<PAGE> Cover
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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
(Mark one)
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[x] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
- -------------------------------------------
or
- -------------------------------------------
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-8612
Ameritech Corporation
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A Delaware Corporation
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30 S. Wacker Drive
Chicago, Illinois 60606
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I.R.S. Employer Identification
Number 36-3251481
Telephone number (800) 257-0902
We have 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, and
have been subject to those filing requirements for the past 90 days.
Yes X No
---- ----
At July 31, 1997, 549,900,313 common shares were outstanding.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM Page
- ---- ----
1. Financial Statements
Condensed Consolidated Statements of Income for
the three and six months ended June 30, 1997 and 1996 1
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996 3
Notes to Condensed Consolidated Financial Statements 4-5
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-16
PART II
6. Exhibits and Reports on Form 8-K 17
Glossary 19-20
i
<PAGE>
Part I - Financial Information
------------------------------
AMERITECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues
Local service................. $1,615 $1,539 $3,170 $3,004
Interstate network access..... 649 585 1,269 1,164
Intrastate network access..... 155 135 304 275
Long distance services........ 345 392 703 768
Cellular, directory and other. 1,222 1,093 2,399 2,100
------- ------- ------- -------
3,986 3,744 7,845 7,311
------- ------- ------- -------
Operating expenses
Employee-related expenses..... 962 931 1,952 1,867
Depreciation and amortization. 618 590 1,229 1,164
Other operating expenses...... 1,215 1,130 2,406 2,221
Taxes other than income taxes. 150 147 305 291
------- ------- ------- -------
2,945 2,798 5,892 5,543
------- ------- ------- -------
Operating income................ 1,041 946 1,953 1,768
Interest expense................ 123 128 248 252
Other (income) expense, net..... 14 (73) (51) (124)
------- ------- ------- -------
Income before income taxes...... 904 891 1,756 1,640
Income taxes.................... 367 324 683 595
------- ------- ------- -------
Net income...................... $ 537 $ 567 $1,073 $1,045
======= ======= ======= =======
Earnings per common share....... $0.97 $1.02 $1.95 $1.89
===== ===== ===== =====
Dividends declared per common
share.......................... $0.565 $0.53 $1.13 $1.06
===== ===== ===== =====
Average common shares outstanding
(millions)..................... 550.0 553.2 550.2 554.0
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements..
1
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
June 30, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments........ $ 308 $ 145
Receivables, net........................... 3,032 3,070
Material and supplies...................... 220 231
Prepaid and other.......................... 327 353
------- -------
3,887 3,799
------- -------
Property, plant and equipment............... 33,100 32,292
Less, accumulated depreciation............. 19,598 18,785
------- -------
13,502 13,507
------- -------
Investments, primarily international........ 1,976 2,323
Other assets and deferred charges........... 4,396 4,078
------- -------
Total assets................................ $ 23,761 $ 23,707
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Debt maturing within one year.............. $ 2,857 $ 3,155
Accounts payable........................... 1,738 1,836
Other...................................... 2,029 1,841
------- -------
6,624 6,832
------- -------
Long-term debt.............................. 4,065 4,437
------- -------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 970 900
Unamortized investment tax credits......... 156 172
Postretirement benefits
other than pensions...................... 2,995 2,984
Other...................................... 926 695
------- -------
5,047 4,751
------- -------
Shareowners' equity
Common stock, par value $1;2.4 billion
shares authorized, 588,314,000 issued in 1997
and 588,113,000 issued in 1996......... 588 588
Proceeds in excess of par value............ 5,818 5,732
Reinvested earnings........................ 3,605 3,154
Treasury stock, at cost (37,237,000 shares
in 1997 and 38,182,000 shares in 1996)... (1,387) (1,344)
Deferred compensation...................... (190) (259)
Currency translation adjustment............ (413) (188)
Other, net................................. 4 4
------- -------
8,025 7,687
------- -------
Total liabilities and shareowners' equity... $ 23,761 $ 23,707
======= =======
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six Months Ended
June 30
-------------
1997 1996
---- ----
Cash Flows from Operating Activities
Net income................................... $1,073 $1,045
Adjustments to net income
Depreciation and amortization.............. 1,229 1,164
Deferred income taxes, net................. 45 3
Investment tax credits, net................ (15) (19)
Capitalized interest....................... (13) (14)
Change in accounts receivable, net......... 38 (282)
Change in material and supplies............ (11) (19)
Change in certain other current assets..... 26 13
Change in accounts payable................. (98) (247)
Change in certain other current
liabilities............................... 209 61
Change in certain other noncurrent
assets and liabilities................... (135) (145)
Other operating activities, net............ 32 (24)
------- -------
Net cash from operating activities........... 2,380 1,536
------- -------
Cash Flows from Investing Activities
Capital expenditures......................... (1,184) (999)
Additional investments....................... (90) (880)
Proceeds from New Zealand Telecom
share repurchase.......................... 89 --
Other investing activities, net.............. (17) 6
------- -------
Net cash from investing activities........... (1,202) (1,873)
------- -------
Cash Flows from Financing Activities
Net change in short-term debt................ (343) 1,170
Issuance of preferred stock by subsidiary.... 250 --
Retirement of long-term debt................. (241) (22)
Dividend payments............................ (622) (587)
Proceeds from reissuance of treasury stock... 196 132
Repurchase of common stock................... (282) (287)
Other financing activities, net.............. 27 46
------- -------
Net cash from financing activities........... (1,015) 452
------- -------
Net increase in cash and temporary
cash investments............................ 163 115
Cash and temporary cash investments,
beginning of period......................... 145 131
------- -------
Cash and temporary cash investments,
end of period............................... $ 308 $ 246
======= =======
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1:Preparation of Interim Financial Statements
We have prepared the unaudited condensed consolidated financial
statements in this report by following Securities and Exchange
Commission rules that permit reduced disclosure for quarterly period
reports. These financial statements include estimates and assumptions
that affect the reported amounts of assets and liabilities and the
amounts of revenues and expenses. Actual amounts could differ from
those estimates. We believe these statements include all adjustments
necessary for a fair statement of results for each period shown. We
believe our disclosures are adequate to make the presented information
clear. You should read these financial statements in conjunction with
the financial statements and notes included in our 1996 Annual Report
on Form 10-K and the quarterly report on Form 10-Q previously filed in
1997.
When reading these financial statements, you should be familiar with
the terminology unique to our business. We have defined a number of
terms in the glossary on pages 19 and 20.
Note 2:Significant Accounting Policies
Derivative Financial Instruments - We occasionally enter into forward
contracts and swap agreements to hedge exposures to foreign currency
exchange and interest rate risks. We include gains and losses on
foreign currency forward contracts used for hedging purposes in net
income in the period in which the contract matures or is terminated.
We record gains and losses that hedge an investment in a foreign
company as a component of shareowners' equity until such time as we
reduce our interest in the company. Gains and losses on interest rate
swaps are recorded as adjustments to interest expense.
We use derivatives in a limited way for the following purposes:
- - to manage financial risk;
- - to hedge assets and obligations that we already hold; and
- - to protect our cash flows.
We do not use derivatives to generate income or engage in speculative
activity and we never use leveraged derivatives.
Note 3:Preferred Stock Issued by Subsidiary
In June 1997, one of our subsidiaries issued $250 million of preferred
stock in a private placement, using the proceeds to pay down long-term
and short-term debt balances. Our subsidiary may redeem the stock at
any time, but we will have to pay certain call premiums if we redeem
the preferred stock before December 31, 2002. The holders of the
preferred stock may require our subsidiary to redeem the shares at any
time after May 20, 2004. Holders of the preferred shares will receive
quarterly dividends based on a rolling three-month London Interbank
Borrowing Rate (LIBOR). The dividend rate at June 30, 1997 was 6.83
percent. This preferred stock is included in other long-term
liabilities on the consolidated balance sheet as of June 30, 1997.
4
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 4:Additional Investments
During the quarter ended June 30, 1997, we acquired certain assets
from other companies. We issued a total of 1,504,801 common shares
with a total dollar value of approximately $100 million for the assets
of certain companies, principally those involved in security services.
Consideration for these assets also included cash payments, which are
reflected as additional investments in the consolidated statement of
cash flows for the six months ended June 30, 1997. Of the shares we
issued, 653,309 were registered with the SEC and are freely tradable.
The remaining 851,492 shares were issued without registration and are
subject to trading restrictions for one year.
5
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 vs.
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
- ---------------------
Results of operations for the three and six months ended June 30,
1997, compared with the prior year periods, were as follows (dollars
in millions, except per share amounts):
Three months ended June 30 Increase Percent
- --------------------------
1997 1996 (Decrease) Change
---- ---- -------- ------
Income before one-time items $ 624 $ 567 $ 57 10.1
EPS before one-time items 1.13 1.02 0.11 10.8
Net income 537 567 (30) (5.3)
Earnings per share $ 0.97 $ 1.02 $(0.05) (4.9)
Average common shares
(millions) 550.0 553.2 (3.2) (0.6)
Six months ended June 30 Increase Percent
- ------------------------
1997 1996 (Decrease) Change
---- ---- -------- ------
Income before one-time items $1,160 $1,045 $ 115 11.0
EPS before one-time items 2.11 1.89 0.22 11.6
Net income 1,073 1,045 28 2.7
Earnings per share $ 1.95 $ 1.89 $ 0.06 3.2
Average common shares
(millions) 550.2 554.0 (3.8) (0.7)
Results for the three and six months ended June 30, 1997 included a
one-time after-tax charge of $87 million, or $0.16 a share, related to
our share of the costs of a work force restructuring at Belgacom, the
national communications company in Belgium. We are a 17.5 percent
owner and strategic partner in Belgacom.
- ---------------------------------------------------------------------
Revenues
- --------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $3,986 $3,744 $ 242 6.5
Six Months Ended 7,845 7,311 534 7.3
Revenues increased for the three and six months ended June 30, 1997
primarily due to increases in the number of cellular and paging
subscribers, higher network usage volumes and increased revenues from
call management services. Decreased revenues from long distance
services partially offset these increases, as discussed below.
6
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Local service
- -------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $1,615 $1,539 $ 76 4.9
Six Months Ended 3,170 3,004 166 5.5
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and
connection charges and public phone revenues. Local service revenues
increased for the three and six months ended June 30, 1997 due largely
to higher network usage volumes. These higher volumes resulted
primarily from access line growth of 3.3 percent over the same period
a year ago. Second line additions by residential and small business
customers contributed to the increase in access lines, as demand for
Internet access and data transport capabilities continued to grow.
Sales of call management services also increased because of customer
demand for additional flexibility and convenience.
There were 20,041,000 access lines in service as of June 30, 1997
compared with 19,399,000 as of June 30, 1996.
- ---------------------------------------------------------------------
Network access
- --------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Three Months Ended $ 649 $ 585 $ 64 10.9
Six Months Ended 1,269 1,164 105 9.0
Intrastate
- ----------
Three Months Ended $ 155 $ 135 $ 20 14.8
Six Months Ended 304 275 29 10.5
Network access revenues include fees charged to interexchange carriers
that use our local landline communications network to connect
customers to their long distance networks. In addition, end users pay
flat rate access fees to connect to the long distance network. These
revenues result from both interstate and intrastate services.
Interstate network access revenues increased for the three and six
months ended June 30, 1997 due primarily to volume increases. Growth
in the volume of calls handled for interexchange carriers and greater
demand for dedicated services by Internet service providers and other
high-capacity users contributed to the increases. These revenue
increases were partially offset by rate reductions. Interstate
minutes of use increased by 5.7 percent for the three months and 5.3
percent for the six months ended June 30, 1997 compared with the same
periods last year.
Intrastate network access revenues increased for the three and six
months ended June 30, 1997 due primarily to volume increases. The
primary reason for these increases was growth in network usage by
alternative providers of intraLATA toll service in Illinois, Michigan
and Wisconsin. Decreases in revenue from intraLATA long distance
7
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Network access (cont'd.)
- -----------------------
service largely offset this volume growth, as discussed below. Rate
decreases also partially offset the volume increases. Intrastate
minutes of use increased by 15.0 percent for the three months and 15.1
percent for the six months ended June 30, 1997 compared with the same
periods last year.
Long distance service
- ---------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 345 $ 392 $ (47) (12.0)
Six Months Ended 703 768 (65) (8.5)
Long distance service revenues result from customer calls to locations
outside of their local calling areas but within the same local access
and transport area (LATA).
Long distance service revenues decreased for the three and six months
ended June 30, 1997, due primarily to volume decreases. Efforts by
other telecommunications carriers to bill their own customers for
local toll calling, especially in Illinois, contributed to these
decreases. Previously, Ameritech collected these revenues in exchange
for the payment of access charges to complete the calls on the
carriers' networks. The revenue decrease was substantially offset by a
corresponding decrease in access charge expenses reflected in other
operating expenses. Implementation of Dial 1+ capability in Illinois,
Michigan and Wisconsin introduced competition to these intraLATA toll
markets, which also contributed to the volume decreases.
- ---------------------------------------------------------------------
Cellular, directory and other
- -----------------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $1,222 $1,093 $ 129 11.8
Six Months Ended 2,399 2,100 299 14.2
Cellular, directory and other revenues include revenues from cellular
communications services, paging services, telephone directory
publishing, lease financing and billing and collection services,
telephone equipment sales and installation, and security services.
Cellular, directory and other revenues increased for the three and six
months ended June 30, 1997, due to the following factors:
- - 31 percent annual growth in cellular subscribers to 2,856,000 as of
June 30, 1997;
- - 38 percent annual growth in paging subscribers to 1,305,000 as of
June 30, 1997;
- - Increases in security and cable TV customers, as those businesses
continued to expand; and
- - Higher revenues from directory advertising, lease financing
services and other nonregulated services, such as inside wire
installation and maintenance and advanced data services.
8
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Operating expenses
- ------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $2,945 $2,798 $ 147 5.3
Six Months Ended 5,892 5,543 349 6.3
Operating expenses increased for the three and six months ended June
30, 1997 largely due to higher operating costs in growing businesses
such as cellular and security services, and increased depreciation
expense. Higher employee-related expenses and other operating
expenses at emerging businesses, such as long distance, personal
communication services and cable TV, also contributed to the
increases.
- ---------------------------------------------------------------------
Employee-related expenses
- -------------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 962 $ 931 $ 31 3.3
Six Months Ended 1,952 1,867 85 4.6
Employee-related expenses increased for the three and six months ended
June 30, 1997, due primarily to higher wage rates at the landline
communications subsidiaries and higher wage rates and employee levels
at emerging and growth-related businesses. Lower overtime expenses
and force levels at the landline communications subsidiaries partially
offset these increases.
We employed 67,764 people as of June 30, 1997, compared with 66,913 as
of June 30, 1996.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 618 $ 590 $ 28 4.7
Six Months Ended 1,229 1,164 65 5.6
Depreciation and amortization expense increased for the three and six
months ended June 30, 1997 due primarily to higher property, plant and
equipment balances. Higher depreciation rates on certain asset
categories also contributed to the increases, as we used shorter
depreciable lives for newer technologies.
9
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other operating expenses
- ------------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $1,215 $1,130 $ 85 7.5
Six Months Ended 2,406 2,221 185 8.3
Other operating expenses increased for the three and six months ended
June 30, 1997 due mostly to the following factors:
- - growth-related cost of sales and customer increases at the cellular
and security operations;
- - higher costs in the emerging long distance and cable TV businesses;
- - increased costs for systems development and data center management;
and
- - higher advertising expenses related to increased marketing and
sales efforts.
- ---------------------------------------------------------------------
Taxes other than income taxes
- -----------------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 150 $ 147 $ 3 2.0
Six Months Ended 305 291 14 4.8
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other taxes not directly related to earnings.
Taxes other than income taxes increased for the three and six months
ended June 30, 1997, due primarily to increased use taxes in Michigan.
Increases in capital stock and gross receipts taxes, resulting
primarily from business growth, also contributed to the increases.
- ---------------------------------------------------------------------
Other income and expenses
- -------------------------
Interest expense
- -----------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 123 $ 128 $ (5) (3.9)
Six Months Ended 248 252 (4) (1.6)
Interest expense decreased for the three and six months ended June 30,
1997, due primarily to decreased interest on short-term debt balances,
reflecting lower average debt balances and lower short-term interest
rates. Increased interest on long-term debt, due to higher average
long-term debt balances, partially offset these decreases.
10
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other (income) expense, net
- ----------------------------
Change
June 30 (Income) Percent
------------
(dollars in millions) 1997 1996 Expense Change
------------------- ---- ---- -------- ------
Three Months Ended $ 14 $ (73) $ 87 n/a
Six Months Ended (51) (124) 73 n/a
Other income includes earnings related to Ameritech's investments
accounted for using the equity method, interest income and other
nonoperating items. Other income decreased for the three and six
months ended June 30, 1997 due primarily to the effects of a one-time,
after-tax charge of $87 million related to Ameritech's share of the
costs of a workforce restructuring at Belgacom. Ameritech is a 17.5
percent owner and a strategic partner in Belgacom, the national
communications company in Belgium. In May 1997, Belgacom offered
certain of its 27,000 employees financial incentives to voluntarily
leave the work force by the end of 1998. Approximately 6,300
employees accepted the offer.
We derive a large portion of our equity earnings from overseas
investments. Although these investments continue to generate strong
earnings, the effects of a stronger U.S. dollar versus foreign
currencies moderated these earnings in the first half of 1997.
- ---------------------------------------------------------------------
Income taxes
- ------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 367 $ 324 $ 43 13.3
Six Months Ended 683 595 88 14.8
Income tax expense increased for the three and six months ended June
30, 1997, due primarily to the increases in pretax earnings discussed
above. Our effective tax rate increased slightly over the same period
last year, largely due to a decrease in the amortization of investment
tax credits relative to pretax income. The Belgacom restructuring in
1997 had the effect of increasing our effective income tax rate.
- ---------------------------------------------------------------------
FINANCIAL CONDITION AND OTHER MATTERS
- -------------------------------------
Capital expenditures
- --------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 644 $ 556 $ 88 15.8
Six Months Ended 1,177 1,022 155 15.2
Capital expenditures increased for the three and six months ended June
30, 1997, due primarily to higher capital expenditures at the landline
communications subsidiaries. These increases were necessary because
of growth in access lines and demand for advanced data services.
Capital expenditures also increased at the cellular, cable TV and
capital services subsidiaries to accommodate growth.
11
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Dividends declared
- -------------------
June 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 312 $ 294 $ 18 6.1
Six Months Ended 622 587 35 6.0
On June 18, 1997, our Board of Directors declared a quarterly dividend
of $0.565 per common share, a 6.6 percent increase over the $0.53 per
common share declared in the second quarter of 1996. The weighted
average number of common shares outstanding decreased to 550.0 million
shares and 550.2 million shares, respectively, in the three and six
months ended June 30, 1997 from 553.2 million shares and 554.0 million
shares, respectively, in the same periods last year. These decreases
primarily resulted from our own purchase of shares of our stock.
Company stock repurchase program
- --------------------------------
Our Board of Directors has periodically authorized management to
repurchase shares of Ameritech stock in the open market. During the
six months ended June 30, 1997, we purchased 4.6 million shares of
stock for $282 million. Management has authority to repurchase 8.5
million additional shares through December 31, 1997.
- ---------------------------------------------------------------------
Debt ratio
- ----------
The debt ratio was 46.3 percent as of June 30, 1997, compared to 49.7
percent as of December 31, 1996. The decrease resulted from a
decrease in debt balances, due primarily to an improvement in cash
flow from operations, combined with an increase in equity due to
higher cumulative earnings. The sale of preferred stock by a
subsidiary described in Note 3 also favorably impacted our ratio.
- ---------------------------------------------------------------------
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the three and six months
ended June 30 was 6.83 in 1997 and 6.27 in 1996.
12
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other Matters
- -------------
Recent FCC Orders
- -----------------
On May 7, 1997, the FCC issued three closely-related orders addressing
revisions to the price cap plan for local exchange carriers (LECs),
interstate access charge reform and funding for universal service. In
its access charge reform order, the FCC adopted changes to its tariff
structure requiring LECs to use rates that reflect the type of costs
incurred. In general, the order provides that:
- - only costs incurred on a minute-of-use basis should be included in
per-minute access charges;
- - costs not incurred on a minute-of-use basis should be recovered
through flat-rate charges; and
- - LECs may not assess interstate access charges on Internet service
providers.
The new price cap rules will reduce access charges by increasing the
price cap productivity offset factor to 6.5 percent from the current
5.3 percent and by applying this factor uniformly to all access
providers. The new rates were effective July 1, 1997 and LECs were to
compute the new rates as if the 6.5 percent productivity factor had
been in effect since July 1, 1996.
The new rules also create a multi-billion-dollar "universal service"
fund for linking schools and libraries to the Internet and subsidizing
low-income consumers and rural health care providers.
Telecommunications service providers will pay into the universal
service fund starting January 1, 1998, but regulators have not yet
determined the size of the fund. The FCC intends to develop suitable
forward-looking cost studies for determining the level of universal
service support in a separate proceeding later in 1997. State
commissions may elect to use the FCC's cost methodology or their own
forward-looking mechanism. They will have until August 15, 1997 to
indicate which mechanism they intend to use. The FCC expects to
select a mechanism for determining support for nonrural carriers by
the end of this year. Subsidies to low-income and rural customers
will be available by January 1, 1998, and funds for linking schools
and libraries to the Internet will be available as needed.
We do not expect these reforms to have a material impact on our
revenue streams; however, the nature and timing of these reforms may
evolve as the FCC considers input from state commissions, potential
legal challenges and the ongoing implementation of other provisions of
the Telecommunications Act of 1996.
13
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other Matters (cont'd)
- ----------------------
Competition and the Telecommunications Act of 1996
- --------------------------------------------------
As a result of our plan to capture the full potential of the
communications industry and the supporting provisions of the
Telecommunications Act of 1996 (the 1996 Act), we have taken several
key steps toward fostering a fully competitive market. We have filed
for FCC approval to begin offering long distance service to all our
Michigan customers, and we plan to file soon for approval in our other
four states. We have made our network available for use by Ameritech's
competitors at unbundled cost-based prices and at bundled prices
representing discounts from established retail levels. Additionally,
we have entered into more than 80 interconnection agreements with
other local communications carriers, indicating a growing wholesale
business. As a fully competitive communications market continues to
develop, regulatory bodies will periodically need to review
interaction among industry members.
In July 1997, the Federal Circuit Court in St. Louis struck down
several provisions of an August 1996 FCC order designed to implement
the interconnection provisions of the 1996 Act. The Court ruled that:
- - the FCC's pricing guidelines intrude upon the rights of state
commissions to implement key elements of the 1996 Act;
- - the FCC lacks jurisdiction to review state commission decisions
regarding interconnection agreements between incumbent LECs and
their competitors;
- - the FCC's rule that would allow requesting carriers to pick and
choose among individual provisions of other interconnection
agreements does not promote negotiated agreements and is
unreasonable;
- - LECs must provide unbundled network elements in a manner that
allows competing carriers to combine them, but LECs need not
actually combine the elements; and,
- - the 1996 Act does not require incumbent LECs to provide competitors
with superior quality connections.
The Court upheld the FCC's interpretation of "network element" to
include operations support systems (OSS) and certain other services.
It did not rule on the LECs' claims regarding infringement of
intellectual property rights and Fifth Amendment confiscation.
The FCC has indicated that it may appeal this Circuit Court's ruling
to the U.S. Supreme Court. We do not believe that any such appeal
would itself delay our entry into the long distance market, and we
continue to progress toward bringing the benefits of full service to
our customers.
14
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other Matters (cont'd)
- ----------------------
New Zealand Share Repurchase
- ----------------------------
In November 1996, Telecom Corporation of New Zealand Limited (New
Zealand Telecom) announced plans to repurchase in 1997 a portion of
its stock. We have a 24.95% ownership interest in New Zealand
Telecom. The New Zealand government prohibits foreign companies from
owning more than 49.9% of New Zealand Telecom's stock. As a result,
Ameritech and Bell Atlantic Corporation, which also has a 24.95%
interest, are selling a pro rata portion of their shares to New
Zealand Telecom when New Zealand Telecom buys shares on the open
market. Ameritech expects to receive cash proceeds of approximately
$165 million (based on the 1996 year-end exchange rate), while not
materially changing our percentage ownership in New Zealand Telecom.
In the first half of 1997, we received proceeds of $89 million as a
result of this repurchase program.
Effects of Foreign Currency Fluctuations
- ----------------------------------------
Our foreign operations and investments in international ventures are
subject to certain risks related to fluctuation in foreign currency
exchange rates. In the three and six months ended June 30, 1997, due
to a strengthening U.S. dollar, we recognized some foreign exchange
transaction losses and currency translation adjustments related to
these investments. Foreign exchange transaction losses incurred by
wholly owned subsidiaries adversely impacted operating income.
Transaction losses incurred by other international ventures (primarily
equity method investments) had a negative impact on other income, net.
Translation adjustments resulted in a decrease in the investment
balance and a corresponding reduction in shareowners' equity on the
consolidated balance sheet. While future fluctuations in currency
exchange rates could impact results of operations or financial
position, foreign operations continue to provide strong financial
results and earnings growth.
New Accounting Pronouncements
- -----------------------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No. 128,
"Earnings Per Share". This statement specifies the computation,
presentation and disclosure requirements for earnings per share
(EPS) previously found in Accounting Principles Board (APB) Opinion
No. 15. It replaces "primary" EPS with "basic" EPS, and requires
dual presentation of "basic" and "diluted" EPS on the face of the
income statement for all companies with options, warrants or
securities convertible into common stock. The statement is
effective for financial statements issued for periods ending after
December 15, 1997, and earlier application is not permitted. We do
not expect adoption of this standard to have a material effect on
our financial statements, since dilutive potential common shares
historically have not resulted in EPS dilution over three percent.
15
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other Matters (cont'd)
- ----------------------
New Accounting Pronouncements (cont'd.)
- ---------------------------------------
In June 1997, the FASB issued FAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and requires that
all components of comprehensive income be reported in a financial
statement having the same prominence as other financial
statements. FAS No. 130 is effective for fiscal years beginning
after December 15, 1997 and it requires reclassification of prior
period financial statements provided for comparative purposes.
Adoption of this standard should have little effect on our
financial statements, since the new requirements primarily involve
modifications to the way that existing information is displayed.
Also in June 1997, the FASB issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
supersedes FAS No. 14, "Financial Reporting of Segments of a
Business Enterprise," by establishing new standards for the way
that a public business enterprise reports operating segment
information in its annual and interim financial statements. In
general, FAS No. 131 requires reporting of financial information
as it is used by senior company management for evaluating
performance and deciding how to allocate resources. The statement
is effective for 1998, but need not be applied to interim
financial statements in that year. Comparative information for
earlier years must be restated. We expect adoption of this
standard to have little effect on our financial statements.
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
The above discussion contains certain forward-looking statements
that involve potential risks and uncertainties. Our future
results could differ materially from those discussed here. Some
of the factors that could cause or contribute to such differences
include:
- - changes in economic and market conditions;
- - effects of state and federal regulation;
- - risks inherent in international operations; and
- - the impact of new technologies.
You should not place undue reliance on these forward-looking
statements, which are applicable only as of August 12, 1997. We have
no obligation to revise or update these forward-looking statements to
reflect events or circumstances that arise after August 12, 1997 or
to reflect the occurrence of unanticipated events.
16
<PAGE>
AMERITECH CORPORATION AND SUBSIDIARIES
Part II - Other Information
- ---------------------------
Item 6 Exhibits and Reports on Form 8-K.
- ------ ---------------------------------
(a) Exhibits
--------
11a Statement re: Computation of primary earnings per share
for the three months ended June 30, 1997 and 1996.
11b Statement re: Computation of fully diluted earnings per
share for the three months ended June 30, 1997 and 1996.
11c Statement re: Computation of primary earnings per share
for the six months ended June 30, 1997 and 1996.
11d Statement re: Computation of fully diluted earnings per
share for the six months ended June 30, 1997 and 1996.
12 Computation of ratio of earnings to fixed charges for
the six months ended June 30, 1997 and 1996.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
We filed a Current Report on Form 8-K dated July 15, 1997
under Item 5, Other Events, to report our earnings for the
second quarter of 1997.
17
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, an
authorized company official has signed this report on our behalf.
Ameritech Corporation
Date: August 12, 1997 By /s/ Barbara A. Klein
------------------------
Barbara A. Klein
Vice President and Comptroller
(Principal Accounting Officer)
18
<PAGE>
GLOSSARY
Access charges -
- --------------
fees that local phone companies charge to long distance carriers for
the handling of long distance calls on our local network.
Access line -
- -----------
a telephone line for voice, data or video reaching from a local phone
company to a home or business.
Advanced data services -
- ----------------------
services that use advanced technology to allow faster network access
to the Internet and other multimedia and data services.
Call management services -
- ------------------------
services that add value and convenience for phone customers, such as
Call Waiting, Call Forwarding and Caller ID. These services are sold
to customers individually or in "packages".
Customer premises equipment (CPE) -
- ---------------------------------
communications equipment owned by customers, including telephones,
faxes and switches.
Dial 1 + -
- --------
a feature that allows local phone customers to designate a carrier
other than the local service provider for toll calls within their
calling area by simply dialing 1 plus the telephone number.
Digital -
- -------
an alternative to traditional analog communications, digital systems
transport information in computer code for improved clarity and
quality.
Federal Communications Commission (FCC) -
- ---------------------------------------
the federal agency responsible for regulating the interstate aspects
of telecommunications activities.
Financial Accounting Standards Board (FASB) -
- -------------------------------------------
the independent body responsible for setting accounting and financial
reporting standards to be followed by U.S. business enterprises.
Gross receipts taxes -
- --------------------
state and local taxes based upon the gross operating revenues earned
in a particular jurisdiction. These taxes may be imposed on general
businesses or public utilities in lieu of other taxes.
Interconnection -
- ---------------
allowing a competitive local service provider to use the local phone
company's network, or elements of the network, to provide local phone
service to its customers.
Interexchange carriers (IXCs) -
- -----------------------------
those companies primarily involved in providing long distance voice
and data transmission services, such as AT&T, MCI and Sprint.
Internet -
- --------
the global web of networks that connects computers around the world,
providing rapid access to information from multiple sources.
Internet service providers (ISPs) -
- ---------------------------------
those companies providing access to the Internet and other computer-
based information networks.
Intrastate revenues -
- -------------------
that portion of revenues regulated by state rather than federal
authorities.
Landline communication subsidiaries -
- -----------------------------------
the subsidiaries of Ameritech engaged primarily in providing local
phone service and network access in the states of Illinois,
Indiana, Michigan, Ohio and Wisconsin.
19
<PAGE>
GLOSSARY (cont'd.)
Local access and transport area (LATA) -
- --------------------------------------
the boundary within which a local telephone company may provide phone
service. It is usually centered around a city or other identifiable
community of interest.
Local exchange carriers (LECs) - those companies primarily involved
in providing local phone service and access to the local phone
network, including Ameritech's landline communications subsidiaries
in Illinois, Indiana, Michigan, Ohio and Wisconsin.
Operations support systems (OSS) -
- --------------------------------
the databases and information used to support the provision of
telephone service to end users.
Personal communications services (PCS) -
- --------------------------------------
wireless services, such as cellular phone service and two-way paging,
that use digital technology to provide enhanced call security, longer
battery life and other convenience features.
Price caps -
- ----------
a form of regulation that sets maximum limits on the prices that LECs
can charge for access services instead of limits on rate of return or
profits.
Productivity factor -
- -------------------
a portion of the interstate price cap formula that requires LECs to
reduce the price cap based on an assumed increase in productivity.
Securities and Exchange Commission (SEC) -
- ----------------------------------------
the federal agency that regulates the issuance and trading of public
debt and equity securities in the United States and monitors
compliance with these regulations.
Security services -
- -----------------
services that help secure people and property, including burglar and
fire alarm systems, closed circuit cameras and electronic card
access. Most of our revenue is from the installation and monitoring
of alarm systems.
Universal service -
- -----------------
a concept designed to ensure access to the telecommunications network
in rural and low-income areas at affordable prices. Funding
typically comes from urban telecommunication operators.
20
EXHIBIT 11a
AMERITECH CORPORATION
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(Unaudited)
Three Months Ended
June 30
-------------
1997 1996
---- ----
Net income $536,868,000 $566,639,000
============ ============
Weighted average number of
shares outstanding 549,974,160 553,172,522
Additional dilutive effect of
outstanding options (as determined
by the application of the treasury
stock method) 2,511,523 2,592,752
------------ ------------
Weighted average shares outstanding
on which primary earnings per share
are based 552,485,683 555,765,274
============ ============
Primary earnings per share $0.97 $1.02
============ ============
We submit this calculation in accordance with Regulation S-K,Item 601(b)11.
It is not required by footnote 2 to paragraph 14 of Accounting Principles
Board Opinion No. 15 because it results in dilution of less than three
percent.
We have restated amounts for the prior year to include the windfall tax
benefit in our determination of the dilutive effect of outstanding options.
EXHIBIT 11b
AMERITECH CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(Unaudited)
Three Months Ended
June 30
-------------
1997 1996
---- ----
Net income $536,868,000 $566,639,000
============ ============
Weighted average number of
shares outstanding 549,974,160 553,172,522
Additional dilutive effect of
outstanding options (as determined
by the application of the treasury
stock method) 3,289,076 2,772,926
------------ ------------
Weighted average shares outstanding
on which fully diluted earnings
per share are based 553,263,236 555,945,448
============ ============
Fully diluted earnings per share $0.97 $1.02
============ ============
We submit this calculation in accordance with Regulation S-K,Item 601(b)11.
It is not required by footnote 2 to paragraph 14 of Accounting Principles
Board Opinion No. 15 because it results in dilution of less than three
percent.
We have restated amounts for the prior year to include the windfall tax
benefit in our determination of the dilutive effect of outstanding options.
EXHIBIT 11c
AMERITECH CORPORATION
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(Unaudited)
Six Months Ended
June 30
-------------
1997 1996
---- ----
Net income $1,073,006,000 $1,044,984,000
============== ==============
Weighted average number of
shares outstanding 550,249,031 553,962,130
Additional dilutive effect of
outstanding options (as determined
by the application of the treasury
stock method) 2,511,523 2,592,752
------------ ------------
Weighted average shares outstanding
on which primary earnings per share
are based 552,760,554 556,554,882
============== ==============
Primary earnings per share $1.94 $1.88
============== ==============
We submit this calculation in accordance with Regulation S-K,Item 601(b)11.
It is not required by footnote 2 to paragraph 14 of Accounting Principles
Board Opinion No. 15 because it results in dilution of less than three
percent.
We have restated amounts for the prior year to include the windfall tax
benefit in our determination of the dilutive effect of outstanding options.
EXHIBIT 11d
AMERITECH CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(Unaudited)
Six Months Ended
June 30
-------------
1997 1996
---- ----
Net income $1,073,006,000 $1,044,984,000
============== ==============
Weighted average number of
shares outstanding 550,249,031 553,962,130
Additional dilutive effect of
outstanding options (as determined
by the application of the treasury
stock method) 3,289,076 2,772,926
------------ ------------
Weighted average shares outstanding
on which fully diluted earnings
per share are based 553,538,107 556,735,056
============== ==============
Fully diluted earnings per share $1.94 $1.88
============== ==============
We submit this calculation in accordance with Regulation S-K,Item 601(b)11.
It is not required by footnote 2 to paragraph 14 of Accounting Principles
Board Opinion No. 15 because it results in dilution of less than three
percent.
We have restated amounts for the prior year to include the windfall tax
benefit in our determination of the dilutive effect of outstanding options.
EXHIBIT 12
AMERITECH CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
(Dollars in Millions)
Six Months Ended
June 30
--------------
1997 1996
---- ----
EARNINGS
- --------
Income before interest, income taxes
and undistributed equity earnings.......... $2,017 $1,846
Portion of rent expense
representing interest...................... 36 31
Michigan Single Business tax................ 21 22
Preferred dividends of subsidiaries (2)..... 8 7
------ ------
Total earnings (1)......................... $2,082 $1,906
------ ------
FIXED CHARGES
- -------------
Interest expense............................ $ 248 $ 252
Capitalized interest........................ 13 14
Portion of rent expense representing
interest expense........................... 36 31
Preferred dividends of subsidiaries......... 8 7
------ ------
Total fixed charges......................... $ 305 $ 304
------ ------
Ratio of earnings to fixed charges.......... 6.83 6.27
====== ======
(1) Earnings represent income before income taxes and fixed charges.
Since we have already deducted the Michigan Single Business Tax
(the Tax) and rental expense to arrive at income before interest
and income taxes, the Tax and the one-third portion of rental
expense considered to be fixed charges are added back to arrive at
total earnings.
(2) As required by SEC rules, we have grossed up the preferred stock
dividends to an amount representing the pretax earnings needed to
cover the dividend requirements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AMERITECH CORPORATION'S JUNE 30, 1997 CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 308,000
<SECURITIES> 0<F1>
<RECEIVABLES> 3,334,000
<ALLOWANCES> (302,000)
<INVENTORY> 220,000
<CURRENT-ASSETS> 3,887,000
<PP&E> 33,100,000
<DEPRECIATION> 19,598,000
<TOTAL-ASSETS> 23,761,000
<CURRENT-LIABILITIES> 6,624,000
<BONDS> 4,065,000
0
0
<COMMON> 588,000
<OTHER-SE> 7,437,000
<TOTAL-LIABILITY-AND-EQUITY> 23,761,000
<SALES> 0<F2>
<TOTAL-REVENUES> 7,845,000
<CGS> 0<F3>
<TOTAL-COSTS> 5,892,000
<OTHER-EXPENSES> (51,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 248,000
<INCOME-PRETAX> 1,756,000
<INCOME-TAX> 683,000
<INCOME-CONTINUING> 1,073,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,073,000
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.95
<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 REVENUE" 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>
