SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6781
THE OHIO BELL TELEPHONE COMPANY
An Ohio Corporation I.R.S. Employer
No. 34-0436390
45 Erieview Plaza, Cleveland, Ohio 44114
Telephone Number 216-822-9700
Securities registered pursuant to Section 12(b) of the Act: See attached
Schedule A.
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 INSTRUCTION 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
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Forty Year 7.5% Debentures, due October 1, 2011 New York Stock Exchange
Forty Year 7.875% Debentures, due October 1, 2013 New York Stock Exchange
2
TABLE OF CONTENTS
PART I
Item Page
1. Business......................................................... 4
2. Properties....................................................... 12
3. Legal Proceedings................................................ 12
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............................ 13
7. Management's Discussion and Analysis of Results of
Operations (Abbreviated pursuant to General Instruction J(2)).. 14
8. Financial Statements and Supplementary Data...................... 20
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 37
PART III
10. Directors and Executive Officers of 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.................................................... 38
3
PART I
Item 1. Business
General
The Ohio Bell Telephone Company (the "Company") is a close corporation
incorporated under the laws of the State of Ohio and has its principal
executive offices at 45 Erieview Plaza, Cleveland, Ohio 44114 (telephone
number 216-822-9700). The Company is a wholly owned subsidiary of Ameritech
Corporation ("Ameritech"), a Delaware corporation. Ameritech is the parent of
the Company, Illinois Bell Telephone Company, Indiana Bell Telephone Company,
Incorporated, Michigan Bell Telephone Company and Wisconsin Bell, Inc. (the
"landline telephone companies"), as well as several other communications
businesses, and has its principal executive offices at 30 South Wacker Drive,
Chicago, Illinois 60606 (telephone number 312-750-5000).
In 1993, Ameritech restructured its landline telephone companies and two
other related businesses into a structure of customer-specific business units
supported by a single, regionally coordinated network unit. The five Bell
companies continue to function as legal entities, owning Bell company assets
in each state and continue to be regulated by the individual state public
utility commissions. Products and services are now marketed under a single
common brand identity, "Ameritech," rather than using the "Bell" name. In
November 1993, the Company registered two trade names with the Ohio Secretary
of State, "Ameritech" and "Ameritech Ohio."
The Company is engaged in the business of furnishing a wide variety of
advanced telecommunications services in Ohio, including local exchange and
toll service and network access services. In accordance with the Consent
Decree and resulting Plan of Reorganization ("Plan") described below, the
Company provides two basic types of telecommunications services within
specified geographical areas termed Local Access and Transport Areas
("LATAs"), which are generally centered on a city or other identifiable
community of interest. The first of these services is the transporting of
telecommunications traffic between telephones and other equipment on
customers' premises located within the same LATA ("intraLATA service"), which
can include toll service as well as local service. The second service is
providing exchange access service, which links a customer's telephone or other
equipment to the network of transmission facilities of interexchange carriers
which provide telecommunications service between LATAs ("interLATA service").
About three-fifths of the population and one-quarter of the area of Ohio
is served by the Company. The remainder of the State is served by other local
telecommunications companies. On December 31, 1993, the Company had
approximately 3,481,000 customer lines in service. About four-fifths of the
Company's customer lines in service are in or adjacent to six cities having
populations in excess of 95,000, including the metropolitan area of Cleveland,
where about 30% of the Company's customer lines are located. Other
communications services offered by the Company include data transmission,
transmission of radio and television programs and private line voice and data
services.
The following table sets forth for the Company the number of customer
lines in service at the end of each year.
Thousands
1993 1992 1991 1990 1989
Customer Lines in Service..... 3,481 3,380 3,314 3,268 3,214
4
The Company has an agreement with Ameritech Publishing, Inc. ("Ameritech
Publishing"), an Ameritech business unit doing business as "Ameritech
Advertising Services," under which Ameritech Publishing publishes and
distributes classified directories under a license from the Company and
provides services to the Company relating to both classified and alphabetical
directories. Ameritech Publishing pays license fees to the Company under the
agreement.
Ameritech Services, Inc. ("ASI") is a company jointly owned by the Company
and the other Ameritech landline telephone companies. ASI provides to those
companies human resources, technical, marketing, regulatory planning and real
estate asset management services, purchasing and material management support,
as well as labor contract bargaining oversight and coordination. ASI acts as
a shared resource for the Ameritech subsidiaries providing operational support
for the landline telephone companies and integrated communications and
information systems for all the business units.
Ameritech Information Systems, Inc., a subsidiary of Ameritech, sells,
installs and maintains business customer premises equipment and sells network
and central office-based services provided by the Company and the other four
landline telephone companies. It also provides expanded marketing, product
support and technical design resources to large business customers in the
Ameritech region.
In 1993, about 91% of the total operating revenues of the Company were
from telecommunications services and the remainder principally from billing
and collection services, rents, directory advertising and miscellaneous
nonregulated operations. About 75% of the revenues from telecommunications
services were attributable to intrastate operations.
Capital Expenditures
Capital expenditures represent the single largest use of Company funds.
The Company has been making and expects to continue to make large capital
expenditures to meet the demand for telecommunications services and to further
improve such services. The total investment in telecommunications plant
increased from about $4,727,000,000 at December 31, 1988, to about
$5,602,000,000 at December 31, 1993, after giving effect to retirements but
before deducting accumulated depreciation at either date. Capital
expenditures of the Company since January 1, 1989 were approximately as
follows:
1989.................$361,000,000 1992...............$356,000,000
1990..................381,000,000 1993...............$327,000,000
1991..................282,000,000
Expanding on the aggressive deployment plan it began in 1992, in January
1994, Ameritech unveiled a multi-billion dollar plan for a digital network to
deliver video services. Ameritech is launching a digital video network
upgrade that by the end of the decade will enable six million customers in its
region to access interactive information and entertainment services, as well
as traditional cable TV services, from their homes, schools, offices,
libraries and hospitals. The Company, for its part in the network upgrade has
made an initial filing with the FCC seeking approval of the program. The
filing reflects capital expenditures of approximately $83,000,000 over the
next three years. The video network concept, along with other competitive
concerns, is discussed on Page 10.
5
The Company may also, depending on market demand, make additional capital
expenditures under the digital video network upgrade program. The Company
anticipates that its capital expenditures for the program will be funded
without increasing its recent historical level of capital expenditures.
Capital expenditures are expected to be about $261,000,000 in 1994. This
amount excludes any capital expenditures that may occur in 1994 related to the
above described video network upgrade program.
Consent Decree and Line of Business Restrictions
On August 24, 1982, the United States District Court for the District of
Columbia ("Court") approved and entered a consent decree entitled
"Modification of Final Judgment" ("Consent Decree"), which arose out of
antitrust litigation brought by the Department of Justice ("DOJ"), and which
required American Telephone and Telegraph Company ("AT&T") to divest itself of
ownership of those portions of its wholly owned Bell operating communications
company subsidiaries ("Bell Companies") that related to exchange
telecommunications, exchange access and printed directory advertising, as well
as AT&T's cellular mobile communications business. On August 5, 1983, the
Court approved a Plan of Reorganization ("Plan") outlining the method by which
AT&T would comply with the Consent Decree. Pursuant to the Consent Decree and
the Plan, effective January 1, 1984, AT&T divested itself of, by transferring
to Ameritech, one of the seven regional holding companies ("RHCs") resulting
from divestiture, its ownership of the exchange telecommunications, exchange
access and printed directory advertising portions of the Ameritech landline
telephone companies, as well as its regional cellular mobile communications
business.
The Consent Decree, as originally approved by the Court in 1982, provided
that the Company (as well as the other Bell Companies) could not, directly or
through an affiliated enterprise, provide interLATA telecommunications
services or information services, manufacture or provide telecommunications
products or provide any product or service, except exchange telecommunications
and exchange access service, that is not a natural monopoly service actually
regulated by tariff. The Consent Decree allowed the Company and the other
Bell Companies to provide printed directory advertising and to provide, but
not manufacture, customer premises equipment.
The Consent Decree provided that the Court could grant a waiver to a Bell
Company or its affiliates upon a showing to the Court that there is no
substantial possibility that the Bell Company could use its monopoly power to
impede competition in the market it seeks to enter. The Court has, from time
to time, granted waivers to the Company and other Bell Companies to engage in
various activities.
The Court's order approving the Consent Decree provided for periodic
reviews of the restrictions imposed by it. Following the first triennial
review, in decisions handed down in September 1987 and March 1988, the Court
continued the prohibitions against Bell Company manufacturing of
telecommunications products and provision of interLATA services. The rulings
allowed limited provision of information services by transmission of
information and provision of information gateways, but excluded generation or
manipulation of information content. In addition, the rulings eliminated the
need for a waiver for entry into non-telephone related businesses.
In April 1990, a Federal appeals court affirmed the Court's decision
continuing the restriction on Bell Company entry into interLATA services and
the manufacture of telecommunications equipment, but directed the Court to
review its ruling that restricted RHC involvement in the information services
business and to determine whether removal of the information services
restriction would be in the public interest. In July 1991, the Court lifted
6
the information services ban but stayed the effect of the decision pending
outcome of the appeals process. Soon after the stay was lifted on appeal and
in July 1993, the U.S. Court of Appeals unanimously upheld the Court's order
allowing the Bell Companies to produce and package information for sale across
business and home phone lines. In November 1993, the U.S. Supreme Court
declined to review the lower court ruling.
Members of Congress and the White House are intensifying efforts to enact
legislative reform of telecommunications policy in order to stimulate the
development of a modern national information infrastructure to bring the
benefits of advanced communications and information services to the American
people.
Intrastate Rates and Regulation
The Company, in providing telecommunications services, is subject to
regulation by The Public Utilities Commission of Ohio (the "PUCO") with
respect to intrastate rates and services, depreciation rates (for intrastate
services), issuance of securities and other matters.
Compensation required in connection with origination and termination of
intrastate telecommunications by interexchange carriers is subject to the
jurisdiction of the PUCO. The Company currently provides access service to
interexchange carriers authorized by the PUCO to provide service within and
between the Company's LATAs pursuant to tariffs which generally parallel the
interstate access tariffs; however, the PUCO has not implemented intrastate
subscriber line charges.
Compensation between the Company and independent telephone companies for
jointly provided telecommunications within the Company's LATAs is also subject
to the jurisdiction of the PUCO. Such compensation is covered by contractual
arrangements generally based on access charge levels.
A prior pooling arrangement set up by the PUCO was terminated in 1987 and
the current rate structures and contracts referenced above were put into
effect in 1987 and 1988. In 1989, the PUCO provided instructions for final
distribution of remaining pool funds. Final distribution of the pool funds
has not yet been ordered.
A complaint brought against the Company by Allnet Communications Services,
Inc. relating to access charges was dismissed by the PUCO and is currently
pending at the Ohio Supreme Court. Allnet claims that the Company's access
charges are too high and that the Company is discriminating in favor of itself
by failing to provide intraLATA presubscription, also known as Dial One Plus.
In late 1992 and early 1993, the PUCO gave the Company approval to offer
certain Integrated Services Digital Network ("ISDN") based services pursuant
to tariff. ISDN is a network technology that allows simultaneous transmission
of voice, data and video signals over one access line.
On February 16, 1993, the PUCO issued an order setting forth its
collocation policy for intrastate services as provided in a September 1992
Report and Order of the Federal Communications Commission ("FCC") on expanded
interconnection (See "Competition"). The PUCO determined that in Ohio large
telecommunications companies, including the Company, would be permitted to
negotiate collocation arrangements based on the unique circumstances of each
request, rather than follow the FCC's physical collocation requirement. These
arrangements must be submitted to the PUCO for approval. One party sought
rehearing of the PUCO order, which was denied in April 1993.
7
On June 30, 1993, the Company filed with the PUCO its application for
alternative regulation, called Advantage Ohio, under rules adopted by the PUCO
in January 1993. The application includes, among other things, the
replacement of rate of return regulation with a price cap mechanism. Under
the price cap mechanism, future rate changes would be subject to a formula
based on inflation, the Company's historic productivity, and service quality.
The application also proposes to cap basic business and residential rates for
three years. A significant commitment to invest in the communications
infrastructure is also proposed.
In March 1994, the Staff of the PUCO issued a Report of Investigation of
the Company's application. The Company will file objections and rebuttal
testimony to the Staff Report prior to hearings on the Company's application
which are expected to take place beginning in May 1994. See Item 7,
Management's Discussion and Analysis of Results of Operations, for further
description.
On April 6, 1993, the Office of Consumers' Counsel (the "OCC") filed a
complaint against the Company with the PUCO alleging that the Company is
earning in excess of the return established in its last rate case and that the
Company's return should be reduced. The PUCO denied the Company's motion to
dismiss and ordered that the case should proceed to hearing. The PUCO
consolidated the complaint case with the Company's alternative regulation
case, Advantage Ohio, for hearing. Hearings on the complaint case are
expected to begin in May 1994. See Item 7, Managements Discussion and
Analysis of Results of Operations, for further description.
In an order issued in September 1993, the PUCO authorized the Company to
institute new toll rate schedules which reflect rates lower for communications
traffic within the Company's serving areas than for communications traffic
between the Company's and independent local exchange companies' serving areas.
FCC Regulatory Jurisdiction
The Company is also subject to the jurisdiction of the FCC with respect to
intraLATA interstate services, interstate access services and other matters.
The FCC prescribes for communications companies a uniform system of accounts
apportioning costs between regulated and nonregulated services, depreciation
rates (for interstate services) and the principles and standard procedures
("separations procedures") used to separate property costs, revenues,
expenses, taxes and reserves between those applicable to interstate services
under the jurisdiction of the FCC and those applicable to services under the
jurisdiction of the respective state regulatory authorities.
The Company's interstate services regulated by the FCC are covered by a
price cap plan. The plan creates incentives to improve productivity over
benchmark levels in order to retain higher earnings. Price cap regulation
sets maximum limits on the prices that may be charged for telecommunications
services but also provides for a sharing of productivity gains. Earnings in
excess of 12.25% will result in prospective reduction to the price ceilings on
interstate services.
In January 1994, the FCC began a scheduled fourth-year comprehensive
review of price cap regulation.
Interstate Access Charges
The Ameritech landline telephone companies provide access services for the
origination and termination of interstate telecommunications. The access
charges are of three types: common line, switched access and trunking.
8
The common line portion of interstate revenue requirements are recovered
through monthly subscriber line charges and per minute carrier common line
charges. The carrier common line rates include recovery of transitional and
long-term support payments for distribution to other local exchange carriers.
Transitional support payments were made over a four-year period which ended on
April 1, 1993. Long-term support payments will continue indefinitely.
Effective January 1, 1994, rates for local transport services were
restructured and a new "trunking" service category created. Trunking services
consist of two types: those associated with the local transport element of
switched access and those associated with special access. Trunking services
associated with switched access handle the transmission of traffic between a
local exchange carrier's serving wire center and a Company end office where
local switching occurs. Trunking services associated with special access
handle the transmission of telecommunications services between any two
customer-designated premises or between a customer-designated premise and a
Company end office where multiplexing occurs. High volume customers generally
use the flat-rated dedicated facilities associated with special access, while
usage sensitive rates apply for lower-volume customers that utilize a common
switching center.
Local transport rate elements for switched services assess a flat monthly
rate and a mileage sensitive rate for the physical facility between the
customer's point of termination and the end office, a usage sensitive and
mileage sensitive rate assessed for the facilities between the end office
through the access tandem to the customer's serving wire center, and a minute
of use charge assessed to all local transport. The flat rate transport rates
and structure generally mirror special access rate elements. Customers can
order direct transport between the serving wire center or end office and the
access tandem and tandem switched transport between the access tandem and the
end office.
Special access charges are monthly charges assessed to customers for
access to interstate private line service. Charges are paid for local
distribution channels, interoffice mileage and optional features and
functions.
Competition
Regulatory, legislative and judicial decisions and technological advances,
as well as heightened customer interest in advanced telecommunications
services, have expanded the types of available communications services and
products and the number of companies offering such services. Market
convergence, already a reality, is expected to intensify.
The FCC has taken a series of steps that are expanding opportunities for
companies to compete with local exchange carriers in providing services that
fall under the FCC's jurisdiction. In September 1992, the FCC mandated that
local exchange carriers provide network access for special transmission paths
to competitive access providers, interexchange carriers and end users. In
February 1993, Ameritech filed a tariff with the FCC, which was effective in
May, making possible this type of interconnection. In August 1993, the FCC
issued an order that permits competitors to interconnect to local telephone
company switches. Under the new rules, certain telephone companies must allow
all interested parties to terminate their switched access transmission
facilities at telephone company central offices, wire centers, tandem switches
and certain remote nodes. Ameritech filed a tariff in November 1993 to effect
that change in February 1994.
9
Ameritech is seeking opportunities to compete on an equal footing.
Although the Company is barred from providing interLATA and nationwide cable
services, our competitors are not. Cellular telephone and other wireless
technologies are poised to bypass Ameritech's local access network. Cable
providers, who currently serve more than eighty percent of American homes,
could provide telephone service and have expressed their desire to do so.
Certain interexchange carriers and competitive access providers have
demonstrated interest in providing local exchange service. Ameritech's plan
is to facilitate competition in the local exchange business in order to
compete in the total communications marketplace.
Customers First: Ameritech's Advanced Universal Access Plan
In 1993, Ameritech embarked on a long-range restructuring with the intent
of dramatically changing the way it serves its customers, and in the process
altered its corporate framework, expanding the nature and scope of its
services and supporting the development of a fully competitive marketplace.
In March, Ameritech filed a plan with the FCC to change the way local
telecommunications services are provided and regulated and to furnish a policy
framework for advanced universal access to modern telecommunications services
- - voice, data and video information.
Ameritech proposes to facilitate competition in the local exchange
business by allowing other service providers to purchase components of its
network and to repackage them with their own services for resale, in exchange
for the freedom to compete in both its existing and currently prohibited
businesses. Ameritech has requested regulatory reforms to match the
competitive environment as well as support of its efforts to remove
restraints, such as the interLATA service restriction, which currently
restrict its participation in the full telecommunications marketplace. In
addition, Ameritech asks for more flexibility in pricing new and competitive
services and replacement of caps on earnings with price regulation. Under the
plan, customers would be able to choose from competitive providers for local
service as they now can choose a provider for interexchange service.
To demonstrate conclusively the substantial customer and economic benefits
of full competition, in December 1993, Ameritech proposed a trial of its plan,
beginning in 1995. Ameritech has petitioned the DOJ to recommend Federal
District Court approval of a waiver of the long-distance restriction of the
Consent Decree so that Ameritech can offer interexchange service. At the same
time, Ameritech would facilitate the development of local communications
markets by unbundling the local network and integrating competitors' switches.
The trial would begin in Illinois in the first quarter of 1995 and would last
indefinitely. Other states could be added over time. If the trial is
approved by the DOJ, the request must be acted on by the Court which retains
jurisdiction over administering the terms of the Consent Decree. In February
1994, Ameritech filed tariffs with the Illinois Commerce Commission that
propose specific rates and procedures to open the local network in that state.
Approval could take up to 11 months.
Ameritech has received broad support for the plan from Midwest elected
officials, national and Midwest business leaders, and education, health
industry, economic development and consumer leaders. The national and local
offices of the Communications Workers of America (CWA) and the International
Brotherhood of Electrical Workers (IBEW) also support the plan.
Ameritech's Video Network Concept
In January 1994, Ameritech filed plans with the FCC to construct a digital
video network upgrade that will enable it to reach six million customers by
the end of the decade. Ameritech expects to spend $4.4 billion to upgrade its
10
network to provide video services, part of a total of approximately $29
billion Ameritech estimates it will spend on network improvements over the
next fifteen years. Ameritech is pursuing alliances and partnerships that
will position it as a key participant in the emerging era of interactive video
experiences. Pending FCC approval of Ameritech's plan and clearing of other
regulatory hurdles, the construction of the first phase of the network could
begin as soon as the fourth quarter of 1994. The new network, which will be
separate from Ameritech's core local communications network, is planned to be
expanded to approximately 1 million additional Midwest customers in each of
the next five years.
Ameritech will be only one of many users of the broadband network. A
multitude of competing video information providers, businesses, institutions,
interexchange carriers and video telephony customers will also have access to
the technology.
With the new system, customers will have access to a virtually unlimited
variety of programming sources. These will include basic broadcast services,
similar to today's cable service, and advanced interactive services such as
video on demand, home health care, interactive educational software, distance
learning, interactive games and shopping, and a variety of other entertainment
and information services that can be accessed from homes, offices, schools,
hospitals, libraries and other public and private institutions.
Cable/Telco Crossownership Ban
In November 1993, Ameritech filed motions in two federal courts seeking
freedom from the ban on providing video services in its own service area.
Ameritech asked U.S. District Courts in Illinois and Michigan to declare
unconstitutional the provisions of the Cable Act of 1984 that bar the RHCs
from providing cable TV service in areas where they hold monopolies on local
phone service. In August 1993, a U.S. District Court in Washington, D.C.
granted a request by Bell Atlantic Corporation for such an order, but that
court denied similar requests by Ameritech and the other RHCs.
Legislation has been introduced in Congress that would repeal the
crossownership ban.
For further discussion see Item 7, Management's Discussion and Analysis of
Results of Operations "Regulatory Environment."
Employee Relations
As of December 31, 1993, the Company employed 10,023 persons, a decrease
from 11,074 at December 31, 1992. During 1993, approximately 435 management
employees left the payroll as a result of voluntary and involuntary work force
programs, and 427 nonmanagement employees left the payroll under a
Supplemental Income Protection Program (SIPP) established under labor
agreements to voluntarily exit the work force. Additional restructuring was
done by normal attrition.
On March 25, 1994, Ameritech announced that it will reduce its
nonmanagement work force by 6,000 employees by the end of 1995, including
approximately 1,500 at the Company. Under terms of agreements between
Ameritech, the CWA and the IBEW, Ameritech is implementing an enhancement to
the Ameritech pension plan by adding three years to the age and net credited
service of eligible nonmanagement employees who leave the business during a
designated period that ends in mid-1995. In addition, Ameritech's network
business unit is offering financial incentives under terms of its current
contracts with the CWA and IBEW to selected nonmanagement employees who leave
the business before the end of 1995.
11
The reduction of the work force results from technological improvements,
consolidations and initiatives identified by management to balance its cost
structure with emerging competition.
Approximately 86% of the Company's employees are represented by the CWA
which is affiliated with the AFL-CIO.
In July and August 1993, the Ameritech landline telephone companies and
Ameritech Services reached agreement with the two unions on a work force
transition plan for assigning union-represented employees to the newly
established business units. The separate agreements with the CWA and the IBEW
extend existing union contracts with the landline telephone companies and
Ameritech Services to the new units. The pacts address a number of force
assignment, employment security and union representation issues. In 1995,
when union contracts are due to expire, the parties will negotiate regional
contracts.
Item 2. Properties.
The properties of the Company do not lend themselves to description by
character and location of principal units. At December 31, 1993, central
office equipment represented 39% of the Company's investment in
telecommunications plant in service; land and buildings (occupied principally
by central offices) represented 10%; and connecting lines which constitute
outside plant, the majority of which are on or under public roads, highways or
streets and the remainder of which are on or under private property,
represented 41%.
Substantially all of the installations of central office equipment and
administrative offices are located in buildings owned by the Company situated
on land which it owns in fee. Many garages, administrative offices, business
offices and some installations of central office equipment are in rented
quarters.
Item 3. Legal Proceedings.
Pre-divestiture Contingent Liabilities Agreement
The Plan 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 divestiture.
These contingent liabilities relate principally to litigation and other claims
with respect to the former Bell System's 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, AT&T and the Bell Companies, including
the Company, 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 reserves for depreciation) as of the effective date of
divestiture. Different allocation rules apply to liabilities which relate
exclusively to pre-divestiture interstate or intrastate operations.
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 the Company would be subject after final
adjudication or settlement of all such liabilities would not be material in
amount to the financial position of the Company.
12
PART II
Item 6. Selected Financial and Operating Data
THE OHIO BELL TELEPHONE COMPANY
(Dollars in Millions)
1993 1992 1991 1990 1989
Revenues
Local service . . . . . . . . $ 1,144.7 $ 1,121.9 $ 1,102.7 $ 1,084.6 $ 1,063.2
Interstate network access . . 434.4 427.9 420.6 402.7 401.9
Intrastate network access . . 144.3 139.9 124.3 132.0 133.0
Long distance . . . . . . . . 186.8 169.8 209.7 217.0 217.1
Other . . . . . . . . . . . . 190.1 181.9 156.8 175.4 176.2
Total revenues . . . . . . 2,100.3 2,041.4 2,014.1 2,011.7 1,991.4
Operating expenses. . . . . . . 1,655.4 1,610.0 1,621.9 1,617.8 1,571.0
Operating income . . . . . . . 444.9 431.4 392.2 393.9 420.4
Interest expense . . . . . . . 62.2 66.1 80.6 76.3 70.1
Other expense (income), net . . (2.0) (.6) (13.3) (13.2) 4.7
Income taxes . . . . . . . . . 104.3 101.1 87.0 86.1 94.4
Income before cumulative
effect of change in
accounting principles . . . . 280.4 264.8 237.9 244.7 251.2
Cumulative effect of change in
accounting principles. . . . . - (347.3) - - -
Net income (loss) . . . . . . . $ 280.4 $ (82.5) $ 237.9 $ 244.7 $ 251.2
Total assets . . . . . . . . . $ 3,793.0 $ 3,854.9 $ 3,832.9 $ 3,864.5 $ 3,710.7
Telecommunications plant-net. . $ 3,191.5 $ 3,246.2 $ 3,210.1 $ 3,296.8 $ 3,279.0
Capital expenditures. . . . . . $ 327.1 $ 355.6 $ 282.0 $ 381.3 $ 360.8
Long-term debt . . . . . . . . $ 837.1 $ 713.7 $ 863.1 $ 863.5 $ 865.4
Debt ratio . . . . . . . . . . 41.5% 42.7% 37.2% 37.0% 36.4%
Return to average equity. . . . 22.3% (6.7)% 15.1% 15.6% 16.3%
Return on average total capital 14.9% (.8)% 11.9% 12.2% 12.5%
Pretax interest coverage1 . . . 7.36 6.56 5.55 5.71
6.02
Customer lines - at end of year
(000's) . . . . . . . . . . . 3,481 3,380 3,314 3,268 3,214
%Customer lines served by digital
electronic offices . . . . . . 69.4 55.2 46.3 42.7 38.4
%Customer lines served by analog
electronic offices . . . . . . 30.6 44.8 53.7 57.3 60.1
Employees - at end of year (000's) 10.0 11.1 12.0 12.9 13.2
Customer lines per employee . . 348 305 276 253 243
Local calls per year (millions) 12,307 12,097 11,952 11,459 11,170
Calls per customer line . . . . 3,535 3,579 3,607 3,506 3,475
<FN>
1 Before cumulative effect of change in accounting principles.
13
Item 7. Management's Discussion and Analysis of Results of Operations
(Dollars in Millions)
The following is a discussion and analysis of the results of operations of the
Company for the year ended December 31, 1993, compared to the year ended
December 31, 1992, which is based on the Statements of Income and Reinvested
Earnings on page 21. The Company has changed the presentation of its
operating expenses in the Statements of Income and Reinvested Earnings to
facilitate a better understanding of its operating results. Prior year
amounts have been reclassified to conform with this presentation. Other
pertinent data are also given in the Selected Financial and Operating Data on
page 13.
Revenues
Total revenues were $2,100.3 in 1993 and $2,041.4 in 1992 reflecting an
increase of $58.9. The increase was due primarily to higher local service
revenues and higher long distance revenues, lower payments to an interstate
pool and higher network access volumes. Lower interstate rates partially
offset the above increases.
Increase
1993 1992 (Decrease) %Change
Local service . . . . . $1,144.7 $1,121.9 $22.8 2.0
The $22.8 increase in local service revenues was due mainly to growth in
access lines and increased usage of custom calling services. Higher message
volumes and increases in nonrecurring charge revenues and public telephone
revenues also contributed to the increase.
Increase
1993 1992 (Decrease) %Change
Network access
Interstate access . . $434.4 $427.9 $ 6.5 1.5
Intrastate access . . $144.3 $139.9 $ 4.4 3.1
Network access revenues from interstate services increased $6.5 due
principally to lower payments to an interstate pool and higher volumes. A
reclassification to intrastate access revenues in 1992 related to
interexchange carrier claims also contributed to the increase. Lower
interstate access rates partially offset these increases.
Interstate access revenues increased due to higher volumes and a change in the
method of recording transactions between the Company and independent telephone
companies for jointly provided telecommunications. A positive revenue
reclassification adjustment in 1992 related to the settlement of a billing
claim and lower intrastate rates partially offset the above increases.
Increase
1993 1992 (Decrease) %Change
Long distance . . . . . $186.8 $169.8 $ 17.0 10.0
Higher revenue from the previously noted change in the method of recording
transactions between the Company and independent telephone companies was the
major contributor to the increase in long distance revenues.
14
Management's Discussion and Analysis of Results of Operations (Continued)
(Dollars in Millions)
Increase
1993 1992 (Decrease) %Change
Other . . . . . . . . . $190.1 $181.9 $ 8.2 4.5
Other includes revenues from directories, billing and collection services and
inside wire maintenance and installation and is net of the Company's provision
for uncollectible revenues. The increase was due mainly to increased revenues
from inside wire maintenance and installation services and billing and
collection services.
Operating Expenses
Total operating expenses were $1,655.4 in 1993 and $1,610.0 in 1992. The
$45.4 increase was due primarily to higher depreciation expense and higher
contracted services. Lower salary and wage payments in 1993 resulting from a
lower employee level and lower interest expense partially offset the above
increases.
Increase
Employee related 1993 1992 (Decrease) %Change
expenses . . . . . . . $479.8 $543.9 $(64.1) (11.8)
The decrease in employee related expenses was due primarily to lower salaries,
wages, payroll taxes, and benefits expense as a result of lower employee
levels. A lower level of incentives and adjustments in postretirement benefit
expense also contributed to the decrease. These decreases were partially
offset by salary and wage rate increases and lower pension credits.
At December 31, 1993, the Company had 10,023 employees compared to 11,074 at
December 31, 1992. The net decrease of 1,051 included 435 management
employees leaving through voluntary and involuntary work force programs and
427 nonmanagement employees leaving through a voluntary force reduction
program. The remainder of the reduction was due to attrition.
Increase
Other operating 1993 1992 (Decrease) %Change
expenses . . . . . . . $567.0 $500.2 $ 66.8 13.4
The increase in other operating expenses was due principally to increased
advertising expenses, higher right-to-use fees, higher access expenses and
costs and expenses for contracted services. The increase in contracted
services includes higher charges from ASI for services provided and the
transfer of certain work functions to ASI in 1992. The higher access expense
reflects the change in the method of recording transactions between the
Company and independent telephone companies previously noted. The higher
level of access expense resulting from the change was offset by higher
intrastate access and long distance revenues.
15
Management's Discussion and Analysis of Results of Operations (Continued)
(Dollars in Millions)
Increase
Depreciation and 1993 1992 (Decrease) %Change
amortization . . . . . $387.8 $346.1 $ 41.7 12.0
Depreciation expense increased due principally to the FCC authorized revised
depreciation rates effective January 1, 1993. Higher plant investment also
contributed to the increase. These increases were partially offset by the
completion of the reserve imbalance amortization in 1992.
Increase
1993 1992 (Decrease) %Change
Taxes other than
income taxes . . . . . $220.8 $219.8 $1.0 .5
Taxes other than income taxes increased due to higher sales taxes and property
taxes. The property tax increase reflects an increase in the taxable plant
base and higher property tax rates. Lower gross receipts taxes due to a tax
credit for providing Ohio telecommunications relay service to persons with
communications disabilities partially offset these increases.
Other Income and Expenses
Increase
1993 1992 (Decrease) %Change
Interest expense. . . . $62.2 $66.1 $(3.9) (5.9)
Interest expense decreased due to lower average interest rates in 1993 on
outstanding debt. Early redemptions of long-term debt were funded with lower
cost short-term debt and the issuance of long-term debt at lower interest
rates.
Increase
1993 1992 (Decrease) %Change
Other expense
(income)-net . . . . . $(2.0) $( .6) $ 1.4 -
Other income increased due principally to higher affiliate equity income net
of affiliated charges in 1992 associated with the change in accounting
principles. Lower costs and expenses in 1993 related to the early redemptions
of the Company's debentures also contributed to the net increase.
Increase
1993 1992 (Decrease) %Change
Income taxes. . . . . . $104.3 $101.1 $ 3.2 3.2
Federal income taxes on income prior to the change in accounting principles
increased $3.2 due principally to increased taxable income.
16
Management's Discussion and Analysis of Results of Operations (Continued)
(Dollars in Millions)
Change in Accounting Principles
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
The new accounting method is essentially a refinement of the method the
Company had been following and, accordingly, did not have a material impact on
the Company's financial statements upon adoption.
As more fully discussed in Note (C) to the financial statements, effective
January 1, 1992, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions" (SFAS No. 106) and Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112).
The cumulative effect of these accounting changes was recognized in the first
quarter of 1992 as a change in accounting principles of $347.3, net of a
deferred income tax benefit of $172.1.
Regulatory Accounting
The Company presently gives accounting recognition to the actions of
regulators where appropriate, as prescribed by Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71). Under SFAS No. 71, the Company records certain
assets and liabilities because of actions of regulators. Further, amounts
charged to operations for depreciation expense reflect estimated useful lives
and methods prescribed by regulators rather than those that might otherwise
apply to unregulated enterprises. In the event the Company determines that it
no longer meets the criteria for following SFAS No. 71, the accounting impact
to the Company would be an extraordinary noncash charge to operations of an
amount which could be material. Criteria that give rise to the discontinuance
of SFAS No. 71 include (1) increasing competition which restricts the
Company's ability to establish prices to recover specific costs, and (2) a
significant change in the manner in which rates are set by regulators from
cost-based regulation to another form of regulation. The Company periodically
reviews these criteria to ensure that continuing application of SFAS No. 71 is
appropriate.
Regulatory Environment
Customer demand, technology and the preferences of policy makers are all
converging to increase competition in the local exchange business. The
effects of increasing competition are apparent in the marketplace the Company
serves. For example, competitive access provider(s) have requested regulatory
authority to provide intrastate private line services in Ohio. The PUCO has
recently stated that it has the authority to authorize other companies to
provide local exchange services within the Company's serving areas.
Additionally, increasing volumes of intraLATA long distance services purchased
by large and medium sized business customers are sold by carriers other than
the Company.
Recognizing the trend, the Company's regulatory/public policy activities are
focused on achieving a framework that allows for expanding competition while
providing a fair opportunity for all carriers, including the Company, to
succeed. The cornerstone of this effort is Ameritech's "Customers First
Plan," filed with the FCC on March 1, 1993, and the Company's Advantage Ohio
plan filed June 30, 1993. In a subsequent filing with the U.S. Department of
Justice, Ameritech proposed that the Customers First Plan be implemented on a
trial basis beginning in January 1995 in Illinois and other states thereafter.
17
Management's Discussion and Analysis of Results of Operations (Continued)
(Dollars in Millions)
The Customers First Plan proposes to open all of the local telephone business
in the Company's service area to competition. In exchange, Ameritech has
requested three regulatory changes. First, Ameritech has requested relief
from the Consent Decree's interLATA ban. Such relief would mean that the
Company would be allowed to offer all long distance services. Second,
Ameritech has requested a number of modifications in the FCC's price cap
rules. These modifications would apply only to Ameritech, including the
Company, and would eliminate any obligation to refund, in the form of its
share of future rate reductions, its share of interstate earnings in excess of
12.25%. The modifications would also provide the Company increased ability to
price its interstate access services in a manner appropriate to competitive
conditions. Third, Ameritech has requested FCC authority to collect, in a
competitively neutral manner, the social subsidies currently embedded in the
rates that the Company charges long distance carriers for access to the local
network.
Regulatory Proceedings
On June 30, 1993, the Company filed with the PUCO its application for
alternative regulation, called Advantage Ohio. The application includes,
among other things, the replacement of rate of return regulation with a price
cap mechanism. Under the price cap mechanism future rate changes would be
subject to a formula based on inflation, the Company's historic productivity
and service quality. The application also proposes to cap basic business and
residential rates for three years. A significant commitment to invest in the
communications infrastructure is also proposed.
In March 1994, the Staff of the PUCO issued its Report of Investigation of the
Company's application. The Staff recommended that a price cap structure be
adopted in place of the current rate of return regulation. The Staff also
recommended that the Company's annual revenues should be reduced by a range of
$125.0 to $144.0. The Company disagrees with certain of the Staff's
recommendations including the recommended revenue reduction. The Company will
file objections and rebuttal testimony to the Staff Report. Hearings on the
Company's application are expected to take place beginning in May 1994. At
this time the Company cannot predict if the PUCO will adopt the Company's
alternative regulation plan or order rate reductions.
On April 6, 1993, the OCC filed a complaint against the Company with the PUCO
alleging that the Company is earning in excess of the return established in
its last rate case and that the Company's return should be reduced. The PUCO
denied the Company's motion to dismiss and ordered that the case should
proceed to hearing. The PUCO consolidated the complaint case with the
Company's alternative regulation case, Advantage Ohio, for hearing. OCC has
filed testimony in the case seeking a revenue reduction of $141.0. The
Company disagrees with OCC's claims and will file rebuttal testimony in April
1994 demonstrating that its earnings and rates are reasonable. Hearings on
the complaint case are expected to begin in May 1994.
Status of New Business Units
In February 1993, following a yearlong examination of its business called
"Breakthrough Leadership," Ameritech announced it would restructure its
organization, including the Company, into separate units organized around
18
Management's Discussion and Analysis of Results of Operations (Continued)
(Dollars in Millions)
specific customer groups such as residential customers, small businesses,
interexchange companies and large corporations and a single business unit to
run Ameritech's network in Illinois, Indiana, Michigan, Ohio and Wisconsin.
The Ameritech landline telephone companies continue to function as legal
entities owning current landline telephone company assets in each state. The
network unit provides network and information technology resources in response
to the needs of the other market units. This unit is the source of network
capabilities for products and services offered by the other business units and
is responsible for the development and day-to-day operation of an advanced
information infrastructure.
All of the market units and the network unit are currently operational.
Ameritech has developed a new logo and is marketing all of its products and
services under the single brand name "Ameritech."
Digital Video Network
In January 1994, Ameritech announced a program to launch a digital video
network upgrade that is expected, by the end of the decade, to make available
interactive information and entertainment services, as well as traditional
cable TV services, to approximately six million Ameritech customers. The
Company has filed an application with the FCC seeking approval of the program.
The application reflects capital expenditures of approximately $83.0 over the
next three years. The Company may also, depending on market demand, make
additional capital expenditures under this program. The Company anticipates
that its capital expenditures for the program will be funded without an
increase to its recent historical level of capital expenditures.
Work Force Resizing
On March 25, 1994, Ameritech announced that it will reduce its nonmanagement
work force by 6,000 employees by the end of 1995, including approximately
1,500 at the Company. Under terms of agreements between Ameritech, CWA and
the IBEW, Ameritech is implementing an enhancement to the Ameritech pension
plan by adding three years to the age and net credited service of eligible
nonmanagement employees who leave the business during a designated period that
ends in mid-1995. In addition, Ameritech's network business unit is offering
financial incentives under the terms of its current contracts with the CWA and
IBEW, to selected nonmanagement employees who leave the business before the
end of 1995.
The above actions will result in a charge to first quarter 1994 earnings of
approximately $132.5 or $86.1 after-tax. A significant portion of the program
cost will be funded by Ameritech's pension plan, whereas financial incentives
to be paid from Company funds are estimated to be approximately $35.5.
Settlement gains, which result from the pension plan, will be reflected in
income as employees leave the payroll. The Company believes this program will
reduce its employee-related costs by approximately $75.0 on an annual basis
upon completion of this program.
The reduction of the work force results from technological improvements,
consolidations and initiatives identified by management to balance its cost
structure with emerging competition.
19
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, 1993 and 1992 and the related
statements of income and reinvested earnings and cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
and the schedules referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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, 1993 and 1992, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note (C) to the financial statements, the Company changed
its method of accounting for certain postretirement and postemployment
benefits in 1992.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules
listed in Item 14(a)(2) are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not a required part of the
basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly state 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 & CO.
Cleveland, Ohio
January 28, 1994
20
THE OHIO BELL TELEPHONE COMPANY
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Dollars in Millions)
Year Ended December 31
1993 1992 1991
Revenues . . . . . . . . . . . . . . . . . . . $ 2,100.3 $ 2,041.4 $ 2,014.1
Operating expenses
Depreciation and amortization. . . . . . . 387.8 346.1 362.9
Employee related expenses. . . . . . . . . 479.8 543.9 570.7
Other operating expenses . . . . . . . . . 567.0 500.2 472.0
Taxes other than income taxes . . . . . . 220.8 219.8 216.3
1,655.4 1,610.0 1,621.9
Operating income . . . . . . . . . . . . . . 444.9 431.4 392.2
Interest expense . . . . . . . . . . . . . . . 62.2 66.1 80.6
Other expense (income) - net . . . . . . . . . (2.0) (.6) (13.3)
Income before income taxes and cumulative
effect of change in accounting principles. . 384.7 365.9 324.9
Income taxes . . . . . . . . . . . . . . . . . 104.3 101.1 87.0
Income before cumulative effect of
change in accounting principles . . . . . . 280.4 264.8 237.9
Cumulative effect of change in accounting
principles . . . . . . . . . . . . . . . . . - (347.3) -
Net income (loss) . . . . . . . . . . . . . . 280.4 ( 82.5) 237.9
Reinvested earnings at beginning of year . . . 216.7 541.1 543.7
Less dividends . . . . . . . . . . . . . . . . 260.3 241.9 240.5
Reinvested earnings at end of year . . . . . . $ 236.8 $ 216.7 $ 541.1
<FN>
The accompanying notes are an integral part of the financial statements.
21
THE OHIO BELL TELEPHONE COMPANY
BALANCE SHEETS
(Dollars in Millions)
December 31,
1993 1992
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . $ - $ -
Receivables, net
Customers and agents (less allowance
for uncollectibles of $18.2 and $19.8,
respectively) . . . . . . . . . . . . . . 287.1 285.1
Ameritech and affiliates . . . . . . . . . 28.1 25.3
Other . . . . . . . . . . . . . . . . . . . 17.5 19.5
Material and supplies . . . . . . . . . . . . . 14.2 16.8
Prepaid and other . . . . . . . . . . . . . . . 30.0 51.0
Total current assets . . . . . . . . . . . 376.9 397.7
TELECOMMUNICATIONS PLANT
In service . . . . . . . . . . . . . . . . . . . 5,518.7 5,360.0
Under construction . . . . . . . . . . . . . . . 83.3 77.0
5,602.0 5,437.0
Less accumulated depreciation . . . . . . . . . 2,410.5 2,190.8
Total telecommunications plant . . . . . . 3,191.5 3,246.2
INVESTMENTS, principally in affiliates . . . . . . . 63.2 54.8
OTHER ASSETS AND DEFERRED CHARGES . . . . . . . . . 161.4 156.2
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $3,793.0 $3,854.9
LIABILITIES AND SHAREOWNER'S EQUITY
CURRENT LIABILITIES
Debt maturing within one year
Ameritech . . . . . . . . . . . . . . . . . $ 35.5 $ 188.0
Other . . . . . . . . . . . . . . . . . . . 11.3 11.5
Accounts payable
Ameritech and affiliates . . . . . . . . . 83.2 70.9
Other . . . . . . . . . . . . . . . . . . . 107.1 145.7
Other current liabilities. . . . . . . . . . . . 373.9 330.7
Total current liabilities . . . . . . . . . 611.0 746.8
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . 837.1 713.7
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES
Accumulated deferred income taxes . . . . . . . 342.7 335.6
Unamortized investment tax credits . . . . . . . 72.9 89.5
Postretirement benefits other than pensions . . 461.0 488.6
Long-term payable to Ameritech Services, Inc.. . 19.7 20.8
Other . . . . . . . . . . . . . . . . . . . . . 201.7 233.1
Total deferred credits . . . . . . . . . . 1,098.0 1,167.6
SHAREOWNER'S EQUITY
Common stock - one share issued and outstanding,
without par value . . . . . . . . . . . . . . . 1,010.1 1,010.1
Reinvested earnings . . . . . . . . . . . . . . 236.8 216.7
Total shareowner's equity . . . . . . . . . 1,246.9 1,226.8
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY . . . . . $3,793.0 $3,854.9
<FN>
The accompanying notes are an integral part of the financial statements.
22
THE OHIO BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Year Ended December 31
1993 1992 1991
>
Cash flows from Operating Activities:
Net income (loss) . . . . . . . . . . . . $ 280.4 $ (82.5) $ 237.9
Adjustments to net income (loss)
Cumulative effect of change in
accounting principles . . . . . . . - 347.3 -
Depreciation and amortization . . . . 387.8 346.1 362.9
Deferred income taxes - net . . . . . (35.2) (12.6) 2.3
Investment tax credits - net . . . . (16.6) (13.5) (14.7)
Interest during construction . . . . (3.4) (2.9) (5.1)
Provision for uncollectibles . . . . 11.4 11.3 35.9
Change in accounts receivable . . . . (14.4) 11.9 (72.5)
Change in materials and supplies . . (.2) 4.7 2.8
Change in prepaid expenses and
certain other current assets . . . . (2.3) (14.4) (4.2)
Change in accounts payable . . . . . (26.4) 56.0 (50.1)
Change in accrued taxes . . . . . . . (1.6) (19.3) 13.8
Change in certain other current
liabilities . . . . . . . . . . . . 6.4 (10.5) (6.0)
Change in certain noncurrent
assets and liabilities . . . . . . . (26.2) (18.2) 13.8
Other . . . . . . . . . . . . . . . . 7.0 20.3 (.4)
Net cash from operating activities . . . . . . 566.7 623.7 516.4
Cash flows from Investing Activities:
Capital expenditures - net . . . . . . . . (323.6) (350.0) (275.6)
Cost of disposal of telecommunications
plant . . . . . . . . . . . . . . . . . . (3.1) (12.7) (.1)
Additional investments, principally equity
in ASI (affiliate) . . . . . . . . . . . (6.3) (8.4) -
Net cash from investing activities . . . . . . (333.0) (371.1) (275.7)
Cash flows from Financing Activities:
Net change in short-term debt . . . . . . - - (38.0)
Intercompany financing - net . . . . . . . (152.5) 145.4 42.6
Issuance of long-term debt . . . . . . . . 247.9 99.2 -
Retirements of long-term debt . . . . . . (125.6) (250.2) (1.6)
Cost of refinancing long-term debt . . . . (8.9) (11.1) -
Dividend payments . . . . . . . . . . . . (194.6) (241.9) (240.5)
Net cash from financing activities . . . . . . (233.7) (258.6) (237.5)
Net increase (decrease) in cash . . . . . . . - (6.0) 3.2
Cash at beginning of year . . . . . . . . . . - 6.0 2.8
Cash at end of year . . . . . . . . . . . . . $ - $ - $ 6.0
<FN>
The accompanying notes are an integral part of the financial statements.
23
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
The Ohio Bell Telephone Company (the "Company") is a wholly owned subsidiary
of Ameritech Corporation ("Ameritech").
(A) Significant Accounting Policies - The financial statements of the Company
reflect the application of the accounting policies described in this Note.
Basis of Accounting - The financial statements have been prepared in
accordance with generally accepted accounting principles. In compliance with
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS No. 71), the Company gives
recognition to the actions of regulators where appropriate. Such actions can
provide reasonable assurance of the existence of an asset, reduce or eliminate
the value of an asset or impose a liability. Actions of a regulator can also
eliminate a liability previously imposed by the regulator.
Certain reclassifications have been made to the prior year financial
statements to conform them to the 1993 presentation.
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) - The Company has a 21% ownership
interest in ASI, an Ameritech controlled affiliate, that provides
consolidated planning, development, management and support services to
all of the Ameritech Bell companies. The Company also provides
certain services, such as loaned employees, to ASI.
1993 1992 1991
Purchases of materials and charges
for services from ASI . . . . $329.8 $280.8 $248.6
Recovery of costs for services
provided to ASI . . . . . . . $ 14.3 $ 12.9 $ 8.3
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.
1993 1992 1991
Charges incurred for services $ 24.5 $ 22.2 $ 24.1
24
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
3. Ameritech Publishing, Inc. (API) - The Company has an agreement under
which payments are made to the Company by API for license fees and
billing and collection services provided by the Company. The Company
also purchases directory services from API under the same agreement.
1993 1992 1991
Fees paid to the Company
by API . . . . . . . . . . . . $ 85.8 $ 84.7 $ 84.1
Purchases by the Company
from API . . . . . . . . . . . $ 16.6 $ 19.1 $ 18.3
4. Ameritech Information Systems, Inc. (AIS) - The Company has an
agreement under which the Company reimburses AIS for costs
incurred by AIS in connection with the sale of network services
by AIS employees.
1993 1992 1991
Charges incurred for services $ 7.7 $ 6.8 $ 8.0
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 the costs.
1993 1992 1991
Charges incurred for services $ 23.2 $ 27.9 $ 27.1
Telecommunications Plant - Telecommunications plant is stated at original
cost. The original cost of telecommunications plant acquired from ASI
includes a return on investment to ASI.
The provision for depreciation is based principally on the straight-line
remaining life method of depreciation applied to individual categories of
telecommunications plant with similar characteristics which provides for the
full expensing of the investment in plant over its useful life. For certain
accounts, reserve imbalance amortization has been authorized by regulatory
authorities in conjunction with remaining life depreciation. Depreciation
rates are determined for various plant categories using either vintage group
or equal life group procedures.
Generally, when depreciable plant is retired, the amount at which such plant
has been carried in telecommunications plant in service is charged to
accumulated depreciation.
The cost of maintenance and repairs of plant is charged to expense.
Investments - The Company's investments in ASI (21% ownership and $55.1) and
The Champaign Telephone Company (50% ownership and $8.1) are reflected in the
financial statements using the equity method of accounting.
25
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
Material and Supplies - Inventories of new and reusable material and supplies
are stated principally at average original cost, except that in the case of
certain large individual items cost is determined on a specific identification
basis. Nonreusable material is carried at net realizable value.
Interest During Construction - Regulatory authorities allow the Company to
accrue interest as a cost of constructing certain plant and as an item of
income; i.e., allowance for debt and equity funds used to finance
construction. Such income is not realized in cash currently but will be
realized over the service life of the plant as the resulting higher
depreciation expense is recovered in the form of increased revenues.
Federal Income Taxes - The Company is included in the consolidated federal
income tax return filed by Ameritech and its subsidiaries. Effective January
1, 1993 the Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS No. 109). The new accounting method
is essentially a refinement of the liability method already followed by the
Company and, accordingly, did not have a significant impact on the Company's
financial statements upon adoption. Consolidated income tax currently payable
has been allocated to the Company based on the Company's contribution to
consolidated taxable income and tax credits.
Deferred tax assets and liabilities are based on differences between the
financial statement bases of assets and liabilities and the tax bases of those
same assets and liabilities. Under the liability method, deferred tax assets
and liabilities at the end of each period are determined using the statutory
tax rates in effect when these temporary differences are expected to reverse.
Deferred income tax expense is measured by the change in the net deferred
income tax asset or liability during the year. In addition, for regulated
companies, SFAS No. 109 requires that all deferred regulatory liabilities be
recognized at the revenue requirement level. It further requires that a
deferred tax liability be recorded to reflect the amount of cumulative tax
benefits previously flowed through to ratepayers and that a long-term deferred
asset be recorded to reflect the revenue to be recovered in telephone rates
when the related taxes become payable in future years.
The Company uses the deferral method of accounting for investment tax credits.
Therefore, credits earned prior to the repeal of investment tax credits by
the Tax Reform Act of 1986 and also certain transitional credits earned after
the repeal are being amortized as reductions in tax expense over the life of
the plant which gave rise to the credits.
Temporary Cash Investments - Temporary cash investments are stated at cost
which approximates market. The Company considers all highly liquid,
short-term investments with an original maturity of three months or less to be
cash equivalents.
It is the practice of the Company to make certain payments by checks and to
make funds available only when the instruments are presented for payment. At
times checks outstanding may exceed the cash in bank accounts. At December
31, 1993 and 1992, outstanding checks in excess of cash in banks were $12.8
and $9.6 respectively and are reflected in accounts payable.
Short-Term Financing Arrangement - During 1991, Ameritech entered into an
arrangement with its subsidiaries, including the Company, for the provision of
short-term financing and cash management services at market rates. 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 Notes (D) and (H).
26
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
(B) Federal Income Taxes - The components of federal income tax expense before
the cumulative effect of the change in accounting principles were as follows:
1993 1992 1991
Current . . . . . . . . . . . . . . . $156.1 $127.2 $ 99.4
Deferred - net . . . . . . . . . . . (35.2) (12.6) 2.3
Investment tax credits - net . . . . (16.6) (13.5) (14.7)
Total . . . . . . . . . . . . . . $104.3 $101.1 $ 87.0
Deferred income tax expense (credit) results principally from temporary
differences caused by the change in the book and tax bases of
telecommunications plant due to the use of different depreciation methods and
lives for financial reporting and federal income tax purposes. Total federal
income taxes paid were $158.6, $135.7, and $93.8 in 1993, 1992 and 1991,
respectively.
The following is a reconciliation between the statutory federal income tax
rate for each of the last three years and the Company's effective tax rate:
\G54\
1993 1992 1991
Statutory tax rate . . . . . . . . . . 35.0% 34.0% 34.0%
(1) Reduction in tax expense due to
amortization of investment
tax credits. . . . . . . . . . . . (4.3) (3.7) (4.5)
(2) Effect of adjusting the post-
retirement and postemployment
deferred income tax balances
due to tax law changes . . . . . . (1.4) - -
(3) Benefit of tax rate differential
applied to reversing temporary
differences . . . . . . . . . . . (3.0) (2.2) (4.0)
(4) Depreciation of certain taxes and
payroll-related construction costs
capitalized for financial statement
purposes, but deducted when incurred
for income tax purposes . . . . . .6 .5 .7
(5) Other . . . . . . . . . . . . . . .2 (1.0) .6
Effective federal tax rate . . . . . 27.1% 27.6% 26.8%
The Revenue Reconciliation Act of 1993, enacted in August of 1993, increased
the statutory federal income tax rate for 1993 to 35 percent. In accordance
with the liability method of accounting, the Company adjusted, on the
enactment date, its deferred income tax balances not subject to regulatory
accounting prescribed by SFAS No. 71 (see Note A). The result was a reduction
in deferred income tax expense of $5.3, primarily from increasing the deferred
tax assets associated with the accrual of costs for postretirement and
postemployment benefits (see Note C).
27
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
As of December 31, 1993, the Company had a regulatory asset of $68.2
(reflected in Other Assets and Deferred Charges) related to the cumulative
amount of income taxes on temporary differences previously flowed through to
ratepayers. In addition, on that date, the Company had a regulatory liability
of $132.3 (reflected in Other Deferred Credits) related to the reduction of
deferred taxes resulting from the change in the federal statutory income tax
rate to 35 percent and deferred taxes provided on unamortized investment tax
credits. These amounts will be amortized over the regulatory lives of the
related depreciable assets concurrent with recovery in rates. The accounting
for and the impact on future net income of these amounts will depend on the
ratemaking treatment authorized in future regulatory proceedings.
As of December 31, 1993 and 1992 the components of long-term accumulated
deferred income taxes were as follows:
1993 1992
Deferred tax assets
Postretirement and $ 182.6 $ 174.5
Postemployment benefits
SFAS No. 71 accounting 40.3 84.0
Other, net 4.4 -
227.3 258.5
Deferred tax liabilities
Accelerated depreciation 569.5 592.6
Other .5 1.5
570.0 594.1
Net deferred tax liability $ 342.7 $ 335.6
Deferred income taxes in current assets and liabilities are not shown as they
are not significant.
(C) Employee Benefit Plans
Pension Plans - Ameritech maintains noncontributory defined pension and death
benefit plans (the "plans") covering substantially all of the Company's
management and nonmanagement employees. The pension benefit formula used in
the determination of pension cost is based on the average compensation earned
during the five highest consecutive years of the last ten years of employment
for the management plan and a flat dollar amount per year of service for the
nonmanagement plan. Pension (credit) cost is 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 (credit) cost for the Ameritech plans:
1993 1992 1991
Pension (credit) cost $(21.6) $(24.9) $(15.8)
Pension (credit) as a
percent of salaries and wages (5.3%) (5.4%) (3.2%)
Pension (credit) was determined using the projected unit credit actuarial
method in accordance with Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions." The resulting pension credits are
primarily attributable to favorable investment performance and the funded
status of the plans.
28
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
Certain disclosures are required to be made of the components of pension costs
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 securities and real estate. As of December 31, 1993,
the fair value of plan assets available for plan benefits exceeded the
projected benefit obligation (calculated using a discount rate of 5.8 percent
as of December 31, 1993 and 1992). The assumed long-term rate of return on
plan assets used in determining pension cost was 7.25 percent for 1993, 1992
and 1991. The assumed increase in future compensation levels, also used in
the determination of the projected benefit obligation, was 4.5 percent in 1993
and 1992.
Postretirement Benefits Other Than Pensions - Effective January 1, 1992, the
Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS
No. 106). SFAS No. 106 requires the cost of postretirement benefits granted
to employees to be accrued and recognized as expense over the period in which
the employee renders service and becomes eligible to receive benefits. The
cost of health care costs and postretirement life insurance benefits for
current and future retirees was recognized as determined under the projected
unit credit actuarial method.
In adopting SFAS No. 106, the Company elected to immediately recognize
effective January 1, 1992 the transition obligation for current and future
retirees. The unrecognized obligation was $481.2 less deferred income taxes
of $163.6 or $317.6, net. To this amount is added the Company's 21% share of
ASI's transition obligation of $12.9 for a total net charge of $330.5.
As defined by SFAS No. 71, a regulatory asset and any corresponding regulatory
liability associated with the recognition of the transition obligation was not
recorded because of uncertainties as to the timing and extent of recovery in
the ratemaking process.
Substantially all current and future retirees are covered under postretirement
benefit plans sponsored by Ameritech. Such benefits include medical, dental
and group life insurance. Ameritech has been prefunding (including cash
received from the Company) certain of these benefits through Voluntary
Employee Benefit Association trust funds ("VEBAs") and Retirement Funding
Accounts ("RFAs"). The associated plan assets (primarily corporate securities
and bonds) were considered in determining the transition obligation under SFAS
No. 106. Ameritech intends to continue to fund its obligation appropriately,
and is exploring other available funding and cost containment alternatives.
Ameritech allocates its retiree health care cost on a per participant basis,
whereas group life insurance is allocated based on compensation levels.
SFAS No. 106 requires certain disclosures 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 its SFAS No. 106 costs.
29
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
As of December 31, 1993 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 7.0 percent as of December 31, 1993 and 7.5 percent as of
December 31, 1992. The assumed rate of future increases in compensation
levels was 4.5 percent as of December 31, 1993 and December 31, 1992. The
expected long-term rate of return on plan assets was 7.25 percent in 1993 and
1992 on VEBAs and 8.0 percent in 1993 and 1992 on RFAs. The assumed health
care cost trend rate in 1993 was 9.6 percent and 10 percent in 1992, and is
assumed to decrease gradually to 4 percent in 2007 and remain at that level.
The assumed increase in health care cost is 9.2 percent for 1994. The health
care cost trend rates have a significant effect on the amounts reported for
costs each year. Specifically, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the 1993 annual
expense by approximately 18 percent.
Postretirement benefit cost determined under SFAS No. 106 for 1993 and 1992
was $45.9 and $45.2, respectively. During 1991, the cost of postretirement
health care benefits for retirees was $46.0.
As of December 31, 1993, the Company had approximately 9,728 retirees eligible
to receive health care and group life insurance benefits.
Postemployment Benefits - Effective January 1, 1992, the Company adopted
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires employers
to accrue the future cost of certain benefits such as workers compensation,
disability benefits and health care continuation coverage. A one-time charge
related to adoption of this statement was recognized as a change in accounting
principle, effective as of January 1, 1992. The charge was $24.9, less
deferred taxes of $8.5, or $16.4 net. To this amount is added the Company's
21% share of ASI's one-time charge of $.4 for a total charge of $16.8.
Previously the Company used the cash method to account for such costs.
Current expense levels are dependent upon actual claim experience, but are not
materially different than prior charges to income.
Work Force Reductions - During 1993, 128 management employees left the Company
under an involuntary termination plan that remains in effect until December
31, 1994. The net cost of this effort including termination benefits,
settlement and curtailment gains from the pension plan, was a credit to
expense of $3.0 million.
Approximately 430 management employees left the Company in 1992 and early 1993
through voluntary and involuntary terminations as part of a 1992 force
reduction program. The net cost of this effort including termination
benefits, settlement and curtailment gains from the pension plan, was a credit
to expense of $3.8 million.
During 1991, the Company offered most of its management employees an early
retirement program. The net cost of this program, including termination
benefits and a settlement gain from the pension plan, was $4.2 million.
30
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
(D) Debt Maturing Within One Year - Debt maturing within one year is included
as debt in the computation of debt ratios and consists of the following as of
December 31:
Weighted Average
Interest Rates
1993 1992 1991 1993 1992 1991
Notes payable
Ameritech @ . . . . . . $ 35.5 $188.0 $ 42.6 3.2% 3.4% 5.1%
Other # . . . . . . . . 10.8 10.8 10.8 3.1% 3.2% 3.9%
Long-term debt maturing
within one year . . . . . .5 .7 .7
Total . . . . . . . . $ 46.8 $199.5 $ 54.1
Average notes payable out-
standing during the year $161.2 $ 76.8 $ 56.0 3.2%** 3.5%** 6.2%**
Maximum notes payable at any
month end during the year $386.2 $293.3 $115.1
@ During 1991 Ameritech entered into an arrangement with its subsidiaries,
including the Company, for the provision of short-term financing. See Note
(A) on short-term financing arrangements.
# Notes payable - other, at December 31, 1993, 1992 and 1991 consisted of
funds related to an interim intrastate pooling arrangement for which the
Company acts as administrator as directed by The Public Utilities
Commission of Ohio.
** Computed by dividing the average daily face amount of advances and
notes payable into the aggregate related interest expense.
31
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
(E) Long-Term Debt - Long-term debt consists principally of debentures and
notes issued by the Company. The following table sets forth interest rates
and maturities on long-term debt outstanding at December 31.
1993 1992
Forty year debentures
5.0 % due 2006 . . . . . . . . . . . . . . . $ 60.0 $ 60.0
5.375% due 2007 . . . . . . . . . . . . . . . 75.0 75.0
6.75 % due 2008 . . . . . . . . . . . . . . . 55.0 55.0
7.5 % due 2011 . . . . . . . . . . . . . . . 100.0 100.0
7.875% due 2013 . . . . . . . . . . . . . . . 200.0 200.0
8.75 % due 2026 . . . . . . . . . . . . . . . - 125.0
Thirty year debentures
7.85 % due 2022 . . . . . . . . . . . . . . . 100.0 100.0
Ten year notes
6.125% due 2003 . . . . . . . . . . . . . . . 150.0 -
Seven year notes
5.75% due 2000. . . . . . . . . . . . . . . . 100.0 -
840.0 715.0
Long-term capital lease obligation . . . . . . . 2.1 2.3
Other . . . . . . . . . . . . . . . . . . . . . .8 1.0
Unamortized discount - net . . . . . . . . . . . (5.8) (4.6)
Total . . . . . . . . . . . . . . . . . . . $837.1 $713.7
In September 1992, the Company called its 9% debentures due November 1, 2018,
and its 8.75% debentures due January 1, 2010, recognizing expenses, including
the call premiums, of $12.9. All $150.0 and $100.0 of the principal amounts
outstanding, respectively, were redeemed in October 1992. The redemption was
funded with short-term debt provided under the financing arrangement between
the Company and Ameritech.
In December 1992, the Company issued $100.0 of 7.85% debentures due December
15, 2022, under a "shelf" Registration Statement for $350.0 in debt
securities. The proceeds from the sale of the debentures were used to repay
outstanding short-term indebtedness incurred by the Company in connection with
the above noted debenture redemptions.
In March 1993, the Company called its 8 3/4% debentures due April 15, 2026,
recognizing expenses, including the call premium, of $9.5 million. All $125.0
million of the principal amounts outstanding were redeemed on April 30, 1993.
The redemption was funded with short-term debt provided under the financing
arrangement between the Company and Ameritech.
In April 1993, the Company sold $100.0 million of 5 3/4% notes due May 1, 2000
and in May 1993 the Company sold $150.0 million of 6 1/8% notes due May 15,
2003, under the Company's shelf Registration Statement. There are no amounts
remaining under the shelf Registration Statement. The proceeds from the sales
were used to repay outstanding short-term indebtedness incurred by the Company
in connection with prior debenture redemptions.
Early extinguishment of debt costs (including call premiums and write-offs of
unamortized deferred costs) were $9.5, $12.9 and $0.0 in 1993, 1992 and 1991,
respectively, and were included in other expense (income)-net on the statements
of income and reinvested earnings.
32
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
(F) Lease Commitments - The Company leases certain facilities and equipment
used in its operations under both operating and capital leases. Rental
expenses under operating leases were $6.7, $7.8, and $12.0 for 1993, 1992 and
1991, respectively. At December 31, 1993, the aggregate minimum rental
commitments under noncancellable leases were approximately as follows:
Year Operating Capital
1994 . . . . . . . . . . . . . . . . . . . $ 2.8 $ .6
1995 . . . . . . . . . . . . . . . . . . . 2.4 .6
1996 . . . . . . . . . . . . . . . . . . . 1.4 .4
1997 . . . . . . . . . . . . . . . . . . . .7 .2
1998 . . . . . . . . . . . . . . . . . . . .5 .2
Thereafter . . . . . . . . . . . . . . . . 5.3 2.0
Total minimum rental commitments . . $ 13.1 $ 4.0
Less: interest cost . . . . . . . . . . . 1.5
Present value of minimum lease payments . $ 2.5
33
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
(G) Financial Instruments - The following table presents the estimated fair
value of the Company's financial instruments as of December 31, 1993 and 1992:
1993
Carrying Fair
Value Value
Debt . . . . . . . . . . . . . . . . . . . . $894.3 $903.8
Long-term payable to ASI (for postretirement
benefits). . . . . . . . . . . . . . . . 19.7 19.7
Other assets . . . . . . . . . . . . . . . . 6.1 6.1
Other liabilities . . . . . . . . . . . . . . 10.2 10.2
1992
Carrying Fair
Value Value
Debt . . . . . . . . . . . . . . . . . . . . $923.7 $893.3
Long-term payable to ASI (for postretirement
benefits). . . . . . . . . . . . . . . . 20.8 20.8
Other assets . . . . . . . . . . . . . . . . 7.4 7.4
Other liabilities . . . . . . . . . . . . . . 8.8 8.8
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Debt - The carrying amount (including accrued interest) of the Company's debt
maturing within one year approximates fair value because of the short-term
maturities involved. The fair value of the Company's 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 financial contracts 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 - This item represents the long-term payable to ASI
for the Company's proportionate share of ASI's transition obligation related
to adoption of SFAS No. 106.
34
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
(H) Additional Financial Information
December 31,
1993 1992
Balance Sheets
Other current liabilities:
Accrued payroll . . . . . . . . . . . . . . $ 12.8 $ 11.0
Compensated absences . . . . . . . . . . . 36.7 36.9
Accrued taxes . . . . . . . . . . . . . . . 168.9 170.5
Advance billings and customer's deposits. . 57.2 52.7
Accrued interest . . . . . . . . . . . . . 13.9 14.1
Dividends payable to Ameritech. . . . . . . 65.7 -
Other . . . . . . . . . . . . . . . . . . 18.7 45.5
Total . . . . . . . . . . . . . . . . . $ 373.9 $ 330.7
1993 1992 1991
Statements of Income
Interest expense:
Interest on long-term debt . . . $ 54.9 $ 62.6 $ 67.4
Interest on notes payable -
Ameritech . . . . . . . . . . . 4.8 2.3 2.4
Other . . . . . . . . . . . . . . 2.5 1.2 10.8
Total . . . . . . . . . . . . $ 62.2 $ 66.1 $ 80.6
Interest paid was $61.1, $71.7 and $68.1 in 1993, 1992 and 1991, respectively.
1993 1992 1991
Taxes other than income taxes:
Property . . . . . . . . . . . . $150.4 $149.7 $143.0
Gross receipts . . . . . . . . . 64.4 66.0 66.2
Other . . . . . . . . . . . . . . 5.9 4.1 7.1
Total . . . . . . . . . . . . $220.7 $219.8 $216.3
Maintenance and
repair expense . . . . . . . . . . $304.4 $324.2 $307.9
Advertising expense . . . . . . . . . $ 21.4 $ 14.3 $ 10.8
Depreciation - percentage of average
depreciable telecommunications plant 7.1% 6.6% 7.1%
Revenues from American Telephone & Telegraph Company, consisting principally
of network access and billing and collection service revenues, comprised
approximately 12%, 13% and 14% of total revenues in 1993, 1992 and 1991,
respectively. No other customer accounted for more than 10% of total
revenues.
35
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
(I) Quarterly Financial Information (Unaudited)
Operating income represents revenue less operating expenses excluding interest
expense and other expense (income) - net. All adjustments necessary for a
fair statement of results for each period have been included.
Operating Net Income
Calendar Quarter Revenues Income (Loss)
1993
1st . . . . . . . . . . . . . . . $ 512.4 $ 106.4 $ 62.0
2nd . . . . . . . . . . . . . . . 524.8 114.1 73.7
3rd . . . . . . . . . . . . . . . 527.8 113.0 74.9
4th . . . . . . . . . . . . . . . 535.3 111.4 69.8
Total . . . . . . . . . . . . $2,100.3 $ 444.9 $ 280.4
1992
1st . . . . . . . . . . . . . . . $ 503.4 $ 106.2 $(275.3)
2nd . . . . . . . . . . . . . . . 506.7 109.0 68.6
3rd . . . . . . . . . . . . . . . 512.9 107.3 56.6
4th . . . . . . . . . . . . . . . 518.4 108.9 67.6
Total . . . . . . . . . . . . $2,041.4 $ 431.4 $( 82.5)
The fourth quarters of 1993 and 1992 were affected by several income and
expense items. The fourth quarter of 1993 was affected by gains from work
force resizing. In the fourth quarter of 1992, the Company recognized higher
costs and charges resulting from its market realignment efforts and increased
advertising. These costs were offset by gains resulting from work force
resizing and higher than expected pension credits.
Net income for the first quarter of 1993 and the third quarter of 1992 was
negatively impacted by expenses related to the early retirement of debt.
First quarter 1992 results reflect charges related to the adoption of SFAS
Nos. 106 and 112 for postretirement and postemployment benefits, as discussed
previously in Note (C). The charges totaled $347.3.
(J) Calculation of Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges of the Company for the years ended
December 31, 1993, 1992, 1991, 1990 and 1989 were 6.97, 6.33, 4.84, 5.05 and
5.53, respectively.
For the purpose of calculating this ratio, (i) earnings have been calculated
by adding to income before interest expense and accounting changes, the amount
of related taxes on income and the portion of rentals representative of the
interest factor, (ii) the Company considers one-third of rental expense to be
the amount representing return on capital, and (iii) fixed charges comprise
total interest expense and such portion of rentals.
(K) Event subsequent to Date of Auditors' Report (Unaudited)
On March 25, 1994, Ameritech announced it would reduce its nonmanagement work
force resulting in an after-tax charge to the Company of $86.1. The charge
will be recorded in the first quarter of 1994. The details of this plan are
discussed on page 19 in Management's Discussion and Analysis of Results of
Operations.
36
THE OHIO BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No changes in nor 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.
37
PART IV
Item 14. Exhibits. Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements: Page
Selected Financial and Operating Data............... 13
Report of Independent Public Accountants............ 20
Statements of Income and Reinvested Earnings ....... 21
Balance Sheets...................................... 22
Statements of Cash Flows............................ 23
Notes to Financial Statements....................... 24
(2) Financial Statement Schedules:
V - Telecommunications Plant..................... 42
VI - Accumulated Depreciation..................... 44
VIII - Allowance for Uncollectibles................. 46
Financial statement schedules other than those 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.
Financial statements for certain owned corporations which
are accounted for by the equity method are omitted pursuant
to Rule 3.09 of Regulation S-X.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the
SEC, are incorporated herein by reference as exhibits
hereto.
Exhibit
Number
(3)a Articles of Incorporation of the registrant as amended April
25, 1974. (Exhibit (3)a to Form 10-K for the fiscal year
ended December 31, 1980, File No. 1-6781.)
(3)b Regulations of the registrant as restated February 28, 1990.
(Exhibit (3)b to Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-6781.)
(4)(i) Close Corporation Agreement with Ameritech dated February
28, 1990. (Exhibit (4)(i) to Form 10-K for the fiscal year
ended December 31, 1989, File NO. 1-6781.)
38
(4)(iii)(A) No instrument which defines the rights of holders of
long-term debt of the registrant is filed herewith
pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, the registrant hereby agrees
to furnish a copy of any such instrument to the SEC upon
request.
(10)(ii)(B)1 Reorganization and Divestiture Agreement among AT&T,
Ameritech and Affiliates dated November 1, 1983. (Exhibit
10a to Form 10-K for 1983 for Ameritech, File No. 1-8612.)
(10)(ii)(B)2 Agreement Concerning Contingent Liabilities, Tax Matters
and Termination of Certain Agreements among AT&T, Bell
System Operating Companies, Regional Holding Companies and
Affiliates dated November 1, 1983. (Exhibit 10j to Form
10-K for 1983 for Ameritech, File No. 1-8612.)
(10)(ii)(B)3 Shared Network Facilities Agreement with AT&T and AT&T
Communications dated January 1, 1984. (Exhibit 10b to
Form 10-K for 1983 for Ameritech, File No. 1-8612.)
(12) Statement re: Computation of Ratio of Earnings to Fixed
Charges for the Years Ended December 31, 1993, 1992, 1991,
1990 and 1989.
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the registrant during the last quarter
of the year covered by this report.
39
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
By Richard A. Brown
Richard A. Brown
Vice President and Comptroller
March 30, 1994
Pursuant to the requirements 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:
Jacqueline F. Woods
Jacqueline F. Woods
President and Chief Executive Officer
Principal Accounting Officer:
Richard A. Brown
Richard A. Brown
Vice President and Comptroller
March 30, 1994
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
registrant and in the capacities and on the date indicated.
AMERITECH CORPORATION
By Richard H. Brown
Richard H. Brown
Vice Chairman
the sole shareholder of the registrant,
which is a statutory close corporation
managed by the shareholder rather than
by a board of directors.
March 30, 1994
41
Schedule V-Sheet 1
THE OHIO BELL TELEPHONE COMPANY
SCHEDULE V-TELECOMMUNICATIONS PLANT
(Millions of Dollars)
COL.A COL.B COL.C COL.D COL.E COL.F
Balance
Beginning Additions Retire- Other Balance
of At Cost ments Changes End of
Classification Period Note (a) Note (b) Note (a) Period
Year 1993
Land.......................... $ 17.5 $ .4 $ - $ - $ 17.9
Buildings..................... 548.9 17.7 2.3 - 564.3
Computers and Other
Office Equipment............ 244.1 13.4 12.9 - 244.6
Vehicles and Other
Work Equipment.............. 113.8 8.2 8.4 - 113.6
Central Office Equipment...... 2,113.7 192.3 114.5 - 2,191.5
Information Origination/
Termination Equipment....... 51.3 3.3 1.6 - 53.0
Cable and Wire Facilities..... 2,262.1 88.2 23.1 - 2,327.2
Capitalized Lease Assets...... 7.5 .1 2.0 - 5.6
Miscellaneous Other Property.. 1.1 (.1) - - 1.0
Total Telecommunications
Plant in Service (c)...... 5,360.0 323.5 164.8 - 5,518.7
Telecommunications Plant
Under Construction.......... 77.0 6.3 - - 83.3
Total Telecommunications
Plant.................. $5,437.0 $329.8 $164.8 $ - $5,602.0
Year 1992
Land.......................... $ 15.7 $ 1.8 $ - $ - $ 17.5
Buildings..................... 525.4 27.2 3.7 - 548.9
Computers and Other
Office Equipment............ 234.7 22.6 13.2 - 244.1
Vehicles and Other
Work Equipment.............. 107.6 18.4 12.2 - 113.8
Central Office Equipment...... 2,066.9 169.5 122.7 - 2,113.7
Information Origination/
Termination Equipment....... 58.9 4.8 12.4 - 51.3
Cable and Wire Facilities..... 2,181.4 101.8 21.1 - 2,262.1
Capitalized Lease Assets...... 9.4 (.4) 1.5 - 7.5
Miscellaneous Other Property.. 1.1 - - - 1.1
Total Telecommunications
Plant in Service (c)...... 5,201.1 345.7 186.8 - 5,360.0
Telecommunications Plant
Under Construction.......... 64.7 12.3 - - 77.0
Total Telecommunications
Plant.................. $5,265.8 $358.0 $186.8 $ - $5,437.0
<FN>
The notes on page 43 are an integral part of this schedule.
42
Schedule V-Sheet 2
THE OHIO BELL TELEPHONE COMPANY
SCHEDULE V-TELECOMMUNICATIONS PLANT
(Millions of Dollars)
COL.A COL.B COL.C COL.D COL.E COL.F
Balance
Beginning Additions Retire- Other Balance
of At Cost ments Changes End of
Classification Period Note (a) Note (b) Note (a) Period
Year 1991
Land.......................... $ 15.9 $ .4 $ .6 $ - $ 15.7
Buildings..................... 510.8 26.3 11.7 - 525.4
Computers and Other
Office Equipment............ 261.8 20.5 47.6 - 234.7
Vehicles and Other
Work Equipment.............. 105.0 11.9 9.3 - 107.6
Central Office Equipment...... 1,990.7 163.6 93.2 5.8 2,066.9
Information Origination/
Termination Equipment....... 65.4 1.6 2.3 (5.8) 58.9
Cable and Wire Facilities..... 2,104.8 102.7 26.1 - 2,181.4
Capitalized Lease Assets...... 11.7 (0.8) 1.5 - 9.4
Miscellaneous Other Property.. 2.3 (1.2) - - 1.1
Total Telecommunications
Plant in Service (c)...... 5,068.4 325.0 192.3 - 5,201.1
Telecommunications Plant
Under Construction.......... 102.3 (37.6) - - 64.7
Total Telecommunications
Plant.................. $5,170.7 $287.4 $192.3 $ - $5,265.8
<FN>
(a) Additions, other than to Buildings, include material purchased from
Ameritech Services, Inc., a centralized procurement subsidiary in which
the Company has a 21 percent ownership interest (See Note (A) to
Financial Statements). Additions shown also include (1) the original
cost (estimated if not known) of reused material, which is concurrently
credited to material and supplies, and (2) interest during construction.
Transfers between the classifications listed are included in Column C.
Column E for 1991 includes a transfer between classifications listed
pursuant to regulatory accounting practices adopted in 1988.
(b) Items of telecommunications plant when retired or sold are deducted from
the property accounts at the amounts at which they are included therein,
estimated if not known.
(c) The Company's 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 plant with
similar characteristics. The Company is allowed by regulatory
authorities to use reserve deficiency amortization in conjunction with
the remaining life method. For years 1993, 1992 and 1991, depreciation
expressed as a percentage of average depreciable plant was 7.1%, 6.6% and
7.1%, respectively.
43
Schedule VI-Sheet 1
THE OHIO BELL TELEPHONE COMPANY
SCHEDULE VI-ACCUMULATED DEPRECIATION
(Millions of Dollars)
COL.A COL.B COL.C COL.D COL.E COL.F
Balance Additions
Beginning Charged to Retire- Other Balance
of Expenses ments Changes End of
Classification Period Note (a) Note (a) Note (b) Period
Year 1993
Buildings..................... $ 138.7 $ 15.2 $ 4.5 $ - $ 149.4
Computers and Other
Office Equipment............ 122.1 28.3 11.1 - 139.3
Vehicles and Other
Work Equipment.............. 44.7 11.8 6.9 - 49.6
Central Office Equipment...... 855.1 223.7 113.1 .5 966.2
Information Origination/
Termination Equipment....... 34.4 4.7 1.6 (.5) 37.0
Cable and Wire Facilities..... 990.8 103.5 28.9 - 1,065.4
Capitalized Lease Assets...... 5.0 .6 2.0 - 3.6
Total Telecommunications
Plant.................. $2,190.8 $387.8 $168.1 $ - $2,410.5
Year 1992
Buildings..................... $ 130.3 $ 14.8 $ 6.4 $ - $ 138.7
Computers and Other
Office Equipment............ 106.9 30.9 15.7 - 122.1
Vehicles and Other
Work Equipment.............. 42.8 12.3 10.4 - 44.7
Central Office Equipment...... 806.8 173.8 126.3 .8 855.1
Information Origination/
Termination Equipment....... 42.6 4.9 12.3 (.8) 34.4
Cable and Wire Facilities..... 920.3 97.6 27.1 - 990.8
Capitalized Lease Assets...... 6.0 .5 1.5 - 5.0
Total Telecommunications
Plant.................. $2,055.7 $334.8 $199.7 $ - $2,190.8
<FN>
The notes on page 45 are an integral part of this schedule.
44
Schedule VI-Sheet 2
THE OHIO BELL TELEPHONE COMPANY
SCHEDULE VI-ACCUMULATED DEPRECIATION
(Millions of Dollars)
COL.A COL.B COL.C COL.D COL.E COL.F
Balance Additions
Beginning Charged to Retire- Other Balance
of Expenses ments Changes End of
Classification Period Note (a) Note (a) Note (b) Period
Year 1991
Buildings..................... $ 123.8 $ 15.5 $ 9.3 $ .3 $ 130.3
Computers and Other
Office Equipment............ 119.5 32.1 45.3 .6 106.9
Vehicles and Other
Work Equipment.............. 39.8 11.4 8.2 (.2) 42.8
Central Office Equipment...... 711.7 183.5 95.3 6.9 806.8
Information Origination/
Termination Equipment....... 43.2 4.1 2.1 (2.6) 42.6
Cable and Wire Facilities..... 828.9 115.3 30.7 6.8 920.3
Capitalized Lease Assets...... 7.0 1.0 1.5 (.5) 6.0
Total Telecommunications
Plant.................. $1,873.9 $362.9 $192.4 $11.3 $2,055.7
<FN>
(a) Includes the amortization of the undepreciated balance and retirement of
investment in tools and equipment costing less than five hundred dollars
but more than two hundred dollars for items purchased prior to January 1,
1989. In 1992 depreciation expense includes $11.3 of reserve
deficiency amortization included in Column E in 1991. See note (b)
below.
(b) Column E also includes transfers between classifications. In addition,
during 1991, the FCC required that certain amortizations be deferred to
the following year by recording the amounts in a deferred charge account.
These amounts were reversed in 1992 and charged to depreciation expense.
45
THE OHIO BELL TELEPHONE COMPANY
SCHEDULE VIII-ALLOWANCE FOR UNCOLLECTIBLES
(Millions of Dollars)
COL.A COL.B COL.C COL.D COL.E
Additions
Charged Charged
Balance to to Other Balance
Beginning Expenses Accounts Deductions End of
Descriptions of Period Note (a) Note (b) Note (c) Period
Year 1993 ......... $ 19.8 $ 10.4 $ 4.2 $ 16.2 $ 18.2
Year 1992 ......... 26.0 10.6 2.3 19.1 19.8
Year 1991 ......... 14.9 35.9 2.3 27.1 26.0
<FN>
(a) Excludes direct charges and credits to expense on the Statements of
Income and Reinvested Earnings related to interexchange carrier
receivables.
(b) Includes principally amounts previously written off which were credited
directly to this account when recovered and amounts related to
interexchange carrier receivables which are being billed by the Company.
(c) Amounts written off as uncollectible.
46