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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 1-6781
THE OHIO BELL TELEPHONE COMPANY
An Ohio Corporation I.R.S. Employer No.
34-0436390
45 Erieview Plaza
Cleveland, Ohio 44114
Telephone Number 1-800-257-0902
Securities registered pursuant to Section 12(b) of the Act:
Forty Year 7 1/2% Debentures, due October 1, 2011
Forty Year 7 7/8% Debentures, due October 1, 2013
Exchanges on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH
CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION J(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
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TABLE OF CONTENTS
PART I
Item Page
---- ----
1. Business......................................... 1
2. Properties....................................... 7
3. Legal Proceedings................................ 8
4. Submission of Matters to a Vote of Security
Holders (Omitted pursuant to General Instruction J(2)).
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable).
6. Selected Financial and Operating Data............ 9
7. Management's Discussion and Analysis of Results of
Operations (Abbreviated pursuant to
General Instruction J(2))....................... 10
8. Financial Statements and Supplementary Data...... 16
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 31
PART III
10. Directors and Executive Officers of the Registrant
(Omitted pursuant to General Instruction J(2)).
11. Executive Compensation (Omitted pursuant to
General Instruction J(2)).
12. Security Ownership of Certain Beneficial Owners
and Management (Omitted pursuant to General
Instruction J(2)).
13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction J(2)).
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ....................... 32
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PART I
Item 1. Business.
The Company
The Ohio Bell Telephone Company (Ohio Bell or the Company),
incorporated under the laws of the State of Ohio, has its principal
office at 45 Erieview Plaza, Cleveland, Ohio 44114 (telephone
number 1-800-257-0902). The Company is a wholly owned subsidiary
of Ameritech Corporation (Ameritech), a Delaware Corporation.
Ameritech is the parent of numerous other communications businesses
and has its principal executive offices at 30 South Wacker Drive,
Chicago, Illinois 60606 (telephone number 1-800-257-0902). The
Company is a statutory close corporation managed by its sole
shareholder rather than a Board of Directors as permitted by Ohio
law.
Ameritech operates its business within the framework of customer-
specific business units delivering specialized services to various
categories of customers, each with unique requirements. The
functions of the business units, which include consumer, business,
cellular, advertising and capital services, as well as services
provided to other companies in the communications industry, overlap
the legal entities, including the Company, which form the
infrastructure of Ameritech. The products and services of all the
companies are marketed under the "Ameritech" brand identity, but
Ameritech's five landline communications companies remain
responsible within their respective service areas for providing
telephone and other communications services, subject to regulation
by the Federal Communications Commission (FCC) and the respective
state public service commissions in Illinois, Indiana, Michigan,
Ohio and Wisconsin. Ohio Bell is regionally identified and does
business as "Ameritech Ohio."
Ameritech is one of seven regional holding companies (RHCs)
formed in connection with the court-approved divestiture of certain
assets of AT&T Corp. (AT&T), formerly American Telephone and
Telegraph Company. Effective January 1, 1984, AT&T transferred to
Ameritech its 100% ownership of the exchange telecommunications,
exchange access and printed directory advertising portions of
Illinois Bell Telephone Company; Indiana Bell Telephone Company,
Incorporated; Michigan Bell Telephone Company; Ohio Bell and
Wisconsin Bell, Inc. (referred to collectively as the "Ameritech
landline communications subsidiaries"), as well as a cellular
communications company.
The consent decree, entitled "Modification of Final Judgment"
(Consent Decree), as originally approved in 1982 by the United
States District Court for the District of Columbia (Court), placed
restrictions on the post-divestiture activities of the seven RHCs,
including Ameritech. Relief from these restrictions could be had
only upon a showing to the Court that there was no substantial
possibility that the requesting company could use its monopoly
power to impede competition in the market it sought to enter. Over
time, the Court granted waivers to the RHCs to engage in otherwise
prohibited lines of business, including the right to offer
information services. Ameritech sought to remove or modify the
remaining restrictions, which included prohibitions on providing
long distance services and manufacturing telecommunications
equipment. These efforts were suspended upon the passage of the
Telecommunications Act of 1996 (Telecom Act). The Telecom Act
effectively superseded future operation of the Consent Decree.
Consequently, in April 1996, the Court issued an order terminating
the Consent Decree and dismissing all pending waiver requests.
Implementing the Telecom Act
On February 8, 1996, the first comprehensive overhaul of
telecommunications legislation in 62 years was signed into law,
removing barriers that prevented the phone, cable TV and broadcast
industries from entering each others businesses. The Telecom Act
addresses various aspects of competition within, and regulation of,
the communications industry. Among other things, the new law
defines the conditions under which local exchange carriers,
including the Ameritech landline communications subsidiaries, may
offer long distance service and provides certain mechanisms
intended to facilitate local exchange competition. The Act gives
the FCC the authority to determine when incumbent
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local exchange carriers have satisfied the statutory criteria
required to provide long distance service in an in-region state,
including meeting a 14-point competitive checklist. The law
eliminates any remaining barriers to companies wishing to compete
against providers of local phone service.
As required by the new law, in August 1996 the FCC adopted rules
to implement the local competition provisions. The rules require
local exchange carriers, among other duties, to (1) provide
interconnection to any telecommunications carrier at any
technically feasible point, equal in quality to that provided for
the local exchange carrier's own operations; (2) provide such
carriers with access to network elements on an unbundled basis; and
(3) offer for resale, at wholesale rates, any telecommunications
services that the local exchange carrier provides at retail to
subscribers who are not telecommunications carriers. The FCC's
rules address pricing for interconnection, unbundled network
elements and resale of telecommunications services.
In October 1996, in an order entered in an appeal filed by
certain local exchange carriers, the U.S. Court of Appeals for the
Eight Circuit stayed the portion of the FCC rules with respect to
pricing and the FCC's so-called "pick and choose" rules. The U.S.
Supreme Court declined to overturn the appeals court stay. The
stay will be in effect until the appeals court decides on the
merits of those provisions, sometime in 1997. Although Ameritech
filed a separate lawsuit, the appeals court consolidated all
challenges to the FCC rules. In the meantime, the FCC's
interconnection rules remain in effect.
It is not possible to determine what effect the FCC rules will
have on the Company's business until challenges to the rules have
been resolved and the state regulatory commission in Ohio has acted
on the matters within its jurisdiction.
Ohio Bell's Full Service Communications Business
Ohio Bell furnishes a wide variety of advanced
telecommunications services, including local exchange and toll
service, network access and communications products to business,
residential and communications company customers in an operating
area comprised of five Local Access and Transport Areas (LATAs) in
Ohio. These LATAs are generally centered on a city or other
identifiable community of interest, and each LATA marks the
boundary within which Ohio Bell may provide telephone service. The
Company provides two basic types of communications services. It
transports communications traffic between a subscriber's equipment
and the telephone exchange offices located within the same LATA
(intraLATA service). These services include local exchange,
private line and intraLATA toll services (including 800 and special
services for data, radio and video transport). In addition, it
provides exchange access service, which links a subscriber's
telephone or other equipment to the transmission facilities of long
distance carriers, which in turn provide communications service
between LATAs (interLATA, or long distance, service). About 60% of
the population and 25% of the area of Ohio is served by Ohio Bell.
The remainder of the state is served by nonaffiliated telephone
companies.
Ohio Bell also provides directory listings, public telephone and
local and toll operator services, including collect calls, third
number billing, person-to-person and calling card calls. It offers
call management services, including voice mail, Caller ID, call
waiting and call forwarding, as well as digital network services
such as on-line database access and fax messaging, document sharing
functions and video conferencing for desktop computers. The
Company provides billing and collection services for several
companies, including billing for long distance services offered by
certain long distance carriers, some of which began billing their
own customers in 1996. In 1997, Ohio Bell launched the first phase
of a plan to offer to customers in certain areas a single bill for
local telephone services, as well as other services provided by
affiliated companies, such as cellular, paging and security
monitoring services, with cable TV and the Ameritech's long
distance services to be added at a later date. The Company markets
its local phone services on a wholesale basis to certain carriers
that resell services from the Company's network.
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The following table sets forth the number of access lines served
by the Company at the end of each of the last five years:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Access lines in service
(in thousands)........... 3,884 3,754 3,609 3,481 3,380
Percent increase over prior
year..................... 3.5 4.0 3.7 3.0 2.0
Ohio Bell has an agreement with Ameritech Publishing, Inc.
(API), an Ameritech subsidiary doing business as Ameritech
Advertising Services, under which the Company furnishes to API
certain services and data to be used by API in publishing and
distributing classified and alphabetical directories. In exchange,
the Company receives compensation for the services and data.
Ameritech Services, Inc. (ASI) is a company jointly owned by
Ohio Bell and the other Ameritech landline communications
subsidiaries. ASI provides to those companies human resources,
technical services, procurement, marketing and regulatory planning,
as well as labor contract bargaining oversight and coordination.
ASI acts as a shared resource for the Ameritech subsidiaries
providing operational support for the Ameritech landline
communications subsidiaries and integrated communications and
information systems for all the business units.
In 1996, about 93% of the total operating revenues of the
Company were from communications services and the remainder
principally from billing and collection services, rents, directory
advertising and other miscellaneous nonregulated operations. About
73% of the revenues from communications services were attributable
to intrastate operations.
Regulatory Environment - Federal
Ohio Bell is subject to jurisdiction by the FCC pursuant to
applicable law. The FCC prescribes for communications companies a
uniform system of accounts, rules for apportioning costs between
regulated and nonregulated services, and the principles and
standard procedures used to separate regulated property, plant and
equipment costs, revenues, expenses, taxes and reserves between
those applicable to interstate services under the jurisdiction of
the FCC and those applicable to intrastate services under the
jurisdiction of the respective state regulatory authorities.
The transformation of the local exchange business has been
underway for some time, even before recent federal legislation.
The Company's interstate revenues are now regulated by use of a
price cap mechanism rather than by rate-of-return regulation. The
FCC's price cap regulatory scheme sets maximum limits on the prices
that local exchange carriers, including Ohio Bell, can charge for
interstate access as compensation for the use of their facilities
for the origination or termination of long distance and other
communications by other carriers. The limits are adjusted each
year to reflect inflation, a productivity factor and certain other
cost changes. Under price caps, local exchange carriers have
increased flexibility to change prices of access services, as well
as prices for interstate intraLATA and video dial tone service
offerings, provided they do not exceed the allowed price cap.
Under interim changes to the price cap plan, the FCC adopted three
productivity/sharing options. Ohio Bell and the other Ameritech
landline communications subsidiaries elected the 5.3% productivity
factor which allows the Company to retain all of its earnings,
whereas election of a lower factor would require earnings to be
shared with customers. The FCC has established a rulemaking
proceeding to consider permanent changes to its price cap
regulation plan.
One major regulatory uncertainty concerns access charge reform.
In December 1996, the FCC laid out its proposals in this area,
asking for comments on a number of steps it would take to
restructure the fees to make the system compatible with the pro-
competitive deregulatory framework established by the Telecom Act.
This move was the third in a trilogy of FCC actions that it has
said are designed to foster and accelerate the introduction of
efficient
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competition in all telecommunications markets. In August 1996, the
FCC released its Interconnection Order to implement the local
competition provisions of the Telecom Act. In November 1996, the
Federal-State Universal Service Joint Board issued its
recommendations to the FCC for reforming the existing system of
universal basic telephone service, which is the part of access
charges used, among other things, to subsidize local service in
high cost areas of the country. The goal is to preserve and
advance universal service in a manner that permits local telephone
markets to move from monopoly to competition. The FCC's current
access charge policies were adopted at the time of the divestiture
by AT&T. These policies were designed primarily to promote
competition in the interstate, interexchange market by ensuring
that all long distance companies would be able to originate and
terminate their traffic over incumbent local exchange carrier
networks at just, reasonable and nondiscriminatory rates. Although
these policies contemplated long distance competition, they did not
attempt to address the potential effects of full competition.
Final rules on access charges are expected in May 1997. In a
separate proceeding, the FCC is working to overhaul the mechanism
to determine the actual cost of universal service and how those
costs will be recovered.
As part of the process of reforming the interstate access charge
system, the FCC sought comment on the treatment of Internet and
other information service providers (sometimes referred to as
enhanced service providers) that also use the local exchange
carriers' facilities. Since the access charge system was
established in 1983, enhanced service providers have been
classified, for purposes of the access charge rules, as end users
rather than carriers and therefore are exempt from access charges.
The FCC made no specific proposals, but tentatively concluded that
enhanced service providers should not be subject to access charges
as currently constituted.
Other FCC Matters
In June 1996, the FCC adopted rules that will allow customers to
switch local exchange carriers without having to change their phone
numbers. Under the rules, by the end of 1998 the nation's one
hundred largest metropolitan areas must have "number portability"
that meets FCC standards, and local exchange carriers are required
to offer temporary number portability, such as remote call
forwarding, immediately.
In July 1996, the FCC announced that the former Bell operating
companies of AT&T (Bell Companies), including Ameritech, that
provide out-of-region long distance service through an affiliate
will be regulated as "nondominant carriers" as long as they meet
three requirements. The interim rules allow the Bell Companies
nondominant carrier status if their affiliated companies maintain
accounting records separate from those of the parent, do not
jointly own transmission or switching equipment with the parent and
obtain services from the parent at tariffed rates. Nondominant
carriers are not subject to price cap regulation and their tariffs
take effect on one day's notice, compared with at least two weeks
for dominant carriers. The FCC plans to establish final rules for
Bell Company out-of-region services in another rulemaking that
began in March 1996.
In December 1996, the FCC issued transitional structural and
accounting rules that apply to the provision of certain services
provided by the Bell Companies including in-region long distance
services. These rules require that certain services be provided
through a separate affiliate and prohibit joint ownership of
switching and transmission facilities. In addition, they call for
nondiscrimination between the affiliate and nonaffiliate long
distance carriers, subject to certain exemptions. The FCC order
did not resolve the issue of whether Bell Company in-region long
distance affiliates will be considered nondominant.
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Regulatory Environment - State
Ohio Bell is also subject to regulation by the Public Utility
Commission of Ohio (PUCO) with respect to certain intrastate rates
and services. In January 1995, Ohio Bell implemented its Advantage
Ohio price regulation plan following approval by the PUCO. Under
the plan, overall rate changes are subject to price caps. Rates
for all services were capped in 1995 and rates for basic access
lines and usage were capped for an additional five years. The plan
provides for the ability to flexibly price competitive and
discretionary services. A series of rate reductions totaling $84
million annually are being phased in over a six-year period,
including reductions in the rates for residential local usage and
access lines, reductions in carrier access charges and deaveraging
of access line rates. The Company committed to meeting certain
benchmarks for the deployment of advanced technology to schools,
hospitals and libraries, funding of community computer centers, a
discounted Lifeline telephone service for low-income customers and
$21 million in grants for new technology in public schools and for
economic development.
In March 1996, the Ohio Supreme Court released an opinion
reversing the PUCO's order that approved the Advantage Ohio plan
and remanding the matter to the PUCO. The court ruled that the
PUCO exceeded its statutory authority when it used alternative rate-
setting methods to establish the Company's basic local exchange
service rates because of the procedure followed by the Company and
the commission. In June 1996, the governor of Ohio signed into law
a bill that restored the original benefits of the plan and included
$21 million in intrastate access charge reductions, as well as
additional customer benefits in the event the Company does not meet
prescribed levels of service.
Ameritech has asked all five state commissions in its region to
declare that its statement of generally available terms and
conditions for interconnection meets the competitive checklist
under the Telecom Act.
Long Distance Services
Under the Telecom Act, Ohio Bell and other Bell Companies must
open the local market to competition by implementing a 14-point
checklist before they can offer interLATA long distance service to
their local landline customers. The FCC will determine whether or
not a Bell Company has satisfied the statutory criteria, including
the competitive checklist, compliance with structural and
accounting rules and whether its entry into long distance is
consistent with the public interest. A Bell Company is restricted
from providing interLATA long distance service until the FCC
determines that the statutory criteria have been met. The FCC will
give substantial weight to Department of Justice recommendations in
reviewing a carrier's entry into the market. In preparation, Ohio
Bell has negotiated or arbitrated numerous agreements with
competitors to allow interconnection access to the Company's
network elements at cost-based rates and purchase of its local
services at discounted, wholesale rates for resale to the public.
The FCC has 90 days to act upon a Bell Company's application to
provide interLATA long distance service.
InterLATA long distance is a $1.9 billion market in the
Company's local service area. Ameritech expects to offer interLATA
landline long distance service within its region in 1997. 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. Ameritech is also certified in all states outside its
five-state region. Long distance carriers, WorldCom, Inc. and
Teleglobe Inc. will complete long distance calls for Ameritech
outside the region on a resale basis.
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Competition -- Evolution of the Industry
Because of the Telecom Act, the communications landscape is
rapidly changing. One objective of the new law was to foster local
exchange competition by establishing a regulatory framework to
govern the provision of local and long distance telecommunications
services. It permits the Bell Companies, including Ohio Bell, to
provide interLATA long distance services only after satisfying the
conditions of the new law for opening local markets to competition
and demonstrating to the FCC that such provision is in the public
interest. For the first time in more than 60 years, all
communications companies are governed by a new set of rules that
call for competition and open markets, not regulatory management,
as the basic business environment. This public policy change opens
a host of business opportunities for providers of all forms of
communications, enabling them to become full-service providers of
voice, video, data, local and long distance services for their
customers. As a result of the new law, consumers can expect to see
more choices and receive greater value for these services.
With the passage of the Telecom Act, Ohio Bell's local service
market is being opened to competition from long distance carriers,
cable TV providers and other nontraditional local service
providers. Interconnection agreements with these providers and the
applicable regulations require the Company to allow access to
network elements at cost-based rates or to provide services for
resale at discounted, wholesale rates. Competitive entry by these
providers may result in some downward pressure on local service
revenues as a portion of the Company's revenues shift from local
service at retail rates to network access at wholesale rates.
The Telecom Act will also 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. Modifications
of this policy by the FCC may result in changes to the Company's
revenue stream related to network access charges.
Although telecom reform was the most dramatic change affecting
the communications industry in 1996, another industry trend that
intensified was the number of mergers, alliances and joint
ventures. Over time, the number, variety and size of competitors
will change and may include companies with substantial capital,
technological and marketing resources and wide-ranging service
offerings.
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 expects to capture a
major share of the expected growth in the communications
marketplace, building on its strengths and branching into new
services that are a logical extension of its business.
Patents, Trademarks and Licenses
The Company, through its parent, Ameritech, has rights to use
various patents, copyrights, trademarks and other intellectual
property which are necessary for it to conduct its present business
operations. It is not anticipated that any such intellectual
property will be subject to expiration or nonrenewal of rights
which would materially and adversely affect the Company.
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Ohio Bell's Human Resources
As of December 31, 1996, Ohio Bell employed 8,579 persons, a
moderate increase from 8,360 as of December 31, 1995. In 1996,
Ameritech commenced a ten-year agreement with Integrated Systems
Solutions Corporation (ISSC), a subsidiary of IBM, to perform
certain information technology services formerly performed by the
Ameritech landline communications companies, and to assume
responsibility for consolidation of Ameritech's data centers.
Approximately 60 management employees of the Company were offered
and accepted employment with ISSC.
About 90% of the Company's employees are represented by the
Communications Workers of America (CWA) which is affiliated with
the AFL-CIO. The current three-year contract expires in the summer
of 1998.
Item 2. Properties.
The properties of Ohio Bell do not lend themselves to
description by character and location of principal units. As of
December 31, 1996, the Company's investment in property, plant and
equipment consisted of the following:
Land and buildings.................................. 9%
Central office equipment............................ 40
Cable, wiring and conduit........................... 43
Other............................................... 6
Under construction.................................. 2
---
100%
Central office equipment includes analog and digital switching
equipment, transmission equipment and related facilities.
Buildings are principally central offices. Cable, wiring and
conduit constitute outside plant, which includes poles, as well as
cable, conduit and wiring primarily above or under public roads,
highways or streets or above or under private property.
Substantially all of the installations of central office equipment
and administrative offices are located in buildings owned by the
Company and situated on property it owns. Many garages and
business offices and some installations of central office equipment
and administrative offices are in leased quarters.
Capital expenditures, the single largest use of Company funds,
were as follows for the last five years (in millions):
1992 ........................................ $356
1993 ........................................ 327
1994 ........................................ 286
1995 ........................................ 316
1996 ........................................ 426
Ohio Bell has been making and expects to continue to make large
capital expenditures to respond to the market's demand for a
modern, efficient and productive network. The total investment in
property, plant and equipment increased from about $5.3 billion as
of December 31, 1991, to about $6.0 billion as of December 31,
1996, after giving effect to retirements but before deducting
accumulated depreciation at either date.
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Item 3. Legal Proceedings.
Pre-Divestiture Contingent Liabilities Agreement
The Court approved Plan of Reorganization signed in connection
with AT&T's divestiture effective January 1, 1984 provides for the
recognition and payment of liabilities that are attributable to pre-
divestiture events (including transactions to implement the
divestiture) but that do not become certain until after the
divestiture. These contingent liabilities relate principally to
litigation and other claims with respect to the former Bell
Companies' rates, taxes, contracts, equal employment matters,
environmental matters and torts (including business torts, such as
alleged violations of the antitrust laws).
With respect to such liabilities, under agreements entered into
at divestiture, AT&T and the Bell Companies will share the costs of
any judgment or other determination of liability entered by a court
or administrative agency, the costs of defending the claim
(including attorneys' fees and court costs) and the cost of
interest or penalties with respect to any such judgment or
determination. Except to the extent that affected parties may
otherwise agree, the general rule is that responsibility for such
contingent liabilities will be divided among AT&T and the Bell
Companies on the basis of their relative net investment (defined as
total assets less accumulated depreciation) as of the effective
date of divestiture. Different allocation rules apply to
liabilities which relate exclusively to pre-divestiture interstate
or intrastate operations.
In January 1995, Ameritech and the other RHCs agreed to
terminate the sharing arrangement among the Bell Companies with
respect to pre-divestiture contingent liabilities for certain
matters. AT&T did not enter into the agreement and, accordingly,
the sharing arrangement remains in effect with respect to AT&T's
pre-divestiture liabilities and AT&T's share of Bell Company pre-
divestiture liabilities.
Although complete assurance cannot be given as to the outcome of
any litigation, in the opinion of the Company's management, any
monetary liability or financial impact to which Ohio Bell would be
subject after final adjudication of all of the foregoing actions
would not be material in amount to the Company.
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PART II
Item 6. Selected Financial and Operating Data.
THE OHIO BELL TELEPHONE COMPANY
SELECTED FINANCIAL AND OPERATING DATA
(Dollars in Millions)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues
Local service........... $1,311.8 $1,241.2 $1,204.2 $1,144.7 $1,121.9
Interstate
network access......... 480.9 449.2 446.0 434.4 427.9
Intrastate
network access......... 140.4 125.0 136.8 144.3 139.9
Long distance........... 161.6 166.6 182.4 186.8 169.8
Other................... 166.0 231.3 209.2 201.5 193.1
-------- -------- -------- -------- --------
Total.................... 2,260.7 2,213.3 2,178.6 2,111.7 2,052.6
Operating expenses*...... 1,766.3 1,671.1 1,919.2 1,666.8 1,621.2
-------- -------- -------- -------- --------
Operating income......... 494.4 542.2 259.4 444.9 431.4
Interest expense......... 57.4 58.4 59.5 58.8 63.2
Other (income) expense,
net..................... (9.4) (5.3) (10.6) 1.4 2.3
Income taxes............. 147.1 163.3 58.7 104.3 101.1
-------- -------- -------- -------- --------
Income before
extraordinary item
and cumulative effect of
changes in accounting
principles.............. 299.3 325.8 151.8 280.4 264.8
Extraordinary item
and cumulative effect of
changes in accounting
principles**............ - - (445.2) - (347.3)
-------- -------- -------- -------- --------
Net income (loss)........ $ 299.3 $ 325.8 $ (293.4) $ 280.4 $ (82.5)
-------- -------- -------- -------- --------
Total assets............. $3,086.6 $3,130.7 $3,051.5 $3,793.0 $3,854.9
Property, plant
and equipment, net...... $2,330.2 $2,293.5 $2,358.7 $3,191.5 $3,246.2
Capital expenditures,
net..................... $ 425.5 $ 315.7 $ 286.0 $ 327.1 $ 355.6
Long-term debt........... $ 834.9 $ 834.7 $ 834.9 $ 837.1 $ 713.7
Debt ratio............... 49.9 % 49.0 % 52.2 % 41.5 % 42.7
%
Return on average
equity.................. 32.8 % 38.2 % (25.4)% 22.3 %
(6.7)%
Return on average
total capital........... 19.4 % 21.8 % (10.7)% 14.9 %
(0.8)%
Pretax interest
coverage................ 8.9 9.6 4.6 7.4 6.6
Customer lines -
at end of year (000's).. 3,884 3,754 3,609 3,481 3,380
Customer lines served by -
Digital electronic
offices................ 86.6 % 80.1 % 78.9 % 69.4 % 55.2
%
Analog electronic
offices................ 13.4 % 19.9 % 21.1 % 30.6 % 44.8
%
Customer lines
per employee............ 453 449 397 347 305
Employees -
at end of year.......... 8,579 8,360 9,084 10,023 11,074
- -------------------
* As discussed in Note D to the financial statements, 1995
operating expenses include a net work force restructuring credit
of $42.7 million, while 1994 operating expenses include a
nonmanagement work force restructuring charge of $173.2 million.
** As discussed in Note I, the Company had a noncash after-tax
extraordinary charge in 1994 of $445.2 million as a result of
discontinuing the application of FAS 71. The Company had
accounting changes in 1992 for FAS 106 and FAS 112 aggregating
$347.3 million, after tax.
9
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations.
(Dollars in Millions)
Following is a discussion and analysis of the results of
operations of the Company for the year ended December 31, 1996 and
for the year ended December 31, 1995, which is based on the
Statements of Income and Accumulated Deficit. Other pertinent data
is also set forth in Selected Financial and Operating Data.
Results of Operations
Revenues
Total operating revenues were $2,260.7 million for 1996 and
$2,213.3 million for 1995. The increase of $47.4 million or 2.1%
consisted of the following:
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Local service......... $1,311.8 $1,241.2 $ 70.6 5.7
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 in 1996 was primarily attributable to higher
network volumes, resulting principally from growth in the number of
access lines, which increased 3.5% to 3,884,000 as of December 31,
1996 as compared with 3,754,000 as of December 31, 1995. Greater
sales of call management services, such as call forwarding, call
waiting and Caller ID, also contributed to the increase. These
increases were partially offset by net rate reductions.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Network access
Interstate ......... $ 480.9 $ 449.2 $ 31.7 7.1
Intrastate ......... 140.4 125.0 15.4 12.3
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.
The increase in network access revenues in 1996 was due
primarily to an increase in network minutes of use resulting from
overall growth in the volume of calls handled for interexchange
carriers. Minutes of use related to interstate and intrastate
calls increased 4.8% and 10.0% in 1996, respectively, compared with
the prior year. Network access revenues also increased due to the
effects of one-time billing settlements, which adversely impacted
revenues in 1995. The increase in network access revenues was
partially offset by net rate reductions.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Long distance......... $ 161.6 $ 166.6 $ (5.0) (3.0)
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 1996 was due primarily to a decrease
in network usage.
10
<PAGE>
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Other................. $ 166.0 $ 231.3 $ (65.3) (28.2)
Other revenues include revenue derived from directory
advertising, billing and collection services, inside wire
installation and maintenance services and other miscellaneous
services. The decrease in other revenues in 1996 was primarily
attributable to a decrease in directory advertising revenue largely
due to a renegotiated listing and directory services agreement with
Ameritech Publishing, Inc. (API), an Ameritech subsidiary doing
business as Ameritech Advertising Services. The renegotiated
agreement resulted in a revenue decrease of $89.9 million in 1996
compared with the prior year period. This decrease was partially
offset by an increase due to growth in voice messaging services,
sales of equipment and other nonregulated services, as well as an
increase in revenues from inside wire installation and maintenance
and billing and collection services.
Operating Expenses
Total operating expenses in 1996 increased by $95.2 million or
5.7% to $1,766.3 million. The increase was partially attributable
to the 1994 work force restructuring, which resulted in a credit of
$42.7 million ($27.8 million after-tax) in 1995 related primarily
to settlement gains from lump-sum pension payments to former
employees, partially offset by fourth quarter charges for planned
work force reductions due to data center consolidations, increased
force costs related to the work force restructuring started in 1994
and a charge to write down certain data processing equipment in
connection with information technology restructuring. Operating
expenses also increased as a result of increases in depreciation
and amortization expense and other operating expenses, such as cost
of sales, uncollectibles and contract services. These increases
were partially offset by decreases in employee-related expenses and
taxes other than income taxes, as discussed below.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Employee-related
expenses............. $ 426.7 $ 440.7 $ (14.0) (3.2)
The decrease in employee-related expenses in 1996 was due
primarily to decreases in employee benefits and other employee-
related expenses, as well as decreases in wages and overtime.
These decreases were partially offset by increased force costs
resulting from higher average employment levels, as well as an
increase in payroll taxes.
During September 1995, a union agreement was ratified by the
Communications Workers of America (CWA). The new contract and wage
increases were retroactive to August 6, 1995. The contract
included basic wage increases of 10.9% (compounded at the maximum
wage rate) over three years and a signing bonus of $500 to eligible
employees upon ratification. In addition, union employees now
receive their annual bonuses in the form of Ameritech stock instead
of cash beginning with the bonus for 1995 and continuing for the
remaining years of the labor contract. The contract addresses
wages, benefits, pensions, employment security, training and
retraining and other conditions of employment. Most of the
Company's nonmanagement work force (about 90% of total employees)
is represented by the union.
There were 8,579 employees as of December 31, 1996, compared
with 8,360 as of December 31, 1995.
11
<PAGE>
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Depreciation and
amortization......... $ 389.2 $ 364.7 $ 24.5 6.7
The increase in depreciation and amortization expense in 1996
was due to higher average plant balances, as well as the use of
higher depreciation rates in certain asset categories due to
shorter depreciable lives established in 1994.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Other operating
expenses............. $ 753.0 $ 700.1 $ 52.9 7.6
The increase in other operating expenses in 1996 was due to
increases in uncollectibles, cost of sales and other expenses
related to increased sales efforts for equipment and call
management services, such as voice messaging and other nonregulated
services. Contract services expenses also increased, due primarily
to higher rent expense in 1996, as well as increased right-to-use
fees for switching system software. A decrease in advertising
expenses, due primarily to the timing of planned marketing
campaigns, partially offset these increases.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Restructuring (credits)
charges.............. $ - $ (42.7) $ 42.7 n/a
As discussed more fully in Note D, the Company significantly
reduced its nonmanagement work force during 1994 and 1995 by 2,576
employees. New employees with different skills were added during
this period to accommodate growth and meet staffing requirements
for new business opportunities. As of 1995, all 2,576 employees
had left the Company, including 491 leaving in 1995. Noncash
settlement gains of $64.1 million were recorded in 1995 associated
primarily with lump-sum pension payments to former employees,
partially offset by increased force costs related to the
restructuring started in 1994, as well as a charge to write down
certain data processing equipment to net realizable value.
The restructuring program was recorded as follows:
Gross
Program Settlement Net Program Cost
----------------
Cost Gains Pretax After-tax
---- ----- ------ ---------
1995...................... $ 21.4 $ (64.1) $ (42.7) $ (27.8)
1994...................... 253.4 (80.2) 173.2 112.6
------- ------- ------- -------
Program total........... $ 274.8 $(144.3) $ 130.5 $ 84.8
======= ======= ======= =======
Additional employees left the Company in 1996 as a result of the
consolidation of data centers and additional work force reductions
previously discussed. No restructuring charges or credits were
recorded in 1996.
The work force restructuring program reduced annual employee-
related costs by approximately $50 thousand per departing employee.
The projected savings are being partially offset by the hiring of
new employees to accommodate growth, ensure high quality customer
service and meet staffing requirements for new business
opportunities.
12
<PAGE>
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Taxes other than
income taxes......... $ 197.4 $ 208.3 $ (10.9) (5.2)
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other taxes not directly related to earnings.
The decrease in taxes other than income taxes for 1996 was due
primarily to a decrease in property taxes resulting from favorable
tax reform legislation, as well as the current year impact of a
1995 gross receipts tax true-up adjustment.
Other Income and Expenses
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Interest expense...... $ 57.4 $ 58.4 $ (1.0) (1.7)
The decrease in interest expense for 1996 was due primarily to
decreases in interest on borrowings from the Ameritech short-term
funding pool, due primarily to low average balances (see Note A),
as well as lower miscellaneous interest expense.
Change
Income Percent
1996 1995 (Expense) Change
---- ---- -------- ------
Other income,
net.................. $ 9.4 $ 5.3 $ 4.1 77.4
Other income, net includes equity in earnings of affiliates,
interest income and other nonoperating items. The increase in
other income, net for 1996 was primarily due to an increase in
equity earnings from Ameritech Services, Inc. (ASI) and an increase
in interest income.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Income taxes.......... $ 147.1 $ 163.3 $ (16.2) (9.9)
The decrease in income taxes for 1996 was due primarily to the
$14.9 million tax effect associated with the work force
restructuring credit recorded in 1995. Excluding the effects of
this item, income taxes changed in line with the earnings of the
business.
13
<PAGE>
Other Matters
New accounting pronouncements
In June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." As amended by FAS 127, this
statement establishes standards of accounting for transfers of
assets in which the transferor has some continuing involvement with
the assets transferred or with the transferee. It also clarifies
the accounting for arrangements whereby assets are set aside for the
extinguishment of a liability. The statement is generally effective
for transactions occurring after December 31, 1996, with early or
retroactive application prohibited. The Company does not expect
adoption of this standard will have a material impact on its
financial statements.
In October 1996, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities." This SOP provides
authoritative guidance on specific accounting issues related to the
recognition, measurement, display and disclosure of environmental
remediation liabilities. The SOP addresses only those actions
undertaken in response to a threat of litigation or assertion of a
claim. It does not address accounting for pollution control costs
with respect to current operations or for costs of future site
restoration or closure required upon cessation of operations. The
SOP is effective for fiscal years beginning after December 15, 1996.
The Company does not expect adoption of this standard will have a
material impact on its financial statements.
Competition
Because of the Telecom Act, the communications landscape is
rapidly changing. The new law, among other things, was designed to
foster local exchange competition by establishing a regulatory
framework to govern the provision of local and long distance
telecommunications services. The 1996 Telecom Act permits the Bell
Companies to provide interLATA long distance services only after
satisfying the conditions of the new law for opening local markets
to competition and demonstrating to the FCC that such provision is
in the public interest. For the first time in more than sixty
years, all communications companies are governed by a new set of
rules that call for competition and open markets, not regulatory
management, as the basic business environment. This public policy
change opens a host of business opportunities for providers of all
forms of communications, enabling them to become full service
providers of voice, video, data, local and long distance services
for their customers. As a result of the new law, consumers can
expect to see more choices and competitive prices for these and
other services.
With the passage of the Telecom Act, the Company's local service
markets are being opened to competition from interexchange carriers,
cable TV providers and other nontraditional local service providers.
Interconnection agreements with these providers and the applicable
regulations require the Company to allow access to network elements
at cost-based rates or to provide services for resale at discounted,
wholesale rates. Competitive entry by these providers 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 Telecom Act will also 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. Modifications
of this policy by the FCC may result in changes to the Company's
revenue stream related to network access charges.
In 1996, the Company 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.
14
<PAGE>
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.
Regulatory environment
On March 5, 1996, the Ohio Supreme Court reversed the order of
the Public Utilities Commission of Ohio (PUCO or the Commission)
that approved the Advantage Ohio alternative regulation plan and
remanded the matter to the Commission. The court ruled that the
Commission exceeded its statutory authority when it used
alternative rate-setting methods in the context of a rate decrease
application. Advantage Ohio, originally adopted by the PUCO in
November 1994, granted the Company relief from rate-of-return
regulation in Ohio and replaced such regulation with a price cap
formula in exchange for certain rate reductions, grants to public
schools and other community infrastructure enhancements.
In May 1996, following approval by the PUCO of an agreement
between the Company and certain interexchange carriers, cable TV
companies and consumer representatives, the state legislature
passed legislation allowing the use of alternative regulation in
the context of a rate decrease application, thereby effectively
restoring the Advantage Ohio plan. The agreement approved by the
Commission stipulated a $21 million reduction in intrastate access
charges effective September 1, 1996, as well as additional customer
benefits in the event the Company does not meet prescribed
standards of service. The legislation, which was signed into law
in June 1996, also required the Commission to approve interim
interconnection arrangements for Time Warner by August 1, 1996.
The Commission approved an interconnection arrangement between the
Company and Time Warner on August 1, 1996.
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.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowner of The Ohio Bell Telephone Company
We have audited the accompanying balance sheets of The Ohio Bell
Telephone Company (an Ohio Corporation) as of December 31, 1996 and
1995, and the related statements of income and accumulated deficit
and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
The Ohio Bell Telephone Company as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note I to the financial statements, the Company
discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," in 1994.
Our audits are made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The financial
statement schedule included in Item 14(a)(2) is presented for
purposes of complying with the Securities and Exchange Commission's
rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 13, 1997
16
<PAGE>
THE OHIO BELL TELEPHONE COMPANY
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues.......................... $ 2,260.7 $ 2,213.3 $ 2,178.6
--------- --------- ---------
Operating expenses................
Employee-related expenses....... 426.7 440.7 501.0
Depreciation and amortization... 389.2 364.7 376.3
Other operating expenses........ 753.0 700.1 643.5
Restructuring (credits) charges. - (42.7) 173.2
Taxes other than income taxes... 197.4 208.3 225.2
--------- --------- ---------
1,766.3 1,671.1 1,919.2
--------- --------- ---------
Operating income.................. 494.4 542.2 259.4
Interest expense.................. 57.4 58.4 59.5
Other income, net................. 9.4 5.3 10.6
--------- --------- ---------
Income before income taxes and
extraordinary item............... 446.4 489.1 210.5
Income taxes...................... 147.1 163.3 58.7
--------- --------- ---------
Income before extraordinary item.. 299.3 325.8 151.8
Extraordinary item................ - - (445.2)
--------- --------- ---------
Net income (loss)................. 299.3 325.8 (293.4)
Reinvested earnings (deficit),
beginning of year................ (122.8) (242.0) 236.8
Less, dividends................... 274.6 206.6 185.4
--------- --------- ---------
Accumulated deficit,
end of year...................... $ (98.1) $ (122.8) $ (242.0)
========= ========= =========
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
THE OHIO BELL TELEPHONE COMPANY
BALANCE SHEETS
(Dollars in Millions)
As of December 31,
------------------
1996 1995
---- ----
Assets
Current assets
Cash and temporary
cash investments..................... $ 0.1 $ 0.1
Investment in Ameritech
funding pool......................... - 134.4
--------- ---------
0.1 134.5
Receivables, net
Customers and agents
(less allowance for
uncollectibles of $37.9 and
$22.2, respectively)................ 466.3 400.9
Ameritech and affiliates............. 1.6 25.3
Other................................ 15.2 15.7
Material and supplies................. 3.2 3.1
Prepaid and other..................... 8.9 23.8
--------- ---------
495.3 603.3
--------- ---------
Property, plant and equipment
In service............................ 5,946.6 5,671.2
Under construction.................... 75.0 85.8
--------- ---------
6,021.6 5,757.0
Less, accumulated depreciation........ 3,691.4 3,463.5
--------- ---------
2,330.2 2,293.5
--------- ---------
Investments, principally
in affiliates.......................... 65.5 64.3
Other assets and deferred charges....... 195.6 169.6
--------- ---------
Total assets............................. $ 3,086.6 $ 3,130.7
========= =========
Liabilities and shareowner's equity
Current liabilities
Debt maturing within one year
Ameritech............................ $ 68.5 $ -
Other................................ - 0.4
Accounts payable
Ameritech Services, Inc. (ASI)....... 93.6 132.6
Ameritech and affiliates............. 34.3 43.2
Other................................ 120.8 155.1
Other current liabilities............. 270.7 315.2
--------- ---------
587.9 646.5
--------- ---------
Long-term debt.......................... 834.9 834.7
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred
income taxes......................... 101.7 100.7
Unamortized investment
tax credits.......................... 35.1 43.1
Postretirement benefits
other than pensions.................. 542.3 547.5
Long-term payable to ASI.............. 16.2 17.4
Other................................. 56.5 53.5
--------- ---------
751.8 762.2
--------- ---------
Shareowner's equity
Common stock (one share
issued and outstanding).............. 1,010.1 1,010.1
Accumulated deficit................... (98.1) (122.8)
--------- ---------
912.0 887.3
--------- ---------
Total liabilities and
shareowner's equity..................... $ 3,086.6 $ 3,130.7
========= =========
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
THE OHIO BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss)................. $ 299.3 $ 325.8 $ (293.4)
Adjustments to net income (loss):
Extraordinary item, net of tax.. - - 445.2
Restructuring (credits) charges,
net of tax..................... - (27.8) 112.6
Depreciation and amortization... 389.2 364.7 376.3
Deferred income taxes, net...... (0.4) 13.2 4.2
Investment tax credits, net..... (8.0) (8.8) (10.7)
Capitalized interest............ (4.0) (3.9) (4.1)
Change in accounts receivable... (41.2) (48.9) (60.4)
Change in material and supplies. (6.9) (2.6) 2.3
Change in certain other
current assets................. 15.3 (9.1) 1.8
Change in accounts payable...... (82.2) 2.0 130.6
Change in certain other
current liabilities............ 25.0 (27.8) (75.3)
Change in certain noncurrent
assets and liabilities......... (29.2) (33.6) (24.0)
Other operating activities, net.. (8.8) (1.2) (2.4)
--------- --------- ---------
Net cash from operating
activities....................... 548.1 542.0 602.7
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures, net......... (421.5) (311.7) (282.0)
Proceeds from (costs of)
disposals of property,
plant and equipment, net........ 6.3 16.9 (0.5)
Other investing activities, net... 0.2 0.4 -
--------- --------- ---------
Net cash from investing
activities....................... (415.0) (294.4) (282.5)
--------- --------- ---------
Cash flows from financing activities:
Intercompany financing, net....... 68.5 - (35.5)
Retirements of long-term debt..... (0.3) (0.5) (0.6)
Dividend payments................. (335.7) (173.1) (223.6)
--------- --------- ---------
Net cash from financing
activities....................... (267.5) (173.6) (259.7)
--------- --------- ---------
Net increase (decrease) in cash and
temporary cash investments....... (134.4) 74.0 60.5
Cash and temporary cash
investments, beginning of year... 134.5 60.5 -
--------- --------- ---------
Cash and temporary cash
investments, end of year......... $ 0.1 $ 134.5 $ 60.5
========= ========= =========
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
A. Significant Accounting Policies
Nature of Operations - The Ohio Bell Telephone Company (the
Company) is a wholly owned subsidiary of Ameritech Corporation
(Ameritech). Ameritech is the parent of the Company; Illinois Bell
Telephone Company; Indiana Bell Telephone Company, Incorporated;
Michigan Bell Telephone Company; and Wisconsin Bell, Inc. (referred
to collectively as the "Ameritech landline communications
subsidiaries"). The Company provides a wide variety of advanced
communications services, including local exchange and toll service,
network access and telecommunications products in Ohio.
See discussion of competition and significant new legislation in
Other Matters in Management's Discussion and Analysis of Results of
Operations.
Basis of Accounting - The financial statements have been
prepared in accordance with generally accepted accounting principles
(GAAP). In 1994, the Company discontinued following accounting
prescribed by Statement of Financial Accounting Standards No. 71
(FAS 71), "Accounting for the Effects of Certain Types of
Regulation." (See Note I).
Use of Estimates - The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Transactions with Affiliates - The Company has various
agreements with affiliated companies. Below is a description of the
significant arrangements followed by a table of the amounts
involved.
1. Ameritech Services, Inc. (ASI) - ASI, an Ameritech-
controlled affiliate in which the Company has 21% ownership,
provides planning, development, management, procurement and support
services to all of the Ameritech landline communications
subsidiaries. The Company also provides certain services and
facilities to ASI.
1996 1995 1994
---- ---- ----
Purchases of
materials and charges
for services from ASI..... $ 549.5 $ 569.4 $ 464.3
Recovery of
costs for services
provided to ASI .......... 10.0 10.6 16.9
2. Ameritech (the Company's parent) - Ameritech provides
various administrative, planning, financial and other services to
the Company. These services are billed to the Company at cost.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 28.3 $ 26.3 $ 22.0
20
<PAGE>
3. Ameritech Publishing, Inc. (API), a wholly owned subsidiary
of Ameritech doing business as Ameritech Advertising Services - The
Company had certain agreements with API under which API published
and distributed classified directories under a license from the
Company and provided services to the Company relating to both
classified and alphabetical directories. API paid license fees to
the Company under the agreements through 1995. The Company entered
into an agreement with API for 1996 under which the Company
furnished to API certain services and data used by API in
publishing and distributing classified and alphabetical
directories. In exchange, the Company received compensation for
the services and data.
1996 1995 1994
---- ---- ----
Fees paid to the Company
by API.................... $ 3.6 $ 89.4 $ 87.7
Fees paid by the Company
to API.................... 5.5 16.7 15.4
4. Ameritech Information Systems, Inc. (AIS), a wholly owned
subsidiary of Ameritech - The Company reimburses AIS for costs
incurred by AIS in connection with the sale of network services by
AIS employees.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 23.1 $ 17.7 $ 13.4
5. Bell Communications Research, Inc. (Bellcore) - Bellcore
provides research and technical support to the Company. ASI has a
one-seventh ownership interest in Bellcore and bills the Company
for costs.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 17.5 $ 17.4 $ 20.6
Property, Plant and Equipment - Property, plant and equipment
are stated at original cost. The provision for depreciation is
based principally on the straight-line remaining life and the
straight-line equal life group methods of depreciation applied to
individual categories of property, plant and equipment with similar
characteristics. As a result of the discontinuation of applying
FAS 71 in 1994, the Company recognized shorter, more economically
realistic lives and increased its accumulated depreciation balance
by $736.3 million. (See Note I).
The following is a summary of average lives (in years) before
and after the discontinuation of FAS 71:
Asset Category Before After
-------------- ------ -----
Central office equipment
Digital switching............... 17 7
Analog switching................ up to 4 obsolete
Circuit accounts................ 8-12 7
Copper and fiber cable
and wire facilities ........... 20-32 15
All other....................... various various
Generally, when depreciable plant is retired, the amount at
which such plant has been carried in property, plant and equipment
in service is charged to accumulated depreciation. The cost of
maintenance and repairs of plant is charged to expense.
21
<PAGE>
Investments - The Company's investment in ASI (21% ownership and
$55.0 million as of December 31, 1996) and The Champaign Telephone
Company (50% ownership and $10.5 million as of December 31, 1996)
are reflected in the financial statements using the equity method
of accounting. All other investments are carried at cost.
Derivative transactions, if any, are executed by Ameritech. The
Company had no derivative transactions in 1996 or 1995.
Material and Supplies - Inventories of new and reusable material
and supplies are stated at the lower of cost or market with cost
generally determined on an average cost basis.
Income Taxes - The Company is included in the federal income tax
return filed by Ameritech and its subsidiaries. The Company's
provision for income taxes is determined effectively on a separate
company basis.
Deferred tax assets and liabilities are determined at the end of
each period based on differences between the financial statement
bases of assets and liabilities and the tax bases of those same
assets and liabilities, using the currently enacted statutory tax
rates. Deferred income tax expense is measured by the change in
the net deferred income tax asset or liability during the year.
The Company uses the deferral method of accounting for
investment tax credits whereby credits realized are being amortized
as reductions to tax expense over the life of the plant that gave
rise to the credits.
Temporary Cash Investments - Temporary cash investments are
stated at cost which approximates market value. The Company
considers all highly liquid, short-term investments with an
original maturity of three months or less to be cash equivalents.
Advertising Costs - Advertising costs are generally charged to
operations as incurred.
Revenue Recognition - Revenues are generally recognized as
services are provided or products are delivered to customers.
Certain local telephone revenues are billed in advance, resulting
in deferred revenues.
Short-Term Financing Arrangement - Ameritech provides short-term
financing and cash management services to its subsidiaries,
including the Company. Ameritech issues commercial paper and notes
and secures bank loans to fund the working capital requirements of
its subsidiaries and invests short-term excess funds on their
behalf. (See Note E).
The results were as follows:
1996 1995 1994
---- ---- ----
Interest charged to the Company
by Ameritech
for financing............. $ 1.7 $ 1.3 $ 3.9
Cash management interest
income earned
by the Company............ 1.4 1.0 -
Reclassifications - Certain reclassifications were made to the
December 31, 1995 balances to correspond to the presentation as of
December 31, 1996.
22
<PAGE>
B. Income Taxes
The components of income tax expense follow:
1996 1995 1994
---- ---- ----
Federal
Current........................ $ 155.5 $ 144.0 $ 125.8
Deferred, net................... (0.4) 28.1 (56.4)
Investment tax credits, net..... (8.0) (8.8) (10.7)
--------- --------- ---------
Total............................. $ 147.1 $ 163.3 $
58.7
========= ========= =========
Total income taxes paid were $141.9 million, $134.9 million, and
$166.0 million in 1996, 1995 and 1994, respectively.
The following is a reconciliation between the statutory federal
income tax rate for each of the past three years and the Company's
effective tax rate:
1996 1995 1994
---- ---- ----
Statutory federal income
tax rate......................... 35.0% 35.0% 35.0%
Reduction in tax expense due to
amortization of investment tax
credits........................ (1.2) (1.2) (5.1)
Benefit of tax rate differential applied
under FAS 71 applied to reversing
temporary differences............ - - (4.2)
Other............................. (0.8) (0.4) 2.2
--------- --------- ---------
Effective income tax rate......... 33.0% 33.4% 27.9%
========= ========= =========
As of December 31, 1996 and 1995 the components of long-term
accumulated deferred income taxes were as follows:
1996 1995
---- ----
Deferred tax assets
Postretirement and
postemployment benefits....... $ 200.5 $ 209.1
Other.......................... 7.3 0.1
-------- --------
207.8 209.2
-------- --------
Deferred tax liabilities
Accelerated depreciation....... 248.0 256.3
Prepaid pension cost........... 57.5 51.7
Other.......................... 4.0 1.9
-------- --------
309.5 309.9
-------- --------
Net deferred tax liability...... $ 101.7 $ 100.7
======== ========
23
<PAGE>
Deferred income taxes in current assets and liabilities relate
primarily to temporary differences resulting from vacation pay,
uncollectibles and work force restructuring. The Company had
valuation allowances against certain deferred tax assets
aggregating $2.5 million as of December 31, 1996 and 1995.
C. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
1996 1995
---- ----
Land............................ $ 16.6 $ 17.5
Buildings....................... 536.1 522.7
Central office equipment........ 2,432.1 2,255.0
Cable, wiring and conduit....... 2,587.3 2,460.3
Other........................... 374.5 415.7
-------- --------
5,946.6 5,671.2
Under construction.............. 75.0 85.8
-------- --------
6,021.6 5,757.0
Less, accumulated depreciation.. 3,691.4 3,463.5
-------- --------
$2,330.2 $2,293.5
======== ========
Depreciation expense on property, plant and equipment was $389.2
million, $364.7 million and $376.3 million in 1996, 1995 and 1994,
respectively.
D. Employee Benefit Plans
Pension Plans - Ameritech maintains noncontributory defined
benefit pension plans covering substantially all of the Company's
employees and death benefit plans for nonmanagement employees.
Pension credits are allocated to subsidiaries based upon the
percentage of compensation for the management plan and per employee
for the nonmanagement plan. The Company's funding policy is to
contribute annually an amount up to the maximum amount that can be
deducted for federal income tax purposes. However, due to the
funded status of the plans, no contributions have been made for the
years reported below. The following data provides information on
the Company's credits for the Ameritech plans:
1996 1995 1994
---- ---- ----
Pension credits............ $ (22.2) $ (18.1) $ (34.6)
Current year credits
as a percent of
salaries and wages........ (6.0)% (4.9)% (8.3)%
Pension expense was determined using the projected unit credit
actuarial method. The resulting pension credits are primarily
attributable to favorable investment performance and the funded
status of the plans.
Certain disclosures are required to be made of the components of
pension credits and the funded status of the plans, including the
actuarial present value of accumulated plan benefits, accumulated
projected benefit obligation and the fair value of plan assets.
Such disclosures are not presented for the Company because the
structure of the Ameritech plans does not permit the plans' data to
be readily disaggregated.
The assets of the Ameritech plans consist principally of debt
and equity securities, fixed income investments and real estate. As
of December 31, 1996, the fair value of plan assets available for
plan benefits exceeded the projected benefit obligation (calculated
using a discount rate of 7.5% and 6.9% as of December 31, 1996 and
1995, respectively). The assumed long-term rate of return on plan
assets used in determining pension credits (or income) was 8.0% for
1996
24
<PAGE>
and 7.25% for 1995 and 1994. The assumed increase in future
compensation, also used in the determination of the projected
benefit obligation, was 4.2% in 1996 and 4.5% in 1995.
Postretirement Benefits Other Than Pensions - Ameritech sponsors
health care and life insurance plans which provide noncontributory
postretirement benefits to substantially all of the Company's
retirees and their dependents. Ameritech accrues the cost of
postretirement benefits granted to employees as expense over the
period in which the employee renders service and becomes eligible to
receive benefits. The cost of postretirement health care and life
insurance benefits for current and future retirees is recognized as
determined under the projected unit credit actuarial method.
Ameritech allocates its retiree health care cost on a per
participant basis, whereas group life insurance is allocated based
on compensation levels.
Ameritech has provided for part of the cost of these plans by
making contributions for health care benefits to voluntary employee
benefit association trust funds (VEBAs) and maintains retirement
funding accounts (RFAs) to provide life insurance benefits.
Ameritech intends to continue to fund the nonmanagement VEBA.
Funding of the management VEBA was suspended effective in 1994. The
nonmanagement VEBA and the RFAs earn income without tax. Plan
assets consist principally of corporate securities and bonds.
Certain disclosures are required as to the components of
postretirement benefit costs and the funded status of the plans.
Such disclosures are not presented for the Company as the structure
of the Ameritech plans does not permit the data to be readily
disaggregated. However, the Company has been advised by Ameritech
as to the following assumptions used in determining FAS 106 costs.
As of December 31, 1996, the accumulated postretirement benefit
obligation exceeded the fair value of plan assets available for plan
benefits. The assumed discount rate used to measure the accumulated
postretirement benefit obligation was 7.5% as of December 31, 1996
and 6.9% as of December 31, 1995. The assumed rate of increase in
future compensation levels was 4.2% in 1996 and 4.5% in 1995. The
expected long-term rate of return on plan assets was 8.0% in 1996
and 7.25% in 1995 and 1994 on VEBAs, and 8.0% in 1996, 1995 and 1994
on RFAs. The assumed health care cost trend rate in 1996 was 8.4%
and 8.8% in 1995, and is assumed to decrease gradually to 4.0% in
2007 and remain at that level. The assumed health care cost trend
rate is 8.0% for 1997. The health care cost trend rate has a
significant effect on the amounts reported for costs each year, as
well as on the accumulated postretirement benefit obligation.
Specifically, increasing the assumed health care cost trend rate by
one percentage point in each year would have increased the 1996
annual expense by approximately 15.6%.
Postretirement benefit cost under FAS 106 was $56.1 million in
1996, $50.7 million in 1995 and $51.2 million in 1994.
As of December 31, 1996, the Company had approximately 11,200
retirees eligible to receive health care and group life insurance
benefits.
Work Force and Other Restructuring - During March 1994,
Ameritech announced a plan to reduce its existing nonmanagement work
force. As of December 31, 1995, 2,576 employees had left the
Company as a result of this restructuring. See additional
discussion in Management's Discussion and Analysis of Results of
Operations.
As a result of this restructuring, a pretax charge of $173.2
million, or $112.6 million after-tax, was recorded in 1994. In
1995, a credit of $42.7 million, or $27.8 million after-tax, was
recorded resulting primarily from settlement gains from lump-sum
pension payments to former employees, net of additional
restructuring charges of $8.2 million recorded in the fourth quarter
of 1995. The fourth quarter restructuring charges included $7.2
million associated with increased force costs related to the
restructuring started in 1994, as well as planned work force
reductions due to consolidation of Ameritech's data centers. In
connection with this consolidation, an additional $1.0 million was
recorded to write down certain data processing equipment to
estimated net realizable value. The cumulative gross program cost
through December 31, 1995 totaled $274.8 million, partially offset
by settlement gains of $144.3 million for an aggregate pretax net
program cost of $130.5 million, or $84.8 million after-tax.
25
<PAGE>
Management Work Force Reductions - Effective January 1, 1995,
management employees who are asked to leave the Company will
receive a severance payment under the Management Separation Benefit
Program (MSBP). The Company accounts for this benefit in
accordance with FAS 112, "Employers' Accounting for Postemployment
Benefits," accruing the separation cost when incurred. The number
of employees leaving the Company under the MSBP and the predecessor
plan was 48 in 1996, 40 in 1995 and 122 in 1994.
Settlement gains result from the payment of lump-sum
distributions from the pension plan to former employees and are
recorded as a credit to other operating expense. Settlement gains,
net of termination costs, under the plans were $4.0 million, $4.4
million and $6.6 million in 1996, 1995 and 1994, respectively. The
involuntary plans are funded from Company operations and required
cash payments of $1.2 million, $1.1 million and $5.0 million in
1996, 1995 and 1994, respectively.
E. Debt Maturing Within One Year
Debt maturing within one year is included as debt in the
computation of debt ratios and consisted of the following as of
December 31:
1996 1995
---- ----
Notes payable - Ameritech....... $ 68.5 $ -
======== ========
Weighted average interest
rate of notes payable,
year-end....................... 5.4% -
======== ========
F. Long-Term Debt
Long-term debt consists principally of debentures and notes
issued by the Company.
The following table sets forth interest rates, scheduled
maturities and other information on long-term debt outstanding as of
December 31:
1996 1995
---- ----
Forty year 5 % debentures,
due February 1, 2006 ................ $ 60.0 $ 60.0
Forty year 5 3/8 % debentures,
due March 1, 2007....................... 75.0 75.0
Forty year 6 3/4 % debentures,
due July 1, 2008........................ 55.0 55.0
Forty year 7 1/2 % debentures,
due October 1, 2011..................... 100.0 100.0
Forty year 7 7/8 % debentures,
due October 1, 2013..................... 200.0 200.0
Thirty year 7.85 % debentures,
due December 15, 2022................... 100.0 100.0
Ten year 6 1/8 % notes,
due May 15, 2003........................ 150.0 150.0
Seven year 5 3/4 % notes,
due May 1, 2000......................... 100.0 100.0
--------- ---------
840.0 840.0
Capital lease obligations................. 1.2 1.2
Unamortized discount, net................. (6.6) (7.0)
Other..................................... 0.3 0.5
--------- ---------
Total..................................... $ 834.9 $ 834.7
========= =========
Over the next five years, only the 5 3/4% notes with a principal
amount of $100.0 million mature in May, 2000.
26
<PAGE>
G. Lease Commitments
The Company leases certain facilities and equipment used in its
operations under both operating and capital leases. Rental expense
under operating leases was $22.6 million, $13.6 million and $5.2
million for 1996, 1995 and 1994, respectively. As of December 31,
1996, the aggregate minimum rental commitments under noncancelable
leases were approximately as follows:
Years Operating Capital
----- --------- -------
1997 ........................... $ 4.1 $ 0.2
1998 ........................... 3.6 0.2
1999 ........................... 3.0 0.2
2000 ........................... 3.0 0.2
2001 ........................... 2.7 0.2
Thereafter ..................... 25.0 1.0
------- -------
Total minimum lease commitments. $ 41.4 $ 2.0
=======
Less: amount representing
executory costs........ -
amount representing
interest costs......... 0.8
-------
Present value of minimum
lease payments ................ $ 1.2
=======
H. Financial Instruments
The following table presents the estimated fair value of the
Company's financial instruments as of December 31, 1996 and 1995:
1996
-------------
Carrying Fair
Value Value
----- -----
Cash and temporary cash
investments.................... $ 0.1 $ 0.1
Debt ........................... 921.2 898.2
Long-term payable to ASI
(for postretirement benefits).. 16.2 16.2
Other assets.................... 3.1 3.1
Other liabilities............... 4.0 4.0
1995
-------------
Carrying Fair
Value Value
----- -----
Cash and temporary cash
investments.................... $ 134.5 $ 134.5
Debt ........................... 852.9 893.8
Long-term payable to ASI
(for postretirement benefits).. 17.4 17.4
Other assets.................... 3.3 3.3
Other liabilities............... 5.1 5.1
The following methods and assumptions were used to estimate the
fair value of financial instruments:
Cash and temporary cash investments - The carrying value
approximates fair value because of the short-term maturity of these
instruments.
27
<PAGE>
Debt - The carrying amount (including accrued interest) of debt
maturing within one year approximates fair value because of the
short-term maturities involved. The fair value of long-term debt
was estimated based on the year-end quoted market price for the
same or similar issues.
Other assets and liabilities - These financial instruments
consist primarily of other investments and customer deposits. The
fair values of these items are based on expected cash flows or, if
available, quoted market prices.
Long-term payable to ASI (for postretirement benefits) -
Carrying value approximates fair value.
I. Discontinuation of Regulatory Accounting - FAS 71
In 1994, having achieved price regulation and recognizing
increased competition, the Company concluded that GAAP prescribed
by FAS 71 was no longer appropriate.
As a result of discontinuing the application of FAS 71, the
Company recorded an extraordinary noncash after-tax charge of
$445.2 million in 1994. The following table is a summary of the
extraordinary charge.
Pretax After-Tax
------ ---------
Increase to the accumulated
depreciation balance............. $ 736.3 $ 478.6
Elimination of other
net regulatory assets............ 13.4 8.6
Tax-related net regulatory
liabilities...................... - (31.7)
Accelerated amortization of
tax credits...................... - (10.3)
-------- --------
$ 749.7 $ 445.2
======== ========
The adjustment of $736.3 million to net property, plant and
equipment was necessary because estimated useful lives and
depreciation methods historically prescribed by regulators did not
keep pace with technological changes and differed significantly
from those used by nonregulated enterprises. Plant balances were
adjusted by increasing the accumulated depreciation balance. The
necessary adjustment was determined by a discounted cash flow
analysis which considered technological changes, capital
requirements and estimated impacts of future competition. To
corroborate this study, a depreciation reserve study was also
performed that identified inadequate accumulated depreciation
levels by individual asset categories. The Company believes these
levels developed over the years as a result of the systematic
underdepreciation of assets resulting from the regulatory process.
When adjusting its net property, plant and equipment, the
Company gave effect to shorter, more economically realistic lives,
as previously outlined in Note A.
The discontinuation of FAS 71 also required the Company to
eliminate from its balance sheet the effects of any actions of
regulators that had been recognized as assets and liabilities
pursuant to FAS 71, but would not have been recognized as assets
and liabilities by nonregulated enterprises. The elimination of
other net regulatory assets primarily related to certain deferred
vacation pay, debt financing costs and certain deferred assets.
Additionally, at the time the Company discontinued the
application of FAS 71, the income tax-related regulatory assets and
liabilities were eliminated and deferred tax balances adjusted to
reflect application of FAS 109, "Accounting for Income Taxes",
consistent with other nonregulated enterprises. As asset lives
were shortened, the related unamortized investment tax credits
deemed already earned were credited to income.
28
<PAGE>
J. Stock Options
During 1995, the Financial Accounting Standards Board issued FAS
123, "Accounting for Stock-Based Compensation." This pronouncement
requires that Ameritech calculate the value of stock options at the
date of grant using an option pricing model. Ameritech elected the
"pro forma, disclosure only" option permitted under FAS 123,
instead of recording a charge to operations. Certain Company
management personnel receive Ameritech stock options; however, the
portion of the option programs allocable to Company employees is
not significant.
K. Additional Financial Information
As of December 31,
------------------
1996 1995
---- ----
Balance Sheets
Other current liabilities:
Accrued payroll....................... $ 9.3 $ 11.6
Compensated absences.................. 31.1 29.6
Accrued taxes......................... 167.2 156.2
Income taxes deferred one year........ (27.0) (25.6)
Advance billings and customer
deposits............................ 59.4 51.9
Dividend payable...................... - 61.1
Accrued interest...................... 14.0 13.8
Other................................. 16.7 16.6
--------- ---------
Total................................ $ 270.7 $ 315.2
========= =========
Advertising and promotion expense was $27.5 million, $32.3
million and $22.7 million in 1996, 1995 and 1994, respectively.
Interest paid was $61.2 million, $61.6 million and $58.2 million in
1996, 1995 and 1994, respectively.
Revenues from AT&T, consisting principally of interstate network
access and billing and collection services revenues, comprised
approximately 10% of total revenues in both 1995 and 1994. No
other customer accounted for more than 10% of total revenues in
those years. No customer accounted for more than 10% of revenues
in 1996.
L. Other Income, Net
The components of other income, net were as follows:
1996 1995 1994
---- ---- ----
Equity in earnings of ASI.. $ 8.1 $ 7.6 $ 10.6
Other, net................. 1.3 (2.3) -
--------- --------- ---------
Total.................... $ 9.4 $ 5.3 $ 10.6
========= ========= =========
29
<PAGE>
M. Quarterly Financial Information (Unaudited)
Operating Net
Revenues Income Income
-------- ------ ------
1996
----
First Quarter............. $ 552.7 $ 111.1 $ 67.2
Second Quarter............ 570.1 134.5 82.1
Third Quarter............. 556.3 110.6 67.3
Fourth Quarter............ 581.6 138.2 82.7
------- ------- -------
1996 Total.............. $2,260.7 $ 494.4 $ 299.3
======= ======= =======
1995
----
First Quarter............. $ 535.0 $ 150.8 $ 90.6
Second Quarter............ 550.6 125.9 75.9
Third Quarter............. 555.0 134.2 79.9
Fourth Quarter............ 572.7 131.3 79.4
------- ------- -------
1995 Total.............. $2,213.3 $ 542.2 $ 325.8
======= ======= =======
Total nonmanagement work force restructuring credits in 1995
were $42.7 million or $27.8 million after-tax as follows: $37.4 or
$24.3 after-tax in the first quarter, $12.4 or $8.1 after-tax in
the third quarter and a net charge of $7.1 million or $4.6 million
after-tax in the fourth quarter. The fourth quarter restructuring
charge includes costs related to the restructuring started in 1994
and charges relating to the consolidation of Ameritech's data
centers as discussed more fully in Note D.
All adjustments necessary for a fair statement of results for
each period have been included.
30
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No changes in or disagreements with accountants on any matter of
accounting principles or practices, financial statement disclosure
or auditing scope or procedure occurred during the period covered
by this annual report.
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of the report:
(1) Financial Statements:
Page
----
Selected Financial and Operating Data..................... 9
Report of Independent Public Accountants.................. 16
Statements:
Statements of Income and Accumulated Deficit............ 17
Balance Sheets.......................................... 18
Statements of Cash Flows................................ 19
Notes to Financial Statements........................... 20
(2) Financial Statement Schedule:
II Valuation and Qualifying Accounts..................... 35
Financial statement schedules other than the one listed above
have been omitted because the required information is contained in
the financial statements and notes thereto, or because such
schedules are not required or applicable.
(3) Exhibits
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
------
3a - Articles of Association of the Company as amended April
25, 1974 (Exhibit 3a to Form 10-K for 1980, File No. 1-
6781).
3b - Regulations of the Company as restated February 28, 1990
(Exhibit 3b to Form 10-K for 1989, File No. 1-6781).
4a - Close Corporation Agreement with Ameritech Corporation
dated February 28, 1990 (Exhibit (4)(i) to Form 10-K for
1989, File No. 1-6781).
4b - No instrument which defines the rights of holders of long
and intermediate term debt of the Company is filed
herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the
Company hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
10a - Reorganization and Divestiture Agreement between American
Telephone and Telegraph Company, American Information
Technologies Corporation and Affiliates, dated as of
November 1, 1983 (Exhibit 10a to Form 10-K for 1983 for
American Information Technologies Corporation, File No. 1-
8612).
27 - Financial Data Schedule for the year ended December 31,
1996.
32
<PAGE>
(b) Reports on Form 8-K:
No Form 8-K was filed by the registrant during the fourth quarter
of 1996.
33
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Ronald G. Pippin
-----------------------------
Ronald G. Pippin,
Comptroller
March 11, 1997
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
Principal Executive Officer:
/s/ Jaqueline F. Woods
-----------------------------
Jaqueline F. Woods,
President
Principal Financial and Accounting Officer:
/s/ Ronald G. Pippin
-----------------------------
Ronald G. Pippin,
Comptroller
Ameritech Corporation:
/s/ Barry K. Allen
-----------------------------
Barry K. Allen,
Executive Vice President,
Consumer and Business Services
The sole shareowner of the registrant, which is
a statutory close corporation managed by the
shareowner rather than by a board of directors.
March 11, 1997
34
<PAGE>
THE OHIO BELL TELEPHONE COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(Dollars in Millions)
COL. A COL. B COL. C COL. D COL. E
------ ------ ----------------- ------ ------
Additions
-----------------
Balance at Charged Charged Balance
Beginning to to Other at End of
of Period Expense (a) Accounts (b) Deductions (c) Period
--------- ---------- ----------- ------------- ------
Year 1996..........$ 22.2 $ 46.5 $ 65.9 $ 96.7 $ 37.9
Year 1995.......... 23.0 20.5 7.1 28.4 22.2
Year 1994.......... 18.2 19.7 4.0 18.9 23.0
----------------------
(a)Excludes direct charges and credits to expense on the statements of
income and accumulated deficit related to interexchange carrier
receivables.
(b)Includes principally amounts related to the interexchange carrier
receivables which are being billed by the Company and amounts
previously written off which were credited directly to this account
when recovered, as well as the reclassification of $7.0 million in
1996 from current liabilities to more accurately state the allowance.
(c)Amounts written off as uncollectible.
35
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM
THE OHIO BELL TELEPHONE COMPANY'S DECEMBER 31, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 100
<SECURITIES> 0<F1>
<RECEIVABLES> 521,000
<ALLOWANCES> (37,900)
<INVENTORY> 3,200
<CURRENT-ASSETS> 495,300
<PP&E> 6,021,600
<DEPRECIATION> 3,691,400
<TOTAL-ASSETS> 3,086,600
<CURRENT-LIABILITIES> 587,900
<BONDS> 834,900
0
0
<COMMON> 1,010,100
<OTHER-SE> (98,100)
<TOTAL-LIABILITY-AND-EQUITY> 3,086,600
<SALES> 0<F2>
<TOTAL-REVENUES> 2,260,700
<CGS> 0<F3>
<TOTAL-COSTS> 1,766,300
<OTHER-EXPENSES> (9,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,400
<INCOME-PRETAX> 446,400
<INCOME-TAX> 147,100
<INCOME-CONTINUING> 299,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 299,300
<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>
