<PAGE>
- ---------------------------------------------------------------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
- -------------------------------------------
Form 10-Q
(Mark one)
- -------------------------------------------
[x] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
- -------------------------------------------
or
- -------------------------------------------
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
- -------------------------------------------
Commission File Number 1-6781
The Ohio Bell Telephone Company
-----------------------------
An Ohio Corporation
-----------------------------
45 Erieview Plaza
Cleveland, Ohio 44114
-----------------------------
I.R.S. Employer Identification
Number 34-0436390
Telephone number (800) 257-0902
OHIO BELL IS A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION AND MEETS
THE CONDITIONS IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q. WE ARE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT UNDER GENERAL INSTRUCTION
H(2).
We have 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, and have
been subject to those filing requirements for the past 90 days.
Yes X No
---- ----
At July 31, 1998, one common share was outstanding.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM Page
- ---- ----
1. Financial Statements
Condensed Statements of Income and Accumulated Deficit
for the three months and six months ended
June 30, 1998 and 1997 1
Condensed Balance Sheets as of
June 30, 1998 and December 31, 1997 2-3
Condensed Statements of Cash Flows for
the six months ended June 30, 1998 and 1997 4
Notes to Condensed Financial Statements 5
2. Management's Discussion and Analysis
of Results of Operations 6-16
3. Quantitative and Qualitative
Disclosures about Market Risk 17
PART II
6. Exhibits and Reports on Form 8-K 18
Glossary 20-21
Page i
<PAGE>
Item 1 - Financial Statements
-----------------------------
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues
Local service................. $ 354.6 $ 343.6 $ 700.3 $ 675.0
Interstate network access..... 134.9 130.8 263.9 259.6
Intrastate network access..... 30.2 32.4 54.9 64.0
Long distance service......... 31.5 35.5 64.3 73.0
Other......................... 51.7 46.7 100.7 86.9
--------- --------- --------- ---------
602.9 589.0 1,184.1 1,158.5
--------- --------- --------- ---------
Operating expenses
Employee-related expenses..... 114.9 109.4 222.3 216.2
Depreciation and amortization. 104.1 103.0 207.6 204.7
Other operating expenses...... 209.9 198.8 389.1 376.2
Taxes other than income taxes. 48.5 46.8 97.1 93.9
--------- --------- --------- ---------
477.4 458.0 916.1 891.0
--------- --------- --------- ---------
Operating income................ 125.5 131.0 268.0 267.5
Interest expense................ 15.9 15.5 31.4 29.9
Other income, net............... 0.7 1.5 5.1 3.3
--------- --------- --------- ---------
Income before income taxes...... 110.3 117.0 241.7 240.9
Income taxes.................... 42.0 39.7 91.4 81.8
--------- --------- --------- ---------
Net income...................... 68.3 77.3 150.3 159.1
Accumulated deficit,
beginning of period........... (79.7) (97.7) (85.2) (98.1)
Less, dividends declared.... 62.2 64.2 138.7 145.6
--------- --------- --------- ---------
Accumulated deficit,
end of period................. $ (73.6) $ (84.6) $ (73.6) $ (84.6)
========= ========= ========= =========
See Notes to Condensed Financial Statements.
Page 1
<PAGE>
CONDENSED BALANCE SHEETS
(Dollars in Millions)
June 30, 1998 Dec. 31, 1997
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments......... $ 8.1 $ 1.4
Receivables, net
Customers................................. 464.2 465.9
Ameritech and affiliates.................. 1.7 2.0
Other..................................... 16.0 18.8
Material and supplies....................... 15.3 4.0
Prepaid and other........................... 20.9 18.0
--------- ---------
526.2 510.1
--------- ---------
Property, plant and equipment................ 6,450.0 6,289.2
Less, accumulated depreciation............... 4,088.0 3,939.8
--------- ---------
2,362.0 2,349.4
--------- ---------
Investments, primarily in affiliates......... 72.5 87.2
Other assets and deferred charges............ 251.6 226.2
--------- ---------
Total assets................................. $ 3,212.3 $ 3,172.9
========= =========
See Notes to Condensed Financial Statements.
Page 2
<PAGE>
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
June 30, 1998 Dec. 31, 1997
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech................................. $ 226.4 $ 188.3
Other..................................... 0.1 0.1
Accounts payable
Ameritech Services, Inc. (ASI)............ 45.5 38.4
Ameritech and affiliates.................. 40.8 33.2
Other..................................... 148.5 112.1
Other current liabilities.................. 190.3 269.6
--------- ---------
651.6 641.7
--------- ---------
Long-term debt.............................. 835.1 834.9
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 120.5 116.9
Unamortized investment tax credits......... 27.6 29.8
Postretirement benefits
other than pensions...................... 524.3 529.2
Long-term payable to ASI................... 13.9 15.1
Other...................................... 54.2 56.4
--------- ---------
740.5 747.4
--------- ---------
Shareowner's equity
Common shares - (one share issued
and outstanding without par value)....... 1,058.7 1,034.1
Accumulated deficit........................ (73.6) (85.2)
--------- ---------
985.1 948.9
--------- ---------
Total liabilities and shareowner's equity... $ 3,212.3 $ 3,172.9
========= =========
See Notes to Condensed Financial Statements.
Page 3
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30
-------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 150.3 $ 159.1
Adjustments to net income
Depreciation and amortization............... 207.6 204.7
Deferred income taxes, net.................. (24.4) (9.5)
Investment tax credits, net................. (2.2) (2.8)
Capitalized interest........................ (1.1) (1.9)
Change in accounts receivable, net.......... 4.8 (4.5)
Change in material and supplies............. (15.8) (6.0)
Change in certain other current assets...... (2.9) (8.9)
Change in accounts payable.................. 51.1 6.9
Change in certain other current
liabilities................................ (51.3) (66.6)
Change in certain other noncurrent
assets and liabilities..................... (9.3) (10.5)
Gain on the sale of
Champaign Telephone Company................ (3.5) --
Other operating activities, net............. 4.6 4.8
-------- --------
Net cash from operating activities............ 307.9 264.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (218.3) (206.0)
Additional investments........................ -- (21.6)
Proceeds from the sale of
Champaign Telephone Company.................. 14.5 --
Proceeds from disposals of
property, plant and equipment................ 3.4 7.3
-------- --------
Net cash from investing activities............ (200.4) (220.3)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... 38.0 101.4
Retirements of long-term debt................. (0.1) (0.5)
Dividend payments............................. (138.7) (145.6)
Other financing activities, net............... -- 0.2
-------- --------
Net cash from financing activities............ (100.8) (44.5)
-------- --------
Net change in cash and
temporary cash investments................... 6.7 --
Cash and temporary cash investments,
beginning of period.......................... 1.4 0.1
-------- --------
Cash and temporary cash investments,
end of period................................ $ 8.1 $ 0.1
======== ========
See Notes to Condensed Financial Statements.
Page 4
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
JUNE 30, 1998
NOTE 1: Preparation of Interim Financial Statements
We have prepared the unaudited condensed financial statements in this
report by following Securities and Exchange Commission rules that permit
reduced disclosure for quarterly period reports. These financial
statements include estimates and assumptions that affect the reported
amounts of assets and liabilities and the amounts of revenues and
expenses. Actual amounts could differ from those estimates. We believe
these statements include all adjustments necessary for a fair statement
of results for each period shown. We believe our disclosures are
adequate to make the presented information clear. You should read these
financial statements in conjunction with the financial statements and
notes included in our 1997 Annual Report on Form 10-K and the quarterly
report on Form 10-Q previously filed in 1998.
When reading these financial statements, you should be familiar with the
terminology unique to our business. We have defined a number of terms
in the glossary on pages 20 and 21.
NOTE 2: Merger Agreement
On May 11, 1998, our parent (Ameritech Corporation) jointly announced
with SBC Communications Inc. (SBC) a definitive agreement to merge an
SBC subsidiary with Ameritech in a transaction in which each share of
Ameritech common stock will be converted into and exchanged for 1.316
shares of SBC common stock. After the merger, Ameritech will be a
wholly owned subsidiary of SBC. The transaction, which was approved by
the Board of Directors of each company, is intended to be accounted for
as a pooling of interests and to be a tax-free reorganization. The
merger is subject to the satisfaction of certain conditions and
regulatory approvals, as well as approval by the shareowners of each
company.
Page 5
<PAGE>
Item 2 - Management's Discussion and Analysis
of Results of Operations
The following is a discussion and analysis of the changes in revenues,
operating expenses and other income and expenses for the first six
months of 1998 as compared with the first six months of 1997.
RESULTS OF OPERATIONS
- ---------------------
Revenues
- --------
Our revenues in the first six months of 1998 were $1,184.1 million and
were $1,158.5 million for the same period in 1997, an increase of $25.6
million. Growth in sales of call management services and access lines,
as well as increases in switched minutes of use resulting from higher
network usage volumes were the primary reasons for the increase. Net
rate reductions and decreased long distance revenues partially offset
these increases.
- ---------------------------------------------------------------------
Local service
- -------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 700.3 $ 675.0 $ 25.3 3.7
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and connection
charges, certain data services and most public phone revenues. Local
service revenues increased for the six months ended June 30, 1998 due
largely to increased sales of call management services, resulting from
strong growth in both the number of features in service and usage of
services on a pay-per-use basis. Higher network usage volumes,
resulting primarily from access line growth of 2.4% over the prior year
period, also contributed to the increase.
There were 4,056,000 access lines in service as of June 30, 1998
compared with 3,961,000 as of June 30, 1997 (restated to standardize
counting of voice-grade equivalent lines).
- ---------------------------------------------------------------------
Network access
- --------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Six Months Ended $ 263.9 $ 259.6 $ 4.3 1.7
Intrastate
- ----------
Six Months Ended $ 54.9 $ 64.0 $ (9.1) (14.2)
Network access revenues are fees charged to interexchange carriers that
use our local landline communications network to connect customers to
their long distance networks. In addition, end users pay flat rate
access fees to connect to the long distance network. These revenues
result from both interstate and intrastate services.
Page 6
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Network access (cont'd.)
- ------------------------
Interstate network access revenues increased for the six months ended
June 30, 1998 due primarily to an increase in minutes of use, resulting
from overall growth in the volume of calls handled for interexchange
carriers, and greater demand for dedicated services by Internet service
providers and other high-capacity users. Rate reductions, combined with
a change in reporting classification of certain pay phone revenues
received from network access to other miscellaneous revenues beginning
in the first quarter of 1998, partially offset these increases. This
change in classification decreased interstate network access revenues by
approximately $8.1 million in the first six months of 1998 compared with
the prior year. Interstate minutes of use for the six months ended June
30, 1998 increased by 5.9% over the same period last year.
Intrastate network access revenues decreased for the six months ended
June 30, 1998 due primarily to rate reductions related to access charge
reform implemented by the FCC in July 1997, as well as a change in
reporting classification of certain pay phone revenues received from
network access to other revenues. This change in classification
decreased intrastate network access revenues by approximately $3.1
million in the first six months of 1998 compared with the prior year.
Volume increases resulting from higher network usage partially offset
these decreases. Intrastate minutes of use for the six months ended
June 30, 1998 increased 5.9% over the same period last year.
- ---------------------------------------------------------------------
Long distance service
- ---------------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 64.3 $ 73.0 $ (8.7) (11.9)
Long distance service revenues result from customer calls to locations
outside of their local calling areas, but within the same Local Access
and Transport Area (LATA). Long distance service revenues decreased in
the first six months of 1998 due primarily to a decrease in network
usage, partially offset by a slight increase in rates. In addition,
other carriers are moving to retain revenue from their customers' use of
intraLATA toll calling services, where previously they had allowed us to
provide these services in exchange for access charge payments to them.
Although we no longer earn these revenues, we also no longer incur the
related access charge expenses.
- ---------------------------------------------------------------------
Other
- -----
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 100.7 $ 86.9 $ 13.8 15.9
Other revenues include revenue derived from directory advertising,
billing and collection services, inside wire installation and
maintenance services and other miscellaneous services. Other revenues
increased for the six months ended June 30, 1998 due primarily to a
change in reporting classification of certain pay phone revenues from
network access to other revenues, as previously discussed. Increased
revenues from nonregulated services, such as equipment sales and voice
messaging, combined with increases in revenues from inside wire
installation and maintenance and billing and collection services, also
contributed to the increase.
Page 7
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Operating expenses
- ------------------
Total operating expenses for the six months ended June 30, 1998
increased by $25.1 million or 2.8 percent to $916.1 million. Higher
employee-related expense and other operating expenses resulted in most
of this increase, as discussed below.
- ---------------------------------------------------------------------
Employee-related expenses
- -------------------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 222.3 $ 216.2 $ 6.1 2.8
Employee-related expenses increased for the six months ended June 30,
1998 due primarily to increased wage rates and overtime expenses,
combined with higher employee benefit expenses. Decreases in bonus
levels and average force levels partially offset these increases.
In July 1998 the Communications Workers of America (CWA) ratified a new
contract, which is effective August 9, 1998 and expires on March 31,
2001. The contract provides basic wage increases of 11.2% (compounded),
and also addresses benefits, pensions, work-rules and other wage-related
items. The CWA represents approximately 90% of our employees.
We employed 8,248 employees as of June 30, 1998, compared with 8,665 as
of June 30, 1997.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 207.6 $ 204.7 $ 2.9 1.4
Depreciation and amortization expense increased for the six months ended
June 30, 1998 due primarily to higher property, plant and equipment
balances. Higher depreciation rates on certain asset categories also
contributed to the increases, as we used shorter depreciable lives for
newer technologies.
- ---------------------------------------------------------------------
Other operating expenses
- ------------------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 389.1 $ 376.2 $ 12.9 3.4
Other operating expenses increased for the six months ended June 30,
1998 due primarily to higher access charge expenses resulting from state
commission rulings regarding calls to the Internet. These rulings
(which we are contesting) require local exchange carriers to pay
reciprocal compensation for calls by their customers to the Internet via
Internet service providers (ISPs) who, in turn, are customers of
competing local exchange carriers. We have accrued all disputed charges
and set aside approximately $7.9 million in segregated funds pending
final resolution of these disputes. Increased contract and affiliated
services related to systems programming and network support also
contributed to the increase. A decrease in uncollectibles resulting
from improved credit screening and collection efforts, combined with
lower material costs, partially offset these increases.
Page 8
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Taxes other than income taxes
- -----------------------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 97.1 $ 93.9 $ 3.2 3.4
Taxes other than income taxes consist of property taxes, gross receipts
taxes and other taxes not related to earnings. Taxes other than income
taxes increased for the six months ended June 30, 1998 due primarily to
revenue increases and the elimination of certain credits, resulting in
higher accruals for gross receipts taxes. A decrease in property taxes
resulting from favorable tax reform legislation partially offset the
increase.
- ---------------------------------------------------------------------
Other income and expenses
- -------------------------
Interest expense
- ----------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 31.4 $ 29.9 $ 1.5 5.0
Interest expense increased for the six months ended June 30, 1998 due
primarily to an increase in interest on borrowings from the Ameritech
short-term funding pool, reflecting higher average pool balances.
Higher miscellaneous interest expense also contributed to the increase.
- ---------------------------------------------------------------------
Other income, net
- -----------------
Change
June 30 Income Percent
------------
(dollars in millions) 1998 1997 (Expense) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 5.1 $ 3.3 $ 1.8 54.5
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. Other income increased for the six
months ended June 30, 1998 due primarily to the gain realized from the
sale of our interest in the Champaign Telephone Company in January 1998,
combined with higher interest income. Decreased equity earnings from
Ameritech Services, Inc. (ASI) partially offset the increase.
- ---------------------------------------------------------------------
Income taxes
- ------------
June 30 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 91.4 $ 81.8 $ 9.6 11.7
Income taxes increased for the six months ended June 30, 1998 due
primarily to the tax impacts of the centralization of administration of
benefits for employees. The increase in pretax earnings discussed above
also contributed to the increase.
Page 9
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
OTHER MATTERS
- -------------
Competitive environment
- -----------------------
The Telecommunications Act of 1996 (the "1996 Act") establishes a
national policy that calls for competition and open markets, rather than
regulatory management, as the basic industry business environment. This
public policy change has further opened opportunities for providers of
all forms of communications services and products, potentially enabling
them to become either niche or full-service providers of voice, video,
data, local and long distance services for their customers.
Technological developments, marketplace demand and legislative,
regulatory and judicial actions have expanded the types of services and
products available from an increasing number of companies, creating
growth opportunities within the global communications industry. Our
competitive strategy includes positioning ourselves to take advantage of
such growth opportunities, by continuing to branch into new services
that are logical extensions of our business.
With the passage of the 1996 Act and other regulatory initiatives, our
local service markets have been more extensively opened to new
competitors, many of which are believed to have initially targeted high-
volume business customers in densely populated areas. Interconnection
agreements with competitive service providers require us to provide
interconnection or access to unbundled network elements at cost-based
rates and telecommunications services at discounted, wholesale rates.
These agreements and applicable tariffs may result in some downward
pressure on local service revenues, as a portion of our revenue shifts
from local service at retail prices to network access and wholesale
services at lower rates. Further, FCC rules require that interLATA long
distance service be offered by a separate Ameritech subsidiary. As a
result, Ameritech's entry into this market will not generate revenues
for Ohio Bell to offset the potential revenue decline brought by local
service competition.
Although we cannot predict with certainty the impact that these and
other developments ultimately may have on our future business, results
of operations or financial condition, especially given the type of legal
and regulatory uncertainties described below, we believe that over time
market competition and regulatory change will provide opportunities to
accelerate growth.
Regulatory considerations
- -------------------------
The Telecommunications Act of 1996
In general, the 1996 Act includes provisions designed to open local
exchange markets to competition and afford the regional Bell operating
companies ("RBOCs") or their affiliates, the competitive opportunity to
provide interLATA (long distance) services. Under the 1996 Act, the
RBOCs' ability to provide in-region long distance services is dependent
upon their satisfaction of, among other conditions, a 14 point
"competitive checklist" of specific requirements, including compliance
with interconnection, network element access and resale service
obligations and related pricing standards and provision of number
portability, and their demonstration that entry into the in-region long
distance market would be in the public interest.
Page 10
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory considerations (cont'd.)
- -----------------------------------
The Telecommunications Act of 1996 (cont'd.)
A U.S. District Court in Texas ruled that certain line-of-business
restrictions in the 1996 Act, including the requirement in Section 271
that the RBOCs must comply with the competitive checklist before being
permitted to provide long distance services, constitute an
unconstitutional bill of attainder by virtue of their exclusive
applicability to the RBOCs. Appeals of this decision by various parties
are pending before the U.S. Court of Appeals for the Fifth Circuit, with
the lower court decision stayed pending resolution of such appeals.
These appeals were argued before the Fifth Circuit Court of Appeals on
July 9, 1998.
In two other cases, constitutional challenges to some of the provisions
of the 1996 Act governing the RBOCs have been presented to the U.S.
Court of Appeals for the District of Columbia Circuit (the "D.C. Circuit
Court"). In May 1998, the D.C. Circuit Court found that Section 274 of
the 1996 Act, covering electronic publishing activities, did not
constitute an unconstitutional bill of attainder. The second action
pending before the D.C. Circuit Court, in which Ameritech has
intervened, challenges the constitutionality of the long distance
provisions of Section 271 of the 1996 Act. This case is scheduled for
oral argument in September 1998.
Local Interconnection and Unbundled Access
In July 1997, and in an October 1997 rehearing, the U.S. Circuit Court
of Appeals for the Eighth Circuit (the "Eighth Circuit Court") vacated
several provisions of an August 1996 FCC order regarding the
interconnection provisions of the 1996 Act (the "FCC Order"), ruling
that such provisions represented improper preemptions of state authority
or were inconsistent with statutory requirements of the 1996 Act. The
Eighth Circuit Court ruled, among other things, that: the states have
exclusive jurisdiction over the pricing for local interconnection,
unbundled network elements and local service resale involving incumbent
local exchange carriers ("ILECs") and competitive local exchange
carriers ("CLECs"); the FCC cannot lawfully allow CLECs to "pick and
choose" among isolated, individual provisions from other interconnection
agreements; and the FCC cannot require ILECs either to recombine or
"rebundle" unbundled network elements for CLECs or to provide them with
a preassembled network platform (or existing combinations of two or more
network elements) at network element prices. These rulings of the
Eighth Circuit Court were appealed by various parties, including the FCC.
The Eighth Circuit Court upheld certain aspects of the FCC Order. These
included, among other things: the classification of operational support
services, operator services, directory assistance and vertical services
as unbundled network elements; the definition of "technically feasible"
interconnection to exclude economic considerations; and the ability of
CLECs to provide complete telecommunications services by recombining
network elements without providing any of their own facilities.
Ameritech has appealed these matters, among others.
The U.S. Supreme Court has agreed to review the Eighth Circuit Court
decision. Oral arguments are scheduled for October 1998.
In August 1997, the FCC revised its local competition rules and required
ILECs to make available a new purported network element known as "shared
transport," which would include access to all of an ILEC's transmission
facilities. Ameritech and other ILECs appealed this matter to the
Eighth Circuit Court. On August 10, 1998, the Eighth Circuit Court
upheld the FCC's determination that shared transport is a network
element and that it should be made available by ILECs to entrants on an
unbundled basis. Ameritech intends to seek judicial review of this
decision.
Page 11
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory considerations (cont'd.)
- -----------------------------------
Local Interconnection and Unbundled Access (cont'd.)
At present, local interconnection matters and unbundled network element
pricing continue to be resolved through interconnection agreement
negotiations or state commission arbitration provisions. We are
continuing to negotiate and enter into interconnection agreements and
pursue, through appropriate proceedings, timely recovery of the costs of
providing interconnection services so as to promote a fair competitive
environment, especially as local and long distance markets are opened to
competition at different times. The outcome of these activities is
subject to significant legal and regulatory uncertainties, as outlined
above.
Reciprocal Compensation
A number of CLECs are engaged in regulatory and judicial proceedings
with certain Ameritech subsidiaries and various other ILECs with respect
to the payment of reciprocal compensation to the CLECs for calls
originating on the ILECs' networks for dial-up connections to access the
Internet via ISPs served by the CLECs' networks. The CLECs have
asserted that such reciprocal compensation is provided for by
interconnection agreements between the CLECs and the ILECs. Together
with other ILECs, we have maintained that we are not required to make
such reciprocal compensation payments, because such traffic is
interstate access service, not local, and therefore is not covered by
applicable local interconnection agreements.
A U.S. District Court in Illinois has ruled that Ameritech's Illinois
landline communications subsidiary will be required to make reciprocal
compensation payments in these circumstances under its applicable
interconnection agreements, but has issued a brief stay of its order to
permit an appeal. Cases involving appeals by other Ameritech
subsidiaries of adverse regulatory determinations are pending in U.S.
District Courts in Michigan and Wisconsin. The issue of whether
reciprocal compensation is payable with respect to Internet traffic also
is pending before the FCC, in the context of a request for expedited
clarification of the issue filed in June 1997 by the Association for
Local Telecommunications Service. We believe that reciprocal
compensation is not required in such circumstances, and that such view
ultimately will be upheld in pending or future appellate judicial
proceedings or through FCC determination. However, there can be no
assurance as to that outcome or that we will not be required in the
future to begin to make such reciprocal compensation payments under
existing interconnection agreements. We have made periodic accruals of
amounts which may become payable in the event our view is not ultimately
upheld.
Number Portability
On May 5, 1998, the FCC entered an order to allow us and other
telecommunications carriers to recover over a five-year period their
carrier-specific costs of implementing long-term number portability.
Long-term number portability allows customers to retain their local
telephone numbers in the event they change local exchange carriers. We
began implementing long-term number portability on March 31, 1998,
consistent with the FCC implementation schedule. The FCC order permits
such cost recovery to begin no earlier than February 1, 1999, in the
form of a surcharge from customers to whom number portability is
available.
Universal Service, Access Charge Reform and Price Cap Order
In May 1997, the FCC issued three closely-related orders that
established rules to implement the universal service provisions of the
1996 Act (the "Universal Service Order") and to revise both interstate
access charge pricing (the "Access Reform Order") and the price cap plan
for certain ILECs (the "Price Cap Order").
Page 12
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory considerations (cont'd.)
- -----------------------------------
Universal Service The FCC's Universal Service Order provides that all
interstate telecommunications providers will be required to contribute
to universal service funding, based on retail telecommunications
revenues. The Universal Service Order establishes a multi-billion
dollar interstate universal service fund to help link eligible schools
and libraries and low-income consumers and rural health care providers
to the global telecommunications network (including the Internet). The
FCC directed the phase-in of these funds during 1998, with a reduced
funding rate for the first six months of 1998.
Access Reform In its Access Reform Order, the FCC restructured
interstate access pricing and adopted changes to its tariff structure
requiring LECs subject to price cap legislation to use rates that
reflect the type of costs incurred. A significant portion of the
services that had been charged using minutes-of-use pricing instead
becomes chargeable using a combination of minutes-of-use rates and flat-
rate charges. The net effect of these changes has been to decrease
minutes-of-use charges and increase per line charges. The majority of
these mandated pricing changes first became effective in January 1998,
with additional changes to be phased in at the beginning of each
subsequent year through 2001. The Access Reform Order also continued in
place existing rules by which ILECs may not assess interstate access
charges on ISPs and purchasers of unbundled network elements. Together
with other ILECs, Ameritech has appealed certain aspects of the Access
Reform Order to the Eighth Circuit Court, where a decision is pending.
In the meantime, we have implemented state changes that mirror the
federal access reform structure. Various interexchange carriers
opposing such changes have filed complaints before the Illinois and
Michigan state commissions.
Price Cap Order Our interstate services are subject to price cap
regulation, which limits prices rather than profits. The Price Cap
Order effectively reduced access charges by increasing the price cap
productivity offset factor to 6.5% from the previous 5.3% and by
applying this factor uniformly to all access providers. The order also
required LECs subject to price cap regulation to set their 1997 price
cap index assuming that the 6.5% factor had been in effect since July
1996. Certain parties have sought judicial review of the Price Cap
Order, and a decision by the D. C. Circuit Court with respect to these
matters is now pending.
We currently cannot predict the precise impact of these regulatory
changes on our business, especially as their nature and timing may
evolve in connection with judicial and FCC consideration of other
provisions of the 1996 Act.
Year 2000 readiness
- -------------------
The Year 2000 issue exists because many computer systems and
applications, including those embedded in equipment and facilities, use
two digit rather than four digit date fields to designate an applicable
year. As a result, the systems and applications may not properly
recognize the year 2000 or process data which includes it, potentially
causing data miscalculations or inaccuracies or operational malfunctions
or failures.
Ameritech has established a centrally-managed, company-wide initiative
to identify, evaluate and address Year 2000 issues. Begun in May 1996,
Ameritech's Year 2000 effort covers network and supporting
infrastructure for provision of local switched and data
telecommunications services, as well as operational and financial
information technology ("IT") systems and applications, end-user
computing resources and building systems, such as security, elevator and
heating and cooling systems. In addition, the project includes a review
of the Year 2000 compliance efforts of key suppliers and other principal
business partners and, as appropriate,
Page 13
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Year 2000 readiness (cont'd.)
- -----------------------------
the development of joint business support and continuity plans for Year
2000 issues. While this initiative is broad in scope, it has been
structured to identify and prioritize our efforts for mission critical
systems, network elements and products and key business partners.
Work is progressing in the following phases: inventory, assessment,
remediation, testing, deployment and monitoring. Although the pace of
the work varies among Ameritech's business units and the phases are
often conducted in parallel, the inventory and assessment phases have
been substantially completed as of June 30, 1998 and the remediation
phase is in progress. As part of the testing phase, Ameritech intends
to conduct independent verification testing of selected network
component upgrades received from suppliers. In addition, selected Year
2000 upgrades are slated to undergo testing in a controlled environment
that replicates the current network and is equipped to simulate the turn
of the century and leap year dates.
Under the current Year 2000 plan, Ameritech has established a target
date of January 1, 1999 for remediation of critical systems, network
elements and products, subject to additional Year 2000 testing and
responsive actions. Ameritech's ability to meet that target date is
dependent upon the timely provision of necessary upgrades and
modifications by suppliers and contractors. In some instances, third
party upgrades or modifications are not expected to be available until
late 1998; accordingly, Ameritech's testing and redeployment of affected
items may be delayed into 1999. In addition, Ameritech cannot guarantee
that third parties on whom we depend for essential services (such as
electric utilities, interexchange carriers, etc.) will convert their
critical systems and processes in a timely manner. Failure or delay by
any of these parties could significantly disrupt our business. However,
Ameritech has established a supplier compliance program, and is working
with its key suppliers to minimize such risks.
Ameritech and all of its subsidiaries, including Ohio Bell, expect to
incur total expenses of approximately $210 million through 2001 in
connection with anticipated Year 2000 efforts, in addition to
approximately $40 million in total expenses incurred through June 30,
1998 for matters historically identified as Year 2000-related. The
timing of these expenses may vary and is not necessarily indicative of
readiness efforts or progress to date. We anticipate that a portion of
our Year 2000 expenses will not be incremental costs, but rather will
represent the redeployment of existing IT resources. Ameritech as a
whole also expects to incur certain capital improvement costs (totaling
approximately $30 million) to support this project. Such capital costs
are being incurred sooner than originally planned, but, for the most
part, would have been required in the normal course of business.
As part of its Year 2000 initiative, Ameritech is evaluating scenarios
that may occur as a result of the century change and is in the process
of developing contingency and business continuity plans tailored for
Year 2000-related occurrences. Contingency planning to maintain and
restore service in the event of natural disasters, power failures and
software-related problems has been part of our standard operation for
many years, and we are working with Ameritech to leverage this
experience in the development of plans tailored to meet Year 2000-
related challenges. These plans are expected to assess the potential
for business disruption in various scenarios, and to provide for key
operational back-up, recovery and restoration alternatives.
Page 14
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Year 2000 readiness (cont'd.)
- -----------------------------
The above information is based on current best estimates, which were
derived using numerous assumptions of future events, including the
availability and future costs of certain technological and other
resources, third party modification actions and other factors. Given
the complexity of these issues and possible as yet unidentified risks,
actual results may vary materially from those anticipated and discussed
above. Specific factors that might cause such differences include,
among others, the availability and cost of personnel trained in this
area, the ability to locate and correct all affected computer code, the
timing and success of remedial efforts of our third party suppliers and
similar uncertainties.
New accounting pronouncements
- -----------------------------
FAS 131
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
supersedes FAS 14, "Financial Reporting of Segments of a Business
Enterprise," by establishing new standards for the way that a public
business enterprise reports operating segment information in its annual
and interim financial statements. In general, FAS 131 requires
reporting of financial information as it is used by senior company
management for evaluating performance and deciding how to allocate
resources. The statement is effective in 1998, but need not be applied
to interim financial statements this year. Comparative information for
earlier years must be restated. We will adopt FAS 131 beginning with
our 1998 Annual Report on Form 10-K.
AICPA SOP 98-1
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP provides authoritative guidance for the capitalization of certain
computer software costs developed or obtained for our internal
applications, such as:
- - external direct costs of materials and services, such as programming
costs,
- - payroll costs for employees devoting time to the software project,
and
- - interest costs to be capitalized.
Costs incurred during the preliminary project stage, as well as training
and data conversion costs, are to be expensed as incurred. The SOP is
effective for fiscal years beginning after December 15, 1998, however
earlier application is encouraged. We have not yet quantified the
impacts of adopting this SOP on our financial statements and have not
determined the timing of our adoption. We have historically expensed
most computer software costs as incurred.
FAS 133
In June 1998 the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement provides
standardized accounting and disclosure guidance for derivative
instruments and the derivative portion of certain similar contracts. It
amends FAS 52, "Foreign Currency Translation" and FAS 107, "Disclosures
about Fair Values of Financial Instruments," and it supersedes a number
of financial accounting standards previously issued by the FASB and
several interpretations from the Emerging Issues Task Force.
Page 15
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
New accounting pronouncements (cont'd.)
- ---------------------------------------
FAS 133 (cont'd.)
The statement requires entities that use derivative instruments to
measure these instruments at fair value and record them as assets or
liabilities on the balance sheet. It also requires entities to reflect
the gains or losses associated with changes in the fair value of these
derivatives, either in earnings or as a separate component of
comprehensive income, depending on the nature of the underlying contract
or transaction.
FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, and is to be adopted as of the beginning of the
fiscal year. At the time of adoption, all derivative instruments are to
be measured at fair value and recorded on the balance sheet. Any
differences between fair value and carrying amount at that time will be
recorded as a cumulative effect of a change in accounting principle, in
either net income or other comprehensive income, as appropriate.
Adoption of this statement may or may not have a material impact on our
results of operations or financial position in a given year, depending
upon the nature and magnitude of derivative activity that we engage in
and the changes in market conditions with respect to interest rates or
other underlying values. We have not yet quantified the impacts of the
initial adoption of FAS 133 on our results of operations or financial
condition, nor have we determined when we will implement the new
standard.
Private Securities Litigation Reform Act safe harbor statement
- --------------------------------------------------------------
Some of the information presented in, or in connection with, this
report may constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 that involve
potential risks and uncertainties. Our future results could differ
materially from those discussed here. Some of the factors that could
cause or contribute to such differences include:
- - changes in economic and market conditions that impact the demand for
our products and services;
- - greater than anticipated competition from new entrants into the local
exchange, intraLATA toll or data markets;
- - regulatory developments that impact the telecommunications industry,
as well as pending regulatory issues under state jurisdiction;
- - potential additional costs to comply with the regulatory requirements
of entry into the interLATA long distance market;
- - the impact of new technologies and the potential effect of delays in
development or deployment of such technologies; and,
- - the potential impact of issues related to year 2000 software
compliance.
You should not place undue reliance on these forward-looking statements,
which are applicable only as of August 13, 1998. We have no obligation
to revise or update these forward-looking statements to reflect events
or circumstances that arise after August 13, 1998 or to reflect the
occurrence of unanticipated events.
Page 16
<PAGE>
Item 3 - Quantitative and Qualitative
Disclosures about Market Risk
-----------------------------
We have not included quantitative and qualitative disclosures about
market risk as of June 30, 1998 because Ohio Bell's value at risk has
not changed significantly since December 31, 1997. Quantitative and
qualitative disclosures about market risk were included in our 1997
Annual Report on Form 10-K.
Page 17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
We did not file a Form 8-K during the quarter ended June
30, 1998.
Page 18
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, an
authorized company official has signed this report on our behalf.
THE OHIO BELL TELEPHONE COMPANY
------------------------------
(Registrant)
Date: August 13, 1998 /s/ Ronald G. Pippin
----------------------
Ronald G. Pippin
Vice President and Comptroller
(Duly Authorized Signatory and
Principal Accounting Officer)
Page 19
<PAGE>
GLOSSARY
Access charges -
- ---------------
fees that local phone companies charge to long distance carriers for
the handling of long distance calls on our local network.
Access line -
- ------------
a telephone line for voice, data or video reaching from a local phone
company to a home or business.
Call management services -
- -------------------------
services that add value and convenience for phone customers, such as
call waiting, call forwarding and Caller ID. These services are sold
to customers individually or in "packages".
Customer premises equipment (CPE) -
- ----------------------------------
communications equipment owned by customers, including telephones,
faxes and switches.
Dial 1+ -
- ---------
a feature that allows local phone customers to designate a carrier
other than the local service provider for toll calls within their
calling area by simply dialing 1 plus the telephone number.
Digital -
- --------
an alternative to traditional analog communications, digital systems
transport information in computer code for improved clarity and
quality.
Federal Communications Commission (FCC) -
- ----------------------------------------
the federal agency responsible for regulating the interstate aspects
of telecommunications activities.
Financial Accounting Standards Board (FASB) -
- --------------------------------------------
the independent body responsible for setting accounting and financial
reporting standards to be followed by U.S. business enterprises.
Gross receipts taxes -
- ---------------------
state and local taxes based upon the gross operating revenues earned
in a particular jurisdiction. These taxes may be imposed on general
businesses or public utilities in lieu of other taxes.
Interconnection -
- ----------------
allowing a competitive local service provider to use the local phone
company's network, or elements of the network, to provide local phone
service to its customers.
Interexchange carriers (IXCs) -
- ------------------------------
those companies primarily involved in providing long distance voice
and data transmission services, such as AT&T, MCI and Sprint.
Internet -
- ---------
the global web of networks that connects computers around the world,
providing rapid access to information from multiple sources.
Internet service providers (ISPs) -
- ----------------------------------
those companies providing access to the Internet and other computer-
based information networks.
Intrastate revenues -
- --------------------
that portion of revenues regulated by state rather than federal
authorities.
Local access and transport area (LATA) -
- ---------------------------------------
the boundary within which a local telephone company may provide phone
service. It is usually centered around a city or other identifiable
community of interest.
Local exchange carriers (LECs) -
- -------------------------------
those companies primarily involved in providing local phone service
and access to the local phone network, including Ameritech's landline
communications subsidiaries in Illinois, Indiana, Michigan, Ohio and
Wisconsin.
Page 20
<PAGE>
GLOSSARY (cont'd.)
Operations support systems (OSS) -
- ---------------------------------
the databases and information used to support the provision of
telephone service to end users.
Price caps -
- -----------
a form of regulation that sets maximum limits on the prices that LECs
can charge for access services instead of limits on rate of return or
profits.
Productivity factor -
- --------------------
a portion of the interstate price cap formula that requires LECs to
reduce the price cap based on an assumed increase in productivity.
Securities and Exchange Commission (SEC) -
- -----------------------------------------
the federal agency that regulates the issuance and trading of public
debt and equity securities in the United States and monitors
compliance with these regulations.
Switched Minutes of Use -
- -----------------------
the measure of time used to bill IXC's for access to our public
switched network.
Unbundled network element -
- -------------------------
any feature, function or capability used in the provision of
telecommunications service that is made available by local exchange
carriers to other telecommunications providers separate from other
network elements and for a separate fee.
Universal service -
- ------------------
a concept designed to ensure access to the telecommunications network
in rural and low-income areas at affordable prices. Funding typically
comes from urban telecommunication operators.
Page 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE OHIO BELL TELEPHONE COMPANY'S JUNE 30, 1998 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,100
<SECURITIES> 0<F1>
<RECEIVABLES> 531,100
<ALLOWANCES> (49,200)
<INVENTORY> 15,300
<CURRENT-ASSETS> 526,200
<PP&E> 6,450,000
<DEPRECIATION> 4,088,000
<TOTAL-ASSETS> 3,212,300
<CURRENT-LIABILITIES> 651,600
<BONDS> 835,100
0
0
<COMMON> 1,058,700
<OTHER-SE> (73,600)
<TOTAL-LIABILITY-AND-EQUITY> 3,212,300
<SALES> 0<F2>
<TOTAL-REVENUES> 1,184,100
<CGS> 0<F3>
<TOTAL-COSTS> 916,100
<OTHER-EXPENSES> (5,100)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,400
<INCOME-PRETAX> 241,700
<INCOME-TAX> 91,400
<INCOME-CONTINUING> 150,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,300
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>WE HAVE NOT STATED SECURITIES SEPARATELY IN THE FINANCIAL STATEMENTS
BECAUSE THEY ARE NOT MATERIAL. WE HAVE INCLUDED THEM IN THE "CASH" TAG.
<F2>NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES. WE THEREFORE HAVE NOT STATED THESE SALES SEPARATELY IN THE
FINANCIAL STATEMENTS, PER REGULATION S-X, RULE 5-03(B). WE HAVE INCLUDED
THESE SALES IN THE "TOTAL REVENUES" TAG.
<F3>WE HAVE INCLUDED COST OF TANGIBLE GOODS SOLD IN COST OF SERVICE AND
PRODUCTS IN THE FINANCIAL STATEMENTS AND THE "TOTAL COST" TAG, PER REGULATION
S-X, RULE 5-03(B).
</FN>
</TABLE>
