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 1-6781
THE OHIO BELL TELEPHONE COMPANY
(Incorporated under the laws of the State of Ohio)
I.R.S. Employer Identification Number 34-0436390
45 Erieview Plaza, Cleveland, Ohio 44114
Telephone Number 216-822-9700
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, one common share was outstanding.
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
PART I - FINANCIAL INFORMATION
The following financial statements have been prepared by The Ohio Bell
Telephone Company ("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 reports previously filed in
the current year.
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Dollars in Millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Revenues . . . . . . . . . . . . $541.0 $527.8 $1,620.0 $1,565.1
Operating expenses
Depreciation and amortization . 95.6 97.1 287.0 290.9
Employee-related expenses . . . 127.9 124.6 373.7 361.8
Other operating expenses . . . 158.1 136.5 444.9 410.5
Taxes other than income taxes . 57.5 56.6 172.6 168.4
Work force restructuring . . . 54.6 - 187.1 -
493.7 414.8 1,465.3 1,231.6
Operating income . . . . . . . . 47.3 113.0 154.7 333.5
Interest expense . . . . . . . . 16.5 16.0 47.3 46.3
Other expense (income) - net . . (2.7) (3.6) (10.0) .2
Income before income taxes . . . 33.5 100.6 117.4 287.0
Income taxes . . . . . . . . . . 8.2 25.7 31.4 76.4
Net income . . . . . . . . . . . 25.3 74.9 86.0 210.6
Reinvested earnings
- at beginning of period . . . 162.1 222.0 236.8 216.7
Less dividends . . . . . . . . . 22.4 64.2 157.8 194.6
Reinvested earnings
- at end of period . . . . . . $165.0 $232.7 $ 165.0 $ 232.7
See Note to Condensed Financial Statements.
2
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
CONDENSED BALANCE SHEETS
(Dollars in Millions)
September 30, 1994 Dec. 31, 1993
(Unaudited) (Derived from
audited financial
statements)
ASSETS
Current assets
Cash . . . . . . . . . . . . . . . . . . $ - $ -
Receivables - net
Customers and agents . . . . . . . . . 338.7 287.1
Ameritech and affiliates . . . . . . . 23.0 28.1
Other . . . . . . . . . . . . . . . . 16.4 17.5
Material and supplies . . . . . . . . . 8.9 14.2
Prepaid and other . . . . . . . . . . . 37.5 30.0
424.5 376.9
Telecommunications plant . . . . . . . . . 5,683.6 5,602.0
Less: accumulated depreciation . . . . 2,563.2 2,410.5
3,120.4 3,191.5
Investments, principally in affiliates . . 63.2 63.2
Other assets and deferred charges . . . . 98.1 161.4
Total assets . . . . . . . . . . . . . $3,706.2 $3,793.0
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech . . . . . . . . . . . . . . $ 76.3 $ 35.5
Other . . . . . . . . . . . . . . . . 11.3 11.3
Accounts payable
Ameritech and affiliates . . . . . . . 90.3 83.2
Other . . . . . . . . . . . . . . . . 105.7 107.1
Other current liabilities. . . . . . . . 341.4 373.9
625.0 611.0
Long-term debt . . . . . . . . . . . . . . 837.0 837.1
Deferred credits and other long-term liabilities
Accumulated deferred income taxes . . . 276.0 342.7
Unamortized investment tax credits . . . 64.7 72.9
Postretirement benefits other than pensions 532.0 461.0
Long-term payable to Ameritech Services, Inc. 18.5 19.7
Other . . . . . . . . . . . . . . . . . 177.9 201.7
1,069.1 1,098.0
Shareowner's equity
Common stock - one share issued and
outstanding, without par value . . . . 1,010.1 1,010.1
Reinvested earnings . . . . . . . . . . 165.0 236.8
1,175.1 1,246.9
Total liabilities and shareowner's equity $3,706.2 $3,793.0
See Note to Condensed Financial Statements.
3
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the 9 Months Ended September 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . $ 86.0 $210.6
Adjustments to net income:
Work force restructuring - net of tax. . . 121.6 -
Depreciation and amortization. . . . . . . 287.0 290.9
Deferred income taxes - net . . . . . . . (23.3) (25.2)
Investment tax credits - net . . . . . . . (8.2) (12.5)
Interest during construction . . . . . . . (3.0) (2.5)
Provision for uncollectibles . . . . . . . 13.4 8.0
(Increase) in accounts receivable. . . . . (58.9) (16.2)
(Increase) in materials and supplies . . . (3.1) (4.2)
Decrease in prepaid expenses and certain
other current assets . . . . . . . . . . 5.6 4.6
Increase (decrease)in accounts payable . . 14.0 (62.7)
(Decrease)in accrued taxes . . . . . . . . (29.7) (19.4)
Increase (decrease) in certain other
current liabilities . . . . . . . . . . . (17.5) 20.2
Change in certain other noncurrent assets
and liabilities . . . . . . . . . . . . (18.9) (21.9)
Other . . . . . . . . . . . . . . . . . . .6 9.1
Net cash from operating activities . . . . . 365.6 378.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - net . . . . . . . . . (204.7) (240.7)
Additional equity investments in ASI . . . . - (6.3)
Proceeds from (cost of) disposal of
telecommunications plant . . . . . . . . . (.2) (1.7)
Net cash from investing activities . . . . . (204.9) (248.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing - net . . . . . . . . 40.9 (113.2)
Issuance of long-term debt . . . . . . . . . - 247.9
Retirements of long-term debt . . . . . . . (.5) (125.5)
Costs of refinancing long-term debt . . . . - (8.9)
Dividend payments . . . . . . . . . . . . . (201.1) (130.4)
Net cash from financing activities . . . . . (160.7) (130.1)
Net increase (decrease) in cash . . . . . . - -
Cash at beginning of period . . . . . . . . - -
Cash at end of period . . . . . . . . . . . $ - $ -
See Note to Condensed Financial Statements.
4
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
NOTE TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 1,500 at the Company. Under terms of agreements between the
Company, 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 $132.5 million or $86.1
million after-tax to reflect the cost of the restructuring. This charge
reduced the Company's prepaid pension asset by $76.2 million for pension
enhancements and curtailment losses. The charge also included a curtailment
loss of $32.9 million related to Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," (SFAS No. 106) and an additional severance accrual of $23.4
million.
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 2,327 through next year instead of the 1,500
originally estimated in March.
The Company recorded an additional charge in the third quarter of 1994 of
$54.6 million or $35.5 million after-tax for the additional program
participants and for revised participant demographics. The third quarter
charge reflects settlement gains of $28.4 million associated with lump-sum
pension payments made by the pension trust through September 30, 1994. This
$54.6 million charge reduced the Company's prepaid pension asset by $4.2
million for pension enhancements and curtailment losses, net of the settlement
gains. The charge also included a curtailment loss of $36.7 million related
to SFAS No. 106 and an additional severance accrual of $13.7 million.
5
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following is a discussion and analysis of the results of operations of the
Company for the nine month period ended September 30, 1994, and for the same
period in the prior year. Results for the nine months ended September 30,
1994 included after-tax charges of $121.6 million for work force
restructuring.
REVENUES
Total revenues were $1,620.0 million in the nine months ended September 30,
1994, and $1,565.1 million in the nine months ended September 30, 1993. The
increase was due primarily to higher local call volumes and access usage,
growth in access lines and lower payments to an interstate pool. Lower access
and toll rates and higher uncollectible revenues partially offset the above
increases.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Local service $897.8 $854.1 $43.7 5.1
The $43.7 million increase in local service revenues was due mainly to higher
call volumes, growth in access lines and increased usage of custom calling
features.
Customer lines increased from 3,456,597 at September 30, 1993, to 3,579,452 at
September 30, 1994.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Network access:
Interstate $332.3 $320.3 $12.0 3.7
Intrastate $103.5 $107.7 $(4.2) (3.9)
The increase of $12.0 million in interstate access revenues was due
principally to higher volumes, lower payments to an interstate pool and lower
sharing accruals, partially offset by lower rates. Network access revenues
from intrastate services decreased $4.2 million due principally to lower
intrastate rates. Higher volumes partially offset the decrease attributable
to lower intrastate rates.
6
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Long distance $139.0 $141.8 $(2.8) (2.0)
Lower intralata long distance rates effective December 1, 1993 were the major
contributors to the decrease in long distance revenue.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Other $147.4 $141.2 $6.2 4.4
The increase was due mainly to nonrecurring revenues from a facilities lease
and increased revenues from inside wire maintenance and installation services.
Higher uncollectibles partially offset the above increases.
OPERATING EXPENSES
Total operating expenses were $1,465.3 million in the nine months ended
September 30, 1994, and $1,231.6 million in the nine months ended
September 30, 1993. The increase was due primarily to restructuring charges
of $187.1 million and higher contracted services. The increases were
partially offset by lower materials and supplies expense and depreciation
expense.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Employee-related expenses $373.7 $361.8 $11.9 3.3
The increase in employee-related expenses was due primarily to higher
postretirement benefits expense, higher salary and wage rates, higher
incentive compensation expense and higher overtime charges. These increases
were partially offset by lower salaries and wages as a result of lower
employee levels.
At September 30, 1994, the Company had 9,428 employees compared to 10,193 at
September 30, 1993. The net reduction of 765 employees resulted primarily
from force reduction programs.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Other operating expenses $444.9 $410.5 $34.4 8.4
The increase in other operating expenses was due principally to increased
costs and expenses for contracted services. The increase in contracted
services is a result of higher charges from Ameritech Services, Inc. for
services provided. Lower materials and supplies expense partially offset the
above increase.
7
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Depreciation and amortization $287.0 $290.9 $(3.9) (1.3)
Depreciation expense decreased due to a lower average composite depreciation
rate partially offset by higher plant investment.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Taxes other than income taxes $172.6 $168.4 $4.2 2.5
Taxes other than income taxes increased due to higher property tax expense
reflecting an increase in property tax rates.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Restructuring charges $187.1 - $187.1 -
As discussed more fully in the Note, 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 1,500 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 2,327 employees through next year
instead of the 1,500 originally estimated in March. A charge for 1,500
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 2,327 employees.
This program resulted in a first quarter 1994 charge of $132.5 million ($86.1
million on an after-tax basis) and an additional charge of $54.6 million
($35.5 million on an after-tax basis) in the third quarter of 1994 for a total
charge of $187.1 million ($121.6 million on an after-tax basis). The
additional charge of $54.6 million includes the effect of $28.4 million in
settlement gains associated with lump-sum pension payments through
September 30, 1994.
The Company originally estimated that 1,500 employees were expected to leave
under the program. The Company currently estimates that, including the
additional 827 employees, approximately 1,723 will leave under the program in
1994 and 604 in 1995. These employee reductions by quarter are as follows:
365 (actual) in the second quarter of 1994, 358 (actual) in the third quarter
of 1994, 1,000 (estimated) in the fourth quarter of 1994, 50 (estimated) in
the first quarter of 1995, 150 (estimated) in the second quarter of 1995,
8
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
and the balance of 404 (estimated) in the third quarter of 1995. As
previously discussed in the Note, 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 $50.0 million) 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.
INTEREST EXPENSE, OTHER EXPENSES AND INCOME TAXES
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Interest expense $47.3 $46.3 $1.0 2.2
Interest expense increased in 1994 due to higher average long-term debt
outstanding at lower average interest rates. This increase was largely offset
by lower short-term debt outstanding in 1994 at higher average interest rates.
In 1993, early redemptions of long-term debt were temporarily funded with
short-term debt prior to the issuance of new long-term debt at lower interest
rates.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Other expense (income) - net $(10.0) $ .2 $(10.2) -
Other expense (income)-net decreased by $10.2 million due principally to 1993
costs and expenses of $9.5 million related to the early redemption of the
Company's debentures.
Nine months ended September 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Income taxes $31.4 $76.4 $(45.0) (58.9)
Federal income taxes decreased $45.0 million due principally to decreased pre-
tax income as a result of the 1994 work force restructuring charges.
9
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
OTHER INFORMATION
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 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 discussed below to
ensure the continuing application of SFAS No. 71 is still appropriate.
Regulatory Proceedings
The complaint brought against the Company by Allnet Communications Services,
Inc. was decided by the Ohio Supreme Court on September 14, 1994. The Supreme
Court affirmed the decision of the Public Utilities Commission of Ohio (PUCO),
turning down Allnet's claims that the Company's access charges are too high
and that the Company is discriminating in favor of itself by failing to
provide intraLATA presubscription, also known as Dial One Plus.
On September 20, 1994, the Company filed with the PUCO a Stipulation and
Recommendation (the "Stipulation") in the Advantage Ohio and Office of the
Consumers' Counsel complaint proceedings. The Stipulation includes no
earnings regulation for at least six years, $84.4 million in rate reductions
phased in over six years, a six year cap on certain basic exchange service
rates, a price cap adjustment mechanism for rates not subject to the six year
cap, network improvement commitments, streamlined approval processes for new
services and contracts and expanded lifeline service. Hearings concluded on
the Stipulation on October 19, 1994. The Stipulation, which was signed by the
Company and some of the parties to these proceedings, must still be approved
by the PUCO.
10
Form 10-Q Part II THE OHIO BELL TELEPHONE COMPANY
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial data schedule for the nine months ended September 30,
1994.
(b) Reports on Form 8-K.
No Form 8-K was filed by the registrant during the quarter for which
this report is filed.
11
Form 10-Q THE OHIO BELL TELEPHONE COMPANY
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.
The Ohio Bell Telephone Company
Date: November 10, 1994 /s/ R. A. Brown
Richard A. Brown
Vice President - Comptroller
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE OHIO BELL TELEPHONE COMPANY'S SEPTEMBER 30, 1994
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 399,400
<ALLOWANCES> 21,300
<INVENTORY> 8,900
<CURRENT-ASSETS> 424,500
<PP&E> 5,683,600
<DEPRECIATION> 2,563,200
<TOTAL-ASSETS> 3,706,200
<CURRENT-LIABILITIES> 625,000
<BONDS> 837,000
<COMMON> 1,010,100
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<OTHER-SE> 165,000
<TOTAL-LIABILITY-AND-EQUITY> 3,706,200
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<TOTAL-REVENUES> 1,620,000
<CGS> 0<F2>
<TOTAL-COSTS> 1,465,300
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<LOSS-PROVISION> 13,400
<INTEREST-EXPENSE> 47,300
<INCOME-PRETAX> 117,400
<INCOME-TAX> 31,400
<INCOME-CONTINUING> 86,000
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<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
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