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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 1-6589
WISCONSIN BELL, INC.
A Wisconsin Corporation I.R.S. Employer No.
39-0716650
722 North Broadway
Milwaukee, Wisconsin 53202
Telephone Number 1-800-257-0902
Securities registered pursuant to Section 12(b) of the Act:
Thirty-Six Year 7 1/4% Debentures, due February 1, 2007
Exchanges on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH
CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION J(2).
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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TABLE OF CONTENTS
PART I
Item Page
---- ----
1. Business......................................... 1
2. Properties....................................... 7
3. Legal Proceedings................................ 8
4. Submission of Matters to a Vote of Security
Holders (Omitted pursuant to General Instruction J(2)).
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable).
6. Selected Financial and Operating Data............ 9
7. Management's Discussion and Analysis of Results of
Operations (Abbreviated pursuant to
General Instruction J(2))....................... 10
8. Financial Statements and Supplementary Data...... 16
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 31
PART III
10. Directors and Executive Officers of the Registrant
(Omitted pursuant to General Instruction J(2)).
11. Executive Compensation (Omitted pursuant to
General Instruction J(2)).
12. Security Ownership of Certain Beneficial Owners
and Management (Omitted pursuant to General
Instruction J(2)).
13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction J(2)).
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ....................... 32
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PART I
Item 1. Business.
The Company
Wisconsin Bell, Inc. (Wisconsin Bell or the Company),
incorporated under the laws of the State of Wisconsin, has its
principal office at 722 North Broadway, Milwaukee, Wisconsin 53202
(telephone number 1-800-257-0902). The Company is a wholly owned
subsidiary of Ameritech Corporation (Ameritech), a Delaware
Corporation. Ameritech is the parent of numerous other
communications businesses and has its principal executive offices
at 30 South Wacker Drive, Chicago, Illinois 60606 (telephone
number 1-800-257-0902). The Company is managed by its sole
shareowner rather than a Board of Directors as permitted by
Wisconsin law.
Ameritech operates its business within the framework of
customer-specific business units delivering specialized services
to various categories of customers, each with unique requirements.
The functions of the business units, which include consumer,
business, cellular, advertising and capital services, as well as
services provided to other companies in the communications
industry, overlap the legal entities, including the Company, which
form the infrastructure of Ameritech. The products and services
of all the companies are marketed under the "Ameritech" brand
identity, but Ameritech's five landline communications companies
remain responsible within their respective service areas for
providing telephone and other communications services, subject to
regulation by the Federal Communications Commission (FCC) and the
respective state public service commissions in Illinois, Indiana,
Michigan, Ohio and Wisconsin. Wisconsin Bell is regionally
identified and does business as "Ameritech Wisconsin."
Ameritech is one of seven regional holding companies (RHCs)
formed in connection with the court-approved divestiture of
certain assets of AT&T Corp. (AT&T), formerly American Telephone
and Telegraph Company. Effective January 1, 1984, AT&T
transferred to Ameritech its 100% ownership of the exchange
telecommunications, exchange access and printed directory
advertising portions of Illinois Bell Telephone Company; Indiana
Bell Telephone Company, Incorporated; Michigan Bell Telephone
Company; The Ohio Bell Telephone Company and Wisconsin Bell
(referred to collectively as the "Ameritech landline
communications subsidiaries"), as well as a cellular
communications company.
The consent decree, entitled "Modification of Final Judgment"
(Consent Decree), as originally approved in 1982 by the United
States District Court for the District of Columbia (Court), placed
restrictions on the post-divestiture activities of the seven RHCs,
including Ameritech. Relief from these restrictions could be had
only upon a showing to the Court that there was no substantial
possibility that the requesting company could use its monopoly
power to impede competition in the market it sought to enter.
Over time, the Court granted waivers to the RHCs to engage in
otherwise prohibited lines of business, including the right to
offer information services. Ameritech sought to remove or modify
the remaining restrictions, which included prohibitions on
providing long distance services and manufacturing
telecommunications equipment. These efforts were suspended upon
the passage of the Telecommunications Act of 1996 (Telecom Act).
The Telecom Act effectively superseded future operation of the
Consent Decree. Consequently, in April 1996, the Court issued an
order terminating the Consent Decree and dismissing all pending
waiver requests.
Implementing the Telecom Act
On February 8, 1996, the first comprehensive overhaul of
telecommunications legislation in 62 years was signed into law,
removing barriers that prevented the phone, cable TV and broadcast
industries from entering each others businesses. The Telecom Act
addresses various aspects of competition within, and regulation
of, the communications industry. Among other things, the new law
defines the conditions under which local exchange carriers,
including the Ameritech landline communications subsidiaries, may
offer long distance service and provides certain mechanisms
intended to facilitate local exchange competition. The Act gives
the FCC the authority to determine when the
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incumbent local exchange carriers have satisfied the statutory
criteria required to provide long distance service in an in-region
state, including meeting a 14-point competitive checklist. The
law eliminates any remaining barriers to companies wishing to
compete against providers of local phone service.
As required by the new law, in August 1996, the FCC adopted
rules to implement the local competition provisions. The rules
require local exchange carriers, among other duties, to (1)
provide interconnection to any telecommunications carrier at any
technically feasible point, equal in quality to that provided for
the local exchange carrier's own operations; (2) provide such
carriers with access to network elements on an unbundled basis;
and (3) offer for resale, at wholesale rates, any
telecommunications services that the local exchange carrier
provides at retail to subscribers who are not telecommunications
carriers. The FCC's rules address pricing for interconnection,
unbundled network elements and resale of telecommunications
services.
In October 1996, in an order entered in an appeal filed by
certain local exchange carriers, the U.S. Court of Appeals for the
Eight Circuit stayed the portion of the FCC rules with respect to
pricing and the FCC's so-called "pick and choose" rules. The
U.S. Supreme Court declined to overturn the appeals court stay.
The stay will be in effect until the appeals court decides on the
merits of those provisions, sometime in 1997. Although Ameritech
filed a separate lawsuit, the appeals court consolidated all
challenges to the FCC rules. In the meantime, the FCC's
interconnection rules remain in effect.
It is not possible to determine what effect the FCC rules will
have on the Company's business until challenges to the rules have
been resolved and the state regulatory commission in Wisconsin has
acted on the matters within its jurisdiction.
Wisconsin Bell's Full Service Communications Business
Wisconsin Bell furnishes a wide variety of advanced
communications services, including local exchange and toll
service, network access and communications products to business,
residential and communications company customers in an operating
area comprised of four Local Access and Transport Areas (LATAs) in
Wisconsin. These LATAs are generally centered on a city or other
identifiable community of interest, and each LATA marks the
boundary within which Wisconsin Bell may provide telephone
service. The Company provides two basic types of communications
services. It transports communications traffic between a
subscriber's equipment and the telephone exchange offices located
within the same LATA (intraLATA service). These services include
local exchange, private line and intraLATA toll services
(including 800 and special services for data, radio and video
transport). In addition, it provides exchange access service,
which links a subscriber's telephone or other equipment to the
transmission facilities of long distance carriers, which in turn
provide communications service between LATAs (interLATA, or long
distance, service). About 67% of the population and 14% of the
area of Wisconsin is served by Wisconsin Bell. The remainder of
the state is served by nonaffiliated telephone companies.
Wisconsin Bell also provides directory listings, public
telephone and local and toll operator services, including collect
calls, third number billing, person-to-person and calling card
calls. It offers call management services, including voice mail,
Caller ID, call waiting and call forwarding, as well as digital
network services such as on-line database access and fax
messaging, document sharing functions and video conferencing for
desktop computers. The Company provides billing and collection
services for several companies, including billing for long
distance services offered by certain long distance carriers, some
of which began billing their own customers in 1996. In 1997,
Wisconsin Bell launched the first phase of a plan to offer to
customers in certain areas a single bill for local telephone
services, as well as other services provided by affiliated
companies, such as cellular, paging and security monitoring
services, with cable TV and Ameritech's long distance services to
be added at a later date. The Company markets its local phone
services on a wholesale basis to certain carriers that resell
services from the Company's network.
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The following table sets forth the number of access lines
served by the Company at the end of each of the last five years:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Access lines in service
(in thousands)........... 2,137 2,048 1,976 1,898 1,834
Percent increase over prior
year..................... 4.3 3.6 4.1 3.5 2.8
Wisconsin Bell has an agreement with Ameritech Publishing, Inc.
(API), an Ameritech subsidiary doing business as Ameritech
Advertising Services, under which the Company furnishes to API
certain services and data to be used by API in publishing and
distributing classified and alphabetical directories. In
exchange, the Company receives a fixed subsidy fee plus
compensation for the services and data.
Ameritech Services, Inc. (ASI) is a company jointly owned by
Wisconsin Bell and the other Ameritech landline communications
subsidiaries. ASI provides to those companies human resources,
technical services, procurement, marketing and regulatory
planning, as well as labor contract bargaining oversight and
coordination. ASI acts as a shared resource for the Ameritech
subsidiaries providing operational support for the Ameritech
landline communications subsidiaries and integrated communications
and information systems for all the business units.
In 1996, about 91% of the total operating revenues of the
Company were from communications services and the remainder
principally from billing and collection services, rents, directory
advertising and other miscellaneous nonregulated operations.
About 73% of the revenues from communications services were
attributable to intrastate operations.
Regulatory Environment - Federal
Wisconsin Bell is subject to jurisdiction by the FCC pursuant
to applicable law. The FCC prescribes for communications
companies a uniform system of accounts, rules for apportioning
costs between regulated and nonregulated services, and the
principles and standard procedures used to separate regulated
property, plant and equipment costs, revenues, expenses, taxes and
reserves between those applicable to interstate services under the
jurisdiction of the FCC and those applicable to intrastate
services under the jurisdiction of the respective state regulatory
authorities.
The transformation of the local exchange business has been
underway for some time, even before recent federal legislation.
The Company's interstate revenues are now regulated by a price cap
mechanism rather than by rate-of-return regulation. The FCC's
price cap regulatory scheme sets maximum limits on the prices that
local exchange carriers, including Wisconsin Bell, can charge for
interstate access as compensation for the use of their facilities
for the origination or termination of long distance and other
communications by other carriers. The limits are adjusted each
year to reflect inflation, a productivity factor and certain other
cost changes. Under price caps, local exchange carriers have
increased flexibility to change prices of access services, as well
as prices for interstate intraLATA and video dial tone service
offerings, provided they do not exceed the allowed price cap.
Under interim changes to the price cap plan, the FCC adopted three
productivity/sharing options. Wisconsin Bell and the other
Ameritech landline communications subsidiaries elected the 5.3%
productivity factor which allows the Company to retain all of its
earnings, whereas election of a lower factor would require
earnings to be shared with customers. The FCC has established a
rulemaking proceeding to consider permanent changes to its price
cap regulation plan.
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One major regulatory uncertainty concerns access charge reform.
In December 1996, the FCC laid out its proposals in this area,
asking for comments on a number of steps it would take to
restructure the fees to make the system compatible with the pro-
competitive deregulatory framework established by the Telecom Act.
This move was the third in a trilogy of FCC actions that it has
said are designed to foster and accelerate the introduction of
efficient competition in all telecommunications markets. In
August 1996, the FCC released its Interconnection Order to
implement the local competition provisions of the Telecom Act. In
November 1996, the Federal-State Universal Service Joint Board
issued its recommendations to the FCC for reforming the existing
system of universal basic telephone service, which is the part of
access charges used, among other things, to subsidize local
service in high cost areas of the country. The goal is to
preserve and advance universal service in a manner that permits
local telephone markets to move from monopoly to competition. The
FCC's current access charge policies were adopted at the time of
the divestiture by AT&T. These policies were designed primarily
to promote competition in the interstate, interexchange market by
ensuring that all long distance companies would be able to
originate and terminate their traffic over incumbent local
exchange carrier networks at just, reasonable and
nondiscriminatory rates. Although these policies contemplated
long distance competition, they did not attempt to address the
potential effects of full competition. Final rules on access
charges are expected in May 1997. In a separate proceeding, the
FCC is working to overhaul the mechanism to determine the actual
cost of universal service and how those costs will be recovered.
As part of the process of reforming the interstate access
charge system, the FCC sought comment on the treatment of Internet
and other information service providers (sometimes referred to as
enhanced service providers) that also use the local exchange
carriers' facilities. Since the access charge system was
established in 1983, enhanced service providers have been
classified, for purposes of the access charge rules, as end users
rather than carriers and therefore are exempt from access charges.
The FCC made no specific proposals, but tentatively concluded that
enhanced service providers should not be subject to access charges
as currently constituted.
Other FCC Matters
In June 1996, the FCC adopted rules that will allow customers
to switch local exchange carriers without having to change their
phone numbers. Under the rules, by the end of 1998 the nation's
one hundred largest metropolitan areas must have "number
portability" that meets FCC standards, and local exchange carriers
are required to offer temporary number portability, such as remote
call forwarding, immediately.
In July 1996, the FCC announced that the former Bell operating
companies of AT&T (Bell Companies), including Ameritech, that
provide out-of-region long distance service through an affiliate
will be regulated as "nondominant carriers" as long as they meet
three requirements. The interim rules allow the Bell Companies
nondominant carrier status if their affiliated companies maintain
accounting records separate from those of the parent, do not
jointly own transmission or switching equipment with the parent
and obtain services from the parent at tariffed rates.
Nondominant carriers are not subject to price cap regulation and
their tariffs take effect on one day's notice, compared with at
least two weeks for dominant carriers. The FCC plans to establish
final rules for Bell Company out-of-region services in another
rulemaking that began in March 1996.
In December 1996, the FCC issued transitional structural and
accounting rules that apply to the provision of certain services
provided by the Bell Companies including in-region long distance
services. These rules require that certain services be provided
through a separate affiliate and prohibit joint ownership of
switching and transmission facilities. In addition, they call for
nondiscrimination between the affiliate and nonaffiliate long
distance carriers, subject to certain exemptions. The FCC order
did not resolve the issue of whether Bell Company in-region long
distance affiliates will be considered nondominant.
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Regulatory Environment - State
Wisconsin Bell is also subject to regulation by the Public
Service Commission of Wisconsin (PSCW) with respect to certain
intrastate rates and services. With passage of a
telecommunications bill in 1994, the PSCW regulates the prices of
Wisconsin Bell rather than earnings. Under the law, price
regulation places no limits on how much the Company can earn.
Wisconsin Bell filed tariffs to adopt pure price regulation
effective September 1, 1994. Prices were reduced by $35 million
on an annualized basis. An additional $10 million carrier common
line access charge reduction was phased in over a two year period
ending in 1996. Under the terms of the law, the Company is
committed to spend, by the year 2000, at least $700 million on new
equipment and technology to extend fiber optics to hundreds of
secondary schools, technical colleges, universities, hospitals and
libraries in the state.
In 1995, tariffs were filed, effective January 1, 1996, which
required implementation of Dial 1+ capability giving customers the
ability to choose an alternate carrier for intraLATA toll calls by
dialing 1 before the phone number. By September 1996, all of the
Company's service area had been converted to 1+ dialing.
In 1996, the PSCW referred a quality of service complaint
against Wisconsin Bell to the state Attorney General's office for
prosecution and appealed a county circuit court's decision that
dismissed the commission's direct civil court action against the
Company. The PSCW sued Wisconsin Bell regarding compliance with
service standards in 1995, but the suit was dismissed by the
county court. The Company has made a good-faith effort to offer
additional compensation to customers throughout the region
affected by past service problems and has taken steps to ensure
that customers receive excellent service, including improving
productivity, hiring additional service technicians and upgrading
internal systems for dispatching repair crews. Wisconsin Bell's
service problems in the summer of 1995 resulted from severe
weather that caused service disruptions, as well as personnel
shortages resulting in part from an early retirement offer in 1994
and 1995 that proved more popular than anticipated.
In April 1997, Wisconsin Bell plans to introduce a flat rate
for local toll calls. The new rate, filed with the WPSC in March
1997, will replace the Company's current local toll pricing
structure which includes over 40 different rates.
Ameritech has asked all five state commissions in its region to
declare that its statement of generally available terms and
conditions for interconnection meets the competitive checklist
under the Telecom Act.
Long Distance Services
Under the Telecom Act, Wisconsin Bell and other Bell Companies
must open the local market to competition by implementing a 14-
point checklist before they can offer interLATA long distance
service to their local landline customers. The FCC will determine
whether or not a Bell Company has satisfied the statutory
criteria, including the competitive checklist, compliance with
structural and accounting rules and whether its entry into long
distance is consistent with the public interest. A Bell Company
is restricted from providing interLATA long distance service until
the FCC determines that the statutory criteria have been met. The
FCC will give substantial weight to Department of Justice
recommendations in reviewing a carrier's entry into the market.
In preparation, Wisconsin Bell has negotiated or arbitrated
numerous agreements with competitors to allow interconnection
access to the Company's network elements at cost-based rates and
purchase of its local services at discounted, wholesale rates for
resale to the public. The FCC has 90 days to act upon a Bell
Company's application to provide interLATA long distance service.
InterLATA long distance is a $1 billion market in the Company's
local service area. Ameritech expects to offer interLATA landline
long distance service within its region in 1997. However, FCC
rules require that interLATA long distance service be offered by a
separate subsidiary of Ameritech. Accordingly, Ameritech's entry
into this market will not generate long distance revenues for
Wisconsin Bell. Ameritech is also certified in all states outside
its five-state region. Long distance carriers, WorldCom, Inc. and
Teleglobe Inc. will complete long distance calls for Ameritech
outside the region on a resale basis.
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Competition -- Evolution of the Industry
Because of the Telecom Act, the communications landscape is
rapidly changing. One objective of the new law was to foster
local exchange competition by establishing a regulatory framework
to govern the provision of local and long distance
telecommunications services. It permits the Bell Companies,
including Wisconsin Bell, to provide interLATA long distance
services only after satisfying the conditions of the new laws for
opening local markets to competition and demonstrating to the FCC
that such provision is in the public interest. For the first time
in more than 60 years, all communications companies are governed
by a new set of rules that call for competition and open markets,
not regulatory management, as the basic business environment.
This public policy change opens a host of business opportunities
for providers of all forms of communications, enabling them to
become full-service providers of voice, video, data, local and
long distance services for their customers. As a result of the
new law, consumers can expect to see more choices and receive
greater value for these services.
With the passage of the Telecom Act, Wisconsin Bell's local
service market is being opened to competition from long distance
carriers, cable TV providers and other nontraditional local
service providers. Interconnection agreements with these
providers and the applicable regulations require the Company to
allow access to network elements at cost-based rates or to provide
services for resale at discounted, wholesale rates. Competitive
entry by these providers may result in some downward pressure on
local service revenues as a portion of the Company's revenues
shift from local service at retail rates to network access at
wholesale rates.
The Telecom Act will also bring renewed scrutiny of the current
universal service funding policy. Historically, network access
charges have been used to help local exchange carriers ensure
universal basic telephone service to all customers. Modifications
of this policy by the FCC may result in changes to the Company's
revenue stream related to network access charges.
Although telecom reform was the most dramatic change affecting
the communications industry in 1996, another industry trend that
intensified was the number of mergers, alliances and joint
ventures. Over time, the number, variety and size of competitors
will change and may include companies with substantial capital,
technological and marketing resources and wide-ranging service
offerings.
It is impossible to predict the specific impact of the Telecom
Act and other changes in the industry on Wisconsin Bell's business
or financial condition. Notwithstanding the potential for an
adverse effect on its revenue streams, the Company expects to
capture a major share of the expected growth in the communications
marketplace, building on its strengths and branching into new
services that are a logical extension of its business.
Patents, Trademarks and Licenses
The Company, through its parent, Ameritech, has rights to use
various patents, copyrights, trademarks and other intellectual
property which are necessary for it to conduct its present
business operations. It is not anticipated that any such
intellectual property will be subject to expiration or nonrenewal
of rights which would materially and adversely affect the Company.
Wisconsin Bell's Human Resources
As of December 31, 1996, Wisconsin Bell employed 4,216 persons,
a moderate decrease from 4,336 as of December 31, 1995. In 1996,
Ameritech commenced a ten-year agreement with Integrated Systems
Solutions Corporation (ISSC), a subsidiary of IBM, to perform
certain information technology services formerly performed by the
Ameritech landline communications companies, and to assume
responsibility for consolidation of Ameritech's data centers.
Approximately 40 management employees of the Company were offered
and accepted employment with ISSC.
About 83% of the Company's employees are represented by the
Communications Workers of America (CWA) which is affiliated with
the AFL-CIO. The current three-year contract expires in the
summer of 1998.
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Item 2. Properties.
The properties of Wisconsin Bell do not lend themselves to
description by character and location of principal units. As of
December 31, 1996, the Company's investment in property, plant and
equipment consisted of the following:
Land and buildings.................................. 12%
Central office equipment............................ 36
Cable, wiring and conduit........................... 46
Other............................................... 6
Under construction.................................. -
---
100%
Central office equipment includes analog and digital switching
equipment, transmission equipment and related facilities.
Buildings are principally central offices. Cable, wiring and
conduit constitute outside plant, which includes poles, as well as
cable, conduit and wiring primarily above or under public roads,
highways or streets or above or under private property.
Substantially all of the installations of central office equipment
and administrative offices are located in buildings owned by the
Company and situated on property it owns. Many garages and
business offices and some installations of central office
equipment and administrative offices are in leased quarters.
Capital expenditures, the single largest use of Company funds,
were as follows for the last five years (in millions):
1992 ........................................ $174
1993 ........................................ 145
1994 ........................................ 145
1995 ........................................ 153
1996 ........................................ 187
Wisconsin Bell has been making and expects to continue to make
large capital expenditures to respond to the market's demand for a
modern, efficient and productive network. The total investment in
property, plant and equipment increased from about $2.6 billion as
of December 31, 1991, to about $2.9 billion as of December 31,
1996, after giving effect to retirements but before deducting
accumulated depreciation at either date.
Under terms of the Wisconsin telecommunications legislation
implementing incentive regulation passed in June 1994, the Company
has committed to spend at least $700 million on new equipment and
technology over five years extending fiber optics to hundreds of
secondary schools, technical colleges, universities, hospitals and
federated libraries in the state.
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Item 3. Legal Proceedings.
Pre-Divestiture Contingent Liabilities Agreement
The Court-approved Plan of Reorganization signed in connection
with AT&T's divestiture effective January 1, 1984 provides for the
recognition and payment of liabilities that are attributable to
pre-divestiture events (including transactions to implement the
divestiture) but that do not become certain until after the
divestiture. These contingent liabilities relate principally to
litigation and other claims with respect to the former Bell
Companies' rates, taxes, contracts, equal employment matters,
environmental matters and torts (including business torts, such as
alleged violations of the antitrust laws).
With respect to such liabilities, under agreements entered into
at divestiture, AT&T and the Bell Companies will share the costs
of any judgment or other determination of liability entered by a
court or administrative agency, the costs of defending the claim
(including attorneys' fees and court costs) and the cost of
interest or penalties with respect to any such judgment or
determination. Except to the extent that affected parties may
otherwise agree, the general rule is that responsibility for such
contingent liabilities will be divided among AT&T and the Bell
Companies on the basis of their relative net investment (defined
as total assets less accumulated depreciation) as of the effective
date of divestiture. Different allocation rules apply to
liabilities which relate exclusively to pre-divestiture interstate
or intrastate operations.
In January 1995, Ameritech and the other RHCs agreed to
terminate the sharing arrangement among the Bell Companies with
respect to pre-divestiture contingent liabilities for certain
matters. AT&T did not enter into the agreement and, accordingly,
the sharing arrangement remains in effect with respect to AT&T's
pre-divestiture liabilities and AT&T's share of Bell Company pre-
divestiture liabilities.
Although complete assurance cannot be given as to the outcome
of any litigation, in the opinion of the Company's management, any
monetary liability or financial impact to which Wisconsin Bell
would be subject after final adjudication of all of the foregoing
actions would not be material in amount to the Company.
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PART II
Item 6. Selected Financial and Operating Data.
WISCONSIN BELL, INC.
SELECTED FINANCIAL AND OPERATING DATA
(Dollars in Millions)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues
Local service........... $ 610.3 $ 555.5 $ 516.6 $ 487.7 $ 474.9
Interstate
network access......... 260.9 249.5 245.8 239.1 224.6
Intrastate
network access......... 60.1 62.1 77.5 88.6 93.3
Long distance........... 164.4 168.7 184.7 206.8 200.4
Other................... 105.6 96.4 105.2 110.5 106.2
-------- -------- -------- -------- --------
Total.................... 1,201.3 1,132.2 1,129.8 1,132.7 1,099.4
Operating expenses*...... 854.7 786.3 938.7 877.7 877.9
-------- -------- -------- -------- --------
Operating income......... 346.6 345.9 191.1 255.0 221.5
Interest expense......... 28.1 29.5 28.5 31.6 41.6
Other (income) expense,
net..................... (2.4) (2.0) (2.2) 11.1 6.6
Income taxes............. 126.6 122.9 57.5 74.3 56.0
-------- -------- -------- -------- --------
Income before
extraordinary item
and cumulative effect of
changes in accounting
principles.............. 194.3 195.5 107.3 138.0 117.3
Extraordinary item
and cumulative effect of
changes in accounting
principles**............ - - (240.4) -
(151.8)
-------- -------- -------- -------- --------
Net income (loss)........ $ 194.3 $ 195.5 $ (133.1) $ 138.0 $
(34.5)
-------- -------- -------- -------- --------
Total assets............. $1,568.7 $ 1556.9 $1,577.9 $2,038.3 $2,043.4
Property, plant
and equipment, net...... $1,175.7 $1,166.9 $1,185.8 $1,658.2 $1,700.2
Capital expenditures,
net..................... $ 186.7 $ 153.3 $ 145.4 $ 145.4 $ 174.4
Long-term debt........... $ 430.0 $ 305.8 $ 305.9 $ 306.5 $ 379.0
Debt ratio............... 45.6 % 44.3 % 51.6 % 44.6 % 44.9
%
Return on average
equity.................. 35.8 % 39.1 % (20.9)% 20.9 %
(5.2)%
Return on average
total capital........... 22.3 % 23.2 % (8.7)% 13.8 % 0.4
%
Pretax interest
coverage................ 12.6 12.0 6.7 7.4 5.4
Customer lines -
at end of year (000's).. 2,137 2,048 1,976 1,898 1,834
Customer lines served by -
Digital electronic
offices................ 84.1 % 81.6 % 76.6 % 64.3 % 49.0
%
Analog electronic
offices................ 15.9 % 18.4 % 23.4 % 35.7 % 51.0
%
Customer lines
per employee............ 507 472 425 369 324
Employees -
at end of year.......... 4,216 4,336 4,651 5,137 5,659
- -------------------
* As discussed in Note D to the financial statements, 1995
operating expenses include a net work force restructuring
credit of $24.1 million, while 1994 operating expenses include
a nonmanagement work force restructuring charge of $71.8
million.
** As discussed in Note I, the Company had a noncash after-tax
extraordinary charge in 1994 of $240.4 million as a result of
discontinuing the application of FAS 71. The Company had
accounting changes in 1992 for FAS 106 and FAS 112 aggregating
$151.8 million, after tax.
9
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations.
(Dollars in Millions)
Following is a discussion and analysis of the results of
operations of the Company for the year ended December 31, 1996 and
for the year ended December 31, 1995, which is based on the
Statements of Income and Accumulated Deficit. Other pertinent
data is also set forth in Selected Financial and Operating Data.
Results of Operations
Revenues
Total operating revenues were $1,201.3 million for 1996 and
$1,132.2 million for 1995. The increase of $69.1 million or 6.1%
consisted of the following:
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Local service......... $ 610.3 $ 555.5 $ 54.8 9.9
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 1996 was due largely to higher network
usage volumes, resulting primarily from growth in the number of
access lines, which increased 4.3% to 2,137,000 as of December 31,
1996 as compared with 2,048,000 as of December 31, 1995. Greater
sales of call management services, such as call forwarding, call
waiting and Caller ID, also contributed to the increase.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Network access
Interstate ......... $ 260.9 $ 249.5 $ 11.4 4.6
Intrastate ......... 60.1 62.1 (2.0) (3.2)
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.
The increase in interstate network access revenues in 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. This increase was partially offset by net
rate reductions. Minutes of use related to interstate calls
increased 6.5% in 1996 compared with the prior year.
The decrease in intrastate network access revenues in 1996 was
primarily attributable to rate reductions, which were mostly
offset by volume increases. Minutes of use related to intrastate
network calls increased 11.7% in 1996 compared with the prior
year.
10
<PAGE> Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Long distance......... $ 164.4 $ 168.7 $ (4.3) (2.5)
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). Long distance
service revenues decreased in 1996 due primarily to a decrease in
network usage, as well as net rate reductions.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Other................. $ 105.6 $ 96.4 $ 9.2 9.5
Other revenues include revenues derived from directory
advertising, billing and collection services, inside wire
installation and maintenance services and other miscellaneous
services. The increase in other revenues in 1996 was due
primarily to growth in voice messaging, sales of equipment and
other nonregulated services, as well as an increase in inside wire
installation and maintenance revenues.
Operating Expenses
Total operating expenses in 1996 increased by $68.4 million or
8.7% to $854.7 million. The increase was partially attributable
to the 1994 work force restructuring, which resulted in a credit
of $24.1 million ($14.4 million after-tax) in 1995 related
primarily to settlement gains from lump-sum pension payments to
former employees, partially offset by fourth quarter charges for
planned work force reductions due to data center consolidations
and increased force costs related to the work force restructuring
started in 1994. Also, increases in depreciation and amortization
expenses and other operating expenses, such as affiliated
services, uncollectibles and cost of sales as discussed below,
contributed to the increase.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Employee-related
expenses............. $ 211.1 $ 220.8 $ (9.7) (4.4)
The decrease in employee-related expenses in 1996 was due
primarily to lower wages resulting from decreases in overtime and
work force levels, as well as a decrease in benefit expenses.
These decreases were partially offset by wage rate increases.
During September 1995, a union agreement was ratified by the
Communications Workers of America (CWA). The new contract and
wage increases were retroactive to August 6, 1995. The contract
included basic wage increases of 10.9% (compounded at the maximum
wage rate) over three years and a signing bonus of $500 to
eligible employees upon ratification. In addition, union
employees now receive their annual bonuses in the form of
Ameritech stock instead of cash beginning with the bonus for 1995
and continuing for the remaining years of the labor contract. The
contract addressed wages, benefits, pensions, employment security,
training and retraining and other conditions of employment. Most
of the Company's nonmanagement work force (about 85% of total
employees) is represented by the union.
There were 4,216 employees as of December 31, 1996, compared
with 4,336 as of December 31, 1995.
11
<PAGE> Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Depreciation and
amortization......... $ 178.1 $ 171.2 $ 6.9 4.0
The increase in depreciation and amortization expense in 1996
was primarily due to an increase in depreciable plant balances, as
well as an increase in depreciation rates used for certain asset
categories due to shorter depreciable lives established in 1994.
These increases were partially offset by a decrease resulting from
two major asset categories becoming fully depreciated in 1995,
requiring no further depreciation accruals in 1996.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Other operating
expenses............. $ 400.5 $ 357.2 $ 43.3 12.1
The increase in other operating expenses in 1996 was due to
increases in uncollectibles, cost of sales and other expenses
related to increased sales efforts for equipment sales, call
management services, such as voice messaging, and other
nonregulated services. Affiliated services expenses also
increased, due primarily to systems programming and reengineering
efforts. These increases were partially offset by a decrease in
advertising expenses, due to the timing of planned marketing
campaigns, as well as a decrease in contract and professional
services as the Company reduced the amount of services performed
by outside vendors.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Restructuring (credits)
charges.............. $ - $ (24.1) $ 24.1 n/a
As discussed more fully in Note D, the Company significantly
reduced its nonmanagement work force during 1994 and 1995 by 1,113
employees. New employees with different skills were added during
this period to accommodate growth and meet staffing requirements
for new business opportunities. As of December 31, 1995, all
1,113 employees had left the Company, including 199 leaving in
1995. Noncash settlement gains of $29.8 million were recorded in
1995 associated primarily with lump-sum pension payments to former
employees, partially offset by costs of planned work force
reductions due to data center consolidation and increased force
costs related to the restructuring started in 1994.
The restructuring program was recorded as follows:
Gross
Program Settlement Net Program Cost
----------------
Cost Gains Pretax After-tax
---- ----- ------ ---------
1995...................... $ 5.7 $ (29.8) $ (24.1) $ (14.4)
1994...................... 104.4 (32.6) 71.8 42.9
------- ------- ------- -------
Program total........... $ 110.1 $ (62.4) $ 47.7 $ 28.5
======= ======= ======= =======
Additional employees left the Company in 1996 as a result of
the consolidation of data centers and additional work force
reductions previously discussed. No restructuring charges or
credits were recorded in 1996.
12
<PAGE>
The work force restructuring program reduced annual employee-
related costs by approximately $50 thousand per departing
employee. The projected savings are being partially offset by the
hiring of new employees to accommodate growth, ensure high quality
customer service and meet staffing requirements for new business
opportunities.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Taxes other than
income taxes......... $ 65.0 $ 61.2 $ 3.8 6.2
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other taxes not directly related to earnings.
The increase in taxes other than income taxes in 1996 was due to
increased gross receipts taxes over the prior year period, largely
due to state tax reforms.
Other Income and Expenses
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Interest expense...... $ 28.1 $ 29.5 $ (1.4) (4.7)
The decrease in interest expense in 1996 was due primarily to a
decrease in interest on borrowings from the Ameritech short-term
funding pool due primarily to a decrease in effective interest
rates, as well as lower average debt balances.
Change
Income Percent
1996 1995 (Expense) Change
---- ---- -------- ------
Other income,
net.................. $ 2.4 $ 2.0 $ 0.4 20.0
Other income, net includes equity in earnings of affiliates,
interest income and other nonoperating items. The increase in
other income, net in 1996 was primarily due to an increase in
equity earnings from Ameritech Services, Inc. (ASI).
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Income taxes.......... $ 126.6 $ 122.9 $ 3.7 3.0
The increase in income taxes in 1996 was primarily attributable
to the previously discussed increases in pretax income, partially
offset by the $9.7 million tax effect associated with the work
force restructuring credit recorded in 1995. Excluding the
effects of this item, income taxes increased in line with the
earnings of the business.
13
<PAGE>
Other Matters
New accounting pronouncements
In June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." As amended by FAS 127, this
statement establishes standards of accounting for transfers of
assets in which the transferor has some continuing involvement
with the assets transferred or with the transferee. It also
clarifies the accounting for arrangements whereby assets are set
aside for the extinguishment of a liability. The statement is
generally effective for transactions occurring after December 31,
1996, with early or retroactive application prohibited. The
Company does not expect adoption of this standard will have a
material impact on its financial statements.
In October 1996, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities." This SOP provides
authoritative guidance on specific accounting issues related to
the recognition, measurement, display and disclosure of
environmental remediation liabilities. The SOP addresses only
those actions undertaken in response to a threat of litigation or
assertion of a claim. It does not address accounting for
pollution control costs with respect to current operations or for
costs of future site restoration or closure required upon
cessation of operations. The SOP is effective for fiscal years
beginning after December 15, 1996. The Company does not expect
adoption of this standard will have a material impact on its
financial statements.
Competition
Because of the Telecom Act, the communications landscape is
rapidly changing. The new law, among other things, was designed
to foster local exchange competition by establishing a regulatory
framework to govern the provision of local and long distance
telecommunications services. The 1996 Telecom Act permits the
Bell Companies to provide interLATA long distance services only
after satisfying the conditions of the new law for opening local
markets to competition and demonstrating to the FCC that such
provision is in the public interest. For the first time in more
than sixty years, all communications companies are governed by a
new set of rules that call for competition and open markets, not
regulatory management, as the basic business environment. This
public policy change opens a host of business opportunities for
providers of all forms of communications, enabling them to become
full service providers of voice, video, data, local and long
distance services for their customers. As a result of the new
law, consumers can expect to see more choices and competitive
prices for these and other services.
With the passage of the Telecom Act, the Company's local
service markets are being opened to competition from interexchange
carriers, cable TV providers and other nontraditional local
service providers. Interconnection agreements with these
providers and the applicable regulations require the Company to
allow access to network elements at cost-based rates or to provide
services for resale at discounted, wholesale rates. Competitive
entry by these providers in some downward pressure on local
service revenues, as a portion of the Company's revenue shifts
from local service at retail rates to network access at wholesale
rates.
The Telecom Act will also bring renewed scrutiny of the current
universal service funding policy. Historically, network access
charges have been used to help local exchange carriers ensure
universal basic telephone service to all customers. Modifications
of this policy by the FCC may result in changes to the Company's
revenue stream related to network access charges.
14
<PAGE>
In 1996, the Company signed a significant number of
interconnection and resale agreements with competitors, paving the
way for entry into the interLATA long distance market. However,
FCC rules require that interLATA long distance service be offered
by a separate subsidiary of Ameritech. Accordingly, Ameritech's
entry into this market will not generate long distance revenues
for Wisconsin Bell. As a result, the potential revenue decline
brought by local service competition will not be offset at the
Company by gains in long distance revenue.
It is impossible to predict the specific impact of the Telecom
Act and other changes in the industry on Wisconsin Bell's business
or financial condition. Notwithstanding the potential for an
adverse effect on its revenue streams, the Company intends to
pursue growth opportunities in its local exchange business.
Regulatory environment
In 1995, tariffs were filed, effective January 1, 1996, which
required implementation of intraLATA Dial 1+ capability, the
ability to choose an alternate long distance carrier for intraLATA
toll calls by dialing 1 before the phone number. By September
1996, all of the Company's service area had been converted to 1+
dialing.
Private securities litigation reform act safe harbor statement
Except for historical information contained herein, the above
discussion contains certain forward-looking statements that
involve potential risks and uncertainties. The Company's future
results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences
include, but are not limited to, changes in economic and market
conditions, effects of state and federal regulation and the impact
of new technologies. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to
revise or update these forward-looking statements to reflect
events or circumstances that arise after the date hereof or to
reflect the occurrence of unanticipated events.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowner of Wisconsin Bell, Inc.
We have audited the accompanying balance sheets of Wisconsin
Bell, Inc. (a Wisconsin Corporation) as of December 31, 1996 and
1995, and the related statements of income and accumulated deficit
and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Wisconsin, Bell, Inc. as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note I to the financial statements, the Company
discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation," in 1994.
Our audits are made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The financial
statement schedule included in Item 14(a)(2) is presented for
purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 13, 1997
16
<PAGE>
WISCONSIN BELL, INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues.......................... $ 1,201.3 $ 1,132.2 $ 1,129.8
--------- --------- ---------
Operating expenses................
Employee-related expenses....... 211.1 220.8 243.9
Depreciation and amortization... 178.1 171.2 185.8
Other operating expenses........ 400.5 357.2 376.1
Restructuring (credits) charges. - (24.1) 71.8
Taxes other than income taxes... 65.0 61.2 61.1
--------- --------- ---------
854.7 786.3 938.7
--------- --------- ---------
Operating income.................. 346.6 345.9 191.1
Interest expense.................. 28.1 29.5 28.5
Other income, net ....... 2.4 2.0 2.2
--------- --------- ---------
Income before income taxes and
extraordinary item............... 320.9 318.4 164.8
Income taxes...................... 126.6 122.9 57.5
--------- --------- ---------
Income before extraordinary item.. 194.3 195.5 107.3
Extraordinary item................ - - (240.4)
--------- --------- ---------
Net income (loss)................. 194.3 195.5 (133.1)
Reinvested earnings (deficit),
beginning of year................ (126.9) (195.5) 24.9
Less, dividends................... 183.6 126.9 87.3
--------- --------- ---------
Accumulated deficit,
end of year...................... $ (116.2) $ (126.9) $ (195.5)
========= ========= =========
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
WISCONSIN BELL, INC.
BALANCE SHEETS
(Dollars in Millions)
As of December 31,
------------------
1996 1995
---- ----
Assets
Current assets
Cash and temporary
cash investments..................... $ 0.1 $ 0.1
Receivables, net
Customers and agents
(less allowance for
uncollectibles of $25.3 and
$10.9, respectively)................ 243.6 230.3
Ameritech and affiliates............. - 18.1
Other................................ 5.6 9.5
Material and supplies................. 2.9 1.9
Prepaid and other..................... 7.4 10.8
--------- ---------
259.6 270.7
--------- ---------
Property, plant and equipment
In service............................ 2,904.7 2,792.0
Under construction.................... 10.2 23.9
--------- ---------
2,914.9 2,815.9
Less, accumulated depreciation........ 1,739.2 1,649.0
--------- ---------
1,175.7 1,166.9
--------- ---------
Investments, principally
in affiliates.......................... 27.4 27.4
Other assets and deferred charges....... 106.0 91.9
--------- ---------
Total assets............................. $ 1,568.7 $ 1,556.9
========= =========
Liabilities and shareowner's equity
Current liabilities
Debt maturing within one year
Ameritech............................ $ 19.2 $ 110.8
Other................................ - 0.1
Accounts payable
Ameritech Services, Inc. (ASI)....... 53.3 45.5
Ameritech and affiliates............. 21.3 13.8
Other................................ 67.8 78.2
Other current liabilities............. 52.3 85.1
--------- ---------
213.9 333.5
--------- ---------
Long-term debt.......................... 430.0 305.8
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred
income taxes......................... 65.2 59.0
Unamortized investment
tax credits.......................... 21.0 26.0
Postretirement benefits
other than pensions.................. 262.7 262.7
Long-term payable to ASI.............. 7.7 8.3
Other................................. 32.8 36.9
--------- ---------
389.4 392.9
--------- ---------
Shareowner's equity
Common stock ($20 par value;
31,995,000 shares
authorized; 31,960,395
issued and outstanding).............. 639.2 639.2
Proceeds in excess of par value....... 12.4 12.4
Accumulated deficit................... (116.2) (126.9)
--------- ---------
535.4 524.7
--------- ---------
Total liabilities and
shareowner's equity..................... $ 1,568.7 $ 1,556.9
========= =========
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
WISCONSIN BELL, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss)................. $ 194.3 $ 195.5 $ (133.1)
Adjustments to net income (loss):
Extraordinary item, net of tax.. - - 240.4
Restructuring (credits) charges,
net of tax..................... - (14.4) 42.9
Depreciation and amortization... 178.1 171.2 185.8
Deferred income taxes, net...... 4.3 22.2 12.2
Investment tax credits, net..... (5.0) (5.7) (6.8)
Capitalized interest............ (0.7) (1.2) (0.6)
Change in accounts receivable... 8.7 (41.6) 6.5
Change in material and supplies. (5.5) 0.9 2.5
Change in certain other
current assets................. 3.3 7.7 (11.5)
Change in accounts payable...... 4.9 (0.8) 1.9
Change in certain other
current liabilities............ 20.4 (18.8) (17.4)
Change in certain noncurrent
assets and liabilities......... (18.7) (12.3) (29.8)
Other operating activities, net. (4.7) (1.8) (2.0)
--------- --------- ---------
Net cash from operating
activities....................... 379.4 300.9 291.0
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures, net......... (186.2) (152.1) (144.7)
Proceeds from (costs of)
disposals of property,
plant and equipment, net........ 4.5 0.2 (0.5)
Other investing activities, net... 0.1 1.4 -
--------- --------- ---------
Net cash from investing
activities....................... (181.6) (150.5) (145.2)
--------- --------- ---------
Cash flows from financing activities:
Intercompany financing, net....... (91.6) (69.4) (57.6)
Issuance of long-term debt........ 124.2 - -
Retirements of long-term debt..... (0.1) (0.7) (0.9)
Dividend payments................. (230.3) (80.2) (87.3)
--------- --------- ---------
Net cash from financing
activities....................... (197.8) (150.3) (145.8)
--------- --------- ---------
Net increase in cash and
temporary cash investments....... - 0.1 -
Cash and temporary cash
investments, beginning of year... 0.1 - -
--------- --------- ---------
Cash and temporary cash
investments, end of year......... $ 0.1 $ 0.1 $ -
========= ========= =========
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
WISCONSIN BELL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
A. Significant Accounting Policies
Nature of Operations - Wisconsin Bell, Inc. (the Company) is a
wholly owned subsidiary of Ameritech Corporation (Ameritech).
Ameritech is the parent of the Company; Illinois Bell Telephone
Company; Indiana Bell Telephone Company, Incorporated; Michigan
Bell Telephone Company; and The Ohio Bell Telephone Company
(referred to collectively as the "Ameritech landline
communications subsidiaries"). The Company provides a wide
variety of communications services, including local exchange and
toll service, network access and telecommunication products in
Wisconsin.
See discussion of competition and significant new legislation
in Other Matters in Management's Discussion and Analysis of
Results of Operations.
Basis of Accounting - The financial statements have been
prepared in accordance with generally accepted accounting
principles (GAAP). In 1994, the Company discontinued following
accounting prescribed by Statement of Financial Accounting
Standards No. 71 (FAS 71), "Accounting for the Effects of Certain
Types of Regulation." (See Note I).
Use of Estimates - The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Transactions with Affiliates - The Company has various
agreements with affiliated companies. Below is a description of
the significant arrangements followed by a table of the amounts
involved.
1. Ameritech Services, Inc. (ASI) - ASI, an Ameritech-
controlled affiliate in which the Company has 10% ownership,
provides planning, development, management, procurement and
support services to all of the Ameritech landline communications
subsidiaries. The Company also provides certain services and
facilities to ASI.
1996 1995 1994
---- ---- ----
Purchases of
materials and charges
for services from ASI..... $ 249.8 $ 262.1 $ 250.8
Recovery of
costs for services
provided to ASI........... 10.5 18.0 17.7
2. Ameritech (the Company's parent) - Ameritech provides
various administrative, planning, financial and other services to
the Company. These services are billed to the Company at cost.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 13.6 $ 13.5 $ 11.6
20
<PAGE>
3. Ameritech Publishing, Inc. (API), a wholly owned subsidiary
of Ameritech doing business as Ameritech Advertising Services -
The Company has certain agreements with API under which the
Company furnishes to API certain services and data to be used by
API in producing and distributing classified and alphabetical
directories. In exchange, the Company receives a fixed subsidy
fee plus compensation for the services and data.
1996 1995 1994
---- ---- ----
Fees paid to the Company
by API.................... $ 28.7 $ 31.9 $ 40.8
Fees paid by the Company
to API.................... 0.3 0.3 4.9
4. Ameritech Information Systems, Inc. (AIS), a wholly owned
subsidiary of Ameritech - The Company reimburses AIS for costs
incurred by AIS in connection with the sale of network services by
AIS employees.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 11.5 $ 8.7 $ 7.2
5. Bell Communications Research, Inc. (Bellcore) - Bellcore
provides research and technical support to the Company. ASI has a
one-seventh ownership interest in Bellcore and bills the Company
for costs.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 8.4 $ 8.7 $ 11.0
Property, Plant and Equipment - Property, plant and equipment
are stated at original cost. The provision for depreciation is
based principally on the straight-line remaining life and the
straight-line equal life group methods of depreciation applied to
individual categories of property, plant and equipment with
similar characteristics. As a result of the discontinuation of
applying FAS 71 in 1994, the Company recognized shorter, more
economically realistic lives and increased its accumulated
depreciation balance by $424.7 million (See Note I).
The following is a summary of average lives (in years) before
and after the discontinuation of FAS 71:
Asset Category Before After
-------------- ------ -----
Central office equipment
Digital switching............... 17 7
Analog switching................ up to 4 obsolete
Circuit accounts................ 8-12 7
Copper and fiber cable
and wire facilities ........... 20-32 15
All other....................... various various
Generally, when depreciable plant is retired, the amount at
which such plant has been carried in property, plant and equipment
in service is charged to accumulated depreciation. The cost of
maintenance and repairs of plant is charged to expense.
Investments - The Company's investment in ASI (10% ownership
and $26.6 million as of December 31, 1996) is reflected in the
financial statements using the equity method of accounting. All
other investments are carried at cost. Derivative transactions,
if any, are executed by Ameritech. The Company had no derivative
transactions in 1996 or 1995.
Material and Supplies - Inventories of new and reusable
material and supplies are stated at the lower of cost or market
with cost generally determined on an average cost basis.
21
<PAGE>
Income Taxes - The Company is included in the federal income
tax return filed by Ameritech and its subsidiaries. The Company's
provision for income taxes is determined effectively on a separate
company basis.
Deferred tax assets and liabilities are determined at the end
of each period based on differences between the financial
statement bases of assets and liabilities and the tax bases of
those same assets and liabilities, using the currently enacted
statutory tax rates. Deferred income tax expense is measured by
the change in the net deferred income tax asset or liability
during the year.
The Company uses the deferral method of accounting for
investment tax credits whereby credits realized are being
amortized as reductions to tax expense over the life of the plant
that gave rise to the credits.
Temporary Cash Investments - Temporary cash investments are
stated at cost which approximates market value. The Company
considers all highly liquid, short-term investments with an
original maturity of three months or less to be cash equivalents.
Advertising Costs - Advertising costs are generally charged to
operations as incurred.
Revenue Recognition - Revenues are generally recognized as
services are provided or products are delivered to customers.
Certain local telephone revenues are billed in advance, resulting
in deferred revenues.
Short-Term Financing Arrangement - Ameritech provides short-
term financing and cash management services to its subsidiaries,
including the Company. Ameritech issues commercial paper and
notes and secures bank loans to fund the working capital
requirements of its subsidiaries and invests short-term excess
funds on their behalf. Interest charged to the Company by
Ameritech for financing was $5.9 million in 1996, $8.3 million in
1995 and $8.7 million in 1994. (See Note E).
B. Income Taxes
The components of income tax expense follow:
1996 1995 1994
---- ---- ----
Federal
Current........................ $ 102.8 $ 78.3 $ 66.3
Deferred, net................... 0.2 23.2 (18.7)
Investment tax credits, net..... (5.0) (5.7) (6.8)
--------- --------- ---------
Total............................. 98.0 95.8 40.8
--------- --------- ---------
State and Local
Current......................... 24.5 18.4 14.7
Deferred, net................... 4.1 8.7 2.0
--------- --------- ---------
Total........................... 28.6 27.1 16.7
--------- --------- ---------
Total income tax expense.......... $ 126.6 $ 122.9 $ 57.5
========= ========= =========
Total income taxes paid were $112.9 million, $107.2 million,
and $94.6 million in 1996, 1995 and 1994, respectively.
22
<PAGE>
The following is a reconciliation between the statutory federal
income tax rate for each of the past three years and the Company's
effective tax rate:
1996 1995 1994
---- ---- ----
Statutory federal income
tax rate......................... 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit.................. 5.8 5.5 6.6
Reduction in tax expense due to
amortization of investment tax
credits........................ (1.0) (1.2) (4.1)
Benefit of tax rate differential applied
under FAS 71 applied to reversing
temporary differences............ - - (2.7)
Other............................. (0.3) (0.7) 0.1
--------- --------- ---------
Effective income tax rate......... 39.5% 38.6% 34.9%
========= ========= =========
As of December 31, 1996 and 1995 the components of long-term
accumulated deferred income taxes were as follows:
1996 1995
---- ----
Deferred tax assets
Postretirement and
postemployment benefits....... $ 109.0 $ 104.4
Other.......................... 18.6 19.8
-------- --------
127.6 124.2
-------- --------
Deferred tax liabilities
Accelerated depreciation....... 135.4 139.5
Prepaid pension cost........... 35.4 36.0
Other.......................... 22.0 7.7
-------- --------
192.8 183.2
-------- --------
Net deferred tax liability ..... $ 65.2 $ 59.0
======== ========
Deferred income taxes in current assets and liabilities relate
primarily to temporary differences resulting from vacation pay,
uncollectibles and work force restructuring. The Company had
immaterial valuation allowances against certain deferred tax
assets as of December 31, 1996 and 1995.
23
<PAGE>
C. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
1996 1995
---- ----
Land............................ $ 16.5 $ 17.0
Buildings....................... 330.2 323.9
Central office equipment........ 1,061.3 1,011.1
Cable, wiring and conduit....... 1,330.3 1,265.7
Other........................... 166.4 174.3
-------- --------
2,904.7 2,792.0
Under construction.............. 10.2 23.9
-------- --------
2,914.9 2,815.9
Less, accumulated depreciation.. 1,739.2 1,649.0
-------- --------
$1,175.7 $1,166.9
======== ========
Depreciation expense on property, plant and equipment was
$178.1 million, $171.2 million and $185.8 million in 1996, 1995
and 1994, respectively.
D. Employee Benefit Plans
Pension Plans - Ameritech maintains noncontributory defined
benefit pension plans covering substantially all of the Company's
employees and death benefit plans for nonmanagement employees.
Pension credits are allocated to subsidiaries based upon the
percentage of compensation for the management plan and per
employee for the nonmanagement plan. The Company's funding policy
is to contribute annually an amount up to the maximum amount that
can be deducted for federal income tax purposes. However, due to
the funded status of the plans, no contributions have been made
for the years reported below. The following data provides
information on the Company's credits for the Ameritech plans:
1996 1995 1994
---- ---- ----
Pension credits............ $ (12.1) $ (9.9) $ (17.5)
Current year credits
as a percent of
salaries and wages........ (6.9)% (5.5) (8.3)%
Pension expense was determined using the projected unit credit
actuarial method. The resulting pension credits are primarily
attributable to favorable investment performance and the funded
status of the plans.
Certain disclosures are required to be made of the components
of pension credits and the funded status of the plans, including
the actuarial present value of accumulated plan benefits,
accumulated projected benefit obligation and the fair value of
plan assets. Such disclosures are not presented for the Company
because the structure of the Ameritech plans does not permit the
plans' data to be readily disaggregated.
The assets of the Ameritech plans consist principally of debt
and equity securities, fixed income investments and real estate.
As of December 31, 1996, the fair value of plan assets available
for plan benefits exceeded the projected benefit obligation
(calculated using a discount rate of 7.5% and 6.9% as of December
31, 1996 and 1995, respectively). The assumed long-term rate of
return on plan assets used in determining pension credits (or
income) was 8.0% for 1996 and 7.25% for 1995 and 1994. The
assumed increase in future compensation, also used in the
determination of the projected benefit obligation, was 4.2% in
1996 and 4.5% in 1995.
24
<PAGE>
Postretirement Benefits Other Than Pensions - Ameritech
sponsors health care and life insurance plans which provide
noncontributory postretirement benefits to substantially all of
the Company's retirees and their dependents. Ameritech accrues
the cost of postretirement benefits granted to employees as
expense over the period in which the employee renders service and
becomes eligible to receive benefits. The cost of postretirement
health care and life insurance benefits for current and future
retirees is recognized as determined under the projected unit
credit actuarial method. Ameritech allocates its retiree health
care cost on a per participant basis, whereas group life insurance
is allocated based on compensation levels.
Ameritech has provided for part of the cost of these plans by
making contributions for health care benefits to voluntary
employee benefit association trust funds (VEBAs) and maintains
retirement funding accounts (RFAs) to provide life insurance
benefits. Ameritech intends to continue to fund the nonmanagement
VEBA. Funding of the management VEBA was suspended effective in
1994. The nonmanagement VEBA and the RFAs earn income without
tax. Plan assets consist principally of corporate securities and
bonds.
Certain disclosures are required as to the components of
postretirement benefit costs and the funded status of the plans.
Such disclosures are not presented for the Company as the
structure of the Ameritech plans does not permit the data to be
readily disaggregated. However, the Company has been advised by
Ameritech as to the following assumptions used in determining FAS
106 costs. As of December 31, 1996, the accumulated
postretirement benefit obligation exceeded the fair value of plan
assets available for plan benefits. The assumed discount rate
used to measure the accumulated postretirement benefit obligation
was 7.5% as of December 31, 1996 and 6.9% as of December 31, 1995.
The assumed rate of increase in future compensation levels was
4.2% in 1996 and 4.5% in 1995. The expected long-term rate of
return on plan assets was 8.0% in 1996 and 7.25% in 1995 and 1994
on VEBAs, and 8.0% in 1996, 1995 and 1994 on RFAs. The assumed
health care cost trend rate in 1996 was 8.4% and 8.8% in 1995, and
is assumed to decrease gradually to 4.0% in 2007 and remain at
that level. The assumed health care cost trend rate is 8.0% for
1997. The health care cost trend rate has a significant effect on
the amounts reported for costs each year, as well as on the
accumulated postretirement benefit obligation. Specifically,
increasing the assumed health care cost trend rate by one
percentage point in each year would have increased the 1996 annual
expense by approximately 15.6%.
Postretirement benefit cost under FAS 106 was $26.7 million in
1996, $24.5 million in 1995 and $24.4 million in 1994.
As of December 31, 1996, the Company had approximately 4,900
retirees eligible to receive health care and group life insurance
benefits.
Work Force and Other Restructuring - During March 1994,
Ameritech announced a plan to reduce its existing nonmanagement
work force. As of December 31, 1995, 1,113 employees had left the
company as a result of this restructuring. See additional
discussion in Management's Discussion and Analysis of Results of
Operations.
As a result of this restructuring, a pretax charge of $71.8
million, or $42.9 million after-tax, was recorded in 1994. In
1995, a credit of $24.1 million, or $14.4 million after-tax, was
recorded resulting primarily from settlement gains from lump-sum
pension payments to former employees, net of additional
restructuring charges of $3.0 million recorded in the fourth
quarter of 1995, associated with increased force costs related to
the restructuring started in 1994, as well as planned work force
reductions due to consolidation of Ameritech's data centers. The
cumulative gross program cost through December 31, 1995 totaled
$110.1 million, partially offset by settlement gains of $62.4
million for an aggregate pretax net program cost of $47.7 million,
or $28.5 million after-tax.
Management Work Force Reductions - Effective January 1, 1995,
management employees who are asked to leave the Company will
receive a severance payment under the Management Separation
Benefit Program (MSBP). The Company accounts for this benefit in
accordance with FAS 112, "Employers' Accounting for Postemployment
25
<PAGE>
Benefits," accruing the separation cost when incurred. The number
of employees leaving the Company under the MSBP and the
predecessor plan was 23 in 1996, 20 in 1995 and 117 in 1994.
Settlement gains result from the payment of lump-sum
distributions from the pension plan to former employees and are
recorded as a credit to other operating expense. Settlement
gains, net of termination costs, under the plans were $2.0
million, $4.1 million and $5.6 million in 1996, 1995 and 1994,
respectively. The involuntary plans are funded from Company
operations and required cash payments of $0.6 million, $0.5
million and $4.1 million in 1996, 1995 and 1994, respectively.
E. Debt Maturing Within One Year
Debt maturing within one year is included as debt in the
computation of debt ratios and consisted of the following as of
December 31:
1996 1995
---- ----
Notes payable - Ameritech....... $ 19.2 $ 110.8
Long-term debt maturing
within one year................ - 0.1
-------- --------
Total........................... $ 19.2 $ 110.9
======== ========
Weighted average interest
rate of notes payable,
year-end....................... 5.4% 5.8%
======== ========
F. Long-Term Debt
Long-term debt consists principally of mortgage bonds and
debentures issued by the Company.
The following table sets forth interest rates, scheduled
maturities and other information on long-term debt outstanding as
of December 31:
1996 1995
---- ----
Forty year 4 3/8% debentures,
due May 1, 2002 ...................... $ 20.0 $ 20.0
Thirty-six year 6 1/4% debentures,
due August 1, 2004...................... 50.0 50.0
Thirty-six year 7 1/4% debentures,
due February 1, 2007........................ 90.0 90.0
Thirty-one year 6 3/4% debentures,
due August 15, 2024 .................... 150.0 150.0
Thirty year 6.35% debentures,
due December 1, 2026..................... 125.0 -
--------- ---------
435.0 310.0
Capital lease obligations................. - 0.1
Other..................................... - (1.0)
Unamortized discount, net................. (5.0) (3.3)
--------- ---------
Total..................................... $ 430.0 $ 305.8
========= =========
In November 1996, the Company issued $125 million of 6.35%
noncallable debentures due December 1, 2026. These debentures
have a provision, which allows the holders to require the Company
to redeem the debentures on December 1, 2006, ten years from the
date of issue. This provision, also known as a "put provision",
is not operable until 2006, and if not redeemed at that date, they
are not redeemable until 2026. The proceeds from this issue were
used to repay outstanding balances in the Ameritech short-term
funding pool. Following this debt issuance, the
26
<PAGE>
Company had $75 million remaining available for issuance of
unsecured debt securities under a registration statement filed
with the Securities and Exchange Commission.
Over the next five years no debentures are scheduled to be
retired.
G. Lease Commitments
The Company leases certain facilities and equipment used in its
operations under operating leases. Rental expense under operating
leases was $14.3 million, $13.9 million and $13.2 million for
1996, 1995, and 1994, respectively. As of December 31, 1996, the
aggregate minimum rental commitments under noncancelable leases
were approximately as follows:
Years Operating
----- ---------
1997 ........................... $ 2.9
1998 ........................... 2.8
1999 ........................... 2.4
2000 ........................... 1.4
2001 ........................... 1.3
Thereafter ..................... 3.0
-------
Total minimum lease commitments. $ 13.8
=======
H. Financial Instruments
The following table presents the estimated fair value of the
Company's financial instruments as of December 31, 1996 and 1995:
1996
-------------
Carrying Fair
Value Value
----- -----
Cash and temporary cash
investments.................... $ 0.1 $ 0.1
Debt ........................... 462.8 432.6
Long-term payable to ASI
(for postretirement benefits).. 7.7 7.7
Other assets.................... 3.6 3.6
Other liabilities............... 0.6 0.6
1995
-------------
Carrying Fair
Value Value
----- -----
Cash and temporary cash
investments.................... $ 0.1 $ 0.1
Debt ........................... 429.2 429.2
Long-term payable to ASI
(for postretirement benefits).. 8.3 8.3
Other assets.................... 3.0 3.0
Other liabilities............... 1.1 1.1
The following methods and assumptions were used to estimate the
fair value of financial instruments:
Cash and temporary cash investments - The carrying value
approximates fair value because of the short-term maturity of
these instruments.
27
<PAGE>
Debt - The carrying amount (including accrued interest) of debt
maturing within one year approximates fair value because of the
short-term maturities involved. The fair value of long-term debt
was estimated based on the year-end quoted market price for the
same or similar issues.
Other assets and liabilities - These financial instruments
consist primarily of other investments and customer deposits. The
fair values of these items are based on expected cash flows or, if
available, quoted market prices.
Long-term payable to ASI (for postretirement benefits) -
Carrying value approximates fair value.
I. Discontinuation of Regulatory Accounting - FAS 71
In 1994, having achieved price regulation and recognizing
increased competition, the Company concluded that GAAP prescribed
by FAS 71 was no longer appropriate.
As a result of discontinuing the application of FAS 71, the
Company recorded an extraordinary noncash after-tax charge of
$240.4 million in 1994. The following table is a summary of the
extraordinary charge.
Pretax After-Tax
------ ---------
Increase to the accumulated
depreciation balance............. $ 424.7 $ 254.2
Elimination of other
net regulatory assets............ 6.8 4.0
Tax-related net regulatory
liabilities...................... - (13.4)
Accelerated amortization of
tax credits...................... - (4.4)
-------- --------
$ 431.5 $ 240.4
======== ========
The adjustment of $424.7 million to net property, plant and
equipment was necessary because estimated useful lives and
depreciation methods historically prescribed by regulators did not
keep pace with technological changes and differed significantly
from those used by nonregulated enterprises. Plant balances were
adjusted by increasing the accumulated depreciation balance. The
necessary adjustment was determined by a discounted cash flow
analysis which considered technological changes, capital
requirements and estimated impacts of future competition. To
corroborate this study, a depreciation reserve study was also
performed that identified inadequate accumulated depreciation
levels by individual asset categories. The Company believes these
levels developed over the years as a result of the systematic
underdepreciation of assets resulting from the regulatory process.
When adjusting its net property, plant and equipment, the
Company gave effect to shorter, more economically realistic lives,
as previously outlined in Note A.
The discontinuation of FAS 71 also required the Company to
eliminate from its balance sheet the effects of any actions of
regulators that had been recognized as assets and liabilities
pursuant to FAS 71, but would not have been recognized as assets
and liabilities by nonregulated enterprises. The elimination of
other net regulatory assets primarily related to certain deferred
vacation pay, debt financing costs and certain deferred assets.
Additionally, at the time the Company discontinued the
application of FAS 71, the income tax-related regulatory assets
and liabilities were eliminated and deferred tax balances adjusted
to reflect application of FAS 109, "Accounting for Income Taxes",
consistent with other nonregulated enterprises. As asset lives
were shortened, the related unamortized investment tax credits
deemed already earned were credited to income.
28
<PAGE>
J. Stock Options
During 1995, the Financial Accounting Standards Board issued
FAS 123, "Accounting for Stock-Based Compensation." This
pronouncement requires that Ameritech calculate the value of stock
options at the date of grant using an option pricing model.
Ameritech elected the "pro forma, disclosure only" option
permitted under FAS 123, instead of recording a charge to
operations. Certain Company management personnel receive
Ameritech stock options; however, the portion of the option
programs allocable to Company employees is not significant.
K. Additional Financial Information
As of December 31,
------------------
1996 1995
---- ----
Balance Sheets
Other current liabilities:
Accrued payroll....................... $ 5.7 $ 7.6
Compensated absences.................. 14.7 14.8
Accrued taxes......................... (8.5) (26.0)
Income taxes deferred one year ....... (7.0) -
Advance billings and customer
deposits............................ 31.0 28.1
Dividend payable...................... - 46.7
Accrued interest...................... 9.5 9.3
Other................................. 6.9 4.6
--------- ---------
Total................................ $ 52.3 $ 85.1
========= =========
Advertising and promotion costs were $13.2 million, $15.9
million and $13.5 million in 1996, 1995 and 1994, respectively.
Interest paid was $28.6 million, $29.8 million and $22.4 million
in 1996, 1995 and 1994, respectively.
Revenues from AT&T, consisting principally of network access
and billing and collection services revenues, comprised
approximately 10% and 11% of total revenues in 1995 and 1994,
respectively. No other customer accounted for more than 10% of
total revenues in those years. No customer accounted for more
than 10% of revenues in 1996.
L. Other Income, Net
The components of other income, net were as follows:
1996 1995 1994
---- ---- ----
Equity in earnings of ASI.. $ 3.9 $ 3.6 $ 5.0
Other, net................. (1.5) (1.6) (2.8)
--------- --------- ---------
Total.................... $ 2.4 $ 2.0 $ 2.2
========= ========= =========
29
<PAGE>
M. Quarterly Financial Information (Unaudited)
Operating Net
Revenues Income Income
-------- ------ ------
1996
----
First Quarter............. $ 296.7 $ 86.9 $ 50.1
Second Quarter............ 305.1 90.1 53.2
Third Quarter............. 299.7 82.9 48.8
Fourth Quarter............ 299.8 86.7 42.2
------- ------- -------
1996 Total.............. $1,201.3 $ 346.6 $ 194.3
======= ======= =======
1995
----
First Quarter............. $ 270.8 $ 99.0 $ 55.1
Second Quarter............ 280.6 77.9 43.1
Third Quarter............. 287.9 88.6 49.8
Fourth Quarter............ 292.9 80.4 47.5
------- ------- -------
1995 Total.............. $1,132.2 $ 345.9 $ 195.5
======= ======= =======
Total nonmanagement work force restructuring credits in 1995
were $24.1 million or $14.4 million after-tax as follows: $26.4
million or $15.8 million after-tax in the first quarter, $0.2
million or $0.1 million after-tax in the third quarter and a net
charge of $2.5 million or $1.5 million after-tax in the fourth
quarter. The fourth quarter restructuring charge includes costs
related to the restructuring started in 1994 and charges relating
to the consolidation of Ameritech's data centers as discussed more
fully in Note D.
All adjustments necessary for a fair statement of results for
each period have been included.
N. Calculation of Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges of the Company for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 was
10.52, 10.01, 5.87, 6.73 and 4.55, respectively.
For the purpose of calculating this ratio, (i) earnings have
been calculated by adding to income before interest expense and
extraordinary item, the amount of related taxes on income, the
portion of rentals representative of the interest factor and
undistributed equity earnings, (ii) the Company considers one-
third of rental expense to be the amount representing return on
capital, and (iii) fixed charges comprise total interest expense,
capitalized interest and such portion of rentals.
30
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
No changes in or disagreements with accountants on any matter
of accounting principles or practices, financial statement
disclosure or auditing scope or procedure occurred during the
period covered by this annual report.
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of the report:
(1) Financial Statements:
Page
----
Selected Financial and Operating Data..................... 9
Report of Independent Public Accountants.................. 16
Statements:
Statements of Income and Accumulated Deficit............ 17
Balance Sheets.......................................... 18
Statements of Cash Flows................................ 19
Notes to Financial Statements........................... 20
(2) Financial Statement Schedule:
II Valuation and Qualifying Accounts..................... 35`
Financial statement schedules other than the one listed above
have been omitted because the required information is contained
in the financial statements and notes thereto, or because such
schedules are not required or applicable.
(3) Exhibits
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
------
3a - Articles of Association of the Company as amended March
27, 1990 (Exhibit 3a to Form 10-K for 1989, File No. 1-
6589).
3b - By-laws of the Company, as amended March 27, 1990
(Exhibit 3b to Form 10-K for 1989, File No. 1-6589).
4 - No instrument which defines the rights of holders of long
and intermediate term debt of the Company is filed
herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the
Company hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
10 - Reorganization and Divestiture Agreement between American
Telephone and Telegraph Company, American Information
Technologies Corporation and Affiliates, dated as of
November 1, 1983 (Exhibit 10a to Form 10-K for 1983 for
American Information Technologies Corporation, File No. 1-
8612).
12 - Computation of ratio of earnings to fixed charges for the
five years ended December 31, 1996.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule for the year ended December 31,
1996.
32
<PAGE>
(b) Reports on Form 8-K:
No Form 8-K was filed by the registrant during the fourth quarter
of 1996.
33
<PAGE>
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.
WISCONSIN BELL, INC.
/s/ Ronald G. Pippin
-----------------------------
Ronald G. Pippin,
Comptroller
March 11, 1997
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Principal Executive Officer:
/s/ Bronson J. Haase
-----------------------------
Bronson J. Haase,
President
Principal Financial and Accounting Officer:
/s/ Ronald G. Pippin
-----------------------------
Ronald G. Pippin,
Comptroller
Ameritech Corporation:
/s/ Barry K. Allen
-----------------------------
Barry K. Allen,
Executive Vice President,
Consumer and Business Services
The sole shareowner of the registrant, which is
a statutory close corporation managed by the
shareowner rather than by a board of directors.
March 11, 1997
34
<PAGE>
WISCONSIN BELL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(Dollars in Millions)
COL. A COL. B COL. C COL. D COL. E
------ ------ ----------------- ------ ------
Additions
-----------------
Balance at Charged Charged Balance
Beginning to to Other at End of
of Period Expense (a) Accounts (b) Deductions (c) Period
--------- ---------- ----------- ------------- ------
Year 1996........$ 10.9 $ 30.6 $ 50.8 $ 67.0 $ 25.3
Year 1995........ 11.5 15.7 25.6 41.9 10.9
Year 1994........ 9.2 12.7 21.7 32.1 11.5
----------------------
(a)Excludes direct charges and credits to expense on the statements of
income and accumulated deficit related to interexchange carrier
receivables.
(b)Includes principally amounts related to the interexchange carrier
receivables which are being billed by the Company and amounts
previously written off which were credited directly to this account
when recovered, as well as the reclassification in 1996 of $4.6
million from current liabilities to more accurately state the
allowance.
(c)Amounts written off as uncollectible.
35
Exhibit 12
WISCONSIN BELL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
1. EARNINGS
a) Income before interest expense,
income tax, extraordinary
charge, cumulative effect
of change in accounting
principles and undistributed
equity earnings (2)..... $ 348.8 $ 348.8 $ 192.4 $ 242.2 $ 208.3
b) Portion of rental expense
representative of the
interest factor (1)..... 4.8 4.6 4.4 4.7 4.9
-------- -------- -------- -------- --------
Total 1(a) and 1(b).... $ 353.6 $ 353.4 $ 196.8 $ 246.9 $ 213.2
======== ======== ======== ======== ========
2. FIXED CHARGES
a) Total interest expense
including capital
lease obligations....... $ 28.1 $ 29.5 $ 28.5 $ 31.6 $ 41.6
b) Capitalized interest ... 0.7 1.2 0.6 0.4 0.4
c) Portion of rental expense
representative of the
interest factor (1)..... 4.8 4.6 4.4 4.7 4.9
-------- -------- -------- -------- --------
Total 2(a) through 2(c). $ 33.6 $ 35.3 $ 33.5 $ 36.7 $ 46.9
======== ======== ======== ======== ========
RATIO OF EARNINGS TO
FIXED CHARGES................ 10.52 10.01 5.87 6.73 4.55
======== ======== ======== ======== ========
(1) One-third of rental expense is considered to be the amount representing
return on capital.
(2) The results for 1995 reflect a $24.1 million pretax credit primarily
from settlement gains resulting from lump sum pension payments from the
pension plan to former employees who left the business in the
nonmanagement work force restructuring, partially offset by increased
force costs related to the restructuring started in 1994, as well as a
write-down of certain data processing equipment to net realizable value.
Results for 1994 reflect a $71.8 million pretax charge associated with
the nonmanagement work force restructuring.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated January 13, 1997,
included in this Form 10-K for the year ended December 31, 1996, into
Wisconsin Bell, Inc.'s previously filed Registration Statement File No.
33-53510.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
WISCONSIN BELL, INC.'S DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 100
<SECURITIES> 0<F1>
<RECEIVABLES> 274,500
<ALLOWANCES> (25,300)
<INVENTORY> 2,900
<CURRENT-ASSETS> 259,600
<PP&E> 2,914,900
<DEPRECIATION> 1,739,200
<TOTAL-ASSETS> 1,568,700
<CURRENT-LIABILITIES> 213,900
<BONDS> 430,000
0
0
<COMMON> 639,200
<OTHER-SE> (103,800)
<TOTAL-LIABILITY-AND-EQUITY> 1,568,700
<SALES> 0<F2>
<TOTAL-REVENUES> 1,201,300
<CGS> 0<F3>
<TOTAL-COSTS> 854,700
<OTHER-EXPENSES> (2,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,100
<INCOME-PRETAX> 320,900
<INCOME-TAX> 126,600
<INCOME-CONTINUING> 194,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194,300
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>SECURITIES ARE NOT MATERIAL AND THEREFORE HAVE NOT BEEN STATED SEPARATELY
IN THE FINANCIAL STATEMENTS. THIS AMOUNT IS INCLUDED IN THE CASH TAG.
<F2>NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL REVENUES AND
THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL STATEMENTS
PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS INCLUDED IN THE
"TOTAL REVENUES" TAG.
<F3>COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICE AND
PRODUCTS IN THE FINANCIAL STATEMENTS AND THE "TOTAL COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
