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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 1-2222
ILLINOIS BELL TELEPHONE COMPANY
An Illinois Corporation I.R.S. Employer No.
36-1253600
225 West Randolph Street
Chicago, Illinois 60606
Telephone Number 1-800-257-0902
Securities registered pursuant to Section 12(b) of the Act:
Thirty-Five Year 7 5/8% First Mortgage Bonds, Series K, due April 1,
2006
Exchanges on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH
CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION J(2).
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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TABLE OF CONTENTS
PART I
Item Page
---- ----
1. Business......................................... 1
2. Properties....................................... 7
3. Legal Proceedings................................ 8
4. Submission of Matters to a Vote of Security
Holders (Omitted pursuant to General Instruction J(2)).
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable).
6. Selected Financial and Operating Data............ 9
7. Management's Discussion and Analysis of Results of
Operations (Abbreviated pursuant to
General Instruction J(2))....................... 10
8. Financial Statements and Supplementary Data...... 17
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 31
PART III
10. Directors and Executive Officers of the Registrant
(Omitted pursuant to General Instruction J(2)).
11. Executive Compensation (Omitted pursuant to
General Instruction J(2)).
12. Security Ownership of Certain Beneficial Owners
and Management (Omitted pursuant to General
Instruction J(2)).
13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction J(2)).
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ....................... 32
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PART I
Item 1. Business.
The Company
Illinois Bell Telephone Company (Illinois Bell or the Company),
incorporated under the laws of the State of Illinois, has its
principal office at 225 West Randolph Street, Chicago, Illinois
60606 (telephone number 1-800-257-0902). The Company is a wholly
owned subsidiary of Ameritech Corporation (Ameritech), a Delaware
Corporation. Ameritech is the parent of numerous other
communications businesses and has its principal executive offices at
30 South Wacker Drive, Chicago, Illinois 60606 (telephone number 1-
800-257-0902). Illinois Bell is managed by its sole shareowner
rather than a Board of Directors as permitted by Illinois law.
Ameritech operates its business within the framework of customer-
specific business units delivering specialized services to various
categories of customers, each with unique requirements. The
functions of the business units, which include consumer, business,
cellular, advertising and capital services, as well as services
provided to other companies in the communications industry, overlap
the legal entities, including the Company, which form the
infrastructure of Ameritech. The products and services of all the
companies are marketed under the "Ameritech" brand identity, but
Ameritech's five landline communications companies remain
responsible within their respective service areas for providing
telephone and other communications services, subject to regulation
by the Federal Communications Commission (FCC) and the respective
state public service commissions in Illinois, Indiana, Michigan,
Ohio and Wisconsin. Illinois Bell is regionally identified and does
business as "Ameritech Illinois."
Ameritech is one of seven regional holding companies (RHCs)
formed in connection with the court-approved divestiture of certain
assets of AT&T Corp. (AT&T), formerly American Telephone and
Telegraph Company. Effective January 1, 1984, AT&T transferred to
Ameritech its 100% ownership of the exchange telecommunications,
exchange access and printed directory advertising portions of
Illinois Bell; Indiana Bell Telephone Company, Incorporated;
Michigan Bell Telephone Company; The Ohio Bell Telephone Company and
Wisconsin Bell, Inc.
(referred to collectively as the "Ameritech landline communications
subsidiaries"), as well as a cellular communications company.
The consent decree, entitled "Modification of Final Judgment"
(Consent Decree), as originally approved in 1982 by the United
States District Court for the District of Columbia (Court), placed
restrictions on the post-divestiture activities of the seven RHCs,
including Ameritech. Relief from these restrictions could be had
only upon a showing to the Court that there was no substantial
possibility that the requesting company could use its monopoly power
to impede competition in the market it sought to enter. Over time,
the Court granted waivers to the RHCs to engage in otherwise
prohibited lines of business, including the right to offer
information services. Ameritech sought to remove or modify the
remaining restrictions, which included prohibitions on providing
long distance services and manufacturing telecommunications
equipment. These efforts were suspended upon the passage of the
Telecommunications Act of 1996 (Telecom Act). The Telecom Act
effectively superseded future operation of the Consent Decree.
Consequently, in April 1996, the Court issued an order terminating
the Consent Decree and dismissing all pending waiver requests.
Implementing the Telecom Act
On February 8, 1996, the first comprehensive overhaul of
telecommunications legislation in 62 years was signed into law,
removing barriers that prevented the phone, cable TV and broadcast
industries from entering each others businesses. The Telecom Act
addresses various aspects of competition within, and regulation of,
the communications industry. Among other things, the new law
defines the conditions under which local exchange carriers,
including the Ameritech landline communications subsidiaries, may
offer long distance service and provides certain mechanisms intended
to facilitate local exchange competition. The Act gives the FCC the
authority to determine when incumbent
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local exchange carriers have satisfied the statutory criteria
required to provide long distance service in an in-region state,
including meeting a 14-point competitive checklist. The law
eliminates any remaining barriers to companies wishing to compete
against providers of local phone service.
As required by the new law, in August 1996 the FCC adopted rules
to implement the local competition provisions. The rules require
local exchange carriers, among other duties, to (1) provide
interconnection to any telecommunications carrier at any technically
feasible point, equal in quality to that provided for the local
exchange carrier's own operations; (2) provide such carriers with
access to network elements on an unbundled basis; and (3) offer for
resale, at wholesale rates, any telecommunications services that the
local exchange carrier provides at retail to subscribers who are not
telecommunications carriers. The FCC's rules address pricing for
interconnection, unbundled network elements and resale of
telecommunications services.
In October 1996, in an order entered in an appeal filed by
certain local exchange carriers, the U.S. Court of Appeals for the
Eight Circuit stayed the portion of the FCC rules with respect to
pricing and the FCC's so-called "pick and choose" rules. The U.S.
Supreme Court declined to overturn the appeals court stay. The stay
will be in effect until the appeals court decides on the merits of
those provisions, sometime in 1997. Although Ameritech filed a
separate lawsuit, the appeals court consolidated all challenges to
the FCC rules. In the meantime, the FCC's interconnection rules
remain in effect.
It is not possible to determine what effect the FCC rules will
have on the Company's business until challenges to the rules have
been resolved and the state regulatory commission in Illinois has
acted on the matters within its jurisdiction.
Illinois Bell's Full Service Communications Business
Illinois Bell furnishes a wide variety of advanced
communications services, including local exchange and toll service,
network access and communications products to business, residential
and communications company customers in an operating area comprised
of 16 Local Access and Transport Areas (LATAs) in Illinois. These
LATAs are generally centered on a city or other identifiable
community of interest, and each LATA marks the boundary within which
Illinois Bell may provide telephone service. The Company provides
two basic types of communications services. It transports
communications traffic between a subscriber's equipment and the
telephone exchange offices located within the same LATA (intraLATA
service). These services include local exchange, private line and
intraLATA toll services (including 800 and special services for
data, radio and video transport). In addition, it provides exchange
access service, which links a subscriber's telephone or other
equipment to the transmission facilities of long distance carriers,
which in turn provide communications service between LATAs
(interLATA, or long distance, service). About 80% of the population
and 20% of the area of Illinois is served by Illinois Bell. The
remainder of the state is served by nonaffiliated telephone
companies.
Illinois Bell also provides directory listings, public telephone
and local and toll operator services, including collect calls, third
number billing, person-to-person and calling card calls. It offers
call management services, including voice mail, Caller ID, call
waiting and call forwarding, as well as digital network services
such as on-line database access and fax messaging, document sharing
functions and video conferencing for desktop computers. A new
national directory assistance service became available in the
Chicago and Detroit areas in 1996, with plans calling for this
service to be offered across the Ameritech region. The Company
provides billing and collection services for several companies,
including billing for long distance services offered by certain long
distance carriers, some of which began billing their own customers
in 1996. In 1996, Illinois Bell launched the first phase of a plan
to offer to customers in certain areas a single bill for long
distance and local telephone services, as well as other services
provided by affiliated companies, such as cellular, paging and
security monitoring services, with cable TV and Ameritech's long
distance services to be added at a later date. The Company markets
its local phone services on a wholesale basis to certain carriers
that resell services from the Company's network.
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The following table sets forth the number of access lines served
by the Company at the end of each of the last five years:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Access lines in service
(in thousands)........... 6,473 6,258 5,983 5,763 5,586
Percent increase over prior
year..................... 3.4 4.6 3.8 3.2 2.3
Illinois Bell has an agreement with: Ameritech Publishing, Inc.,
an Ameritech subsidiary; 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
Illinois Bell, the partnership pays 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. In 1994, Illinois Bell exercised its
option to extend the current agreement through 1999.
Ameritech Services, Inc. (ASI) is a company jointly owned by
Illinois Bell and the other Ameritech landline communications
subsidiaries. ASI provides to those companies human resources,
technical services, procurement, marketing and regulatory planning,
as well as labor contract bargaining oversight and coordination.
ASI acts as a shared resource for the Ameritech subsidiaries
providing operational support for the Ameritech landline
communications subsidiaries and integrated communications and
information systems for all the business units.
In 1996, about 88% of the total operating revenues of the
Company were from communications services and the remainder
principally from billing and collection services, rents, directory
advertising and other miscellaneous nonregulated operations. About
70% of the revenues from communications services were attributable
to intrastate operations.
Regulatory Environment - Federal
Illinois Bell is subject to jurisdiction by the FCC pursuant to
applicable law. The FCC prescribes for communications companies a
uniform system of accounts, rules for apportioning costs between
regulated and nonregulated services, and the principles and standard
procedures used to separate regulated property, plant and equipment
costs, revenues, expenses, taxes and reserves between those
applicable to interstate services under the jurisdiction of the FCC
and those applicable to intrastate services under the jurisdiction
of the respective state regulatory authorities.
The transformation of the local exchange business has been
underway for some time, even before recent federal legislation. The
Company's interstate revenues are now regulated by a price cap
mechanism rather than by rate-of-return regulation. The FCC's price
cap regulatory scheme sets maximum limits on the prices that local
exchange carriers, including Illinois Bell, can charge for
interstate access as compensation for the use of their facilities
for the origination or termination of long distance and other
communications by other carriers. The limits are adjusted each year
to reflect inflation, a productivity factor and certain other cost
changes. Under price caps, local exchange carriers have increased
flexibility to change prices of access services, as well as prices
for interstate intraLATA and video dial tone service offerings,
provided they do not exceed the allowed price cap. Under interim
changes to the price cap plan, the FCC adopted three
productivity/sharing options. Illinois Bell and the other Ameritech
landline communications subsidiaries elected the 5.3% productivity
factor which allows the Company to retain all of its earnings,
whereas election of a lower factor would require earnings to be
shared with customers. The FCC has established a rulemaking
proceeding to consider permanent changes to its price cap regulation
plan.
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One major regulatory uncertainty concerns access charge reform.
In December 1996, the FCC laid out its proposals in this area,
asking for comments on a number of steps it would take to
restructure the fees to make the system compatible with the pro-
competitive deregulatory framework established by the Telecom Act.
This move was the third in a trilogy of FCC actions that it has said
are designed to foster and accelerate the introduction of efficient
competition in all telecommunications markets. In August 1996, the
FCC released its Interconnection Order to implement the local
competition provisions of the Telecom Act. In November 1996, the
Federal-State Universal Service Joint Board issued its
recommendations to the FCC for reforming the existing system of
universal basic telephone service, which is the part of access
charges used, among other things, to subsidize local service in high
cost areas of the country. The goal is to preserve and advance
universal service in a manner that permits local telephone markets
to move from monopoly to competition. The FCC's current access
charge policies were adopted at the time of the divestiture by AT&T.
These policies were designed primarily to promote competition in the
interstate, interexchange market by ensuring that all long distance
companies would be able to originate and terminate their traffic
over incumbent local exchange carrier networks at just, reasonable
and nondiscriminatory rates. Although these policies contemplated
long distance competition, they did not attempt to address the
potential effects of full competition. Final rules on access
charges are expected in May 1997. In a separate proceeding, the FCC
is working to overhaul the mechanism to determine the actual cost of
universal service, and how those costs will be recovered.
As part of the process of reforming the interstate access charge
system, the FCC sought comment on the treatment of Internet and
other information service providers (sometimes referred to as
enhanced service providers) that also use the local exchange
carriers' facilities. Since the access charge system was
established in 1983, enhanced service providers have been
classified, for purposes of the access charge rules, as end users
rather than carriers and therefore are exempt from access charges.
The FCC made no specific proposals, but tentatively concluded that
enhanced service providers should not be subject to access charges
as currently constituted.
Other FCC Matters
In June 1996, the FCC adopted rules that will allow customers to
switch local exchange carriers without having to change their phone
numbers. Under the rules, by the end of 1998 the nation's one
hundred largest metropolitan areas must have "number portability"
that meets FCC standards, and local exchange carriers are required
to offer temporary number portability, such as remote call
forwarding, immediately. The groundwork for number portability was
already laid in Illinois in March 1996 when the state regulatory
commission approved a stipulated agreement among Illinois Bell and
other telecommunications carriers, the first of its kind in the
nation, to implement number portability as soon as technically
feasible in the Chicago area, as early as 1997.
In July 1996, the FCC announced that the former Bell operating
companies of AT&T (Bell Companies), including Ameritech, that
provide out-of-region long distance service through an affiliate
will be regulated as "nondominant carriers" as long as they meet
three requirements. The interim rules allow the Bell Companies
nondominant carrier status if their affiliated companies maintain
accounting records separate from those of the parent, do not jointly
own transmission or switching equipment with the parent and obtain
services from the parent at tariffed rates. Nondominant carriers
are not subject to price cap regulation and their tariffs take
effect on one day's notice, compared with at least two weeks for
dominant carriers. The FCC plans to establish final rules for Bell
Company out-of-region services in another rulemaking that began in
March 1996.
In December 1996, the FCC issued transitional structural and
accounting rules that apply to the provision of certain services
provided by the Bell Companies including in-region long distance
services. These rules require that certain services be provided
through a separate affiliate and prohibit joint ownership of
switching and transmission facilities. In addition, they call for
nondiscrimination between the affiliate and nonaffiliate long
distance carriers, subject to certain exemptions. The FCC order did
not resolve the issue of whether Bell Company in-region long
distance affiliates will be considered nondominant.
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Regulatory Environment - State
Illinois Bell is also subject to regulation by the Illinois
Commerce Commission (ICC) with respect to certain intrastate rates
and services. Advantage Illinois, approved by the ICC in 1994,
provided a new framework for regulating Illinois Bell by capping
prices for noncompetitive services. At the same time, the Company's
monthly line charge for residential customers and residential
calling rates within local calling areas was capped at November 1994
levels for five years. In return for these price protections, the
ICC removed a ceiling on Illinois Bell's earnings to reflect the
increasingly competitive communications industry and to create
incentive to invest in new technology, develop new services and
improve efficiency.
In April 1996, Illinois Bell implemented Dial 1+ capability in
its local toll markets in Illinois, giving customers the ability to
choose an alternate carrier for intraLATA toll calls by dialing 1
before the phone number. The ICC issued an order in June that set
rules and pricing mechanisms for interconnection, unbundled network
elements and the wholesale discount to resellers of local services.
The order was in response to an AT&T petition that requested a
wholesale price for retail services of Illinois Bell and another
Illinois local exchange carrier. In July 1996, Illinois Bell
implemented a $31 million general rate reduction, including price
cuts for residential calling, Caller ID and other optional features
and monthly line charges for business customers statewide. This was
the third consecutive year of price reductions under the Advantage
Illinois plan totaling $164 million. In November, the ICC allowed
Ameritech's statement of generally available terms and conditions
for interconnection to go into effect, subject to further review by
the ICC. In February 1997, a Second Interim Order was issued by the
ICC which incorporated updates based on an interconnection agreement
recently approved by the commission. Ameritech has asked all five
state commissions in its region to declare that its statement of
generally available terms and conditions for interconnection meets
the competitive checklist under the Telecom Act.
Long Distance Services
Under the Telecom Act, Illinois Bell and other Bell Companies
must open the local market to competition by implementing a 14-point
checklist before they can offer interLATA long distance service to
their local landline customers. The FCC will determine whether or
not a Bell Company has satisfied the statutory criteria, including
the competitive checklist, compliance with structural and accounting
rules and whether its entry into long distance is consistent with
the public interest. A Bell Company is restricted from providing
interLATA long distance service until the FCC determines that the
statutory criteria have been met. The FCC will give substantial
weight to Department of Justice recommendations in reviewing a
carrier's entry into the market. In preparation, Illinois Bell has
negotiated or arbitrated numerous agreements with competitors to
allow interconnection access to the Company's network elements at
cost-based rates and purchase of its local services at discounted,
wholesale rates for resale to the public. The FCC has 90 days to
act upon a Bell Company's application to provide interLATA long
distance service.
InterLATA long distance is a $2.8 billion market in the
Company's local service area. Ameritech expects to offer landline
interLATA long distance service within its region in 1997. However,
FCC rules require that interLATA long distance service be offered by
a separate subsidiary of Ameritech. Accordingly, Ameritech's entry
into this market will not generate long distance revenues for
Illinois Bell. Ameritech is also certified in all states outside
its five-state region. Long distance carriers, WorldCom, Inc. and
Teleglobe Inc. will complete long distance calls for Ameritech
outside the region on a resale basis.
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Competition -- Evolution of the Industry
Because of the Telecom Act, the communications landscape is
rapidly changing. One objective of the new law was to foster local
exchange competition by establishing a regulatory framework to
govern the provision of local and long distance telecommunications
services. It permits the Bell Companies, including Illinois Bell,
to provide interLATA long distance services only after satisfying
the conditions of the new laws for opening local markets to
competition and demonstrating to the FCC that such provision is in
the public interest. For the first time in more than 60 years, all
communications companies are governed by a new set of rules that
call for competition and open markets, not regulatory management, as
the basic business environment. This public policy change opens a
host of business opportunities for providers of all forms of
communications, enabling them to become full-service providers of
voice, video, data, local and long distance services for their
customers. As a result of the new law, consumers can expect to see
more choices and receive greater value for these services.
With the passage of the Telecom Act, Illinois Bell's local
service market is being opened to competition from long distance
carriers, cable TV providers and other nontraditional local service
providers. Interconnection agreements with these providers and the
applicable regulations require the Company to allow access to
network elements at cost-based rates or to provide services for
resale at discounted, wholesale rates. Competitive entry by these
providers may result in some downward pressure on local service
revenues as a portion of the Company's revenues shift from local
service at retail rates to network access at wholesale rates.
The Telecom Act will also bring renewed scrutiny of the current
universal service funding policy. Historically, network access
charges have been used to help local exchange carriers ensure
universal basic telephone service to all customers. Modifications
of this policy by the FCC may result in changes to the Company's
revenue stream related to network access charges.
Although telecom reform was the most dramatic change affecting
the communications industry in 1996, another industry trend that
intensified was the number of mergers, alliances and joint ventures.
Over time, the number, variety and size of competitors will change
and may include companies with substantial capital, technological
and marketing resources and wide-ranging service offerings.
It is impossible to predict the specific impact of the Telecom
Act and other changes in the industry on Illinois Bell's business or
financial condition. Notwithstanding the potential for an adverse
effect on its revenue streams, the Company expects to capture a
major share of the expected growth in the communications
marketplace, building on its strengths and branching into new
services that are a logical extension of its business.
Patents, Trademarks and Licenses
The Company, through its parent, Ameritech, has rights to use
various patents, copyrights, trademarks and other intellectual
property which are necessary for it to conduct its present business
operations. It is not anticipated that any such intellectual
property will be subject to expiration or nonrenewal of rights which
would materially and adversely affect the Company.
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Illinois Bell's Human Resources
As of December 31, 1996, Illinois Bell employed 14,785 persons,
a nominal decrease from 14,791 as of December 31, 1995. In 1996,
Ameritech commenced a ten-year agreement with Integrated Systems
Solutions Corporation (ISSC), a subsidiary of IBM, to perform
certain information technology services formerly performed by the
Ameritech landline communications companies, and to assume
responsibility for consolidation of Ameritech's data centers.
Approximately 100 management employees of the Company were offered
and accepted employment with ISSC.
The Communications Workers of America (CWA) and the
International Brotherhood of Electrical Workers (IBEW) represent
more than 12,000 of the Company's employees. Of those so
represented, about 15% are represented by the CWA and about 85% are
represented by the IBEW, both of which are affiliated with the AFL-
CIO. Current three-year contracts expire in the summer of 1998.
Item 2. Properties.
The properties of Illinois Bell do not lend themselves to
description by character and location of principal units. As of
December 31, 1996, the Company's investment in property, plant and
equipment consisted of the following:
Land and buildings.................................. 9%
Central office equipment............................ 39
Cable, wiring and conduit........................... 43
Other............................................... 8
Under construction.................................. 1
---
100%
Central office equipment includes analog and digital switching
equipment, transmission equipment and related facilities. Buildings
are principally central offices. Cable, wiring and conduit
constitute outside plant, which include poles, as well as cable,
conduit and wiring primarily above or under public roads, highways
or streets or above or under private property. Substantially all of
the installations of central office equipment and administrative
offices are located in buildings owned by the Company and situated
on property it owns. Many garages and business offices and some
installations of central office equipment and administrative offices
are in leased quarters.
Capital expenditures, the single largest use of Company funds,
were as follows for the last five years (in millions):
1992 ........................................ $579
1993 ........................................ 537
1994 ........................................ 503
1995 ........................................ 490
1996 ........................................ 632
Illinois Bell has been making and expects to continue to make
large capital expenditures to respond to the market's demand for a
modern, efficient and productive network. The total investment in
property, plant and equipment increased from about $7.9 billion as
of December 31, 1991, to $8.8 billion as of December 31, 1996, after
giving effect to retirements, but before deducting accumulated
depreciation at either date.
Under the Advantage Illinois plan, the Company committed to
making $3.0 billion in capital and other network expenditures over
the five year period ending 1999. This commitment has been
clarified recently to include the capital expenditures of Illinois
Bell and specifically exclude the capital expenditures of other
Ameritech subsidiaries in Illinois.
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Item 3. Legal Proceedings.
Pre-Divestiture Contingent Liabilities Agreement
The Court-approved Plan of Reorganization signed in connection
with AT&T's divestiture effective January 1, 1984 provides for the
recognition and payment of liabilities that are attributable to
pre-divestiture events (including transactions to implement the
divestiture) but that do not become certain until after the
divestiture. These contingent liabilities relate principally to
litigation and other claims with respect to the former Bell
Companies' rates, taxes, contracts, equal employment matters,
environmental matters and torts (including business torts, such as
alleged violations of the antitrust laws).
With respect to such liabilities, under agreements entered into
at divestiture, AT&T and the Bell Companies will share the costs of
any judgment or other determination of liability entered by a court
or administrative agency, the costs of defending the claim
(including attorneys' fees and court costs) and the cost of interest
or penalties with respect to any such judgment or determination.
Except to the extent that affected parties may otherwise agree, the
general rule is that responsibility for such contingent liabilities
will be divided among AT&T and the Bell Companies on the basis of
their relative net investment (defined as total assets less
accumulated depreciation) as of the effective date of divestiture.
Different allocation rules apply to liabilities which relate
exclusively to pre-divestiture interstate or intrastate operations.
In January 1995, Ameritech and the other RHCs agreed to
terminate the sharing arrangement among the Bell Companies with
respect to pre-divestiture contingent liabilities for certain
matters. AT&T did not enter into the agreement and, accordingly,
the sharing arrangement remains in effect with respect to AT&T's pre-
divestiture liabilities and AT&T's share of Bell Company pre-
divestiture liabilities.
Although complete assurance cannot be given as to the outcome of
any litigation, in the opinion of the Company's management, any
monetary liability or financial impact to which Illinois Bell would
be subject after final adjudication of all of the foregoing actions
would not be material in amount to the Company.
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PART II
Item 6. Selected Financial and Operating Data.
ILLINOIS BELL TELEPHONE COMPANY
SELECTED FINANCIAL AND OPERATING DATA
(Dollars in Millions)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues
Local service........... $2,105.9 $1,958.4 $1,919.4 $1,834.2 $1,768.4
Interstate
network access......... 773.1 757.5 734.9 701.5 688.0
Intrastate
network access......... 103.5 95.0 92.3 80.4 79.2
Long distance........... 251.1 246.4 226.7 162.3 162.8
Other................... 429.5 356.7 304.7 297.0 283.5
-------- -------- -------- -------- --------
Total.................... 3,663.1 3,414.0 3,278.0 3,075.4 2,981.9
Operating expenses*...... 2,676.7 2,396.8 2,648.6 2,307.5 2,248.1
-------- -------- -------- -------- --------
Operating income......... 986.4 1,017.2 629.4 767.9 733.8
Interest expense......... 116.3 117.2 105.7 117.5 112.9
Other (income) expense,
net..................... (10.7) (7.5) (9.0) 12.3 6.1
Income taxes............. 365.9 334.2 206.3 220.9 201.4
-------- -------- -------- -------- --------
Income before
extraordinary item
and cumulative effect of
changes in accounting
principles.............. 514.9 573.3 326.4 417.2 413.4
Extraordinary item
and cumulative effect of
changes in accounting
principles**............ - - (728.6) - (588.6)
-------- -------- -------- -------- --------
Net income (loss)........ $ 514.9 $ 573.3 $ (402.2) $ 417.2 $ (175.2)
-------- -------- -------- -------- --------
Total assets............. $5,190.3 $4,980.3 $4,797.3 $6,176.2 $6,095.2
Property, plant
and equipment, net...... $3,829.9 $3,755.3 $3,809.5 $5,038.5 $4,995.7
Capital expenditures,
net..................... $ 631.8 $ 489.8 $ 503.0 $ 536.9 $ 579.2
Long-term debt........... $1,012.3 $1,061.2 $1,062.2 $1,077.0 $1,330.1
Debt ratio............... 57.7 % 56.5 % 58.9 % 47.6 % 46.9 %
Return on average
equity.................. 40.8 % 51.7 % (22.8)% 22.3 % (9.7)%
Return on average
total capital........... 20.9 % 24.8 % (8.3)% 14.7 % (1.8)%
Pretax interest
coverage................ 8.6 9.0 6.1 6.4 6.4
Customer lines -
at end of year (000's).. 6,473 6,258 5,983 5,763 5,586
Customer lines served by -
Digital electronic
offices................ 82.6 % 82.0 % 81.5 % 64.6 % 50.8 %
Analog electronic
offices................ 17.4 % 18.0 % 18.5 % 35.4 % 49.2 %
Customer lines
per employee............ 438 423 382 324 295
Employees -
at end of year.......... 14,785 14,791 15,678 17,785 18,914
- -------------------
* As discussed in Note D to the financial statements, 1995
operating expenses include a net work force restructuring credit
of $57.1 million, while 1994 operating expenses include a
nonmanagement work force restructuring charge of $196.5 million.
** As discussed in Note I, the Company had a noncash after-tax
extraordinary charge in 1994 of $728.6 million as a result of
discontinuing the application of FAS 71. The Company had
accounting changes in 1992 for FAS 106 and FAS 112 aggregating
$588.6 million, after tax.
9
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations.
(Dollars in Millions)
Following is a discussion and analysis of the results of
operations of the Company for the year ended December 31, 1996 and
for the year ended December 31, 1995, which is based on the
Statements of Income and Accumulated Deficit. Other pertinent data
is also set forth in Selected Financial and Operating Data.
Results of Operations
Revenues
Total operating revenues were $3,663.1 million for 1996 and
$3,414.0 million for 1995. The increase of $249.1 million or 7.3%
consisted of the following:
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Local service......... $2,105.9 $1,958.4 $ 147.5 7.5
Local service revenues include basic monthly service fees and
usage charges, fees for call management services, installation and
connection charges and public phone revenues. The increase in local
service revenues in 1996 as compared with 1995 was due largely to
higher network usage volumes, resulting primarily from growth in the
number of access lines, which increased 3.4% to 6,473,000 as of
December 31, 1996 as compared with 6,258,000 as of December 31,
1995. Greater sales of call management services, such as call
forwarding, call waiting and Caller ID, also contributed to the
increase, as did the impact of a refund to certain business
customers that unfavorably affected 1995 revenues. This increase
was partially offset by net rate decreases.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Network access
Interstate ......... $ 773.1 $ 757.5 $ 15.6 2.1
Intrastate ......... 103.5 95.0 8.5 8.9
Network access revenues are fees charged to interexchange
carriers that use the Company's local landline communications
network to connect customers to their long distance network. In
addition, end users pay flat rate access fees to connect to the long
distance network. These revenues are generated from both interstate
and intrastate services.
The increase in network access revenues in 1996 was due
primarily to an increase in network minutes of use resulting from
overall growth in the volume of calls handled for interexchange
carriers. Minutes of use related to interstate and intrastate calls
increased by 9.1% and 29.4%, respectively, in 1996 compared with the
prior year.
The increase in interstate network access revenues was offset by
net rate reductions. The increase in intrastate network access
revenues was offset primarily by a refund to interexchange carriers
related to certain payphone use fees in the second quarter of 1996,
as well as net rate reductions.
10
<PAGE>
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Long distance......... $ 251.1 $ 246.4 $ 4.7 1.9
Long distance service revenues are derived from customer calls to
locations outside of their local calling areas, but within the same
Local Access and Transport Area (LATA). The increase in long
distance service revenues in 1996 as compared with 1995 was due
primarily to higher network usage, as well as increased revenues
related to surcharges collected for third-party credit card calls.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Other................. $ 429.5 $ 356.7 $ 72.8 20.4
Other revenues include revenues derived from directory
advertising, billing and collection services, inside wire
installation and maintenance services and other miscellaneous
services. The increase in other revenues in 1996 as compared with
1995 was due to growth in voice messaging, equipment sales and other
nonregulated services, as well as increases in revenues from inside
wire installation and maintenance services. These increases were
partially offset by a decrease in billing and collection services,
as certain long distance carriers began direct billing of their own
customers in 1996.
Operating Expenses
Total operating expenses in 1996 increased by $279.9 million or
11.7% to $2,676.7 million. The increase was partially attributable
to the 1994 work force restructuring, which resulted in a credit of
$57.1 million ($30.4 million after-tax) in 1995 related primarily to
settlement gains from lump-sum pension payments to former employees,
partially offset by fourth quarter charges for planned work force
reductions due to data center consolidations, increased force costs
related to the work force restructuring started in 1994 and a charge
to write down certain data processing equipment in connection with
information technology restructuring. Total operating expenses also
increased in 1996 due to increases in other operating expenses, such
as cost of sales, uncollectibles and affiliated services, as
discussed below.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Employee-related
expenses............. $ 795.1 $ 789.2 $ 5.9 0.7
The increase in employee-related expenses for 1996 was primarily
due to increases in wage rates and overtime expenses, and an
increase in payroll taxes. These increases were partially offset by
a decrease in benefit expenses.
In September 1995, union agreements were ratified by the
Communications Workers of America (CWA) and the International
Brotherhood of Electrical Workers (IBEW). The new contracts and
wage increases were retroactive to June 25, 1995 for the IBEW and
August 6, 1995 for the CWA. The contracts include basic wage
increases of 10.9% (compounded at the maximum wage rate) over three
years and a signing bonus of $500 to eligible employees upon
ratification. In addition, union employees now receive their annual
bonuses in the form of Ameritech stock instead of cash, beginning
with the bonus for 1995 and continuing for the remaining years of
the labor contracts. Both contracts address wages, benefits,
pensions, employment security, training and retraining and other
conditions of employment. Most of the Company's nonmanagement work
force (about 85% of total employees) is represented by the two
unions.
There were 14,785 employees as of December 31, 1996, compared
with 14,791 as of December 31, 1995.
11
<PAGE>
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Depreciation and
amortization......... $ 570.4 $ 537.9 $ 32.5 6.0
The increase in depreciation and amortization expense in 1996
was due to higher depreciation as a result of higher average plant
balances and the use of higher depreciation rates in certain plant
categories due to shorter depreciable lives established in 1994.
The increase was partially offset by a decrease in computer
equipment depreciation.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Other operating
expenses............. $1,219.4 $1,060.4 $ 159.0 15.0
The increase in other operating expenses for 1996 was due to
increases in uncollectibles and advertising and other expenses
related to increased sales efforts for equipment and call management
services, such as voice messaging and other nonregulated services.
Higher contract and affiliated services expenses related primarily
to systems programming and reengineering also contributed to the
increase, as did an increase in cost of sales.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Restructuring (credits)
charges.............. $ - $ (57.1) $ 57.1 n/a
As discussed more fully in Note D, the Company significantly
reduced its nonmanagement work force during 1994 and 1995 by 3,503
employees. New employees with different skills were added during
this period to accommodate growth and meet staffing requirements for
new business opportunities. As of December 31, 1995, all 3,503
employees had left the Company, including 803 leaving in 1995.
Pretax charges totaling $196.5 million ($118.4 million after-tax)
related to the work force reductions were recorded in 1994. Noncash
settlement gains of $101.4 million were recorded in 1995, associated
primarily with lump-sum pension payments to former employees,
partially offset by increased force costs related to the
restructuring started in 1994, as well as a charge to write down
certain data processing equipment to net realizable value.
The restructuring program was recorded as follows:
Gross Net Program Cost
Program Settlement ----------------
Cost Gains Pretax After-tax
---- ----- ------ ---------
1995...................... $ 44.3 $(101.4) $ (57.1) $ (30.4)
1994...................... 291.4 (94.9) 196.5 118.4
------- ------- ------- -------
Program total........... $ 335.7 $(196.3) $ 139.4 $ 88.0
======= ======= ======= =======
Additional employees left the Company in 1996 as a result of the
consolidation of data centers and additional work force reductions
previously discussed. No restructuring charges or credits were
recorded in 1996.
The work force restructuring program reduced annual employee-
related costs by approximately $50 thousand per departing employee.
The savings are being partially offset by the hiring of new
employees as discussed above.
12
<PAGE>
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Taxes other than
income taxes......... $ 91.8 $ 66.4 $ 25.4 38.3
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other taxes not directly related to earnings.
The increase in taxes other than income taxes in 1996 was primarily
due to higher property tax rates and assessed valuations, as well as
the effect of a favorable prior year impact of legislation involving
property tax reforms. Capital stock taxes also increased due to the
effects of a favorable true-up adjustment recorded in 1995 and
higher accrual levels in 1996.
Other Income and Expenses
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Interest expense...... $ 116.3 $ 117.2 $ (0.9) (0.8)
The decrease in interest expense in 1996 was due to a decrease
in interest on borrowings from the Ameritech short-term pool, as
well as decreased miscellaneous interest expense and increased
capitalized interest.
Change
Income Percent
1996 1995 (Expense) Change
---- ---- -------- ------
Other income,
net.................. $ 10.7 $ 7.5 $ 3.2 42.7
Other income, net includes earnings related to the Company's
investments, interest income and other nonoperating items. Other
income in 1996 increased primarily because the Company's share of
equity earnings from ASI increased, as did interest income.
Increase Percent
1996 1995 (Decrease) Change
---- ---- -------- ------
Income taxes.......... $ 365.9 $ 334.2 $ 31.7 9.5
Income taxes increased in 1996 due primarily to a revision to
deferred taxes resulting from the Company's discontinuance of
regulatory accounting. A modification to how state income taxes are
determined within Ameritech contributed to the increase as well.
13
<PAGE>
Other Matters
New accounting pronouncements
In June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." As amended by FAS 127, this
statement establishes standards of accounting for transfers of
assets in which the transferor has some continuing involvement with
the assets transferred or with the transferee. It also clarifies
the accounting for arrangements whereby assets are set aside for the
extinguishment of a liability. The statement is generally effective
for transactions occurring after December 31, 1996, with early or
retroactive application prohibited. The Company does not expect
adoption of this standard will have a material impact on its
financial statements.
In October 1996, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities." This SOP provides
authoritative guidance on specific accounting issues related to the
recognition, measurement, display and disclosure of environmental
remediation liabilities. The SOP addresses only those actions
undertaken in response to a threat of litigation or assertion of a
claim. It does not address accounting for pollution control costs
with respect to current operations or for costs of future site
restoration or closure required upon cessation of operations. The
SOP is effective for fiscal years beginning after December 15, 1996.
The Company does not expect adoption of this standard will have a
material impact on its financial statements.
Competition
Because of the Telecom Act, the communications landscape is
rapidly changing. The new law, among other things, was designed to
foster local exchange competition by establishing a regulatory
framework to govern the provision of local and long distance
telecommunications services. The 1996 Telecom Act permits the Bell
Companies to provide interLATA long distance services only after
satisfying the conditions of the new law for opening local markets
to competition and demonstrating to the FCC that such provision is
in the public interest. For the first time in more than sixty
years, all communications companies are governed by a new set of
rules that call for competition and open markets, not regulatory
management, as the basic business environment. This public policy
change opens a host of business opportunities for providers of all
forms of communications, enabling them to become full service
providers of voice, video, data, local and long distance services
for their customers. As a result of the new law, consumers can
expect to see more choices and competitive prices for these and
other services.
With the passage of the Telecom Act, the Company's local service
markets are being opened to competition from interexchange carriers,
cable TV providers and other nontraditional local service providers.
Interconnection agreements with these providers and the applicable
regulations require the Company to allow access to network elements
at cost-based rates or to provide services for resale at discounted,
wholesale rates. Competitive entry by these providers in some
downward pressure on local service revenues, as a portion of the
Company's revenue shifts from local service at retail rates to
network access at wholesale rates.
The Telecom Act will also bring renewed scrutiny of the current
universal service funding policy. Historically, network access
charges have been used to help local exchange carriers ensure
universal basic telephone service to all customers. Modifications
of this policy by the FCC may result in changes to the Company's
revenue stream related to network access charges.
In 1996, the Company signed a significant number of
interconnection and resale agreements with competitors, paving the
way for entry into the interLATA long distance market. However, FCC
rules require that interLATA long distance service be offered by a
separate subsidiary of Ameritech. Accordingly, Ameritech's entry
into this market will not generate long distance revenues for
Illinois Bell. As a result, the potential revenue decline brought
by local service competition will not be offset at the Company by
gains in long distance revenue.
14
<PAGE>
It is impossible to predict the specific impact of the Telecom
Act and other changes in the industry on Illinois Bell's business or
financial condition. Notwithstanding the potential for an adverse
effect on its revenue streams, the Company intends to pursue growth
opportunities in its local exchange business.
Advantage Illinois
On October 11, 1994, the ICC approved an alternative regulation
proposal - Advantage Illinois- that was initially filed by the
Company in December 1992. The ICC order eliminated rate-of-return
regulation and replaced it with price regulation.
The order included initial rate reductions of $93.2 million.
These reductions included the elimination of monthly touch-tone
charges for all customers and the lowering of monthly charges for
business customers who have their own PBX call processing equipment.
Other reductions included lower usage rates for certain calls and
lower charges for carrier access. The order also imposed a five-
year cap on basic residential rates and also allowed the Company to
set its own depreciation rates.
Subsequent rate changes related to noncompetitive services were
implemented in July 1995 and July 1996 and will be implemented each
July thereafter based on changes in the Gross Domestic Product Price
Index (GDPPI) and other factors for the previous calendar year.
The Company filed with the ICC an Application for Rehearing of
various portions of the Order. The ICC denied rehearing. On
appeal, the Illinois Appellate Court for the Second District denied
the Company's appeal, but reversed the Commission's Order based on
the appeal of another party on the ground that the Commission had
failed to make a statutorily-required determination that the
Company's rate of return on investment, as approved by the
Commission, did not include any incremental risk or increased cost
of capital as a direct or indirect result of the Company's
affiliation with Ameritech or other unregulated companies. The case
was remanded to the Commission on January 10, 1997, and the
Commission has requested comments from the parties regarding the
appropriate procedure on remand and whether the record should be
reopened for additional evidence. The Company has taken the
position that the Commission should make the required finding on the
existing record, and that no changes to the Company's rate of return
on investment are warranted.
Dial 1+
The Company implemented intra-MSA (Market Service Area; similar
to LATA boundaries but within state borders) presubscription on
April 7, 1996 pursuant to the Customers First Order issued by the
ICC on April 7, 1995. Presubscription allows customers to select
one carrier for inter-MSA interstate calling and a second carrier
for non-local intra-MSA calls. Non-local intra-MSA calls include
all Band C calls (more than 15 miles) plus intra-MSA toll calls
between the Company's territory and that of an independent company.
As a result, the Company's customers may now select an alternate
long distance carrier for Band C calls by presubscribing their Band
C calls and intra-MSA toll calls to that carrier.
Illinois rate reductions
Effective July 11, 1996, the Company reduced rates by $31.0
million annually under the adjustment process of the Advantage
Illinois plan discussed above. These rate reductions primarily
impact local service revenues.
16
<PAGE>
Wholesale/Resale Order
On June 26, 1996, the ICC approved an Order establishing
wholesale prices to be made available to resellers. Based on the
discount from retail levels required, the Company will experience
lower operating margins on those services purchased at wholesale.
The potential impact cannot be quantified because the demand shift
to resellers is unknown.
Private securities litigation reform act safe harbor statement
Except for historical information contained herein, the above
discussion contains certain forward-looking statements that involve
potential risks and uncertainties. The Company's future results
could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not
limited to, changes in economic and market conditions, effects of
state and federal regulation and the impact of new technologies.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or update these forward-
looking statements to reflect events or circumstances that arise
after the date hereof or to reflect the occurrence of unanticipated
events.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowner of Illinois Bell Telephone Company
We have audited the accompanying balance sheets of Illinois Bell
Telephone Company (an Illinois Corporation) as of December 31, 1996
and 1995, and the related statements of income and accumulated
deficit and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Illinois Bell Telephone Company as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note I to the financial statements, the Company
discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," in 1994.
Our audits are made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The financial
statement schedule included in Item 14(a)(2) is presented for
purposes of complying with the Securities and Exchange Commission's
rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 13, 1997
17
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues.......................... $ 3,663.1 $ 3,414.0 $ 3,278.0
--------- --------- ---------
Operating expenses................
Employee-related expenses....... 795.1 789.2 827.9
Depreciation and amortization... 570.4 537.9 527.1
Other operating expenses........ 1,219.4 1,060.4 1,012.6
Restructuring (credits) charges. - (57.1) 196.5
Taxes other than income taxes... 91.8 66.4 84.5
--------- --------- ---------
2,676.7 2,396.8 2,648.6
--------- --------- ---------
Operating income.................. 986.4 1,017.2 629.4
Interest expense.................. 116.3 117.2 105.7
Other income, net................. 10.7 7.5 9.0
--------- --------- ---------
Income before income taxes and
extraordinary item............... 880.8 907.5 532.7
Income taxes...................... 365.9 334.2 206.3
--------- --------- ---------
Income before extraordinary item.. 514.9 573.3 326.4
Extraordinary item................ - - (728.6)
--------- --------- ---------
Net income (loss)................. 514.9 573.3 (402.2)
Reinvested earnings (deficit),
beginning of year................ (465.8) (608.5) 133.2
Less, dividends................... 432.7 430.6 398.5
--------- --------- ---------
Accumulated deficit,
end of year...................... $ (383.6) $ (465.8) $ (608.5)
========= ========= =========
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
BALANCE SHEETS
(Dollars in Millions)
As of December 31,
------------------
1996 1995
---- ----
Assets
Current assets
Cash and temporary
cash investments..................... $ - $ 0.3
Receivables, net
Customers and agents
(less allowance for
uncollectibles of $81.6 and
$48.8, respectively)................ 836.9 745.8
Ameritech and affiliates............. 53.0 39.5
Other................................ 23.4 29.9
Material and supplies................. 18.7 17.8
Prepaid and other..................... 17.0 26.4
--------- ---------
949.0 859.7
--------- ---------
Property, plant and equipment
In service............................ 8,781.8 8,382.7
Under construction.................... 55.1 62.0
--------- ---------
8,836.9 8,444.7
Less, accumulated depreciation........ 5,007.0 4,689.4
--------- ---------
3,829.9 3,755.3
--------- ---------
Investments, principally
in affiliates.......................... 85.6 85.5
Other assets and deferred charges....... 325.8 279.8
--------- ---------
Total assets............................. $ 5,190.3 $ 4,980.3
========= =========
Liabilities and shareowner's equity
Current liabilities
Debt maturing within one year
Ameritech............................ $ 735.3 $ 544.0
Other................................ 51.5 1.3
Accounts payable
Ameritech Services, Inc. (ASI)....... 178.7 197.0
Ameritech and affiliates............. 20.8 11.9
Other................................ 244.1 225.1
Other current liabilities............. 292.1 362.0
--------- ---------
1,522.5 1,341.3
--------- ---------
Long-term debt.......................... 1,012.3 1,061.2
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred
income taxes......................... 244.9 220.8
Unamortized investment
tax credits.......................... 49.6 61.0
Postretirement benefits
other than pensions.................. 921.1 932.5
Long-term payable to ASI.............. 25.5 27.3
Other................................. 93.2 97.2
--------- ---------
1,334.3 1,338.8
--------- ---------
Shareowner'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
Accumulated deficit................... (383.6) (465.8)
--------- ---------
1,321.2 1,239.0
--------- ---------
Total liabilities and
shareowner's equity..................... $ 5,190.3 $ 4,980.3
========= =========
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss)................. $ 514.9 $ 573.3 $ (402.2)
Adjustments to net income (loss):
Extraordinary item, net of tax.. - - 728.6
Restructuring (credits) charges,
net of tax..................... - (30.4) 118.4
Depreciation and amortization... 570.4 537.9 527.1
Deferred income taxes, net...... 18.8 76.8 29.5
Investment tax credits, net..... (11.4) (14.2) (14.6)
Capitalized interest............ (3.6) (2.8) (3.3)
Change in accounts receivable... (98.1) (119.0) (32.9)
Change in material and supplies. (11.2) (9.4) 3.8
Change in certain other
current assets................. 9.4 8.1 (24.6)
Change in accounts payable...... 9.6 (73.3) 117.3
Change in certain other
current liabilities............ 105.2 (100.6) (51.4)
Change in certain noncurrent
assets and liabilities......... (66.7) (0.3) (41.5)
Other operating activities, net. (16.8) (22.2) (4.9)
--------- --------- ---------
Net cash from operating
activities....................... 1,020.5 823.9 949.3
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures, net......... (628.8) (487.0) (499.7)
Proceeds from (costs of)
disposals of property,
plant and equipment, net........ 2.2 7.8 (0.7)
Other investing activities, net... 0.2 0.8 -
--------- --------- ---------
Net cash from investing
activities....................... (626.4) (478.4) (500.4)
--------- --------- ---------
Cash flows from financing activities:
Intercompany financing, net....... 191.3 67.3 (17.5)
Issuances of long-term debt....... - - 196.1
Retirements of long-term debt..... - (31.2) (301.2)
Dividend payments................. (586.9) (388.4) (333.9)
Other financing activities, net... 1.2 - -
--------- --------- ---------
Net cash from financing
activities....................... (394.4) (352.3) (456.5)
--------- --------- ---------
Net decrease in cash and
temporary cash investments....... (0.3) (6.8) (7.6)
Cash and temporary cash
investments, beginning of year... 0.3 7.1 14.7
--------- --------- ---------
Cash and temporary cash
investments, end of year......... $ - $ 0.3 $ 7.1
========= ========= =========
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
ILLINOIS BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
A. Significant Accounting Policies
Nature of Operations - Illinois Bell Telephone Company (the
Company) is a wholly owned subsidiary of Ameritech Corporation
(Ameritech). 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. (referred
to collectively as the "Ameritech landline communications
subsidiaries"). The Company provides a wide variety of
communications services in Illinois, including local exchange and
toll service, and network access and telecommunications products.
See discussion of competition and significant new legislation in
Other Matters in Management's Discussion and Analysis of Results of
Operations.
Basis of Accounting - The financial statements have been
prepared in accordance with generally accepted accounting principles
(GAAP). The financial statements include the accounts of the
Company and, through March 31, 1995, its wholly owned subsidiary,
Illinois Bell Administration Center, Inc. (IBAC). The subsidiary,
formed in 1988 to hold a limited partnership interest in a real
estate venture, was sold in the first quarter of 1995. All
significant intercompany transactions have been eliminated. In
1994, the Company discontinued following accounting prescribed by
Statement of Financial Accounting Standards No. 71 (FAS 71),
"Accounting for the Effects of Certain Types of Regulation." (See
Note I).
Use of Estimates - The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Transactions with Affiliates - The Company has various
agreements with affiliated companies. Below is a description of the
significant arrangements followed by a table of the amounts
involved.
1. Ameritech Services, Inc. (ASI) - ASI, an Ameritech-
controlled affiliate in which the Company has 33% ownership,
provides planning, development, management, procurement and support
services to all of the Ameritech landline communications
subsidiaries. The Company also provides certain services and
facilities to ASI.
1996 1995 1994
---- ---- ----
Purchases of
materials and charges
for services from ASI..... $ 790.7 $ 733.8 $ 739.5
Recovery of
costs for services
provided to ASI .......... 19.0 20.1 23.5
2. Ameritech (the Company's parent) - Ameritech provides
various administrative, planning, financial and other services to
the Company. These services are billed to the Company at cost.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 42.4 $ 34.4 $ 32.3
21
<PAGE>
3. Ameritech Publishing, Inc. (API), a wholly owned subsidiary
of Ameritech doing business as Ameritech Advertising Services - 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.
1996 1995 1994
---- ---- ----
Fees paid to the Company
by DonTech ............... $ 75.0 $ 75.0 $ 75.0
4. Ameritech Information Systems, Inc. (AIS), a wholly owned
subsidiary of Ameritech - The Company reimburses AIS for costs
incurred by AIS in connection with the sale of network services by
AIS employees.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 34.8 $ 25.2 $ 17.1
5. Bell Communications Research, Inc. (Bellcore) - Bellcore
provides research and technical support to the Company. ASI has a
one-seventh ownership interest in Bellcore and bills the Company for
costs.
1996 1995 1994
---- ---- ----
Charges incurred........... $ 26.3 $ 29.1 $ 34.5
Property, Plant and Equipment - Property, plant and equipment
are stated at original cost. The provision for depreciation is
based principally on the straight-line remaining life and the
straight-line equal life group methods of depreciation applied to
individual categories of property, plant and equipment with similar
characteristics. As a result of the discontinuation of applying FAS
71 in 1994, the Company recognized shorter, more economically
realistic lives and increased its accumulated depreciation balance
by $1,151.5 million. (See Note I).
The following is a summary of average lives (in years) before
and after the discontinuation of FAS 71:
Asset Category Before After
-------------- ------ -----
Central office equipment
Digital switching............... 17 7
Analog switching................ up to 4 obsolete
Circuit accounts................ 8-12 7
Copper and fiber cable
and wire facilities ........... 20-32 15
All other....................... various various
Generally, when depreciable plant is retired, the amount at
which such plant has been carried in property, plant and equipment
in service is charged to accumulated depreciation. The cost of
maintenance and repairs of plant is charged to expense.
Investments - The Company's investment in ASI (33% ownership and
$84.4 million as of December 31, 1996) is reflected in the financial
statements using the equity method of accounting. All other
investments are carried at cost. Derivative transactions, if any,
are executed by Ameritech. The Company had no derivative
transactions in 1996 or 1995.
Material and Supplies - Inventories of new and reusable material
and supplies are stated at the lower of cost or market with cost
generally determined on an average cost basis.
22
<PAGE>
Income Taxes - The Company is included in the federal income tax
return filed by Ameritech and its subsidiaries. The Company's
provision for income taxes is determined effectively on a separate
company basis.
Deferred tax assets and liabilities are determined at the end of
each period based on differences between the financial statement
bases of assets and liabilities and the tax bases of those same
assets and liabilities, using the currently enacted statutory tax
rates. Deferred income tax expense is measured by the change in the
net deferred income tax asset or liability during the year.
The Company uses the deferral method of accounting for
investment tax credits whereby credits realized are being amortized
as reductions to tax expense over the life of the plant that gave
rise to the credits.
Temporary Cash Investments - Temporary cash investments are
stated at cost which approximates market value. The Company
considers all highly liquid, short-term investments with an original
maturity of three months or less to be cash equivalents.
Advertising Costs - Advertising costs are generally charged to
operations as incurred.
Revenue Recognition - Revenues are generally recognized as
services are provided or products are delivered to customers.
Certain local telephone revenues are billed in advance, resulting in
deferred revenues.
Short-Term Financing Arrangement - Ameritech provides short-term
financing and cash management services to its subsidiaries,
including the Company. Ameritech issues commercial paper and notes
and secures bank loans to fund the working capital requirements of
its subsidiaries and invests short-term excess funds on their
behalf. Interest charged to the Company by Ameritech for financing
was $35.8 million in 1996, $38.3 million in 1995 and $27.1 million
in 1994. (See Note E).
B. Income Taxes
The components of income tax expense follow:
1996 1995 1994
---- ---- ----
Federal
Current........................ $ 292.9 $ 211.7 $ 226.0
Deferred, net................... 7.3 87.5 (41.9)
Investment tax credits, net..... (11.4) (14.2) (14.6)
--------- --------- ---------
Total............................. 288.8 285.0 169.5
--------- --------- ---------
State and Local
Current......................... 65.6 33.2 43.5
Deferred, net................... 11.5 16.0 (6.7)
--------- --------- ---------
Total........................... 77.1 49.2 36.8
--------- --------- ---------
Total income tax expense.......... $ 365.9 $ 334.2 $ 206.3
========= ========= =========
Total income taxes paid were $308.0 million, $312.6 million, and
$290.2 million in 1996, 1995 and 1994, respectively.
23
<PAGE>
The following is a reconciliation between the statutory federal
income tax rate for each of the past three years and the Company's
effective tax rate:
1996 1995 1994
---- ---- ----
Statutory federal income
tax rate......................... 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit.................. 5.7 3.5 4.5
Reduction in tax expense due to
amortization of investment tax
credits........................ (0.8) (1.0) (2.7)
Real estate write-down requiring
valuation allowance............ - - 2.5
Benefit of tax rate differential applied
under FAS 71 applied to reversing
temporary differences............ - - (1.3)
Other............................. 1.6 (0.7) 0.7
--------- --------- ---------
Effective income tax rate......... 41.5% 36.8% 38.7%
========= ========= =========
As of December 31, 1996 and 1995 the components of long-term
accumulated deferred income taxes were as follows:
1996 1995
---- ----
Deferred tax assets
Postretirement and
postemployment benefits....... $ 381.0 $ 389.5
Other.......................... 21.0 8.8
-------- --------
402.0 398.3
-------- --------
Deferred tax liabilities
Accelerated depreciation....... 532.6 510.2
Prepaid pension cost........... 111.5 95.2
Other.......................... 2.8 13.7
-------- --------
646.9 619.1
-------- --------
Net deferred tax liability...... $ 244.9 $ 220.8
======== ========
Deferred income taxes in current assets and liabilities relate
primarily to temporary differences resulting from vacation pay,
uncollectibles, and work force restructuring. The Company had
valuation allowances against certain deferred tax assets aggregating
$12.0 million as of December 31, 1996 and 1995.
24
<PAGE>
C. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
1996 1995
---- ----
Land............................ $ 37.4 $ 38.8
Buildings....................... 784.4 755.3
Central office equipment........ 3,470.6 3,183.6
Cable, wiring and conduit....... 3,753.6 3,559.0
Other........................... 735.8 846.0
-------- --------
8,781.8 8,382.7
Under construction.............. 55.1 62.0
-------- --------
8,836.9 8,444.7
Less, accumulated depreciation.. 5,007.0 4,689.4
-------- --------
$3,829.9 $3,755.3
======== ========
Depreciation expense on property, plant and equipment was $570.4
million, $537.9 million and $527.1 million in 1996, 1995 and 1994,
respectively.
D. Employee Benefit Plans
Pension Plans - Ameritech maintains noncontributory defined
benefit pension plans covering substantially all of the Company's
employees and death benefit plans for nonmanagement employees.
Pension credits are allocated to subsidiaries based upon the
percentage of compensation for the management plan and per employee
for the nonmanagement plan. The Company's funding policy is to
contribute annually an amount up to the maximum amount that can be
deducted for federal income tax purposes. However, due to the
funded status of the plans, no contributions have been made for the
years reported below. The following data provides information on
the Company's credits for the Ameritech plans:
1996 1995 1994
---- ---- ----
Pension credits............ $ (40.7) $ (33.8) $ (60.0)
Current year credits
as a percent of
salaries and wages........ (6.0)% (5.3)% (8.0)%
Pension expense was determined using the projected unit credit
actuarial method. The resulting pension credits are primarily
attributable to favorable investment performance and the funded
status of the plans.
Certain disclosures are required to be made of the components of
pension credits and the funded status of the plans, including the
actuarial present value of accumulated plan benefits, accumulated
projected benefit obligation and the fair value of plan assets.
Such disclosures are not presented for the Company because the
structure of the Ameritech plans does not permit the plans' data to
be readily disaggregated.
The assets of the Ameritech plans consist principally of debt
and equity securities, fixed income investments and real estate. As
of December 31, 1996, the fair value of plan assets available for
plan benefits exceeded the projected benefit obligation (calculated
using a discount rate of 7.5% and 6.9% as of December 31, 1996 and
1995, respectively). The assumed long-term rate of return on plan
assets used in determining pension credits (or income) was 8.0% for
1996 and 7.25% for 1995 and 1994. The assumed increase in future
compensation, also used in the determination of the projected
benefit obligation, was 4.2% in 1996 and 4.5% in 1995.
25
<PAGE>
Postretirement Benefits Other Than Pensions - Ameritech sponsors
health care and life insurance plans which provide noncontributory
postretirement benefits to substantially all of the Company's
retirees and their dependents. Ameritech accrues the cost of
postretirement benefits granted to employees as expense over the
period in which the employee renders service and becomes eligible to
receive benefits. The cost of postretirement health care and life
insurance benefits for current and future retirees is recognized as
determined under the projected unit credit actuarial method.
Ameritech allocates its retiree health care cost on a per
participant basis, whereas group life insurance is allocated based
on compensation levels.
Ameritech has provided for part of the cost of these plans by
making contributions for health care benefits to voluntary employee
benefit association trust funds (VEBAs) and maintains retirement
funding accounts (RFAs) to provide life insurance benefits.
Ameritech intends to continue to fund the nonmanagement VEBA.
Funding of the management VEBA was suspended effective in 1994. The
nonmanagement VEBA and the RFAs earn income without tax. Plan
assets consist principally of corporate securities and bonds.
Certain disclosures are required as to the components of
postretirement benefit costs and the funded status of the plans.
Such disclosures are not presented for the Company as the structure
of the Ameritech plans does not permit the data to be readily
disaggregated. However, the Company has been advised by Ameritech
as to the following assumptions used in determining FAS 106 costs.
As of December 31, 1996, the accumulated postretirement benefit
obligation exceeded the fair value of plan assets available for plan
benefits. The assumed discount rate used to measure the accumulated
postretirement benefit obligation was 7.5% as of December 31, 1996
and 6.9% as of December 31, 1995. The assumed rate of increase in
future compensation levels was 4.2% in 1996 and 4.5% in 1995. The
expected long-term rate of return on plan assets was 8.0% in 1996
and 7.25% in 1995 and 1994 on VEBAs, and 8.0% in 1996, 1995 and 1994
on RFAs. The assumed health care cost trend rate in 1996 was 8.4%
and 8.8% in 1995, and is assumed to decrease gradually to 4.0% in
2007 and remain at that level. The assumed health care cost trend
rate is 8.0% for 1997. The health care cost trend rate has a
significant effect on the amounts reported for costs each year, as
well as on the accumulated postretirement benefit obligation.
Specifically, increasing the assumed health care cost trend rate by
one percentage point in each year would have increased the 1996
annual expense by approximately 15.6%.
Postretirement benefit cost under FAS 106 was $95.6 million in
1996, $88.6 million in 1995 and $90.2 million in 1994.
As of December 31, 1996, the Company had approximately 18,000
retirees eligible to receive health care and group life insurance
benefits.
Work Force and Other Restructuring - During March 1994,
Ameritech announced a plan to reduce its existing nonmanagement work
force. As of December 31, 1995, 3,503 employees had left the
Company as a result of this restructuring. See additional
discussion in Management's Discussion and Analysis of Results of
Operations.
As a result of this restructuring, a pretax charge of $196.5
million, or $118.4 million after-tax, was recorded in 1994. In
1995, a credit of $57.1 million, or $30.4 million after-tax, was
recorded resulting primarily from settlement gains from lump-sum
pension payments to former employees, net of additional
restructuring charges of $15.5 million recorded in the fourth
quarter of 1995. The fourth quarter restructuring charges included
$11.2 million associated with increased force costs related to the
restructuring started in 1994, as well as planned work force
reductions due to consolidation of Ameritech's data centers. In
connection with this consolidation, an additional $4.3 million was
recorded to write down certain data processing equipment to
estimated net realizable value. The cumulative gross program cost
through December 31, 1995 totaled $335.7 million, partially offset
by settlement gains of $196.3 million for an aggregate pretax net
program cost of $139.4 million, or $88.0 million after-tax.
26
<PAGE>
Management Work Force Reductions - Effective January 1, 1995,
management employees who are asked to leave the Company will receive
a severance payment under the Management Separation Benefit Program
(MSBP). The Company accounts for this benefit in accordance with
FAS 112, "Employers' Accounting for Postemployment Benefits,"
accruing the separation cost when incurred. The number of employees
leaving the Company under the MSBP and the predecessor plan was 73
in 1996, 57 in 1995 and 277 in 1994.
Settlement gains result from the payment of lump-sum
distributions from the pension plan to former employees and are
recorded as a credit to other operating expense. Settlement gains,
net of termination costs, under the plans were $5.5 million, $8.9
million and $13.0 million in 1996, 1995 and 1994, respectively. The
involuntary plans are funded from Company operations and required
cash payments of $1.7 million, $1.4 million and $9.6 million in
1996, 1995 and 1994, respectively.
E. Debt Maturing Within One Year
Debt maturing within one year is included as debt in the
computation of debt ratios and consisted of the following as of
December 31:
1996 1995
---- ----
Notes payable - Ameritech....... $ 735.3 $ 544.0
Long-term debt maturing
within one year................ 51.5 1.3
-------- --------
Total........................... $ 786.8 $ 545.3
======== ========
Weighted average interest
rate of notes payable,
year-end....................... 5.4% 5.8%
======== ========
As of December 31, 1996, $50.0 million of long-term debt was
reclassified to debt maturing within one year to reflect First
Mortgage bonds, Series G, 4 7/8%, which mature in July 1997.
F. Long-Term Debt
Long-term debt consists principally of mortgage bonds and
debentures issued by the Company.
The following table sets forth interest rates, scheduled
maturities and other information on long-term debt outstanding as of
December 31:
1996 1995
---- ----
First Mortgage bonds:
Series G, 4 7/8%, due July 1, 1997...... $ - $ 50.0
Series H, 4 3/8%, due July 1, 2003...... 50.0 50.0
Series K, 7 5/8%, due April 1, 2006..... 200.0 200.0
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...................... 200.0 200.0
Thirty year 7 1/8% debentures,
due July 1, 2023........................ 100.0 100.0
Thirty-one year 6 5/8% debentures,
due February 1, 2025.................... 100.0 100.0
Ten year 5 4/5% notes,
due February 1, 2004.................... 100.0 100.0
--------- ---------
1,025.0 1,075.0
Capital lease obligations................. 4.2 3.4
Unamortized discount, net................. (16.9) (17.2)
--------- ---------
Total..................................... $ 1,012.3 $ 1,061.2
========= =========
27
<PAGE>
The Company has filed a registration statement with the
Securities and Exchange Commission for issuance of up to $550.0
million in unsecured debt securities. As of December 31, 1996,
$200.0 million of debt had been issued under this shelf
registration.
Over the next five years, only the Series G 4 7/8%, First
Mortgage Bonds with a principal amount of $50.0 million and a
maturity date of July 1, 1997 are scheduled to be retired.
Substantially all property, plant and equipment owned by the
Company is subject to lien under the indenture covering first
mortgage bonds.
G. 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 $31.1 million, $29.8 million and $26.5
million for 1996, 1995 and 1994, respectively. As of December 31,
1996, the aggregate minimum rental commitments under noncancelable
leases were approximately as follows:
Years Operating Capital
----- --------- -------
1997 ........................... $ 7.3 $ 1.8
1998 ........................... 7.3 1.2
1999 ........................... 6.1 0.8
2000 ........................... 5.7 0.7
2001 ........................... 5.6 2.2
Thereafter ..................... 31.6 0.3
------- -------
Total minimum lease commitments. $ 63.6 $ 7.0
=======
Less: amount representing
executory costs........ -
amount representing
interest costs......... 1.4
-------
Present value of minimum
lease payments ................ $ 5.6
=======
H. Financial Instruments
The following table presents the estimated fair value of the
Company's financial instruments as of December 31, 1996 and 1995:
1996
-------------
Carrying Fair
Value Value
----- -----
Cash and temporary cash
investments.................... $ - $ -
Debt ........................... 1,833.6 1,845.6
Long-term payable to ASI
(for postretirement benefits).. 25.5 25.5
Other assets.................... 5.3 5.3
Other liabilities............... 4.7 4.7
28
<PAGE>
1995
-------------
Carrying Fair
Value Value
----- -----
Cash and temporary cash
investments.................... $ 0.3 $ 0.3
Debt ........................... 1,645.0 1,695.1
Long-term payable to ASI
(for postretirement benefits).. 27.3 27.3
Other assets.................... 5.6 5.6
Other liabilities............... 11.1 11.1
The following methods and assumptions were used to estimate the
fair value of financial instruments:
Cash and temporary cash investments - The carrying value
approximates fair value because of the short-term maturity of these
instruments.
Debt - The carrying amount (including accrued interest) of debt
maturing within one year approximates fair value because of the
short-term maturities involved. The fair value of long-term debt
was estimated based on the year-end quoted market price for the same
or similar issues.
Other assets and liabilities - These financial instruments
consist primarily of other investments and customer deposits. The
fair values of these items are based on expected cash flows or, if
available, quoted market prices.
Long-term payable to ASI (for postretirement benefits) -
Carrying value approximates fair value.
I. Discontinuation of Regulatory Accounting - FAS 71
In 1994, having achieved price regulation and recognizing
increased competition, the Company concluded that GAAP prescribed by
FAS 71 was no longer appropriate.
As a result of discontinuing the application of FAS 71, the
Company recorded an extraordinary noncash after-tax charge of $728.6
million in 1994. The following table is a summary of the
extraordinary charge.
Pretax After-Tax
------ ---------
Increase to the accumulated
depreciation balance............. $1,151.5 $ 693.9
Elimination of other
net regulatory assets............ 82.1 49.4
Tax-related net regulatory
liabilities...................... - 5.5
Accelerated amortization of
tax credits...................... - (20.2)
-------- --------
$1,233.6 $ 728.6
======== ========
The adjustment of $1,151.5 million to net property, plant and
equipment was necessary because estimated useful lives and
depreciation methods historically prescribed by regulators did not
keep pace with technological changes and differed significantly from
those used by nonregulated enterprises. Plant balances were
adjusted by increasing the accumulated depreciation balance. The
necessary adjustment was determined by a discounted cash flow
analysis which considered technological changes, capital
requirements and estimated impacts of future competition. To
corroborate this study, a depreciation reserve study was also
performed that identified inadequate accumulated depreciation levels
by individual asset categories. The Company believes these levels
developed over the years as a result of the systematic
underdepreciation of assets resulting from the regulatory process.
When adjusting its net property, plant and equipment, the
Company gave effect to shorter, more economically realistic lives,
as previously outlined in Note A.
29
<PAGE>
The discontinuation of FAS 71 also required the Company to
eliminate from its balance sheet the effects of any actions of
regulators that had been recognized as assets and liabilities
pursuant to FAS 71, but would not have been recognized as assets and
liabilities by nonregulated enterprises. The elimination of other
net regulatory assets primarily related to certain deferred vacation
pay, debt financing costs and certain deferred assets.
Additionally, at the time the Company discontinued the
application of FAS 71, the income tax-related regulatory assets and
liabilities were eliminated and deferred tax balances adjusted to
reflect application of FAS 109, "Accounting for Income Taxes",
consistent with other nonregulated enterprises. As asset lives were
shortened, the related unamortized investment tax credits deemed
already earned were credited to income.
J. Stock Options
During 1995, the Financial Accounting Standards Board issued FAS
123, "Accounting for Stock-Based Compensation." This pronouncement
requires that Ameritech calculate the value of stock options at the
date of grant using an option pricing model. Ameritech elected the
"pro forma, disclosure only" option permitted under FAS 123, instead
of recording a charge to operations. Certain Company management
personnel receive Ameritech stock options; however, the portion of
the option programs allocable to Company employees is not
significant.
K. Additional Financial Information
As of December 31,
------------------
1996 1995
---- ----
Balance Sheets
Other current liabilities:
Accrued payroll....................... $ 21.3 $ 22.2
Compensated absences.................. 53.3 53.0
Accrued taxes......................... 101.7 24.4
Income taxes deferred one year........ (38.7) (33.5)
Advance billings and customer
deposits............................ 86.0 76.8
Dividend payable...................... - 154.2
Accrued interest...................... 31.5 32.0
Other................................. 37.0 32.9
--------- ---------
Total................................ $ 292.1 $ 362.0
========= =========
Advertising and promotion costs were $53.3 million, $52.6
million and $35.5 million in 1996, 1995 and 1994, respectively.
Interest paid was $120.4 million, $118.0 million and $106.3 million
in 1996, 1995 and 1994, respectively.
Revenues from AT&T, consisting principally of interstate network
access and billing and collection services revenues, comprised
approximately 11% of total revenues in 1994. No other customer
accounted for more than 10% of total revenues in that year. No
customer accounted for more than 10% of revenues either in 1996 or
1995.
L. Other Income, Net
The components of other income, net were as follows:
1996 1995 1994
---- ---- ----
Equity in earnings of ASI.. $ 12.7 $ 11.9 $ 16.6
Other, net................. (2.0) (4.4) (7.6)
--------- --------- ---------
Total.................... $ 10.7 $ 7.5 $ 9.0
========= ========= =========
30
<PAGE>
M. Quarterly Financial Information (Unaudited)
Operating Net
Revenues Income Income
-------- ------ ------
1996
----
First Quarter............. $ 897.1 $ 240.3 $ 130.8
Second Quarter............ 918.8 249.5 131.6
Third Quarter............. 908.9 219.6 113.8
Fourth Quarter............ 938.3 277.0 138.7
------- ------- -------
1996 Total.............. $3,663.1 $ 986.4 $ 514.9
======= ======= =======
1995
----
First Quarter............. $ 809.3 $ 296.7 $ 167.1
Second Quarter............ 859.6 257.0 146.0
Third Quarter............. 872.7 247.5 140.2
Fourth Quarter............ 872.4 216.0 120.0
------- ------- -------
1995 Total.............. $3,414.0 $1,017.2 $ 573.3
======= ======= =======
Total nonmanagement work force restructuring credits in 1995
were $57.1 million or $30.4 million after-tax as follows: $76.9
million or $46.4 million after-tax in the first quarter and net
charges of $5.8 million or $3.6 million after-tax in the third
quarter and $14.0 million or $12.4 million after-tax in the fourth
quarter.
All adjustments necessary for a fair statement of results for
each period have been included.
N. Calculation of Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges of the Company for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 was 7.73 ,
7.99, 5.45, 5.82 and 5.68, respectively.
For the purpose of calculating this ratio, (i) earnings have
been calculated by adding to income before interest expense and
extraordinary item, the amount of related taxes on income, the
portion of rentals representative of the interest factor and
undistributed equity earnings, (ii) the Company considers one-third
of rental expense to be the amount representing return on capital,
and (iii) fixed charges comprise total interest expense, capitalized
interest and such portion of rentals.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No changes in or disagreements with accountants on any matter of
accounting principles or practices, financial statement disclosure
or auditing scope or procedure occurred during the period covered by
this annual report.
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of the report:
(1) Financial Statements:
Page
----
Selected Financial and Operating Data..................... 9
Report of Independent Public Accountants.................. 17
Statements:
Statements of Income and Accumulated Deficit.. 18
Balance Sheets.......................................... 19
Statements of Cash Flows................................ 20
Notes to Financial Statements........................... 21
(2) Financial Statement Schedule:
II Valuation and Qualifying Accounts.................. 35
Financial statement schedules other than the one listed above
have been omitted because the required information is contained in
the financial statements and notes thereto, or because such
schedules are not required or applicable.
(3) Exhibits
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
------
3a - Certificate of Incorporation of the Company as amended and
restated March 21, 1990 (Exhibit 3a to Form 10-K for 1989,
File No. 1-2222).
3b - By-laws of the Company, effective March 21, 1990 (Exhibit
3b to Form 10-K for 1989, File No. 1-2222).
4b - No instrument which defines the rights of holders of long
and intermediate term debt of the Company is filed
herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the
Company hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
10a - Reorganization and Divestiture Agreement between American
Telephone and Telegraph Company, American Information
Technologies Corporation and Affiliates, dated as of
November 1, 1983 (Exhibit 10a to Form 10-K for 1983 for
American Information Technologies Corporation, File No. 1-
8612).
10b - 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).
10c - 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 for the
five years ended December 31, 1996.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule for the year ended December 31,
1996.
32
<PAGE>
(b) Reports on Form 8-K:
No Form 8-K was filed by the registrant during the fourth quarter of
1996.
33
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ILLINOIS BELL TELEPHONE COMPANY
/s/ Ronald G. Pippin
-----------------------------
Ronald G. Pippin,
Comptroller
March 11, 1997
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
Principal Executive Officer:
/s/ Douglas L. Whitley
-----------------------------
Douglas L. Whitley,
President
Principal Financial and Accounting Officer:
/s/ Ronald G. Pippin
-----------------------------
Ronald G. Pippin,
Comptroller
Ameritech Corporation:
/s/ Barry K. Allen
-----------------------------
Barry K. Allen,
Executive Vice President,
Consumer and Business Services
The sole shareowner of the registrant, which is
a statutory close corporation managed by the
shareowner rather than by a board of directors.
March 11, 1997
34
ILLINOIS BELL TELEPHONE COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(Dollars in Millions)
COL. A COL. B COL. C COL. D COL. E
------ ------ ----------------- ------ ------
Additions
-----------------
Balance at Charged Charged Balance
Beginning to to Other at End of
of Period Expense (a) Accounts (b) Deductions (c) Period
--------- ---------- ----------- ------------- ------
Year 1996...........$ 48.8 $ 106.4 $114.5 $ 188.1 $ 81.6
Year 1995........... 43.9 42.8 66.2 104.1 48.8
Year 1994........... 36.7 42.7 66.8 104.3 43.9
----------------------
(a)Excludes direct charges and credits to expense on the statements of
income and accumulated deficit related to interexchange carrier
receivables.
(b)Includes principally amounts related to the interexchange carrier
receivables which are being billed by the Company and amounts
previously written off which were credited directly to this account
when recovered, as well as a reclassification in 1996 of $15.7 million
from current liabilities to more accurately state the allowance.
(c)Amounts written off as uncollectible.
35
Exhibit 12
ILLINOIS BELL TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
1. EARNINGS
a) Income before interest expense,
income tax, extraordinary
charge, cumulative effect
of change in accounting
principles and undistributed
equity earnings (2)...... $ 996.6 $1,027.4 $ 633.3 $ 750.1 $ 705.9
b) Portion of rental expense
representative of the
interest factor (1)...... 10.4 9.9 8.8 10.8 12.3
-------- -------- -------- -------- --------
Total 1(a) and 1(b)..... $1,007.0 $1,037.3 $ 642.1 $ 760.9 $ 718.2
======== ======== ======== ======== ========
2. FIXED CHARGES
a) Total interest expense
including capital
lease obligations........ $ 116.3 $ 117.2 $ 105.7 $ 117.5 $ 112.9
b) Capitalized interest ..... 3.6 2.8 3.3 2.4 1.2
c) Portion of rental expense
representative of the
interest factor (1)...... 10.4 9.9 8.8 10.8 12.3
-------- -------- -------- -------- --------
Total 2(a) through 2(c). $ 130.3 $ 129.9 $ 117.8 $ 130.7 $ 126.4
======== ======== ======== ======== ========
RATIO OF EARNINGS TO
FIXED CHARGES................. 7.73 7.99 5.45 5.82 5.68
======== ======== ======== ======== ========
(1) One-third of rental expense is considered to be the amount representing
return on capital.
(2) The results for 1995 reflect a $57.1 million pretax credit primarily
from settlement gains resulting from lump sum pension payments from the
pension plan to former employees who left the business in the
nonmanagement work force restructuring, partially offset by increased
force costs related to the restructuring started in 1994, as well as a
write-down of certain data processing equipment to net realizable value.
Results for 1994 reflect a $196.5 million pretax charge associated with
the nonmanagement work force restructuring.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated January 13, 1997,
included in this Form 10-K for the year ended December 31, 1996, into
Illinois Bell Telephone Company's previously filed Registration
Statement File No. 33-50007.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ILLINOIS BELL TELEPHONE COMPANY'S DECEMBER 31, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0<F1>
<RECEIVABLES> 994,900
<ALLOWANCES> (81,600)
<INVENTORY> 18,700
<CURRENT-ASSETS> 949,000
<PP&E> 8,836,900
<DEPRECIATION> 5,007,000
<TOTAL-ASSETS> 5,190,300
<CURRENT-LIABILITIES> 1,522,500
<BONDS> 1,012,300
0
0
<COMMON> 1,638,800
<OTHER-SE> (317,600)
<TOTAL-LIABILITY-AND-EQUITY> 5,190,300
<SALES> 0<F2>
<TOTAL-REVENUES> 3,663,100
<CGS> 0
<TOTAL-COSTS> 2,676,700
<OTHER-EXPENSES> (10,700)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,300
<INCOME-PRETAX> 880,800
<INCOME-TAX> 365,900
<INCOME-CONTINUING> 514,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 514,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>SECURITIES ARE NOT MATERIAL AND THEREFORE HAVE NOT BEEN STATED SEPARATELY
IN THE FINANCIAL STATEMENTS. THIS AMOUNT IS INCLUDED IN THE CASH TAG.
<F2>NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL
STATEMENTS PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS
INCLUDED IN THE "TOTAL REVENUES" TAG.
<F3>COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICE AND PRODUCTS
IN THE FINANCIAL STATEMENTS AND THE "TOTAL COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
