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 1-6781
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 July 31, 1994, one common share was outstanding.
<TABLE>
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 report previously filed in the
current year.
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Dollars in Millions)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . $546.1 $524.9 $1,079.0 $1,037.3
Operating expenses
Depreciation and amortization . 95.6 97.1 191.4 193.8
Employee-related expenses . . . 126.1 120.5 245.8 237.2
Other operating expenses . . . 147.5 137.4 286.8 274.0
Taxes other than income taxes . 57.5 55.7 115.1 111.8
Work force restructuring - - 132.5 -
426.7 410.7 971.6 816.8
Operating income . . . . . . . . 119.4 114.2 107.4 220.5
Interest expense . . . . . . . . 15.5 14.9 30.8 30.3
Other expense (income) - net . . (3.9) (2.9) (7.3) 3.8
Income before income taxes . . . 107.8 102.2 83.9 186.4
Income taxes . . . . . . . . . . 29.9 28.4 23.2 50.7
Net income . . . . . . . . . . . 77.9 73.8 60.7 135.7
Reinvested earnings
- at beginning of period . . . 153.2 216.8 236.8 216.7
Less dividends . . . . . . . . . 69.0 68.6 135.4 130.4
Reinvested earnings
- at end of period . . . . . . $162.1 $222.0 $162.1 $ 222.0
<FN>
See Note to Condensed Financial Statements.
</TABLE>
2
<TABLE>
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
CONDENSED BALANCE SHEETS
(Dollars in Millions)
<CAPTION>
June 30, 1994 Dec. 31, 1993
(Unaudited) (Derived from
audited financial
statements)
<S> <C> <C>
ASSETS
Current assets
Cash . . . . . . . . . . . . . . . . . . $ - $ -
Receivables - net
Customers and agents . . . . . . . . . 308.9 287.1
Ameritech and affiliates . . . . . . . 22.0 28.1
Other . . . . . . . . . . . . . . . . 15.8 17.5
Material and supplies . . . . . . . . . 6.7 14.2
Prepaid and other . . . . . . . . . . . 33.4 30.0
386.8 376.9
Telecommunications plant . . . . . . . . . 5,652.1 5,602.0
Less: accumulated depreciation . . . . 2,514.5 2,410.5
3,137.6 3,191.5
Investments, principally in affiliates . . 60.7 63.2
Other assets and deferred charges . . . . 99.8 161.4
Total assets . . . . . . . . . . . . . $3,684.9 $3,793.0
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech . . . . . . . . . . . . . . $ 57.5 $ 35.5
Other . . . . . . . . . . . . . . . . 11.3 11.3
Accounts payable
Ameritech and affiliates . . . . . . . 67.9 83.2
Other . . . . . . . . . . . . . . . . 107.3 107.1
Other current liabilities. . . . . . . . 378.8 373.9
622.8 611.0
Long-term debt . . . . . . . . . . . . . . 837.1 837.1
Deferred credits and other long-term liabilities
Accumulated deferred income taxes . . . 292.1 342.7
Unamortized investment tax credits . . . 67.4 72.9
Postretirement benefits other than pensions 495.0 461.0
Long-term payable to Ameritech Services, Inc. 18.5 19.7
Other . . . . . . . . . . . . . . . . . 179.8 201.7
1,052.8 1,098.0
Shareowner's equity
Common stock - one share issued and
outstanding, without par value . . . . 1,010.1 1,010.1
Reinvested earnings . . . . . . . . . . 162.1 236.8
1,172.2 1,246.9
Total liabilities and shareowner's equity $3,684.9 $3,793.0
<FN>
See Note to Condensed Financial Statements.
</TABLE>
3
<TABLE>
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<CAPTION>
For the 6 Months Ended June 30,
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . $ 60.7 $135.7
Adjustments to net income:
Work force restructuring - net of tax. . . 86.1 -
Depreciation and amortization. . . . . . . 191.4 193.8
Deferred income taxes - net . . . . . . . (19.0) (9.5)
Investment tax credits - net . . . . . . . (5.6) (8.4)
Interest during construction . . . . . . . (1.9) (1.6)
Provision for uncollectibles . . . . . . . 7.9 5.1
(Increase) in accounts receivable. . . . . (22.0) (.9)
(Increase) in materials and supplies . . . (.9) (4.4)
Decrease in prepaid expenses and certain
other current assets . . . . . . . . . . 5.3 .7
(Decrease) in accounts payable . . . . . . (15.8) (80.1)
(Decrease) in accrued taxes. . . . . . . . (38.3) (35.4)
Increase in certain other current
liabilities. . . . . . . . . . . . . . . 4.8 19.2
Change in certain other noncurrent assets
and liabilities . . . . . . . . . . . . (17.8) (21.7)
Other . . . . . . . . . . . . . . . . . . 2.9 11.2
Net cash from operating activities . . . . . 237.8 203.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - net . . . . . . . . . (127.7) (155.0)
Proceeds from (cost of) disposal of
telecommunications plant . . . . . . . . . .3 (.8)
Net cash from investing activities . . . . . (127.4) (155.8)
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing - net . . . . . . . . 22.0 (99.7)
Issuance of long-term debt . . . . . . . . . - 247.9
Retirements of long-term debt . . . . . . . (.3) (125.4)
Costs of refinancing long-term debt . . . . - (8.9)
Dividend payments . . . . . . . . . . . . . (132.1) (61.8)
Net cash from financing activities . . . . . (110.4) (47.9)
Net increase (decrease) in cash . . . . . . - -
Cash at beginning of period . . . . . . . . - -
Cash at end of period . . . . . . . . . . . $ - $ -
<FN>
See Note to Condensed Financial Statements.
</TABLE>
4
<PAGE>
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 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 $132.5
million or $86.1 million after-tax. This charge reduced the Company's prepaid
pension asset by $76.2 million for pension enhancements and curtailment
losses. The charge also includes a curtailment loss of $32.9 million related
to SFAS No. 106 ("Employers' Accounting for Postretirement Benefits Other than
Pensions") and a severance accrual of $23.4 million.
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 the 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.
5
<PAGE>
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 six month period ended June 30, 1994, and for the same period
in the prior year.
REVENUES
Total revenues were $1,079.0 million in the six months ended June 30, 1994,
and $1,037.3 million in the six months ended June 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.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Local service $595.4 $564.8 $30.6 5.4
The $30.6 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 3,426,539 at June 30, 1993, to 3,538,217 at
June 30, 1994.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Network access:
Interstate $220.5 $212.9 $7.6 3.6
Intrastate $70.1 $71.5 $(1.4) (2.0)
The increase of $7.6 million in interstate access revenues was due principally
to higher volumes and lower payments to an interstate pool, partially offset
by lower rates. Network access revenues from intrastate services decreased
$1.4 million due principally to lower intrastate rates. Higher volumes
partially offset the above decrease.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Long distance $92.3 $94.8 $(2.5) (2.6)
Lower intralata long distance rates effective December 1, 1993 were the major
contributor to the decrease in long distance revenue.
6
<PAGE>
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Other $100.7 $93.3 $7.4 7.9
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 $971.6 million in the six months ended June 30,
1994, and $816.8 million in the six months ended June 30, 1993. The increase
was due primarily to a work force restructuring charge and higher contracted
services. The increases were partially offset by lower materials and supplies
expense and depreciation expense.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Employee-related expenses $245.8 $237.2 $ 8.6 3.6
The increase in employee related expenses was due primarily to higher
postretirement benefits expense, higher salary and wage rates and higher
incentive compensation expense. These increases were partially offset by
lower salaries and wages as a result of lower employee levels and lower
overtime charges.
At June 30, 1994, the Company had 9,789 employees compared to 10,342 at
June 30, 1993. The reduction of 553 employees resulted primarily from force
reduction programs.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Other operating expenses $286.8 $274.0 $12.8 4.7
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 and access expense
partially offset the above increase.
7
<PAGE>
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Depreciation and amortization $191.4 $193.8 $(2.4) (1.2)
Depreciation expense decreased due to a lower average composite depreciation
rate partially offset by higher plant investment.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Taxes other than income taxes $115.1 $111.8 $3.3 3.0
Taxes other than income taxes increased due to higher property tax expense
reflecting an increase in property tax rates.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Restructuring Charge $132.5 - $132.5 -
As discussed more fully in the Note 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 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.
This program resulted in a first quarter 1994 charge of $132.5 million ($86.1
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 $35.9
million. Settlement gains of an estimated $50.0 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 1,500 employees would leave the payroll in 1994 with the balance
departing by the end of the third quarter of 1995. 365 employees left the
payroll in the second quarter of 1994 under this plan. As previously
discussed in the Note, 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 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.
8
<PAGE>
Form 10-Q Part I THE OHIO BELL TELEPHONE COMPANY
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.
INTEREST EXPENSE, OTHER EXPENSES AND INCOME TAXES
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Interest expense $30.8 $30.3 $.5 1.7
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 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.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Other expense (income) - net $(7.3) $3.8 $(11.1) -
Other expense (income)-net decreased by $11.1 million due principally to 1993
costs and expenses of $9.5 million related to the redemption of the Company's
debentures.
Six months ended June 30
Increase
(Dollars in millions) 1994 1993 (Decrease) % Change
Income taxes $23.2 $50.7 $(27.5) -
Federal income taxes decreased $27.5 million due principally to decreased
taxable income as a result of the 1994 work force restructuring charge.
9
<PAGE>
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 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.
Regulatory Proceedings
Hearings began on June 22, 1994, with the Public Utilities Commission of Ohio
on the Company's alternative regulation proposal, called Advantage Ohio, and
on the Office of the Consumers' Counsel complaint alleging that the Company is
earning in excess of its authorized rate of return and are ongoing.
10
<PAGE>
Form 10-Q Part II THE OHIO BELL TELEPHONE COMPANY
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Reports on Form 8-K.
No Form 8-K was filed by the registrant during the quarter for which this
report is filed.
11
<PAGE>
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: August 12, 1994 /s/ R. A. Brown
Richard A. Brown
Vice President - Comptroller
(Principal Accounting Officer)
12
