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 June 30, 1994
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-6746
INDIANA BELL TELEPHONE COMPANY, INCORPORATED
An Indiana I.R.S. Employer
Corporation No. 35-0407820
240 North Meridian Street, Indianapolis, Indiana 46204
Telephone Number 317 265-2266
_________________________________
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 July 29, 1994, 13,490,876 common shares were outstanding.
Page 2
Indiana Bell Telephone Company, Inc.
PART 1 - FINANCIAL INFORMATION
------------------------------
The following financial statements have been prepared by the Indiana
Bell Telephone Company, Incorporated (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 the Form 10-Q quarterly
report previously filed in the current year.
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
------------------------------------------------------
(Dollars in Millions)
(Unaudited)
Three months ended Six months ended
June 30 June 30
------- -------
1994 1993 1994 1993
---- ---- ---- ----
REVENUES $ 287.2 $ 280.1 $ 578.7 $ 544.3
------ ------ ------ ------
OPERATING EXPENSES
Employee-related expenses 58.5 62.0 120.3 123.9
Depreciation and amortization 52.9 55.2 105.8 109.3
Other operating expenses 86.8 78.0 170.0 142.7
Restructuring charge - - 68.9 -
Taxes other than income taxes 11.7 11.3 23.4 22.8
------ ------ ------ ------
209.9 206.5 488.4 398.7
------ ------ ------ ------
OPERATING INCOME 77.3 73.6 90.3 145.6
Interest expense 4.0 7.7 8.5 15.7
Other (income) expense, net (1.5) 2.7 (2.4) 2.0
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 74.8 63.2 84.2 127.9
Income taxes 25.2 20.4 27.6 41.4
------ ------ ------ ------
NET INCOME 49.6 42.8 56.6 86.5
REINVESTED EARNINGS AT BEGINNING
OF PERIOD 213.1 243.8 250.8 239.8
LESS DIVIDENDS 45.5 39.6 90.2 79.3
------ ------ ------ ------
REINVESTED EARNINGS AT END OF
PERIOD $ 217.2 $ 247.0 $ 217.2 $ 247.0
====== ====== ====== ======
See Notes to Condensed Financial Statements
Page 3
Indiana Bell Telephone Company, Inc.
CONDENSED BALANCE SHEETS
(Dollars in Millions)
June 30, 1994 December 31, 1993
------------- -----------------
(Unaudited) (Derived from
audited financial
ASSETS statements)
- ------
Current assets
Cash and temporary cash investments $ 5.7 $ 0.6
Receivables
Customers and agents (less allowance
for uncollectibles of $4.8 and $5.6,
respectively) 173.1 160.9
Ameritech and affiliates 14.9 16.6
Other 4.4 9.5
Material and supplies 6.0 6.1
Prepaid and other 9.9 12.7
-------- --------
214.0 206.4
-------- --------
Telecommunications plant 3,011.2 2,982.9
Less: Accumulated depreciation 1,394.3 1,320.6
-------- --------
1,616.9 1,662.3
-------- --------
Investments, principally in affiliates 37.6 31.1
-------- --------
Other assets and deferred charges 61.7 87.7
-------- --------
TOTAL ASSETS $ 1,930.2 $ 1,987.5
======== ========
See Notes to Condensed Financial Statements.
Page 4
Indiana Bell Telephone Company, Inc.
CONDENSED BALANCE SHEETS
(Dollars in Millions)
June 30, 1994 December 31, 1993
------------- -----------------
(Unaudited) (Derived from
audited financial
LIABILITIES AND SHAREOWNER'S EQUITY statements)
- -----------------------------------
Current liabilities
Debt maturing within one year
Ameritech $ 281.5 $ 75.0
Other 0.3 220.1
Accounts payable
Ameritech Services, Inc. (ASI) 26.6 19.9
Ameritech and affiliates 12.0 13.4
Other 76.8 62.8
Other current liabilities 180.8 178.0
-------- --------
578.0 569.2
-------- --------
Long term debt 86.0 85.2
-------- --------
Deferred credits and other long term
liabilities
Accumulated deferred income taxes 127.6 163.1
Unamortized investment tax credits 32.0 34.5
Postretirement benefits other than
pensions 241.7 224.1
Long term payable to ASI (affiliate) 8.8 9.4
for SFAS No. 106 adoption
Other 73.9 86.2
-------- --------
484.0 517.3
-------- --------
Shareowner's equity
Common stock ($40 par value; 15,000,000
shares authorized; 13,490,876 issued
and outstanding) 539.6 539.6
Proceeds in excess of par value 25.4 25.4
Reinvested earnings 217.2 250.8
-------- --------
782.2 815.8
-------- --------
TOTAL LIABILITIES
AND SHAREOWNER'S EQUITY $ 1,930.2 $ 1,987.5
======== ========
See Notes to Condensed Financial Statements.
Page 5
Indiana Bell Telephone Company, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Dollars in Millions)(Unaudited)
For the six months ended June 30,
1994 1993
---- ----
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 56.6 $ 86.5
Adjustments to net income
Restructuring charge, net of tax 42.8 -
Depreciation and amortization 105.8 109.3
Deferred income taxes, net (2.4) (3.7)
Investment tax credits, net (2.5) (3.5)
Interest during construction (0.4) (0.2)
Provision for uncollectibles 4.0 3.7
(Increase) in accounts receivable (9.5) (1.4)
(Increase) decrease in materials
and supplies (0.5) 0.3
Decrease in certain other current assets 2.7 2.8
Increase (decrease) in accounts payable 27.2 (47.4)
Increase (decrease) in accrued taxes (17.8) 2.2
(Decrease) in certain other current
liabilities (16.0) (0.8)
Change in certain other noncurrent
assets and liabilities (16.3) 13.6
Other 10.2 (2.9)
------- -------
Net cash provided by operating activities 183.9 158.5
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (61.1) (70.8)
Proceeds from (cost of) disposals of
telecommunications plant 1.6 (0.1)
Other nonaffiliate investments (7.8) -
------- -------
Net cash used in investing activities (67.3) (70.9)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Intercompany financing - net 206.5 92.5
Increase in long term debt 1.0 -
Retirements of long term debt (220.0) (100.1)
Cost of refinancing long term debt (8.7) (3.7)
Dividend payments (90.3) (79.3)
------- -------
Net cash used in financing activities (111.5) (90.6)
------- -------
Net increase (decrease) in cash and
temporary cash investments 5.1 (3.0)
Cash and temporary cash investments
at beginning of period 0.6 10.2
------- -------
Cash and temporary cash investments
at end of period $ 5.7 $ 7.2
======= =======
See Notes to Condensed Financial Statements.
Page 6
Indiana Bell Telephone Company, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
June 30, 1994
-------------
(Dollars in Millions)
A. Work Force Restructuring
On March 25, 1994, the Company's parent (Ameritech Corporation)
announced that it will reduce its nonmanagement work force by 6,000
employees by the end of 1995. Under terms of agreements between the
Company, 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 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 its current contracts with the CWA and the
IBEW to selected nonmanagement employees who leave the business before
the end of 1995.
This program resulted in a charge in the first quarter of 1994 of $68.9,
or $42.8 after-tax. This charge reduced the Company's prepaid pension
asset by $39.6 for pension enhancements and curtailment losses. The
charge also includes a curtailment loss of $17.1 related to SFAS No. 106
("Employers' Accounting for Postretirement Benefits Other than
Pensions") and a severance accrual of $12.2.
In June, Ameritech completed the first phase of its restructuring plan,
having solicited volunteers to leave the Company. The response to date
is exceeding expectations. Ameritech management is in the process of
evaluating the specific job functions and locations of the employees who
have requested to leave under than plan to ensure that service to
customers will not be adversely affected. The task is complex as the
intended 6,000 employee force reduction represents approximately twelve
percent of the nonmanagement work force. Accordingly, insufficient
information currently exists to adjust the restructuring accrual.
Ameritech expects to complete this process in the third quarter and the
Company will increase its restructuring accrual to the appropriate
level. The adjustment could be material.
Page 7
Indiana Bell Telephone Company, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
(Dollars in Millions)
The following is a discussion and analysis of the results of operations
of the Company for the six-month period ended June 30, 1994, as compared
to the same period in the prior year.
Revenues
- --------
Total revenues in the first six months of 1994 were $578.7 and were
$544.3 for the same period in 1993. The following paragraphs explain
the components of that change:
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Local service $262.5 $250.6 $11.9 4.7%
Local service revenue increases were primarily from a $5.2 increase in
business revenues and a $11.1 increase in residence revenues. These
increases were offset by an accrual of $2.4 for rate reductions related
to Opportunity Indiana, as well as a $2.0 decrease in public revenues.
Business access lines increased 7.6% over the same period last year,
while residence access lines increased 2.5%.
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Network access
Interstate $121.0 $111.4 $9.6 8.6%
Intrastate $ 53.6 $ 52.9 $0.7 1.3%
Interstate:
Interstate access included increases in end user revenues of $3.2,
carrier common line of $2.5, special access of $1.2 and traffic
sensitive revenues of $0.9. In addition, National Exchange Carrier
Association (NECA) net settlement payments decreased $1.7 from 1993 to
1994. The end user and carrier common line increases resulted primarily
from increases in volume, partially offset by decreases in rates.
Intrastate:
Increases of $1.2 and $1.1 in carrier common line and traffic sensitive
revenues, respectively, were due to increased volume partially offset by
rate decreases. A net decrease of $1.4 in end user revenue was caused
by accruals of $2.2 for rate reductions related to Opportunity Indiana
and increased volume of $0.8.
Page 8
Indiana Bell Telephone Company, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS (CONT.)
---------------------------------------------------------------------
(Dollars in Millions)
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Long distance $75.5 $71.4 $4.1 5.7%
The increase was caused mainly by an increase of $4.4 in settlement
revenue attributable to a March 1993 change in the intrastate
settlements process, whereby access expenses are no longer treated as a
revenue offset. The increase was partially offset by small decreases in
WATS and private line revenues. Long distance messages increased 4.7%
over the same period last year.
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Other $66.1 $58.0 $8.1 14.0%
Nonregulated revenue increased $3.0 due primarily to an increase in
rates. Carrier billing and collection revenue increased $1.2. In July
1993, the Company began billing for late payment charges, resulting in
increased revenue of $3.3. In addition, uncollectibles decreased $0.3.
Operating Expenses
- ------------------
Total operating expenses were $488.4 in the first six months of 1994 and
$398.7 in the first six months of 1993. The increase is comprised of
the following:
1994 1993 Decrease % Change
- ------------------------------------------------------------------------
Employee-related expenses $120.3 $123.9 ($3.6) (2.9%)
Workforce reductions resulted in decreases in wages, payroll taxes, and
benefits totaling $10.5. Increases in normal wages of $4.4 and an
increase in the ongoing expense for SFAS No. 106 of $2.4 offset some of
the decrease.
1994 1993 Decrease % Change
- ------------------------------------------------------------------------
Depreciation and amortization $105.8 $109.3 ($3.5) (3.2%)
Most of the decrease over the same period last year was caused by
accruals of $3.3 made in the first six months of 1993 in anticipation of
favorable rate represcription results. These accruals were reversed in
the third and fourth quarters of 1993.
Page 9
Indiana Bell Telephone Company, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS (CONT.)
---------------------------------------------------------------------
(Dollars in Millions)
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Other operating expenses $170.0 $142.7 $27.3 19.1%
Other operating expenses consist of contracted services, services from
affiliates, materials and supplies, and miscellaneous expenses including
access charge expenses and advertising. The increase consists of $7.7
in access charges which, prior to March 1993, were an offset to revenue,
$8.6 and $2.8 in services contracted from Ameritech Services, Inc. (ASI)
and Ameritech Information Systems (AIS), respectively, both affiliates,
$2.0 in advertising and $4.2 in other miscellaneous expenses. The
increase in expenses for services contracted from ASI and AIS were
caused by the consolidation of services previously performed by the
Company. An increase in materials and supplies expense accounted for an
additional increase of $2.7.
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Restructuring charge $68.9 $ - $68.9 -
As discussed more fully in Note A to the Financial Statements, Ameritech
announced on March 25, 1994, that it will reduce its nonmanagement work
force by 6,000 employees by the end of 1995, including 780 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.
This program resulted in a first quarter 1994 charge of $68.9 million
($42.8 million on an after-tax basis). A significant portion of the
program's cost will be funded by the Ameritech Pension Plan, whereas
financial incentives to be paid by the Company will require Company
funds of approximately $15.7 million. Settlement gains of an estimated
$25.0 million, which result from lump-sum payments from the Ameritech
Pension Plan, will be reflected in income as payments are made by the
Ameritech Pension Plan (none recorded as of June 30, 1994). Settlement
gains are noncash in nature and result from the funded status of the
Ameritech Pension Plan.
Ameritech originally advised the Company that it expected approximately
two-thirds of the 780 employees would leave the payroll in 1994 with the
balance by the end of the third quarter of 1995. 220 employees left the
payroll in the second quarter of 1994 under this plan. As previously
discussed in Note A, the program has generated more requests to leave
the payroll than originally planned, requiring revision to the
expected number and timing of employees leaving the payroll which should
be quantifiable in the third quarter of 1994. Ameritech will manage the
departure of all employees to minimize disruption within its business
and to its customers. Cash requirements of the Company to fund the
financial incentives (principally contractual termination payments) will
be met as prescribed by applicable collective bargaining agreements.
Certain of these collective bargaining agreements may require
Page 10
Indiana Bell Telephone Company, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS (CONT.)
---------------------------------------------------------------------
(Dollars in Millions)
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 terminated employee on an annual basis.
However, these anticipated savings may be partially offset by growth in
new businesses and the cost of adding other employees with different
skills.
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Taxes other than income taxes $23.4 $22.8 $0.6 2.6%
The increase is mostly comprised of an increase in gross receipts tax of
$0.6 due to increased revenue.
Other Income and Expenses
- -------------------------
1994 1993 Increase % Change
- ------------------------------------------------------------------------
Other (income) expense - net ($2.4) $2.0 $4.4 220.0%
The increase in other income is primarily due to bond call expenses of
$3.7 in the second quarter of 1993. The remaining increase is due to an
increase in ASI earnings partially offset by a decrease in interest
income.
1994 1993 Decrease % Change
- ------------------------------------------------------------------------
Interest expense $8.5 $15.7 ($7.2) (45.9%)
The decrease was due primarily to a decrease of $11.4 in long term debt
interest expense from the bond retirements in late 1993, partially
offset by an increase in interest paid to the Ameritech short term
funding pool of $4.1.
Income Taxes
- ------------
1994 1993 Decrease % Change
- ------------------------------------------------------------------------
Income taxes $27.6 $41.4 ($13.8) (33.3%)
The decrease was caused by the restructuring charge in 1994 (as
discussed above), partially offset by the increase in income before tax
and excluding the restructuring charge.
Page 11
Indiana Bell Telephone Company, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS (CONT.)
---------------------------------------------------------------------
(Dollars in Millions)
Other Information
- -----------------
Opportunity Indiana
- -------------------
On June 30, 1994, the Indiana Utility Regulatory Commission approved the
settlement agreements in Ameritech's Opportunity Indiana Plan (the
Plan). Under the Plan, traditional rate of return regulation is
eliminated and replaced by a price regulation mechanism. The Plan gives
the Company the ability to set prices for competitive services and the
ability to determine its own depreciation rates. The Company agreed to
cap basic exchange rates at current levels through the end of 1997.
Under the Plan, the Company agreed to rate reductions totaling $57.5
between May 1994 and June 1996 ($27.7, $13.5, and $16.3 for 1994, 1995,
and 1996, respectively). In addition, the Company agreed to spend
$120.0 in infrastructure investment over the next six years to provide
an advanced communications system for schools, hospitals and major
government centers and to contribute an additional $30.0 during that
period for equipment and training for schools to take advantage of the
advanced system. The Plan also provides for instant mirroring of
intrastate access rates with interstate rates and removes resale
restrictions on all services except flat rate basic local service and
Centrex.
Effects of Regulatory Accounting
- --------------------------------
The Company presently gives accounting recognition to the actions of
regulators where appropriate, as prescribed by Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71). 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
likely 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
periodically reviews these criteria to ensure the continuing application
of SFAS No. 71 is still appropriate.
Ratio of Earnings to Fixed Charges
- ----------------------------------
The Company's ratio of earnings to fixed charges for the six months
ended June 30 was 7.62 in 1994 and 7.65 in 1993.
Page 12
Indiana Bell Telephone Company, Inc.
PART 2 - OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12 Statement re: Computation of Ratios
(b) Reports on Form 8-K
No Form 8-K was filed by the registrant during the quarter
for which this report is filed.
Page 13
Indiana Bell Telephone Company, Inc.
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.
Indiana Bell Telephone Company, Incorporated
Date: August 12, 1994 By: /s/ Cheryl K. Wooley
--------------------
Cheryl K. Wooley
Vice President - Comptroller
(Principal Financial Officer)
Page 14
Indiana Bell Telephone Company, Inc.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(Thousands of Dollars)
Six months ended June 30,
1994 1993
---- ----
1. Earnings
(a) Income before interest expense
and income taxes $ 92,777 $ 143,562
(b) Portion of rental expense
representative of the
interest factor (i) 4,183 3,521
--------- ---------
Total 96,960 147,083
--------- ---------
2. Fixed Charges
(a) Total interest deductions 8,538 15,718
(b) Portion of rental expense
representative of the
interest factor (i) 4,183 3,521
--------- ---------
Total $ 12,721 $ 19,239
--------- ---------
3. Ratio (1. divided by 2.) 7.62 7.65
========= =========
(i) The Company considers 1/3 of rental expense to be the amount
representing return on capital and, therefore, it must be included in
fixed charges.
NOTE 1: The results for the first six months of 1994 reflect a $68.9
pretax charge for work force restructuring (see Management's Discussion
and Analysis of Results of Operations for a discussion of this charge).
This charge will be funded primarily from the Ameritech Pension Plan.
Indiana Bell Telephone Company, Inc.
11
