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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-2222
ILLINOIS BELL TELEPHONE COMPANY
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AN ILLINOIS CORPORATION IRS EMPLOYER
NO. 36-1253600
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225 WEST RANDOLPH STREET, CHICAGO, ILLINOIS 60606
TELEPHONE NUMBER 312 727-9411
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(SEE ATTACHED SCHEDULE A)
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 INSTRUCTION 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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SCHEDULE A
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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THIRTY-FIVE YEAR 7 5/8% FIRST MORTGAGE BONDS, SERIES K,
DUE APRIL 1, 2006 NEW YORK STOCK EXCHANGE
THIRTY-ONE YEAR 7 1/4% DEBENTURES, DUE MARCH 15, 2024 MIDWEST STOCK EXCHANGE
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TABLE OF CONTENTS
PART I
DESCRIPTION
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ITEM PAGE
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1. Business................................................................... 1
2. Properties................................................................. 8
3. Legal Proceedings.......................................................... 9
4. Submission of Matters to a Vote of Security Holders (Omitted pursuant to
General Instruction J(2)).
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PART II
DESCRIPTION
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5. Market for Registrant's Common Equity and Related Stockholder Matters
(Inapplicable).
6. Selected Financial and Operating Data...................................... 10
7. Management's Discussion and Analysis of Results of Operations (Abbreviated
pursuant to General Instruction J(2)).................................... 11
8. Financial Statements and Supplementary Data................................ 16
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 32
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PART III
DESCRIPTION
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10. Directors and Executive Officers of 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)).
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PART IV
DESCRIPTION
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14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 32
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PART I
ITEM 1. BUSINESS.
GENERAL
Illinois Bell Telephone Company ("the Company") is incorporated under the
laws of the State of Illinois and has its principal office at 225 West Randolph
Street, Chicago, Illinois 60606 (telephone number 312-727-9411). The Company is
a wholly-owned subsidiary of Ameritech Corporation ("Ameritech"), a Delaware
corporation. Ameritech is the parent of the Company, Indiana Bell Telephone
Company, Incorporated, Michigan Bell Telephone Company, The Ohio Bell Telephone
Company and Wisconsin Bell, Inc. (the "landline telephone companies"), as well
as several other communications businesses, and has its principal executive
offices at 30 South Wacker Drive, Chicago, Illinois 60606 (telephone number
312-750-5000). The Company is managed by its sole shareholder rather than a
Board of Directors as permitted by Illinois law.
In 1993, Ameritech restructured its landline telephone companies and two
other related businesses into a structure of customer-specific business units
supported by a single, regionally coordinated network unit. The five landline
companies continue to function as legal entities, owning Bell company assets in
each state and continue to be regulated by the individual state public utility
commissions. Products and services are now marketed under a single common brand
identity, "Ameritech," rather than using the "Bell" name. While the Ameritech
logo is now used to identify all the Ameritech companies, the Company is
sometimes regionally identified as Ameritech Illinois.
The Company is engaged in the business of furnishing a wide variety of
advanced telecommunications services in Illinois, including local exchange and
toll service and network access services. In accordance with the Consent Decree
and resulting Plan of Reorganization ("Plan") described on page 2, the Company
provides two basic types of telecommunications services within specified
geographical areas termed Local Access and Transport Areas ("LATAs"), which are
generally centered on a city or other identifiable community of interest. The
first of these services is the transporting of telecommunications traffic
between telephones and other equipment on customers' premises located within the
same LATA ("intraLATA service"), which can include toll service as well as local
service. The second service is providing exchange access service, which links a
customer's telephone or other equipment to the network of transmission
facilities of interexchange carriers which provide telecommunications service
between LATAs ("interLATA service").
About 80% of the population and 20% of the area of Illinois is served by the
Company. The remainder of the state is served by other local telecommunications
companies. Other communications services offered by the Company include data
transmission, transmission of radio and television programs and private line
voice and data services.
The following table sets forth for the Company the number of customer lines
in service at the end of each year.
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THOUSANDS
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1993 1992 1991 1990 1989
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Customer Lines in Service............................. 5,763 5,586 5,460 5,360 5,232
</TABLE>
The Company has an agreement with: Ameritech Publishing, Inc., an Ameritech
business unit doing business as "Ameritech Advertising Services"; Ameritech
Publishing of Illinois, Inc. ("API-IL"); The Reuben H. Donnelley Corporation
("Donnelley"); and AM-DON, a partnership between Donnelley and API-IL. Effective
January 1, 1991, the obligations of the individual parties with respect to
publication of classified directories were assigned to the partnership, which
does business as DonTech. Under this agreement, DonTech publishes, prints and
delivers classified directories and the Company provides listings to DonTech and
performs the billing and collection services for the directories as an agent for
the partnership. In consideration for the operations performed by the
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Company, the partnership pays it a guaranteed amount each year plus an increment
for growth and reimburses the Company for various expenses it incurs in
connection with its publication of alphabetical directories.
Ameritech Services, Inc. ("ASI") is a company jointly owned by the Company
and the other Ameritech landline telephone companies. ASI provides to those
companies human resources, technical, marketing, regulatory planning and real
estate asset management services, purchasing and material management support, as
well as labor contract bargaining oversight and coordination. ASI acts as a
shared resource for the Ameritech subsidiaries providing operational support for
the landline telephone companies and integrated communications and information
systems for all the business units.
Ameritech Information Systems, Inc., a subsidiary of Ameritech, sells,
installs and maintains business customer premises equipment and sells network
and central office-based services provided by the Company and the other four
landline telephone companies. It also provides expanded marketing, product
support and technical design resources to large business customers in the
Ameritech region.
In 1993, about 91% of the total operating revenues of the Company were from
telecommunications services and the remainder principally from billing and
collection services, rents, directory advertising and other miscellaneous
nonregulated operations. About 74% of the revenues from communications services
were attributable to intrastate operations.
CAPITAL EXPENDITURES
Capital expenditures represent the single largest use of Company funds. The
Company has been making and expects to continue to make large capital
expenditures to meet the demand for telecommunications services and to further
improve such services. The total investment in telecommunications plant
increased from about $7,036,000,000 at December 31, 1988, to about
$8,224,000,000 at December 31, 1993, after giving effect to retirements but
before deducting accumulated depreciation at either date. Capital expenditures
of the Company since January 1, 1989 were approximately as follows:
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1989................. $588,000,000 1992..................... $579,000,000
1990................. $549,000,000 1993..................... $537,000,000
1991................. $565,000,000
</TABLE>
Expanding on the aggressive deployment plan it began in 1992, in January
1994, Ameritech unveiled a multi-billion dollar plan for a digital network to
deliver video services. Ameritech is launching a digital video network upgrade
that by the end of the decade will enable six million customers in its region to
access interactive information and entertainment services, as well as
traditional cable TV services, from their homes, schools, offices, libraries and
hospitals. The Company, for its part in the network upgrade has made an initial
filing with the Federal Communications Commission ("FCC") seeking approval
of the program. The filing reflects capital expenditures of approximately
$160,000,000 over the next three years.
The Company may also, depending on market demand make additional capital
expenditures under the digital video network upgrade program. The Company
anticipates that its capital expenditures for the program will be funded without
increasing its recent historical level of capital expenditures. Capital
expenditures are expected to be about $441,000,000 in 1994. This amount excludes
any capital expenditures that may occur in 1994 related to the above described
video network upgrade program.
CONSENT DECREE AND LINE OF BUSINESS RESTRICTIONS
On August 24, 1982, the United States District Court for the District of
Columbia ("Court") approved and entered a consent decree entitled the
"Modification of Final Judgment" ("Consent Decree"), which arose out of
antitrust litigation brought by the Department of Justice ("DOJ"), and which
required American Telephone and Telegraph Company ("AT&T") to divest itself of
ownership
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of those portions of its wholly-owned Bell operating communications company
subsidiaries ("Bell Companies") that related to exchange telecommunications,
exchange access and printed directory advertising, as well as AT&T's cellular
mobile communications business. On August 5, 1983, the Court approved a Plan of
Reorganization ("Plan") outlining the method by which AT&T would comply with the
Consent Decree. Pursuant to the Consent Decree and the Plan, effective January
1, 1984, AT&T divested itself of, by transferring to Ameritech, one of the seven
regional holding companies ("RHCs") resulting from divestiture, its ownership of
the exchange telecommunications, exchange access and printed directory
advertising portions of the Ameritech landline telephone companies, as well as
its regional cellular mobile communications business.
The Consent Decree, as originally approved by the Court in 1982, provided
that the Company (as well as the other Bell Companies) could not, directly or
through an affiliated enterprise, provide interLATA telecommunications services
or information services, manufacture or provide telecommunications products or
provide any product or service, except exchange telecommunications and exchange
access service, that is not a natural monopoly service actually regulated by
tariff. The Consent Decree allowed the Company and the other Bell Companies to
provide printed directory advertising and to provide, but not manufacture,
customer premises equipment.
The Consent Decree provided that the Court could grant a waiver to a Bell
Company or its affiliates upon a showing to the Court that there is no
substantial possibility that the Bell Company could use its monopoly power to
impede competition in the market it seeks to enter. The Court has, from time to
time, granted waivers to the Company and other Bell Companies to engage in
various activities.
The Court's order approving the Consent Decree provided for periodic reviews
of the restrictions imposed by it. Following the first triennial review, in
decisions handed down in September 1987 and March 1988, the Court continued the
prohibitions against Bell Company manufacturing of telecommunications products
and provision of interLATA services. The rulings allowed limited provision of
information services by transmission of information and provision of information
gateways, but excluded generation or manipulation of information content. In
addition, the rulings eliminated the need for a waiver for entry into
non-telephone related businesses.
In April 1990, a Federal appeals court decision affirmed the Court's
decision continuing the restriction on Bell Company entry into interLATA
services and the manufacture of telecommunications equipment, but directed the
Court to review its ruling that restricted RHC involvement in the information
services business and to determine whether removal of the information services
restriction would be in the public interest. In July 1991, the Court lifted the
information services ban but stayed the effect of the decision pending outcome
of the appeals process. Soon after, the stay was lifted on appeal and in July
1993, the U.S. Court of Appeals unanimously upheld the Court's order allowing
the Bell Companies to produce and package information for sale across business
and home phone lines. In November 1993, the U.S. Supreme Court declined to
review the lower court ruling.
Members of Congress and the White House are intensifying efforts to enact
legislative reform of telecommunications policy in order to stimulate the
development of a modern national information infrastructure to bring the
benefits of advanced communications and information services to the American
people.
INTRASTATE RATES AND REGULATION
The Company, in providing communications services, is subject to regulation
by the Illinois Commerce Commission ("ICC") with respect to intrastate rates and
services, depreciation rates (for intrastate services), issuance of securities
and other matters. Unless otherwise indicated, the amounts of the changes in
revenues resulting from changes in intrastate rates referred to below are stated
on an annual basis and are estimates without adjustment for subsequent changes
in volumes of business.
The principal changes in intrastate rates authorized since January 1, 1989,
were net decreases of $15,050,000 in 1989 and $49,567,000 in 1990, net increases
of $3,522,000 in 1991 and net decreases of $2,593,000 and $6,023,000 in 1992 and
1993, respectively. The decreases in 1989 included $3,087,000
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in one-time credits and $15,125,000 in on-going rate reductions relating to a
true-up associated with the detariffing of building cable. A decrease in 1990 of
$48,433,000 was due to on-going rate reductions stemming from the November 9,
1989 Rate Case Order. Rate decreases in 1991 included a $6,929,000 decrease
in business usage rates due to increases in volume discounts.
The business rate decrease partially offset a $7,438,000 increase in
residence network access line charges that was part of the 1989 rate case.
In 1992, the Company reduced public coin rates by $1,752,000 to reflect the
replacement of municipal message taxes with excise taxes and decreased
digital private line services by $1,800,000. Rate decreases in 1993
included a $1,000,000 decrease due to the restructure of
Optinet Service, a decrease of $4,000,000 due to the switched transport
restructure and a decrease of $2,200,000 due to the restructure of IntraMSA 800
nondedicated service.
In 1988, the Company entered into negotiations with the Commission staff
that resulted in an agreement for temporary rate reductions of $85,000,000
annually to reflect the effect of the Tax Reform Act of 1986. The Company's
proposal for a permanent rate reduction of $35,000,000 annually was filed on
December 13, 1988. Included in this plan were several proposals to bring rates
into closer alignment with costs, i.e., increases for most residence customers'
monthly access line charges, modification of the "pay-per-call" rate plan in the
Chicago Market Service Area ("MSA") and extension of that plan to other MSAs and
elimination or reduction of some subsidies to residence customers by business
customers. This plan also included introduction of an incentive regulation plan.
The ICC issued an order November 9, 1989 requiring the Company to reduce its
rates by $45,383,000, in addition to the $85,000,000 temporary rate reduction,
which was made permanent. The Commission approved the structural rate changes
proposed by the Company, including the Company's plan to expand its mandatory
usage-sensitive service throughout most of the state, to increase monthly
residence access line charges over a three year period, to increase usage volume
discounts and to reduce business rates for touch-tone and custom calling
services. The ICC also approved a modified regulatory structure in place of the
incentive regulation plan proposed by the Company. Under this structure, the
Company's rates were set to produce earnings at a 12.76% return on equity with
earnings above that level shared with customers via refunds.
The ICC's rate order was appealed to the Appellate Court of Illinois. The
Court overturned the modified regulatory plan on the grounds that the
earnings-sharing provisions of the plan constituted retroactive ratemaking. The
prescribed rate of return, because it was inextricably linked to the modified
regulatory plan, was also reversed. In addition, the Court directed the
Commission to arrive at a service cost methodology which apportions the cost of
common expenses among competitive and noncompetitive services. These issues were
remanded to the Commission on December 5, 1990.
The ICC issued a new Order on Remand on November 4, 1991 that eliminated the
modified regulatory plan and established a fixed authorized return on equity of
13.1%. The ICC also adopted a method of allocating overhead costs between
competitive and noncompetitive services, concluding that competitive services
receive no cross-subsidy from noncompetitive services. Appeals of the Remand
Order were denied by the Appellate Court on January 6, 1993 and denied by the
Illinois Supreme Court on March 31, 1993.
In April 1991, the Company began offering Optical Interconnection Service to
interconnect with alternative local transport carriers. The tariff enables other
certified telecommunications carriers to provide transport to Company central
offices for purposes of reselling the Company's digital, nonswitched intrastate
private line and special access service via DS1 and DS3 high capacity circuits.
In November 1991, the ICC began a reconnaissance management audit of the
Company. The audit consisted of a broad-based review of the Company's management
and operations. The ICC Staff concluded that, on an overall basis, the Company
is well-managed and ranks above average. Due to the scope and difficulty in
reviewing the Company's affiliated relationships, the ICC ordered a focused
management audit of the Company's affiliated interest transactions. A final
report on the focused audit was issued in July 1993 that generally found that
the Company was a relatively low cost provider of telecommunications services
and that it obtained efficient services from its affiliates. For more discussion
on the reconnaissance management audit see page 14.
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On May 12, 1992, the Illinois General Assembly voted to revise the Universal
Telephone Service Protection Law of 1985. The new law enables the ICC to approve
alternative regulation of any type, subject to explicit policy goals. In
addition, the law transfers authority over intraLATA equal access dialing
arrangements to the ICC. Telephone companies may transmit electronic news,
features and advertising only through resale from a separate or independent
provider. In the realm of competitive pricing, the law requires that telephone
companies providing essential facilities impute the rate charged for those
facilities to themselves and that telephone companies are required to apportion
overhead and embedded costs between competitive and noncompetitive services. The
new telecommunications law remains in effect until July 1, 1999.
On December 1, 1992, the Company filed an alternative regulation proposal
with the ICC. Under the proposal, rate of return (earnings) regulation would be
replaced with price regulation. Maximum rate levels for noncompetitive services
would be determined by a formula consisting of an inflation factor, a
productivity offset and a service quality component. A final decision by the ICC
is expected during the second quarter of 1994.
In December 1993, Ameritech proposed to the Department of Justice a trial of
its Customers First Plan (see page 7) in Illinois to begin in the first quarter
of 1995. In February 1994, Ameritech filed tariffs with the ICC that propose
specific rates and procedures to open the local network in Illinois. Approval
could take up to eleven months.
FCC REGULATORY JURISDICTION
The Company is also subject to the jurisdiction of the FCC
with respect to intraLATA interstate, interstate access services and other
matters. The FCC prescribes for communications companies a uniform system of
accounts, rules for apportioning costs between regulated and nonregulated
services, depreciation rates (for interstate services) and the principles
and standard procedures ("separations procedures") used to separate
property costs, revenues, expenses, taxes and reserves between those
applicable to interstate services under the jurisdiction of the FCC and
those applicable to services under the jurisdiction of respective state
regulatory authorities.
For certain companies, including the Company, interstate services regulated
by the FCC are covered by a price cap plan. The plan creates incentives to
improve productivity over benchmark levels in order to retain higher earnings.
Price cap regulation sets maximum limits on the prices that may be charged for
telecommunications services but also provides for a sharing of productivity
gains. Earnings in excess of 12.25% will result in prospective reductions of the
price ceilings on interstate services.
In January 1994, the FCC began a scheduled fourth-year comprehensive review
of price cap regulation for local exchange companies.
ACCESS CHARGE ARRANGEMENTS
INTERSTATE ACCESS CHARGES
The Ameritech landline telephone companies provide access services for the
origination and termination of interstate telecommunications. The access charges
are of three types: common line, switched access and trunking.
The common line portion of interstate revenue requirements are recovered
through monthly subscriber line charges and per minute carrier common line
charges. The carrier common line rates include recovery of transitional and
long-term support payments for distribution to other local exchange carriers.
Transitional support payments were made over a four-year period ending on April
1, 1993. Long-term support payments will continue indefinitely.
Effective January 1, 1994, rates for local transport services were
restructured and a new "trunking" service category was created. Trunking
services consist of two types: those associated with the local transport element
of switched access and those associated with special access. Trunking services
associated with switched access handle the transmission of traffic between a
local exchange carrier's serving wire center and a Company end office where
local switching occurs. Trunking services
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associated with special access handle the transmission of telecommunications
services between any two customer-designated premises or between a
customer-designated premise and a Company end office where multiplexing occurs.
High volume customers generally use the flat-rated dedicated facilities
associated with special access, while usage sensitive rates apply for
lower-volume customers that utilize a common switching center.
Local transport rate elements for switched services assess a flat monthly
rate and a mileage sensitive rate for the physical facility between the
customer's point of termination and the end office, a usage sensitive and
mileage sensitive rate assessed for the facilities between the end office
through the access tandem to the customer's serving wire center, and a minute of
use charge assessed to all local transport. The flat rate transport rates and
structure generally mirror special access rate elements. Customers can order
direct transport between the serving wire center and the access tandem and
tandem switched transport between the access tandem and the end office.
Special access charges are monthly charges assessed to customers for access
to interstate private line service. Charges are paid for local distribution
channels, interoffice mileage and optional features and functions.
STATE ACCESS CHARGES
Compensation arrangements required in connection with origination and
termination of intrastate communications by interexchange carriers are subject
to the jurisdiction of the ICC. The Company currently provides access services
to interexchange carriers which provide service between MSAs within Illinois,
pursuant to tariffs which generally parallel the terms, conditions and structure
of the interstate access tariffs. Similar tariff provisions also cover access
service to interexchange carriers authorized by the ICC to provide service
within a MSA.
Separate arrangements govern compensation between the Company and
independent telephone companies for jointly provided communications within MSAs.
These arrangements are subject to the jurisdiction of the ICC and involve the
payment of traffic sensitive access charges (at parity with intrastate access
charges) and lease payments for intraMSA toll traffic originating and
terminating within each company's territory and for facilities jointly used in
providing intraMSA toll service.
COMPETITION
Regulatory, legislative and judicial decisions and technological advances,
as well as heightened customer interest in advanced telecommunications services,
have expanded the types of available communications services and products and
the number of companies offering such services. Market convergence, already a
reality, is expected to intensify.
The FCC has taken a series of steps that is expanding opportunities for
companies to compete with local exchange carriers in providing services that
fall under the FCC's jurisdiction. In September 1992, the FCC mandated that
local exchange carriers provide network access for special transmission paths to
competitive access providers, interexchange carriers and end users. In February
1993, Ameritech filed a tariff with the FCC, which was effective in May, making
possible this type of interconnection. In August 1993, the FCC issued an order
that permits competitors to interconnect to local telephone company switches.
Under the new rules, certain telephone companies must allow all interested
parties to terminate their switched access transmission facilities at telephone
company central offices, wire centers, tandem switches and certain remote nodes.
Ameritech filed a tariff in November 1993 to effect that change in February
1994.
Ameritech is seeking opportunities to compete on an equal footing. Although
the Company is barred from providing interLATA and nationwide cable services,
its competitors are not. Cellular telephone and other wireless technologies are
poised to bypass Ameritech's local access network. Cable providers, who
currently serve more than eighty percent of American homes, could provide
telephone service and have expressed their desire to do so. Certain competitive
access providers and interexchange carriers have demonstrated interest in
providing local exchange service, with one company--MFS Communications Company,
Inc. having already filed a petition with the ICC seeking
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authority to provide full local exchange service. Ameritech's plan is to
facilitate competition in the local exchange business at the same time that it
be permitted to compete in the total communications marketplace.
CUSTOMERS FIRST: AMERITECH'S ADVANCED UNIVERSAL ACCESS PLAN
In 1993, Ameritech embarked on a long-range restructuring with the intent of
dramatically changing the way it serves its customers, and in the process
altered its corporate framework, expanding the nature and scope of its services
and supporting the development of a fully competitive marketplace. In March,
Ameritech filed a plan with the FCC to change the way local telecommunications
services are provided and regulated and to furnish a policy framework for
advanced universal access to modern telecommunications services-voice, data and
video information.
Ameritech proposes to facilitate competition in the local exchange business
by allowing other service providers to purchase components of its network and to
repackage them with their own services for resale, in exchange for the freedom
to compete in both its existing and currently prohibited businesses. Ameritech
has requested regulatory reforms to match the competitive environment as well as
support of its efforts to remove restraints, such as the interLATA service
restriction, which currently restrict its participation in the full
telecommunications marketplace. In addition, Ameritech asks for more flexibility
in pricing new and competitive services and replacement of caps on earnings with
price regulation. Under the plan, customers would be able to choose from
competitive providers for local service as they now can choose a provider for
interexchange service.
To demonstrate conclusively the substantial customer and economic benefits
of full competition, in December 1993 Ameritech proposed a trial of its plan,
beginning in 1995. Ameritech has petitioned the Department of Justice to
recommend Federal District Court approval of a waiver of the long-distance
restriction of the Consent Decree so that Ameritech can offer interexchange
service. At the same time, Ameritech would facilitate the development of local
communications markets by unbundling the local network and integrating
competitors' switches. The trial would begin in Illinois in the first quarter of
1995 and would last indefinitely. Other states could be added over time. If the
trial is approved by the Department of Justice, the request must be acted on by
the Court which retains jurisdiction over administering the terms of the Consent
Decree. In February 1994, Ameritech filed tariffs with the ICC that propose
specific rates and procedures to open the local network in Illinois. Approval
could take up to eleven months.
Ameritech has received broad support for the plan from Midwest elected
officials, national and Midwest business leaders, and education, health
industry, economic development and consumer leaders. The national and local
offices of the Communications Workers of America ("CWA") and the International
Brotherhood of Electrical Workers ("IBEW") also support the plan.
AMERITECH'S VIDEO NETWORK CONCEPT
In January 1994, Ameritech filed plans with the FCC to construct a digital
video network upgrade that could reach six million customers by the end of the
decade. Ameritech expects to spend $4.4 billion to upgrade its network to
provide video services, part of a total of approximately $29 billion Ameritech
estimates it will spend on network improvements over the next fifteen years.
Ameritech is pursuing alliances and partnerships that will position it as a key
participant in the emerging era of interactive video experiences. Pending FCC
approval of Ameritech's plan and clearing of other regulatory hurdles, the
construction of the first phase of the network could begin as soon as the fourth
quarter of 1994. The new network, which will be separate from Ameritech's core
local communications network, will be expanded to approximately one million
additional Midwest customers in each of the next five years.
Ameritech would be only one of many users of the broadband network. A
multitude of competing video information providers, businesses, institutions,
interexchange carriers and video telephony customers will also have access to
the technology.
With the new system, customers will have access to a virtually unlimited
variety of programming sources. These will include basic broadcast services,
similar to today's cable service, and advanced
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interactive services such as video on demand, home healthcare, interactive
educational software, distance learning, interactive games and shopping, and a
variety of other entertainment and information services that can be accessed
from homes, offices, schools, hospitals, libraries and other public and private
institutions.
CABLE/TELCO CROSS OWNERSHIP BAN
In August 1993, Bell Atlantic won the right to enter the video services
business in its own service area. The U.S. District Court in the District of
Columbia that permitted entry to Bell Atlantic denied the requests of Ameritech
and the other RHCs. In response, in November 1993, Ameritech filed motions in
two federal courts seeking freedom from the ban on providing video services in
its own service area. Ameritech asked U.S. District Courts in Illinois and
Michigan to declare unconstitutional the provisions of the Cable Act of 1984
that bar the RHCs from providing cable TV service in areas where they hold
monopolies on local phone service.
Legislation has been introduced in Congress that would repeal the
cross ownership ban.
EMPLOYEE RELATIONS
As of December 31, 1993, the Company had 17,785 employees, a decrease from
18,914 at December 31, 1992. During 1993, 1,226 employees left the payroll as a
result of voluntary and involuntary workforce reduction programs, which included
approximately 600 nonmanagement employees who took advantage of a Supplemental
Income Protection Program ("SIPP") established under labor agreements to
voluntarily exit the workforce.
On March 25, 1994, Ameritech announced that it will reduce its
nonmanagement workforce by 6,000 employees by the end of 1995,
including approximately 1,560 at the Company. Under terms of agreements between
Ameritech, the CWA and the IBEW, Ameritech is implementing an enhancement to the
Ameritech pension plan by adding three years to the age and net credited service
of eligible nonmanagement employees who leave the business during a designated
period that ends in mid-1995. In addition, Ameritech's network business unit is
offering financial incentives under the terms of its current contracts with the
CWA and IBEW to selected nonmanagement employees who leave the business before
the end of 1995.
The reduction of the workforce results from technological improvements,
consolidations and initiatives identified by management to balance its cost
structure with emerging competition.
Approximately 84% of the Company's employees are represented by unions. Of
those so represented, about 17% are represented by the CWA and about 83% are
represented by the IBEW, both of which are affiliated with the AFL-CIO.
In July and August 1993, the Ameritech landline telephone companies and ASI
reached agreement with the two unions on a workforce transition plan for
assigning union-represented employees to the newly established business units.
The separate agreements with the CWA and the IBEW extend existing union
contracts with the landline telephone companies and ASI to the new units. The
pacts address a number of force assignment, employment security and union
representation issues. In 1995, when union contracts are due to expire, the
parties will negotiate regional contracts.
ITEM 2. PROPERTIES.
The properties of the Company do not lend themselves to description by
character and location of principal units. At December 31, 1993, central office
equipment represented 38% of the Company's investment in telecommunications
plant in service; land and buildings (occupied principally by central offices)
represented 10%; telecommunications instruments and related wiring and
equipment, including private branch exchanges, substantially all of which are on
the premises of customers, represented 4%; and connecting lines which constitute
outside plant, the majority of which are on or under public roads, highways or
streets and the remainder of which are on or under private property, represented
41%.
Substantially all of installations of central office equipment and
administrative offices are located in buildings owned by the Company situated on
land which it owns in fee. Many garages, administrative offices, business
offices and some installations of central office equipment are in rented
quarters.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
PRE-DIVESTITURE CONTINGENT LIABILITIES AGREEMENT
The Plan 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 divestiture. These
contingent liabilities relate principally to litigation and other claims with
respect to the former Bell System's 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, AT&T and the Bell Companies, including the
Company, 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 reserves for depreciation) as of the effective date of
divestiture. Different allocation rules apply to liabilities which relate
exclusively to pre-divestiture interstate or intrastate operations.
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 the Company would be subject after final adjudication
or settlement of all such liabilities would not be material in amount to the
financial position of the Company.
9
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
ILLINOIS BELL TELEPHONE COMPANY
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Local service......................... $ 1,834.2 $ 1,768.4 $ 1,737.5 $ 1,672.4 $ 1,657.8
Interstate network access............. 701.5 688.0 661.7 667.1 642.2
Intrastate network access............. 80.4 79.2 68.8 64.2 64.4
Long distance......................... 162.3 162.8 173.2 192.4 206.7
Other................................. 262.6 248.0 244.7 251.0 256.6
---------- ---------- ---------- ---------- ----------
3,041.0 2,946.4 2,885.9 2,847.1 2,827.7
Operating expenses...................... 2,273.1 2,212.6 2,254.9 2,187.2 2,182.7
---------- ---------- ---------- ---------- ----------
Operating income........................ 767.9 733.8 631.0 659.9 645.0
Interest expense........................ 119.9 114.2 131.5 116.2 118.9
Other expense (income)-net.............. 9.9 4.8 (19.4) (2.8) (2.1)
Income taxes............................ 220.9 201.4 166.7 187.8 184.1
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principles........ 417.2 413.4 352.2 358.7 344.1
Cumulative effect of change in
accounting principles.................. -- (588.6) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ 417.2 $ (175.2) $ 352.2 $ 358.7 $ 344.1
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total assets............................ $ 6,176.2 $ 6,095.2 $ 6,008.4 $ 5,866.3 $ 5,507.9
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Telecommunications plant--net........... $ 5,038.5 $ 4,995.7 $ 4,911.6 $ 4,834.8 $ 4,731.1
Capital expenditures--net............... $ 534.4 $ 577.0 $ 558.5 $ 545.4 $ 583.3
Long-term debt.......................... $ 1,077.0 $ 1,330.1 $ 1,379.8 $ 1,378.7 $ 1,379.6
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Debt ratio.............................. 47.6% 46.9% 41.5% 40.4% 39.7%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Return to average equity................ 22.3% (9.7)% 15.2% 15.8% 15.9%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Return on average total capital......... 14.7% (1.8)% 11.6% 12.1% 11.9%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pretax interest coverage................ 6.4 6.4 5.3 5.9 5.6
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Customer lines-at end of year (000's)... 5,763 5,586 5,460 5,360 5,232
Customer lines served by--
Digital electronic offices............ 64.6% 50.8% 43.9% 39.5% 36.5%
Analog electronic offices............. 35.4% 49.2% 56.1% 60.5% 63.0%
Electromechanical offices............. -- % -- % -- % -- % 0.5%
Customer lines per employee............. 324 295 267 251 233
Local calls per year (000,000's)........ 19,207 18,414 17,797 16,855 16,316
Calls per customer line................. 3,333 3,296 3,259 3,145 3,118
Employees--at end of year............... 17,785 18,914 20,470 21,386 22,495
</TABLE>
10
<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, 1993 and for the year ended December 31,
1992, which is based on the Consolidated Statements of Income and Reinvested
Earnings. Other pertinent data are also given in the Selected Financial and
Operating Data.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Local service................................... $ 1,834.2 $ 1,768.4 $ 65.8 3.7%
</TABLE>
Higher calling volumes increased local service revenues by $67.2. The
increased calling volumes were primarily attributed to higher usage and
growth in the number of customer lines, which increased 3.2% to 5,763,394
from 5,586,023.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Network access
Interstate.................................... $ 701.5 $ 688.0 $ 13.5 2.0%
Intrastate.................................... $ 80.4 $ 79.2 $ 1.2 1.5%
</TABLE>
Interstate access revenues increased by $24.7 due to growth of customer
lines and switched access minutes of use and by $20.8 due to a reduction in
National Exchange Carrier Association support payments. These increases were
offset by lower revenues of $22.7 due to rate reductions for common carrier,
switched and special access services and $10.5 due to a decline in special
access service volumes. The increase in intrastate revenues is primarily due
to growth of switched access minutes of use.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Long distance................................... $ 162.3 $ 162.8 $ (0.5) (0.3)%
</TABLE>
Long distance revenues decreased by $1.6 due to lower interstate intraLATA
toll rates, offset by a $1.0 increase in revenues due to volume growth of
interstate intraLATA and private line usage.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Other........................................... $ 262.6 $ 248.0 $ 14.6 5.9%
</TABLE>
Other revenues include revenues derived from directory advertising, billing
and collection services, inside wire installation and maintenance services
and other miscellaneous services. These revenues are net of the Company's
provision for uncollectibles. The increase in other revenues was primarily
due to growth of inside wire, directory and billing and collection services
of $9.4. Also contributing to the higher revenues was a $3.3 increase in
rent revenues due to office space and computer rentals to Ameritech
Services, Inc. (ASI), an affiliate, and a $1.1 lower uncollectibles
provision, resulting from an overall improvement in collection efforts.
OPERATING EXPENSES
The Company has changed the presentation of its operating expenses in the
Consolidated Statements of Income and Reinvested Earnings to facilitate a better
understanding of its operating results. Prior year amounts have been
reclassified to conform with this presentation.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Employee-related expenses....................... $ 882.8 $ 869.0 $ 13.8 1.6%
</TABLE>
Employee-related expenses include employee salaries, benefits and other
employee-related expenses. Wage rate increases and higher nonmanagement
employee bonuses were offset by salary savings created from a reduced work
force as a result of early retirement programs, involuntary terminations and
the transfer of employees to ASI. As a result of involuntary and voluntary
11
<PAGE>
termination programs, 1,226 and 676 employees left the Company in 1993 and
1992, respectively. In addition, during 1992, 862 employees were transferred
to ASI. The Company's work force decreased to 17,785 at December 31, 1993
from 18,914 at December 31, 1992. Other employee benefits were higher due to
lower pension credits and an increase in the costs for postretirement
benefits and other employee benefits.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Depreciation and amortization................... $ 506.9 $ 509.6 $ (2.7) (0.5)%
</TABLE>
Depreciation and amortization expense decreased by $8.5 primarily due to the
completion of Illinois Commerce Commission authorized amortization of public
telephone embedded labor and depreciation reductions resulting from the
retirement of internal data and communications equipment. Lower investments
in capital leases resulted in an additional decrease of $1.0 in amortization
expense. These declines were offset by a $6.8 increase in depreciation due
to overall higher plant investment.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
--------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Other operating expenses........................ $ 796.2 $ 742.8 $ 53.4 7.2%
</TABLE>
The increase in other operating expenses was primarily due to a $33.1
increase in affiliated services, primarily related to charges for services
previously performed internally by work groups transferred to ASI. Also
contributing to the increase were higher contract services of $15.4,
primarily for right-to-use fees for the license of telecommunications
software. Advertising expenses increased by $13.7 primarily due to the
marketing of the Company's products and services under the single brand name
"Ameritech." These increases were offset slightly by an $8.8 decrease in
other miscellaneous expenses associated with market realignment and
workforce resizing.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Taxes other than income taxes................... $ 87.2 $ 91.2 $ (4.0) (4.4)%
</TABLE>
Taxes other than income taxes decreased $5.7 due to lower capital stock
taxes, resulting from lower average reinvested earnings. Also contributing
to the lower expense was a $2.5 decline in gross receipts taxes, reflecting
the impact of the adoption of a municipal excise tax by certain
municipalities, which replaced previously enacted gross receipts taxes.
These decreases were offset by a $4.9 increase in property taxes.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
--------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Interest expense................................ $ 119.9 $ 114.2 $ 5.7 5.0%
</TABLE>
Interest expense increased by $1.4 due to higher interest incurred on
long-term debt and by $1.5 due to interest incurred on short-term debt as a
result of higher average notes payable. In addition, 1992 interest expense
reflects $2.2 of interest credits related to prior year tax filings.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Other expense (income)--net..................... $ 9.9 $ 4.8 $ 5.1 106.3%
</TABLE>
Other expense (income)-net increased by $17.4 due to costs related to the
early extinguishment of $750.0 of the Company's long-term debt and by $7.0
due to interest income received in 1992 related to Internal Revenue Service
settlements of federal income taxes. These increases were offset by $18.2
primarily due to higher equity earnings for ASI and lower miscellaneous
expenses.
<TABLE>
<CAPTION>
INCREASE
1993 1992 (DECREASE) % CHANGE
--------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Income taxes.................................... $ 220.9 $ 201.4 $ 19.5 9.7%
</TABLE>
Income taxes increased primarily as a result of higher pre-tax income and an
increase in the federal statutory income tax rate.
12
<PAGE>
OTHER MATTERS
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The new
accounting method is essentially a refinement of the method the Company had been
following and, accordingly, did not have a material impact on the Company's
financial statements upon adoption.
As more fully discussed in Note C to the Consolidated Financial Statements,
effective January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The cumulative effect of
these accounting changes was recognized in the first quarter of 1992 as a change
in accounting principles of $588.6, net of a deferred income tax benefit of
$360.2.
REGULATORY ENVIRONMENT
Customer demand, technology and the preferences of policy makers are all
converging to increase competition in the local exchange business. The effects
of increasing competition are apparent in the marketplace the Company serves.
For example, one competitive access provider--MFS Communications Company,
Inc.--has requested regulatory authority to provide full local exchange service
in Illinois. Additionally, increasing volumes of intraLATA long distance
services purchased by large and medium sized business customers are sold by
carriers other than the Company.
Recognizing the trend, the Company's regulatory/public policy activities are
focused on achieving a framework that allows for expanding competition while
providing a fair opportunity for all carriers, including the Company, to
succeed. The cornerstone of this effort is Ameritech's "Customers First Plan"
that was filed with the Federal Communications Commission ("FCC") on March 1,
1993. In a subsequent filing with the U.S. Department of Justice, Ameritech
proposed that the Customers First Plan be implemented on a trial basis beginning
in January 1995 in Illinois. In February 1994, Ameritech filed tariffs with the
Illinois Commerce Commission ("ICC") that propose specific rates and procedures
to open the local network in Illinois. Approval could take up to eleven months.
The Customers First Plan proposes to open all of the local telephone
business in the Company's service area to competition. In exchange, Ameritech
has requested three regulatory changes. First, Ameritech has requested relief
from the Modified Final Judgment ("MFJ") interLATA ban. Such relief would mean
that the Company would be allowed to offer all long distance services. Second,
Ameritech has requested a number of modifications in the FCC's price cap rules.
These modifications would apply only to Ameritech, including the Company, and
would eliminate any obligation to refund, in the form of its share of future
rate reductions, its share of interstate earnings in excess of 12.25%. The
modifications would also provide the Company increased ability to price its
interstate access services in a manner appropriate to competitive conditions.
Third, Ameritech has requested FCC authority to collect in a competitively
neutral manner, the social subsidies currently embedded in the rates that the
Company charges long distance carriers for access to the local network.
REGULATORY PROCEEDINGS
On December 1, 1992, the Company submitted an alternative regulation
proposal to the ICC. Under the proposal, rate of return regulation would be
eliminated and replaced by a price regulation mechanism, under which future rate
changes for noncompetitive services would be subject to a predetermined formula
reflecting changes in inflation, the Company's historic productivity and actual
service quality performance. The proposal would not affect the Company's ability
to set prices for services which are classified as competitive services by the
ICC, and the Company would also be able to determine its own depreciation rates.
If the proposal is adopted by the ICC, the Illinois Public Utilities Act would
require that basic residential rates cannot be increased for three years
following the proposal's effective date.
In July 1993, the ICC Staff and The Citizens Utility Board ("CUB") filed
testimony in the proceeding recommending rate reductions in the range of $100.0
to $200.0. The Company disagrees with the Staff's and CUB's recommendations and
filed its response in September 1993. Additional
13
<PAGE>
rebuttal testimony was filed in October 1993. The record was closed at the end
of November 1993, and a final decision by the ICC is not expected before the end
of the second quarter 1994. At this time, the Company cannot predict if the ICC
will approve the alternative regulation proposal or order any reductions in
rates.
In November 1991, the ICC began a reconnaissance management audit of the
Company. The audit consisted of a broad-based review of the Company's management
and operations. The ICC Staff concluded that, on an overall basis, the Company
is well-managed and ranked above average. Due to the scope of reviewing the
Company's affiliated relationships, the ICC ordered a focused management audit
of the Company's affiliated interest transactions. In July 1993, the ICC's
auditors issued a report recommending the imputation of $51.0 in additional
Yellow Pages revenues to the Company's regulated operations and proposed expense
disallowances of approximately $28.0. The ICC Staff utilized these
recommendations as part of the basis for proposing prospective rate reductions
in the Company's pending alternative regulation filing. The Company disagrees
with the ICC Staff's recommendations and discussed this in its rebuttal
testimony in September and October 1993.
REGULATORY ACCOUNTING
The Company presently gives accounting recognition to the actions of
regulators where appropriate, as prescribed by SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation". Under SFAS No. 71, the Company records
certain assets and liabilities because of actions of regulators. Further,
amounts charged to operations for depreciation expense reflect estimated useful
lives and methods prescribed by regulators rather than those that might
otherwise apply to unregulated enterprises. In the event the Company determines
that it no longer meets the criteria for following SFAS No. 71, the accounting
impact to the Company would be an extraordinary noncash charge to operations of
an amount which could be material. Criteria that give rise to the discontinuance
of SFAS No. 71 include (1) increasing competition which restricts the Company's
ability to establish prices to recover specific costs, and (2) a significant
change in the manner in which rates are set by regulators from cost-based
regulation to another form of regulation. The Company periodically reviews these
criteria to ensure that continuing application of SFAS No. 71 is appropriate.
BUSINESS UNITS
In February 1993, following a year-long examination of its business called
"Breakthrough Leadership," Ameritech announced it would restructure its business
into separate units organized around specific customer groups - such as
residential customers, small businesses, interexchange companies and large
corporations - and a single unit that will run Ameritech's network in Illinois,
Indiana, Michigan, Ohio and Wisconsin. The Ameritech Bell Companies will
continue to function as legal entities owning current Bell Company assets in
each state. The network unit will provide network and information technology
resources in response to the needs of the other 11 business units. This unit
will be the source of network capabilities for products and services offered by
the other business units and will be responsible for the development and
day-to-day operation of an advanced information infrastructure.
All of the business units and the network unit are currently operational.
Ameritech has developed a new logo and is marketing all of its products and
services under the single brand name "Ameritech."
DIGITAL VIDEO NETWORK
In January 1994, Ameritech, the parent of the Company, announced a program
to launch a digital video network upgrade that is expected, by the end of the
decade, to make available interactive information and entertainment services, as
well as traditional cable TV services, to approximately six million Ameritech
customers. The Company has filed an application with the FCC seeking approval of
the program. The application reflects capital expenditures of approximately
$160.0 over the next three years. The Company may also, depending on market
demand, make additional capital expenditures under this program. The Company
anticipates that its capital expenditures for the program will be funded without
an increase to its recent historical level of capital expenditures.
14
<PAGE>
WORKFORCE RESIZING
On March 25, 1994, Ameritech announced that it will reduce its nonmanagement
workforce by 6,000 employees by the end of 1995, including approximately 1,560
at the Company. Under terms of agreements between Ameritech, the Communications
Workers of America ("CWA") and the International Brotherhood of Electrical
Workers ("IBEW"), Ameritech is implementing an enhancement to the Ameritech
pension plan by adding three years to the age and net credited service of
eligible nonmanagement employees who leave the business during a designated
period that ends in mid-1995. In addition, Ameritech's network business unit is
offering financial incentives under the terms of its current contracts with the
CWA and IBEW, to selected nonmanagement employees who leave the business before
the end of 1995.
The above actions will result in a charge to first quarter 1994 earnings of
approximately $137.8 or $83.0 after-tax. A significant portion of the program
cost will be funded by Ameritech's pension plan, whereas financial incentives to
be paid from company funds are estimated to be approximately $36.9. Settlement
gains, which result from terminated employees accepting lump-sum payments from
the pension plan, will be reflected in income as employees leave the payroll.
The Company believes this program will reduce its employee-related costs by
approximately $78.0 on an annual basis upon completion of this program.
The reduction of the workforce results from technological improvements,
consolidations and initiatives identified by management to balance its cost
structure with emerging competition.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Illinois Bell
Telephone Company:
We have audited the accompanying consolidated balance sheets of Illinois
Bell Telephone Company (an Illinois corporation) and its subsidiary as of
December 31, 1993 and 1992, and the related consolidated statements of income
and reinvested earnings and cash flows for each of the three years in the period
ended December 31, 1993. These consolidated financial statements and the
schedules referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Illinois
Bell Telephone Company and subsidiary as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note C to the consolidated financial statements, the Company
changed its method of accounting for certain postretirement and postemployment
benefits in 1992.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The financial statement
schedules listed in Item 14(a)(2) are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not a required part of
the basic consolidated financial statements. These schedules have been subjected
to the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 28, 1994
16
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
REVENUES..................................................................... $3,041.0 $2,946.4 $2,885.9
------- ------- -------
OPERATING EXPENSES
Employee-related expenses.................................................. 882.8 869.0 919.4
Depreciation and amortization.............................................. 506.9 509.6 497.4
Other operating expenses................................................... 796.2 742.8 719.7
Taxes other than income taxes.............................................. 87.2 91.2 118.4
------- ------- -------
2,273.1 2,212.6 2,254.9
------- ------- -------
OPERATING INCOME............................................................. 767.9 733.8 631.0
Interest expense............................................................. 119.9 114.2 131.5
Other expense (income) -- net................................................ 9.9 4.8 (19.4)
------- ------- -------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLES................................................................. 638.1 614.8 518.9
Income taxes................................................................. 220.9 201.4 166.7
------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES........... 417.2 413.4 352.2
Cumulative effect of change in accounting principles......................... -- (588.6) --
------- ------- -------
NET INCOME (LOSS)............................................................ 417.2 (175.2) 352.2
REINVESTED EARNINGS, BEGINNING OF YEAR....................................... 114.5 584.7 560.7
DIVIDENDS.................................................................... 398.5 295.0 328.2
------- ------- -------
REINVESTED EARNINGS, END OF YEAR............................................. $ 133.2 $ 114.5 $ 584.7
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
17
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments............................................. $ 14.7 $ 17.6
Receivables
Customers and agents (less allowance for uncollectibles of $36.7 and $35.2,
respectively)................................................................ 591.6 561.7
Ameritech and affiliates...................................................... 40.9 10.4
Other......................................................................... 30.8 54.5
Material and supplies........................................................... 15.6 25.1
Prepaid and other............................................................... 12.1 23.6
-------------- --------------
705.7 692.9
TELECOMMUNICATIONS PLANT
In service...................................................................... 8,115.1 8,021.5
Under construction.............................................................. 108.6 116.5
-------------- --------------
8,223.7 8,138.0
Less, accumulated depreciation.................................................. 3,185.2 3,142.3
-------------- --------------
5,038.5 4,995.7
-------------- --------------
INVESTMENTS, principally in affiliates............................................ 86.8 71.4
OTHER ASSETS AND DEFERRED CHARGES................................................. 345.2 335.2
-------------- --------------
TOTAL ASSETS...................................................................... $ 6,176.2 $ 6,095.2
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Debt maturing within one year
Ameritech..................................................................... $ 494.2 $ 275.7
Other......................................................................... 100.3 1.5
Accounts payable
Ameritech and affiliates...................................................... 79.3 79.9
Other......................................................................... 321.5 297.8
Other current liabilities....................................................... 404.6 394.2
-------------- --------------
1,399.9 1,049.1
-------------- --------------
LONG-TERM DEBT.................................................................... 1,077.0 1,330.1
-------------- --------------
DEFERRED CREDITS
Accumulated deferred income taxes............................................... 587.1 532.6
Unamortized investment tax credits.............................................. 109.9 128.1
Postretirement benefits other than pensions..................................... 815.7 854.3
Long-term payable to Ameritech Services, Inc.................................... 30.9 32.7
Other........................................................................... 317.7 349.0
-------------- --------------
1,861.3 1,896.7
-------------- --------------
SHAREHOLDER'S EQUITY
Common stock ($20 par value; 100,000,000 shares authorized; 81,938,121 issued
and outstanding)............................................................... 1,638.8 1,638.8
Proceeds in excess of par value................................................. 66.0 66.0
Reinvested earnings............................................................. 133.2 114.5
-------------- --------------
1,838.0 1,819.3
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........................................ $ 6,176.2 $ 6,095.2
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
18
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 417.2 $(175.2) $ 352.2
Adjustments to net income (loss):
Cumulative effect of change in accounting principles.......................... -- 588.6 --
Depreciation and amortization................................................. 506.9 509.6 497.4
Deferred income taxes--net.................................................... 27.3 23.7 (9.2)
Investment tax credits--net................................................... (18.2) (18.5) (24.2)
Interest during construction.................................................. (2.4) (1.2) (4.5)
Provision for uncollectibles.................................................. 34.4 35.5 38.9
Change in accounts receivable--net.............................................. (71.1) (7.4) (70.2)
Change in material and supplies................................................. 9.4 (3.0) 0.5
Change in prepaid expenses and certain other current assets..................... (14.2) (4.6) (17.8)
Change in accounts payable...................................................... 23.4 67.5 46.6
Change in accrued taxes......................................................... (21.2) 40.1 (39.2)
Change in certain other current liabilities..................................... 16.6 (104.0) 4.1
Net change in certain noncurrent assets and liabilities......................... (43.3) (18.7) 10.8
Other........................................................................... 13.5 (5.3) (2.8)
------- ------- -------
Net cash from operating activities.............................................. 878.3 927.1 782.6
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures--net....................................................... (534.4) (577.0) (558.5)
(Cost of) proceeds from disposals of telecommunications plant................... (5.0) (7.9) 11.8
Additional investments in affiliates (principally equity)....................... (9.9) (14.4) (4.9)
------- ------- -------
Net cash from investing activities.............................................. (549.3) (599.3) (551.6)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt................................................... -- -- (157.8)
Intercompany financing--net..................................................... 218.5 30.7 245.0
Issuances of long-term debt..................................................... 295.9 -- --
Retirements of long-term debt................................................... (451.5) (58.8) (8.2)
Costs of refinancing long-term debt............................................. (10.0) -- --
Dividend payments............................................................... (384.8) (293.2) (324.5)
------- ------- -------
Net cash from financing activities.............................................. (331.9) (321.3) (245.5)
------- ------- -------
Net (decrease) increase in cash and temporary cash investments.................. (2.9) 6.5 (14.5)
Cash and temporary cash investments, beginning of year.......................... 17.6 11.1 25.6
------- ------- -------
Cash and temporary cash investments, end of year................................ $ 14.7 $ 17.6 $ 11.1
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
19
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
Illinois Bell Telephone Company ("the Company") is a wholly owned subsidiary
of Ameritech Corporation ("Ameritech").
A. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION--The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Illinois Bell Administration
Center, Inc. ("IBAC"), formed in 1988 to hold a limited partnership interest in
a real estate venture. All significant intercompany transactions have been
eliminated.
BASIS OF ACCOUNTING--The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles. In
compliance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," the Company gives accounting recognition to the actions of
regulators where appropriate. Such actions can provide reasonable assurance of
the existence of an asset, reduce or eliminate the value of an asset or impose a
liability. Actions of a regulator can also eliminate a liability previously
imposed by the regulator.
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 33% ownership, provides consolidated planning,
development, management, procurement and support services to all of the
Ameritech Bell companies. The Company also provides certain services and
facilities to ASI.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Purchases of materials and charges for services from ASI......... $ 537.0 $ 503.6 $ 430.4
Recovery of costs for services provided to ASI................... 34.9 24.7 26.8
</TABLE>
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.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Charges incurred................................................. $ 32.5 $ 33.1 $ 33.4
</TABLE>
3. Ameritech Publishing, Inc. ("API")--The Company has a contract with DonTech,
a partnership between API and the Reuben H. Donnelley Corporation, under
which payments are made to the Company by DonTech for license fees and
billing and collection services.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Fees paid to the Company by DonTech.............................. $ 75.0 $ 75.0 $ 75.5
</TABLE>
4. Ameritech Information Systems, Inc. ("AIS")--The Company reimburses AIS for
costs incurred by AIS in connection with the sale of network services by AIS
employees.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Charges incurred................................................. $ 11.4 $ 13.2 $ 14.3
</TABLE>
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 the costs.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Charges incurred................................................. $ 42.4 $ 50.4 $ 49.3
</TABLE>
20
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TELECOMMUNICATIONS PLANT--Telecommunications plant is stated at original
cost. The original cost of telecommunications plant acquired from ASI includes a
return on investment to ASI.
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 telecommunications plant with similar
characteristics.
Generally, when depreciable plant is retired, the amount at which such plant
has been carried in telecommunications plant 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 (33% ownership and $84.6) and
IBAC's investment in a real estate venture (26.4% ownership) are reflected in
the consolidated financial statements using the equity method of accounting.
MATERIAL AND SUPPLIES--Inventories of new and reusable material and supplies
are stated at the lower of cost or market with cost determined generally on an
average cost basis.
INTEREST DURING CONSTRUCTION--Regulatory authorities allow the Company to
accrue interest as a cost of constructing certain plant and as an item of
income, i.e., allowance for debt and equity funds used to finance construction.
Such income is not realized in cash currently but will be realized over the
service life of the plant as the resulting higher depreciation expense is
recovered in the form of increased revenues.
INCOME TAXES--The Company is included in the consolidated federal income tax
return filed by Ameritech and its subsidiaries. Effective January 1, 1993, the
Company adopted SFAS No. 109, "Accounting for Income Taxes." The new accounting
method is essentially a refinement of the liability method already followed by
the Company and, accordingly, did not have a significant impact on the Company's
financial statements upon adoption. Consolidated income tax currently payable
has been allocated to the Company based on the Company's contribution to
consolidated taxable income and tax credits.
Deferred tax assets and liabilities are based on differences between the
financial statement bases of assets and liabilities and the tax bases of those
same assets and liabilities. Under the liability method, deferred tax assets and
liabilities at the end of each period are determined using the statutory tax
rates in effect when these temporary differences are expected to reverse.
Deferred income tax expense is measured by the change in the net deferred income
tax asset or liability during the year. In addition, for regulated companies,
SFAS No. 109 requires that all deferred regulatory liabilities be recognized at
the revenue requirement level. It further requires that a deferred tax liability
be recorded to reflect the amount of cumulative tax benefits previously flowed
through to ratepayers and that a long-term deferred asset be recorded to reflect
the revenue to be recovered in telephone rates when the related taxes become
payable in future years.
The Company uses the deferral method of accounting for investment tax
credits. Therefore, credits earned prior to the repeal of investment tax credits
by the Tax Reform Act of 1986 and also certain transitional credits earned after
the repeal are being amortized as reductions in tax expense over the life of the
plant which gave rise to the credits.
TEMPORARY CASH INVESTMENTS--Temporary cash investments are stated at cost
which approximates market. The Company considers all highly liquid, short-term
investments with an original maturity of three months or less to be cash
equivalents.
21
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SHORT-TERM FINANCING ARRANGEMENT--During 1991, Ameritech entered into an
arrangement with its subsidiaries, including the Company, for the provision of
short-term financing and cash management services. Ameritech issues commercial
paper and notes and secures bank loans to fund the working capital requirement
of its subsidiaries and invests short-term, excess funds on their behalf. See
Notes D and H.
B. INCOME TAXES
The components of income tax expense follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Federal
Current................................................................. $ 176.1 $ 178.8 $ 159.4
Deferred--net........................................................... 17.0 19.7 (11.9)
Investment tax credits--net............................................. (18.2) (18.5) (24.2)
--------- --------- ---------
Total............................................................. 174.9 180.0 123.3
--------- --------- ---------
State and local
Current................................................................. 35.7 17.4 40.7
Deferred-net............................................................ 10.3 4.0 2.7
--------- --------- ---------
Total............................................................. 46.0 21.4 43.4
--------- --------- ---------
Total income tax expense.................................................. $ 220.9 $ 201.4 $ 166.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income tax expense (credits) results principally from temporary
differences caused by the change in the book and tax bases of telecommunications
plant due to the use of different depreciation methods and lives for financial
reporting and income tax purposes. Total income taxes paid were $231.9, $224.3
and $171.1 in 1993, 1992 and 1991, respectively.
The following is a reconciliation between the statutory federal income tax
rate for each of the past three years and the Company's overall effective tax
rate:
<TABLE>
<CAPTION>
1993 1992 1991
------ ----- ----
<S> <C> <C> <C>
Statutory federal income tax rate............................................. 35.0% 34.0% 34.0%
State income taxes, net of federal benefit.................................. 4.7 2.3 5.5
Reduction in tax expense due to amortization of investment tax credits...... (2.8) (3.0) (4.7)
Effect of adjusting deferred income tax balances due to tax law changes..... (1.4) -- --
Benefit of tax rate differential applied to reversing temporary
differences................................................................ (1.8) (2.2) (3.4)
Other....................................................................... 0.9 1.7 0.7
------ ----- ----
Effective overall income tax rate............................................. 34.6% 32.8% 32.1%
------ ----- ----
------ ----- ----
</TABLE>
The Revenue Reconciliation Act of 1993, enacted in August 1993, increased
the statutory federal income tax rate for 1993 to 35 percent. In accordance with
the liability method of accounting, the Company adjusted, on the enactment date,
its deferred income tax balances not subject to regulatory accounting prescribed
by SFAS No. 71 (see Note A). The result was a reduction in deferred income tax
expense of $8.9, primarily from increasing the deferred tax assets associated
with SFAS Nos. 106 and 112 (see Note C).
As of December 31, 1993, the Company had a regulatory asset of $160.5
(reflected primarily in Other Assets and Deferred Charges) related to the
cumulative amount of income taxes on temporary differences on benefits that
previously flowed through to the ratepayers. In addition, on that date, the
22
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company had a regulatory liability of $227.9 (reflected in Other Deferred
Credits) related to the reduction of deferred taxes resulting from the change in
the federal statutory income tax rate to 35 percent and deferred taxes provided
on unamortized investment tax credits. These amounts will be amortized over the
regulatory lives of the related depreciable assets concurrent with recovery in
rates. The accounting for and the impact on future net income of these amounts
will depend on the ratemaking treatment authorized in future regulatory
proceedings.
As of December 31, 1993 and 1992 the components of long-term accumulated
deferred income taxes were as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ---------
<S> <C> <C>
Deferred tax assets
Postretirement and postemployment benefits............................................... $ 332.8 $ 351.8
SFAS No. 71 accounting................................................................... 57.8 82.5
Other, net............................................................................... 35.1 30.0
---------- ---------
$ 425.7 $ 464.3
---------- ---------
Deferred tax liabilities
Accelerated depreciation................................................................. $ 939.9 $ 935.8
Other.................................................................................... 72.9 61.1
---------- ---------
$ 1,012.8 $ 996.9
---------- ---------
Net deferred tax liability................................................................. $ 587.1 $ 532.6
---------- ---------
---------- ---------
</TABLE>
Deferred income taxes in current assets and liabilities are not shown as
they are not significant.
C. EMPLOYEE BENEFIT PLANS
PENSION PLANS--Ameritech maintains noncontributory defined pension and death
benefit plans covering substantially all of the Company's employees. The pension
benefit formula used in the determination of pension cost is based on the
average compensation earned during the five highest consecutive years of the
last ten years of employment for the management plan and a flat dollar amount
per year of service for the nonmanagement plan. Pension credit is 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 credit for the Ameritech plans:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Pension credit..................................................................... $ (33.9) $ (37.7) $ (26.2)
--------- --------- ---------
--------- --------- ---------
Current year credit as a percent of salaries and wages............................. (4.60)% (5.04)% (3.34)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Pension credits were determined using the projected unit credit actuarial
method in accordance with SFAS No. 87, "Employers' Accounting for Pensions." 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
credit 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.
23
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assets of the Ameritech plans consist principally of debt and equity
securities, fixed income investments and real estate. As of December 31, 1993,
the fair value of plan assets available for plan benefits exceeded the projected
benefit obligation (calculated using a discount rate of 5.8 percent as of
December 31, 1993 and 1992). The assumed long-term rate of return on plan assets
used in determining pension income was 7.25 percent for 1993, 1992 and 1991. The
assumed rate of increase in future compensation levels for management, also used
in the determination of the projected benefit obligation, was 4.5 percent in
1993 and 1992.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--Effective January 1, 1992, the
Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". SFAS No. 106 requires the cost of postretirement benefits
granted to employees to be accrued 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 was recognized as determined under the projected unit credit actuarial
method.
In adopting SFAS No. 106, the Company elected to immediately recognize
effective January 1, 1992, the transition obligation for current and future
retirees. The transition obligation was $867.6 less deferred income taxes of
$336.8 or $530.8, net. To this amount, was added the Company's 33% share of
ASI's transition obligation of $20.4 for a total charge of $551.2.
As defined by SFAS No. 71, a regulatory asset and any corresponding
regulatory liability associated with the recognition of the transition
obligation was not recorded because of uncertainties as to the timing and extent
of recovery in the rate-making process.
Substantially all current and future retirees are covered under
postretirement benefit plans sponsored by Ameritech. Such benefits include
medical, dental and group life insurance. Ameritech has been prefunding
(including cash received from the Company) certain of these benefits through
Voluntary Employee Benefit Association trust funds ("VEBAs") and Retirement
Funding Accounts ("RFAs"). The associated plan assets (primarily corporate
securities and bonds) were considered in determining the transition obligation
under SFAS No. 106. Ameritech intends to continue to fund its obligation
appropriately, and is exploring other available funding and cost containment
alternatives. Ameritech allocates its retiree health care cost on a per
participant basis, whereas group life insurance is allocated based on
compensation levels.
SFAS No. 106 requires certain disclosures 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 SFAS No. 106 costs.
As of December 31, 1993 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 7.0 percent as of December 31, 1993 and 7.5 percent as of December 31, 1992.
The assumed rate of future increases in compensation levels was 4.5 percent as
of December 31, 1993 and December 31, 1992. The expected long-term rate of
return on plan assets was 7.25 percent in 1993 and 1992 on VEBAs and 8.0 percent
in 1993 and 1992 on RFAs. The assumed health care cost trend rate in 1993 was
9.6 percent and 10 percent in 1992, and is assumed to decrease gradually to 4
percent in 2007 and remain at that level. The assumed health care cost trend
rate is 9.2 percent for 1994. The health care cost trend rate has significant
effect on the amounts reported for costs each year. Specifically, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the 1993 annual expense by approximately 18 percent.
24
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Postretirement benefit cost under SFAS No. 106 for 1993 and 1992 was $84.7
and $79.8, respectively. During 1991, the cost of postretirement health care
benefits for retirees was $83.8.
As of December 31, 1993, the Company had approximately 15,369 retirees
eligible to receive health care and group life insurance benefits.
POSTEMPLOYMENT BENEFITS--Effective January 1, 1992, the Company adopted SFAS
No. 112, "Employers Accounting for Postemployment Benefits". SFAS No. 112
requires employers to accrue the future cost of certain benefits such as workers
compensation, disability benefits and health care continuation coverage. A
one-time charge related to adoption of this statement was recognized as a change
in accounting principle, effective as of January 1, 1992. The charge was $60.2,
less deferred taxes of $23.4, for a net of $36.8. To this amount, was added the
Company's 33% share of ASI's one-time charge of $0.6 for a total charge of
$37.4. Previously the Company used the cash method to account for such costs.
Current expense levels are dependent upon actual claim experience, but are not
materially different than prior charges to income.
WORKFORCE REDUCTIONS--During 1993, 1,226 employees left the Company through
voluntary and involuntary termination programs. The programs, including
termination benefits, settlement and curtailment gains from the pension plan,
resulted in a credit to expense of $5.4. The involuntary termination plan
remains in effect until December 31, 1994.
During 1992, 676 employees left the Company through a voluntary early
retirement program and involuntary terminations. The net cost of this effort
including termination benefits, settlement and curtailment gains from the
pension plan, was a credit to expense of $4.9.
During 1991, the Company offered most of its management employees an early
retirement program. The net cost of this program, including termination benefits
and a settlement gain from the pension plan, was $1.2.
D. DEBT MATURING WITHIN ONE YEAR--Debt maturing within one year is included
as debt in the computation of debt ratios and consists of the following as of
December 31:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNTS INTEREST RATES*
----------------------------- --------------------
1993 1992 1991 1993 1992 1991
------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Notes payable--Ameritech.................................... $ 494.2 $ 275.7 $ 245.0 3.2% 3.4% 5.1%
Long-term debt maturing within one year..................... 100.3 1.5 2.1
------- ------- -------
Total................................................... $ 594.5 $ 277.2 $ 247.1
------- ------- -------
------- ------- -------
Average notes payable outstanding during the year........... $ 292.7 $ 197.3 $ 236.4 3.1% 3.9% 5.9%
------- ------- ------- ---- ---- ----
------- ------- ------- ---- ---- ----
Maximum notes payable at any month end during the year...... $ 564.4 $ 277.5 $ 298.0
------- ------- -------
------- ------- -------
<FN>
- ---------
*Computed by dividing the average daily face amount of notes payable into the
aggregate related interest expense.
</TABLE>
On January 12, 1994, the Company redeemed all $300.0 of the principal
amounts outstanding on its 8% debentures, due December 4, 2004. The redemption
was made pursuant to a call made by the Company in December 1993. The debentures
were redeemed at 101.85% plus interest accrued to the redemption date. The
redemption was financed with short-term debt. Expenses associated with this call
were $6.5, including a call premium of $5.6. These expenses are recorded as
other expense (income)-net.
25
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1993, $200.0 of debt maturing within one year was
reclassified to long-term debt to reflect the Company's debt offerings made on
January 28, 1994. The debt sold included $100.0 debentures at 6 5/8%, due
February 1, 2025 (noncallable until 2004) and $100.0 notes at 5 4/5%, due
February 1, 2004. The long-term debt issues, settled in February 1994, will be
used to repay notes payable outstanding. These amounts have been included in the
Company's long-term debt. See Note E.
At December 31, 1993 debt maturing within one year reflects the redemption
of the $300.0 debentures, net of the $200.0 of debt offerings made by the
Company.
During 1991 Ameritech consolidated the short-term financing of its
subsidiaries at Ameritech Corporate. See Note A--SHORT-TERM FINANCING
ARRANGEMENTS.
E. LONG-TERM DEBT--Long-term debt consists principally of mortgage bonds and
debentures issued by the Company.
The following table sets forth interest rates and other information on
long-term debt outstanding at December 31, after giving effect to debt
refinanced in January 1994.
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
First Mortgage bonds:
Series D, 3 1/4%, due July 15, 1995............. $ 30.0 $ 30.0
Series G, 4 7/8%, due July 1, 1997.............. 50.0 50.0
Series H, 4 3/8%, due July 1, 2003.............. 50.0 50.0
Series I, 6%, due July 1, 1998.................. -- 125.0
Series J, 8%, due June 1, 2005.................. -- 150.0
Series K, 7 5/8%, due April 1, 2006............. 200.0 200.0
Thirty-one year 8% debentures, due December 10,
2004............................................ -- 300.0
Forty year 8 1/4% debentures, due August 18,
2016............................................ -- 175.0
Forty year 8 1/2% debentures, due April 22,
2026............................................ 275.0 275.0
Thirty-one year 7 1/4% debentures, due March 15,
2024............................................ 200.0 --
Thirty year 7 1/8% debentures, due July 1, 2023... 100.0 --
Thirty-one year debentures, 6 5/8% due February 1,
2025............................................ 100.0* --
Ten year notes, 5 4/5% due February 1, 2004....... 100.0* --
Long-term capital lease obligations............... 5.8 7.0
--------- ---------
$ 1,110.8 $ 1,362.0
Unamortized discount--net......................... (33.8) (31.9)
--------- ---------
Total....................................... $ 1,077.0 $ 1,330.1
--------- ---------
--------- ---------
<FN>
- ---------
*See Note D.
</TABLE>
On March 26, 1993, the Company issued $200.0 of 7 1/4% debentures, due March
15, 2024. On July 6, 1993, the Company issued $100.0 of 7 1/8% debentures, due
July 1, 2023. The proceeds from these issues were used to repay outstanding
notes payable.
On August 9, 1993, the Company redeemed all $150.0 of the principal amounts
outstanding on its 8%, Series J mortgage bonds, due June 1, 2005. The debentures
were redeemed at 101.75%. Expenses associated with this call, net of unamortized
premium amounts, were $2.2, including a call premium of $2.6.
On September 1, 1993, the Company redeemed all $125.0 of the principal
amounts outstanding on its 6%, Series I mortgage bonds, due July 1, 1998. The
debentures were redeemed at par value. Expenses associated with this call were
$0.2.
26
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 12, 1993, the Company redeemed all $175.0 of the principal
amounts on its forty-year, 8 1/4% debentures, due August 18, 2016. The
debentures were redeemed at 104.24% plus interest accrued to the redemption
date. Expenses associated with this call were $8.5, including a call premium of
$7.4.
On January 12, 1994, the Company redeemed all $300.0 of the principal
amounts on its thirty-one year, 8% debentures, due December 10, 2004. The
debentures were redeemed at 101.85% plus interest accrued to the redemption
date. Expenses associated with this call, recorded in 1993, were $6.5, including
a call premium of $5.6. See Note D.
On February 4, 1994, the Company issued debt of $200.0. These issues
included $100.0 debentures at 6 5/8%, due February 1, 2025 (noncallable until
2004) and $100.0 notes at 5 4/5%, due February 1, 2004. The proceeds from these
issues will be used to repay notes payable outstanding. See Note D.
On August 17, 1993, the Company filed a registration statement with the
Securities and Exchange Commission for issuance of up to $550.0 in unsecured
debt securities to be used to retire long-term indebtedness. Debt sold
subsequent to year end of $200.0 reduced the available securities that can be
offered.
Early extinguishment of debt costs (including call premiums and write-offs
of unamortized deferred costs) were $17.4 in 1993 and zero in 1992 and 1991, and
were included in other expense (income) on the statements of income.
Substantially all telecommunications plant owned by the Company is subject
to lien under the indenture covering first mortgage bonds.
F. LEASE COMMITMENTS--The Company leases certain facilities and equipment
used in its operations under both operating and capital leases. Rental expense
under operating leases was $32.3, $36.9 and $32.6 for 1993, 1992 and 1991,
respectively. At December 31, 1993 the aggregate minimum rental commitments
under noncancelable leases were approximately as follows:
<TABLE>
<CAPTION>
YEARS OPERATING CAPITAL
- ----------------------------------------------------- ----------- -----------
<S> <C> <C>
1994................................................. $ 7.7 $ 2.0
1995................................................. 9.2 1.9
1996................................................. 6.7 1.7
1997................................................. 6.6 1.3
1998................................................. 6.5 0.7
Thereafter........................................... 52.9 2.9
----- -----
Total minimum lease commitments...................... $ 89.6 10.5
-----
-----
Less: executory costs............................................. 0.7
interest costs............................................... 2.8
-----
Present value of minimum lease payments........................... $ 7.0
-----
-----
</TABLE>
27
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
G. FINANCIAL INSTRUMENTS--The following table presents the estimated fair
value of the Company's financial instruments as of December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993
----------------------
CARRYING
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Cash and temporary cash investments........................ $ 14.7 $ 14.7
Debt....................................................... 1,670.9 1,690.1
Long-term payable to ASI (for postretirement benefits)..... 30.9 30.9
Other assets............................................... 11.2 11.2
Other liabilities.......................................... 15.3 15.3
</TABLE>
<TABLE>
<CAPTION>
1992
----------------------
CARRYING
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Cash and temporary cash investments........................ $ 17.6 $ 17.6
Debt....................................................... 1,622.0 1,639.0
Long-term payable to ASI (for postretirement benefits)..... 32.7 32.7
Other assets............................................... 9.3 9.3
Other liabilities.......................................... 12.9 12.9
</TABLE>
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 short-term maturity of these instruments.
DEBT--The carrying amount (including accrued interest) of the Company's debt
maturing within one year approximates fair value because of the short-term
maturities involved. The fair value of the Company's 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 long-term receivables, other investments, financial contracts 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.
28
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
H. ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
--------- ---------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS
Other current liabilities:
Accrued payroll.......................................................... $ 23.1 $ 21.8
Compensated absences..................................................... 61.0 58.1
Accrued taxes............................................................ 63.0 84.2
Income taxes deferred one year........................................... (38.6) (65.2)
Advance billings and customer deposits................................... 141.0 135.2
Dividend payable......................................................... 106.3 92.7
Accrued interest......................................................... 27.2 20.8
Other.................................................................... 21.6 46.6
--------- ---------
Total................................................................ $ 404.6 $ 394.2
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME
Interest expense:
Interest on long-term debt............................................... $ 106.1 $ 104.7 $ 105.4
Interest on notes payable--Ameritech..................................... 9.2 7.8 14.0
Interest on capital leases............................................... 0.8 1.1 1.1
Other.................................................................... 3.8 0.6 11.0
--------- --------- ---------
Total................................................................ $ 119.9 $ 114.2 $ 131.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
Interest paid was $113.6, $134.8 and $121.3 in 1993, 1992 and 1991,
respectively.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Taxes other than income taxes
Property................................................................. $ 33.5 $ 28.6 $ 32.4
Gross receipts........................................................... 27.2 29.7 53.8
Other.................................................................... 26.5 32.9 32.2
--------- --------- ---------
Total................................................................ $ 87.2 $ 91.2 $ 118.4
--------- --------- ---------
--------- --------- ---------
Maintenance and repair expense............................................... $ 617.8 $ 598.5 $ 560.3
========= ========= =========
Advertising expenses......................................................... $ 36.6 $ 22.8 $ 19.8
========= ========= =========
Depreciation-Percentage of average depreciable telecommunications
equipment.................................................................. 6.3% 6.5% 6.5%
========= ========= =========
</TABLE>
Revenues from AT&T, consisting principally of interstate network access and
billing and collection service revenues, comprised approximately 12%, 14% and
15%, of total revenues in 1993, 1992 and 1991, respectively. No other customer
accounted for more than 10% of total revenues.
29
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
I. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
NET
OPERATING INCOME
CALENDAR QUARTER REVENUES INCOME (LOSS)
------------- ---------- ----------- -------
<S> <C> <C> <C>
1993
- ------------------------------------------------------------------
1st ............................................................ $ 730.5 $ 169.9 $ 90.9
2nd............................................................. 763.0 205.5 114.1
3rd............................................................. 768.2 192.3 102.1
4th............................................................. 779.3 200.2 110.1
---------- ----------- -------
Total..................................................... $ 3,041.0 $ 767.9 $ 417.2
---------- ----------- -------
---------- ----------- -------
1992
- ------------------------------------------------------------------
1st ............................................................ $ 720.0 $ 162.0 $(497.5)
2nd............................................................. 736.8 181.0 99.0
3rd............................................................. 740.0 183.2 101.3
4th............................................................. 749.6 207.6 122.0
---------- ----------- -------
Total..................................................... $ 2,946.4 $ 733.8 $(175.2)
---------- ----------- -------
---------- ----------- -------
</TABLE>
The fourth quarter of 1993 and 1992 was affected by several income and
expense items. The fourth quarter of 1993 was affected by gains from workforce
resizing and charges for the early retirement of debt. In the 1992 quarter, the
Company recognized higher costs and charges resulting from its market
realignment efforts. These costs were offset by gains resulting from workforce
resizing and higher than expected pension credits.
First quarter 1992 results reflect charges related to the adoption of SFAS
Nos. 106 and 112 for postretirement and postemployment benefits, as discussed
previously in Note C. The charges totaled $588.6.
All adjustments necessary for a fair statement of results for each period
have been included.
J. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of the Company for the five years
ended December 31, 1993, 1992, 1991, 1990, and 1989 was 5.88, 5.86, 4.65, 5.28
and 5.01, respectively.
For the purpose of calculating this ratio, (i) earnings have been calculated
by adding to income before interest expense and accounting changes, the amount
of related taxes on income and the portion of rentals representative of the
interest factor, (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 and such portion of rentals.
K. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
On March 25, 1994, Ameritech announced it would reduce its nonmanagement
workforce resulting in an after-tax charge to the Company of $83.0. The charge
will be recorded in the first quarter of 1994. The details of this plan are
discussed on page 15 in MD&A.
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No changes in nor 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.
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:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Selected Financial and Operating Data.................................................... 10
Report of Independent Public Accountants................................................. 16
Statements:
Consolidated Statements of Income and Reinvested Earnings.............................. 17
Consolidated Balance Sheets............................................................ 18
Consolidated Statements of Cash Flows.................................................. 19
Notes to Consolidated Financial Statements............................................. 20
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<S> <C>
V--Telecommunications Plant.......................................... 33
VI--Accumulated Depreciation.......................................... 35
VIII--Allowance for Uncollectibles..................................... 37
</TABLE>
Financial statement schedules other than those listed above have been
omitted because the required information is contained in the consolidated
financial statements and notes thereto, or because such schedules are not
required or applicable.
(3) EXHIBITS: See index on Page 38.
(B) REPORTS ON FORM 8-K:
On February 4, 1994, the Company filed a Current Report on Form 8-K dated
February 4, 1994 to file pursuant to Item 7, Financial Statements and
Exhibits, certain financial information concerning the Company and its
subsidiary.
On February 4, 1994, the Company filed a Current Report on Form 8-K dated
January 28, 1994 to file pursuant to Item 5, Other Events, (a) copies of
an Underwriting Agreement and a Pricing Agreement executed in connection
with a proposed offering of debentures by the Company to be issued
pursuant to the Registration Statement on Form S-3 (File No. 33-50007)
filed by the Company on August 17, 1993, together with a form of
Officer's Certificate and a form of debentures and (b) an Underwriting
Agreement and a Pricing Agreement executed in connection with a proposed
offering of notes by the Company to be issued pursuant to the
Registration Statement, together with a form of Officer's Certificate and
a form of notes.
31
<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.
ILLINOIS BELL TELEPHONE COMPANY
By _______/S/_RICHARD A. KUZMAR_______
Richard A. Kuzmar
VICE PRESIDENT -- CONTROLLER
March 30, 1994
Pursuant to the requirements 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/_DOUGLAS L. WHITLEY_____
Douglas L. Whitley
PRESIDENT
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER:
______/S/_RICHARD A. KUZMAR_____
Richard A. Kuzmar
VICE PRESIDENT -- CONTROLLER
Ameritech Corporation
By ______/S/_RICHARD H. BROWN_____
Richard H. Brown
VICE CHAIRMAN
The sole shareholder of the
registrant, which is a statutory
close corporation managed by the
shareholder rather than by a board
of directors.
March 30, 1994
32
<PAGE>
SCHEDULE V--SHEET 1
ILLINOIS BELL TELEPHONE COMPANY
SCHEDULE V--TELECOMMUNICATIONS PLANT
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
------------- ---------- --------- -------- ---------- ----------
BALANCE AT ADDITIONS BALANCE AT
BEGINNING AT RETIRE- OTHER END OF
CLASSIFICATION OF PERIOD COST(A) MENTS(B) CHANGES(C) PERIOD
- -------------------------------------------------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR 1993
Land.............................................. $ 37.4 $ 0.5 $ -- $ -- $ 37.9
Buildings......................................... 727.4 24.7 3.9 -- 748.2
Computer and Other Office Equipment............... 402.0 12.8 74.3 -- 340.5
Vehicles and Other Work Equipment................. 210.8 18.2 6.5 -- 222.5
Central Office Equipment.......................... 3,098.2 316.9 327.1 (1.0) 3,087.0
Information Origination/Termination Equipment..... 305.4 20.6 2.9 1.0 324.1
Cable and Wire Facilities......................... 3,207.1 164.1 48.5 -- 3,322.7
Capitalized Lease Assets.......................... 17.8 -- 1.5 -- 16.3
Miscellaneous Other Property...................... 15.4 -- (0.5) -- 15.9
---------- --------- -------- ----- ----------
Total telecommunications plant in service..... 8,021.5 557.8 464.2 -- 8,115.1
Telecommunications plant under construction... 116.5 (7.9) -- -- 108.6
---------- --------- -------- ----- ----------
TOTAL TELECOMMUNICATIONS PLANT........ $ 8,138.0 $ 549.9 $ 464.2 $ -- $ 8,223.7
---------- --------- -------- ----- ----------
---------- --------- -------- ----- ----------
YEAR 1992
Land.............................................. $ 37.4 $ -- $ -- $ -- $ 37.4
Buildings......................................... 711.3 21.1 5.0 -- 727.4
Computer and Other Office Equipment............... 416.7 22.5 37.2 -- 402.0
Vehicles and Other Work Equipment................. 201.9 15.0 6.1 -- 210.8
Central Office Equipment.......................... 3,092.5 268.7 262.9 (0.1) 3,098.2
Information Origination/Termination Equipment..... 293.9 17.4 6.0 0.1 305.4
Cable and Wire Facilities......................... 3,060.7 184.0 37.6 -- 3,207.1
Capitalized Lease Assets.......................... 19.2 1.0 2.4 -- 17.8
Miscellaneous Other Property...................... 15.4 -- -- -- 15.4
---------- --------- -------- ----- ----------
Total telecommunications plant in service..... 7,849.0 529.7 357.2 -- 8,021.5
Telecommunications plant under construction... 60.9 55.9 0.3 -- 116.5
---------- --------- -------- ----- ----------
TOTAL TELECOMMUNICATIONS PLANT........ $ 7,909.9 $ 585.6 $ 357.5 $ -- $ 8,138.0
---------- --------- -------- ----- ----------
---------- --------- -------- ----- ----------
</TABLE>
The notes on Sheet 2 are an integral part of this Schedule.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
33
<PAGE>
SCHEDULE V--SHEET 2
ILLINOIS BELL TELEPHONE COMPANY
SCHEDULE V--TELECOMMUNICATIONS PLANT (CONTINUED)
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
------------- ---------- --------- -------- ---------- ----------
BALANCE AT ADDITIONS BALANCE AT
BEGINNING AT RETIRE- OTHER END OF
CLASSIFICATION OF PERIOD COST(A) MENTS(B) CHANGES(C) PERIOD
- -------------------------------------------------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR 1991
Land.............................................. $ 36.9 $ 0.5 $ -- $ -- $ 37.4
Buildings......................................... 678.2 41.4 8.3 -- 711.3
Computer and Other Office Equipment............... 431.2 43.6 58.1 -- 416.7
Vehicles and Other Work Equipment................. 194.3 24.7 17.1 -- 201.9
Central Office Equipment.......................... 2,965.2 325.3 197.6 (0.4) 3,092.5
Information Origination/Termination Equipment..... 283.4 15.5 5.8 0.8 293.9
Cable and Wire Facilities......................... 2,908.9 191.6 39.4 (0.4) 3,060.7
Capitalized Lease Assets.......................... 17.8 2.4 1.0 -- 19.2
Miscellaneous Other Property...................... 15.2 0.2 -- -- 15.4
---------- --------- -------- ----- ----------
Total telecommunications plant in service..... 7,531.1 645.2 327.3 -- 7,849.0
Telecommunications plant under construction... 124.3 (63.5) (0.1) -- 60.9
---------- --------- -------- ----- ----------
TOTAL TELECOMMUNICATIONS PLANT........ $ 7,655.4 $ 581.7 $ 327.2 $ -- $ 7,909.9
---------- --------- -------- ----- ----------
---------- --------- -------- ----- ----------
<FN>
- ---------
Notes:
(a) Additions, other than to buildings, include material purchased from
Ameritech Services, Inc., a centralized procurement subsidiary in which the
Company has a 33% ownership interest (See Note A to Consolidated Financial
Statements.) Additions shown also include (1) the original cost (estimated
if not known) of reused material, which is concurrently credited to
material and supplies and (2) interest during construction.
(b) Items of telecommunications plant when retired or sold are deducted from
the property accounts at the amounts at which they are included therein
(estimated if not known.)
(c) Comprised principally of reclassifications between plant categories.
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
34
<PAGE>
SCHEDULE VI--SHEET 1
ILLINOIS BELL TELEPHONE COMPANY
SCHEDULE VI--ACCUMULATED DEPRECIATION
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. B COL. C COL. F
------------- -------------- COL. D COL. E -----------
COL. A BALANCE AT ADDITIONS --------------- ------------- BALANCE AT
------------- BEGINNING OF CHARGED TO RETIRE- OTHER END OF
CLASSIFICATION PERIOD EXPENSE(A) MENTS(B) CHANGES(C) PERIOD
- ------------------------------------------- ------------- -------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR 1993
Buildings.................................. $ 209.5 $ 20.4 $ 8.4 $ (0.5) $ 221.0
Computer and Other Office Equipment........ 184.5 54.2 73.1 -- 165.6
Vehicles and Other Work Equipment.......... 71.8 18.6 6.2 -- 84.2
Central Office Equipment................... 1,264.8 254.2 320.5 -- 1,198.5
Information Origination/ Termination
Equipment................................ 170.2 14.7 3.1 -- 181.8
Cable and Wire Facilities.................. 1,230.0 143.5 51.7 -- 1,321.8
Capitalized Lease Assets................... 9.6 1.3 1.0 -- 9.9
Miscellaneous Other Property............... 1.9 -- -- 0.5 2.4
------------- ------- ------- ----- -----------
TOTAL ACCUMULATED
DEPRECIATION................. $ 3,142.3 $ 506.9 $ 464.0 $ -- $ 3,185.2
------------- ------- ------- ----- -----------
------------- ------- ------- ----- -----------
YEAR 1992
Buildings.................................. $ 198.6 $ 20.5 $ 9.6 $ -- $ 209.5
Computer and Other Office Equipment........ 158.7 60.6 34.8 -- 184.5
Vehicles and Other Work Equipment.......... 61.8 17.9 7.9 -- 71.8
Central Office Equipment................... 1,270.0 254.3 259.5 -- 1,264.8
Information Origination/ Termination
Equipment................................ 162.0 13.4 5.2 -- 170.2
Cable and Wire Facilities.................. 1,135.3 141.0 46.3 -- 1,230.0
Capitalized Lease Assets................... 10.0 1.9 2.3 -- 9.6
Miscellaneous Other Property............... 1.9 -- -- -- 1.9
------------- ------- ------- ----- -----------
TOTAL ACCUMULATED
DEPRECIATION................. $ 2,998.3 $ 509.6 $ 365.6 $ -- $ 3,142.3
------------- ------- ------- ----- -----------
------------- ------- ------- ----- -----------
</TABLE>
The notes on Sheet 2 are an integral part of this Schedule.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35
<PAGE>
SCHEDULE VI--SHEET 2
ILLINOIS BELL TELEPHONE COMPANY
SCHEDULE VI--ACCUMULATED DEPRECIATION (CONTINUED)
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. B COL. C COL. F
------------- --------------- COL. D COL. E -----------
COL. A BALANCE AT ADDITIONS --------------- ------------- BALANCE AT
------------- BEGINNING OF CHARGED TO RETIRE- OTHER END OF
CLASSIFICATION PERIOD EXPENSE(A) MENTS(B) CHANGES(C) PERIOD
- ------------------------------------------ ------------- --------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR 1991
Buildings................................. $ 194.0 $ 19.8 $ 13.9 $ (1.3) $ 198.6
Computer and Other Office Equipment....... 150.5 62.1 53.9 -- 158.7
Vehicles and Other Work Equipment......... 60.9 17.7 16.8 -- 61.8
Central Office Equipment.................. 1,204.0 250.3 182.0 (2.3) 1,270.0
Information Origination/ Termination
Equipment............................... 154.8 12.3 4.7 (0.4) 162.0
Cable and Wire Facilities................. 1,045.3 133.5 43.5 -- 1,135.3
Capitalized Lease Assets.................. 9.2 1.7 0.9 -- 10.0
Miscellaneous Other Property.............. 1.9 -- -- -- 1.9
------------- ------- ------- ----- -----------
TOTAL ACCUMULATED
DEPRECIATION................ $ 2,820.6 $ 497.4 $ 315.7 $ (4.0) $ 2,998.3
------------- ------- ------- ----- -----------
------------- ------- ------- ----- -----------
<FN>
- ---------
(a) The Company's 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 plant with similar
characteristics. The Company is allowed by regulatory authorities to use
reserve deficiency amortization in conjunction with the remaining life
method. For years 1993, 1992 and 1991, depreciation expressed as a
percentage of average depreciable plant was 6.3%, 6.5% and 6.5%,
respectively.
(b) Amounts include amortization of undepreciated balance and retirement of
investment in tools and equipment costing less than five hundred dollars
but more than two hundred dollars for items purchased prior to January 1,
1989.
(c) Includes reclassifications between plant accounts, adjustments for
depreciation expense previously recorded in other periods and transfers
from operating plant to non-operating plant.
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
36
<PAGE>
SCHEDULE VIII
SCHEDULE VIII--ALLOWANCE FOR UNCOLLECTIBLES
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. C
---------------------
COL. B ADDITIONS COL. E
---------- --------------------- ----------
COL. A BALANCE AT CHARGED CHARGED TO COL. D BALANCE AT
------------- BEGINNING TO OTHER ------------- END OF
CLASSIFICATION OF PERIOD EXPENSE ACCOUNTS(A) DEDUCTIONS(B) PERIOD
- -------------------------------------------------- ---------- ------- ----------- ------------- ----------
Year 1993......................................... $ 35.2 $ 31.2 $ 55.3 $ 85.0 $ 36.7
<S> <C> <C> <C> <C> <C>
Year 1992......................................... 36.2 34.3 61.1 96.4 35.2
Year 1991......................................... 26.6 38.4 60.1 88.9 36.2
<FN>
- ---------
(a) Includes amounts related to interexchange carrier receivables which are
being billed by the Company and amounts previously written off which were
credited directly to this account when recovered.
(b) Amounts written off as uncollectible.
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
37
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
*3a --Articles of Incorporation of the registrant as amended and restated March 21, 1990 (Exhibit 3a to Form
10-K for 1989, File No. 1-2222).
*3b --By-Laws of the registrant effective March 21, 1990 (Exhibit 3b to Form 10-K for 1989, File No.
1-2222).
4 --No instrument which defines the rights of holders of long and intermediate term debt of the registrant
is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request.
*10a --Reorganization and Divestiture Agreement among American Telephone and Telegraph Company, American
Information Technologies Corporation (n/k/a Ameritech Corporation) and Affiliates dated November 1,
1983 (Exhibit 10a to Form 10-K for 1983 for Ameritech Corporation, File No. 1-8612).
*10b --Agreement Concerning Contingent Liabilities, Tax Matters and Termination of Certain Agreements among
American Telephone and Telegraph Company, Bell System Operating Companies, Regional Holding Companies
and Affiliates dated November 1, 1983 (Exhibit 10j to Form 10-K for 1983 for Ameritech Corporation,
File No. 1-8612).
*10c --Agreement Concerning Illinois Bell Mortgage Bonds with American Telephone and Telegraph Company dated
January 1, 1984 (Exhibit (10)(ii)(B)8 to Form 10-K for 1983, File No. 1-2222).
*10d --Ordinance authorizing the Company to construct, maintain and operate a telephone system in the City of
Chicago, effective July 30, 1931 (Exhibit 5-C to Registration Statement No. 2-42370).
12 --Computation of Ratio of Earnings to Fixed Charges.
24 --Consent of Independent Public Accountants.
<FN>
- ---------
*Incorporated by reference
</TABLE>
38
<PAGE>
EXHIBIT 12
ILLINOIS BELL TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1. EARNINGS
a) Income before interest expense, income tax and cumulative effect
of change in accounting principles................................ $ 758.0 $ 729.0 $ 650.4 $ 662.7 $ 647.1
b) Portion of rental expense representative of the interest factor
(1)............................................................... 10.8 12.3 10.8 11.6 12.9
--------- --------- --------- --------- ---------
Total 1(a) through 1(b)........................................ $ 768.8 $ 741.3 $ 661.2 $ 674.3 $ 660.0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
2. FIXED CHARGES
a) Total interest expense including capital lease obligations........ $ 119.9 $ 114.2 $ 131.5 $ 116.2 $ 118.9
b) Portion of rental expense representative of the interest factor
(1)............................................................... 10.8 12.3 10.8 11.6 12.9
--------- --------- --------- --------- ---------
Total 2(a) through 2(b)........................................ $ 130.7 $ 126.5 $ 142.3 $ 127.8 $ 131.8
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
3. RATIO OF EARNINGS TO FIXED CHARGES.................................. 5.88 5.86 4.65 5.28 5.01
========= ========= ========= ========= =========
<FN>
- ---------
(1) The Company considers one-third of rental expense to be the amount
representing return on capital.
</TABLE>
39
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 28, 1994, included as an Exhibit to this
Form 10-K, into Illinois Bell Telephone Company's previously filed Registration
Statement File No. 33-50007.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
March 30, 1994
40
