<PAGE>1
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 March 31, 1997
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)
45 Erieview Plaza, Cleveland, Ohio 44114
I.R.S. Employer Identification Number 34-0436390
Telephone Number - (800) 257-0902
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 April 30, 1997, one common share was outstanding.
<PAGE>2
Part I - Financial Information
------------------------------
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
----------------
1997 1996
---- ----
Revenues
Local service...................... $ 331.4 $ 319.4
Interstate network access.......... 128.8 115.9
Intrastate network access.......... 31.6 35.8
Long distance services............. 37.5 42.1
Other.............................. 40.2 39.5
--------- ---------
569.5 552.7
--------- ---------
Operating expenses
Employee-related expenses.......... 106.8 105.9
Depreciation and amortization...... 101.7 94.5
Other operating expenses........... 177.4 190.2
Taxes other than income taxes...... 47.1 51.0
--------- ---------
433.0 441.6
--------- ---------
Operating income..................... 136.5 111.1
Interest expense..................... 14.4 13.9
Other income, net.................... 1.8 2.9
--------- ---------
Income before income taxes........... 123.9 100.1
Income taxes......................... 42.1 32.9
--------- ---------
Net income........................... 81.8 67.2
Accumulated deficit,
beginning of period................ (98.1) (122.8)
Less, dividends declared ......... 81.4 60.4
--------- ---------
Accumulated deficit,
end of period...................... $ (97.7) $ (116.0)
========= =========
See Notes to Condensed Financial Statements.
Page 2
<PAGE>3
CONDENSED BALANCE SHEETS
(Dollars in Millions)
March 31, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments......... $ 0.2 $ 0.1
Receivables, net
Customers................................. 459.8 466.3
Ameritech and affiliates.................. 0.8 1.6
Other..................................... 15.6 15.2
Material and supplies....................... 3.8 3.2
Prepaid and other........................... 14.4 8.9
--------- ---------
494.6 495.3
--------- ---------
Property, plant and equipment................ 6,086.2 6,021.6
Less, accumulated depreciation............... 3,756.0 3,691.4
--------- ---------
2,330.2 2,330.2
--------- ---------
Investments, primarily in affiliates......... 59.4 65.5
Other assets and deferred charges............ 190.3 195.6
--------- ---------
Total assets................................. $ 3,074.5 $ 3,086.6
========= =========
See Notes to Condensed Financial Statements.
Page 3
<PAGE>4
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
March 31, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech .................. $ 88.0 $ 68.5
Accounts payable
Ameritech Services, Inc. (ASI)............ 91.4 93.6
Ameritech and affiliates.................. 30.0 34.3
Other..................................... 110.7 120.8
Other current liabilities.................. 263.9 270.7
--------- ---------
584.0 587.9
--------- ---------
Long-term debt.............................. 834.7 834.9
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 99.9 101.7
Unamortized investment tax credits......... 33.7 35.1
Postretirement benefits
other than pensions...................... 539.8 542.3
Long-term payable to ASI................... 15.1 16.2
Other ..................................... 54.9 56.5
--------- ---------
743.4 751.8
--------- ---------
Shareowner's equity
Common shares - (one share issued
and outstanding without par value)....... 1,010.1 1,010.1
Accumulated deficit........................ (97.7) (98.1)
--------- ---------
912.4 912.0
--------- ---------
Total liabilities and shareowner's equity... $ 3,074.5 $ 3,086.6
========= ========
See Notes to Condensed Financial Statements.
Page 4
<PAGE>5
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
-------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 81.8 $ 67.2
Adjustments to net income
Depreciation and amortization............... 101.7 94.5
Deferred income taxes, net.................. (7.1) (2.8)
Investment tax credits, net................. (1.4) (2.0)
Capitalized interest........................ (1.1) (1.1)
Change in accounts receivable, net.......... 6.9 (5.3)
Change in material and supplies............. (3.0) (0.8)
Change in certain other current assets...... (5.5) 6.9
Change in accounts payable.................. (16.6) (32.0)
Change in certain other current
liabilities ............................. (1.7) (2.7)
Change in certain other noncurrent
assets and liabilities..................... (3.0) (7.8)
Other operating activities, net............ 6.2 5.1
-------- --------
Net cash from operating activities............ 157.2 119.2
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (99.4) (87.6)
Proceeds from disposals of
property, plant and equipment................ 4.6 0.9
Other investing activity...................... 0.1 --
-------- --------
Net cash from investing activities............ (94.7) (86.7)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... 19.5 --
Retirements of long-term debt................. (0.5) (0.1)
Dividend payments............................. (81.4) (121.5)
-------- --------
Net cash from financing activities............ (62.4) (121.6)
-------- --------
Net decrease in cash and
temporary cash investments................... 0.1 (89.1)
Cash and temporary cash investments,
beginning of period.......................... 0.1 134.5
-------- --------
Cash and temporary cash investments,
end of period................................ $ 0.2 $ 45.4
======== ========
See Notes to Condensed Financial Statements.
Page 5
<PAGE>6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
MARCH 31, 1997
NOTE 1: Preparation of Interim Financial Statements
The condensed consolidated financial statements of The Ohio Bell
Telephone Company (Ohio Bell or the Company) have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission (SEC). These financial statements include
estimates and assumptions that affect the reported amounts of assets
and liabilities and the amounts of revenues and expenses. Actual
amounts could differ from those estimates. In the Company's opinion,
these statements include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of results 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.
Page 6
<PAGE>7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following is a discussion and analysis of the changes in
revenues, operating expenses and other income and expenses for the
first three months of 1997 as compared with the first three months of
1996.
Results of Operations
- ---------------------
Revenues
- --------
Total revenues in the first three months of 1997 were $569.5 million
and were $552.7 million for the same period in 1996. The increase
was primarily attributable to growth in access lines and sales of
call management services, as well as increases in switched minutes of
use resulting from higher network usage volumes. These increases
were partially offset by net rate reductions.
- ---------------------------------------------------------------------
Local service
- -------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 331.4 $ 319.4 $ 12.0 3.8
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and
connection charges and public phone revenues. The increase in local
service revenues for the three months ended March 31, 1997 was due
largely to higher network usage volumes, resulting primarily from
access line growth of 3.3 percent over the prior year period. Second
line additions by residential and small business customers
contributed to the increase in access lines. Sales of call
management services, such as Call Forwarding, Call Waiting and Caller
ID continued to grow as well, fueled by customer demand for
additional flexibility and convenience. These increases were
partially offset by rate decreases pursuant to alternative
regulation.
There were 3,923,000 access lines in service as of March 31, 1997
compared with 3,799,000 as of March 31, 1996.
- ---------------------------------------------------------------------
- -
Network access
- --------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Three Months Ended $ 128.8 $ 115.9 $ 12.9 11.1
Intrastate
- ----------
Three Months Ended $ 31.6 $ 35.8 $ (4.2) (11.7)
Network access revenues are fees charged to interexchange carriers
that use the Company's local landline communications network to
connect customers to their long distance network. In addition, end
users pay flat rate access fees to connect to the long distance
network. These revenues are generated from both interstate and
intrastate services.
Page 7
<PAGE>8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Network access (cont'd.)
- ------------------------
The increase in network access revenues for the three months ended
March 31, 1997 was due primarily to an increase in network minutes of
use, resulting from overall growth in the volume of calls handled for
interexchange carriers. Greater demand for dedicated services by
Internet service providers and other high-capacity users also
contributed to the increase, as did rate increases. Interstate
minutes of use for the three months ended March 31, 1997 increased by
3.8 percent over the comparable prior year period.
The decrease in intrastate network access revenues for the three
months ended March 31, 1997 was due primarily to rate decreases,
partially offset by increased network usage volumes. Minutes of use
related to intrastate calls increased by 3.2 percent over the
comparable prior year period.
- ---------------------------------------------------------------------
Long distance service
- ---------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 37.5 $ 42.1 $ (4.6) (10.9)
Long distance service revenues are derived from customer calls to
locations outside of their local calling areas, but within the same
Local Access and Transport Area (LATA). The decrease in long
distance service revenues in the first three months of 1997 was due
primarily to a decrease in network usage, combined with a decrease in
rates.
- ---------------------------------------------------------------------
Other
- -----
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 40.2 $ 39.5 $ 0.7 1.8
Other revenues include revenue derived from directory advertising,
billing and collection services, inside wire installation and
maintenance services and other miscellaneous services. The increase
in other revenues for the three months ended March 31, 1997 was
primarily due to increased revenues from inside wire installation and
maintenance, combined with increases in other nonregulated services,
such as billing and collection. These increases were substantially
offset by decreases in rent revenue and directory advertising
revenues.
- ---------------------------------------------------------------------
Operating expenses
- ------------------
Total operating expenses for the three months ended March 31, 1997
decreased by $8.6 million or 1.9 percent to $433.0 million. The
decrease was primarily attributable to a decrease in other operating
expenses, such as cost of sales and contract services, as well as a
decrease in taxes other than income taxes. These decreases were
partially offset by increases in depreciation expense and employee-
related expenses, as discussed below.
Page 8
<PAGE>9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Employee-related expenses
- -------------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 106.8 $ 105.9 $ 0.9 0.8
The increase in employee-related expenses for the three months ended
March 31, 1997 was due primarily to increases in employee medical
benefits and other employee-related expenses. These increases were
substantially offset by decreased wages and salaries resulting from
decreased overtime and bonus expenses, partially offset by wage rate
increases and higher average employee levels.
There were 8,565 employees as of March 31, 1997, compared with 8,502
as of March 31, 1996.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 101.7 $ 94.5 $ 7.2 7.6
The increase in depreciation and amortization expense for the three
months ended March 31, 1997 was due to higher average plant balances
and the use of higher depreciation rates in certain plant categories
due to the use of shorter depreciable lives for newer technologies.
- ---------------------------------------------------------------------
Other operating expenses
- ------------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 177.4 $ 190.2 $ (12.8) (6.7)
The decrease in other operating expenses for the three months ended
March 31, 1997 was due to decreases in cost of sales and contract
services expenses, as well as decreased right-to-use fees for
switching system software and lower advertising expenses, due
primarily to the timing of planned marketing campaigns. These
decreases were offset by increases in uncollectibles and other
miscellaneous operating expenses.
- ---------------------------------------------------------------------
Taxes other than income taxes
- -----------------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 47.1 $ 51.0 $ (3.9) (7.6)
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other nonincome based taxes. The decrease in
taxes other than income taxes for the three months ended March 31,
1997 was due primarily to a decrease in property taxes resulting from
favorable tax reform legislation, as well as a decrease in gross
receipts taxes resulting from a lower level of revenues subject to
tax.
Page 9
<PAGE>10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Income and Expenses
- -------------------------
Interest expense
- ----------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 14.4 $ 13.9 $ 0.5 3.6
The increase in interest expense for the three months ended March 31,
1997 was due primarily to an increase in interest on borrowings from
the Ameritech short-term funding pool, partially offset by lower
miscellaneous interest expense.
- ---------------------------------------------------------------------
Other income, net
- -----------------
Change
March 31 Income Percent
------------
(dollars in millions) 1997 1996 (Expense) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 1.8 $ 2.9 $ (1.1) (37.9)
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. The decrease in other income,
net for the three months ended March 31, 1997 was primarily due to a
decrease in equity earnings from Ameritech Services, Inc. (ASI), as
well as a decrease in interest earned on funds invested in the
Ameritech short-term funding pool. These decreases were partially
offset by an increase in interest income.
- ---------------------------------------------------------------------
Income taxes
- ------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 42.1 $ 32.9 $ 9.2 28.0
The increase in income taxes for the three months ended March 31,
1997 was due primarily to increased pretax earnings resulting from
the revenue and expense items discussed above.
Page 10
<PAGE>11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
- --------------
Competition and the Telecommunications Act of 1996
- --------------------------------------------------
The Company's local service markets have been opened to competition
from interexchange carriers and other local service providers, as
required by the Telecommunications Act of 1996 (the 1996 Act).
Interconnection agreements that the Company has signed require it to
allow access to network elements at cost-based rates or services at
discounted, wholesale rates. These agreements may result in some
downward pressure on local service revenues, as a portion of the
Company's revenue shifts from local service at retail rates to
network access at wholesale rates.
The 1996 Act was also designed to bring renewed scrutiny of the
current universal service funding policy. Historically, network
access charges have been used to help local exchange carriers ensure
universal basic telephone service to all customers. The FCC is
expected to review and possibly modify this policy during 1997. Any
modifications by the FCC may result in changes to the Company's
revenue stream related to network access charges.
The Company has signed a significant number of interconnection and
resale agreements with competitors, paving the way for entry into
the interLATA long distance market. However, FCC rules require that
interLATA long distance service be offered by a separate subsidiary
of Ameritech. Accordingly, Ameritech's entry into this market will
not generate long distance revenues for Ohio Bell. As a result, the
potential revenue decline brought by local service competition will
not be offset at the Company by gains in long distance revenue.
It is impossible to predict the specific impact of the Telecom Act
and other changes in the industry on Ohio Bell's business or
financial condition. Notwithstanding the potential for an adverse
effect on its revenue streams, the Company intends to pursue growth
opportunities in its local exchange business.
Private Securities Litigation Reform Act Safe Harbor Statement
- ------------------------------------------------------------------
Except for historical information contained herein, the above
discussion contains certain forward-looking statements that involve
potential risks and uncertainties. The Company's future results
could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not
limited to, changes in economic and market conditions, effects of
state and federal regulation and the impact of new technologies.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or update these forward-
looking statements to reflect events or circumstances that arise
after the date hereof or to reflect the occurrence of unanticipated
events.
Page 11
<PAGE>12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
27 Financial Data Schedule.
(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 12
<PAGE>13
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
------------------------------
(Registrant)
Date: May 6, 1997 /s/ Ronald G. Pippin
--------------------------
Ronald G. Pippin
Comptroller
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM
THE OHIO BELL TELEPHONE COMPANY'S MARCH 31, 1997 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 200
<SECURITIES> 0<F1>
<RECEIVABLES> 511,800
<ALLOWANCES> (35,600)
<INVENTORY> 3,800
<CURRENT-ASSETS> 494,600
<PP&E> 6,086,200
<DEPRECIATION> 3,756,000
<TOTAL-ASSETS> 3,074,500
<CURRENT-LIABILITIES> 584,000
<BONDS> 834,700
0
0
<COMMON> 1,010,100
<OTHER-SE> (97,700)
<TOTAL-LIABILITY-AND-EQUITY> 3,074,500
<SALES> 0<F2>
<TOTAL-REVENUES> 569,500
<CGS> 0<F3>
<TOTAL-COSTS> 433,000
<OTHER-EXPENSES> (1,800)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,400
<INCOME-PRETAX> 123,900
<INCOME-TAX> 42,100
<INCOME-CONTINUING> 81,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,800
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>SECURITIES ARE NOT MATERIAL AND THEREFORE HAVE NOT BEEN STATED SEPARATELY IN
THE FINANCIAL STATEMENTS. THIS AMOUNT IS INCLUDED IN THE CASH TAG.
<F2>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.
<F3>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).
</FN>
</TABLE>
