1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6781
THE OHIO BELL TELEPHONE COMPANY
(Incorporated under the laws of the State of Ohio)
45 Erieview Plaza, Cleveland, Ohio 44114
I.R.S. Employer Identification Number 34-0436390
Telephone Number - (216) 822-9700
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM
10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No .
At July 31, 1995, one common share was outstanding.
2
Form 10-Q Part I The Ohio Bell Telephone Company
Part I - Financial Information
The following condensed financial statements have been prepared by The
Ohio Bell Telephone Company (the Company) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the
opinion of the Company, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of results
for each period shown. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. The Company believes that
the disclosures made are adequate to make the information presented not
misleading. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
latest Annual Report on Form 10-K and the quarterly report on Form 10-Q
previously filed in the current year.
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS (DEFICIT)
(Dollars in Millions)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
Revenues $ 550.6 $ 549.5 $1,085.6 $1,086.9
-------- -------- -------- --------
Operating Expenses
Employee-related expenses 110.9 126.1 227.7 245.8
Depreciation and amortization 89.0 95.6 177.2 191.4
Other operating expenses 168.1 150.9 329.0 294.7
Restructuring (credit) charge -- -- (37.4) 132.5
Taxes other than income taxes 56.7 57.5 112.4 115.1
-------- -------- -------- --------
424.7 430.1 808.9 979.5
-------- -------- -------- --------
Operating income 125.9 119.4 276.7 107.4
Interest expense 14.3 14.5 28.7 28.9
Other income, net (1.5) (2.9) (2.1) (5.4)
-------- -------- -------- --------
Income before income taxes 113.1 107.8 250.1 83.9
Income taxes 37.2 29.9 83.6 23.2
-------- -------- -------- --------
Net income 75.9 77.9 166.5 60.7
Reinvested earnings (deficit),
beginning of period (197.1) 153.2 (242.0) 236.8
Less, dividends 46.0 69.0 91.7 135.4
-------- -------- -------- --------
Reinvested earnings (deficit),
end of period $ (167.2) $ 162.1 $ (167.2) $162.1
======== ======== ======== ======
See Notes to Condensed Financial Statements.
3
Form 10-Q Part I The Ohio Bell Telephone Company
CONDENSED BALANCE SHEETS
(Dollars in Millions)
June 30, 1995 Dec. 31, 1994
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments $ -- $ 60.5
Receivables, net
Customers 393.6 350.1
Ameritech and affiliates 24.1 25.6
Other 18.6 17.3
Material and supplies 8.0 3.3
Prepaid and other 65.2 82.2
--------- --------
509.5 539.0
--------- --------
Property, plant and equipment 5,677.6 5,572.5
Less, accumulated depreciation 3,362.8 3,213.8
--------- --------
2,314.8 2,358.7
--------- --------
Investments, principally in affiliates 60.4 65.8
Other assets and deferred charges 160.3 88.0
--------- --------
Total assets $3,045.0 $3,051.5
========= ========
See Notes to Condensed Financial Statements.
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Form 10-Q Part I The Ohio Bell Telephone Company
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
June 30, 1995 Dec. 31,1994
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech $ 13.2 $ --
Other -- 0.4
Accounts payable
Ameritech Services, Inc. (ASI) 136.5 126.2
Ameritech and affiliates 31.8 38.3
Other 119.4 167.3
Other current liabilities 298.0 355.9
-------- --------
598.9 688.1
-------- --------
Long-term debt 834.9 834.9
-------- --------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes 91.7 77.2
Unamortized investment tax credits 47.4 51.9
Postretirement benefits other than pensions 551.6 547.2
Long-term payable to ASI 17.4 18.5
Other 60.2 65.6
-------- --------
768.3 760.4
-------- --------
Shareowner's equity
Common shares(one share issued
and outstanding without par value) 1,010.1 1,010.1
Reinvested deficit (167.2) (242.0)
-------- --------
842.9 768.1
-------- --------
Total liabilities and shareowner's equity $3,045.0 $3,051.5
======== ========
See Notes to Condensed Financial Statements.
5
Form 10-Q Part I The Ohio Bell Telephone Company
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 166.5 $ 60.7
Adjustments to net income
Restructuring (credit) charge, net of tax (24.3) 86.1
Depreciation and amortization 177.2 191.4
Deferred income taxes, net (1.6) (19.0)
Investment tax credits (4.5) (5.6)
Interest during construction (2.1) (1.9)
Provision for uncollectibles 8.9 7.9
Change in accounts receivable (52.1) (22.0)
Change in material and supplies (5.7) (0.9)
Change in certain other current assets (47.0) 5.3
Change in accounts payable (44.1) (15.8)
Change in certain other current liabilities (28.1) (33.5)
Change in certain other noncurrent
assets and liabilities (19.2) (17.8)
Other 5.9 2.9
-------- --------
Net cash from operating activities 129.8 237.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (131.2) (127.7)
Proceeds from disposals of
property, plant and equipment 0.9 0.3
Other investing activities, net 0.3 --
-------- --------
Net cash from investing activities (130.0) (127.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net 13.2 22.0
Retirements of long-term debt (0.2) (0.3)
Dividend payments (73.3) (132.1)
-------- --------
Net cash from financing activities (60.3) (110.4)
-------- --------
Net decrease in cash and
temporary cash investments (60.5) --
Cash and temporary cash investments at
beginning of period 60.5 --
-------- --------
Cash and temporary cash investments at
end of period $ -- $ --
======== ========
See Notes to Condensed Financial Statements.
6
Form 10-Q Part I The Ohio Bell Telephone Company
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
JUNE 30, 1995
NOTE 1: Work Force Restructuring
During March 1994, the Company's parent, Ameritech Corporation, announced
its plan to reduce its existing nonmanagement work force. Approximately
11,500 employees are expected to leave under this program, including
2,801 employees of the Company. Under terms of agreements between
Ameritech, the Communications Workers of America (CWA) and the
International Brotherhood of Electrical Workers (IBEW), Ameritech
implemented an enhancement to the Ameritech Pension Plan by adding three
years to both the age and the net credited service of eligible
nonmanagement employees who leave the business during a designated period
that corresponds to contract expiration in 1995. In addition, certain
business units are offering financial incentives under terms of the
current contracts with the CWA and IBEW to selected nonmanagement
employees who leave the business before the end of 1995. See additional
discussion in Management's Discussion and Analysis below.
As a result of the restructuring, a pretax charge of $132.5, or $86.1
after-tax, was recorded in the first quarter 1994. In the first quarter
1995, a gain of $37.4, or $24.3 after-tax, was recorded resulting
primarily from settlement gains from lump sum pension payments from the
Ameritech pension plan to former employees. Settlement gains were not
recorded in the second quarter of 1995 as they were not significant. The
cumulative gross program costs through June 30, 1995 totaled $283.1,
partially offset by settlement gains of $147.3 for an aggregate pretax
net program cost of $135.8, or $88.3 after-tax. At June 30, 1995, the
remaining severance accrual was $18.6.
As of June 30, 1995, 2,280 employees have left the Company as a result of
the restructuring, with 521 expected to leave later in 1995.
NOTE 2: Discontinuation of FAS 71 and Reclassifications
As discussed more fully in the 1994 Annual Report on Form 10-K, during
the fourth quarter of 1994, the Company incurred an extraordinary noncash
after-tax charge of $445.2 as a result of its decision to discontinue the
application of Statement of Financial Accounting Standards No. 71 (FAS
71), "Accounting for the Effects of Certain Types of Regulation."
The principal component of the above charge related to a determination
that telephone plant asset lives were too long and analog switches were
obsolete. The net effect of this determination is causing 1995
depreciation expense to decrease. Long-term, depreciation expense will
increase as the effects of shorter lives on plant assets and future plant
additions offset the discontinuation of depreciation of analog switches.
Certain additional financial statement impacts occurred as a result of
the discontinuation of FAS 71, including the reclassification of the
provision for uncollectibles, previously shown as a reduction in other
revenues, to other operating expenses.
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Form 10-Q Part I The Ohio Bell Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Dollars in Millions)
The following is a discussion and analysis of the changes in revenues,
operating expenses and other income and expenses for the first six months
of 1995 as compared with the first six months of 1994:
Results of Operations
Revenues
Total revenues in the first six months of 1995 were $1,085.6 and were
$1,086.9 for the same period in 1994. The following paragraphs explain
the components of that change.
Local service
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $608.6 $595.4 $13.2 2.2
The increase in local service revenues in the first six months of 1995
was primarily attributable to higher network usage volumes, resulting
principally from growth in the number of access lines, which increased
4.2 percent to 3,685,440 as of June 30, 1995, as well as increased
volumes and greater sales of special calling features, such as Call
Forwarding and Caller ID. These increases were partially offset by rate
reductions of $22.7 resulting from regulatory proceedings which adopted
price regulation in place of rate-of-return regulation and removed limits
on intrastate earnings.
8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Network access
June 30 Increase Percent
1995 1994 (Decrease) Change
Interstate
Six Months Ended $225.7 $220.5 $ 5.2 2.4
Intrastate
Six Months Ended $ 65.3 $ 70.1 (4.8) (6.8)
The increase in interstate network access revenues for the six months
ended June 30, 1995 was primarily due to higher network usage, which
resulted in additional revenues of $16.8, and a reduction in NECA common
line pool support payments of $4.9. Partially offsetting these revenue
increases were net rate reductions of $11.2. Minutes of use related to
interstate calls increased 6.0 percent in 1995. See additional
discussion below regarding Ameritech's interstate access rate reduction.
The decrease in intrastate network access revenues for the six months
ended June 30, 1995 was primarily due to rate reductions of $7.6, $1.7 of
which resulted from regulatory proceedings which adopted certain
regulatory freedoms as previously discussed. Higher network usage
resulted in additional revenues of $5.4 which partially offset these
decreases. Intrastate network access revenues also decreased as a result
of a change in certain billing arrangements with independent telephone
companies. Minutes of use related to intrastate calls increased 8.8
percent in 1995.
_________________________________________________________________________
Long distance service
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $ 83.1 $ 92.3 $ (9.2) (10.0)
The decrease in long distance service revenues for the six months ended
June 30, 1995 was due to a decrease in intrastate network usage. Toll
messages decreased 3.1 percent in the six months ended June 30, 1995 as
compared with the prior year period.
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Form 10-Q Part I The Ohio Bell Telephone Company
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $102.9 $108.6 $ (5.7) (5.2)
Other revenues include revenues derived from directory advertising,
billing and collection services, inside wire installation and maintenance
services and other miscellaneous services. The decrease in other
revenues was primarily due to a decrease in rent revenues of $8.5 from a
change in methodology in the way the Company accounts for these revenues.
In 1995, these revenues were reflected as credits to expense, whereas in
1994, such amounts were included in other revenues. Also contributing to
the decrease was decreased revenues from billing and collection services
of $2.3. Partially offsetting the decreases was an increase in other
nonregulated revenues of $2.3 largely due to increased voice mail
volumes, as well as inside wire installation and maintenance revenues of
$1.9, partially resulting from rate increases of $1.4.
___________________________________________________________________________
Operating expenses
Total operating expenses for the six months ended June 30, 1995 decreased
by $170.6 or 17.4 percent to $808.9. The decrease was almost entirely
attributable to the 1994 work force restructuring, which resulted in a
credit of $37.4 in the first quarter of 1995 related to the net
settlement gains previously discussed compared with a first quarter 1994
charge of
$132.5.
_________________________________________________________________________
Employee-related expenses
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $227.7 $245.8 $ (18.1) (7.4)
The decrease in employee-related expenses for the six months ended
June 30, 1995 was attributable primarily to the effect of work force
reductions over the past year of $25.2, as well as reduced bonus accruals
and other benefits of $11.2. Partially offsetting these decreases were
the effects of increased overtime payments and medical, dental and
postretirement benefits of $18.3.
There were 8,386 employees at June 30, 1995, compared with 9,789 at
June 30, 1994.
10
Form 10-Q Part I The Ohio Bell Telephone Company
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Depreciation and
amortization
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $177.2 $191.4 $(14.2) (7.4)
The decrease in depreciation and amortization expense for the six months
ended June 30, 1995 was primarily due to the cessation of depreciation of
analog switches determined to be obsolete in connection with the
discontinuance of Statement of Financial Accounting Standards No. 71 (FAS
71), "Accounting for the Effects of Certain Types of Regulation," in the
fourth quarter of 1994. This decrease was partially offset by the change
in depreciation rates as a result of shortening telephone plant lives
following the discontinuation of FAS 71.
_________________________________________________________________________
Other operating expenses
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $ 329.0 $ 294.7 $ 34.3 11.6
The increase in other operating expenses for the six months ended
June 30, 1995 was primarily attributable to higher affiliate services
expenses of $42.1, resulting from increased billings from Ameritech
Services, Inc. (ASI) as business unit expenses, especially contract and
professional services have shifted to that entity, as well as increased
advertising expenses of $6.8, resulting from increased marketing
efforts. These increases were partially offset by a net decrease of
$14.6 in expenses for contract services, discussed above.
11
Form 10-Q Part I The Ohio Bell Telephone Company
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Restructuring (credit) charge
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $(37.4) $132.5 $(169.9) n/a
As discussed in Note 1, Ameritech announced in March 1994 that it
intended to reduce its nonmanagement work force by 6,000 employees (1,500
at the Company) by the end of 1995. Reduction of the work force results
from the Company's implementation of technological improvements,
consolidations and initiatives to balance the cost structure with
emerging competition. Ameritech currently expects its nonmanagement work
force to be reduced by about 11,500 employees through 1995 instead of the
6,000 originally estimated in March 1994, including 2,801 at the Company.
A pretax charge of $132.5 related to the original estimated work force
reduction was recorded in the first quarter of 1994, with additional
charges later in 1994. A noncash settlement gain of $37.4 was recorded
in the first quarter of 1995 associated with lump-sum pension payments to
former employees. Future settlement gains (estimated at $12.0) are
anticipated.
Actual employee reductions by quarter were: 365 in the second quarter of
1994, 358 in the third quarter of 1994, 1,362 in the fourth quarter of
1994, 74 in the first quarter of 1995 and 121 in the second quarter of
1995. Employee reductions of 521 are expected in the third quarter of
1995. Cash requirements to fund the financial incentives (principally
contractual termination payments totaling approximately $80.6) are being
met as prescribed by applicable collective bargaining agreements.
Certain of these collective bargaining agreements require contractual
termination payments to be paid in a manner other than lump-sum, thus
requiring cash payments beyond an employee's termination date.
This program will reduce annual employee-related costs by approximately
$50 thousand per departing employee. The projected savings are being
partially offset by the hiring of new employees with better matched
skills to accommodate growth, ensure high quality customer service and
meet staffing requirements for new business opportunities.
_________________________________________________________________________
Taxes other than income taxes
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $112.4 $115.1 $ (2.7) (2.3)
The decrease in taxes other than income taxes for the six months ended
June 30, 1995 is primarily attributable to lower sales and use taxes of
$2.3 resulting from a change in the method of assessing these taxes, as
well as a decrease in property taxes.
12
Form 10-Q Part I The Ohio Bell Telephone Company
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Income and Expenses
Interest expense
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $ 28.7 $ 28.9 $ (0.2) (0.7)
Interest expense remained relatively constant for the six months ended
June 30, 1995 as compared with the prior year period. Lower short-term
interest expense on borrowings from the Ameritech short-term funding pool
resulted from lower average debt balances, partially offset by higher
short-term
interest rates.
_________________________________________________________________________
Other income, net
June 30 (Increase) Percent
1995 1994 Decrease Change
Six Months Ended $ (2.1) $ (5.4) $ 3.3 n/a
Other income, net includes equity earnings in affiliates, interest income
and other nonoperating items. The change in other income, net results
primarily from decreased equity earnings from ASI.
_________________________________________________________________________
Income taxes
June 30 Increase Percent
1995 1994 (Decrease) Change
Six Months Ended $ 83.6 $ 23.2 $ 60.4 n/a
The increase in income taxes for the six months ended June 30, 1995 was
due primarily to the change in pretax income as a result of the work
force restructuring credit of $37.4 ($24.3 after-tax) in the first
quarter of 1995 as compared to the work force restructuring charge of
$132.5 ($86.1 after-tax) in the first quarter of 1994. Excluding these
items, income taxes changed in line with the earnings in the business.
13
Form 10-Q Part I The Ohio Bell Telephone Company
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Interstate access rate reduction
On July 18, 1995, the Federal Communications Commission (FCC) approved
Ameritech's request for price regulation without sharing of earnings
effective January 1, 1995. By receiving FCC approval of Ameritech's
waiver request effective January 1, 1995, the total annual reduction in
prices that the Company charges long distance companies for local
connections increased to $19.4 effective August 1, 1995. The current
year impact is expected to be a reduction in interstate access revenues
of $8.2, which represents an increase of $2.9 over the 1995 reduction
otherwise required under the FCC's interim price cap rules.
_________________________________________________________________________
Labor negotiations
The Company's nonmanagement workforce (about 85 percent of total
employees) is represented by the Communications Workers of America whose
contract was set to expire on August 5, 1995, but has been extended
indefinitely. The extension may be canceled by the Company or the CWA
with 24 hour notice. Membership of the union has authorized a work
stoppage. Negotiations with the union continue and management believes
a satisfactory resolution will be achieved.
14
Form 10-Q Part II The Ohio Bell Telephone Company
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
No Form 8-K was filed by the registrant during the quarter for
which this report is filed.
15
Form 10-Q Part II The Ohio Bell Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE OHIO BELL TELEPHONE COMPANY
(Registrant)
Date: August 7, 1995 /s/ Richard A. Kuzmar
Richard A. Kuzmar
Vice President and Comptroller
(Principal Financial Officer)