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 September 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 October 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 reports on Form 10-Q previously filed in the current year.
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues........................ $ 556.3 $ 555.0 $ 1,679.1 $ 1,640.6
--------- --------- --------- ---------
Operating expenses
Employee-related expenses..... 111.5 112.7 324.1 340.4
Depreciation and amortization. 97.9 93.0 289.3 270.2
Other operating expenses...... 185.4 171.1 557.0 500.1
Restructuring credit.......... -- (12.4) -- (49.8)
Taxes other than income taxes. 50.9 56.4 152.5 168.8
--------- --------- --------- ---------
445.7 420.8 1,322.9 1,229.7
--------- --------- --------- ---------
Operating income................ 110.6 134.2 356.2 410.9
Interest expense................ 14.5 15.6 42.5 44.3
Other income, net............... 3.7 1.2 8.7 3.3
--------- --------- --------- ---------
Income before income taxes...... 99.8 119.8 322.4 369.9
Income taxes.................... 32.5 39.9 105.8 123.5
--------- --------- --------- ---------
Net income...................... 67.3 79.9 216.6 246.4
Accumulated deficit,
beginning of period........... (108.8) (167.2) (122.8) (242.0)
Less, dividends declared.... 86.3 53.8 221.6 145.5
--------- --------- --------- ---------
Accumulated deficit,
end of period................. $ (127.8) $ (141.1) $ (127.8) $ (141.1)
========= ========= ========= =========
See Notes to Condensed Financial Statements.
3
CONDENSED BALANCE SHEETS
(Dollars in Millions)
Sept. 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................................. 445.1 400.9
Ameritech and affiliates.................. 3.1 25.3
Other..................................... 14.0 15.7
Material and supplies....................... 2.3 3.1
Prepaid and other........................... 13.9 23.8
--------- ---------
478.5 603.3
--------- ---------
Property, plant and equipment................ 5,969.1 5,757.0
Less, accumulated depreciation............... 3,662.2 3,463.5
--------- ---------
2,306.9 2,293.5
--------- ---------
Investments, primarily in affiliates......... 64.6 64.3
Other assets and deferred charges............ 181.3 169.6
--------- ---------
Total assets................................. $ 3,031.3 $ 3,130.7
========= =========
See Notes to Condensed Financial Statements.
4
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
Sept. 30, 1996 Dec. 31, 1995
------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech .................. $ 77.8 $ --
Other..................................... 0.3 0.4
Accounts payable
Ameritech Services, Inc. (ASI)............ 96.8 132.6
Ameritech and affiliates.................. 39.2 43.2
Other..................................... 139.2 155.1
Other current liabilities.................. 205.0 315.2
--------- ---------
558.3 646.5
--------- ---------
Long-term debt.............................. 834.9 834.7
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 108.4 100.7
Unamortized investment tax credits......... 37.4 43.1
Postretirement benefits
other than pensions...................... 538.1 547.5
Long-term payable to ASI................... 16.2 17.4
Other ..................................... 55.7 53.5
--------- ---------
755.8 762.2
--------- ---------
Shareowner's equity
Common shares - (one share issued
and outstanding without par value)....... 1,010.1 1,010.1
Accumulated deficit........................ (127.8) (122.8)
--------- ---------
882.3 887.3
--------- ---------
Total liabilities and shareowner's equity... $ 3,031.3 $ 3,130.7
========= =========
See Notes to Condensed Financial Statements.
5
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine Months Ended
September 30
-------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 216.6 $ 246.4
Adjustments to net income
Restructuring credit, net of tax............ -- (32.4)
Depreciation and amortization............... 289.3 270.2
Deferred income taxes, net.................. 11.1 4.8
Investment tax credits, net................. (5.7) (6.8)
Capitalized interest........................ (3.0) (2.6)
Provision for uncollectibles................ 31.3 12.9
Change in accounts receivable............... (51.6) (72.5)
Change in material and supplies............. (3.7) (4.4)
Change in certain other current assets...... 9.9 (30.0)
Change in accounts payable.................. (55.7) (28.9)
Change in certain other current
liabilities ............................. (52.5) (25.9)
Change in certain other noncurrent
assets and liabilities..................... (20.1) (21.2)
Other....................................... (0.1) 3.5
-------- --------
Net cash from operating activities............ 365.8 313.1
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (298.3) (216.9)
Proceeds from disposals of
property, plant and equipment................ 3.0 1.1
Other investing activity...................... 0.2 0.4
-------- --------
Net cash from investing activities............ (295.1) (215.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in other short-term debt -- 0.1
Intercompany financing, net................... 77.8 --
Retirements of long-term debt................. (0.2) (0.4)
Dividend payments............................. (282.7) (119.3)
-------- --------
Net cash from financing activities............ (205.1) (119.6)
-------- --------
Net decrease in cash and
temporary cash investments................... (134.4) (21.9)
Cash and temporary cash investments,
beginning of period.......................... 134.5 60.5
-------- --------
Cash and temporary cash investments,
end of period................................ $ 0.1 $ 38.6
======== ========
See Notes to Condensed Financial Statements.
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
SEPTEMBER 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 $49.8 million or $32.4 million after-tax in
the first nine 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 nine 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 remaining accrual related to
work force restructuring charges was not significant as of September
30, 1996. See further discussion in Management's Discussion and
Analysis below.
NOTE 2: Incentive Regulation
On March 5, 1996, the Ohio Supreme Court reversed the order of the
Public Utilities Commission of Ohio (PUCO or the Commission) that
approved the Advantage Ohio alternative regulation plan and remanded
the matter to the Commission. The court ruled that the Commission
exceeded its statutory authority when it used alternative rate-setting
methods in the context of a rate decrease application. Advantage
Ohio, originally adopted by the PUCO in November 1994, granted the
Company relief from rate-of-return regulation in Ohio and replaced
such regulation with a price cap formula in exchange for certain rate
reductions, grants to public schools and other community
infrastructure enhancements.
In May 1996, following approval by the PUCO of an agreement between
the Company and certain interexchange carriers, cable TV companies and
consumer representatives, the state legislature passed legislation
allowing the use of alternative regulation in the context of a rate
decrease application, thereby effectively restoring the Advantage Ohio
plan. The agreement approved by the Commission stipulated a $21
million reduction in intrastate access charges effective September 1,
1996, as well as additional customer benefits in the event the Company
does not meet prescribed standards of service. The legislation, which
was signed into law in June 1996, also required the Commission to
approve interim interconnection arrangements for Time Warner by August
1, 1996. The Commission approved an interconnection arrangement
between the Company and Time Warner on August 1, 1996.
NOTE 3: Reclassifications
Certain reclassifications were made to the December 31, 1995 balances
to correspond to the presentation as of September 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 nine
months of 1996 as compared with the first nine months of 1995.
Results of Operations
---------------------
Revenues
--------
Total revenues in the first nine months of 1996 were $1,679.1 million
and were $1,640.6 million for the same period in 1995. The increase
was primarily attributable to growth in access lines and switched
minutes of use resulting in higher network usage volumes, as well as
increased sales of equipment and other nonregulated services. These
increases were partially offset by net rate reductions.
----------------------------------------------------------------------
Local service
-------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 978.1 $ 921.9 $ 56.2 6.1
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and
connection charges and public phone revenues. The increase in local
service revenues for the nine months ended September 30, 1996 was
primarily attributable to higher network volumes, resulting
principally from growth in the number of access lines, which increased
3.5 percent to 3,852,000 as of September 30, 1996 as compared with
3,720,000 at September 30, 1995. Greater sales of call management
services, such as Call Forwarding, Call Waiting and Caller ID also
contributed to the increase. These increases were partially offset by
net rate reductions.
----------------------------------------------------------------------
Network access
--------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
----------
Nine Months Ended $ 349.8 $ 336.3 $ 13.5 4.0
Intrastate
----------
Nine Months Ended $ 107.4 $ 92.0 $ 15.4 16.7
Network access revenues are fees charged to interexchange carriers
that use the Company's local landline communications network to
connect customers to their long distance network. In addition, end
users pay flat rate access fees to connect to the long distance
network. These revenues are generated from both interstate and
intrastate services.
8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Network access (cont'd.)
--------------
The increase in network access revenues for the nine months ended
September 30, 1996 was due primarily to an increase in network minutes
of use, resulting from overall growth in the volume of calls handled
for interexchange carriers. Interstate and intrastate minutes of use
for the nine months ended September 30, 1996 increased by 4.7 percent
and 10.1 percent, respectively, over the comparable prior year period.
Network access revenues also increased due to the effects of one-time
billing settlements, which adversely impacted revenues in the third
quarter of 1995. The increases in network access revenues were
partially offset by net rate reductions.
----------------------------------------------------------------------
Long distance service
---------------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 123.8 $ 125.7 $ (1.9) (1.5)
Long distance service revenues are derived from customer calls to
locations outside of their local calling areas, but within the same
local access and transport area (LATA). The decrease in long distance
service revenues in the first nine months of 1996 was due primarily to
a decrease in network usage.
----------------------------------------------------------------------
Other
-----
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 120.0 $ 164.7 $ (44.7) (27.1)
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 nine months ended September 30, 1996 was
primarily attributable to a decrease in directory advertising revenue
largely due to a renegotiated listing and directory services agreement
with Ameritech Publishing, Inc. (API), an Ameritech subsidiary doing
business as Ameritech Advertising Services. The renegotiated
agreement resulted in a revenue decrease of $67.2 million in the nine
months ended September 30, 1996 compared to the prior year period.
This decrease is partially offset by an increase due to growth in
voice messaging services, sales of equipment and other nonregulated
services, as well as an increase in revenues from inside wire
installation and maintenance and billing and collections services.
9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
----------------------------------------------------------------------
Operating expenses
------------------
Total operating expenses for the nine months ended September 30, 1996
increased by $93.2 million or 7.6 percent to $1,322.9 million. The
increase was partially attributable to the work force restructuring,
which resulted in a credit of $49.8 million in the first nine 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
-------------------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 324.1 $ 340.4 $ (16.3) (4.8)
The decrease in employee-related expenses for the nine months ended
September 30, 1996 was due primarily to decreases in employee medical
benefits and other employee-related expenses, largely due to
renegotiated contracts with health care providers, as well as
decreases in wages and overtime. These decreases were partially
offset by increased force costs resulting from higher average employee
levels, as well as an increase in payroll taxes.
There were 8,666 employees as of September 30, 1996, compared with
8,189 at September 30, 1995.
Depreciation and
amortization
------------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 289.3 $ 270.2 $ 19.1 7.1
The increase in depreciation and amortization expense for the nine
months ended September 30, 1996 was due to higher average plant
balances, as well as the use of higher depreciation rates in certain
asset categories due to shorter depreciable lives established in 1994.
10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
----------------------------------------------------------------------
Other operating expenses
------------------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 557.0 $ 500.1 $ 56.9 11.4
The increase in other operating expenses for the nine months ended
September 30, 1996 was due to increases in cost of sales,
uncollectibles and other expenses related to increased sales efforts
for equipment and call management services, such as voice messaging
and other nonregulated services. Contract services expenses also
increased, due primarily to higher rent expense in 1996, as well as
increased right-to-use fees for switching system software. A decrease
in advertising expenses, due primarily to the timing of planned
marketing campaigns, partially offset these increases.
----------------------------------------------------------------------
Restructuring credit
--------------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ -- $ (49.8) $ 49.8 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 September 30, 1995, all 2,576 employees had left
the Company, with 491 leaving in the first nine months of 1995. A
pretax, noncash settlement gain of $49.8 million was recorded in the
first nine months of 1995, associated with lump-sum pension payments
to former employees. No restructuring credits were recorded in the
first nine months of 1996.
Taxes other than income taxes
-----------------------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 152.5 $ 168.8 $ (16.3) (9.7)
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other nonincome based taxes. The decrease in taxes
other than income taxes for the nine months ended September 30, 1996
was due primarily to a decrease in property taxes resulting from
favorable tax reform legislation.
----------------------------------------------------------------------
Other Income and Expenses
-------------------------
Interest expense
-----------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 42.5 $ 44.3 $ (1.8) (4.1)
The decrease in interest expense for the nine months ended September
30, 1996 was due primarily to decreases in interest on borrowings from
the Ameritech short-term funding pool, as well as lower miscellaneous
interest expense.
11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
----------------------------------------------------------------------
Other income, net
-----------------
Change
September 30 Income Percent
------------
(dollars in millions) 1996 1995 (Expense) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 8.7 $ 3.3 $ 5.4 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 nine months ended September 30, 1996 was primarily due to
an increase in equity earnings from Ameritech Services, Inc. (ASI) and
an increase in interest income resulting from higher average balances
deposited in the Ameritech short-term funding pool.
----------------------------------------------------------------------
Income taxes
------------
September 30 Increase Percent
------------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 105.8 $ 123.5 $ (17.7) (14.3)
The decrease in income taxes for the nine months ended September 30,
1996 was due primarily to a decrease in revenue resulting from the
Company's renegotiation of its directory service agreement with API,
as well as the tax effect ($17.4 million) associated with the work
force restructuring credit recorded in the first nine months of 1995.
Excluding the effects of these items, income taxes increased in line
with earnings of the business.
12
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
--------------
Telecommunications Act of 1996
------------------------------
The Telecommunications Act of 1996 (the 1996 Act) was enacted 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,
provides the framework for additional competition in the Company's
traditional local exchange markets.
On August 8, 1996, the Federal Communications Commission (FCC) adopted
rules to implement the local competition provisions of the 1996 Act.
Among other things, the rules require local exchange carriers to
provide interconnection to any requesting telecommunications carrier at
any technically feasible point and equal in quality to that provided
for the local exchange carriers' own operations. The rules also
require each local exchange carrier to provide these other carriers
access to network elements on an unbundled basis, and to offer for
resale any telecommunications services that it provides at retail to
subscribers who are not telecommunications carriers. The FCC's rules
address mechanisms for pricing of interconnection, unbundled network
elements and reselling of telecommunications services and prescribe
that the individual state regulatory authorities develop specific rates
and procedures consistent with general rules and guidelines established
by the FCC.
In September 1996, several local exchange carriers, including
Ameritech, filed appeals of the FCC interconnection order in the U.S.
Court of Appeals for the District of Columbia. In their appeals, the
local exchange carriers argue, among other things, that the FCC
exceeded its authority over state regulatory commissions, that the
rules setting national pricing standards violate the 1996 Act, and that
the order will force local exchange carriers to sell elements of their
networks below cost. Several companies also requested a stay of the
FCC's order pending the outcome of the appeals, while others, including
Ameritech, opposed the stay and requested only an expedited review of
the order.
Following the FCC's denial of the requests for a stay, a motion for a
stay was filed by certain parties in the U.S. Court of Appeals for the
Eighth Circuit (the Court) in St. Louis, which had been selected to
hear the challenges to the FCC's order. On September 27, 1996, the
Court ordered a temporary stay of the new rules pending the hearing of
oral arguments from local exchange carriers and the FCC. On October
15, 1996, after hearing the oral arguments, the Court issued a partial
stay of the FCC's order, saying that the pricing provisions and the
"pick and choose" rule related to unbundled network elements could not
take effect until the Court conducts a full review of the order and
rules on the merits of the case. On November 1, 1996, the Court lifted
the stay on three aspects of the pricing rules that apply primarily to
cellular service providers. The FCC has indicated that it will appeal
the Court's decision to the U.S. Supreme Court.
It will not be possible to determine what effect the 1996 Act and the
FCC rules implementing it will have on the Company's results of
operations until the challenges to the rules have been resolved and the
Public Utility Commission of Ohio (PUCO) has acted on the matter within
its jurisdiction under the 1996 Act.
----------------------------------------------------------------------
Regulatory Environment
-----------------------
See Note 2 for a discussion of the status of incentive regulation in Ohio.
13
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.
14
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: November 7, 1996 /s/ Laurie L. Streling
----------------------
Laurie L. Streling
Comptroller
State Finance Organization
(Principal Accounting Officer)