Item 1. Business
United Telephone Company of Ohio (Company), a wholly-owned subsidiary of Sprint Corporation (Sprint), was incorporated under the laws of the State of Ohio in 1965 and subsequently succeeded by acquisition or merger to the business of several other telephone operating companies in Ohio.
In 1990, the Company combined its administrative offices with United Telephone Company of Indiana, Inc. (United of Indiana), an affiliate. Each company retains a separate legal identity.
The Company is engaged in the business of furnishing communications services consisting mainly of local and long-distance services and network access. It provides service to 507,111 access lines in 164 exchange areas. No other company furnishes local telephone service in any of the exchange areas served by the Company.
Revenues from telephone and other communications services constitute about 91% of the Company's total operating revenues. The remaining 9% of total operating revenues is, in large part, contributed by directory advertising, billing and collection services, operator services, facility leases, and non- regulated sales. A significant portion of the Company's network access revenues are derived from access charge billings to AT&T Communications, Inc. (AT&T).
The Company's operating area includes approximately 8,700 square miles or 21% of the geographical area of the State of Ohio and contains approximately 10% of the State's population. Approximately 34% of the Company's 507,111 access lines in service are located in the five exchange areas of Warren, Mansfield, Lima, Wooster and Mount Vernon. The service areas contain a variety of both large and commercial and agricultural businesses.
In addition to furnishing local service, the Company's central offices and long-distance lines are connected with other independent telephone companies and with the nationwide long-distance networks of interexchange carriers, primarily AT&T. Long-distance calls may thus be made to any telephone in the United States and most other countries. Other telecommunications services, for the most part furnished in conjunction with other telephone companies, include facilities for private line service, data transmission, mobile radio telephone and wide area long-distance service.
The Company has two wholly-owned subsidiaries. United Telephone Communications Services of Ohio, Inc. offers terminal equipment and inside wire leasing and maintenance services to the residential and business markets. United Telephone Long Distance, Inc. offers one-plus, interLATA long-distance service.
(Page 2)
United of Ohio Form 10-K,Part I December 31, 1993
Item 1. Business (continued)
The PUCO also continued to debate extended area service (EAS) in 1993 regarding the definition of more stringent guidelines for specific EAS requests. A generic docket is before the PUCO but has not been ruled upon. In the meantime, the PUCO has continued to rule in favor of extended local calling (a measured form of EAS), as recommended by the Company (resulting in the cost causer being the cost payer), rather than traditional flat rate EAS.
At the interstate level, the FCC has revised its rules to permit connection of customer-owned coin telephones to the local network, exposing LECs to direct coin telephone competition in many states. Additionally, the FCC has assisted Competitive Access Providers (CAPs) in providing access to interexchange carriers and end users by mandating that all Tier 1 LECs (including the Company) allow collocation of CAP equipment in LEC central offices. The FCC's decision regarding collocation is under appeal to the U.S. Court of Appeals for the D.C. Circuit. In October 1992, the FCC adopted a new rate structure and new pricing rules for LEC-provided switched transport. It is considered an interim rate structure (approximately two years) while the FCC determines a long-term structure. Rates were developed such that the impact of this new rate structure will be revenue-neutral for the Company. The new rates went into effect on December 30, 1993.
The extent and ultimate impact of competition on the Company will continue to depend, to a considerable degree, on FCC and PUCO actions, court decisions and possible federal or state legislation. Legislation designed to stimulate local competition between local exchange service providers and cable programming service providers, in both markets, is presently pending in both houses of the U.S. Congress.
Item 2.
Item 2. Properties
The properties of the Company consist principally of land, structures, facilities and equipment used in providing telephone service and are in good operating condition. Substantially all of the telephone properties are subject to the lien securing the Company's first mortgage bonds.
Of the Company's investment in telephone plant in service as of December 31, 1993, central office equipment represented approximately 37%; cable and wire facilities, 45%; telephone instruments and related equipment installed on subscribers' premises, 4%; land and buildings, 6%; and other telephone plant, 8%.
The following table shows gross additions to, and retirements of, properties of the Company for each of the years in the five year period ended December 31, 1993 (in thousands of dollars):
Gross Property Gross Gross Property at Beginning Property Retirements at End of Year Additions or Sales of Year
1993 $992,555 $74,587 $36,609 $1,030,533 1992 944,646 76,856 28,947 992,555 1991 902,252 76,131 33,737 944,646 1990 850,631 78,706 27,085 902,252 1989 818,228 62,686 30,283 850,631
(Page 4)
United of Ohio Form 10-K, Part I December 31, 1993
Item 3.
Item 3. Legal Proceedings
No material legal proceedings are pending to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted under the provisions of General Instruction J.
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Registrant is a wholly-owned subsidiary of Sprint, and consequently its common stock is not traded.
Item 6.
Item 6. Selected Financial Data
The table set forth below presents significant financial data for each of the years in the five year period ended December 31, 1993 (in thousands of dollars):
1993 1992 1991 1990 1989
Operating Revenues $398,089 $371,806 $351,973 $343,005 $343,328
Net Income (1) $ 34,741 $ 42,896 $ 41,238 $40,969 $ 41,777
Total Assets $628,839 $596,282 $575,721 $557,214 $552,282
Long-Term Debt $163,705 $167,386 $121,780 $122,876 $130,282 (excludes current maturities)
(1) During 1993, nonrecurring charges of $12.8 million were recorded representing the Company's portion of the costs associated with the merger of Sprint and Centel Corporation. Such charges reduced 1993 net income by $8.3 million.
Earnings and dividend per share information has been omitted because the Company is a wholly-owned subsidiary of Sprint.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Recent Development - Sprint/Centel Merger
Effective March 9, 1993, Sprint consummated its merger with Centel Corporation, a telecommunications company with local exchange and cellular/wireless communications services operations (see Note 2 of "Notes to Consolidated Financial Statements" for additional information). The transaction costs associated with the merger (consisting primarily of investment banking and legal fees) and the estimated expenses of integrating and restructuring the operations of the two companies (consisting primarily of employee severance and relocation expenses and costs of eliminating duplicative facilities) resulted in a nonrecurring charge to Sprint during 1993. The portion of such charge attributable to the Company was $12.8 million, which reduced 1993 net income by approximately $8.3 million.
(Page 5)
United of Ohio Form 10-K, Part I December 31, 1993
Item 7 Management's Discussion (continued)
Liquidity and Capital Resources
During 1993, cash from operating activities exceeded capital expenditures by $2.8 million, continuing to indicate the Company's strong liquidity and financial position. The Company maintains its commitment to provide its subscribers the most technologically advanced telecommunications equipment. Accordingly, the Company continually replaces and constructs new facilities, and the 1993 construction program continued that emphasis. The actual expenditures for property, plant and equipment were $74.6 million in 1993, $76.9 million in 1992, and $76.1 million in 1991. The planned construction expenditures in 1994 are expected to approximate $77.1 million, as the increasing demand for interexchange access services requires the placement of high-capacity fiber optic facilities. The Company anticipates that the funds for this program will be supplied by operating activities and short-term borrowings.
The demand for telephone services is relatively constant and usually generates a non-cyclical cash in-flow. During 1993, operating activities generated cash of $77.4 million, compared to $111.1 million in 1992 and $109.4 million in 1991. The decrease from 1992 to 1993 is attributable to increased accounts receivable, decreased accounts payable, and expenditures related to merger and restructuring costs.
Adequate depreciation rates remain critical to the Company due to the large investment in telecommunications plant and equipment. To ensure the timely recovery of capital, the Company has historically sought to obtain higher depreciation rates from the PUCO. Effective January 1, 1989, the PUCO allowed a maximum ten-year period for amortizing a depreciation reserve deficiency of $54.5 million, and gave the Company the option to accelerate the amortization for book purposes. Included in depreciation expense for 1993, 1992 and 1991 is amortization of $5.4 million each year. At December 31, 1993, $26.1 million of the reserve deficiency remains to beamortized at a minimum of $5.4 million annually.
Net cash used by financing activities was $4.3 million. The Company issued $40 million of First Mortgage Bonds, Series CC, due January 1, 2000. The proceeds from this issuance were used to repay advances from the parent company of $30 million, which were classified as long-term debt, and to fund capital construction. The Company early retired $76.0 million in long-term debt in 1993 with interest rates ranging from 6.875 percent to 9.0 percent. These retirements were refinanced on a long-term basis with the issuance of Series DD, due June 1, 2000 for $30 million and Series EE, due June 1, 2005 for $35 million at rates of 6.5 percent and 7.25 percent, respectively. No dividends were declared in 1993.
At December 31, 1993, the composition of the Company's capital structure was 61.4 percent common equity and 38.6 percent long-term debt. This compares to a year-end capital structure comprised of 57.6 percent common equity and 42.4 percent long-term debt in 1992.
(Page 6)
United of Ohio Form 10-K, Part I December 31, 1993
Item 7 Management's Discussion (continued)
Results of Operations
Operating revenues consist of local service, network access, long-distance network and miscellaneous. Local service revenues are derived from providing local telephone exchange services and leasing equipment. Network access revenues are derived from billing other carriers and telephone customers for their use of the local network to complete long-distance calls in those instances where the long-distance service is not provided by the Company. Long- distance revenues are derived principally from providing long-distance services within designated areas. Miscellaneous revenues primarily relate to directory advertising, billing and collection services for interexchange carriers, operator services, network facility leases and sales of telecommunications equipment.
Operating revenues in 1993 increased by $26.3 million or 7.1 percent from 1992. This increase in total operating revenues was universal to all revenue categories during the year.
Access lines in 1993 grew by 17,785 or 3.6 percent compared to 1992. This growth trend was reflected in a 3.9 percent growth in local service revenue. Basic subscriber line revenue increased $4.6 million or 3.8 percent.
Network access revenue increased by $9.7 million or 7.7 percent for the year ended December 31, 1993 compared to 1992. Increased usage, as indicated by a 5.0 percent growth in message volumes and a 7.2 percent growth in minutes of use, accounted for the increase.
Long distance network revenue increased $4.8 million or 8.7 percent for the year ended December 31, 1993 compared to 1992. The increase can be attributed to increased volumes of messages and minutes of use in the current year.
Other revenues increased $5.6 million or 17.8 percent for the year ended December 31, 1993 compared to 1992. Sales of telecommunication equipment increased $4.1 million due to increased sales of structured wire and PBX systems. Increased revenues from providing operator services also contributed to the increase.
Operating expenses (including taxes) increased $34.0 million or 10.7 percent in 1993 compared to 1992. The major components of the current year's increase were increases in plant expense, customer operations, and merger, integration and restructuring costs.
Plant expense increased $7.4 million or 6.7 percent. Repairs of buried cable increased $1.4 million due to the implementation of a new preventive cable maintenance program. General purpose computer and generic software expense increased $1.7 million resulting from increased purchases from Northern Telecom for central office switch conversions. Other plant nonspecific expenses increased $1.6 million, including network operations and access expense. Other increases in plant expense occurred in rearrangement and change activity.
Customer operations expense increased $8.3 million or 20.6 percent for the year ended December 31, 1993. Sales and advertising expense increased $4.2 million in the current year as the Company continues to intensify its efforts to achieve increased market share in today's competitive environment. Call completion, number services, and business operations expense increased $1.7 million which is directly related to the increase in revenues derived from providing operator services.
(Page 7)
United of Ohio Form 10-K, Part I December 31, 1993
Item 7 Management's Discussion (continued)
Merger, integration and restructuring costs were $12.8 million in 1993 as discussed above.
Other operating expense was $4.1 million higher in 1993 when compared to 1992 due to an increase of $4.0 million in cost of equipment sales.
In addition to the increases discussed above, plant expense, customer operations expense and corporate operations expense also increased as a result of higher postretirement benefits costs due to the adoption of Statement of Financial Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The incremental cost associated with this change in accounting principle was approximately $6,550,000.
Effects of Inflation
The effects of inflation on the operations of the Company were not significant during 1993, 1992 or 1991.
Recent Accounting Developments
Effective January 1, 1994, the Company will adopt Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits" (see Note 1 of "Notes to Consolidated Financial Statements" for additional information).
Consistent with most local exchange carriers, the Company accounts for the economic effects of regulation pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." The application of SFAS No. 71 requires the accounting recognition of the rate actions of regulators where appropriate, including the recognition of depreciation based on estimated useful lives prescribed by regulatory commissions rather than those which might be utilized by non-regulated enterprises. The Company's management believes that the Company's operations meet the criteria for the continued application of the provisions of SFAS No. 71. With increasing competition and the changing nature of regulation in the telecommunications industry, the ongoing applicability of SFAS No. 71 must, however, be constantly monitored and evaluated. Should the Company no longer qualify for the application of the provisions of SFAS No. 71 at some future date, the accounting impact could result in the recognition of a material, extraordinary, non-cash charge.
(Page 8)
United of Ohio Form 10-K, Part I December 31, 1993
Item 8.
Item 8. Financial Statements and Supplementary Data
UNITED TELEPHONE COMPANY OF OHIO INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Auditors 10
Consolidated Balance Sheets at December 31, 1993 and 1992 11-12
Consolidated Statements of Income for each of the three years ended December 31, 1993 13
Consolidated Statements of Retained Earnings for each of the three years ended December 31, 1993 14
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1993 15
Notes to Consolidated Financial Statements 16-27
(Page 9)
United of Ohio Form 10-K, Part I December 31, 1993
REPORT OF INDEPENDENT AUDITORS
The Board of Directors United Telephone Company of Ohio
We have audited the accompanying consolidated balance sheets of United Telephone Company of Ohio, a wholly-owned subsidiary of Sprint Corporation, as of December 31, 1993 and 1992, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements and schedules 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 consolidated financial position of United Telephone Company of Ohio at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, United Telephone Company of Ohio changed its method of accounting for postretirement benefits in 1993.
ERNST & YOUNG
Kansas City, Missouri January 21, 1994 (Page 10)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
1. ACCOUNTING POLICIES
United Telephone Company of Ohio is engaged in the business of providing communications services, principally local, network access and long distance services in Ohio. The principal industries in its service area include a variety of both large and small industrial, commercial and agricultural businesses.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of United Telephone Company of Ohio, and its wholly-owned subsidiaries, United Telephone Long Distance, Inc. (UTLD) and United Telephone Communications Services of Ohio, Inc., collectively referred to as the "Company". All significant intercompany transactions have been eliminated. The Company is a wholly-owned subsidiary of Sprint Corporation (Sprint); accordingly, earnings per share information has been omitted.
The Company accounts for the economic effects of regulation pursuant to Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation", which requires the accounting recognition of the rate 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 on a regulated enterprise.
Certain amounts in the accompanying consolidated financial statements for 1992 and 1991 have been reclassified to conform to the presentation of amounts in the 1993 consolidated financial statements. These reclassifications had no effect on net income in either year.
Cash and Equivalents
Cash equivalents generally include highly liquid investments with original maturities of three months or less and are stated at cost, which approximates market value.
Inventories
Inventories consist of materials and supplies, stated at average cost, and equipment held for resale, stated at the lower of average cost or market. The sales inventory balances were $377,000 and $291,000 at December 31, 1993 and 1992, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Retirements of depreciable property are charged against accumulated depreciation with no gain or loss recognized. Repairs and maintenance costs are expensed as incurred.
(Page 16)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
1. ACCOUNTING POLICIES (continued)
Depreciation
Depreciation expense is generally computed on a straight-line basis over estimated useful lives as prescribed by regulatory commissions. As ordered by the Public Utilities Commission of Ohio (PUCO), the Company recorded an amortization of a reserve deficiency to depreciation expense in the amount of $5,447,000 in 1993, 1992 and 1991, which reduced net income by $3,149,000, $3,122,000 and $3,145,000, respectively. Average annual composite depreciation rates, excluding the nonrecurring charges, were 7.5 percent for 1993, 7.3 percent for 1992 and 7.5 percent for 1991.
Income Taxes
Operations of the Company are included in the consolidated federal income tax returns of Sprint. Federal income tax is calculated by the Company on the basis of its filing a separate return.
Effective January 1, 1992, the Company changed its method of accounting for income taxes by adopting SFAS No. 109, "Accounting for Income Taxes", which requires an asset and liability approach to accounting for income taxes. Under the provisions of SFAS No. 109, the Company adjusted existing deferred income tax amounts, using current tax rates, for the estimated future tax effects attributable to temporary differences between the tax bases of the Company's assets and liabilities and their reported amounts in the financial statements. The Company's principal temporary difference results from using different depreciable lives and methods with respect to its property, plant and equipment for tax and financial reporting purposes.
As a result of corporate income tax rate reductions in prior years and the previous income tax accounting standards which did not permit accumulated deferred income tax amounts to be adjusted for subsequent tax rate changes, adoption of SFAS No. 109 resulted in a decrease in the amount of deferred income tax liabilities recorded. However, because this decrease will accrue to the benefit of the Company's customers through future telephone rates established by the Company's regulators, this decrease in deferred income tax liabilities has been reflected as a regulatory liability in the Company's financial statements. Additionally, deferred income taxes were not provided in prior years in those instances where the Company's regulators did not recognize such deferred income taxes for ratemaking purposes. Upon adoption of SFAS No. 109, the Company recognized deferred income tax liabilities for those temporary differences for which deferred income taxes had not previously been provided. Corresponding regulatory assets were also recorded by the Company to reflect the anticipated recovery of such taxes in future telephone rates based on actions of the Company's regulators.
Accordingly, the adoption of SFAS No. 109 had no significant effect upon the Company's 1992 net income. As allowed by SFAS No. 109, prior years' consolidated financial statements were not restated.
During 1991, in accordance with Accounting Principles Board Opinion (APB) No. 11, deferred income taxes were provided for all differences in timing of reporting income and expenses for financial statement and income tax purposes, except for items that were not allowable by the Federal Communications Commission (FCC) or the PUCO, as an expense for rate-making purposes.
(Page 17)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
1. ACCOUNTING POLICIES (continued)
Income Taxes (continued)
Investment tax credits (ITC) are deferred and amortized over the useful life of the related property. The Tax Reform Act of 1986 effectively eliminated ITC after December 31, 1985.
Postretirement Benefits
Effective January 1, 1993, the Company changed its method of accounting for postretirement benefits (principally health care benefits) provided to certain retirees by adopting SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires accrual of the expected cost of providing postretirement benefits to employees and their dependents or beneficiaries during the years employees earn the benefits. As permitted by SFAS No. 106, the Company elected to recognize the obligation for postretirement benefits already earned by its current retirees and active work force as of January 1, 1993, by amortizing such obligation on a straight-line basis over a period of twenty years.
During 1992 and 1991, the Company expensed postretirement benefits as such costs were paid.
Postemployment Benefits
Effective January 1, 1994, the Company will adopt SFAS No 112, "Employers' Accounting for Postemployment Benefits." Under the new standard, the Company is required to recognize certain previously unrecorded obligations for benefits provided to former or inactive employees and their dependents, after employment but before retirement. Postemployment benefits offered by the Company include severance, workers' compensation and disability benefits, including the continuation of other benefits such as health care and life insurance coverage. As required by the standard, the Company will recognize its obligations for postemployment benefits through a cumulative adjustment in the consolidated income statement. The resulting nonrecurring, non-cash charge will not significantly impact the Company's 1994 net income. Adoption of this standard is not expected to significantly impact future operating expenses.
Interest Charged to Construction
In accordance with the Uniform System of Accounts, as prescribed by the FCC, interest is capitalized on those telephone plant construction projects for which the estimated construction period exceeds one year. In addition, the PUCO has ordered that the Company also capitalize interest during construction on short-term projects.
2. MERGER AND INTEGRATION COSTS
Effective March 9, 1993, Sprint consummated its merger with Centel Corporation (Centel), a telecommunications company with local exchange and cellular/wireless communications services operations. Centel's local exchange telephone businesses operate in six states: Florida, North Carolina, Virginia, Illinois, Texas and Nevada. Pursuant to the Agreement and Plan of Merger dated May 27, 1992, Sprint issued 1.37 shares of its common stock in exchange for each outstanding share of Centel common stock.
(Page 18)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
2. MERGER AND INTEGRATION COSTS (continued)
The operations of the merged companies are being integrated and restructured to achieve efficiencies which are expected to yield significant operational synergies and cost savings. The transaction costs associated with the merger and the estimated expenses of integrating and restructuring the operations of the two companies resulted in nonrecurring charges to Sprint during 1993. The portion of such charges attributable to the Company was $12,816,000, which reduced 1993 net income by approximately $8,300,000.
3. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
Substantially all employees of the Company are covered by a noncontributory defined benefit pension plan. For participants of the plan represented by collective bargaining units, benefits are based upon schedules of defined amounts as negotiated by the respective parties. For participants not covered by collective bargaining agreements, the plan provides pension benefits based upon years of service and participants' compensation.
The Company's policy is to make contributions to the plan each year equal to an actuarially determined amount consistent with applicable federal tax regulations. The funding objective is to accumulate funds at a relatively stable rate over the participants' working lives so that benefits are fully funded at retirement. As of December 31, 1993, the plan's assets consisted principally of investments in corporate equity securities and U.S. government and corporate debt securities.
The components of the net pension credits and related assumptions are as follows (in thousands):
1993 1992 1991
Service cost - benefits earned during the period $ 3,222 $ 3,044 $ 2,948 Interest cost on projected benefit obligation 8,972 8,513 7,912 Actual return on plan assets (27,975) (10,400) (44,237) Net amortization and deferral 7,391 (6,914) 27,854 --------- --------- --------
Net pension credit $ (8,390) $ (5,757) $(5,523) ========= ========= ========
Discount rate 8.00% 8.50% 8.50% Expected long-term rate of return on plan assets 9.50% 8.25% 8.25% Anticipated composite rate of future increases in compensation 5.50% 6.33% 7.02%
(Page 19)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
3. EMPLOYEE BENEFIT PLANS (continued)
Defined Benefit Pension Plan (continued)
The funded status and amounts recognized in the consolidated balance sheets for the plan, as of December 31, are as follows (in thousands):
1993 1992
Actuarial present value of pension benefit obligations
Vested benefit obligation $(112,517) $ (96,112) --------- --------- Accumulated benefit obligation $(126,977) $(106,179) --------- --------- Projected benefit obligation $(135,615) $(114,879) Plan assets at fair value 231,371 209,165 Plan assets in excess of the projected --------- --------- benefit obligation 95,756 94,286 Unrecognized net gains (38,781) (36,062) Unrecognized prior service cost (benefit) 4,956 (2,681) Unamortized portion of transition asset (29,654) (32,949) --------- --------- Prepaid pension cost $ 32,277 $ 22,594 ========= =========
The projected benefit obligations as of December 31, 1993 and 1992, were determined using a discount rate of 7.50% for 1993 and of 8.00% for 1992, and anticipated composite rates of future increases in compensation of 4.50% for 1993 and of 5.50% for 1992.
Defined Contribution Plans
Sprint sponsors two defined contribution employee savings plans covering substantially all employees of the Company. Participants may contribute portions of their compensation to the plans. Contributions of participants represented by collective bargaining units are matched by the Company based upon defined amounts as negotiated by the respective parties. Contributions of participants not covered by collective bargaining agreements are also matched by the Company. For these participants, the Company provides matching contributions equal to 50 percent of participants' contributions up to 6 percent of their base compensation and may, at the discretion of Sprint's Board of Directors, provide additional matching contributions based upon the performance of Sprint's common stock price in comparison to other telecommunications companies. The Company's contributions to the plans aggregated $2,280,000, $1,612,000 and $1,651,000 in 1993, 1992 and 1991, respectively.
Postretirement Benefits
The Company provides other postretirement benefits (principally health care benefits) to certain retirees. Substantially all employees who retired from the Company before January 1, 1991, became eligible for these postretirement benefits at no cost to the retirees. Employees retiring after such date, who meet specified age and years of service requirements, are eligible for these benefits on a shared cost basis, with the Company's portion of the cost determined by the retirees' years of credited service at retirement. The Company funds the accrued costs as benefits are paid.
(Page 20)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
3. EMPLOYEE BENEFITS PLAN (continued)
Postretirement Benefits (continued)
For regulatory purposes, the FCC permits recognition of net postretirement benefits costs, including amortization of the transition obligation, in accordance with SFAS No. 106.
The components of the 1993 net postretirement benefits cost are as follows (in thousands):
Service cost -- benefits earned during the period $ 1,857 Interest on accumulated postretirement benefits obligation 5,325 Amortization of transition obligation 3,395 ------- Net postretirement benefits cost $10,577 =======
For measurement purposes, an annual health care cost trend rate of 13 percent was assumed for 1993, gradually decreasing to 6 percent by 2001 and remaining constant thereafter. The effect of a one percent annual increase in the assumed trend rate would have increased the 1993 net postretirement benefits cost by approximately $1,721,000. The weighted average discount rate for 1993 was 8 percent.
The cost of providing health care benefits to retirees was $2,016,000 and $1,698,000 in 1992 and 1991, respectively.
The amount recognized in the consolidated balance sheet as of December 31, 1993, is as follows (in thousands):
Accumulated postretirement benefits obligation Retirees $25,224 Active plan participants -- fully eligible 19,382 Active plan participants -- other 26,499 ------- 71,105
Unrecognized net gains 2,005 Unrecognized transition obligation (64,514)
Accrued postretirement benefits cost $ 8,596
The accumulated benefits obligation as of December 31, 1993, was determined using a discount rate of 7.5 percent. An annual health care cost trend rate of 12 percent was assumed for 1994, gradually decreasing to 6 percent by 2001 and remaining constant thereafter. The effect of a one percent annual increase in the assumed health care cost trend rate would have increased the accumulated benefits obligations as of December 31, 1993, by approximately $10,239,000.
(Page 21)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
4. INCOME TAXES
The components of federal and state income tax expense are as follows (in thousands):
1993 1992 1991 ------- ------- ------- Federal income taxes Current $22,418 $23,415 $21,027 Deferred (8,868) (5,764) (2,756) Amortization of deferred ITC (3,298) (3,819) (4,029) ------- ------- ------- 10,252 13,832 14,242 ------- ------- ------- State income taxes Current (341) 118 203 Deferred 123 140 24 ------- ------- ------- (218) 258 227 ------- ------- ------- Total income tax expense $10,034 $14,090 $14,469 ======= ======= =======
The differences which cause the effective income tax rate to vary from the statutory federal income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991 are as follows (in thousands):
1993 1992 1991 ------- ------- ------- Federal income tax at the statutory rate $15,671 $19,375 $18,940 Less amortization of deferred ITC (3,298) (3,819) (4,038) Expected federal income tax provision after ------- ------- ------- amortization of deferred ITC 12,373 15,556 14,902 Effect of Differences required to be flowed through by regulatory commissions 457 509 607 Reversal of rate differentials (2,187) (2,725) (2,482) Tax examination adjustments 1,087 Other, net (609) 750 355 ------- ------- ------- Income tax expense, including ITC $10,034 $14,090 $14,469 ======= ======= ======= Effective income tax rate 22.4% 24.7% 26.0% ======= ======= =======
(Page 22)
UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
4. INCOME TAXES (continued)
During 1993 and 1992, in accordance with SFAS No. 109, deferred income taxes were provided for the temporary differences between the carrying amounts of the Company's assets and liabilities for financial statement purposes and their tax bases. The sources of the differences that give rise to the deferred income tax assets and liabilities as of December 31, along with the income tax effect of each, are as follows (in thousands):
1993 1992 Deferred Income Tax Deferred Income Tax Assets Liabilities Assets Liabilities ------- ------------ ------- ----------- Property, plant and equipment $44,291 $49,520 Allowance for doubtful accounts 575 234 Expense accruals 6,894 3,937 Deferred ITC 8,206 11,503 Other, net (3,909) (3,485) ------- ------- ------ -------
$56,057 $61,709
On August 10, 1993, the Revenue Reconciliation Act of 1993 (the Act) was enacted which, among other changes, raised the federal income tax rate for corporations to 35 percent from 34 percent, retroactive to the beginning of the year. Pursuant to SFAS No. 71, the resulting adjustments to the Company's deferred income tax assets and liabilities to reflect the revised rate have generally been reflected as reductions to the related regulatory liabilities.
During 1991, in accordance with APB No. 11, deferred income tax provisions resulted from the differences in the timing of recognizing certain revenues and expenses for financial statement and income tax purposes. The sources of the differences, along with the income tax effect of each, were as follows (in thousands):
Property, plant and equipment $(4,424) Allowance for doubtful accounts (207) Expense accruals 2,585 Other, net (686) ------- $(2,732) =======
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UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
5. LONG-TERM DEBT
Long-term debt as of December 31, excluding current maturities, is as follows (in thousands):
1993 1992 ----------------------- ------- Weighted Average Amount Interest Rate Amount -------- ------------- -------- First mortgage bonds, maturities 2000 to 2005 $165,000 6.85% $137,537 Advances from parent company classified as long-term debt 30,000 Less: Unamortized discount on first mortgage bonds 1,295 151 -------- -------- $163,705 $167,386 ======== ========
Advances from parent company were classified as long-term debt at December 31, 1992, as they were replaced with $40,000,000 of 7.11% series CC seven-year First Mortgage Bonds issued in February 1993.
Long-term debt maturities during the next five years consist of $1,587,000 scheduled for repayment in 1994.
The first mortgage bonds are secured by substantially all of the Company's property, plant, and equipment.
Under the most restricted terms of the Company's first mortgage bond indentures, $56,629,000 of retained earnings were restricted from payment of dividends at December 31, 1993.
As of December 31, 1993, the Company had lines of credit with banks totalling $20,000,000, all of which was available at year end. The bank lines, which renew annually on various dates, provide for short-term borrowings at market rates of interest and require annual commitment fees based on the unused portion. Lines of credit may be withdrawn by the banks if there is a material adverse change in the financial condition of the Company.
During 1993, the Company redeemed prior to scheduled maturities $75,950,000 of first mortgage bonds with interest rates from 6.875 percent to 9.0 percent. During 1992, the Company redeemed, prior to scheduled maturities, $43,850,000 of first mortgage bonds with interest rates ranging from 8.875 percent to 10.25 percent. The payment penalties related to these early extinguishments of debt were not significant.
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UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
6. COMMITMENTS
Gross rental expense aggregated $5,490,000 in 1993, $5,676,000 in 1992 and $5,963,000 in 1991.
The Company's planned capital expenditures for the year ending December 31, 1994 are approximately $77,118,000. Normal purchase commitments have been or will be made for these planned expenditures.
7. RELATED PARTY TRANSACTIONS
The Company purchases telecommunications equipment, construction and maintenance equipment, and materials and supplies from its affiliate, North Supply Company. Total purchases for 1993, 1992, and 1991 were $25,612,000, $23,207,000 and $20,420,000, respectively.
Under an agreement with Sprint, the Company reimburses Sprint for data processing services, other data related costs and certain management costs which are incurred for the Company's benefit. A credit resulting from deferred income taxes on intercompany profits is also allocated by Sprint to affiliated companies. Total charges to the Company aggregated $30,628,000, $27,091,000 and $23,065,000 in 1993, 1992 and 1991, respectively, and the credit relating to deferred income taxes was $596,000, $630,000 and $704,000 in 1993, 1992 and 1991, respectively. The Company enters into cash advance and borrowing transactions with Sprint; generally, interest on such transactions is computed based on the prior month's thirty-day average commercial paper index, as published in the Federal Reserve Statistical Release H.15, plus forty-five basis points. Interest expense on such advances from Sprint was $429,000, $1,256,000 and $1,057,000 in 1993, 1992 and 1991, respectively. Interest income on such advances to Sprint was $162,000, $63,000 and $357,000 in 1993, 1992 and 1991, respectively.
Sprint Publishing & Advertising, an affiliate, pays the Company a fee for the right to publish telephone directories in the Company's operating territory, a listing fee, and a fee for billing and collection services performed for Sprint Publishing & Advertising by the Company. For 1993, 1992 and 1991, Sprint Publishing & Advertising paid the Company a total of $8,622,000, $8,549,000 and $8,512,000, respectively. The Company paid Sprint Publishing & Advertising $850,000, $788,000 and $1,572,000 in 1993, 1992 and 1991, respectively, for its costs of publishing the white page portion of the directories.
The Company provides various services to Sprint's long distance communications services division, such as network access, operator and billing and collection services, and the lease of network facilities. The Company received $10,094,000, $9,227,000 and $8,454,000 in 1993, 1992 and 1991, respectively, for these services. The Company paid Sprint's long distance communications services division $4,648,000, $4,540,000 and $4,109,000 in 1993, 1992 and 1991, respectively, for interexchange telecommunications services.
Beginning in 1991, the Company provided interstate interexchange carrier operator services to nine affiliated local telephone companies. The Company billed the affiliated companies a total of $5,665,000 and $5,301,000 in 1993 and 1992, respectively. The amount billed in 1991 was insignificant.
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UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
7. RELATED PARTY TRANSACTIONS (continued)
The Company is reimbursed by United Telephone Company of Indiana, Inc. for certain salaries and other costs which are incurred by the Company for the benefit of the affiliate. Similarly, the Company reimburses the affiliate for certain costs incurred by the affiliate for the Company's benefit. These reimbursements represent the cost of such items as determined by the Company and its affiliates. Such reimbursable charges, net of amounts reimbursed by the Company, totalled $23,955,000, $21,651,000 and $18,584,000 in 1993, 1992 and 1991, respectively.
Certain directors and officers of the Company are also directors or officers of banks at which the Company conducts borrowings and related transactions. The terms are comparable with other banks at which the Company has similar transactions.
8. ADDITIONAL FINANCIAL INFORMATION
Financial Instruments Information
The Company's financial instruments consist of long-term debt, including current maturities, with carrying amounts as of December 31, 1993 and 1992 of $165,292,000 and $167,939,000, respectively, and estimated fair values of $172,977,000 and $168,339,000, respectively. The fair values are estimated based on quoted market prices for publicly-traded issues, and based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved for all other issues.
The carrying values of the Company's other financial instruments (principally cash equivalents) approximate fair value as of December 31, 1993 and 1992.
Supplemental Cash Flows Information
The supplemental disclosures required for the consolidated statements of cash flows for the years ended December 31, are as follows (in thousands):
1993 1992 1991 Cash paid for Interest, net of amounts capitalized $10,166 $11,568 $10,404 Income taxes $24,578 $25,679 $18,119
Major Customer Information
Operating revenues from American Telephone & Telegraph resulting primarily from network access, billing and collection services, and the lease of network facilities aggregated approximately $70,090,000, $68,740,000 and $66,842,000 for 1993, 1992 and 1991, respectively.
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UNITED TELEPHONE COMPANY OF OHIO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993
9. SUPPLEMENTAL QUARTERLY INFORMATION - UNAUDITED (in thousands)
1993 Quarters Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Operating revenues $95,294 $98,522 $101,255 $103,018 Operating income 5,095 13,812 14,803 13,577 Net income 2,123 10,312 11,751 10,555
1992 Quarters Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ -----------
Operating revenues $90,656 $92,214 $91,409 $97,527 Operating income 13,731 13,858 13,066 14,340 Net income 10,878 10,821 9,697 11,500
In the first and fourth quarters of 1993, the Company recorded merger and integration costs of $10,300,000 and $2,516,000, respectively, as a result of the merger of Sprint and Centel. Such charges reduced net income by approximately $6,700,000 and $1,600,000, respectively.
(Page 27)
United Telephone of Ohio Form 10-K, Part II/Part III December 31, 1993
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Omitted under the provisions of General Instruction J.
Item 11.
Item 11. Executive Compensation
Omitted under the provisions of General Instruction J.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted under the provisions of General Instruction J.
Item 13.
Item 13. Certain Relationships and Related Transactions
Omitted under the provisions of General Instruction J.
(Page 28)
United Telephone of Ohio Form 10-K, Part II/Part III December 31, 1993
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The consolidated financial statements of the Company filed as part of this report are listed in the Index to Consolidated Financial Statements on page 9.
2. The consolidated financial statement schedules of the Company filed as part of this report are listed in the Index to Consolidated Financial Statement Schedules on page 30.
(b) The exhibits filed as part of this report as required by Item 601 of Regulation S-K are listed in the Index to Exhibits on page 39.
(Page 29)
United of Ohio Form 10-K, Part IV December 31, 1993
UNITED TELEPHONE COMPANY OF OHIO INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (Item 14(a) 2)
Page Reference
For the three years ended December 31, 1993, 1992 and 1991 Schedule V - Property, Plant and Equipment. . . . . . . . . . . . . 31-33 Schedule VI - Accumulated Depreciation. . . . . . . . . . . . . . . 34-36 Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . 37 Schedule X - Supplementary Income Statement Information . . . . . . 38
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto.
(Page 31)
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United Telephone of Ohio Form 10-K, Part IV December 31, 1993
PART IV UNITED TELEPHONE COMPANY OF OHIO SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION-CONSOLIDATED (Thousands of Dollars)
[TEXT] Maintenance expense is the primary component of plant expense which is shown separately on the Consolidated Statements of Income. The Company had no significant advertising or royalty expenses during 1993, 1992, and 1991.
(Page 38)
United of Ohio Form 10-K, Part IV December 31, 1993
UNITED TELEPHONE COMPANY OF OHIO INDEX TO EXHIBITS (Item 14(c))
Exhibit No.
(3A) Amended Articles of Incorporation (incorporated herein by reference to Exhibit 3-A to Registration Statement of the Company on Form S-1, No. 2-39684).
(3B) Amendment to Amended Articles of Incorporation (incorporated herein by reference to Exhibit 3-B to Registration Statement of the Company on Form S-1, No. 2-52845).
(3C) Code of Regulations (incorporated herein by reference to Exhibit 3-C to Registration Statement of the Company on Form S-1, No. 2-34454).
(4A) Indenture of Mortgage and Deed of Trust dated as of April 1, 1968 and Supplemental Indentures First through Seventh (filed as Exhibit 4-A to Registration Statement No. 2-45070, Exhibit 2-H to Registration Statement No. 2-62515 and Exhibit 19 to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1982), and the Eighth Supplemental Indenture dated as of October 1, 1982, from Company to the Huntington National Bank, Trustee (filed as Exhibit 4J to the Company's Registration Statement on Form S-3, No. 33-50818), and incorporated herein by reference.
(4B) Ninth Supplemental Indenture dated as of October 1, 1992, from the Company to the Huntington National Bank, Trustee, filed with this Annual Report on Form 10-K for the year ended December 31, 1992. (Filed as an exhibit to Company's Registration statement on Form S-3 No. 33-50818 and incorporated herein by reference.)
(4C) Tenth Supplemental Indenture dated as of January 1, 1993, from the Company to the Huntington National Bank, Trustee, filed with this Annual Report on Form 10-K for the year ended December 31, 1992.
(4D) Eleventh supplemental Indenture dated as of May 15, 1993 from the Company to the Huntington National Bank, Trustee, filed with this Annual Report on Form 10-K for the year ended December 31, 1993. (Filed as an exhibit to the Company's Registration statement on Form S-3 No. 33-61024 and incorporated herein by reference.)
23 Consent of Independent Auditors
(Page 39)
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors United Telephone Company of Ohio
We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-61024) of United Telephone Company of Ohio and in the related Prospectus of our report dated January 21, 1994, with respect to the consolidated financial statements and schedules of United Telephone Company of Ohio included in this Annual Report (Form 10-K) for the year ended December 31, 1993.
ERNST & YOUNG
Kansas City, Missouri March 30, 1994
(Page 40)
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.
UNITED TELEPHONE COMPANY OF OHIO (Registrant)
March 3, 1994 ________________________________ I. C. Oberlin Vice President-Finance and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
____________________________ President and Director March 3, 1994 J. D. Kelley
____________________________ Vice President-Network March 3, 1994 L. V. Sprouse Operations
____________________________ Controller March 3, 1994 P. J. Weitzel
____________________________ Director March 3, 1994 J. O. Basford
____________________________ Director March 3, 1994 J. W. Gillis
____________________________ Director March 3, 1994 J. S. Gorman
(Page 41)
Signature Title Date
____________________________ Director March 3, 1994 B. L. Laramore
____________________________ Director March 3, 1994 N. E. McCann
____________________________ Director March 3, 1994 D. W. Peterson
____________________________ Director March 3, 1994 R. W. Platt
____________________________ Director March 3, 1994 J. E. Schafstall
____________________________ Director March 3, 1994 J. B. Schomaeker
____________________________ Director March 3, 1994 G. L. White
____________________________ Director March 3, 1994 R. L. Zielsdorf
(Page 42)