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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, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 1-800-257-0902
Securities registered pursuant to Section 12(b) of the Act:
Forty Year 7 3/4% Debentures, due June 1, 2011
Forty Year 7% Debentures, due November 1, 2012
Exchanges on which registered: New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS J(1)(a) AND (b) OF FORM 10-K AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION J(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
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<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Item Page
- ---- ----
<C> <S> <C>
1. Business............................................. 1
2. Properties........................................... 8
3. Legal Proceedings.................................... 9
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction J(2)).
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable).
6. Selected Financial and Operating Data................ 10
7. Management's Discussion and Analysis of Results of
Operations (Abbreviated pursuant to
General Instruction J(2))........................... 11
8. Financial Statements and Supplementary Data.......... 18
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 37
PART III
10. Directors and Executive Officers of the Registrant
(Omitted pursuant to General Instruction J(2)).
11. Executive Compensation (Omitted pursuant to
General Instruction J(2)).
12. Security Ownership of Certain Beneficial Owners and
Management (Omitted pursuant to General Instruction
J(2)).
13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction J(2)).
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 38
</TABLE>
<PAGE>
PART I
Item 1. Business.
The Company
Michigan Bell Telephone Company (the Company), incorporated under the laws of
the State of Michigan, has its principal office at 444 Michigan Avenue, Detroit,
Michigan 48226 (telephone number 1-800-257-0902). The Company is a wholly owned
subsidiary of Ameritech Corporation (Ameritech), a Delaware Corporation.
Ameritech is the parent of the Company; Illinois Bell Telephone Company; Indiana
Bell Telephone Company, Incorporated; The Ohio Bell Telephone Company and
Wisconsin Bell, Inc. (referred to collectively as the "Ameritech landline
communications subsidiaries"), as well as several other communications
businesses, and has its principal executive offices at 30 South Wacker Drive,
Chicago, Illinois 60606 (telephone number 1-800-257-0902). The Company is
managed by its sole shareowner rather than a Board of Directors as permitted by
Michigan law.
Ameritech operates its business within the framework of customer-specific
business units delivering specialized services to various categories of
customers, each with unique requirements. The functions of the business units,
which include consumer, business, cellular, advertising and leasing services, as
well as services provided to other companies in the communications industry,
overlap the legal entities, including the Company, which form the infrastructure
of Ameritech. The products and services of all the companies are marketed under
the "Ameritech" brand identity, but Ameritech's five landline communications
subsidiaries remain responsible within their respective service areas for
providing telephone and other communications services, subject to regulation by
the Federal Communications Commission (FCC) and the five respective state public
service commissions. In 1995, Ameritech further aligned its business unit and
legal entity structure into three sectors: communications and information
products, consumer and business services and worldwide network systems, to
sharpen its strategic focus and to better position the Company to serve
customers and meet the competition. The Company is regionally identified as
Ameritech Michigan.
Operations Under Line-of-Business Restrictions
Until a new telecommunications law came into effect in February 1996, the
operations of Ameritech and its subsidiaries were subject to the requirements of
a consent decree entitled "Modification of Final Judgment" (Consent Decree)
approved by the United States District Court for the District of Columbia
(Court) in August 1982. The Consent Decree arose out of antitrust litigation
brought by the Department of Justice (DOJ) and required AT&T Corp. (AT&T),
formerly named American Telephone and Telegraph Company, to divest those assets
relating to exchange telecommunications, exchange access functions, printed
directories and cellular communications. The Consent Decree, together with the
Court-approved Plan of Reorganization (Plan), outlined the method of divestiture
and established restrictions on the post-divestiture activities of the seven
regional holding companies (RHCs), including Ameritech, formed to receive AT&T's
divested assets. Effective January 1, 1984, AT&T transferred to Ameritech its
100% ownership of the exchange telecommunications, exchange access and printed
directory advertising portions of the Ameritech landline communications
subsidiaries, as well as a cellular communications company.
The Consent Decree, as originally approved, prohibited the RHCs from
providing long distance communications services or information services,
manufacturing telecommunications equipment, or providing 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 RHCs to provide printed directory advertising and to provide, but
not manufacture, customer premises equipment.
1
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Over time, the Court granted waivers to the RHCs to engage in otherwise
prohibited lines of business upon a showing to the Court that there was no
substantial possibility that the company could use its monopoly power to impede
competition in the market it sought to enter. In decisions handed down in
September 1987 and March 1988, the Court continued prohibitions relating to
equipment manufacturing and long distance 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 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 RHCs 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.
In April 1995, the Court opened the long distance market to the RHCs,
allowing them to offer long distance cellular and other wireless services on the
condition that they demonstrate measurable competition in their own markets. The
ruling allowed the RHCs to resell long distance services provided by long
distance carriers and handle all marketing, billing and discounts, but imposed a
number of conditions which were recently superseded by the Telecommunications
Act of 1996 (the 1996 Act).
On February 8, 1996, the first comprehensive overhaul of telecommunications
legislation in 62 years was signed into law, removing barriers that had
prevented the phone, cable TV and broadcast industries from entering each others
businesses. The 1996 Act addresses various aspects of competition within, and
regulation of, the communications industry. Among other things, the new law
defines the conditions under which the Company may offer long distance service
and provides certain mechanisms intended to facilitate local exchange
competition. The new law removes the Consent Decree, lifting many prohibitions
imposed by the Court, and gives the FCC responsibility for making a host of new
rules governing telephone service. One rule-making function of the FCC is to
determine when the local exchange carriers (LECs) have met a 14-step competition
test that will allow them to offer long distance service to their local
customers. For the RHCs, immediate relief under the new law includes permission
to provide cellular long distance, in and out of region, out of region long
distance and certain other incidental long distance services. The 1996 Act
eliminates any barriers to companies wishing to compete against providers of
local phone service.
The Company furnishes a wide variety of advanced communications services,
including local exchange and toll service, network access and communications
products, in an operating area comprised of 5 Local Access and Transport Areas
(LATAs) in Michigan. These LATAs are generally centered on a city or other
identifiable community of interest, and each LATA marks the boundary within
which the Company may provide telephone service. The Company provides two basic
types of communications services. First, it transports communications traffic
between a subscriber's equipment and the telephone exchange offices located
within the same LATA (intraLATA service). These services include local
exchange, private line and intraLATA toll services (including 800 and special
services for data, radio and video transport). Second, it provides exchange
access service, which links a subscriber's telephone or other equipment to the
network of transmission facilities of long distance carriers, which in turn
provide communications service between LATAs (interLATA, or long distance,
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 nonaffiliated telephone
companies. Muskegon is the only city of over 50,000 population in the State in
which local service is furnished by a nonaffiliated telephone company.
2
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The Company provides directory assistance, local and toll operator services,
including collect calls, third number billing, person-to-person and calling card
calls, and offers such digital network services as voice-mail, on-line database
access and fax messaging, document sharing functions, and video-conferencing for
desktop computers. The Company also provides billing and collection services
for several companies, including billing for long distance services offered by
certain long distance carriers, some of which began billing their own customers
in 1996. It is not possible for the Company to estimate the impact of this
change on future billing and collection revenues due to the uncertainty as to
the number of customers affected, the timing of the billing changeovers and the
degree of acceptance by customers.
The following table sets forth the number of access lines served by the
Company at the end of each of the last five years:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Access lines in service (in thousands).. 4,979 4,747 4,563 4,431 4,314
% increase over prior year.............. 4.9 4.0 2.9 2.7 1.7
</TABLE>
The Company has certain agreements with Ameritech Publishing, Inc. (API), an
Ameritech subsidiary doing business as Ameritech Advertising Services, under
which the Company will furnish to API certain services and data to be used by
API in producing and distributing classified and alphabetical directories. In
exchange, the Company will receive a fixed subsidy fee plus compensation for the
services and data.
Ameritech Services Inc. (ASI) is a company jointly owned by the Company and
the other Ameritech landline communications subsidiaries. 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 Ameritech landline communications subsidiaries and integrated communications
and information systems for all the business units.
In 1995, about 92% of the total operating revenues of the Company were from
communications services and the remainder principally from billing and
collection services, rents, directory advertising and other miscellaneous
nonregulated operations. About 77% of the revenues from communications services
were attributable to intrastate operations.
Long Distance Services
When Ameritech first unveiled its Customers First plan in 1993, becoming the
first company in the U.S. communications industry to voluntarily offer to open
its local network to competitors, it sought regionwide freedom to compete in
both its existing businesses and long distance services. In exchange, to
facilitate competition in the local exchange business, Ameritech would allow
other service providers to purchase components of its network and to repackage
them with their own services for resale. Ameritech proposed to change the way
local communications services are provided and regulated and to furnish a policy
framework for advanced universal access to modern communications services --
voice, data and video information. Under the plan, customers would be able to
choose from competitive providers for local service as they now can choose a
provider for long distance service. In 1995, Ameritech sought permission to
enter the interLATA market on a trial basis only, in order to demonstrate
conclusively the substantial customer and economic benefits of full competition.
3
<PAGE>
Much of the detailed language of the 1996 Act was based on Ameritech's plan.
Under the 1996 Act, the Company must comply with a checklist to ensure
competition before it can offer long distance service to its local landline
customers. The FCC will determine whether or not a local service provider's
entry into the long distance market serves the public interest. An RHC is
restricted from providing long distance service until a competitor provides
local phone service to its residential and business customers. The FCC will have
to give substantial weight to DOJ recommendations in reviewing a company's entry
into the market. In preparation, the Company is currently negotiating local
network resale agreements with companies planning to offer local exchange
service in 1996.
The new Act allows Ameritech and the other RHCs to provide long distance
service immediately to their cellular customers, regardless of location.
Ameritech is currently offering long distance service to its cellular customers
in Illinois, northwest Indiana, Ohio, Wisconsin, Michigan and Missouri.
Regulatory Environment -- Federal
The Company is subject to the jurisdiction of the FCC with respect to
interstate services. The FCC prescribes for communications companies a uniform
system of accounts, rules for apportioning costs between regulated and
nonregulated services and the principles and standard procedures (separations
procedures) used to separate regulated property, plant and equipment costs,
revenues, expenses, taxes and reserves between those applicable to interstate
services under the jurisdiction of the FCC and those applicable to intrastate
services under the jurisdiction of the respective state regulatory authorities.
Access Services
The Company provides access services that allow long distance carriers and
other companies to originate and terminate interstate and intrastate
communications services using the facilities of the Company. Access charges
recover the Company's costs associated with such facilities. Access charges
consist primarily of three types: common line, traffic sensitive and trunking.
Common line charges are recovered through separate charges applied to end
users (monthly subscriber line charges) and long distance carriers. The FCC has
authorized subscriber line charges of up to $3.50 per access line per month for
residential and single line business customers and up to $6.00 per access line
per month for multiple line business customers. The remaining portion of the
interstate common line revenue requirement is recovered by means of usage-based
long distance carrier common line charges.
Traffic sensitive charges are usage-based charges billed to long distance
carriers which are associated with central office switching facilities used in
the provision of access services and cable and wire facilities that connect
customers through common facilities from the Company's end office where
switching occurs to the serving wire center where access is provided.
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 through dedicated facilities from the Company's end office where
switching occurs to the serving wire center (including the entrance facilities
to the long distance carrier) where access is provided. Trunking services
associated with special access handle the transmission of interstate private
line services using dedicated facilities between any two customer-designated
premises or between a customer-dedicated premises and a Company end
4
<PAGE>
office where multiplexing, the transmission of two or more signals over a single
channel, occurs. Trunking charges are fixed monthly charges per access line
which in certain cases involve a distance element associated with the dedicated
facilities used to provide the trunking service.
In 1994, the FCC initiated its review of interstate price cap regulation
initially adopted effective January 1, 1991. The FCC's price cap regulatory
scheme sets maximum limits on the prices that LECs, including the Company, can
charge for access services. The limits are adjusted each year to reflect
inflation, a productivity factor and certain other cost changes. LECs under
price caps have increased flexibility to change prices of existing services
within the common line, traffic sensitive and trunking access revenue
categories, as well as for interexchange (interstate intraLATA) and video dial
tone service offerings.
In March 1995, the FCC adopted changes to its price cap plan to be effective
August 1, 1995. The new rules include changes to the measure of inflation, the
introduction of new productivity factor options and changes in the definition of
other costs which may be included in the price cap formula. Under the new
rules, LECs can annually elect one of three productivity factors: 4.0%, 4.7% or
5.3%. Ameritech's election of the 5.3% productivity factor allowed the Company
to retain all of its earnings, whereas election of a lower factor would require
earnings to be shared with customers. Concurrently, Ameritech filed a waiver
request with the FCC to make an additional downward adjustment of its indices to
apply the 5.3% productivity factor retroactively to January 1, 1995.
Regulatory Environment -- State
The Company is also subject to regulation by the Michigan Public Service
Commission (MPSC) with respect to certain intrastate rates and services,
issuance of securities, competitive issues and other matters.
Under the Michigan Telecommunications Act of 1991 (MTA) there was no cap on
earnings or depreciation. The prices of basic services, defined as residence and
business access lines and local calling, were subject to a price cap formula
based on the Consumer Price Index (CPI minus 1%) and could be changed upon MPSC
approval within a period from 90 days (for changes within the index) to 210 days
(for changes falling outside the index). IntraLATA toll prices were capped
through December 31, 1995 at December 31, 1991 levels. Intrastate access rates
could not exceed the levels of comparable interstate access services without
MPSC approval. Prices of many other services (e.g., custom calling, advanced
custom calling, Caller ID and voice mail private line) could be changed
immediately upon notice to customers.
Beginning January 1, 1996, Michigan consumers in certain of the Company's
exchange areas are able to use alternative telephone companies for intraLATA
toll calls by dialing 1 before the regular phone number. Under the new law, the
Company was required to designate 10% of its exchanges for this dial-1 option.
All of the state will have this option when the Company is permitted to offer
interLATA long distance service. Further, the MPSC is directed to take action
toward obtaining Federal authority to allow local service providers to provide
interLATA services. These actions, authorized under the amendments to the MTA
enacted in 1995 Public Act 216 (PA 216), signed in November and effective until
January 1, 2001, support local exchange competition in the Michigan marketplace.
PA 216 continued and expanded the regulatory reforms initially enacted in the
MTA by authorizing the Company to restructure its local exchange, toll and
access rates to address historical support mechanisms built into its rates,
ending rate regulation of intraLATA toll and payphone services, and streamlining
the procedures to obtain
5
<PAGE>
increases in local exchange rates. By January 1, 2000, all local service
providers must restructure their rates so that their toll, access and local
services will be priced at or above total service long run incremental cost.
Following the restructuring, prices for customer lines and local calling can be
increased up to the CPI minus 1%, each year, without MPSC approval.
In addition, 1995 PA 245 repealed the Public Utility Securities Act,
eliminating the requirement to obtain MPSC approval for the Company to issue
debt and equity securities.
Other Matters
In addition, the Company is a party to various proceedings pending before the
MPSC which involve, among other things, terms and conditions of services
provided by the Company, unbundling the local network and terms for
interconnecting networks.
In 1995, the state commissions in Illinois, Ohio, Michigan and Wisconsin
conducted investigations of the Ameritech landline communications subsidiaries'
service quality as a result of Ameritech's failure to meet certain minimum
service standards required under state regulations. The Company's service
problems in the summer of 1995 resulted from severe weather that caused service
disruptions, as well as manpower shortages because of an early retirement offer
in 1994 and 1995 that proved more popular than expected. Ameritech has paid
fines to the commissions and issued bill credits for lost service, and is taking
steps necessary to return service to a high standard, including the addition of
employees in customer service positions.
Competition
The communications industry is undergoing significant changes. LECs, long
distance service companies, cable TV companies, cellular service companies,
computer companies and the entertainment and information services industries are
converging, forming alliances and positioning to provide a variety of services.
Market convergence, already a reality, intensified in 1995. Regulatory,
legislative and judicial decisions, and technological advances, as well as
heightened customer interest in advanced communications services, have expanded
the types of available communications services and products, as well as the
number of companies offering such services.
The primary competitors in the Company's business historically have been
other access providers, cellular service providers and long distance companies.
AT&T, MCI Communications Corp. and other long distance providers are ready to
offer local phone service in various parts of Ameritech's five-state region.
Companies, such as AT&T and McCaw Cellular Communications, Inc., have allied to
form expanded cellular markets, creating the possibility of a wireless network
with nationwide presence and brand-name recognition. Cable companies and long
distance companies are joining to offer alternative wireless and landline local
service. Today, many of the companies planning to provide local telephone
service also have directory operations. Various communications groups,
including almost all the nation's largest phone and cable companies, hold
licenses to offer personal communication services throughout the U.S. Increased
competition in the local exchange service business, as well as the technological
innovations rapidly spawned by that business, will further intensify
competition. Much of it will come from companies with substantial capital,
technological and marketing resources, many of which do not face the same
regulatory constraints as the Company.
6
<PAGE>
Regulatory reform continues to be one of the most significant issues facing
the communications industry today. The Company believes that relief from
excessive regulation will benefit customers and ultimately shareowners by
enabling the Company to compete effectively and meet customers' expanding needs.
The Company is seeking relief before the regulatory agencies from the
restraints, laws and regulations that impose restrictions on its current
business and curtail its future business offerings.
The 1996 Act will radically alter the U.S. communications business and
enhance the Ameritech landline communication subsidiaries' ability to compete.
Passage of the new law broadly opens up the communications industry to
competition and allows cable TV, local phone companies and long distance
carriers into each others businesses, removing the formal barriers between
businesses and reshaping the information industry.
The Company's competitive strategy includes positioning itself to take
advantage of future opportunities by streamlining its processes to continue to
contribute to Ameritech's standing as the most efficient of the RHCs.
Patents, Trademarks and Licenses
The Company, through its parent, Ameritech, has rights to use various
patents, copyrights, trademarks and other intellectual property which are
necessary for it to conduct its present business operations. It is not
anticipated that any such intellectual property will be subject to expiration or
nonrenewal of rights which would materially and adversely affect the Company.
Employee Relations
As of December 31, 1995, the Company employed 12,405 persons, a decrease from
12,761 at December 31, 1994. By year end 1995, approximately 2,626 nonmanagement
employees had resigned or retired in response to an early retirement offer
announced in 1994 (approximately 548 employees left in 1995). Under terms of
agreements between the Company and the Communications Workers of America (CWA),
Ameritech implemented an enhancement to the Ameritech pension plan by adding
three years to the age and the net credited service of eligible nonmanagement
employees who left the business during a designated period ending with contract
expiration, a period extended during contract negotiations to the end of the
third quarter of 1995. Staff additions partially offset these departures. New
employees were added to ensure high quality customer service and to meet special
skill requirements. In 1996, as a result of a planned consolidation of data
centers and other reductions, more employees will leave the Company.
In September 1995, members of the CWA ratified a new three-year contract with
Ameritech. The new contract wage increases were retroactive to the expiration
date of the prior contract, August 6, 1995. The contract addresses wages,
benefits, pensions, employment security, child and family care, training and
retraining and other conditions of employment. Base wages were increased
approximately 10.9% (compounded at the maximum wage rate) over the next three
years. In addition, all eligible employees received a lump sum bonus of $500.
The new contract will expire on August 8, 1998.
Approximately 85% of the Company's employees are represented by the CWA which
is affiliated with the AFL-CIO.
7
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Item 2. Properties.
The properties of the Company do not lend themselves to description by
character and location of principal units. At December 31, 1995, the Company's
investment in property, plant and equipment consisted of the following:
<TABLE>
<S> <C>
Land and buildings..................................... 8%
Central office equipment............................... 39
Cable, wiring and conduit.............................. 47
Other.................................................. 5
Under construction..................................... 1
---
100%
</TABLE>
Central office equipment includes analog and digital switching equipment,
transmission equipment and related facilities. Buildings are principally
central offices. Cable, wiring and conduit constitute outside plant, and
includes poles as well as cable, conduit and wiring primarily on or under public
roads, highways or streets or on or under private property. Substantially all
of the installations of central office equipment and administrative offices are
located in buildings owned by the Company and situated on property it owns.
Many garages and business offices and some installations of central office
equipment and administrative offices are in leased quarters.
Capital Investment Plans
Capital expenditures, the single largest use of Company funds, were as
follows for the last five years (in millions):
<TABLE>
<S> <C>
1991................................................... $542
1992................................................... 523
1993................................................... 452
1994................................................... 365
1995................................................... 378
</TABLE>
The Company has been making and expects to continue to make large capital
expenditures to respond to the market's demand for a modern, efficient and
productive network. The total investment in property, plant and equipment
increased from about $7.3 billion at December 31, 1990, to about $7.8 billion at
December 31, 1995, after giving effect to retirements but before deducting
accumulated depreciation at either date.
Capital expenditures are expected to be about $410 million in 1996.
8
<PAGE>
Item 3. Legal Proceedings.
Pre-Divestiture Contingent Liabilities Agreement
The Plan provides for the recognition and payment of liabilities that are
attributable to pre-divestiture events (including transactions to implement the
divestiture) but that do not become certain until after divestiture. These
contingent liabilities relate principally to litigation and other claims with
respect to the former Bell System's rates, taxes, contracts, equal employment
matters, environmental matters and torts (including business torts, such as
alleged violations of the antitrust laws).
With respect to such liabilities, under agreements entered into at
divestiture, AT&T and the former Bell operating companies of AT&T (Bell
Companies) will share the costs of any judgment or other determination of
liability entered by a court or administrative agency, the costs of defending
the claim (including attorneys' fees and court costs) and the cost of interest
or penalties with respect to any such judgment or determination. Except to the
extent that affected parties may otherwise agree, the general rule is that
responsibility for such contingent liabilities will be divided among AT&T and
the Bell Companies on the basis of their relative net investment (defined as
total assets less 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.
In January 1995, Ameritech and the other RHCs agreed to terminate the sharing
arrangement among the Bell Companies with respect to pre-divestiture contingent
liabilities for certain matters. AT&T did not enter into the agreement and,
accordingly, the sharing arrangement remains in effect with respect to AT&T's
pre-divestiture liabilities and AT&T's share of Bell Company pre-divestiture
liabilities.
Although complete assurance cannot be given as to the outcome of any
litigation, in the opinion of the Company's management, any monetary liability
or financial impact to which the Company would be subject after final
adjudication of all of the foregoing actions would not be material in amount to
the Company.
9
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PART II
Item 6. Selected Financial and Operating Data.
MICHIGAN BELL TELEPHONE COMPANY
Selected Financial and Operating Data
(Dollars in Millions)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
Local service............... $1,258.9 $1,165.6 $1,092.1 $1,168.6 $1,097.7
Interstate network access... 555.2 547.7 512.6 479.4 474.0
Intrastate network access... 189.6 202.3 201.5 199.9 182.0
Long distance............... 724.1 709.7 695.8 591.6 582.7
Other....................... 236.6 229.4 287.5 275.8 273.8
-------- -------- -------- -------- --------
Total........................ 2,964.4 2,854.7 2,789.5 2,715.3 2,610.2
Operating expenses*.......... 2,106.9 2,379.7 2,195.0 2,139.5 2,078.6
-------- -------- -------- -------- --------
Operating income............. 857.5 475.0 594.5 575.8 531.6
Interest expense............. 90.3 97.1 104.8 108.4 123.1
Other (income) expense, net.. (3.4) (4.8) 6.0 10.6 (2.8)
Income taxes................. 259.2 103.4 140.5 130.6 120.8
-------- -------- -------- -------- --------
Income before extraordinary
items and cumulative effect
of change in accounting
principles.................. 511.4 279.3 343.2 326.2 290.5
Extraordinary items and
cumulative effect of change
in accounting principles**.. -- (599.1) -- (448.4) --
-------- -------- -------- -------- --------
Net income (loss)............ $ 511.4 $ (319.8) $ 343.2 $ (122.2) $ 290.5
-------- -------- -------- -------- --------
Total assets................. $4,142.7 $4,033.8 $5,259.2 $5,289.9 $5,251.8
Property, plant and
equipment, net.............. $3,118.2 $3,228.3 $4,382.8 $4,456.1 $4,446.5
Capital expenditures, net.... $ 377.6 $ 364.7 $ 452.1 $ 523.3 $ 542.2
Long-term debt............... $1,093.1 $1,128.9 $1,132.4 $1,085.1 $1,071.0
Debt ratio................... 46.1% 52.9% 46.3% 46.4% 41.9%
Return on average equity..... 40.3% (19.5)% 19.6% (7.1)% 14.0%
Return on average total
capital..................... 23.5% (7.0)% 13.2% (0.6)% 11.0%
Pretax interest coverage..... 9.7 5.0 5.3 4.9 4.1
Customer lines -- at end of
year (000's)................ 4,979 4,747 4,563 4,431 4,314
Customer lines served by --
Digital electronic offices.. 80.5% 76.0% 68.0% 53.0% 49.0%
Analog electronic offices... 19.5% 24.0% 31.0% 46.0% 49.0%
Customer lines per employee.. 401 372 313 293 272
Employees -- at end of year.. 12,405 12,761 14,561 15,142 15,836
- -------------------------
</TABLE>
* As discussed in Note E to the financial statements, 1995 operating expenses
include a net work force restructuring credit of $64.9, while 1994 operating
expenses include a nonmanagement work force restructuring charge of $174.4.
** As discussed in Note D, the Company had a noncash after-tax extraordinary
charge in 1994 of $599.1 as a result of discontinuing the application of FAS
71. The Company had accounting changes in 1992 for FAS 106 and FAS 112
aggregating $448.4.
10
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations.
(Dollars in Millions)
Following is a discussion and analysis of the results of operations of the
Company for the year ended December 31, 1995 and for the year ended December 31,
1994, which is based on the Statements of Income and Reinvested Earnings
(Deficit). Other pertinent data are also given in the Selected Financial and
Operating Data.
Results of Operations
Revenues
Total operating revenues were $2,964.4 for 1995 and $2,854.7 for 1994. The
increase of $109.7 or 3.8% consisted of the following:
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- -------- ------
<S> <C> <C> <C> <C>
Local service.. $1,258.9 $1,165.6 $ 93.3 8.0
</TABLE>
Local service revenues include basic monthly service fees and usage charges,
fees for custom-calling features, public phone revenues and installation and
connection charges. Local service rates have generally been regulated by the
Michigan Public Service Commission (MPSC).
Higher network usage increased local service revenues by $75.0. Increased
volumes were primarily attributed to growth in the number of customer lines,
which increased 4.9% to 4,979,000 from 4,747,000 the previous year, as well as
greater sales of call management services (e.g., Call Forwarding, Caller ID,
etc.) and second line additions. Rate increases accounted for $16.6 of the 1995
increase.
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- -------- ------
<S> <C> <C> <C> <C>
Network access
Interstate..... $ 555.2 $ 547.7 $ 7.5 1.4
Intrastate..... 189.6 202.3 (12.7) (6.3)
</TABLE>
Network access revenues are fees charged to interexchange carriers, such as
AT&T Corp. (AT&T) and MCI Communications Corp. (MCI), that use the local
telecommunications network to provide long distance services to their customers.
In addition, end users pay flat rate access fees to connect to the local network
to obtain long distance service. These revenues are generated from both
interstate and intrastate services.
Interstate access revenues increased by $31.2 due to growth of customer
lines, switched access minutes of use and special access circuits.
Additionally, such revenues increased by $6.4 due to lower National Exchange
Carrier Association common line support payments. These increases were offset
by lower revenues of $23.7 primarily due to net rate reductions. Minutes of use
related to interstate calls increased by 8.8% in 1995.
As a result of the FCC's approval of the Company's request for price
regulation without sharing of earnings, as previously discussed in Part I, the
Company was required to reduce its annual access charges to long distance
companies for local network connections by $23.8. The impact in 1995 was a
reduction in interstate access revenues of $10.2.
11
<PAGE>
The decrease in intrastate network access revenues in 1995 was primarily due
to rate reductions of $23.7. Also contributing to the decrease is the effect of
certain revenues of $9.0 reclassified to the long distance revenue category
discussed below. Higher network usage resulted in additional revenues of $24.2
which partially offset these decreases. Minutes of use related to intrastate
calls increased 10.8% in 1995.
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- -------- ------
<S> <C> <C> <C> <C>
Long distance.. $ 724.1 $ 709.7 $ 14.4 2.0
</TABLE>
Long distance revenues are derived from customer calls to locations outside
of the local calling area but within the same service area. The increase in
long distance revenues was attributable to net rate increases of $10.9 and a
transfer of $9.0 from the intrastate network access revenue category discussed
above partially offset by lower network usage of $6.0.
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- -------- ------
<S> <C> <C> <C> <C>
Other.. $ 236.6 $229.4 $ 7.2 3.1
</TABLE>
Other revenues include revenues derived from directory advertising, billing
and collection services, inside wire installation and maintenance services and
sales of customer premises equipment (CPE). The increase in other revenues is
primarily due to an increase in revenues from CPE sales and other nonregulated
services, such as voice messaging and caller ID, of $39.9. Partially offsetting
this increase was a decrease of $16.2 in directory advertising revenues due to a
renegotiated directory and license fee contract with Ameritech Publishing, Inc.
(API), as well as a decrease of $16.5 as a result of decreased revenues from
inside wire installation and maintenance services, billing and collection
services and rent. Inside wire installation and maintenance service revenues
decreased as a result of volume decreases of $21.4, partially offset by rate
increases of $7.3.
The Company provides billing and collection services for several companies,
including billing for long distance services offered by certain long distance
carriers, some of which began billing their own customers in 1996. It is not
possible for the Company to estimate the impact of this change on future billing
and collection revenues due to the uncertainty as to the number of customers
affected, the timing of the billing changeovers and the degree of acceptance by
customers. Accounts receivable and payable balances will be impacted in 1996
reflecting the reduction in accounts billed on behalf of the long distance
carriers and purchased from them.
Operating Expenses
Total operating expenses in 1995 decreased by $272.8 or 11.5% to $2,106.9.
The decrease was almost entirely attributable to the 1994 work force
restructuring, which resulted in a credit of $64.9 ($42.0 after-tax) in 1995
related primarily to settlement gains from lump-sum pension payments to former
employees, partially offset by fourth quarter charges for planned work force
reductions due to data center consolidations, increased force costs related to
the work force restructuring started in 1994 and a charge of $2.8 to write-down
certain data processing equipment in connection with information technology
restructuring. This compares with the 1994 charge of $174.4 ($112.9 after-tax)
for work force restructuring.
12
<PAGE>
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ------- ------
<S> <C> <C> <C> <C>
Employee-related expenses....... $ 671.4 $ 691.7 $ (20.3) (2.9)
</TABLE>
The decrease in employee-related expenses in 1995 was attributable primarily
to the effect of work force reductions over the past year of $46.2, as well as a
decrease due to wage rate changes, postretirement benefits and payroll taxes of
$8.4. These decreases were partially offset by a decrease in pension credits of
$10.3 and the effects of increased overtime payments, bonuses and medical and
dental plan expenses of $23.8.
During September 1995, a union agreement was ratified by the Communications
Workers of America (CWA). The new contract and wage increases were retroactive
to August 6, 1995. The contract includes basic wage increases of 10.9%
(compounded at the maximum wage rate) over three years and a signing bonus of
$500 to eligible employees upon ratification. In addition, union employees will
receive their annual bonuses in the form of Ameritech stock instead of cash,
beginning with the bonus for 1995 and continuing for the remaining three years
of the labor contract. The contract addresses wages, benefits, pensions,
employment security, training and retraining and other conditions of employment.
Most of the Company's nonmanagement work force (about 85% of total employees) is
represented by the union.
There were 12,405 employees at December 31, 1995, compared with 12,761 at
December 31, 1994. Work force restructuring at the Company resulted in a
decrease of 548 employees since December 31, 1994.
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ----- -------- ------
<S> <C> <C> <C> <C>
Depreciation and amortization.. $ 492.7 $ 530.6 $ (37.9) (7.1)
</TABLE>
The decrease in depreciation and amortization expense in 1995 was primarily
due to the cessation of depreciation of analog switches determined to be
obsolete in connection with discontinuing the application of Statement of
Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation," in 1994. This decrease was partially offset by
the increase in depreciation rates as a result of shortening telephone plant
lives following the discontinuation of FAS 71. See Note D for further details.
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- -------- ------
<S> <C> <C> <C> <C>
Other operating expenses.. $ 872.9 $ 859.3 $ 13.6 1.6
</TABLE>
The increase in other operating expenses in 1995 was primarily attributable
to higher affiliated services expenses of $25.4, resulting from increased
project billings, as well as increased cost of sales resulting from CPE and
equipment sales of $15.8. Advertising and other expenses, such as commission
expense related to sales by authorized distributors increased $15.4, reflecting
increased marketing and sales efforts. These increases were partially offset by
$43.0 in lower expenses for contract and professional services, switching system
software, access charges from independent telephone companies, as a result of
renegotiated contracts, and bad debt expense.
13
<PAGE>
<TABLE>
<CAPTION>
Percent
1995 1994 Change Change
---- ---- ------- ------
<S> <C> <C> <C> <C>
Restructuring (credits) charges.. $ (64.9) $ 174.4 $ (239.3) n/a
</TABLE>
The Company announced in March 1994, that it intended to significantly reduce
its nonmanagement work force by the end of 1995. Reduction of the work force
resulted from the implementation of technology improvements, consolidations and
initiatives to balance the cost structure with emerging competition. The
nonmanagement work force was reduced by 2,626 employees. New employees were
added during these periods to accommodate growth, ensure high quality customer
service and meet staffing requirements for new business opportunities. Pretax
charges totaling $174.4 ($112.9 after-tax) related to the work force reductions
were recorded in 1994. Noncash settlement gains of $63.9 were recorded in 1995,
associated primarily with lump-sum pension payments to former employees, as well
as an additional credit of $3.8 associated with the completion of the 1994
restructuring program, partially offset by a $2.8 charge that was recorded to
write down certain data processing equipment to net realizable value.
The restructuring program was recorded by quarter as follows:
<TABLE>
<CAPTION>
Gross Net Program Cost
Program Settlement ----------------
Cost Gains Pretax After-tax
-------- ------ ------ ----------
1995
- ----
<S> <C> <C> <C> <C>
First Quarter........... $ (12.9) $ (59.9) $ (72.8) $ (47.1)
Second Quarter.......... -- -- -- --
Third Quarter........... 0.4 (2.9) (2.5) (1.6)
Fourth Quarter.......... 11.5 (1.1) 10.4 6.7
--------- --------- -------- ----------
1995 Total........... $ (1.0) $ (63.9) $ (64.9) $ (42.0)
--------- --------- -------- ----------
<CAPTION>
1994
- ----
<S>.................. <C> <C> <C> <C>
First Quarter........... $ 137.8 $ -- $ 137.8 $ 89.2
Second Quarter.......... -- -- -- --
Third Quarter........... 87.1 (30.2) 56.9 36.8
Fourth Quarter.......... 32.7 (53.0) (20.3) (13.1)
--------- --------- ------ ---------
1994 Total........... $ 257.6 $ (83.2) $ 174.4 $ 112.9
--------- --------- -------- ---------
Program Total............... $ 256.6 $ (147.1) $ 109.5 $ 70.9
========= ========= ======== =========
</TABLE>
Actual employee reductions by quarter in 1994 were: 396 in the second
quarter, 570 in the third quarter and 1,112 in the fourth quarter, or 2,078 in
total. Employee reductions in 1995 aggregated 548 as follows: 60 in the first
quarter, 184 in the second quarter and 304 in the third quarter. See also the
discussion of employee-related expenses above. Additional employees are
expected to leave the Company in 1996 as a result of the consolidation of data
centers and additional work force reductions previously discussed. Cash
requirements to fund the financial incentives (principally contractual
termination payments totaling approximately $51.8) were met as prescribed by
applicable collective bargaining agreements. Certain of these collective
bargaining agreements required contractual termination payments to be paid in a
manner other than lump-sum, thus requiring cash payments beyond an employee's
termination date.
14
<PAGE>
The work force restructuring program reduced annual employee-related costs by
approximately $50 thousand per departing employee. The projected savings are
being partially offset by the hiring of new employees to accommodate growth,
ensure high quality customer service and meet staffing requirements for new
business opportunities.
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ------- ------
<S> <C> <C> <C> <C>
Taxes other than income taxes.... $ 134.8 $ 123.7 $ 11.1 9.0
</TABLE>
The increase in taxes other than income taxes in 1995 is primarily due to
higher property taxes attributable to a decrease in the prior year period in the
provision for property taxes to recognize the impact of state legislation
enacted in December 1993 which lowered property tax millage rates in Michigan.
The Company had disputed the manner in which property taxes were assessed in
Michigan. As discussed more fully in Note M to the financial statements,
agreement between the Company and the State of Michigan have settled all the
issues in dispute.
Other Income and Expenses
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- --------- ------
<C> <C> <C> <C>
Interest expense.... $ 90.3 $ 97.1 $ (6.8) (7.0)
</TABLE>
The decrease in interest expense in 1995 was primarily due to the decrease in
interest of $7.0 on borrowings from the Ameritech short-term pool reflecting
lower average debt levels. (See Note A).
<TABLE>
<CAPTION>
Change
(Income) Percent
1995 1994 Expense Change
---- ----- ------- ------
<S> <C> <C> <C> <C>
Other income, net... $ (3.4) $ (4.8) $ 1.4 29.2
</TABLE>
Other income, net includes earnings related to the Company's investments,
interest income and other nonoperating items. Other income in 1995 decreased
primarily because the Company's share of equity earnings from ASI decreased.
<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- -------- ------
<S> <C> <C> <C> <C>
Income taxes........ $ 259.2 $ 103.4 $ 155.8 150.7
</TABLE>
The increase in income taxes in 1995 was primarily attributable to the
previously discussed increases in pretax income.
15
<PAGE>
Extraordinary Item -- FAS 71
As described in Note D to the financial statements, the Company discontinued
applying FAS 71 in the fourth quarter of 1994, after determining that it no
longer met the criteria for following FAS 71. The factors that gave rise to
this decision were changes in the manner in which the Company is regulated and
the heightened competitive environment. The accounting impact to the Company
was an extraordinary noncash after-tax charge of $599.1.
As a result of the discontinuation of applying FAS 71, 1995 depreciation
expense decreased due to the cessation of depreciation on analog switches.
Depreciation expense in 1996 and beyond will likely be higher as the effect of
shorter lives intensifies at the Company.
Additional financial statement impacts occurred as a result of no longer
following FAS 71. Specifically, the effective income tax rate increased in 1995
as a result of the elimination of excess deferred tax balances previously
amortized as a reduction to tax expense over the lives of the related assets.
Other Matters
Competition.
The communications industry is undergoing significant changes. LECs, such as
the Company, and long distance service companies, cable TV companies, cellular
service providers, computer companies and the entertainment and information
services industries are converging, forming alliances and positioning to provide
a variety of services. Regulatory, legislative and judicial decisions, and
technological advances, as well as heightened customer interest in advanced
communications services, have expanded the types of available communications
services and products, as well as the number of companies offering such
services. Market convergence, already a reality, has intensified in 1995.
The primary competitors of the company historically have been other access
providers, cellular service providers and long distance companies. Today, as
the Company prepares to open its local market to competition, AT&T, MCI and
other long distance providers are ready to offer local phone service in various
parts of Ameritech's five state region. Companies, such as AT&T with its
acquisition of McCaw Cellular, have allied to form expanded cellular markets,
creating the possibility of a wireless network with nationwide presence and
brand-name recognition. Cable companies and long distance companies are joining
to offer alternative wireless and landline local service. Today, many of the
companies planning to provide local telephone service also have directory
operations. Various communications groups, including almost all of the nations
largest phone and cable companies, hold licenses to offer personal communication
services throughout the U.S. Increased competition in the local exchange
service business, as well as the technological innovations rapidly spawned by
that business, will further intensify competition in the directory business.
Regulatory reform continues to be one of the most significant issues facing
the communications industry today. The Company believes that continued relief
from regulation will benefit customers and ultimately shareowners by enabling
the Company to compete effectively and meet customers' expanding needs.
Ameritech is seeking relief before regulatory agencies from the restraints, laws
and regulations that impose restrictions on its current business and curtail its
future business offerings.
16
<PAGE>
The Company's competitive strategy includes positioning itself to take
advantage of future opportunities by streamlining its processes to continue to
be the most efficient of the RHCs. In 1995, Ameritech realigned its business
units into three sectors to sharpen its strategic focus and better serve the
needs of its customers.
On the national level, the Telecommunications Act of 1996 was signed into law
by the President on February 8, 1996. This legislation defines the conditions
under which Ameritech will be permitted to offer interLATA long distance service
and provides certain mechanisms intended to facilitate local exchange
competition. This legislation, in addition to allowing Ameritech to offer
interLATA long distance services, will allow competitors into the Company's
traditional local exchange markets. Management believes the legislation gives
Ameritech an opportunity to expand its revenue base by providing long distance
services, while retaining lower-margin access revenues as other local service
providers, acting as resellers, continue to use the Company's network
facilities.
As the communications industry expands and converges, Ameritech is positioned
to compete aggressively in new and existing markets, all of which are expanding
at rates far in excess of historical levels. Ameritech plans to maintain
aggressive revenue growth rates and productivity increases as it faces
formidable competition in these markets.
Regulatory Environment
On July 18, 1995, FCC approved Ameritech's request for price regulation
without sharing of earnings effective January 1, 1995, resulting in a reduction
in prices that the Company charges long distance companies for local
connections. These price reductions resulted in a decrease in 1995 interstate
access revenues as discussed above.
Also see Regulatory Environment -- Federal and State in Part I.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowner of Michigan Bell Telephone Company
We have audited the accompanying balance sheets of Michigan Bell Telephone
Company (a Michigan Corporation) as of December 31, 1995 and 1994, and the
related statements of income and reinvested earnings (deficit) and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Michigan Bell Telephone Company
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note D to the financial statements, the Company discontinued
applying the provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," in 1994.
Our audits are made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule
included in Item 14(a)(2) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 17, 1996
18
<PAGE>
MICHIGAN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME AND REINVESTED EARNINGS (DEFICIT)
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues........................................... $2,964.4 $2,854.7 $2,789.5
-------- -------- --------
Operating expenses
Employee-related expenses......................... 671.4 691.7 705.8
Depreciation and amortization..................... 492.7 530.6 543.3
Other operating expenses.......................... 872.9 859.3 813.7
Restructuring (credits) charges................... (64.9) 174.4 --
Taxes other than income taxes..................... 134.8 123.7 132.2
-------- -------- --------
2,106.9 2,379.7 2,195.0
-------- -------- --------
Operating income................................... 857.5 475.0 594.5
Interest expense................................... 90.3 97.1 104.8
Other (income) expense, net........................ (3.4) (4.8) 6.0
-------- -------- --------
Income before income taxes and extraordinary item.. 770.6 382.7 483.7
Income taxes....................................... 259.2 103.4 140.5
-------- -------- --------
Income before extraordinary item................... 511.4 279.3 343.2
Extraordinary item................................. -- (599.1) --
-------- -------- --------
Net income (loss).................................. 511.4 (319.8) 343.2
Reinvested earnings (deficit), beginning of year... (560.3) 21.4 2.8
Less, dividends.................................... 369.3 261.9 324.6
-------- -------- --------
Reinvested earnings (deficit), end of year......... $ (418.2) $ (560.3) $ 21.4
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
MICHIGAN BELL TELEPHONE COMPANY
BALANCE SHEETS
(Dollars in Millions)
<TABLE>
<CAPTION>
As of December 31,
---------------------
1995 1994
---- ----
<S> <C> <C>
Assets
Current assets
Cash and temporary cash investments.................. $ 0.1 $ --
Investment in Ameritech funding pool................. 17.0 14.2
--------- ---------
17.1 14.2
Receivables, net
Customers and agents (less allowance for
uncollectibles of $37.7 and $38.2, respectively)... 634.2 503.5
Ameritech and affiliates............................ 9.2 11.3
Other............................................... 20.7 20.8
Material and supplies................................ 7.4 26.7
Prepaid and other.................................... 20.8 25.9
--------- ---------
709.4 602.4
--------- ---------
Property, plant and equipment
In service........................................... 7,737.1 7,515.6
Under construction................................... 38.8 61.3
--------- ---------
7,775.9 7,576.9
Less, accumulated depreciation....................... 4,657.7 4,348.6
--------- ---------
3,118.2 3,228.3
--------- ---------
Investments, principally in affiliates................ 68.7 70.9
Other assets and deferred charges..................... 246.4 132.2
---------- ---------
Total assets.......................................... $ 4,142.7 $ 4,033.8
========== =========
Liabilities and Shareowner's Equity
Current liabilities
Debt maturing within one year
Ameritech........................................... $ -- $ 193.6
Other............................................... 38.0 2.9
Accounts payable
Ameritech Services, Inc. (ASI)...................... 116.8 108.3
Ameritech and affiliates............................ 31.0 32.8
Other............................................... 204.2 185.7
Other current liabilities............................ 415.5 296.2
---------- ---------
805.5 819.5
---------- ---------
Long-term debt........................................ 1,093.1 1,128.9
---------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.................... 105.7 81.2
Unamortized investment tax credits................... 55.9 69.8
Postretirement benefits other than pensions.......... 676.2 678.2
Long-term payable to ASI............................. 21.5 22.9
Other................................................ 62.7 53.3
---------- ---------
922.0 905.4
---------- ---------
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 deficit................................... (418.2) (560.3)
---------- ---------
1,322.1 1,180.0
---------- ---------
Total liabilities and shareowner's equity............. $ 4,142.7 $ 4,033.8
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
MICHIGAN BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).............................................. $ 511.4 $ (319.8) $ 343.2
Adjustments to net income (loss):
Extraordinary item, net of tax................................. -- 599.1 --
Restructuring (credits) charges, net of tax.................... (42.0) 112.9 --
Depreciation and amortization.................................. 492.7 530.6 543.3
Deferred income taxes, net..................................... 16.5 15.1 (18.3)
Investment tax credits, net.................................... (13.9) (14.9) (23.7)
Capitalized interest........................................... (1.7) (1.5) (1.4)
Provision for uncollectibles................................... 38.3 44.0 42.7
Change in accounts receivable.................................. (166.8) (83.2) (35.4)
Change in material and supplies................................ 15.8 (2.4) (2.2)
Change in certain other current assets......................... 5.1 (2.9) (7.1)
Change in accounts payable..................................... 25.2 60.7 14.1
Change in certain other current liabilities.................... (15.2) (71.1) (5.2)
Change in certain noncurrent assets and liabilities............ (43.8) (52.4) (45.9)
Costs of refinancing long-term debt............................ -- -- (11.2)
Other.......................................................... (2.9) (1.6) (0.7)
--------- --------- --------
Net cash from operating activities.............................. 818.7 812.6 792.2
--------- --------- --------
Cash Flows from Investing Activities:
Capital expenditures, net...................................... (379.2) (363.2) (449.5)
Proceeds from (costs of) disposals of property,
plant and equipment........................................... (4.2) 2.1 (5.2)
Other investing activities, net................................ 0.5 -- (7.8)
------- ------- -------
Net cash from investing activities.............................. (382.9) (361.1) (462.5)
------- ------- -------
Cash Flows from Financing Activities:
Intercompany financing, net.................................... (193.6) (189.3) 118.9
Issuances of short-term debt................................... 1.5 -- --
Issuances of long-term debt.................................... -- 4.5 200.0
Retirements of long-term debt.................................. (2.3) (7.6) (307.0)
Dividend payments.............................................. (238.5) (261.9) (324.6)
------- ------- -------
Net cash from financing activities.............................. (432.9) (454.3) (312.7)
------- ------- -------
Net increase (decrease) in cash and temporary cash investments.. 2.9 (2.8) 17.0
Cash and temporary cash investments, beginning of year.......... 14.2 17.0 --
------- ------- -------
Cash and temporary cash investments, end of year................ $ 17.1 $ 14.2 $ 17.0
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
MICHIGAN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
A. Significant Accounting Policies
Nature of Operations -- Michigan Bell Telephone Company (the Company) is a
wholly owned subsidiary of Ameritech Corporation (Ameritech). Ameritech is the
parent of the Company, Illinois Bell Telephone Company, Indiana Bell Telephone
Company, Incorporated, The Ohio Bell Telephone Company and Wisconsin Bell, Inc.
(referred to collectively as the "Ameritech landline communications
subsidiaries"). The Company provides a wide variety of communications services,
including local exchange and toll service, network access and telecommunications
products in Michigan.
See discussion of Competition in Other Matters in Management's Discussion and
Analysis of Results of Operations.
Basis of Accounting -- The financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). In the fourth
quarter of 1994, the Company discontinued following accounting prescribed by
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the
Effects of Certain Types of Regulation." (See Note D).
Use of Estimates -- The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Transactions with Affiliates -- The Company has various agreements with
affiliated companies. Below is a description of the significant arrangements
followed by a table of the amounts involved.
1. Ameritech Services, Inc. (ASI) -- ASI, an Ameritech-controlled affiliate,
in which the Company has 26% ownership, provides planning, development,
management, procurement and support services to all of the Ameritech landline
communications subsidiaries. The Company also provides certain services and
facilities to ASI.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Purchases of materials and charges for
services from ASI................... $651.3 $605.7 $526.5
Recovery of costs for services
provided to ASI...................... 12.9 15.9 11.7
</TABLE>
2. Ameritech (the Company's parent) -- Ameritech provides various
administrative, planning, financial and other services to the Company. These
services are billed to the Company at cost.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<C> <C> <C>
Charges incurred...................... $ 31.6 $ 29.2 $ 29.4
</TABLE>
22
<PAGE>
3. Ameritech Publishing, Inc. (API), a wholly owned subsidiary of Ameritech
doing business as Ameritech Advertising Services -- The Company has certain
agreements with API, under which the Company will furnish to API certain
services and data to be used by API in producing and distributing classified and
alphabetical directories. In exchange, the Company will receive a fixed subsidy
plus compensation for the services and data.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fees paid to the Company by API.. $ 86.4 $ 109.3 $ 132.7
Fees paid by the Company to API.. 0.6 14.5 19.8
</TABLE>
4. Ameritech Information Systems, Inc. (AIS), a wholly owned subsidiary of
Ameritech. The Company reimburses AIS for costs incurred by AIS in connection
with the sale of network services by AIS employees.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Charges incurred................ $ 18.9 $ 16.0 $ 13.9
</TABLE>
5. Bell Communications Research, Inc. (Bellcore) -- Bellcore provides
research and technical support to the Company. ASI has a one-seventh ownership
interest in Bellcore and bills the Company for the costs.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Charges incurred................ $ 24.3 $ 28.7 $ 32.2
</TABLE>
Property, Plant and Equipment -- Property, plant and equipment are stated at
original cost. The provision for depreciation is based principally on the
straight-line remaining life and the straight-line equal life group methods of
depreciation applied to individual categories of property, plant and equipment
with similar characteristics. As a result of the discontinuation of applying
FAS 71 in the fourth quarter of 1994, the Company recognized shorter, more
economically realistic lives and increased its accumulated depreciation balance
by $984.8. (See Note D).
The following is a summary of average lives (in years) before and after the
discontinuation of FAS 71:
<TABLE>
<CAPTION>
Asset Category Before After
-------------- ------ -----
<S> <C> <C>
Central office equipment
Digital switching......................... 17 7
Analog switching.......................... up to 4 obsolete
Circuit accounts.......................... 8-12 7
Copper and fiber cable and wire facilities. 20-32 15
All other.................................. various various
</TABLE>
Generally, when depreciable plant is retired, the amount at which such plant
has been carried in property, plant and equipment in service is charged to
accumulated depreciation. The cost of maintenance and repairs of plant is
charged to expense.
Investments -- The Company's investment in ASI (26% ownership and $68.3) is
reflected in the financial statements using the equity method of accounting. All
other investments are carried at cost. Derivative transactions are generally
handled by Ameritech. The Company had no derivatives in 1995 or 1994.
Material and Supplies -- Inventories of new and reusable material and
supplies are stated at the lower of cost or market with cost generally
determined on an average cost basis.
23
<PAGE>
Income Taxes -- The Company is included in the federal income tax return
filed by Ameritech and its subsidiaries. Effective January 1, 1993, the Company
adopted FAS 109, "Accounting for Income Taxes." The accounting method is
essentially a refinement of the liability method previously followed by the
Company and, accordingly, did not have a significant impact on the Company's
financial statements upon adoption. The Company's provision for income taxes is
determined effectively on a separate company basis.
Deferred tax assets and liabilities are determined at the end of each period
based on differences between the financial statement bases of assets and
liabilities and the tax bases of those same assets and liabilities, using the
currently enacted statutory tax rates. Deferred income tax expense is measured
by the change in the net deferred income tax asset or liability during the year.
The Company uses the deferral method of accounting for the investment tax
credit whereby credits realized are being amortized as reductions in tax expense
over the life of the plant that gave rise to the credits.
Temporary Cash Investments -- Temporary cash investments are stated at cost
which approximates market. The Company considers all highly liquid, short-term
investments with an original maturity of three months or less to be cash
equivalents.
Advertising Costs -- Advertising costs are charged to operations as incurred.
Revenue Recognition -- The Company recognizes revenue as earned.
Short-Term Financing Arrangement -- Ameritech provides short-term financing
and cash management services to its subsidiaries, including the Company.
Ameritech issues commercial paper and notes and secures bank loans to fund the
working capital requirement of its subsidiaries and invests short-term, excess
funds on their behalf. (See Note F).
The results of these efforts are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest charged to the
Company by Ameritech for
financing................. $ 5.6 $ 13.0 $ 7.5
Cash management interest
income earned by the
Company................... $ 0.2 $ -- $ --
</TABLE>
Reclassifications -- In 1994, the Company made certain reclassifications,
which were applied retroactively, to its financial statements to correspond to
financial reporting for unregulated enterprises.
24
<PAGE>
B. Income Taxes
The components of income tax expense follow:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal
Current...................... $231.4 $162.7 $180.7
Deferred, net................ 39.1 (45.9) (18.3)
Investment tax credits, net.. (13.9) (14.9) (23.7)
------ ------ ------
Total........................ 256.6 101.9 138.7
------ ------ ------
State and Local
Current...................... 2.3 2.0 1.9
Deferred, net................ 0.3 (0.5) (0.1)
------ ------ ------
Total........................ 2.6 1.5 1.8
------ ------ ------
Total income tax expense...... $259.2 $103.4 $140.5
====== ====== ======
</TABLE>
Total income taxes paid were $232.9, $211.9 and $175.0 in 1995, 1994 and
1993, respectively.
The following is a reconciliation between the statutory federal income tax
rate for each of the past three years and the Company's effective tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate................................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit...................... 0.2 0.3 0.2
Reduction in tax expense due to amortization of investment tax
credits........................................................ (1.2) (3.9) (4.0)
Effect of adjusting deferred income tax balances due to tax law
changes........................................................ -- -- (1.4)
Benefit of tax rate differential applied under FAS 71 applied to
reversing temporary differences................................ -- (3.3) (3.3)
Other........................................................... (0.4) (1.1) 2.5
---- ---- ----
Effective income tax rate........................................ 33.6% 27.0% 29.0%
==== ==== ====
</TABLE>
The Revenue Reconciliation Act of 1993, enacted in August 1993, increased the
statutory federal income tax rate for 1993 to 35%. Deferred income tax balances
were adjusted to reflect the enacted tax rate. The result was a reduction in
deferred income tax expense of $6.8 primarily from increasing the deferred tax
assets associated with the adoption of FAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
25
<PAGE>
As of December 31, 1995 and 1994 the components of long-term accumulated
deferred income taxes were as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Deferred tax assets
Postretirement and postemployment
benefits............................... $261.1 $260.5
Other................................... 15.4 18.4
------ ------
276.5 278.9
------ ------
Deferred tax liabilities
Accelerated depreciation................ 314.7 320.8
Prepaid pension cost.................... 63.5 30.4
Other................................... 4.0 8.9
------ ------
382.2 360.1
------ ------
Net deferred tax liability............... $105.7 $ 81.2
====== ======
</TABLE>
Deferred income taxes in current assets and liabilities relate primarily to
temporary differences resulting from vacation pay, bad debts and work force
restructuring. The Company had immaterial valuation allowances against certain
deferred tax assets as of December 31, 1995 and 1994.
C. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Land............................ $ 28.7 $ 29.2
Buildings....................... 633.0 637.9
Central office equipment........ 3,016.0 2,904.6
Cable, wiring and conduit....... 3,684.5 3,578.0
Other........................... 374.9 365.9
-------- --------
7,737.1 7,515.6
Under construction.............. 38.8 61.3
-------- --------
7,775.9 7,576.9
Less, accumulated depreciation.. 4,657.7 4,348.6
-------- --------
$3,118.2 $3,228.3
======== ========
</TABLE>
Depreciation expense on property, plant and equipment was $486.7, $523.6 and
$536.2 in 1995, 1994 and 1993, respectively.
26
<PAGE>
D. Discontinuation of Regulatory Accounting -- FAS 71
In the fourth quarter of 1994, having achieved were price regulation and
recognizing increased competition, the Company concluded that GAAP prescribed by
FAS 71 was no longer appropriate.
As a result of discontinuing the application of FAS 71, the Company recorded
an extraordinary noncash after-tax charge of $599.1 in 1994. The following
table is a summary of the extraordinary charge.
<TABLE>
<CAPTION>
Pretax After-Tax
------ ---------
<S> <C> <C>
Increase to the accumulated depreciation
balance................................... $ 984.8 $637.6
Elimination of other net regulatory assets. 16.6 11.0
Tax-related net regulatory liabilities..... -- (40.4)
Accelerated amortization of tax credits.... -- (9.1)
-------- ------
$1,001.4 $599.1
======== ======
</TABLE>
The adjustment of $984.8 to net property, plant and equipment was necessary
because estimated useful lives and depreciation methods historically prescribed
by regulators did not keep pace with technological changes and differed
significantly from those used by unregulated enterprises. Plant balances were
adjusted by increasing the accumulated depreciation balance. The necessary
adjustment was determined by a discounted cash flow analysis which considered
technological changes, capital requirements, and estimated impacts of future
competition. To corroborate this study, a depreciation reserve study was also
performed that identified inadequate accumulated depreciation levels by
individual asset categories. The Company believes these levels developed over
the years as a result of the systematic underdepreciation of assets resulting
from the regulatory process.
When adjusting its net property, plant and equipment, the Company gave effect
to shorter, more economically realistic lives, as previously outlined in Note A.
The discontinuation of FAS 71 also required the Company to eliminate from its
balance sheet the effects of any actions of regulators that had been recognized
as assets and liabilities pursuant to FAS 71, but would not have been recognized
as assets and liabilities by enterprises in general. The elimination of other
net regulatory assets primarily related to certain deferred vacation pay, debt
financing costs, and certain deferred assets.
Additionally, at the time the Company discontinued the application of FAS 71,
the income tax-related regulatory assets and liabilities were eliminated and
deferred tax balances adjusted to reflect application of FAS 109 consistent with
other unregulated enterprises.
As asset lives were shortened, the related unamortized investment tax credits
deemed already earned were credited to income.
The effects on the Company's financial statements going forward without FAS
71 are discussed in Management's Discussion and Analysis of Results of
Operations.
27
<PAGE>
E. Employee Benefit Plans
Pension Plans -- Ameritech maintains noncontributory defined benefit pension
plans covering substantially all of the Company's employees and death benefit
plans for nonmanagement employees. Pension credits are allocated to
subsidiaries based upon the percentage of compensation for the management plan
and per employee for the nonmanagement plan. The Company's funding policy is to
contribute annually an amount up to the maximum amount that can be deducted for
federal income tax purposes. However, due to the funded status of the plans, no
contributions have been made for the years reported below. The following data
provides information on the Company's credits for the Ameritech plans:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Pension credits....................... $(27.9) $(50.0) $(27.8)
====== ====== ======
Current year credits as a percent of
salaries and wages................... (5.2)% (8.6)% (4.7)%
====== ====== ======
</TABLE>
Pension credits were determined using the projected unit credit actuarial
method. The resulting pension credits are primarily attributable to favorable
investment performance and the funded status of the plans.
Certain disclosures are required to be made of the components of pension
credits and the funded status of the plans, including the actuarial present
value of accumulated plan benefits, accumulated projected benefit obligation and
the fair value of plan assets. Such disclosures are not presented for the
Company because the structure of the Ameritech plans does not permit the plans'
data to be readily disaggregated.
The assets of the Ameritech plans consist principally of debt and equity
securities, fixed income investments and real estate. As of December 31, 1995,
the fair value of plan assets available for plan benefits exceeded the projected
benefit obligation (calculated using a discount rate of 6.9% and 7.2% as of
December 31, 1995 and 1994, respectively). The assumed long-term rate of return
on plan assets used in determining pension credits (or income) was 7.25% for
1995, 1994 and 1993. The assumed increase in future compensation, also used in
the determination of the projected benefit obligation, was 4.5% in 1995 and
1994.
Postretirement Benefits Other Than Pensions -- Ameritech sponsors health care
and life insurance plans which provide noncontributory postretirement benefits
to substantially all of its retirees and their dependents. Ameritech accrues
the cost of postretirement benefits granted to employees as expense over the
period in which the employee renders service and becomes eligible to receive
benefits. The cost of postretirement health care and life insurance benefits
for current and future retirees was recognized as determined under the projected
unit credit actuarial method. Ameritech allocates its retiree health care costs
on a per participant basis, whereas group life insurance is allocated based on
compensation levels.
Ameritech has provided for part of the cost of these plans by making
contributions for health care benefits to voluntary employee benefit association
trust funds (VEBAs) and maintains retirement funding accounts (RFAs) to provide
life insurance benefits. Ameritech intends to continue to fund the
nonmanagement VEBA. During 1993 the Ameritech utilized excess pension plan
assets to help pay the nonmanagement retiree health care obligation. Funding of
the management VEBA was suspended effective in 1994, primarily due to a tax rate
increase from 31.0% to 39.6% on its investment income. The nonmanagement VEBA
and the RFAs earn income without tax. Plan assets consist principally of
corporate securities and bonds.
28
<PAGE>
Certain disclosures are required as to the components of postretirement
benefit costs and the funded status of the plans. Such disclosures are not
presented for the Company as the structure of the Ameritech plans does not
permit the data to be readily disaggregated. However, the Company has been
advised by Ameritech as to the following assumptions used in determining FAS 106
costs.
As of December 31, 1995, 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 6.9% as of December 31, 1995 and 8.5% as of December 31, 1994. The assumed
rate of increase in future compensation levels was 4.5% in 1995 and 1994. The
expected long-term rate of return on plan assets was 7.25% in 1995, 1994 and
1993 on VEBAs, and 8.0% in 1995, 1994 and 1993 on RFAs. The assumed health care
cost trend rate in 1995 was 8.8% and 9.2% in 1994, and is assumed to decrease
gradually to 4.0% in 2007 and remain at that level. The assumed health care
cost trend rate is 8.4% for 1996. The health care cost trend rate has
significant effect on the amounts reported for costs each year as well as in the
accumulated postretirement benefit obligation. Specifically, increasing the
assumed health care cost trend rate by one percentage point in each year would
have increased the 1995 annual expense by approximately 12.8%.
Postretirement benefit cost under FAS 106 was $66.4 in 1995, $67.5 in 1994
and $55.9 in 1993.
As of December 31, 1995, the Company had 13,140 retirees eligible to receive
health care and group life insurance benefits.
Work Force and Other Restructuring -- During March 1994, Ameritech announced
a plan to restructure its existing nonmanagement work force. As of December 31,
1995, 2,626 employees have left the Company as a result of this restructuring.
See additional discussion in Management's Discussion and Analysis of Results of
Operations.
As a result of this restructuring, a pretax charge of $174.4, or $112.9
after-tax, was recorded in 1994. In 1995, a credit of $64.9, or $42.0 after-
tax, was recorded resulting primarily from settlement gains from lump-sum
pension payments to former employees, net of additional restructuring charges of
$11.5 recorded in the fourth quarter of 1995. The fourth quarter restructuring
charges include $8.7 associated with increased force costs related to the
restructuring started in 1994, as well as planned work force reductions due to
consolidation of Ameritech's data centers. In connection with this
consolidation, an additional $2.8 was recorded to write-down certain data
processing equipment to estimated net realizable value. The cumulative gross
program cost through December 31, 1995 totaled $256.6, partially offset by
settlement gains of $147.1 for an aggregate pretax net program cost of $109.5,
or $70.9 after-tax.
Management Work Force Reductions -- Effective January 1, 1995, management
employees who are asked to leave the Company will receive a severance payment
under the Management Separation Benefit Program. The Company accounts for this
benefit in accordance with FAS 112, "Employers' Accounting for Postemployment
Benefits," accruing the separation cost when incurred. 1995 activity under this
program included 59 employees.
During 1994, 193 management employees left the Company involuntarily. The
net cost of these reductions, including termination benefits, settlement and
curtailment gains from the pension plan, was a net credit to other operating
expense of $6.9 in 1995 and $9.9 in 1994. The 1995 credit resulted from
settlement gains from lump-sum pension payments to former employees.
29
<PAGE>
During 1993, 217 management employees left the Company through voluntary and
involuntary programs. The net cost of these reductions, including termination
benefits, settlement and curtailment gains from the pension plan, was a credit
to other operating expense of $5.4.
The involuntary plans are funded from Company operations and required cash
payments of $1.6, $7.1 and $12.4 in 1995, 1994 and 1993, respectively.
F. Debt Maturing Within One Year
Debt maturing within one year is included as debt in the computation of debt
ratios and consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Notes payable -- Ameritech............ $ -- $193.6
Long-term debt maturing within one
year................................. 38.0 2.9
----- ------
Total................................. $38.0 $196.5
===== ======
Weighted average interest rate of
notes payable, year-end.............. 5.8% 5.7%
===== ======
</TABLE>
At December 31, 1995, $35.0 of long-term debt was reclassified to debt
maturing within one year to reflect 4.625% debentures maturing in August 1996.
During 1991, Ameritech consolidated the short-term financing of its
subsidiaries at Ameritech Corporate. (See Note A -- Short-Term Financing
Arrangement).
30
<PAGE>
G. Long-Term Debt
Long-term debt consists principally of debentures and notes issued by the
Company.
The following table sets forth interest rates, scheduled maturities and other
information on long-term debt outstanding at December 31:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Thirty-six year 4 5/8% debentures,
due August 1, 1996................... $ -- $ 35.0
Thirty-seven year 6 3/8% debentures
due February 1, 2005................. 125.0 125.0
Forty year 7% debentures, due
November 1, 2012..................... 75.0 75.0
Thirty year 7 1/2% debentures, due
February 15, 2023.................... 200.0 200.0
Forty year 7 3/4% debentures, due
June 1, 2011......................... 150.0 150.0
Thirty year 7.85% debentures, due
January 15, 2022..................... 200.0 200.0
Ten year 6 3/8% notes, due September
15, 2002............................. 100.0 100.0
Seven year 5 7/8% notes, due
September 15, 1999................... 150.0 150.0
Ten year 9 1/4% notes, due November
15, 1998............................. 100.0 100.0
-------- --------
1,100.0 1,135.0
Capital lease obligations............. 3.5 5.0
Unamortized discount, net............. (10.4) (11.1)
-------- --------
Total................................ $1,093.1 $1,128.9
======== ========
</TABLE>
At December 31, 1995, $35.0 of long-term debt was reclassified to debt
maturing within one year to reflect the 4 5/8% debentures, which mature in
August 1996.
The Company filed a registration statement with the Securities and Exchange
Commission for issuance of up to $450.0 in unsecured debt securities for general
corporate purposes. As of January 17, 1996, none of these securities had been
issued.
Over the next five years, the 9 1/4% ten year notes mature in November 1998
and the 5 7/8% seven year notes mature in September 1999.
31
<PAGE>
H. Lease Commitments
The Company leases certain facilities and equipment used in its operations
under both operating and capital leases. Rental expense under operating leases
was $39.2, $35.3 and $40.5 for 1995, 1994 and 1993 respectively. At December
31, 1995, the aggregate minimum rental commitments under noncancelable leases
were approximately as follows:
<TABLE>
<CAPTION>
Years Operating Capital
----- --------- -------
<S> <C> <C>
1996................................ $ 23.6 $ 2.4
1997................................ 17.9 1.6
1998................................ 9.7 1.0
1999................................ 7.3 1.0
2000................................ 4.3 0.9
Thereafter.......................... 4.5 1.9
-------- -------
Total minimum lease
commitments........................ $ 67.3 8.8
========
Less: amount representing
executory costs ............ 2.0
amount representing
interest costs.............. 1.8
-------
Present value of minimum
lease payments..................... $ 5.0
=======
</TABLE>
32
<PAGE>
I. Financial Instruments
The following table presents the estimated fair value of the Company's
financial instruments as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995
----------------------------
Carrying Fair
Value Value
-------- ------
<S> <C> <C>
Cash and temporary cash investments..... $ 17.1 $ 17.1
Debt.................................... 1,160.7 1,232.6
Long-term payable to ASI
(for postretirement benefits).......... 21.5 21.5
Other assets............................ 3.9 3.9
Other liabilities....................... 19.3 19.3
<CAPTION>
1994
----------------------------
Carrying Fair
Value Value
-------- --------
<S> <C> <C>
Cash and temporary cash investments..... $ 14.2 $ 14.2
Debt.................................... 1,343.4 1,233.8
Long-term payable to ASI
(for postretirement benefits).......... 22.9 22.9
Other assets............................ 3.8 3.8
Other liabilities....................... 32.3 32.3
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and temporary cash investments -- The carrying value approximates fair
value because of the short-term maturity of these instruments.
Debt -- The carrying amount (including accrued interest) of debt maturing
within one year approximates fair value because of the short-term maturities
involved. The fair value of long-term debt was estimated based on the year-end
quoted market price for the same or similar issues.
Other assets and liabilities -- These financial instruments consist primarily
of other investments and customer deposits. The fair values of these items are
based on expected cash flows or, if available, quoted market prices.
Long-term payable to ASI (for postretirement benefits) -- Carrying value
approximates fair value.
33
<PAGE>
J. Additional Financial Information
<TABLE>
<CAPTION>
As of December 31,
---------------------
1995 1994
---- ----
<S> <C> <C>
Balance sheets
Other current liabilities:
Accrued payroll.................. $ 22.5 $ 23.9
Compensated absences............. 43.6 44.9
Accrued taxes.................... 117.8 91.1
Income taxes deferred one year... (15.9) (30.6)
Advance billings and customer
deposits........................ 55.1 59.3
Dividend payable................. 130.8 --
Accrued interest................. 26.0 25.9
Other............................ 35.6 81.7
------ ------
Total............................ $415.5 $296.2
====== ======
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statements of income
Capitalized interest.............. $(1.7) $(1.5) $(1.4)
Provision for uncollectibles...... 38.3 44.0 42.7
Advertising....................... 42.1 37.9 30.8
</TABLE>
Interest paid, net of amounts capitalized, was $90.2, $95.8 and $102.4 in
1995, 1994 and 1993, respectively.
Revenues from AT&T, consisting principally of interstate network access and
billing and collection services revenues, comprised approximately 11% of total
revenues in both 1994 and 1993. No other customer accounted for more than 10%
of total revenues. No customer accounted for more than 10% of revenues in 1995.
K. Other (Income) Expense, Net
The components of other (income) expense, net are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Equity earnings of ASI.............. $(9.4) $(13.1) $(9.9)
Early extinguishment of debt costs.. -- -- 7.0
Other, net.......................... 6.0 8.3 8.9
----- ------ -----
Total.............................. $(3.4) $ (4.8) $ 6.0
===== ====== =====
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
L. Quarterly Financial Information (Unaudited)
Net
Operating Income
Revenues Income (Loss)
------------------- ------------------- --------------------
<S> <C> <C> <C>
1995
----
1st Quarter.......................... $ 705.3 $ 248.8 $ 148.4
2nd Quarter.......................... 736.4 214.7 128.0
3rd Quarter.......................... 748.9 206.5 121.7
4th Quarter.......................... 773.8 187.5 113.3
-------- -------- --------
Total................................ $2,964.4 $ 857.5 $ 511.4
======== ======== ========
<CAPTION> Net
Operating Income
Revenues Income (Loss)
-------- ------ -------
<S> <C> <C> <C>
1994
----
1st Quarter.......................... $ 707.7 $ 16.2 $ (4.5)
2nd Quarter.......................... 717.0 173.6 105.2
3rd Quarter.......................... 719.4 89.2 51.4
4th Quarter.......................... 710.6 196.0 (471.9)
-------- ------ ------
Total................................ $2,854.7 $475.0 $(319.8)
======== ====== =======
</TABLE>
Total nonmanagement work force restructuring credits in 1995 were $64.9 or
$42.0 after-tax as follows: $72.8 or $47.1 after-tax in the first quarter, $2.5
or $1.6 after-tax in the third quarter and a net charge of $10.4 or $6.7 after-
tax in the fourth quarter. The fourth quarter restructuring charge includes
costs related to the restructuring started in 1994 and charges relating to the
consolidation of Ameritech's data centers as discussed more fully in Note E.
Total nonmanagement work force restructuring charges in 1994 were $174.4 or
$112.9 after-tax as follows: $137.8 or $89.2 after-tax in the first quarter,
$56.9 or $36.8 after-tax in the third quarter, and a net credit of $20.3 or
$13.1 after-tax in the fourth quarter. The credit in the fourth quarter results
from pension settlement gains. (See Note E above). The fourth quarter of 1994
also includes a $599.1 noncash after-tax extraordinary charge related to the
discontinuance of applying FAS 71, as discussed in Note D above.
All adjustments necessary for a fair statement of results for each period
have been included.
M. Contingencies
The Company had disputed the manner in which its property taxes were assessed
in Michigan. In 1994, the Michigan Supreme Court let stand a lower court
decision that awarded the Company a refund of taxes paid for the tax years 1984
through 1986. However, there were certain outstanding issues before the
Michigan Tax Tribunal for taxes paid by the Company in 1987 and beyond which
could have resulted in either a significant tax liability or a refund to the
Company for such years. The Company had not recorded the court award pending
clearer resolution of those issues.
35
<PAGE>
In 1995, the Company and the State of Michigan agreed to a settlement of all
issues in dispute regarding the Company's state property taxes for the years
1984 through 1994. The settlement releases each party from all claims for the
years involved without any payment by either party, including cancellation of
the court-awarded refund for 1984 through 1986.
N. Calculation of Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges of the Company for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991 was 8.58, 4.72, 5.27, 4.88 and
4.12, respectively.
For the purpose of calculating this ratio, (i) earnings have been calculated by
adding to income before interest expense and extraordinary item, the amount of
related taxes on income, the 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.
36
<PAGE>
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.
37
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of the report:
(1) Financial Statements:
Page
----
Selected Financial and Operating Data......................... 10
Report of Independent Public Accountants...................... 18
Statements:
Statements of Income and Reinvested Earnings (Deficit)..... 19
Balance Sheets............................................. 20
Statements of Cash Flows................................... 21
Notes to Financial Statements.............................. 22
(2) Financial Statement Schedule:
II Valuation and Qualifying Accounts..................... 41
Financial statement schedules other than the one listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not required or
applicable.
(3) Exhibits
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number
-------
3 -- Articles of Incorporation of the Company as amended March 26, 1990,
and By-laws of the Company as amended May 7, 1992 (Exhibit 3 to Form
10-K for 1993, File No. 1-3499).
4 -- No instrument which defines the rights of holders of long and
intermediate term debt of the Company is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation,
the Company hereby agrees to furnish a copy of any such instrument to
the SEC upon request.
10 -- Reorganization and Divestiture Agreement between American Telephone
and Telegraph Company, American Information Technologies Corporation
and Affiliates, dated as of November 1, 1983 (Exhibit 10a to Form 10-K
for 1983 for American Information Technologies Corporation, File
No. 1-8612).
12 -- Computation of ratio of earnings to fixed charges for the five years
ended December 31, 1995.
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for the year ended December 31, 1995.
38
<PAGE>
(b) Reports on Form 8-K:
No Form 8-K was filed by the registrant during the quarter for which this
report is filed.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MICHIGAN BELL TELEPHONE COMPANY
/s/ Laurie L. Streling
----------------------------
(Laurie L. Streling,
Comptroller,
State Finance Organization)
March 11, 1996
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
/s/ James E. Wilkes
- ------------------------------
(James E. Wilkes,
President)
Principal Financial and Accounting Officer:
/s/ Laurie L. Streling
- -------------------------------
(Laurie L. Streling,
Comptroller,
State Finance Organization)
Ameritech Corporation:
/s/ Barry K. Allen
- ---------------------------------
(Barry K. Allen,
Senior Vice President,
Communications and Information Services)
The sole shareowner of the registrant, which has
elected under the law of its state of incorporation to be
managed by the shareowner rather than by a board of directors.
March 11, 1996
40
<PAGE>
MICHIGAN BELL TELEPHONE COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(Dollars in Millions)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------- --------------------------- ------ ------
Additions
---------------------------
Balance at Charged Charged Balance
Beginning to to Other at End of
Classification of Period Expense (a) Accounts (b) Deductions (c) Period
- -------------- ----------- ------------ ------------ -------------- ---------
<S> <C> <C> <C> <C> <C>
Year 1995......................... $38.2 $37.9 $55.1 $ 93.5 $37.7
Year 1994......................... 44.9 41.3 56.6 104.6 38.2
Year 1993......................... 40.6 42.7 57.5 95.9 44.9
</TABLE>
- --------------------------
(a) Excludes direct charges and credits to expense on the statements of income
and reinvested earnings (deficit) related to interexchange carrier
receivables.
(b) Includes principally amounts related to the interexchange carrier
receivables which are being billed by the Company and amounts previously
written off which were credited directly to this account when recovered.
(c) Amounts written off as uncollectible.
41
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
MICHIGAN BELL TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
1. EARNINGS
a) Income before interest cost,
income tax, extraordinary charge
and cumulative effect of change
in accounting principles...... $862.6 $481.3 $589.9 $566.4 $536.6
b) Single Business Tax........... 26.2 28.3 27.6 25.2 25.6
c) Portion of rental expense
representative of the interest
factor (1) (2)................ 13.1 11.8 13.5 14.5 14.8
------ ------ ------ ------ ------
Total 1(a) through 1(c).. $901.9 $521.4 $631.0 $606.1 $577.0
====== ====== ====== ====== ======
2. FIXED CHARGES
a) Total interest cost
including capital
lease obligations.............. $ 92.0 $ 98.6 $106.2 $109.6 $125.3
b) Portion of rental expense
representative of the interest
factor (1)..................... 13.1 11.8 13.5 14.5 14.8
------ ------ ------ ------ ------
Total 2(a) through 2(b)... $105.1 $110.4 $119.7 $124.1 $140.1
====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES............. 8.58 4.72 5.27 4.88 4.12
====== ====== ====== ====== ======
</TABLE>
(1) One-third of rental expense is considered to be the amount representing
return on capital.
(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 one-third portion of rental expense considered to
be fixed charges are added back.
(3) The results for 1995 reflect a $64.9 pretax credit primarily from
settlement gains resulting from lump sum pension payments from the pension
plan to former employees who left the business in the nonmanagement work
force restructuring, partially offset by increased force costs related to
the restructuring started in 1994, as well as a write-down of certain data
processing equipment to net realizable value. Results for 1994 reflect a
$174.4 pretax charge associated with the nonmanagement work force
restructuring. Costs of the work force restructuring program have largely
been funded from the Ameritech Pension Plan.
(4) Interest cost includes capitalized interest expense.
(5) Earnings have not been adjusted to reflect the timing of dividends received
and equity in earnings of unconsolidated affiliates since the effect on an
annual basis has been insignificant.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 17, 1996, included in this Form 10-K for
the year ended December 31, 1995, into Michigan Bell Telephone Company's
previously filed Registration Statement File No. 33-51169.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Michigan
Bell Telephone Company's December 31, 1995 Financial Statements and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 17,100
<SECURITIES> 0<F1>
<RECEIVABLES> 701,800
<ALLOWANCES> 37,700
<INVENTORY> 7,400
<CURRENT-ASSETS> 709,400
<PP&E> 7,775,900
<DEPRECIATION> 4,657,700
<TOTAL-ASSETS> 4,142,700
<CURRENT-LIABILITIES> 805,500
<BONDS> 1,093,100
0
0
<COMMON> 1,721,800
<OTHER-SE> (399,700)
<TOTAL-LIABILITY-AND-EQUITY> 4,142,700
<SALES> 0<F2>
<TOTAL-REVENUES> 2,964,400
<CGS> 0<F3>
<TOTAL-COSTS> 2,106,900
<OTHER-EXPENSES> (3,400)
<LOSS-PROVISION> 38,300
<INTEREST-EXPENSE> 90,300
<INCOME-PRETAX> 770,600
<INCOME-TAX> 259,200
<INCOME-CONTINUING> 511,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 511,400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Securities are not material and therefore have not been stated separately in
the financial statements. This amount is included in the Cash tag.
<F2>Net sales of tangible products is not more than 10% of total operating revenues
and therefore has not been stated separately in the financial statements
pursuant to Regulation S-X, Rule 5-03(b). This amount is included in the
"Total Revenues" tag.
<F3>Cost of tangible goods sold is included in cost of service and products in the
financial statements and the "Total Cost" tag, pursuant to Regulation S-X, Rule
5-03(b).
</FN>
</TABLE>
