SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE
REQUIRED]
For the fiscal year ended December 31, 1993
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE
REQUIRED]
Commission File Number 1-3499
Michigan Bell Telephone Company
A Michigan Corporation
I.R.S. Employer
No. 38-0823930
444 Michigan Avenue, Detroit, Michigan 48226
Telephone Number (313) 223-9900
Securities registered pursuant to Section 12(b) of the Act:
(See attached Schedule A)
Securities registered pursuant to Section 12(g) of the Act:
None.
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF
AMERITECH CORPORATION, MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b) OF FORM 10-
K AND IS THEREFORE FILING THIS FORM WITH REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION
J(2).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] . No .
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XXX BEGIN PAGE 2 HERE XXX
SCHEDULE A
Name of each exchange
Title of each Class on which registered
Forty Year 7 3/4% Debentures, due June 1, 2011 New York Stock Exchange
Forty Year 7% Debentures, due November 1, 2012 New York Stock Exchange
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XXX BEGIN AGE 3 HERE XXX
TABLE OF CONTENTS
PART I
Item Page
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 13
4. Submission of Matters to a Vote of Security Holders (Omitted
pursuant to General Instruction J(2)).
PART II
5. Market for the Registrant's Common Equity and Related Stock-
holder Matters (Inapplicable).
6. Selected Financial and Operating Data . . . . .. . . . . . . 14
7. Management's Discussion and Analysis of the Results of Oper-
ations (abbreviated pursuant to General Instruction J(2)) . 15
8. Financial Statements . . . . . . . . . . . . . . . . . . . . .. . 21
9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . 37
PART III
10. Directors and Executive Officers of Registrant (Omitted pursuant
to General Instruction J(2)).
11. Executive Compensation (Omitted pursuant to General
Instruction
J(2)).
12. Security Ownership of Certain Beneficial Owners and
Management
(Omitted pursuant to General Instruction J(2)).
13. Certain Relationships and Related Transactions (Omitted
pursuant to General Instruction J(2)).
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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PART I
Item 1. Business
General
Michigan Bell Telephone Company (the "Company") is
incorporated under the laws of the State of Michigan and has its
principal office at 444 Michigan Avenue, Detroit, Michigan 48226
(telephone number 313-223-9900). The Company is a wholly owned
subsidiary of Ameritech Corporation ("Ameritech"), a Delaware
corporation. Ameritech is the parent of the Company, Illinois Bell
Telephone Company, Indiana Bell Telephone Company, Incorporated,
The Ohio Bell Telephone Company and Wisconsin Bell, Inc. (the
"landline telephone companies"), as well as several other
communications businesses, and has its principal executive offices at
30 South Wacker Drive, Chicago, Illinois 60606 (telephone number
312-750-5000). The Company is managed by its sole shareholder
rather than a Board of Directors, as permitted by Michigan law.
In 1993, Ameritech restructured its landline telephone
companies and two other related businesses into a structure of
customer-specific business units supported by a single, regionally
coordinated network unit. The five Bell companies continue to
function as legal entities, owning Bell company assets in each state
and continue to be regulated by the individual state public utility
commissions. Products and services are now marketed under a single
common brand identity, "Ameritech", rather than using the "Bell"
name. While the Ameritech logo is now used to identify all the
Ameritech companies, the Company is sometimes regionally
identified as Ameritech Michigan.
The Company is engaged in the business of furnishing a wide
variety of advanced telecommunications services in Michigan,
including local exchange and toll service and network access
services. In accordance with the Consent Decree and resulting Plan
of Reorganization ("Plan") described below, the Company provides
two basic types of telecommunications services within specified
geographical areas termed Local Access and Transport Areas
("LATAs"), which are generally centered on a city or other
identifiable community of interest. The first of these services is the
transporting of telecommunications traffic between telephones and
other equipment on customers' premises located within the same
LATA ("intraLATA service"), which can include toll service as well
as local service. The second service is providing exchange access
service, which links a customer's telephone or other equipment to the
network of transmission facilities of interexchange carriers which
provide telecommunications service between LATAs ("interLATA
service").
About 82% of the population and 42% of the area of
Michigan is served by the Company. The remainder of the State is
served by other telecommunications companies. The Company does
not furnish local service in the areas and localities served by such
companies. Muskegon is the only city of over 50,000 population in
the State in which local service is furnished by a non-affiliated
telephone company. The Company estimates that on December 31,
1993, non-affiliated telephone companies had approximately 794,000
customer lines in service. Other communications services offered by
the Company include data transmission, transmission of radio and
television programs and private line voice and data services.
The following table sets forth for the Company the number of
customer lines in service at the end of each year.
Thousands
1993 1992 1991 1990 1989
Customer Lines in Service 4,563 4,431 4,314 4,242 4,150
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XXX BEGIN PAGE 5 HERE XXX
The Company has certain agreements with Ameritech
Publishing, Inc. ("Ameritech Publishing"), an Ameritech business
unit doing business as "Ameritech Advertising Services", under
which Ameritech Publishing publishes and distributes classified
directories under a license from the Company and provides services
to the Company relating to both classified and alphabetical
directories. Ameritech Publishing pays license fees to the Company
under the agreements. See the discussion in Part II, Item 7., on page
20 for further information on the status of the agreements.
Ameritech Services, Inc. ("ASI") is a company jointly owned
by the Company and the other Ameritech landline telephone
companies. ASI provides to those companies human resources,
technical, marketing, regulatory planning and real estate asset
management services, purchasing and material management support,
as well as labor contract bargaining oversight and coordination. ASI
acts as a shared resource for the Ameritech subsidiaries providing
operational support for the landline telephone companies and
integrated communications and information systems for all the
business units.
Ameritech Information Systems, Inc., a subsidiary of
Ameritech, sells, installs and maintains business customer premises
equipment and sells network and central office-based services
provided by the Company and the other four landline telephone
companies. It also provides expanded marketing, product support and
technical design resources to large business customers in the
Ameritech region.
In 1993, about 90% of the total operating revenues of the
Company were from telecommunications services and the remainder
principally from billing and collection services, rents, directory
advertising and other miscellaneous nonregulated operations. About
77% of the revenues from telecommunication services were
attributable to intrastate operations.
Capital Expenditures
Capital expenditures represent the single largest use of
Company funds. The Company has been making and expects to
continue to make large capital expenditures to meet the demand for
telecommunications services and to further improve such services.
The total investment in telecommunications plant increased from
about $6,789,500,000 at December 31, 1988, to about $7,559,000,000
at December 31, 1993, after giving effect to retirements but before
deducting accumulated depreciation at either date. Capital
expenditures of the Company since January 1, 1989 were
approximately as follows:
1989. . . . . . . $502,000,000 1992. . . . . . . $523,000,000
1990. . . . . . . $530,000,000 1993. . . . . . . $452,000,000
1991. . . . . . . $542,000,000
Expanding on the aggressive deployment plan it began it
1992, in January 1994, Ameritech unveiled a multi-billion dollar plan
for a digital network to deliver video services. Ameritech is
launching a digital video network upgrade that by the end of the
decade will enable six million customers in its region to access
interactive information and entertainment services, as well as
traditional cable TV services, from their homes, schools, offices,
libraries and hospitals. The Company, for its part in the network
upgrade has made an initial filing with the FCC seeking approval of
the program. The filing reflects capital expenditures of
approximately $55 million over the next three years. The video
network concept, along with other competitive concerns, is discussed
on page 20.
The Company may also, depending on market demand, make
additional capital expenditures under the digital video network
upgrade program. In addition to the video network upgrade
expenditures, other capital expenditures are expected to be about
$348 million in 1994. These are part of a $2 billion, four-year
program that Ameritech began in 1992 to incur construction-related
costs to expand and improve Michigan's telecommunications
infrastructure with technologies such as fiber optics and digital
switching. Through December 31, 1993, Ameritech has spent over
$1 billion in Michigan toward that program.
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XXX BEGIN PAGE 5 HERE XXX
Consent Decree and Line of Business Restrictions
On August 24, 1982, the United States District Court for the
District of Columbia ("Court") approved and entered a consent decree
entitled "Modification of Final Judgment" ("Consent Decree"), which
arose out of antitrust litigation brought by the Department of Justice
("DOJ"), and which required American Telephone and Telegraph
Company ("AT&T") to divest itself of ownership of those portions of
its wholly owned Bell operating communications company
subsidiaries ("Bell Companies") that related to exchange
telecommunications, exchange access and printed directory
advertising, as well as AT&T's cellular mobile communications
business. On August 5, 1983, the Court approved a Plan of
Reorganization ("Plan") outlining the method by which AT&T would
comply with the Consent Decree. Pursuant to the Consent Decree
and the Plan, effective January 1, 1984, AT&T divested itself of, by
transferring to Ameritech, one of the seven regional holding
companies ("RHCs") resulting from divestiture, its ownership of the
exchange telecommunications, exchange access and printed directory
advertising portions of the Ameritech landline telephone companies,
as well as its regional cellular mobile communications business.
The Consent Decree, as originally approved by the Court in
1982, provided that the Company (as well as the other Bell
Companies) could not, directly or through an affiliated enterprise,
provide interLATA telecommunications services or information
services, manufacture or provide telecommunications products or
provide any product or service, except exchange telecommunications
and exchange access service, that is not a natural monopoly service
actually regulated by tariff. The Consent Decree allowed the
Company and the other Bell Companies to provide printed directory
advertising and to provide, but not manufacture, customer premise
equipment.
The Consent Decree provided that the Court could grant a
waiver to a Bell Company or its affiliates upon a showing to the
Court that there is no substantial possibility that the Bell Company
could use its monopoly power to impede competition in the market it
seeks to enter. The Court has, from time to time, granted waivers to
the Company and other Bell Companies to engage in various
activities.
The Court's order approving the Consent Decree provided for
periodic reviews of the restrictions imposed by it. Following the first
triennial review, in decisions handed down in September 1987 and
March 1988, the Court continued the prohibitions against Bell
Company manufacturing of telecommunications products and
provision of interLATA services. The rulings allowed limited
provision of information services by transmission of information and
provision of information gateways, but excluded generation or
manipulation of information content. In addition, the rulings
eliminated the need for a waiver for entry into non-telephone related
businesses.
In April 1990, a Federal appeals court decision affirmed the
Court's decision continuing the restriction on Bell Company entry
into interLATA services and the manufacture of telecommunications
equipment, but directed the Court to review its ruling that restricted
RHC involvement in the information services business and to
determine whether removal of the information services restriction
would be in the public interest. In July 1991, the Court lifted the
information services ban but stayed the effect of the decision pending
outcome of the appeals process. Soon after, the stay was lifted on
appeal and in July 1993, the U.S. Court of Appeals unanimously
upheld the Court's order allowing the Bell Companies to produce and
package information for sale across business and home phone lines.
In November 1993, the U.S. Supreme Court declined to review the
lower court ruling.
Members of Congress and the White House are intensifying
efforts to enact legislative reform of telecommunications policy in
order to stimulate the development of a modern national information
infrastructure to bring the benefits of advanced communications and
information services to the American people.
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XXX BEGIN PAGE 7 HERE XXX
Intrastate Rates and Regulation
Prior to January 1, 1992, most of the intrastate
communications services provided by the Company were subject to
regulation by the Michigan Public Service Commission ("MPSC")
with respect to intrastate rates and services. The MPSC prescribed a
uniform system of accounts that largely parallels the one promulgated
by the Federal Communications Commission and prescribed
depreciation rates for the intrastate portion of the Company's assets.
Effective January 1, 1992, the authority of the MPSC over many of
the Company's services and asset depreciation parameters has been
removed or narrowed by the new Michigan Telecommunications Act
of 1991 ("MTA"), Public Act 179. Under MTA, the MPSC retains
administrative responsibility for the Act and has duties such as
establishing quality of service standards and investigating
complaints.
Effective January 1, 1992, for a four-year period, MTA
replaced the 1913 Michigan Telephone Act and 1986 Public Act 305
which were scheduled to sunset December 31, 1991. A major goal of
MTA was to encourage the development of a modern, high-quality
telecommunications infrastructure that would allow the state to be
competitive in a national and international information economy.
MTA encourages the Company to commit significant
investment in advanced technology by allowing new flexibility in
developing and pricing telecommunications services. New services
may be introduced without MPSC approval; however, the MPSC has
the authority to regulate such services in the future if they are found
to be adverse to the public interest. Prices of certain services such as
intraLATA toll may be reduced without prior MPSC approval. MTA
also allows the Company to seek a waiver from federal restrictions to
provide two-way interactive video across LATA boundaries for
educational services and also allows the Company to offer cable
television services if permitted by federal law.
The Act established a 400-call allowance for residential flat-
rate local service. Calls above the 400 allowance are billed on a per-
call basis, which was later approved at 6.2 cents per call. Unlimited
residence flat-rate local calling is provided to persons age 60 and
older, handicapped individuals and persons volunteering services to
certain charitable and veterans organizations.
MTA froze residential monthly basic local exchange rates for
two years at rates in effect at the end of 1991. It also caps
intraLATA long-distance rates for the four-year life of the Act at
those in effect at the end of 1991, unless carrier access charges are
increased during that period. However, the Act institutes a
streamlined system for changes to basic rates, depending on the size
of the change. Rate changes which do not exceed 1% less than the
change in the consumer price index ("CPI") may be put in place after
90 days' notice unless the MPSC takes further action, but proposed
rate changes greater than 1% less than the CPI change require MPSC
approval.
As a direct response to the new pricing flexibility afforded by
MTA, the Company immediately reduced intraLATA message toll
rates by $20 million effective January 1, 1992, with an additional
reduction of over $20 million implemented on December 15, 1992.
In addition, the Company made progress in reducing pricing
anomalies that had resulted from the fully regulated pricing structure
which had evolved over the decades before competition was
introduced. Where prices did increase, primarily in discretionary
services such as operator handled call surcharges and certain
nonregulated services, they were to recognize increased costs and to
price these services more in line with the marketplace.
In the more flexible regulatory environment created by MTA,
the Company introduced new products and services made possible by
new technologies. Caller ID, ScanFone, and Voice Mail were three
information services that became available during 1992. Caller ID
helps customers identify a calling party before they answer by
displaying the telephone number from which the call is made.
ScanFone services uses specialized telephone equipment to pay bills
and shop electronically, and Voice Mail provides electronic
answering service.
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XXX BEGIN PAGE 8 HERE XXX
Two new calling plans were introduced effective February 1,
1992. Circle Calling 20 allows seven hours of calling within a 20-
mile radius of a residential customer for a charge of $20 a month.
Circle Calling 30 provides a 30 percent discount on long-distance
charges within a 30-mile radius and includes 30 minutes of toll
calling for a fee of $3 per month. Overall, the reductions and
discount plans will amount to a cut of more than 12 percent in prices
residence and business customers pay for long-distance calls within
LATAs. In addition, the Company introduced other new services
such as Information Call Completion in which the Company will
complete the call to a number supplied by an information operator for
a nominal fee.
Halfway through the four year life of MTA, the Company
believes the record shows that the Act has been an unqualified
success. MTA has been nationally recognized as progressive, forward
looking legislation that has served as a model for change in other
jurisdictions. MTA is scheduled to sunset on December 31, 1995.
On February 16, 1993, the Company filed an application with
the MPSC for approval to increase the local message charge for calls
from public and semi-public coin telephones from 20 cents to 25
cents per call. The 20-cent rate has been in effect since 1976. The
Company estimated the annual revenue impact of the proposal to be
an increase of approximately $5.6 million after a 90-day period
required to convert all coin phones to the new rate.
Also on February 16, 1993, the Company filed a separate
application to change the way it charges for directory assistance
service. The Company proposed that changes would be implemented
in three phases over a twelve-month period. In the first phase, the
monthly allowance of free calls would be reduced from twenty to
eight and the charge for calls over the allowance will increase from
22 cents to 35 cents per call. In the second phase, six months after
MPSC approval, the calling allowance would be reduced to five calls
per month, and in the final phase, six months later, the calling
allowance would be reduced to three.
On May 11, 1993, the MPSC issued orders on both of the
applications discussed above. In the 25 cent coin telephone filing,
the MPSC declined approval of the Company's proposal, finding that
there was unsatisfactory resolution of the issues concerning the size
of the local calling area for customer-owned customer operated coin
phones and the charges for directory assistance calls made from those
phones. The MPSC directed the Company to initiate a contested case
proceeding under Section 203 of MTA. On August 6, 1993, the
Company complied by resubmitting its February 16, 1993 application.
Currently, the contested case is approximately halfway through the
scheduled proceedings, with a proposal for decision by the
administrative law judge anticipated in April 1994, and an MPSC
order expected in June 1994.
In the May 11, 1993 MPSC order related to directory
assistance service, the MPSC approved portions of the Company's
proposal but only under the condition that the effects of the changes
be revenue neutral. Specifically, the MPSC approved the first phase
of the Company's proposal which called for an increase of the per call
charge from 22 cents to 35 cents and a reduction in the free call
allowance from twenty to eight. The Company implemented this
phase on July 1, 1993, after receiving approval of its revenue neutral
plan which reduced rates in other areas, primarily access charges.
The MPSC also approved a second phase of a directory
assistance increase to begin six months after the first phase which
increases the per call charge to 45 cents and reduces the free call
allowance from eight to five per month. The Company is still in the
process of developing its revenue neutral proposal related to this
phase, but it is anticipated that rate reductions will again be made
primarily in access charges to be effective in July 1994.
The May 11, 1993 MPSC order rejected the Company's
proposal for a third phase on directory assistance service which
would have reduced the free call allowance from five to three per
month.
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FCC Regulatory Jurisdiction
The Company is also subject to the jurisdiction of the Federal
Communications Commission ("FCC") with respect to intraLATA
interstate services, interstate access services and other matters. The
FCC prescribes for communications companies a uniform system of
accounts apportioning costs between regulated and non-regulated
services, depreciation rates (for interstate services) and the principles
and standard procedures ("separations procedures") used to separate
property costs, revenues, expenses, taxes and reserves between those
applicable to interstate services under the jurisdiction of the FCC and
those applicable to services under the jurisdiction of the respective
state regulatory authorities.
For certain companies, including the Company, interstate
services regulated by the FCC are covered by a price cap plan. The
plan creates incentives to improve productivity over benchmark levels
in order to retain higher earnings. Price cap regulation sets
maximum limits on the prices that may be charged for
telecommunications services but also provides for a sharing of
productivity gains. Earnings in excess of 12.25% will result in
prospective reduction to the price ceilings on interstate services.
In January 1994, the FCC began a scheduled fourth-year
comprehensive review of price cap regulation for local exchange
companies.
Access Charge Arrangements
Interstate Access Charges.
The Ameritech landline telephone companies provide access
services for the origination and termination of interstate
telecommunications. The access charges are of three types: common
line, switched access and trunking.
The common line portion of interstate revenue requirements
are recovered through monthly subscriber line charges and per
minute carrier common line charges. The carrier common line rates
include recovery of transitional and long-term support payments for
distribution to other local exchange carriers. Transitional support
payments were made over a four-year period which ended on April 1,
1993. Long-term support payments will continue indefinitely.
Effective January 1, 1994, rates for local transport services
were restructured and a new "trunking" service category created.
Trunking services consist of two types: those associated with the local
transport element of switched access and those associated with
special access. Trunking services associated with switched access
handle the transmission of traffic between a local exchange carrier's
serving wire center and a Company end office where local switching
occurs. Trunking services associated with special access handle the
transmission of telecommunications services between any two
customer-designated premises or between a customer-designated
premise and a Company end office where multiplexing occurs. High
volume customers generally use the flat-rated dedicated facilities
associated with special access, while usage sensitive rates apply for
lower-volume customers that utilize a common switching center.
Local transport rate elements for switched services assess a
flat monthly rate and a mileage sensitive rate for the physical facility
between the customer's point of termination and the end office, a
usage sensitive and mileage sensitive rate assessed for the facilities
between the end office through the access tandem to the customer's
serving wire center, and a minute of use charge assessed to all local
transport. The flat rate transport rates and structure generally mirror
special access rate elements. Customers can order direct transport
between the serving wire center or end office and the access tandem
and tandem switched transport between the access tandem and the
end office.
Special access charges are monthly charges assessed to
customers for access to interstate private line service. Charges are
paid for local distribution channels, interoffice mileage and optional
features and functions.
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State Access Charges.
Compensation arrangements required in connection with
origination and termination of intrastate communications by
interexchange carriers are subject to the jurisdiction of the MPSC.
The Company currently provides intrastate access services to
interexchange carriers pursuant to MPSC tariffs which generally
parallel the terms of the interstate access tariffs.
The MPSC granted authority to certain interexchange carriers
to provide intrastate interLATA service and, effective January 1,
1988, intrastate intraLATA communications services in Michigan.
The Company provides intraLATA access service under the same
tariffs as are applicable to intrastate interLATA services. On
February 24, 1994, the MPSC issued an order on intrastate
intraLATA communications service. See discussion under
"IntraLATA Long Distance Service Order" in Part II, Item 7., on
page 19.
Separate arrangements have historically governed
compensation between the Company and independent telephone
companies for jointly provided communications within the Company's
local serving areas and associated independent telephone company
exchanges. The FCC ordered, effective January 1, 1988, that Meet
Point Billing be implemented. Meet Point Billing requires the local
exchange carriers ("LEC's") involved to divide ordering, rating and
billing services on a proportional basis, so that each carrier bills
under its respective tariff. On December 21, 1989, the MPSC issued
an order on access charge arrangements. The MPSC ordered that,
effective January 1, 1990, all intrastate toll carriers, including the
Company, purchase any necessary access services from other local
exchange carriers at their access tariff rates.
Competition
Regulatory, legislative and judicial decisions and
technological advances, as well as heightened customer interest in
advanced telecommunications services, have expanded the types of
available communications services and products and the number of
companies offering such services. Market convergence, already a
reality, is expected to intensify.
The FCC has taken a series of steps that are expanding
opportunities for companies to compete with local exchange carriers
in providing services that fall under the FCC's jurisdiction. In
September 1992, the FCC mandated that local exchange carriers
provide network access for special transmission paths to competitive
access providers, interexchange carriers and end users. In February
1993, Ameritech filed a tariff with the FCC, which was effective in
May, making possible this type of interconnection. In August 1993,
the FCC issued an order that permits competitors to interconnect to
local telephone company switches. Under the new rules, certain
telephone companies must allow all interested parties to terminate
their switched access transmission facilities at phone company
central offices, wire centers, tandem switches and certain remote
nodes. Ameritech filed a tariff in November 1993 to effect that
change in February 1994.
Ameritech is seeking opportunities to compete on an equal
footing. Although the Company is barred from providing interLATA
and nation-wide cable services, its competitors are not. Cellular
telephone and other wireless technologies are poised to bypass
Ameritech's local access network. Cable providers, who currently
serve more than eighty percent of American homes, could provide
telephone service and have expressed their desire to do so. Certain
interexchange carriers and competitive access providers have
demonstrated interest in providing local exchange service.
Ameritech's plan is to facilitate competition in the local exchange
business in order to compete in the total communications
marketplace.
Customers First: Ameritech's Advanced Universal Access Plan
In 1993, Ameritech embarked on a long-range restructuring
with the intent of dramatically changing the way it serves its
customers, and in the process altered its corporate framework,
expanding the nature and scope of its services and supporting the
development of a fully competitive marketplace. In March, Ameritech
filed a plan with the FCC to change the way local
telecommunications services are provided and regulated and to
furnish a policy framework for advanced universal access to modern
telecommunications services - voice, data and video information.
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XXX BEGIN PAGE 11 HERE XXX
Ameritech proposes to facilitate competition in the local
exchange business by allowing other service providers to purchase
components of its network and to repackage them with their own
services for resale, in exchange for the freedom to compete in both its
existing and currently prohibited businesses. Ameritech has
requested regulatory reforms to match the competitive environment as
well as support of its efforts to remove restraints, such as the
interLATA service restriction, which currently restrict its
participation in the full telecommunications marketplace. In addition,
Ameritech asks for more flexibility in pricing new and competitive
services and replacement of caps on earnings with price regulation.
Under the plan, customers would be able to choose from competitive
providers for local service as they now can choose a provider for
interexchange service.
To demonstrate conclusively the substantial customer and
economic benefits of full competition, in December 1993, Ameritech
proposed a trial of its plan beginning in 1995. Ameritech has
petitioned the DOJ to recommend Federal District Court approval of a
waiver of the long-distance restriction of the Consent Decree so that
Ameritech can offer interexchange service. At the same time,
Ameritech would facilitate the development of local communications
markets by unbundling the local network and integrating competitors'
switches. The trial would begin in Illinois in the first quarter of 1995
and would last indefinitely. Other states could be added over time. If
the trial is approved by the DOJ, the request must be acted on by the
Court which retains jurisdiction over administering the terms of the
Consent Decree. In February 1994, Ameritech filed tariffs with the
Illinois Commerce Commission that propose specific rates and
procedures to open the local network in that state. Approval could
take up to 11 months.
Ameritech has received broad support for the plan from
Midwest elected officials, national and Midwest business leaders, and
education, health industry, economic development and consumer
leaders. The national and local offices of the Communications
Workers of America ("CWA") and the International Brotherhood of
Electrical Workers ("IBEW") also support the plan.
Ameritech has alternative regulatory proposals pending with
other state regulatory commissions in its region to support
implementation of the plan.
Ameritech's Video Network Concept
In January 1994, Ameritech filed plans with the FCC to
construct a digital video network upgrade that will enable it to reach
6 million customers by the end of the decade. Ameritech expects to
spend $4.4 billion to upgrade its network to provide video services,
part of a total of approximately $29 billion Ameritech estimates it
will spend on network improvements over the next fifteen years.
Ameritech is pursuing alliances and partnerships that will position it
as a key participant in the emerging era of interactive video
experiences. Pending FCC approval of Ameritech's plan and
clearing of other regulatory hurdles, the construction of the first
phase of the network could begin as soon as the fourth quarter of
1994. The new network, which will be separate from Ameritech's core
local communications network, will be expanded by approximately 1
million additional Midwest customers in each of the next five years.
Ameritech will be only one of many users of the broadband
network. A multitude of competing video information providers,
businesses, institutions, interexchange carriers and video telephony
customers will also have access to the technology.
With the new system, customers will have access to a
virtually unlimited variety of programming sources. These will
include basic broadcast services, similar to today's cable service, and
advanced interactive services such as video on demand, home
healthcare, interactive educational software, distance learning,
interactive games and shopping, and a variety of other entertainment
and information services that can be accessed from homes, offices,
schools, hospitals, libraries and other public and private institutions.
<PAGE>
XXX BEGIN PAGE 12 HERE XXX
Cable/Telco Cross-ownership Ban
In November 1993, Ameritech filed lawsuits in two federal
courts seeking freedom from the ban on providing video services in
its own service area. Ameritech asked U.S. District Courts in Illinois
and Michigan to declare unconstitutional the provisions of the Cable
Act of 1984 that bar the RHCs from providing cable TV service in
areas where they hold monopolies on local phone service. In August
1993, a U.S. District Court granted a request by Bell Atlantic
Corporation for such an order, but that court denied similar requests
by Ameritech and the other RHCs.
Legislation has been introduced in Congress that would
repeal the cross-ownership ban.
Employee Relations
As of December 31, 1993, the Company employed 14,561
persons, a decrease from 15,142 at December 31, 1992. During 1993,
approximately 217 management employees left the payroll as a result
of voluntary and involuntary workforce reduction programs, and 214
nonmanagement employees took advantage of a Supplemental
Protection Program ("SIPP") established under labor agreements to
voluntarily exit the workforce. Additional restructuring was done by
normal attrition. On March 25, 1994, Ameritech announced that it
will reduce its nonmanagement workforce by 6,000 employees by the
end of 1995, including approximately 1,560 at the Company. Under
terms of agreements between Ameritech, the CWA and the IBEW,
Ameritech is implementing an enhancement to the Ameritech pension
plan by adding three years to the age and net credited service of
eligible nonmanagement employees who leave the business during a
designated period that ends in mid-1995. In addition, Ameritech's
network business unit is offering financial incentives under the terms
of its current contracts with the CWA and IBEW to selected
nonmanagement employees who leave the business before the end of
1995.
The reduction of workforce results from technological
improvements, consolidations and initiatives identified by
management to balance its cost structure with emerging competition.
Approximately 12,021 employees are represented by the CWA
which is affiliated with the AFL-CIO.
In July and August 1993, the Ameritech landline telephone
companies and Ameritech Services reached agreement with the CWA
and the IBEW on a workforce transition plan for assigning union-
represented employees to the newly established business units. The
separate agreements with the two unions extend existing union
contracts with the landline telephone companies and Ameritech
Services to the new units. The pacts address a number of force
assignment, employment security and union representation issues. In
1995, when union contracts are due to expire, the parties will
negotiate regional contracts.
Item 2. Properties
The properties of the Company do not lend themselves to
description by character and location of principal units. At December
31, 1993, central office equipment represented 40% of the Company's
investment in telecommunications plant in service; land and
buildings (occupied principally by central offices) represented 9%;
and connecting lines which constitute outside plant, the majority of
which are on or under public roads, highways or streets and the
remainder of which are on or under private property, represented
46%.
Substantially all of the installations of central office
equipment and administrative offices are located in buildings owned
by the Company situated on land which it owns in fee. Many
garages, business offices and some administrative offices are in
leased premises.
<PAGE>
XXX BEGIN PAGE 13 HERE XXX
Item 3. Legal Proceedings
Pre-divestiture Contingent Liabilities Agreement
The Plan provides for the recognition and payment of
liabilities that are attributable to pre-divestiture events (including
transactions to implement the divestiture) but that do not become
certain until after divestiture. These contingent liabilities relate
principally to litigation and other claims with respect to the former
Bell System's rates, taxes, contracts, equal employment matters,
environmental matters and torts (including business torts, such as
alleged violations of the antitrust laws).
With respect to such liabilities, AT&T and the Bell
Companies, including the Company, will share the costs of any
judgment or other determination of liability entered by a court or
administrative agency, the costs of defending the claim (including
attorneys' fees and court costs) and the cost of interest or penalties
with respect to any such judgment or determination. Except to the
extent that affected parties may otherwise agree, the general rule is
that responsibility for such contingent liabilities will be divided
among AT&T and the Bell Companies on the basis of their relative
net investment (defined as total assets less reserves for depreciation)
as of the effective date of divestiture. Different allocation rules apply
to liabilities which relate exclusively to pre-divestiture interstate or
intrastate operations.
Although complete assurance cannot be given as to the
outcome of any litigation, in the opinion of the Company's
management any monetary liability or financial impact to which the
Company would be subject after final adjudication or settlement of all
such liabilities would not be material in amount to the financial
position of the Company.
<PAGE>
XXX BEGIN PAGE 14 HERE XXX
PART II
Item 6. Selected Financial and Operating Data
MICHIGAN BELL TELEPHONE COMPANY
(Dollars in Millions)
1993 1992 1991 1990 1989
Revenues
Local service . . . . . $1,092.1 $1,168.6 $1,097.7 $1,093.0 $1,082.8
Interstate network access . . 512.6 479.4 474.0 496.2 453.5
Intrastate network access . . 201.5 199.9 182.0 186.4 173.8
Long distance . . . . . . . . 695.8 591.6 582.7 605.3 570.2
Other . . . . . . . . . . . 244.8 239.4 238.9 237.0 234.9
2,746.8 2,678.9 2,575.3 2,617.9 2,515.2
Operating expenses . . . . . 2,152.3 2,103.1 2,043.7 2,038.2 1,957.0
Operating income . . . . . 594.5 575.8 531.6 579.7 558.2
Interest expense . . . . . . . 106.2 109.6 125.3 116.9 117.2
Other (income) expense, net . . . 4.6 9.4 (5.0) (3.8) (3.5)
Income taxes . . . . . . . . . 140.5 130.6 120.8 140.8 126.9
Income before cumulative
effect of change in accounting
principles . . . . . . . . . . 343.2 326.2 290.5 325.8 317.6
Cumulative effect of change in
accounting principles . . . -- (448.4) -- -- --
Net income (loss) . . . . . . $ 343.2 $ (122.2) $ 290.5 $ 325.8 $ 317.6
Total assets . . . . . . . . 5,259.2 5,289.9 5,251.8 5,192.8 5,001.1
Telecommunications plant, net . 4,382.8 4,456.1 4,446.5 4,410.4 4,398.3
Capital expenditures . . . . 452.1 523.3 542.2 530.1 501.6
Long-term debt . . . . . . . $1,132.4 $1,085.1 $1,071.0 $1,202.8 $1,174.4
Debt ratio . . . . . . . . . 46.3% 46.4% 41.9% 41.3% 41.3%
Pre-tax interest coverage . . 5.74 4.88 4.12 4.70 4.58
Return to average equity * . . . 19.6% (7.1)% 14.0% 16.0% 16.0%
Return on average total capital * 13.2% (0.6)% 11.0% 12.2% 12.2%
Customer lines at end of year
(in thousands) . . . . . . . 4,563 4,431 4,314 4,242 4,150
% Customer lines served by
digital electronic offices . . 68% 53% 49% 44% 39%
% Customer lines served by analog
electronic offices . . . . . 31% 46% 49% 52% 56%
Employees at end of year . . . . 14,561 15,142 15,836 16,234 16,785
Customer lines per employee . . . 313 293 272 261 247
Local calls per
year (in millions) # . . . . . 14,198 14,555 14,136 14,072 12,679
Calls per customer
line . . . . . . . . . . . . 3,112 3,285 3,277 3,317 3,055
* After cumulative effect of change in accounting principles.
# Effective August 1991 (MPSC NO.U9004), certain local calls from private line
circuits were reclassified to Access Service. The years 1989-1991 have been
restated to be on a comparable basis.
<PAGE>
XXX BEGIN PAGE 15 HERE XXX
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Dollars in millions)
Following is a discussion and analysis of the results of operations of
the Company for the year ended December 31, 1993 and for the year
ended December 31, 1992, which is based on the Statements of
Income and Reinvested Earnings on page 23 Other pertinent data are
also given in Selected Financial and Operating Data on page 14.
Results of Operations
REVENUES
Revenues increased $67.9 or 2.5% due to the following:
Increase
1993 1992 (Decrease) %Change
Local service . . . . . . . . . . $1,092.1 $1,168.6 ($76.5) (6.5%)
The decrease of $76.5 was primarily due to a $119.9
reclassification, at the Company's initiative, of certain measured
interzone messages from the local service category to the long
distance service category. Without the reclassification, local
service would have increased $43.4. This was comprised of $37.6
in volume increases attributable to continued growth in central
office custom features and public telephone revenues, and a 3.0%
increase in access lines to 4,562,740 from 4,431,174 in the prior
year. An additional $5.7 increase resulted from rate changes
which consisted of an increase in certain operator assisted
services, custom calling features, and the expiration of temporary
customer credits in effect during 1992.
Increase
1993 1992 (Decrease) %Change
Access service
Interstate access . . . $512.6 $479.4 $ 33.2 6.9%
Intrastate access . . . $201.5 $199.9 $ 1.6 0.8%
Interstate access increased $33.2 due to a $16.7 reduction in
support payments made to the National Exchange Carrier
Association, volume of business increases of $11.3, and a $10.6
increase related to anticipated settlements with other
telecommunications providers. These increases were partially
offset by $6.0 in rate reductions.
The intrastate access increase of $1.6 was mainly the result of the
effect of higher calling volumes of $11.3 and true-ups and
settlements with other local exchange carriers of $5.2. These
increases were offset by $10.8 in rate reductions and $3.3 in
various claims and settlements with interexchange carriers.
Increase
1993 1992 (Decrease) %Change
Long distance services . . . . $695.8 $591.6 $104.2 17.6%
The increase in long distance revenues of $104.2 is primarily the
result of the $119.9 reclassification related to local service
revenues discussed above. Without this reclassification, long
distance revenues would have decreased $15.7. Volume increases
of $46.9 were more than offset by shifts to discount calling plans
of $42.6 and rate reductions totaling $19.3.
<PAGE>
XXX BEGIN PAGE 16 HERE XXX
Increase
1993 1992 (Decrease) %Change
Other revenues . . . . . . . $244.8 $239.4 $5.4 2.3%
An increase of $5.4 was primarily due to growth in nonregulated
revenues (primarily inside wiring services) of $8.7 and $2.2 in
Ameritech Publishing, Inc. license fees. This was reduced by a
$6.3 increase in uncollectibles resulting from increased write-
offs.
OPERATING EXPENSES
The Company has changed the presentation of its operating expenses
in the Statements of Income and Reinvested Earnings to facilitate a
better understanding of its operating results. Prior year amounts
have been reclassified to conform with this presentation.
Operating expenses increased $49.2 or 2.3% primarily due to the
following:
Increase
1993 1992 (Decrease) %Change
Depreciation . . . . . . . . . $543.3 $520.7 $22.6 4.3%
Depreciation expense increased $22.6 due mainly to a $13.4
increase in intrastate rates resulting from the Company's ongoing
review of the lives of its property. In addition, a $15.6 increase
resulted from the continued expansion of the plant investment
base. These increases were partially offset by a $6.7 reduction
caused by the expiration of FCC-authorized inside wire and
reserve deficiency amortization schedules.
Increase
1993 1992 (Decrease) %Change
Employee-related
expenses. . . . . . . . . $705.8 $701.8 $4.0 0.6%
The $4.0 increase in employee-related expenses was due to
increases of $16.3 in basic wage rates, $5.7 in the provision for
team awards and bonus payments, and $5.0 in other employee-
related costs, mainly tuition aid and technical training fees,
relocation costs and travel expenses. Offsetting these increases
were reductions of $21.5 due to lower force levels than the
previous year. The remaining offset was primarily due to lower
overtime payments recorded in 1993. The Company's total
employee count was 14,561 as of December 31, 1993, compared
to 15,142 at December 31, 1992.
Increase
1993 1992 (Decrease) %Change
Taxes other than income
taxes . . . . . . . . . . . $132.2 $144.1 ($11.9) (8.3%)
The decrease in taxes other than income taxes is due to a $13.2
reduction made to the provision for property taxes to recognize
the impact of new state legislation enacted in December 1993
which lowers property tax millage rates in Michigan for
December 31, 1993 assessments. Partially offsetting this
reduction was a $1.9 increase in other taxes, primarily Michigan
single business tax expense, resulting from higher 1993 business
volumes.
<PAGE>
XXX BEGIN PAGE 17 HERE XXX
Increase
1993 1992 (Decrease) %Change
Other operating
expenses. . . . . . . $771.0 $736.5 $34.5 4.7%
The growth reported in this category was due to increases of
$28.7 in payments for services provided by affiliated companies
due in part to a transfer of certain work functions to Ameritech
Services, Inc. (a subsidiary jointly owned by the Company and the
other four Ameritech landline telephone companies)("ASI"), $8.7
in higher advertising costs, a $5.7 increase in expenses paid to
other carriers for access, and a $2.5 increase in the provision
made for potential claims and settlements with interexchange
carriers. Partially offsetting these increases was a $10.8 decrease
resulting from the effects of the work force resizing provision
reflected in 1992 results.
OTHER INCOME AND EXPENSES
Increase
1993 1992 (Decrease) %Change
Interest Expense . . . . . . $106.2 $109.6 $(3.4) (3.1)%
The decrease in interest expense is attributable primarily to $3.8
in tax and other settlements made in 1992. In addition, interest
related to debt decreased $.9 due to lower composite interest rates
on short-term debt. These decreases were partially offset by $1.7
of interest related to the 1990 incentive regulation plan.
Increase
1993 1992 (Decrease) %Change
Other expense, net . . . . . . $4.6 $ 9.4 $(4.8) (51.1)%
The $4.8 decrease is primarily the result of $4.0 in higher
earnings from ASI in which the Company has a 26% ownership
interest. In addition, other expenses were $4.1 lower: $2.4 in
lower 1993 costs related to the early retirement of debt, and $1.7
from a 1992 write-off of relocation work performed but not
collectible. These reductions in expense were partly offset by a
$3.1 increase in 1993 contributions, primarily new commitments
to education in the form of educational grants.
Increase
1993 1992 (Decrease) %Change
Income taxes . . . . . . .. . $140.5 $130.6 $9.9 7.6%
The income tax increase of $9.9 was the net effect of several
items. There were increases of $9.4 due to higher pre-tax
income, $9.0 in adjustments to the provision for future
settlements, and $6.1 due to the change to the new 35% tax rate.
These were somewhat offset by a one-time $6.8 reduction caused
by adjusting the SFAS Nos. 106 and 112 deferred tax asset to
reflect the change in tax rate, and a $6.5 true-up in the
investment-related components of the 1992 tax provision. The
remaining offset is due mainly to a $2.0 increase in investment
tax credits amortized in 1993.
<PAGE>
XXX BEGIN PAGE 18 HERE XXX
OTHER INFORMATION
Changes in Accounting Principles
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." The new accounting method is essentially a
refinement of the liability method already followed by the companies
of Ameritech Corporation ("Ameritech", the Company's parent) and,
accordingly, did not have a significant impact on the Company's
financial statements upon adoption.
As more fully discussed in Note (C) to the financial statements,
effective January 1, 1992, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions" and SFAS No. 112, "Employers Accounting for
Postemployment Benefits". The cumulative effect of these accounting
changes was recognized in the first quarter of 1992 as a change in
accounting principles of $448.4, net of a deferred income tax benefit
of $225.1.
Regulatory Environment
Customer demand, technology, and the preferences of policy makers
are all converging to increase competition in the local exchange
business. The effects of increasing competition are apparent in the
marketplace the Company serves. For example, certain large
telecommunications providers have recently announced their
intentions to provide full local exchange service. Additionally,
increasing volumes of intraLATA long distance services purchased by
large and medium sized business customers are sold by carriers other
than the Company.
Recognizing this trend, the Company's regulatory/public policy
activities are focused on achieving a framework that allows for
expanding competition while providing a fair opportunity for all
carriers, including the Company, to succeed. The cornerstone of this
effort is Ameritech's "Customers First Plan" that was filed with the
FCC on March 1, 1993. In a subsequent filing with the U.S.
Department of Justice, Ameritech proposed that the Customers First
Plan be implemented on a trial basis beginning in January 1995 in
Illinois and other states thereafter.
The Customers First Plan proposes to open all of the local telephone
business in the Company's service area to competition. In exchange,
Ameritech has requested three regulatory changes. First, Ameritech
has requested relief from the Modification of Final Judgment ("MFJ")
interLATA ban. Such relief would mean that the Company would be
allowed to offer all long distance services. Second, Ameritech has
requested a number of modifications in the FCC's price cap rules.
These modifications would apply only to Ameritech, including the
Company, and would eliminate any obligation to refund, in the form
of its share of future rate reductions, its share of interstate earnings
in excess of 12.25%. The modifications would also provide the
Company increased ability to price its interstate access services in a
manner appropriate to competitive conditions. Third, Ameritech has
requested FCC authority to collect in a competitively neutral manner,
the social subsidies currently embedded in the rates that the Company
charges long distance carriers for access to the local network.
The Michigan Public Service Commission ("MPSC") adopted an
incentive regulation plan on March 13, 1990. The incentive
regulation plan, which became effective April 1, 1990, was
terminated as of December 31, 1991, having been found inconsistent
with the Michigan Telecommunications Act ("MTA") effective
January 1, 1992. Through the end of 1991, after 21 months under the
plan, the Company had recognized a liability of $8.2 for potential
sharing of profits with customers. In September 1992, the Company
increased this provision to $10.5 in accordance with a tentative
agreement reached with the MPSC staff. In January 1993, the MPSC
issued an order approving the agreement but also providing that
interest be accrued on the $10.5 at 9% per annum since January 1,
1992. As of December 31, 1993, the total liability related to
ratepayer sharing is $12.2.
<PAGE>
XXX BEGIN PAGE 19 HERE XXX
In response to the January 1993 order, the Company filed its
proposed plan in February 1993 for the matching of shareable
earnings to benefit education. This plan proposed to match the
original $10.5 plus interest with an equal amount if all amounts
would be available for and dedicated to educational
telecommunications services. In December 1993, the MPSC issued
an order approving an agreement reached between the Company,
intervenors, and the MPSC staff, establishing two separate funds
dedicated to educational telecommunications projects: the ratepayers'
portion and the Company's matching fund. As of December 31, 1993,
the amount recorded to recognize the matching portion is $11.3.
A three-member Michigan Council on Telecommunications Services
for Public Education ("Council") was established to review and make
recommendations on all projects funded by the ratepayers' portion.
The Company retains control over how the matching funds are
expended, which may be in the form of capital, expense or in-kind
services, but agrees to work with the Council in making those
determinations.
IntraLATA Long Distance Service Order
On July 31, 1992, MCI Telecommunications Corporation ("MCI")
filed a complaint with the MPSC seeking "1+" intraLATA dialing
parity for all toll competitors of the Company, alleging that current
dialing arrangements violated the Michigan Telecommunications Act.
Callers in Michigan must currently dial "10" plus a three digit access
code to use the services of the Company's intraLATA toll
competitors.
The MPSC dismissed MCI's complaint finding no statutory
violations. However, as a result of subsequent proceedings in the
case, on February 24, 1994, the MPSC issued an order requiring the
implementation of "1+" intraLATA toll dialing parity in Michigan.
The MPSC order requires dialing parity to be implemented
concurrently with the termination of prohibitions against the
Company's ability to offer interLATA service, but in no event later
than January 1, 1996. The order also requires the establishment of
an industry task force to consider all issues involved in the
implementation of intraLATA dialing parity. The task force will
develop a deployment schedule, identify the costs for deployment, and
determine the methodology to recover those costs. The task force is
required to file a report with the MPSC no later than September 23,
1994, setting forth its findings and recommendations.
The Company believes that the MPSC has not considered all relevant
factors in rendering its decision on intraLATA parity. Accordingly,
the Company has filed a petition for a rehearing with the MPSC as a
first step in bringing further clarification to the issues.
In 1993 the Company recorded $695.8 of long distance revenue, of
which approximately $634.0 resulted from intraLATA message and
unidirectional long distance services. Customer response to dialing
parity and the effect on the Company's intraLATA long distance
revenue is uncertain. However, it is estimated that approximately
50% of any long distance revenue lost, which could be significant,
would be offset by additional access revenue.
Effects of Regulatory Accounting
The Company presently gives accounting recognition to the actions of
regulators where appropriate, as prescribed by Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS No. 71"). Under SFAS No. 71, the
Company records certain assets and liabilities because of actions of
regulators. Further, amounts previously charged to operations for
depreciation expense reflect estimated useful lives and methods
prescribed by regulators rather than those that might otherwise apply
to unregulated enterprises. In the event the Company determines that
it no longer meets the criteria for following SFAS No. 71, the
accounting impact to the Company would be an extraordinary
noncash charge to operations of an amount which could be material.
Criteria that give rise to the discontinuance of SFAS No. 71 include
(1) increasing competition which restricts the Company's ability to
<PAGE>
XXX BEGIN PAGE 20 HERE XXX
establish prices to recover specific costs, and (2) a significant change
in the manner in which rates are set by regulators from cost-based
regulation to another form of regulation. The Company periodically
reviews these criteria to ensure that continuing application of SFAS
No. 71 is appropriate.
Status of new business units
In February 1993, following a year-long examination of its business
called "Breakthrough Leadership," Ameritech announced it would
restructure its business into separate units organized around specific
customer groups - such as residential customers, small businesses,
interexchange companies and large corporations - and a single unit
that will run Ameritech's network in Illinois, Indiana, Michigan,
Ohio and Wisconsin. The Ameritech Bell Companies will continue to
function as legal entities owning current Bell company assets in each
state. The network unit will provide network and information
technology resources in response to the needs of the other business
units. This unit will be the source of network capabilities for
products and services offered by the other business units and will be
responsible for the development and day-to-day operation of an
advanced information infrastructure.
All of the market units and the network unit are currently
operational. Ameritech has developed a new logo and is marketing
all of its products and services under the single brand name
"Ameritech."
Digital Video Network
In January 1994, Ameritech announced a program to launch a digital
video network upgrade that is expected, by the end of the decade, to
make available interactive information and entertainment services, as
well as traditional cable TV services, to approximately six million
Ameritech customers. The Company has filed an application with the
FCC seeking approval of the program. The application reflects
capital expenditures of approximately $55.0 over the next three years.
The Company may also, depending on market demand, make
additional capital expenditures under this program. The Company
anticipates that its capital expenditures for the program will be
funded without an increase in its recent historical level of capital
expenditures.
Termination of publishing services contract
On September 9, 1993, Ameritech Publishing exercised its right to
terminate its publishing services contract (the "Agreement") with the
Company, effective September 8, 1994, or such other mutually
acceptable date. Pursuant to the Agreement, which became effective
on January 1, 1991, the Company granted a license and provides
billing, collection and other services to Ameritech Publishing, and
Ameritech Publishing provides directory services for the Company.
Ameritech Publishing is a wholly-owned subsidiary of the Company's
parent, Ameritech Corporation. The Agreement's initial term was to
have been five years, subject, however, to either party's right to
terminate on not less than twelve months' prior notice. In 1993, the
Company earned fees of approximately $132.7 from Ameritech
Publishing and paid Ameritech Publishing approximately $19.8 for
services rendered.
The Company has begun negotiations with Ameritech Publishing for
a new contract. While the Company cannot predict at this time the
specific terms and conditions of any new contract it may negotiate
with Ameritech Publishing, it anticipates that annual payments from
Ameritech Publishing under a new contract could be significantly less
than current annual payments under the Agreement. A new contract
with Ameritech Publishing could also vary from the Agreement as to
duration, services to be provided by the parties, and other provisions.
<PAGE>
XXX BEGIN PAGE 21 HERE XXX
Property Tax Litigation
The Company has disputed the manner of assessment of its property
taxes in Michigan. In August of 1993, the Michigan Supreme Court
agreed to hear certain issues associated with that dispute which
involves the 1984-1986 tax years. If the Company is successful in its
arguments, it will receive a refund of overpayment of property taxes.
If unsuccessful, the Company may be subject to an additional, and
possibly substantial, tax liability for those years beyond 1986. An
opinion of the court could be issued by the end of 1994. Management
of the Company believes that the ultimate resolution of this case will
not have a material adverse effect on the Company's financial
position or results of operations.
Workforce Resizing
On March 25, 1994, Ameritech announced that it will reduce its
nonmanagement workforce by 6,000 employees by the end of 1995,
including approximately 1,560 at the Company. Under terms of
agreements between Ameritech, the Communications Workers of
America ("CWA") and the International Brotherhood of Electrical
Workers ("IBEW"), Ameritech is implementing an enhancement to
the Ameritech pension plan by adding three years to the age and net
credited service of eligible nonmanagement employees who leave the
business during a designated period that ends in mid-1995. In
addition, Ameritech's network business unit is offering financial
incentives under the terms of its current contracts with the CWA and
IBEW, to selected nonmanagement employees who leave the business
before the end of 1995.
The above actions will result in a charge to first quarter 1994
earnings of approximately $137.8 or $89.2 after tax. A significant
portion of the program cost will be funded by Ameritech's pension
plan, whereas financial incentives to be paid from Company funds are
estimated to be approximately $36.9. Settlement gains, which result
from terminated employees accepting lump-sum payments from the
pension plan, will be reflected in income as employees leave the
payroll. The Company believes this program will reduce its
employee-related costs by approximately $78.0 on an annual basis
upon completion of this program.
The reduction of the workforce results from technological
improvements, consolidations and initiatives identified by
management to balance its cost structure with emerging competition
<PAGE>
XXX BEGIN PAGE 22 HERE XXX
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants
To the Shareholder of
Michigan Bell Telephone Company:
We have audited the accompanying balance sheets of Michigan
Bell Telephone Company (a Michigan Corporation), as of December
31, 1993 and 1992, and the related statements of income and
reinvested earnings and cash flows for each of the three years in the
period ended December 31, 1993. These financial statements and the
schedules referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Michigan Bell
Telephone Company as of December 31, 1993 and 1992, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note (C) to the financial statements, the
Company changed its method of accounting for certain postretirement
and postemployment benefits in 1992.
Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The financial
statement schedules listed in Item 14(a)(2) are presented for purposes
of complying with the Securities and Exchange Commission's rules
and are not a required part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in
our audits of the basic financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Detroit, Michigan
January 28, 1994
<PAGE>
XXX BEGIN PAGE 23 HERE XXX
Statements of Income and Reinvested Earnings
MICHIGAN BELL TELEPHONE COMPANY
(Dollars in millions)
Year Ended December 31,
1993 1992 1991
Revenues . . . . . . . .. . . . . . $2,746.8 $2,678.9 $2,575.3
Costs and expenses
Depreciation. . . . . . . . . . . . . 543.3 520.7 507.9
Employee-related expenses. . . . . 705.8 701.8 708.1
Taxes other than income taxes . . . 132.2 144.1 136.9
Other operating expenses. . . . . . 771.0 736.5 690.8
2,152.3 2,103.1 2,043.7
Operating Income . . . . . . . . . . 594.5 575.8 531.6
Interest expense. . . . . . . . . . . 106.2 109.6 125.3
Other (income) expense - net . . . . 4.6 9.4 (5.0)
110.8 119.0 120.3
Income before income taxes and
cumulative effect of change in
accounting principles. . . . . . . 483.7 456.8 411.3
Income taxes . . . . . . . . . . . . 140.5 130.6 120.8
Income before cumulative effect of
change in accounting principles . . 343.2 326.2 290.5
Cumulative effect of change in
accounting principles . . . . . . -- (448.4) --
Net income (loss). . . . . . . . . . 343.2 (122.2) 290.5
Reinvested earnings, beginning of year . 2.8 348.5 323.3
Less: Dividends . . . . . . . . . . . 324.6 223.5 265.3
Reinvested earnings, end of year . . $ 21.4 $ 2.8 $ 348.5
The accompanying notes are an integral part of these financial
statements.
<PAGE>
XXX BEGIN PAGE 24 HERE XXX
Balance Sheets
MICHIGAN BELL TELEPHONE COMPANY
(Dollars in millions)
December 31, December 31,
1993 1992
ASSETS
CURRENT ASSETS
Cash and temporary cash investments . . . . $ 17.0 $ --
Receivables, net
Customers and agents (less allowance for
uncollectibles of $44.9 and $40.6
for 1993 and 1992, respectively) . . . 452.9 458.1
Ameritech and affiliates . . . . . . . . 15.7 16.5
Other . . . . . . . . . . . . . . . . . . 27.8 29.0
Material and supplies . . . . . . . . . . . . . 26.4 28.0
Prepaid and other . . . . . . . . . . . . . 23.0 30.4
562.8 562.0
TELECOMMUNICATIONS PLANT
In service . . . . . . . . . . . . . . . 7,452.8 7,315.5
Under construction . . . . . . . . . . . . 106.2 140.2
7,559.0 7,455.7
Less accumulated depreciation . . . . . . . 3,176.2 2,999.6
4,382.8 4,456.1
INVESTMENTS, principally in affiliates. . . . . . 68.5 56.4
OTHER ASSETS AND DEFERRED CHARGES . . . . . . 245.1 215.4
TOTAL ASSETS . . . . . . . . . . . . . . . . . $5,259.2 $5,289.9
LIABILITIES AND SHAREOWNER'S EQUITY
CURRENT LIABILITIES
Debt maturing within one year
Ameritech . . . . . . . . . . . . . . . $ 382.9 $ 264.0
Other . . . . . . . . . . . . . . . . . . 3.2 157.6
Accounts payable
Ameritech Services, Inc. . . . . . . . . . 50.6 46.7
Other Ameritech Affiliates . . . . . . . . 47.0 24.5
Other . . . . . . . . . . . . . . . . . . 168.5 183.7
Other current liabilities . . . . . . . . 322.9 326.8
975.1 1,003.3
LONG-TERM DEBT . . . . . . . . . . . . . . 1,132.4 1,085.1
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES
Accumulated deferred income taxes . . . . . 405.7 440.2
Unamortized investment tax credits. . . . . . 93.7 117.4
Postretirement benefits other than pensions . 636.8 653.1
Long-term payable to affiliate (ASI) for
SFAS 106 adoption . . . . . . . . . . 22.9 25.8
Regulatory liability and other . . . . . 230.9 221.9
1,390.0 1,458.4
SHAREOWNER'S EQUITY
Common stock ($14 2/7 par value,
120,810,000 shares authorized,
120,526,415 issued and outstanding) . 1,721.8 1,721.8
Proceeds in excess of par value . . . . 18.5 18.5
Reinvested earnings . . . . . . . . . . . 21.4 2.8
1,761.7 1,743.1
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY . $5,259.2 $5,289.9
The accompanying notes are an integral part of these financial
statements.
<PAGE>
XXX BEGIN PAGE 25 HERE XXX
Statements of Cash Flows
MICHIGAN BELL TELEPHONE COMPANY
(Dollars in millions)
Year Ended December 31,
1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . $ 343.2 $(122.2) $ 290.5
Adjustments to net income (loss)
Cumulative effect of change in
accounting principles. . . . . . . . . . -- 448.4 --
Depreciation. . . . . . . . . . . . . . . . 543.3 520.7 507.9
Deferred income taxes, net. . . . . . . . . (18.3) (15.0) (37.2)
Investment tax credits . . . . . . . . . . (23.7) (18.9) (18.3)
Interest during construction . . . . . . . ( 1.4) ( 1.2) ( 2.2)
Provision for uncollectibles. . . . . . . 42.7 36.4 34.9
Change in accounts receivable. . . . . . . (35.4) (56.2) (71.1)
Change in materials and supplies . . . . . ( 2.2) 1.0 ( 4.7)
Change in prepaid expense and certain
other current assets . . . . . . . . . . ( 7.1) 1.2 3.1
Change in accounts payable . . . . . . . . . . 14.1 (26.7) 1.7
Change in accrued taxes . . . . . . . . . . (6.4) (26.4) 19.5
Change in certain other current liabilities . 1.2 22.7 21.8
Change in certain non-current
assets and liabilities . . . . . . . . .. (45.9) 17.9 (2.8)
Other . . . . . . . . . . . . . . . . . . . ( 0.7) ( 19.5) 0.2
Net cash from operating activities . . . . 803.4 762.2 743.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net . . . . . . . . (449.5) (515.6) (537.8)
Proceeds from (costs of) disposal of
telecommunications plant. . . . . . . . . ( 5.2) (11.3) 5.5
Additional equity investments in ASI. . . . . ( 7.8) (10.4) --
Net cash used in investing activities . . . . (462.5) (537.3) (532.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net . . . . . . . . . 118.9 (37.5) 301.5
Net change in other short-term debt . . . -- -- (210.0)
Issuance of long-term debt . . . . . . . 200.0 450.0 50.0
Retirements of long-term debt . . . . . . . . (307.0) (412.2) ( 87.8)
Cost of refinancing long-term debt . . . . . ( 11.2) ( 1.7) --
Dividend payments . . . . . . . . . . . . . (324.6) (223.5) (265.3)
Net cash from financing activities . . . . . (323.9) (224.9) (211.6)
Net increase (decrease) in cash and
temporary cash investments. . . . . . . . 17.0 -- (0.6)
Cash and temporary cash investments,
beginning of year. . . . . . . . . . . . -- -- 0.6
Cash and temporary cash investments,
end of year. . . . . . . . . . . . . . . $ 17.0 $ -- $ --
The accompanying notes are an integral part
of these financial statements.
<PAGE>
XXX BEGIN PAGE 26 HERE XXX
Notes to Financial Statements
MICHIGAN BELL TELEPHONE COMPANY
(Dollars in millions)
Michigan Bell Telephone Company ("the Company") is a wholly-
owned subsidiary of Ameritech Corporation ("Ameritech").
(A) ACCOUNTING POLICIES - The financial statements of the
Company reflect the application of the accounting policies described
in this note.
Basis of Accounting - The financial statements have been prepared in
accordance with generally accepted accounting principles. In
compliance with Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71), the Company, which is still subject to regulation for
certain services, recognizes the actions of regulators where
appropriate. Such actions can provide reasonable assurance of the
existence of an asset, reduce or eliminate the value of an asset or
impose a liability. Actions of a regulator can also eliminate a
liability previously imposed by the regulator.
Transactions with Affiliates -The Company has various agreements
with affiliated companies. Below is a description of the significant
arrangements followed by a table of the amounts involved.
1. Ameritech Services, Inc. (ASI) The Company has a 26%
ownership interest in ASI, an Ameritech-controlled affiliate that
provides consolidated planning, development, management and
support services to all the Ameritech Bell companies. The
Company also has an agreement with ASI whereby the Company
provides certain services such as loaned employees to ASI.
1993 1992 1991
Purchase of materials and charges for services . . . . $526.5 $489.4 $397.4
Recovery of costs of services provided to ASI . . . . 11.7 9.3 7.9
2. Ameritech (the Company's parent) Ameritech provides
various administrative, planning, financial, and other services to
the Company. Such services are billed to the Company at cost.
1993 1992 1991
Charges incurred for services . . . . . . . . . . . . $29.4 $29.7 $29.8
3. Ameritech Publishing, Inc. (API) The Company has an
agreement whereby payments are made to the Company by API
for license fees and billing and collection services provided by
the Company. The Company also purchases directory services
from API under the same agreement.
1993 1992 1991
Fees paid to the Company by API . . . . . . . . . $132.7 $130.5 $128.6
Purchases by the Company from API. . . . . . . . . . . 19.8 18.9 18.5
4. Ameritech Information Systems, Inc. (AIS) The
Company has an agreement whereby the Company reimburses
AIS for costs incurred by AIS in connection with the sale of
network services on behalf of the Company by AIS employees.
1993 1992 1991
Charges incurred for services . . . . . . . . . . $13.9 $9.9 $11.1
<PAGE>
XXX BEGIN PAGE 27 HERE XXX
5. Bell Communications Research, Inc. (Bellcore)
Bellcore provides research and technical support to the Company.
ASI has a one-seventh interest in Bellcore and bills the Company
for the costs.
1993 1992 1991
Charges incurred for services . . . . . . . . . . . $32.2 $40.7 $39.0
Telecommunications Plant - Telecommunications plant is stated at
original cost. The original cost of telecommunications plant
purchased from ASI includes a return on investment to ASI.
The provision for interstate depreciation, as prescribed by the FCC, is
based principally on the straight-line remaining life and the straight-
line equal life group (ELG) methods of depreciation applied to
individual categories of telecommunications plant with similar
characteristics. Effective January 1, 1990, the Company began a
phase-in of ELG rates for determination of intrastate depreciation.
This method was applied to two classes of plant in 1990, with all
other classes (except electromechanical switching) completed in
1991. In 1992 the Company began a cyclical review plan under
which the depreciation rate parameters of various classes of plant are
under examination on a triennial basis.
When depreciable plant is retired, the amount at which such plant
has been carried in telecommunications plant in service is charged to
accumulated depreciation.
The cost of maintenance and repairs of plant is charged to expense.
Investments - The Company's investments in ASI (26% ownership
and $68.5) are reflected in the financial statements using the equity
method of accounting.
Material and Supplies - Inventories of new and reusable materials
and supplies are stated at the lower of cost or market with cost stated
principally at average original cost; for certain large individual
items, cost is determined on a specific identification basis.
Interest During Construction - Regulatory authorities allow the
Company to accrue interest as a cost of constructing certain plant and
as an item of income, i.e., allowance for debt and equity funds used to
finance construction. Such income is not realized in cash currently
but will be realized over the service life of the plant as the resulting
higher depreciation expense is recovered in the form of increased
revenues.
Income Taxes - The Company is included in the consolidated federal
income tax return filed by Ameritech and its subsidiaries. Effective
January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). The new accounting method is essentially a
refinement of the liability method already followed by the Ameritech
companies and, accordingly, did not have a significant impact on the
Company's financial statements upon adoption. Consolidated income
tax currently payable has been allocated by Ameritech to the
Company based on the Company's contribution to consolidated
taxable income and tax credits.
Deferred tax assets and liabilities are based on differences between
the financial statement bases of assets and liabilities and the tax
bases of those same assets and liabilities. Under the liability method,
deferred tax assets and liabilities at the end of each period are
determined using the statutory tax rates in effect when these
temporary differences are expected to reverse. Deferred income tax
expense is measured by the change in the net deferred income tax
asset or liability during the year. In addition, for regulated
companies, SFAS No. 109 requires that all deferred regulatory assets
and liabilities be recognized at the revenue requirement level. It
further requires that a deferred tax liability be recorded to reflect the
amount of cumulative tax benefits previously flowed through to
ratepayers and that a long-term deferred asset be recorded to reflect
the revenues to be recovered in telephone rates when the related taxes
become payable in future years.
<PAGE>
XXX BEGIN PAGE 28 HERE XXX
The Company uses the deferral method of accounting for investment
tax credits. Therefore, credits earned prior to the repeal of
investment tax credits by the Tax Reform Act of 1986 and also
certain transitional credits earned after the repeal are being
amortized as reductions in tax expense over the life of the plant
which gave rise to the credits.
Temporary Cash Investments - Temporary cash investments are stated
at cost which approximates market. The Company considers all
highly liquid, short-term investments with an original maturity of
three months or less to be cash equivalents.
Short-Term Financing Arrangement - During 1991, Ameritech
entered into an arrangement with its subsidiaries, including the
Company, for the provision of short-term financing and cash
management services. Ameritech issues commercial paper and notes
and secures bank loans to fund the working capital requirements of
its subsidiaries and invests short-term, excess funds on their behalf
(See Notes (D) and (H)).
(B) INCOME TAXES - The components of income tax expense
(before cumulative effect of change in accounting principles) were as
follows:
1993 1992 1991
Federal
Current . . . . . . . . . . . $180.7 $162.5 $174.1
Deferred, net . . . . . . . . . . (18.3) (14.8) (36.8)
Investment tax credits . . . . . . (23.7) (18.9) (18.3)
Total . . . . . . . . . . $138.7 $128.8 $119.0
Local
Current . . . . . . . . . . . . . $ 1.9 $ 2.0 $ 2.2
Deferred, net . . . . . . . . . . (0.1) (0.2) (0.4)
Total . . . . . . . . . . . 1.8 1.8 1.8
Total income tax expense . . $140.5 $130.6 $120.8
Deferred income tax expense (credits) results principally from
temporary differences caused by the change in the book and tax bases
of telecommunications plant due to the use of different depreciation
methods and lives for financial reporting and income tax purposes.
Total income taxes paid were $175.0, $171.7, and $159.1 in 1993,
1992 and 1991, respectively.
<PAGE>
XXX BEGIN PAGE 29 HERE XXX
The following is a reconciliation between the statutory federal income
tax rates of 35% in 1993, and 34% in 1992 and 1991, and the
Company's effective tax rates:
1993 1992 1991
Statutory tax rate . . . . . . . . . . 35.0% 34.0% 34.0%
Reduction in tax expense due to amortization
of investment tax credits . . . . . . (4.0)% (3.8)% (4.4)%
Effect of adjusting deferred income tax
balances due to tax law changes . . . (1.4)% -- --
Benefit of tax rate differential applied
to reversing temporary differences . . (3.3)% (3.2)% (4.1)%
Depreciation of certain taxes and
payroll-related construction costs
capitalized for financial statement
purposes, but deducted when incurred
for income tax purposes . . . . . . . 2.3% 1.8% 1.1%
Flow-through of temporary differences
related to cost of removal/
salvage credit . . . . . . . . . . . . 0.6% 1.3% 3.0%
Other . . . . . . . . . . . . . . . . (0.2)% (1.5)% (0.2)%
Effective tax rate . . . . . . . . . 29.0% 28.6% 29.4%
The Revenue Reconciliation Act of 1993, enacted in August of that
year, increased the statutory federal income tax rate for 1993 to 35
percent. In accordance with the liability method of accounting, the
Company adjusted, on the enactment date, its deferred income tax
balances not subject to regulatory accounting prescribed by SFAS No.
71 (see Note (A)). The result was a reduction in deferred income tax
expense of $6.8, primarily from increasing the deferred tax assets
associated with SFAS Nos. 106 and 112 (See Note (C)).
As of December 31, 1993 the Company had a regulatory asset of
$112.5 (reflected in Other Assets and Deferred Charges) related to
the cumulative amount of income taxes on temporary differences
previously flowed through to ratepayers. In addition, on that date,
the Company had a regulatory liability of $210.4 (reflected primarily
in Regulatory Liability and Other) related to the reduction of deferred
taxes resulting from the change in the statutory federal income tax
rate to 35% and deferred taxes provided on unamortized investment
tax credits. These amounts will be amortized over the regulatory
lives of the related depreciable assets concurrent with recovery in
rates. The accounting for and the impact on future net income of
these amounts will depend on the ratemaking treatment authorized in
future regulatory proceedings.
<PAGE>
XXX BEGIN PAGE 30 HERE XXX
As of December 31, 1993 and 1992, the components of long-term
accumulated deferred income taxes were as follows:
1992 1993
Deferred tax assets
Postretirement and postemployment benefits $232.4 $231.7
SFAS No. 71 accounting 97.8 81.9
Other, net 19.0 24.6
Total non-current deferred tax assets $349.2 $338.2
Deferred tax liabilities
Accelerated depreciation $733.1 $756.4
Other 21.8 22.0
Total non-current deferred tax liabilities $754.9 $778.4
Net long-term accumulated deferred tax liability $405.7 $440.2
Deferred income taxes in current assets and liabilities are not
significant and therefore are not itemized.
(C) EMPLOYEE BENEFIT PLANS
Pension Plans
Ameritech maintains noncontributory defined pension and death
benefit plans ("the plans") covering substantially all of the
Company's management and non-management employees. The
pension benefit formula used in the determination of pension cost is
based on the average compensation earned during the five highest
consecutive years of the last ten years of employment for the
management plan and a flat dollar amount per year of service for the
non-management plan. Pension (credit) expense is allocated to
subsidiaries based upon the percentage of compensation for the
management plan and per employee for the non-management plan.
The Company's funding policy is to contribute annually an amount up
to the maximum amount that can be deducted for federal income tax
purposes. However, due to the funded status of the plans, no
contributions have been made for the years reported below. The
following data provides information on the Company's credit for the
Ameritech plans:
1993 1992 1991
Pension credit $(27.8) $(29.9) $(21.1)
Current year credit as a
percent of salaries and wages (4.7)% (4.9)% (3.6)%
Pension credits were determined using the projected unit credit
actuarial method in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions."
The resulting pension credits are primarily attributable to favorable
investment performance and the funded status of the plans. Certain
disclosures are required to be made of the components of pension cost
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 securities, and real estate. As of
December 31, 1993, the fair value of plan assets available for plan
benefits exceeded the projected benefit obligation (calculated using a
discount rate of 5.8% as of December 31, 1993 and 1992). The
assumed long-term rate of return on plan assets used in determining
pension cost was 7.25% for 1993, 1992, and 1991. The assumed
<PAGE>
XXX BEGIN PAGE 31 HERE XXX
increase in future compensation levels, also used in the determination
of the projected obligation, was 4.5% in 1993 and 1992.
Postretirement Benefits Other Than Pensions
Effective January 1, 1992, the Company adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS No. 106).
SFAS No. 106 requires the cost of postretirement benefits granted to
employees to be accrued and recognized as expense over the period in
which the employee renders service and becomes eligible to receive
benefits. The cost of health care and postretirement life insurance
benefits for current and future retirees was recognized as determined
under the projected unit credit actuarial method.
In adopting SFAS No. 106, the Company elected to immediately
recognize effective January 1, 1992 the transition obligation for
current and future retirees. The transition obligation was $608.9 less
deferred income taxes of $208.6 or $400.3, net. To this amount,
$16.0 was added for the Company's 26% share of ASI's transition
obligation, for a total charge of $416.3.
As defined by SFAS No. 71, a regulatory asset and any corresponding
regulatory liability associated with the recognition of the transition
obligation was not recorded because of uncertainties as to the timing
and extent of recovery in the rate-making process.
Substantially all current and future retirees are covered under
postretirement benefit plans sponsored by Ameritech. Such benefits
include medical, dental, and group life insurance. Ameritech has
been prefunding (including cash received from the Company) certain
of these benefits through Voluntary Employee Benefit Associations
(VEBAs) and Retirement Funding Accounts (RFAs). The associated
plan assets (primarily corporate securities and bonds) were
considered in determining the transition obligation under SFAS No.
106. Ameritech intends to continue to fund its obligation
appropriately, and is exploring other available funding and cost
containment alternatives. Ameritech allocates its retiree health care
cost on a per participant basis, whereas group life insurance is
allocated based on compensation levels.
SFAS No. 106 requires certain disclosures as to the components of
postretirement benefit costs and the funded status of the plans. Such
disclosures are not presented for the Company, as the structure of the
Ameritech plans does not permit the data to be readily disaggregated.
However, the Company has been advised by Ameritech as to the
following assumptions used in determining its SFAS No. 106 costs.
As of December 31, 1993, the accumulated postretirement benefit
obligation exceeded the fair value of plan assets available for plan
benefits. The assumed discount rate used to measure the accumulated
postretirement benefit obligation was 7.0% as of December 31, 1993,
and 7.5% as of December 31, 1992. The assumed rate of future
increases in compensation level was 4.5% as of December 31, 1993
and 1992. The expected long-term rate of return on plan assets was
7.25% in 1993 and 1992 on VEBAs and 8.0% in 1993 and 1992 on
RFAs. The assumed health care cost trend rate was 9.6% in 1993 and
10.0% in 1992, and is assumed to decrease gradually to 4.0% in 2007
and remain at that level. The assumed increase in health care cost is
9.2% for 1994. The health care cost trend rates have a significant
effect on the amounts reported for costs each year. Specifically,
increasing the assumed health care cost trend rate by one percentage
point in each year would increase the 1993 annual expense by
approximately 18%.
Postretirement benefit costs determined under SFAS No. 106 for 1993
and 1992 were $55.9 and $57.8, respectively. During 1991, the cost
of postretirement health care benefits for retirees was $54.3.
As of December 31, 1993, the Company had approximately 13,893
retirees eligible to receive health care and group life insurance
benefits.
<PAGE>
XXX BEGIN PAGE 32 HERE XXX
Postemployment Benefits
Effective January 1, 1992, the Company adopted Statement of
Financial Accounting Standards No. 112, "Employers Accounting for
Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires
employers to accrue the future cost of certain benefits such as workers
compensation, disability benefits, and health care continuation
coverage. A one-time charge related to adoption of this statement
was recognized as a change in accounting principle, effective as of
January 1, 1992. The charge was $48.1, less deferred income taxes of
$16.5, for a net of $31.6. To this amount, $.4 is added for the
Company's 26% share of ASI's one-time charge, for a total of $32.0.
Previously, these costs were accounted for on a cash basis. Current
expense levels are dependent upon actual claim experience, but are
not materially different than prior charges to income.
Workforce Reductions
During 1993, 217 management employees left the Company through
voluntary and involuntary termination programs. These programs,
including termination benefits, settlement and curtailment gains from
the pension plan, resulted in a credit to expense of $5.4. The
involuntary plan remains in effect until December 31, 1994.
During 1992, 210 management employees left the Company through
voluntary early retirement programs and involuntary terminations.
The net cost of this program, along with other transfers from the
pension plan, including termination benefits, and settlement and
curtailment gains from the pension plan was $.4. During 1991, the
Company also offered most of its management employees an early
retirement program. The net cost of that program, including
termination benefits and a settlement gain from the pension plan, was
$.7.
D) DEBT MATURING WITHIN ONE YEAR - Debt maturing
within one year consists of the following at December 31:
Weighted Average
Amounts Interest Rates
1993 1992 1991 1993 1992 1991
Notes payable
Parent (Ameritech) $382.9 $264.0 $301.5 3.3% 3.4% 5.1%
Long-term debt maturing
within one year 3.2 157.6 134.1 -- -- --
Total . . . $386.1 $421.6 $435.6
Average notes payable
outstanding during
the year . . . . . . $237.8 $223.3 $218.0 3.1%* 3.9%* 6.1%*
Maximum notes payable
at any month end
during the year . . $382.9 $264.5 $301.5
In December 1992, the Company called $150.0 of 8.625% debentures
due in 2010. The debentures were retired in February 1993 using
funds obtained from long-term borrowings. This debt was classified
as Debt Maturing Within One Year as of December 31, 1992.
* Computed by dividing the average daily face amount of notes
payable into the aggregate related interest expense.
During 1991 Ameritech consolidated the short-term financing of its
subsidiaries at Ameritech Corporate. See note (A), short-term
financing arrangement.
<PAGE>
XXX BEGIN PAGE 33 HERE
(E) LONG-TERM DEBT - Interest rates and maturities on long-
term debt, consisting principally of debentures and notes, outstanding
at December 31, were as follows:
1993 1992
Thirty-six year 4.625% debentures due August 1, 1996 $ 35.0 $ 35.0
Thirty-seven year 6.375% debentures due February 1, 2005 125.0 125.0
Forty year 7.0% debentures due November 1, 2012 75.0 75.0
Thirty year 7.50% debentures due February 15, 2023 200.0 --
Forty year 7.75% debentures due June 1, 2011 150.0 150.0
Thirty year 7.85% debentures due January 15, 2022 200.0 200.0
Thirty-eight year 8.125% debentures due June 1, 2015 -- 150.0
Seven year 5.875% notes due September 15, 1999 150.0 150.0
Ten year 6.375% notes due September 15, 2002 100.0 100.0
Ten year 9.25% notes due November 15, 1998 100.0 100.0
$1,135.0 $1,085.0
Long-term capital lease obligations . . . . 7.8 10.2
Unamortized discount - net . . . . . . . . . . (10.4) (10.1)
Total $1,132.4 $1,085.1
On February 15, 1993, the Company issued $200.0 of 7.5%
debentures due February 15, 2023 under a $350.0 shelf registration
filed in August 1992. The proceeds from this issuance were used to
repay long-term borrowings and for general corporate purposes.
On October 29, 1993, the Company called $150.0 of 8.125%
debentures due June 1, 2015. The redemption on December 2, 1993,
was funded by short-term borrowings from Ameritech.
On November 16, 1993, the Company filed a registration statement
with the SEC for issuance of up to $450.0 in unsecured debt
securities. No issuances have been made under this shelf
registration.
Early extinguishment of debt costs (including call premiums and
write-offs of unamortized deferred costs) were $7.0, $9.4, and $7.2 in
1993, 1992 and 1991, respectively, and were included in other
income on the statements of income.
(F) LEASE COMMITMENTS - The Company leases certain
facilities and equipment used in its operations under both capital and
operating leases. Rental expense under operating leases was $40.5,
$43.6 and $44.3 for 1993, 1992 and 1991, respectively. At December
31, 1993 the aggregate minimum rental commitments under non-
cancelable leases were approximately as follows:
Years Operating Capital
1994 . . . . . . . . . . . . . $22.9 $ 4.9
1995 . . . . . . . . . . . . 20.9 4.1
1996 . . . . . . . . . . . . . 14.6 2.4
1997 . . . . . . . . . . . . . 9.7 1.6
1998 . . . . . . . . . . . . 5.2 1.0
Thereafter . . . . . . . . . . 9.0 3.8
Total minimum rental
commitments . . . . . . . . $82.3 17.8
Less: amount representing
executory costs . . . . . . . . . . . . 3.1
amount representing
interest costs . . . . . . . . 3.7
Present value of minimum lease payments $11.0
<PAGE>
XXX BEGIN PAGE 34 HERE XXX
(G) FINANCIAL INSTRUMENTS - The following table presents
the estimated fair value of the Company's financial instruments as of
December 31, 1993 and 1992:
1993
Carrying Fair
Value Value
Cash and temporary cash investments . . . . . . . $ 17.0 $ 17.0
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,532.8 1,583.3
Long-term payable to ASI (for postretirement benefits) 22.9 22.9
Other assets . . . . . . . . . . . . . . . . . . . . . . 3.5 3.5
Other liabilities. . . . . . . . . . . . . . . . . . . . . 31.6 31.6
1992
Carrying Fair
Value Value
Cash and temporary cash investments . . . . . . . $ 0.0 $ 0.0
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,524.5 1,501.8
Long-term payable to ASI (for postretirement benefits ) 25.8 25.8
Other assets . . . . . . . . . . . . . . . . . . . . . . . 7.3 7.3
Other liabilities. . . . . . . . . . . . . . . . . . . . . 17.6 17.6
The following methods and assumptions were used to estimate the
fair value of financial instruments:
Cash and temporary cash investments: Carrying value approximates
fair value because of the short-term maturity of these instruments.
Debt: The carrying amount (including accrued interest) of the
Company's debt maturing within one year approximates fair value
because of the short-term maturities involved. The fair value of the
Company's long-term debt was valued based on the year-end quoted
market prices for the same or similar issues.
Long-term payable to ASI (for postretirement benefits): This item
represents the long-term payable to ASI for the Company's
proportionate share of ASI's transition benefit obligation related to
adoption of SFAS No. 106. Carrying value approximates fair value
for this item.
Other assets and liabilities: These financial instruments consist
primarily of long-term receivables and payables, other investments,
and customer deposits. The fair value of these items was based on
expected cash flows or, if available, quoted market prices.
(H) ADDITIONAL FINANCIAL INFORMATION
December 31,
1993 1992
Balance Sheets
Other current liabilities:
Accrued payroll . . . . . . . . . . . . . $ 23.2 $ 24.4
Compensated absences . . . . . . . . . . . . 50.3 47.4
Accrued taxes . . . . . . . . . . . . . . . 140.1 146.5
Advance billings and customer's deposits . . 58.2 54.6
Accrued interest . . . . . . . . . . . . . . 26.5 26.3
Other . . . . . . . . . . . . . . . . . . . 24.6 27.6
Total . . . . . . . . . . . . . . . . . . $ 322.9 $ 326.8
<PAGE>
XXX BEGIN PAGE 35 HERE XXX
1993 1992 1991
Statements of Income
Interest expense:
Interest on long-term debt . . . . . $ 92.1 $ 91.9 $ 96.0
Interest on notes payable - Ameritech . . 7.5 8.8 9.7
Interest on other notes payable . . . . . -- -- 3.6
Interest on capital leases . . . . . . . . 1.4 1.6 2.0
Other . . . . . . . . . . . . . . . . . 5.2 7.3 14.0
Total . . . . . . . . . . . . . . . $ 106.2 $ 109.6 $ 125.3
Interest paid, net was $102.4, $106.4, and $118.2 in 1993, 1992, and
1991 respectively.
1993 1992 1991
Taxes other than income taxes:
Property . . . . . . . . . . . . . . . . $ 99.9 $ 113.7 $ 106.0
Other . . . . . . . . . . . . . . . . . . . 32.3 30.4 30.9
Total . . . . . . . . . . . . . . . . $ 132.2 $ 144.1 $ 136.9
Maintenance and repair expense . . . . . . . $ 463.7 $ 478.8 $ 444.0
Advertising expense . . . . . . . . . . . . $ 30.8 $ 22.1 $ 19.4
Depreciation-Percentage of average
depreciable telecommunications plant . . . 7.4% 7.3% 7.0%
Revenues from American Telephone and Telegraph Company,
consisting principally of interstate network access and billing and
collection service revenues, comprised approximately 11%, 12%, and
13%, of total revenues in 1993, 1992 and 1991, respectively. No
other customer accounted for more than 10% of total revenues.
(I) CONTINGENCIES
The Company has disputed the manner of assessment of its property
taxes in Michigan. In August of 1993, the Michigan Supreme Court
agreed to hear certain issues associated with that dispute which
involves the 1984-1986 tax years. If the Company is successful in its
arguments, it will receive a refund of overpayment of property taxes.
If unsuccessful, the Company may be subject to an additional, and
possibly substantial, tax liability for those years beyond 1986. An
opinion of the court could be issued by the end of 1994. Management
of the Company believes that the ultimate resolution of this case will
not have a material adverse effect on the Company's financial
position or results of operations.
(J) OTHER INFORMATION
Michigan Telecommunications Act
On January 1, 1992, the Michigan Telecommunications Act of 1991
("MTA"), Public Act 179, became effective. The new law replaced
the former Michigan Telephone Act of 1913 and Public Act 305 and
terminated traditional rate-of-return regulation of telecommunication
providers within Michigan, including the Company. MTA affords the
Company new pricing flexibility in certain areas such as message toll
services and encourages the introduction of new services.
<PAGE>
XXX BEGIN PAGE 36 HERE XXX
(K) CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of the Company for the five
years ended December 31, 1993, 1992, 1991, 1990, and 1989 was
5.27, 4.88, 4.12, 4.70, and 4.58 respectively.
For the purpose of calculating this ratio: (i) earnings have been
calculated by adding to income before interest expense and
accounting changes, the amount of related taxes on income, the
Single Business Tax, and the portion of rentals representative of the
interest factor, (ii) the Company considers one-third of rental expense
to be the amount representing return on capital, and (iii) fixed
charges comprise total interest expense and such portion of rentals.
(L) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Calendar Operating
Net
Quarter Revenues Income Income(Loss)
1993
1st . . . . . . . . . . . . .. . $ 667.0 $134.5 $ 74.3
2nd . . . . . . . . . . . . . . . . 683.8 147.7 85.6
3rd . . . . . . . . . . . . . . . . . 696.2 142.1 90.6
4th . . . . . . . . . . . . . . . . . 699.8 170.2 92.7
Total . . . . . . . . . . . . . . $2,746.8 $594.5 $ 343.2
Calendar Operating
Net
Quarter Revenues Income Income(Loss)
1992
1st . . . . . . . . . . . . . . . . . $ 647.3 $137.3 $(366.0)
2nd . . . . . . . . . . . . . . . . . 671.5 144.1 81.9
3rd . . . . . . . . . . . . . . . . . 683.0 147.3 79.6
4th . . . . . . . . . . . . . . . . . 677.1 147.1 82.3
Total . . . . . . . . . . . . . . $2,678.9 $575.8 $(122.2)
Operating income represents revenues less costs and expenses
excluding interest expense and other income-net.
The fourth quarters of 1993 and 1992 were affected by several income
and expense items. The fourth quarter of 1993 was affected by gains
from a workforce resizing of $5.4, a reduction in the tax provision of
$13.2 due to a change in state property tax law, and charges for the
early retirement of debt of $7.0. In the fourth quarter of 1992, the
Company recognized higher costs and charges resulting from its
market realignment efforts, the early retirement of debt, and
increased advertising costs. These costs were offset by gains
resulting from workforce resizing and higher than expected pension
credits.
First quarter 1992 results reflect charges related to the adoption of
SFAS Nos. 106 and 112 for certain postretirement and
postemployment benefits, as discussed previously in Note (C) above.
The charges totaled approximately $448.4.
All adjustments necessary for a fair statement of results for each
period have been included.
(M) EVENT SUBSEQUENT TO DATE OF AUDITORS'
REPORT (UNAUDITED)
On March 25, 1994, Ameritech announced it would reduce its
nonmanagement workforce resulting in an after-tax charge to the
Company of $89.2. The charge will be recorded in the first quarter of
1994. The details of this plan are discussed on page 21 in
Management's Discussion and Analysis of Results of Operations.
<PAGE>
XXX BEGIN PAGE 37 HERE XXX
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
No changes in nor disagreements with accountants on any
matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure occurred during the period
covered by this annual report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as part of the report:
(1) Financial Statements:
Page
Selected Financial and Operating Data. . . . 14
Report of Independent Public Accountants . . 22
Statements of Income and Reinvested
Earnings . . . . . . . . . . . . . 23
Balance Sheets . . . . . . . . . . . . . . . . 24
Statements of Cash Flows. . . . . . . . . . 25
Notes to Financial statements. . . . . . . . 26
(2) Financial Statement Schedules
V - Telecommunications Plant. . . . . . . . 41
VI - Accumulated Depreciation. . . . . . . . 43
VIII- Allowance for Uncollectibles. . . . . . 45
Financial statement schedules other than those 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.
<PAGE>
XXX BEGIN PAGE 38 HERE XXX
(3) Exhibits:
Exhibits identified below, on file with the SEC, are incorporated
herein by reference as exhibits hereto.
Exhibit
Number
3 Articles of Incorporation of the registrant, as amended
March 26, 1990, and by-laws of the registrant, as amended
May 7, 1992.
4 No instrument which defines the rights of holders of long and
intermediate term debt of the registrant is filed herewith
pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, the registrant hereby agrees to
furnish a copy of any such instrument to the SEC upon request.
10a Reorganization and Divestiture Agreement among American
Telephone and Telegraph Company, American Information
Technologies Corporation and affiliates dated November 1,
1983 (Exhibit 10a to Form 10-K for 1983 for American
Information Technologies Corporation, File No. 1-8612).
10b Agreement Concerning Contingent Liabilities, Tax Matters
and Termination of Certain Agreements among American Telephone
and Telegraph Company, Bell System Operating Companies, Regional
Holding Companies and Affiliates dated November 1, 1983 (Exhibit
10j to Form 10-K for American Information Technologies
Corporation, File No. 1-8612).
12 Computation of Ratio of Earnings to Fixed Charges for the five
years Ended December 31, 1993.
23 Consent of independent public accountants.
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the registrant during the
last quarter of the year covered by this report.
<PAGE>
XXX BEGIN PAGE 39 HERE XXX
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.
MICHIGAN BELL TELEPHONE COMPANY
by James W. Trunk
James W. Trunk
Vice President - Comptroller
March 30, 1994
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
Principal Executive Officer:
James E. Wilkes
James E. Wilkes, President
Principal Accounting and Financial Officer:
James W. Trunk
James W. Trunk, Vice President - Comptroller
March 30, 1994
<PAGE>
XXX BEGIN PAGE 40 HERE XXX
SIGNATURES - (Continued)
Ameritech Corporation
By Richard H. Brown
Richard H. Brown
Vice Chairman
the sole shareholder of the
registrant, which has elected
under the law of its state of
incorporation to be managed by the
shareholder rather than by a board
of directors.
March 30, 1994
<PAGE>
XXX BEGIN PAGE 41 HERE XXX
Schedule V -- Sheet 1
MICHIGAN BELL TELEPHONE COMPANY
SCHEDULE V - TELECOMMUNICATIONS PLANT
(Millions of Dollars)
Col. A Col. B Col. C Col. D Col. E Col. F
Balance at Balance at
beginning Additions Retire- Other at end of
Classification of period at cost(a) ments(b) changes(c) period
Year 1993
Land . . . . . . . . .. $ 29.3 $ -- $ 0.1 $ -- $ 29.2
Buildings . . . . . . . . . . 612.4 21.3 10.0 -- 623.7
Computers and Other Office
Equipment 244.3 13.5 39.9 -- 217.9
Vehicles and Other Work
Equipment . 57.7 5.8 3.7 -- 59.8
Central Office Equipment . . 2,966.2 264.5 268.9 1.3 2,963.1
Information Orig/ Term
Equipment . . 67.6 9.0 5.6 (0.8) 70.2
Cable and Wire Facilities . 3,305.2 178.3 26.1 -- 3,457.4
Capitalized Lease Assets . 24.2 1.1 2.3 -- 23.0
Miscellaneous Other Property 8.6 (0.1) -- -- 8.5
Total telecommunications plant in
service . . . . . . 7,315.5 493.4 356.6 0.5 7,452.8
Telecommunications plant under
construction. . 140.2 (34.0) -- -- 106.2
Total telecommunications
plant. . . . $7,455.7 $459.4 $356.6 $ 0.5 $7,559.0
Year 1992
Land . . . . . . . . . . $ 29.4 $ -- $ 0.1 $ -- $ 29.3
Buildings . . . . . . . . 592.7 26.4 6.7 -- 612.4
Computers and Other Office
Equipment 224.0 29.5 9.2 -- 244.3
Vehicles and Other Work
Equipment . 58.3 5.8 6.4 -- 57.7
Central Office Equipment . 2,885.9 240.5 160.2 -- 2,966.2
Information Orig/ Term
Equipment . . 86.6 6.1 25.1 -- 67.6
Cable and Wire Facilities . 3,145.7 179.6 20.1 -- 3,305.2
Capitalized Lease Assets . 18.4 6.5 0.7 -- 24.2
Miscellaneous Other Property 7.3 1.3 -- -- 8.6
Total telecommunications plant in
service . . . . . . 7,048.3 495.7 228.5 -- 7,315.5
Telecommunications plant under
construction. . . 112.3 27.9 -- -- 140.2
Total telecommunications
plant. . . $7,160.6 $523.6 $228.5 $ -- $7,455.7
The notes on Sheet 2 are an integral part of this schedule.
<PAGE>
XXX BEGIN PAGE 42 HERE XXX
Schedule V -- Sheet 2
MICHIGAN BELL TELEPHONE COMPANY
SCHEDULE V - TELECOMMUNICATIONS PLANT
(Millions of Dollars)
Col. A Col. B Col. C Col. D Col. E Col. F
Balance at Balance at
beginning Additions Retire- Other at end of
Classification of period at cost(a) ments(b) changes(c) period
Year 1991
Land . . . . . $ 28.6 $ 0.8 $ -- $ -- $ 29.4
Buildings . . . . . . . . . 575.3 29.0 11.6 -- 592.7
Computers and Other Office
Equipment 207.7 31.2 14.9 -- 224.0
Vehicles and Other Work
Equipment . 64.1 5.8 11.6 -- 58.3
Central Office Equipment . . 2,736.9 283.4 165.8 31.4 2,885.9
Information Orig/ Term
Equipment . . 553.7 8.0 443.7 (31.4) 86.6
Cable and Wire Facilities . 3,017.6 179.0 50.9 -- 3,145.7
Capitalized Lease Assets . . 21.0 2.2 4.8 -- 18.4
Miscellaneous Other Property 6.5 0.8 -- -- 7.3
Total telecommunications plant in
service . . . . . . 7,211.4 540.2 703.3 -- 7,048.3
Telecommunications plant under
construction. . . 101.9 10.4 -- -- 112.3
Total telecommunications
plant. . . $7,313.3 $550.6 $703.3 $ -- $7,160.6
Notes:
(a) Additions, other than to Buildings, include material purchased
from Ameritech Services, Inc., a centralized procurement subsidiary
in which the Company has a 26 percent ownership interest (see note
(A) to Financial Statements). Additions shown also include (1) the
original cost (estimated if not known) of reused material, which is
concurrently credited to Material and Supplies, and (2) Interest
During Construction. Transfers between the classifications listed are
included in Column E.
(b) Items of telecommunications plant when retired or sold are
deducted from the property accounts at the amounts at which they are
included therein (estimated if not known).
(c) Reflects reclassification of certain subscriber equipment to
central office circuit equipment accounts.
<PAGE>
XXX BEGIN PAGE 43 HERE XXX
Schedule VI -- Sheet 1
MICHIGAN BELL TELEPHONE COMPANY
SCHEDULE VI - ACCUMULATED DEPRECIATION
(Millions of Dollars)
Col. A Col. B Col. C Col. D Col. E Col. F
Balance at Balance at
beginning Depreciation Retire- Other at end of
Classification of period expense(a) ments(b) changes period
Year 1993
Buildings . . . . . . . $ 146.9 $ 17.2 $ 12.8 $ 0.1 $ 151.4
Computers and Other Office
Equipment 147.6 26.3 39.8 -- 134.1
Vehicles and Other Work
Equipment . . 18.3 5.4 5.0 -- 18.7
Central Office Equipment 1,217.5 303.0 264.0 (1.8) 1,254.7
Information Orig/ Term
Equipment . . 43.9 4.4 6.1 0.4 42.6
Cable and Wire Facilities 1,411.5 183.8 34.3 (1.8) 1,559.2
Capitalized Lease Assets 12.8 3.1 2.2 0.1 13.8
Miscellaneous Other Property 1.1 -- -- 0.6 1.7
Total Accumulated
Depreciation. . . . $2,999.6 $543.2 $364.2 $ (2.4) $3,176.2
Year 1992
Buildings . . . . . $ 138.7 $ 16.4 $ 8.1 $ (0.1) $ 146.9
Computers and Other Office
Equipment 129.5 27.6 9.5 -- 147.6
Vehicles and Other Work
Equipment . . 18.0 6.8 6.5 -- 18.3
Central Office Equipment 1,088.2 286.9 157.6 -- 1,217.5
Information Orig/ Term
Equipment . . 62.9 6.6 25.2 (0.4) 43.9
Cable and Wire Facilities 1,265.7 173.1 27.3 -- 1,411.5
Capitalized Lease Assets 10.1 3.3 0.6 -- 12.8
Miscellaneous Other Property 1.0 -- -- 0.1 1.1
Total Accumulated
Depreciation. . . . $2,714.1 $520.7 $234.8 (0.4) $2,999.6
The notes on Sheet 2 are an integral part of this schedule.
<PAGE>
XXX BEGIN PAGE 44 HERE XXX
Schedule VI -- Sheet 2
MICHIGAN BELL TELEPHONE COMPANY
SCHEDULE VI - ACCUMULATED DEPRECIATION
Col. A Col. B Col. C Col. D Col. E Col. F
Balance at Balance at
beginning Depreciation Retire- Other at end of
Classification of period expense(a) ments(b) changes period
(Millions of Dollars)
Year 1991
Buildings . . . . .. $ 136.1 $ 17.1 $ 14.3 $ (0.2) $138.7
Computers and Other Office
Equipment 115.6 27.6 13.7 -- 129.5
Vehicles and Other Work
Equipment . . 17.3 10.1 9.4 -- 18.0
Central Office Equipment 934.6 281.6 155.7 27.7 1,088.2
Information Orig/ Term
Equipment . . 527.6 6.8 443.8 (27.7) 62.9
Cable and Wire Facilities 1,159.8 161.6 55.7 -- 1,265.7
Capitalized Lease Assets 11.1 3.1 4.1 -- 10.1
Miscellaneous Other Property 0.8 -- -- 0.2 1.0
Total Accumulated
Depreciation. . . $2,902.9 $507.9 $696.7 $ -- $2,714.1
Notes:
(a) The provision for interstate depreciation as prescribed by the
FCC is based on the straight-line remaining life and the straight-line
equal life group methods of depreciation applied to individual
categories of telephone plant with similar characteristics. Beginning
in 1983, the Company has accounted for intrastate depreciation in
accordance with MPSC straight-line remaining life depreciation rates
and the ten-year amortization of a recognized intrastate reserve
deficiency. Beginning in 1990, the Company began a phase-in of
equal life group rates for determination of intrastate depreciation.
Beginning in 1992, the Company is implementing a cyclical review
plan under which the depreciation rate parameters of various classes
of plant are under examination on a triennial basis. For the years
1993, 1992, and 1991 depreciation expressed as a percentage of
average depreciable plant was 7.4%, 7.3% and 7.0%, respectively.
(b) 1991 data includes amortization of the undepreciated balance and
retirement of investment in tools and equipment costing less than five
hundred dollars but more than two hundred dollars purchased prior to
January 1, 1988. 1991 also includes $442.4 in retirements of
customer premises wiring assets fully amortized.
<PAGE>
XXX BEGIN PAGE 45 HERE XXX
Schedule VIII
MICHIGAN BELL TELEPHONE COMPANY
SCHEDULE VIII - ALLOWANCE FOR UNCOLLECTIBLES
(Millions of Dollars)
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged Charged to Balance at
beginning to other Other end of
Classification of period expense accounts(a) Deductions(b) period
Year 1993 . . . . . . $ 40.6 $ 42.7 $ 57.5 $ 95.9 $ 44.9
Year 1992 . . . . . . . . 38.2 36.4 50.4 84.4 40.6
Year 1991. . . . . . . $ 72.4 $ 34.9 $ 51.2 $120.3 $ 38.2
(a) Includes principally amounts previously written off which
were credited directly to this account when recovered and amounts
related to interexchange carrier receivables which are being billed by
the Company.
(b) Amounts written off as uncollectible.
EXHIBIT 12
MICHIGAN BELL TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED
CHARGES
(Dollars in thousands)
Year ended
December 31,
1993 1992 1991 1990 1989
1. Earnings
(a) Income before interest expense,
income taxes, and cumulative
effect of change in accounting
principles $589,845 $566,380 $536,587 $583,571 $561,744
(b) Single Business Tax 27,600 25,239 25,618 25,634 24,815
(c) Portion of rental expense
representative of the
interest factor(1) (2) 13,513 14,543 14,770 16,269 14,046
Total 1. (a) through (c) $630,958 $606,162 $576,975 $625,474 $600,605
2. Fixed Charges
(a) Total interest deductions $106,166 $109,575 $125,271 $116,892 $117,186
(b) Portion of rental expense
representative of the
interest factor(1) (2) 13,513 14,543 14,770 16,269 14,046
Total 2. (a) through (b) $119,679 $124,118 $140,041 $133,161 $131,232
3. Ratio (1. divided by 2.) 5.27 4.88 4.12 4.70 4.58
(1) The Company considers 1/3 of rental expense to be the amount representing
return on capital and therefore it must be included in fixed charges.
(2) Earnings are income before income taxes and fixed charges. Since the
Single Business Tax ("the Tax") and rental expense have already been
deducted, the Tax and the 1/3 portion of rental expense considered to
be fixed charges are added back.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Michigan Bell Telephone Company
Detroit, Michigan
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated January 28, 1994,
included in this Form 10-K, into Michigan Bell Telephone
Company's previously filed Registration Statement File No. 33-
51169.
ARTHUR ANDERSEN & CO.
Detroit, Michigan
March 30, 1994
EXHIBIT 3
MICHIGAN BELL TELEPHONE COMPANY
ARTICLES OF INCORPORATION
ARTICLE I
These Articles of Association are entered into for the purpose
of organizing a corporation under Act 129 of the Public Acts of 1883
as amended entitled "An Act for the Organization of Telephone and
Messenger Service Companies" being Sections 11690 et seq. of the
Compiled Laws of 1929.
ARTICLE II
The name of this corporation shall be MICHIGAN BELL
TELEPHONE COMPANY.
ARTICLE III
The place where principle business in this State is to be
located is the city of Detroit.
ARTICLE IV
The term of existence of said corporation shall be perpetual.
ARTICLE V
The amount of authorized stock of said corporation is One
Hundred Twenty Million Eight Hundred and Ten Thousand
(120,810,000) shares of common stock with a par value of fourteen
and two-sevenths dollars ($14 2/7) per share.
ARTICLE VI
There shall not be a board of directors. The business of the
corporation shall be managed by the shareholders of the corporation,
as permitted under Section 463 of the Michigan Business Corporation
Act. The effect of this provision is to impose upon the shareholders
the liability for managerial acts or omissions that is imposed on
directors by law.
ARTICLE VII
The Corporation, the corporate existence of which is hereby
continued, having purchased all the property, rights, privileges and
franchises formerly owned and operated by the Michigan Telephone
Company, a corporation of the State of Michigan, which were sold to
Norman W. Harris by Walter S. Harsha, Special Master, under a
decree of foreclosure and sale made and entered by the Circuit Court
of the United States for the eastern district of Michigan on the
fifteenth day of July, A.D., 1903, in the suit between the Old Colony
Trust Company, Trustee, and the Michigan Telephone Company, the
corporation shall continue to have and hold all such property at the
time of the execution of these Articles of Association continued to be
so held and all such other property as shall have been acquired and
shall be held on the date of the execution of these Articles of
Association.
ARTICLE VIII
The names of the stockholders, their respective residences,
and the number of shares of stock subscribed, held and paid for by
each, are as follows:
No. of
Name Address
Shares
American Telephone & 195 Broadway
Telegraph Company New York City
1,099,890
Frank W. Blair Union Joint Stock
Land Bank
Detroit, Michigan
10
Emory W. Clark First Wayne
National Bank
Detroit, Michigan
10
Fred J. Fisher General Motors Bldg.,
Detroit, Michigan
10
Burch Foraker 1365 Cass Avenue
Detroit, Michigan
10
Bancroft Gherardi 195 Broadway
New York City
10
W.S. Gifford 195 Broadway
New York City
10
Robert W. Irwin 23 Summer St. N.W.
Grand Rapids, Mich.
10
W.I. Mizner 1365 Cass Avenue
Detroit, Michigan
10
R. Perry Shorts Second National Bank
& Trust Company
Saginaw, Michigan
10
Oscar Webber c/o The J.L. Hudson
Co.
Detroit, Michigan
10
G.M. Welch 1365 Cass Avenue
Detroit, Michigan
10
BY-LAWS
ARTICLE I
SECTION 1.. PLACE OF MEETINGS - All meetings of the
stockholders shall be held at the principle office of the corporation in
the City of Detroit, or at such other place as may be designated in the
notice of the meeting. Meetings of the stockholders may be held
outside the State of Michigan.
SECTION 2. ANNUAL MEETING - The annual meeting of
the stockholders shall be held on the fourth Monday in March, or at
such other time as may be designated in the notice of the meeting.
SECTION 3. SPECIAL MEETINGS - A special meeting of
the stockholders may be called by the President at any time, and the
President shall call a special meeting whenever he is requested in
writing to do so by stockholders representing one-third of the
outstanding stock entitled to vote at such meeting. Such request shall
specify the time and object of the proposed meeting.
SECTION 4. NOTICE OF MEETINGS - The notice of all
meetings of the stockholders shall be in writing and signed by the
Secretary. Such notice shall state the purpose or purposes for which
the meeting is called, and the time and place where it is to be held,
and a copy thereof shall be served either personally or by mail upon
each stockholder of record entitled to vote at such a meeting, not less
than ten nor more than forty days before the meeting. If mailed, it
shall be directed to the stockholder at his address as it appears on the
stock book of the corporation, unless he shall have filed with the
Secretary a written request that notices intended for him be mailed to
some other address, in which case it shall be mailed to the address
designated by such request. Failure of any stockholder to receive
notice of any such meeting shall not invalidate the meeting.
SECTION 5. QUORUM AND CONDUCT OF MEETINGS -
At all meetings of the stockholders a majority in interest of the stock
entitled to vote thereat shall constitute a quorum, except where by
law a greater interest is required, but a less number may adjourn the
meeting to a day and time specified. Each stockholder entitled to
vote shall be entitled to one vote for each share of stock standing in
his name on the books of the corporation; and any such stockholder
may vote in person or by proxy. All elections by stockholders shall
be by ballot. All other votes shall be by ballot if demanded by any
stockholder.
SECTION 6. INSPECTORS - Two inspectors shall be
appointed by the President at each meeting of the stockholders. The
inspectors shall receive and take in charge the proxies and ballots,
decide in the first instance all questions touching the qualifications of
voters, the validity of proxies and the acceptance or rejection of
votes, count the ballots cast and report to the presiding officer the
result of such election or vote.
ARTICLE II
MANAGEMENT OF CORPORATE AFFAIRS
The business of the corporation shall be managed by the
stockholders which may exercise all such powers of the Company and
do all such lawful acts and things as the Company might do.
ARTICLE III
OFFICERS
SECTION 1. TITLES AND ELECTIONS - The elective
officers of the Company shall consist of a President, such number of
Vice-Presidents as the stockholders may determine, a Secretary and
Treasurer (who may or may not be one and the same person), and one
or more Assistant Secretaries. These officers shall be elected by the
stockholders at the annual stockholders' meeting, and shall hold their
offices for one year, and until their successors are elected and
qualified, unless they are sooner removed by the stockholders.
SECTION 2. VACANCIES - A vacancy in any elective office
shall be filled as soon as may be after the occurrence thereof and by
the authority herein empowered to elect to such office.
ARTICLE IV
PRESIDENT
SECTION 1. POWERS AND DUTIES - The President shall
preside at all meetings of the stockholders. The President shall have
direct charge of and supervision over the business and employees of
the Company; shall appoint and remove such employees and agents,
except as those elected by the stockholders, as he shall deem
necessary; and shall have such other powers and perform such other
duties as are usually exercised and performed by the President of a
corporation, or as may be delegated to him by the stockholders.
SECTION 2. REPORTS - The President shall, from time to
time, make reports to the stockholders as to the affairs of the
Company, as may be required of him by the stockholders.
ARTICLE V
VICE-PRESIDENTS
SECTION 1. POWERS AND DUTIES - Each Vice-President
shall have such powers and perform such duties as may be assigned
him by the stockholders or the President. In case of absence or
disability of the President, the Vice-President designated by the
stockholders shall have all the powers and perform the duties of the
President during such absence or disability, or in case of a vacancy in
that office.
ARTICLE VI
SECRETARY
SECTION 1. POWERS AND DUTIES - The Secretary shall
attend all meetings of the stockholders, and shall keep a true and
faithful record thereof. He shall have custody of the seal of the
corporation and of all records, contracts, papers, documents and
books of the Company except those required to be in the custody of
the Treasurer or the Comptroller, and except such subsidiary records
as may be kept in departmental offices. He shall sign and execute all
contracts and documents which require his signature and execution,
and shall affix the seal of the corporation thereto when necessary. He
shall have such powers and perform such other duties as are usually
exercised and performed by the secretary of a corporation, or as may
be delegated to him by the stockholders or the President.
SECTION 2. ASSISTANT SECRETARY - The Assistant
secretary designated by the Secretary in writing and approved by the
President shall, in the absence or disability of the Secretary or in case
of a vacancy in that office, or when and to the extent authorized by
the Secretary in writing and approved by the President, exercise the
powers and perform the duties appertaining to the office of Secretary.
ARTICLE VII
TREASURER
SECTION 1. POWERS AND DUTIES - The Treasurer shall
receive and have charge of all the funds and securities of the
Company, except the portion of cash collections retained by
collection agents as their commission as provided in contracts with
the Company. The funds, except such portion of the cash in
collections as the Treasurer may deem necessary or expedient for
cashing Company checks or drafts, shall be deposited to the credit of
the Company in such banks or trust companies as the stockholders
shall direct, and the Treasurer shall disburse the same only upon the
certification of the Comptroller, or his duly authorized
representative, and under such rules and regulations as the
stockholders may from time to time adopt. The Treasurer shall sign
and execute all stock certificates and shall have such other powers
and perform such other duties as may be delegated to him by the
stockholders or the President.
SECTION 2. ACCOUNTS AND REPORTS - The Treasurer
shall keep an account of all funds he receives and disburses which
shall be open to inspection at all times by the President or any
stockholder. He shall report the condition of the treasury to the
stockholders at such times as may be required by them.
SECTION 3. ASSISTANT TREASURERS - The Treasurer
may, at his discretion, and with the approval of the stockholders,
appoint one or more Assistant Treasurers who shall perform such
duties as the Treasurer shall from time to time direct. The Treasurer,
with the approval of the President, may designate any Assistant
Treasurer to exercise the powers and duties of the Treasurer during
his absence or disability, or in case of a vacancy in that office.
SECTION 4. BOND The Treasurer and each Assistant
Treasurer shall give bond for the faithful discharge of his duties in
such sum and with such sureties as the stockholders may determine.
ARTICLE VIII
COMPTROLLER
SECTION 1. POWERS AND DUTIES - The Comptroller
shall have custody and charge of all books of account, except those
required by the Treasurer in keeping record of the work of his office,
and shall have supervision over such subsidiary accounting records as
may be kept in departmental offices. He shall have access to all
books of account, including the Treasurer's records, for purposes of
audit and for obtaining information necessary to verify or complete
the records of his office. He shall make periodical audits of all
Company cash, including working advance funds, and Company
owned securities. The Comptroller or his duly authorized
representative shall certify to the authorizations or approvals
pertaining to all vouchers for payment by the Treasurer. The
Comptroller shall perform such other duties as may be required by
the stockholders or the President, and with the approval of the
President he shall designate in writing some other person or persons
to perform the duties of Comptroller in case of his absence or
disability, and with the approval of the President he may delegate in
writing to some other person or persons such part of his duties as he
sees fit and necessary in the ordinary conduct of the business. Such
designations and delegations shall be filed with the Secretary.
ARTICLE IX
TRANSFER OF STOCK
SECTION 1. CERTIFICATES - Every certificate shall have
noted thereon any information required to be set forth on a stock
certificate by Section 463 of the Michigan Business Corporation Act
and shall be set forth in the manner provided in said Section.
SECTION 2. TRANSFER - The shares of stock of the
Company may be transferred by the surrender and cancellation of the
old and the issue of new certificates, duly entered and transferred on
the stock book of the Company.
SECTION 3. CLOSING OF BOOKS - The stock transfer
books shall be closed, if so ordered by the stockholders, for not
exceeding twenty days before any dividend payment date or any
meeting of the stockholders.
SECTION 4. LOST, ETC., CERTIFICATES - In case of a
certificate for stock is claimed to be lost, stolen or destroyed, a new
certificate may be issued upon such terms as the stockholders may
prescribe.
ARTICLE X
CORPORATE SEAL
SECTION 1. DESCRIPTION - The Seal of the corporation
shall bear the words "Michigan Bell Telephone Company", with the
device of a Bell.
ARTICLE XI
AMENDMENT OF BY-LAWS
SECTION 1. METHOD - These By-laws or any of them may
be altered, amended or repealed by the stockholders at any meeting by
the affirmative vote of a majority of the stockholders, provided that
notice of an intention to submit alterations, amendments or repeal
shall have been included in the notice of the meeting.
