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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6781
THE OHIO BELL TELEPHONE COMPANY
(Incorporated under the laws of the State of Ohio)
45 Erieview Plaza, Cleveland, Ohio 44114
I.R.S. Employer Identification Number 34-0436390
Telephone Number - (800) 257-0902
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q
AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
At July 31, 1996, one common share was outstanding.
2
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 ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues........................ $ 570.1 $ 550.6 $ 1,122.8 $ 1,085.6
--------- --------- --------- ---------
Operating expenses
Employee-related expenses..... 106.7 110.9 212.6 227.7
Depreciation and amortization. 96.9 89.0 191.4 177.2
Other operating expenses...... 181.4 168.1 371.6 329.0
Restructuring credit.......... -- -- -- (37.4)
Taxes other than income taxes. 50.6 56.7 101.6 112.4
--------- --------- --------- ---------
435.6 424.7 877.2 808.9
--------- --------- --------- ---------
Operating income................ 134.5 125.9 245.6 276.7
Interest expense................ 14.0 14.3 28.0 28.7
Other income, net ..... 2.0 1.5 5.0 2.1
--------- --------- --------- ---------
Income before income taxes...... 122.5 113.1 222.6 250.1
Income taxes.................... 40.4 37.2 73.3 83.6
--------- --------- --------- ---------
Net income...................... 82.1 75.9 149.3 166.5
Accumulated deficit,
beginning of period........... (116.0) (197.1) (122.8) (242.0)
Less, dividends declared.... 74.9 46.0 135.3 91.7
--------- --------- --------- ---------
Accumulated deficit,
end of period................. $ (108.8) $ (167.2) $ (108.8) $ (167.2)
========= ========= ========= =========
See Notes to Condensed Financial Statements.
3
CONDENSED BALANCE SHEETS
(Dollars in Millions)
June 30, 1996 Dec. 31, 1995
------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
- ------
Current assets
Cash and temporary cash investments......... $ 0.1 $ 0.1
Investment in Ameritech funding pool -- 134.4
--------- ---------
0.1 134.5
Receivables, net
Customers................................. 457.1 400.9
Ameritech and affiliates.................. 1.2 25.3
Other..................................... 13.6 15.7
Material and supplies....................... 3.3 3.1
Prepaid and other........................... 14.2 23.8
--------- ---------
489.5 603.3
--------- ---------
Property, plant and equipment................ 5,886.9 5,757.0
Less, accumulated depreciation............... 3,604.0 3,463.5
--------- ---------
2,282.9 2,293.5
--------- ---------
Investments, primarily in affiliates......... 62.1 64.3
Other assets and deferred charges............ 174.8 169.6
--------- ---------
Total assets................................. $ 3,009.3 $ 3,130.7
========= =========
See Notes to Condensed Financial Statements.
4
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
June 30, 1996 Dec. 31, 1995
------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech and affiliates.................. $ 49.3 $ --
Other..................................... 0.3 0.4
Accounts payable
Ameritech Services, Inc. (ASI)............ 94.8 132.6
Ameritech and affiliates.................. 37.3 43.2
Other..................................... 134.1 155.1
Other current liabilities.................. 215.0 315.2
--------- ---------
530.8 646.5
--------- ---------
Long-term debt.............................. 834.8 834.7
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 93.4 100.7
Unamortized investment tax credits......... 39.3 43.1
Postretirement benefits
other than pensions...................... 539.5 547.5
Long-term payable to ASI................... 16.2 17.4
Other ..................................... 54.0 53.5
--------- ---------
742.4 762.2
--------- ---------
Shareowner's equity
Common shares - (one share issued
and outstanding without par value)....... 1,010.1 1,010.1
Accumulated deficit........................ (108.8) (122.8)
--------- ---------
901.3 887.3
--------- ---------
Total liabilities and shareowner's equity... $ 3,009.3 $ 3,130.7
========= =========
See Notes to Condensed Financial Statements.
5
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30
-------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 149.3 $ 166.5
Adjustments to net income
Restructuring credit, net of tax............ -- (24.3)
Depreciation and amortization............... 191.4 177.2
Deferred income taxes, net.................. (7.0) (1.6)
Investment tax credits, net................. (3.8) (4.5)
Capitalized interest........................ (2.0) (2.1)
Provision for uncollectibles................ 19.0 8.9
Change in accounts receivable............... (49.0) (52.1)
Change in material and supplies............. (3.4) (5.7)
Change in certain other current assets...... 9.8 (47.0)
Change in accounts payable.................. (64.7) (44.1)
Change in certain other current
liabilities ............................. (39.4) (28.1)
Change in certain other noncurrent
assets and liabilities..................... (13.9) (19.2)
Other....................................... 2.2 5.9
-------- --------
Net cash from operating activities............ 188.5 129.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (178.3) (131.2)
Proceeds from disposals of
property, plant and equipment................ 2.7 0.9
Other investing activity...................... 0.1 0.3
-------- --------
Net cash from investing activities............ (175.5) (130.0)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... 49.2 13.2
Retirements of long-term debt................. (0.2) (0.2)
Dividend payments............................. (196.4) (73.3)
-------- --------
Net cash from financing activities............ (147.4) (60.3)
-------- --------
Net decrease in cash and
temporary cash investments................... (134.4) (60.5)
Cash and temporary cash investments,
beginning of period.......................... 134.5 60.5
-------- --------
Cash and temporary cash investments,
end of period................................ $ 0.1 $ --
======== ========
See Notes to Condensed Financial Statements.
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
JUNE 30, 1996
NOTE 1: Work Force Restructuring
As announced in March 1994, the Company's parent, Ameritech
Corporation, restructured its existing nonmanagement work force,
reducing the work force by 11,500 employees during 1994 and 1995,
including 2,576 at the Company. As a result of the restructuring, the
Company recorded a gain of $37.4 million or $24.3 million after-tax in
the first six months of 1995, resulting primarily from settlement
gains from lump sum pension payments from the Ameritech Pension Plan
to former employees. No restructuring charges or credits were recorded
in the first six months of 1996.
The Company recorded additional restructuring charges in the fourth
quarter of 1995, primarily for the consolidation of data centers and
additional work force reductions. The total accrual amount remaining
related to work force restructuring charges was not significant as of
June 30, 1996. See further discussion in Management's Discussion and
Analysis below.
NOTE 2: Incentive Regulation
On March 5, 1996, the Ohio Supreme Court released an opinion reversing
the order of the Public Utilities Commission of Ohio (PUCO or the
Commission) that approved the Advantage Ohio alternative regulation
plan and remanding the matter to the Commission. The court ruled that
the Commission exceeded its statutory authority when it used
alternative rate-setting methods in the context of a rate decrease
application. Advantage Ohio, originally adopted by the PUCO in
November 1994, granted the Company relief from rate-of-return
regulation in Ohio and replaced such regulation with a price cap
formula in exchange for certain rate reductions, grants to public
schools and other community infrastructure enhancements.
In May 1996, following approval by the PUCO of an agreement between
the Company and certain interexchange carriers, cable TV companies and
consumer representatives, the state legislature passed legislation
allowing the use of alternative regulation in the context of a rate
decrease application, thereby restoring the Advantage Ohio plan. The
agreement approved by the Commission stipulated a $21 million
reduction in intrastate access charges effective September 1, 1996, as
well as additional customer benefits in the event the Company does not
meet prescribed standards of service. The legislation, which was
signed into law in June 1996, also required the Commission to approve
interim interconnection arrangements for Time Warner by August 1,
1996. The Commission approved an interconnection arrangement between
the Company and Time Warner on August 1, 1996.
NOTE 3: Reclassifications
Certain reclassifications were made to the December 31, 1995 balances
to correspond to the presentation as of June 30, 1996.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following is a discussion and analysis of the changes in revenues,
operating expenses and other income and expenses for the first six
months of 1996 as compared with the first six months of 1995.
Results of Operations
---------------------
Revenues
--------
Total revenues in the first six months of 1996 were $1,122.8 million
and were $1,085.6 million for the same period in 1995. The following
paragraphs explain the components of that change.
----------------------------------------------------------------------
Local service
-------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 652.8 $ 608.6 $ 44.2 7.3
The increase in local service revenues for the six months ended June
30, 1996 was primarily attributable to higher network volumes, which
increased network service revenues by $52.2 million. The increase in
revenues resulted principally from growth in the number of access
lines, which increased 3.7 percent to 3,823,000 as of June 30, 1996 as
compared with 3,685,000 at June 30, 1995, and greater sales of call
management services, such as Call Forwarding and Caller ID. These
increases were partially offset by rate reductions of $7.6 million.
----------------------------------------------------------------------
Network access
--------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
----------
Six Months Ended $ 233.7 $ 225.7 $ 8.0 3.5
Intrastate
----------
Six Months Ended $ 71.6 $ 65.3 $ 6.3 9.6
The increase in interstate network access revenues for the six months
ended June 30, 1996 was due primarily to higher network usage, which
resulted in additional revenues of $20.7 million, partially offset by
net rate reductions of $12.7 million. Minutes of use related to
interstate calls increased 6.0 percent in 1996.
The increase in intrastate network access revenues for the six months
ended June 30, 1996 was primarily attributable to higher network
usage, which resulted in additional revenues of $14.2 million,
partially offset by net rate reductions of $7.9 million. Minutes of
use related to intrastate calls increased 12.8 percent in 1996. See
Note 2 for a discussion of additional intrastate access charge
reductions to become effective September 1, 1996.
8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Long distance service
---------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 84.8 $ 83.1 $ 1.7 2.1
The increase in long distance service revenues in the first six months
of 1996 was due to increased network usage.
----------------------------------------------------------------------
Other
-----
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 79.9 $ 102.9 $ (23.0) (22.4)
Other revenues include revenue derived from directory advertising,
billing and collection services, inside wire installation and
maintenance services and other miscellaneous services. The decrease
in other revenues for the six months ended June 30, 1996 was primarily
attributable to a decrease of $52.3 million in directory advertising
revenue due to a renegotiated listing and directory services agreement
with Ameritech Publishing, Inc. (API), an Ameritech subsidiary doing
business as Ameritech Advertising Services. This decrease is
partially offset by an increase of $21.9 million due to growth in
voice messaging services, sales of equipment and other nonregulated
services, as well as an increase of $7.4 million in revenues from
inside wire installation and maintenance and billing and collections
services.
----------------------------------------------------------------------
Operating expenses
------------------
Total operating expenses for the six months ended June 30, 1996
increased by $68.3 million or 8.4 percent to $877.2 million. The
increase was partially attributable to work force restructuring, which
resulted in a credit of $37.4 million in the first six months of 1995
related to noncash settlement gains from the pension plan, as well as
increases in depreciation expense and other operating expenses, such
as cost of sales and contract services. These increases were
partially offset by decreases in employee-related expenses and taxes
other than income taxes, as discussed below.
----------------------------------------------------------------------
Employee-related expenses
-------------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 212.6 $ 227.7 $ (15.1) (6.6)
The decrease in employee-related expenses for the six months ended
June 30, 1996 was due primarily to decreases in payroll taxes,
employee benefits and other employee-related expenses, as well as
decreases in wages and overtime. These decreases were partially
offset by an increase in incentive bonus expenses.
There were 8,750 employees as of June 30, 1996, compared with 8,386 at
June 30, 1995.
9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Depreciation and
amortization
------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 191.4 $ 177.2 $ 14.2 8.0
The increase in depreciation and amortization expense for the six
months ended June 30, 1996 was due to higher average plant balances,
which resulted in an increase of $10.0 million in depreciation
expense, as well as a $4.2 million increase resulting from the use of
higher depreciation rates in certain asset categories related to newer
technologies.
----------------------------------------------------------------------
Other operating expenses
------------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 371.6 $ 329.0 $ 42.6 12.9
The increase in other operating expenses for the six months ended June
30, 1996 was due to an increase of $21.2 million in contract and
affiliated services and switching system software, and $22.8 million
in increases in uncollectibles and other expenses related to increased
sales efforts for equipment and call management services, such as
voice messaging and other nonregulated services, and cost of sales
increases related to equipment sales. These increases were partially
offset by a decrease in advertising expenses.
----------------------------------------------------------------------
Restructuring credit
--------------------
June 30 Percent
----------
(dollars in millions) 1996 1995 Change Change
------------------- ---- ---- -------- ------
Six Months Ended $ -- $ (37.4) $ 37.4 n/a
As discussed in Note 1, the Company significantly reduced its
nonmanagement work force during 1994 and 1995 by 2,576 employees. New
employees with different skills were added during this period to
accommodate growth and meet staffing requirements for new business
opportunities. As of June 30, 1995, 2,280 employees had left the
Company, with 195 leaving in the first six months of 1995. A pretax,
noncash settlement gain of $37.4 million was recorded in the first six
months of 1995, associated with lump-sum pension payments to former
employees. No restructuring charges or credits were recorded in the
first six months of 1996.
10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Taxes other than income taxes
-----------------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 101.6 $ 112.4 $ (10.8) (9.6)
The decrease in taxes other than income taxes for the six months ended
June 30, 1996 was due primarily to a decrease of $10.7 million in
property taxes resulting from favorable tax reform legislation.
----------------------------------------------------------------------
Other Income and Expenses
-------------------------
Interest expense
-----------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 28.0 $ 28.7 $ (0.7) (2.4)
The decrease in interest expense for the six months ended June 30,
1996 was due primarily to decreases in interest on borrowings from the
Ameritech short-term funding pool and other interest expense.
----------------------------------------------------------------------
Other income, net
-----------------
Change
June 30 Income Percent
----------
(dollars in millions) 1996 1995 (Expense) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 5.0 $ 2.1 $ 2.9 n/m
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. The increase in other income,
net for the six months ended June 30, 1996 was primarily due to an
increase in equity earnings from ASI and an increase in interest
income resulting from higher average balances deposited in the
Ameritech short-term funding pool.
----------------------------------------------------------------------
Income taxes
------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six Months Ended $ 73.3 $ 83.6 $ (10.3) (12.3)
The decrease in income taxes for the six months ended June 30, 1996
was due primarily to the tax effect ($13.1 million) associated with
the work force restructuring credit recorded in the first six months
of 1995. Excluding the effects of this item, income taxes increased
in line with earnings of the business.
11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
--------------
Telecommunications Act of 1996
------------------------------
The Telecommunications Act of 1996 was signed into law on February 8,
1996. This legislation defines the conditions under which Ameritech,
including the Company, will be permitted to offer interLATA long
distance service and provides certain mechanisms intended to
facilitate local exchange competition. This legislation, in addition
to allowing Ameritech to offer interLATA long distance services
through an affiliate, will allow competitors into the Company's
traditional local exchange markets. Management believes the
legislation gives Ameritech an opportunity to expand its revenue base
by providing long distance services, while retaining lower-margin
access revenues as other local service providers, acting as resellers,
continue to use the Company's network facilities.
On August 1, 1996 the Federal Communications Commission adopted rules
by which competitors will connect to local network facilities. The
rules address, among other things, unbundling of network elements,
pricing for interconnection and unbundled elements, and resale of
network services. The Company has not yet determined the impact of
the new rules.
----------------------------------------------------------------------
Regulatory Environment
-----------------------
See Note 2 for a discussion of the status of incentive regulation in
Ohio.
12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No Form 8-K was filed by the registrant during the quarter
which this report is filed.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE OHIO BELL TELEPHONE COMPANY
------------------------------
(Registrant)
Date: August 7, 1996 /s/ Laurie L. Streling
----------------------
Laurie L. Streling
Comptroller
State Finance Organization
(Principal Accounting Officer)