Form 10-Q Part I Wisconsin Bell, Inc.
- 14 -
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-6589
WISCONSIN BELL, INC.
(Incorporated under the laws of the State of Wisconsin)
722 North Broadway, Milwaukee, Wisconsin 53202
I.R.S. Employer Identification Number 39-0716650
Telephone No. 414-549-7102
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF AMERITECH CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-
Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT
TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
At October 31, 1994, 31,960,395 common shares were outstanding.
PART I - FINANCIAL INFORMATION
The following financial statements have been prepared by Wisconsin Bell,
Inc. ("the Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of results of operations,
financial position, and cash flows for each period shown. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate
to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's latest annual report on Form 10-K
and Form 10-Q quarterly reports previously filed in the current year.
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Millions of Dollars)
(Unaudited)
For the 3 Months For the 9 Months
Ended Sept. 30, Ended Sept. 30,
1994 1993 1994 1993
Revenues $284.4 $282.7 $848.1 $836.9
Operating expenses
Employee-related expenses 64.4 65.9 186.5 193.5
Depreciation and amortization 47.2 47.6 141.8 138.9
Other operating expenses 93.4 93.4 268.4 269.0
Restructuring charges 25.7 - 78.7 -
Taxes other than income taxes 15.8 16.5 46.7 47.1
246.5 223.4 722.1 648.5
Operating income 37.9 59.3 126.0 188.4
Interest expense 8.0 8.4 21.4 24.8
Other expense (income), net .5 4.9 ( 1.3) 4.1
Income before income taxes 29.4 46.0 105.9 159.5
Income taxes 10.0 15.8 37.6 56.0
Net income 19.4 30.2 68.3 103.5
Reinvested earnings, beginning
of period 18.5 17.3 24.8 11.9
Less dividends 29.3 29.0 84.5 96.9
Reinvested earnings, end of
period $ 8.6 $ 18.5 $ 8.6 $ 18.5
See Notes to Condensed Financial Statements.
CONDENSED BALANCE SHEETS
(Millions of Dollars)
Sept. 30, 1994 Dec. 31, 1993
(Unaudited) (Derived from
ASSETS Audited Financial
Statements)
Current assets:
Cash $ .7 $ -
Receivables, net
Customers 201.4 179.0
Ameritech and affiliates 5.6 31.2
Other 9.2 12.6
Material and supplies 8.6 6.4
Prepaid directories 7.5 10.8
Prepaid and other 3.7 21.0
236.7 261.0
Telecommunications plant 2,757.9 2,724.4
Less, accumulated depreciation 1,139.9 1,066.2
1,618.0 1,658.2
Investments, principally in
affiliates 27.3 27.5
Other assets and deferred charges 69.5 91.6
Total assets $1,951.5 $2,038.3
CONDENSED BALANCE SHEETS - Continued
(Millions of Dollars)
Sept. 30, 1994 Dec. 31, 1993
(Unaudited) (Derived from
Audited Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities:
Debt maturing within one year
Ameritech $ 190.1 $ 237.8
Other .8 .9
Accounts payable
Ameritech and affiliates 44.1 27.4
Other 76.1 109.0
Other current liabilities 88.8 76.9
399.9 452.0
Long-term debt 306.0 306.5
Deferred credits and other long-term
liabilities:
Accumulated deferred income taxes 163.0 201.6
Unamortized investment tax credits 37.7 42.9
Postretirement benefits other than
pensions 256.4 225.8
Long-term payable to affiliate (ASI)
for SFAS 106 adoption 8.8 8.8
Other 119.5 124.2
585.4 603.3
Shareowner's equity:
Common shares, $20 per value per share,
31,995,000 shares authorized;
31,960,395 shares issued and
outstanding 639.2 639.2
Proceeds in excess of par value 12.4 12.4
Reinvested earnings 8.6 24.9
660.2 676.5
Total liabilities and shareowner's
equity $1,951.5 $2,038.3
See Notes to Condensed Financial Statements.
CONDENSED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
For the 9 Months Ended
Sept. 30, 1994 Sept. 30, 1993
(Unaudited)
Cash flows from operating activities:
Net income $ 68.3 $ 103.5
Adjustments to net income:
Restructuring charges, net of tax 47.1 -
Depreciation and amortization 141.8 138.9
Deferred income taxes, net 1.6 4.4
Investment tax credits, net ( 5.2) ( 6.7)
Interest during construction ( .4) ( .3)
Provision for uncollectibles 9.4 8.0
Increase in accounts receivable ( 2.8) ( 7.2)
Increase in material and supplies ( 2.2) ( 3.0)
Decrease in certain other current
assets 5.5 3.8
Decrease in accounts payable ( 16.2) ( 2.7)
Increase in accrued taxes 18.2 10.9
(Decrease) increase in certain other
current liabilities ( 10.2) .1
Change in certain other noncurrent
assets and liabilities ( 19.8) ( 11.7)
Other - .3
Net cash from operating activities 235.1 238.3
Cash flows from investing activities:
Capital expenditures, net (101.2) (101.2)
Proceeds (net of removal costs) from
disposal of telecommunications plant ( .2) 1.4
Additional equity investments in ASI
(affiliate) - (3.0)
Net cash from investing activities (101.4) (102.8)
Cash flows from financing activities:
Intercompany financing, net ( 47.7) ( 61.3)
Issuance of long-term debt - 145.6
Retirements of long-term debt ( .8) (120.5)
Call premium on early retirement of
long-term debt - ( 5.1)
Dividend payments ( 84.5) ( 96.9)
Net cash from financing activities (133.0) (138.2)
Net increase (decrease) in cash .7 ( 2.7)
Cash, beginning of period - 3.1
Cash, end of period $ .7 $ .4
See Notes to Condensed Financial Statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1994
(Millions of Dollars)
Note 1: WORK FORCE RESTRUCTURING
On March 25, 1994, the Company's parent, Ameritech, announced
plans to reduce its existing nonmanagement work force by 6,000
employees by the end of 1995, including 600 at the Company.
Under terms of agreements between Ameritech, the Communication
Workers of America ("CWA") and the International Brotherhood of
Electrical Workers ("IBEW"), Ameritech implemented an enhancement
to the Ameritech Pension Plan by adding three years to both the
age and the net credited service of eligible nonmanagement
employees who leave the business during a designated period that
ends in mid-1995. In addition, certain of the Company's business
units are offering financial incentives under terms of the current
contracts with the CWA and the IBEW to selected nonmanagement
employees who leave the business before the end of 1995.
The Company recorded a first quarter 1994 charge of $53.0 or $31.7
after-tax to reflect the cost of the restructuring. This charge
reduced the Company's prepaid pension asset by $30.5 for pension
enhancements and curtailment losses. The charge also included a
curtailment loss of $13.1 related to Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," and an additional
severance accrual of $9.4.
Employee response to the pension enhancement program and other
financial incentives being offered by the Company has exceeded the
Company's initial expectations. As a result, the Company expects
its existing nonmanagement work force to be reduced by 965 through
next year instead of the 600 originally estimated in March.
The Company recorded an additional charge in the third quarter of
1994 of $25.7 or $15.4 after-tax for the additional program
participants and for revised participant demographics. The third
quarter charge reflects settlement gains of $11.8 associated with
lump sum pension payments made by the pension trust through
September 30, 1994. This $25.7 charge reduced the Company's
prepaid pension asset by $2.8 for pension enhancements and
curtailment losses, net of the settlement gains. The charge also
included a $15.8 curtailment loss related to SFAS No. 106 and an
additional severance accrual of $7.1.
Note 2: LONG-TERM DEBT
On November 8, 1993, the Company filed a registration statement
with the Securities and Exchange Commission on Form S-3 to
register $200.0 in debt securities. As of the date of this
report, $200.0 is still available for debt issuance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Millions of Dollars)
The following is a discussion and analysis of the results of operations of
the Company for the nine-month periods ended September 30, 1994 and 1993.
Results of the nine-month period ended September 30, 1994 are not
necessarily indicative of results for the full year.
Revenues
Total operating revenues were $848.1 for the nine-month period ended
September 30, 1994, and $836.9 for the nine-month period ended
September 30, 1993. The increase of $11.2 or 1.3 percent consisted of the
following:
Increase %
1994 1993 (Decrease) Change
Local service $387.1 $364.7 $22.4 6.1%
Local service revenues increased $22.4 due to higher network usage which
resulted in a $13.5 increase in local message revenues and monthly service
revenues, a $7.3 increase due to implementation of extended community
calling plans, and volume increases in directory assistance services
resulting in a $2.1 increase in revenues. Customer lines increased 4.0%
from 1,881,834 on September 30, 1993, to 1,957,358 on September 30, 1994.
Increase %
1994 1993 (Decrease) Change
Network access
Interstate $184.2 $176.0 $ 8.2 4.7%
Intrastate $ 61.7 $ 66.7 $(5.0) (7.5%)
Interstate access charge revenues increased by $8.8 due to growth of
customer lines and higher network usage. Additionally, revenues increased
by $3.2 due to lower National Exchange Carrier Association ("NECA")
transitional funding. These increases were partially offset by lower
revenues of $3.8 due to rate reductions in switched and special access.
Minutes of use related to interstate calls for the nine-month period ended
September 30, 1994, increased 6.2 percent.
Intrastate access revenues decreased $5.0 primarily due to a $7.3 decrease
in switched access revenues caused by rate decreases, partially offset by
volume-related increases in switched access revenues of $2.4.
Minutes of use related to intrastate calls for the nine-month period ended
September 30, 1994, increased 7.6 percent.
Increase %
1994 1993 (Decrease) Change
Long distance $141.1 $155.7 ($14.6) (9.4%)
Long distance revenues decreased $14.6 due to a $19.9 decrease resulting
from the implementation of extended community calling plans. This decrease
was partially offset by increased revenue of $5.3 due to volume increases.
Increase %
1994 1993 (Decrease) Change
Miscellaneous revenues -
net $74.0 $73.8 $0.2 0.3%
Miscellaneous revenues increased $0.2 due primarily to a $3.5 increase in
Inside Wire revenues due to rate and volume increases and a $2.6 increase
in Billing and Collections revenues. These increases were partially offset
by a decrease of $3.3 in Rent Revenues, a $1.6 decrease in Other
Miscellaneous Revenues and an increase in the provision for uncollectibles
of $1.3 resulting from higher accounts receivable balances and higher
realized uncollectibles.
Operating Expenses
Total operating expenses were $722.1 for the nine-month period ended
September 30, 1994, and $648.5 for the nine-month period ended
September 30, 1993. The increase of $73.6 consisted of the following:
Increase %
1994 1993 (Decrease) Change
Employee-related expenses$186.5 $193.5 ($7.0) (3.6%)
Employee-related expenses decreased $15.0 due to decreases in wages,
salaries, and other employee expenses related to work force reductions. On
September 30, 1994, the Company had 4,917 employees compared to 5,299 on
September 30, 1993, a decrease of 382 employees. This decrease was
partially offset by wage and salary increases of $7.0 and incentives and
bonus increases of $2.7.
Increase %
1994 1993 (Decrease) Change
Depreciation and
amortization $141.8 $138.9 $2.9 2.1%
Depreciation and amortization increased $2.9 due to the amortization of a
reserve deficiency authorized by the Public Service Commission of Wisconsin
("PSCW"). This increase was partially offset by reduced depreciation due
to central office equipment retirements.
Increase %
1994 1993 (Decrease) Change
Other operating expenses$268.4 $269.0 ($0.6) (0.2%)
The $0.6 decrease in other operating expenses resulted primarily from a
$10.6 decrease in independent access charges. These decreases were
partially offset by a $10.3 increase in affiliated company billings due to
more functions being transferred to other affiliates.
Increase %
1994 1993 (Decrease) Change
Restructuring charges $78.7 $ -- $78.7 N/A
As discussed more fully in Note 1, the Company's parent, Ameritech,
announced on March 25, 1994 that it would reduce its existing nonmanagement
work force by 6,000 employees by the end of 1995, including 600 at the
Company. Reduction of the work force results from technological
improvements, consolidations, and
initiatives identified by management to balance its cost structure with
emerging competition. The Company now expects its nonmanagement work force
to be reduced by 965 employees through next year instead of the 600
originally estimated in March. A charge for 600 employees was recorded in
the first quarter and an additional charge was recorded in the third
quarter to reflect acceptance of the plan by a total of 965 employees.
This program resulted in a first quarter 1994 charge of $53.0 ($31.7 on an
after-tax basis) and an additional charge of $25.7 ($15.4 on an after-tax
basis) in the third quarter of 1994, for a total charge of $78.7 ($47.1 on
an after-tax basis). The additional charge of $25.7 includes the effect of
$11.8 in settlement gains associated with lump-sum pension payments through
September 30, 1994.
The Company originally estimated that 600 employees were expected to leave
under the program. The Company currently estimates that, including the
additional 365 employees, approximately 833 will leave under the program in
1994 and 132 in 1995. These employee reductions by quarter are as follows:
114 (actual) in the second quarter of 1994, 207 (actual) in the third
quarter of 1994, 512 (estimated) in the fourth quarter of 1994, 26
(estimated) in the first quarter of 1995, 63 (estimated) in the second
quarter of 1995, and 43 (estimated) in the third quarter of 1995. As
previously discussed in Note 1, the program has generated more employee
requests to accept the incentives offered than originally planned,
requiring revision to the expected number and timing of employees
terminating employment. The Company is managing the departure of all
employees to minimize disruption within its business and to its customers,
while still accommodating the individual employee's acceptance of the
program. Cash requirements of the Company to fund the financial incentives
(principally contractual termination payments totaling approximately $20.0)
will be met as prescribed by applicable collective bargaining agreements.
Certain of these collective bargaining agreements require contractual
termination payments to be paid to employees in a manner other than lump-
sum, thus requiring cash payments beyond an employee's termination date.
The Company believes this program will reduce its employee-related costs by
approximately $50,000 per departing employee on an annual basis. The
projected savings will be partially offset by the hiring of new employees
to accommodate growth and ensure high quality customer service, and to meet
staffing requirements for new business opportunities.
Increase %
1994 1993 (Decrease) Change
Taxes other than income
taxes $46.7 $47.1 ($0.4) (0.9%)
The decrease in taxes other than income taxes resulted from lower gross
receipts tax rates during the nine-month period ended September 30, 1994.
This was offset by an increase in revenues.
Interest Expense, Other Expenses, and Income Tax Expense
Increase %
1994 1993 (Decrease) Change
Interest expense $21.4 $24.8 ($3.4) (13.6%)
The decrease in interest expense is due to the retirements in 1993 of
$300.0 in long-term debt bearing interest ranging from 8% to 8.75%. This
debt was refinanced with short-term debt from Ameritech, which bears lower
interest rates, and $150.0 of long-term debt bearing interest at 6.75%.
Increase %
1994 1993 (Decrease) Change
Other (income) expense ($1.3) $4.1 $5.4 N/A
The increase in other (income) expense is due to a charge for the early
retirement of debt in September 1993, accounting for $4.9 of the increase.
The increase is also due to 1994 interest income of $1.0 related to amended
state sales tax returns for the years 1986 through 1990.
Increase %
1994 1993 (Decrease) Change
Income tax expense $37.6 $56.0 ($18.4) (32.9%)
The decrease in income tax expense is due primarily to the restructuring
charges of $78.7. Tax on these charges amounted to $31.6. Excluding the
affect of the restructuring charges, income taxes increased in line with
the increased earnings of the Company.
Other Information
Effects of Regulatory Accounting
The Company presently gives accounting recognition to the actions of
regulators where appropriate, as prescribed by SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation." Under SFAS No. 71, the
Company records certain assets and liabilities because of actions of
regulators. Further, amounts charged to operations for depreciation
expense reflect estimated useful lives and methods prescribed by regulators
rather than those that might otherwise apply to unregulated enterprises.
The Company cannot presently quantify, without a complete historical
assessment of its competitive and regulatory environments, what the
financial statement impact would have been had depreciation expense been
determined absent regulation.
In the event the Company determines that it no longer meets the criteria
for following SFAS No. 71, the accounting impact to the Company would be an
extraordinary noncash charge to operations of an amount which would be
material. Criteria that give rise to the discontinuance of SFAS No. 71
include (1) increasing competition which restricts the Company's ability to
establish prices to recover specific costs, and (2) a significant change in
the manner in which rates are set by regulators from cost-based regulation
to another form of regulation. The Company is currently reviewing these
criteria in light of the changes in its regulatory environment and
increasing competition discussed on the following page to ensure the
continuing application of SFAS No. 71 is still appropriate.
State Regulatory Matters
Effective September 1, 1994, the Company adopted price regulation,
replacing rate of return regulation, under 1993 Wisconsin Act 496. The
Public Service Commission of Wisconsin ("PSCW") will no longer regulate the
Company's overall earnings. Instead, prices will be overseen by the PSCW,
with the Company having greater flexibility to adjust prices to meet
competition and changing market conditions. Price changes resulting from
this adoption are expected overall to save customers in excess of $30.0
annually. The Company is lowering the monthly rate for basic residential
and small business access lines by $14.0 annually (as specifically required
under the Act) and reducing the rates it charges long distance carriers to
complete toll calls within the state by $21.0 annually, both effective
September 1, 1994. Other changes affecting the charges for Directory
Assistance, Custom Calling features, operator-assisted and Ameritech
calling card calls were also made effective during October, 1994. A plan
describing the Company's commitment to invest $700.0 in the state's
telecommunications infrastructure during the next five years was filed with
the PSCW on October 31, 1994.
On July 7, 1994, the PSCW issued an order in Phase III of its Investigation
Into the Extent of Competition in the IntraLATA Toll Telecommunications
Market and of the Level of Regulation for IntraLATA Toll Telecommunications
Service. This order continues the trend of opening markets to competition
by requiring all local exchange companies in Wisconsin, as a matter of
general policy, to provide intraLATA 1+ dialing and presubscription as soon
as possible. The order has been appealed by the Company.
Ratio of Earnings to Fixed Charges
The Company's Ratio of Earnings to Fixed Charges for the nine-month period
ended September 30, was 5.36 in 1994 and 6.66 in 1993. The ratio in 1994
was adversely affected by charges of $78.7 for work force restructuring
(see prior discussion of these charges). These charges will be primarily
funded from the Ameritech Pension Plan. The Company believes its ratio in
1994 is not indicative of a significant change in its ability to service
its debt.
PART II - OTHER INFORMATION
(Millions of Dollars)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(12) Computation of ratio of earnings to fixed charges
for the nine-months ended September 30, 1994 and September 30,
1993.
(27) Financial data schedule for the nine-months ended
September 30, 1994.
(b) Reports of Form 8-K
No form 8-K was filed by the registrant during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wisconsin Bell, Inc.
Date November 10, 1994 Richard H. Witte
Richard H. Witte
Vice President
and Comptroller
(Principal
Financial
Officer)
EXHIBIT 12
WISCONSIN BELL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
For the 9 Months Ended
Sept. 30, 1994 Sept. 30, 1993
1. EARNINGS
a) Income before interest and
income taxes $127.3 $184.3
b) Portion of rental expense
representative of the
interest factor (A) 2.9 3.4
Total 1(a) through 1(b) $130.2 $187.7
2. FIXED CHARGES
a) Total interest expense
including interest on capital
lease obligations $ 21.4 $ 24.8
b)Portion of rental expense
representative of the
interest factor (A) 2.9 3.4
Total 2(a) through 2(b) $ 24.3 $ 28.2
3. RATIO OF EARNINGS TO FIXED CHARGES 5.36 6.66
(A)The Company considers one-third of rental
expense to be the amount representing interest.
(B)The results for the nine-months of 1994
reflect $78.7 in pre-tax charges for work force restructuring
(see MD&A discussion of these charges). These charges will be
funded primarily from the Ameritech Pension Plan.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
WISCONSIN BELL, INC.'S SEPTEMBER 30, 1994 FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<RECEIVABLES> 227300
<ALLOWANCES> 11100
<INVENTORY> 8600
<CURRENT-ASSETS> 236700
<PP&E> 2757900
<DEPRECIATION> 1139900
<TOTAL-ASSETS> 1951500
<CURRENT-LIABILITIES> 399900
<BONDS> 306000
<COMMON> 639200
0
0
<OTHER-SE> 21000
<TOTAL-LIABILITY-AND-EQUITY> 1951500
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<TOTAL-COSTS> 722100
<OTHER-EXPENSES> (1300)
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<FN>
<F1>NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL
STATEMENTS PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS
INCLUDED IN THE "TOTAL REVENUES" TAG.
<F2>COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICE AND PRODUCTS
IN THE FINANCIAL STATEMENTS AND THE "TOTAL COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
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