1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
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
(Incorporated under the laws of the State of Michigan)
444 Michigan Avenue, Detroit, Michigan 48226
I.R.S. Employer Identification Number 38-0823930
Telephone Number - (800) 257-0902
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION,
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION H(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
---- ----
At April 30, 1996, 120,526,415 common shares were outstanding.
2
Part I - Financial Information
------------------------------
The following condensed financial statements have been prepared by Michigan
Bell Telephone Company (the Company) pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC) and, in the opinion of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of results for each period
shown. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC
rules and regulations. The Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's latest Annual Report on Form 10-K.
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
-------------
1996 1995
---- ----
Revenues................................. $ 788.8 $ 705.3
--------- ---------
Operating Expenses
Employee-related expenses.............. 165.3 163.1
Depreciation and amortization.......... 126.5 119.5
Other operating expenses............... 225.3 213.2
Restructuring credit................... -- (72.8)
Taxes other than income taxes.......... 35.2 33.5
--------- ---------
552.3 456.5
--------- ---------
Operating income......................... 236.5 248.8
Interest expense......................... 21.1 22.8
Other income, net........................ 2.9 --
--------- ---------
Income before income taxes............... 218.3 226.0
Income taxes............................. 75.0 77.6
--------- ---------
Net income............................... 143.3 148.4
Accumulated deficit,
beginning of period.................... (418.2) (560.3)
Less, dividends declared............. 107.8 127.1
--------- ---------
Accumulated deficit,
end of period.......................... $ (382.7) $ (539.0)
========= =========
See Notes to Condensed Financial Statements.
3
CONDENSED BALANCE SHEETS
(Dollars in Millions)
Mar. 31, 1996 Dec. 31, 1995
------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
- ------
Current assets
Cash and temporary cash investments......... $ 0.1 $ 0.1
Investment in Ameritech funding pool........ 20.8 17.0
--------- ---------
20.9 17.1
Receivables, net
Customers................................. 646.8 634.2
Ameritech and affiliates.................. 1.9 9.2
Other..................................... 19.1 20.7
Material and supplies....................... 6.5 7.4
Prepaid and other........................... 20.0 22.1
--------- ---------
715.2 710.7
--------- ---------
Property, plant and equipment................ 7,837.2 7,775.9
Less, accumulated depreciation............... 4,750.1 4,657.7
--------- ---------
3,087.1 3,118.2
--------- ---------
Investments, primarily in affiliates......... 63.1 68.7
Other assets and deferred charges............ 238.4 238.0
--------- ---------
Total assets................................. $ 4,103.8 $ 4,135.6
========= =========
See Notes to Condensed Financial Statements.
4
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
Mar. 31, 1996 Dec. 31, 1995
------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year............ $ 36.9 $ 38.0
Accounts payable
Ameritech Services, Inc. (ASI).......... 137.9 116.8
Ameritech and affiliates................ 47.7 31.0
Other................................... 138.3 197.1
Other current liabilities................ 384.8 415.5
--------- ---------
745.6 798.4
--------- ---------
Long-term debt............................ 1,093.1 1,093.1
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes........ 102.5 105.7
Unamortized investment tax credits....... 53.3 55.9
Postretirement benefits
other than pensions.................... 670.1 676.2
Long-term payable to ASI................. 20.0 21.5
Other.................................... 61.6 62.7
--------- ---------
907.5 922.0
--------- ---------
Shareowner's equity
Common shares - ($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
Accumulated deficit...................... (382.7) (418.2)
--------- ---------
1,357.6 1,322.1
--------- ---------
Total liabilities and shareowner's equity.. $ 4,103.8 $ 4,135.6
========= =========
See Notes to Condensed Financial Statements.
5
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
-------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 143.3 $ 148.4
Adjustments to net income
Restructuring credit, net of tax............ -- (47.1)
Depreciation and amortization............... 126.5 119.5
Deferred income taxes, net.................. (2.9) 0.5
Investment tax credits, net................. (2.6) (3.5)
Capitalized interest........................ (0.5) (0.4)
Provision for uncollectibles................ 14.1 9.4
Change in accounts receivable............... (17.8) 10.6
Change in material and supplies............. (1.1) 1.5
Change in certain other current assets...... 1.9 9.8
Change in accounts payable.................. (21.0) (18.7)
Change in certain other current liabilities. 99.8 71.2
Change in certain other noncurrent
assets and liabilities.................... (9.9) (17.9)
Other....................................... 8.1 9.4
-------- --------
Net cash from operating activities............ 337.9 292.7
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (94.2) (89.3)
Cost of disposals of
property, plant and equipment................. (0.2) (0.2)
-------- --------
Net cash from investing activities............. (94.4) (89.5)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net.................... (0.7) (193.6)
Retirements of long-term debt.................. (0.4) (0.6)
Dividend payments.............................. (238.6) --
-------- --------
Net cash from financing activities............. (239.7) (194.2)
-------- --------
Net increase in cash and
temporary cash investments.................... 3.8 9.0
Cash and temporary cash investments,
beginning of period........................... 17.1 14.2
-------- --------
Cash and temporary cash investments,
end of period................................. $ 20.9 $ 23.2
======== ========
See Notes to Condensed Financial Statements.
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
MARCH 31, 1996
NOTE 1: Work Force Restructuring
As announced in March 1994, the Company's parent, Ameritech
Corporation, restructured its existing nonmanagement work force,
reducing the work force by 11,500 employees during 1994 and 1995,
including 2,626 at the Company. As a result of the restructuring, the
Company recorded a gain of $72.8 million or $47.1 million after-tax in
the first three months of 1995, resulting primarily from settlement
gains from lump sum pension payments from the Ameritech Pension Plan
to former employees. No restructuring charges or credits were recorded
in the first three months of 1996.
The Company recorded additional restructuring charges in the fourth
quarter of 1995, primarily for the consolidation of data centers and
additional work force reductions.
NOTE 2: Reclassification
Certain reclassifications were made to the December 31, 1995 balances
to correspond to the presentation as of March 31, 1996.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Dollars in Millions)
The following is a discussion and analysis of the changes in revenues,
operating expenses and other income and expenses for the first three
months of 1996 as compared with the first three months of 1995.
Results of Operations
- ---------------------
Revenues
- --------
Total revenues in the first three months of 1996 were $788.8 million
and were $705.3 million for the same period in 1995. The following
paragraphs explain the components of that change.
- ----------------------------------------------------------------------
Local service
- -------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 337.1 $ 298.2 $ 38.9 13.0
The increase in local service revenues in the first three months of
1996 was primarily attributable to higher network usage volumes, which
increased local service revenues by $35.4 million. The increased
network usage volumes resulted principally from growth in the number
of access lines, which increased 4.8 percent to 5,029,000 as of March
31, 1996 as compared to 4,800,000 at March 31, 1995, and greater sales
of call management services, such as Call Forwarding and Caller ID.
Local service revenues also increased by $3.4 million due to net rate
increases.
- ----------------------------------------------------------------------
Network access
- --------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Three Months Ended $ 144.3 $ 137.4 $ 6.9 5.0
Intrastate
- ----------
Three Months Ended $ 44.5 $ 46.1 $ (1.6) (3.5)
The increase in interstate network access revenues for the three
months ended March 31, 1996 was primarily due to higher network usage
of $15.1 million. Partially offsetting this increase were net rate
reductions of $3.4 million, as well as a reduction of $4.0 million due
to the elimination of the carrier common line surcharge in December
1995. Minutes of use related to interstate calls increased 9.5
percent in 1996 compared to the prior year period.
The decrease in intrastate network access revenues for the three
months ended March 31, 1996 was primarily due to rate decreases of
$8.7 million, as well as a revenue decrease of $6.5 million due to a
reclassification of certain revenues to the long distance category
discussed below. These decreases were partially offset by higher
network usage of $13.6 million. Minutes of use related to intrastate
calls increased 9.2 percent in 1996 compared to the prior year period.
8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Long distance service
- ---------------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 189.8 $ 171.0 $ 18.8 11.0
The increase in long distance service revenues for the three months
ended March 31, 1996 was due primarily to volume increases, resulting
in increases to revenue of $11.1 million, as well as rate increases of
$1.2 million and an increase in long distance service revenues of $6.5
million due to a reclassification of certain revenues from the
intrastate network access category.
- ----------------------------------------------------------------------
Other
- -----
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 73.1 $ 52.6 $ 20.5 39.0
Other revenues include revenues derived from directory advertising,
billing and collection services, inside wire installation and
maintenance services and other miscellaneous services. The increase
in other revenues for the three months ended March 31, 1995 was due
primarily to growth in voice messaging, sales of equipment and other
nonregulated services of $18.2 million, as well as an increase in
directory advertising revenue of $2.0 million.
- ----------------------------------------------------------------------
Operating expenses
- ------------------
Total operating expenses for the three months ended March 31, 1996
increased $95.8 million, or 21.0 percent to $552.3 million. The
increase was primarily attributable to work force restructuring, which
resulted in a credit of $72.8 million in the first quarter of 1995
related to settlement gains previously discussed.
9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Employee-related expenses
- -------------------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 165.3 $ 163.1 $ 2.2 1.3
The increase in employee-related expenses for the three months ended
March 31, 1996 was due primarily to increased incentive accruals and
payroll taxes of $4.1 million, as well as a decrease of $4.9 million
in the pension credit amount recorded in the first quarter of 1996
compared to the prior year period. These increases were partially
offset by a decrease of $3.0 million due to wage rate decreases, work
force reductions and decreased overtime, as well as decreases in
benefits and other employee-related expenses of $3.7 million.
There were 12,441 employees at March 31, 1996, compared with 12,544 at
March 31, 1995.
- ----------------------------------------------------------------------
Depreciation and
amortization
- ------------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 126.5 $ 119.5 $ 7.0 5.9
The increase in depreciation and amortization expense for the three
months ended March 31, 1996 was due to higher average plant balances,
which resulted in an increase of $3.5 million in depreciation expense,
as well as a $3.4 million increase resulting from the use of higher
depreciation rates in the first quarter of 1996.
- ----------------------------------------------------------------------
Other operating expenses
- ------------------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 225.3 $ 213.2 $ 12.1 5.7
The increase in other operating expenses for the three months ended
March 31, 1996 was due to increases in advertising, uncollectible and
other expenses of $15.1 million, related to increased sales efforts
for equipment and call management services, as well as cost of sales
increases of $13.5 million primarily related to equipment sales.
These increases were partially offset by a decrease in contract and
professional and affiliated services of $13.2 million, as well as a
decrease of $3.4 million in access charge expenses, which resulted
from elimination of the carrier common line surcharge, as discussed
above.
10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Restructuring credit
- --------------------
March 31 Percent
----------
(dollars in millions) 1996 1995 Change Change
------------------- ---- ---- -------- ------
Three Months Ended $ -- $ (72.8) $ 72.8 (100.0)
As discussed in Note 1, the Company significantly reduced its
nonmanagement work force during 1994 and 1995 by 2,626 employees. New
employees with different skills were added during this period to
accommodate growth and meet staffing requirements for new business
opportunities. As of March 31, 1995, 2,138 employees had left the
Company, with 60 leaving in the first quarter of 1995. A pretax,
noncash settlement gain of $72.8 million was recorded in the first
quarter of 1995, associated with lump-sum pension payments to former
employees. No restructuring charges or credits were recorded in the
first quarter of 1996.
- ----------------------------------------------------------------------
Taxes other than income taxes
- -----------------------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 35.2 $ 33.5 $ 1.7 5.1
The increase in taxes other than income taxes for the three months
ended March 31, 1996 was due primarily to increases in property and
other operating taxes.
- ----------------------------------------------------------------------
Other Income and Expenses
- -------------------------
Interest expense
- -----------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 21.1 $ 22.8 $ (1.7) (7.5)
The decrease in interest expense for the three months ended March 31,
1996 was due primarily to lower interest on borrowings from the
Ameritech short-term funding pool, reflecting lower average short-term
balances, as well as an increase in the amount of interest capitalized
in the first quarter compared to the prior year period.
11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other income, net
- -----------------
Change
March 31 Income Percent
----------
(dollars in millions) 1996 1995 (Expense) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 2.9 $ -- $ 2.9 n/a
Other income, net includes equity earnings in affiliates, interest
income and other nonoperating items. The increase in other income,
net for the three months ended March 31, 1996 is due primarily to
increases in interest income and increased equity earnings from ASI,
as well as a decrease in certain miscellaneous nonoperating expenses.
- ----------------------------------------------------------------------
Income taxes
- ------------
March 31 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 75.0 $ 77.6 $ (2.6) (3.4)
The decrease in income taxes in the three months ended March 31, 1996
as compared to the prior year period was primarily attributable to the
decrease in pretax earnings, related to the revenue and expense items
previously discussed.
- ----------------------------------------------------------------------
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the three months ended
March 31, was 10.34 in 1996 and 10.30 in 1995. The ratio in 1995 was
favorably affected by a credit of $72.8 million for work force
restructuring (see prior discussion of this item). The work force
restructuring program has largely been funded by the Ameritech Pension
Plan.
The computations of the ratio of earnings to fixed charges for the
five years ended December 31, 1995 have been restated. The ratio, as
adjusted, for the years ended December 31, 1995, 1994, 1993, 1992 and
1991 was 8.59, 4.69, 5.22, 4.74 and 4.10, respectively. The impact of
the restatement was not significant and was made to be consistent with
unregulated enterprises.
12
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
- --------------
Telecommunications Act of 1996
- ------------------------------
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 the Company 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 Ameritech's
network facilities.
On April 19, 1996 the Federal Communications Commission (FCC) issued a
notice of proposed rulemaking seeking comment on proposed rules
opening local telephone markets to competition. The FCC has until
August 8, 1996 to issue the new rules.
Dial 1+
- -------
On May 1, 1996, AT&T Corp. and MCI Communications Corp. filed a joint
motion with the Michigan Public Service Commission seeking
unconditional implementation of intraLATA Dial 1+, or the ability to
place an intraLATA long distance call with an alternate long distance
carrier by dialing 1 before the regular phone number, throughout
Michigan on and after May 2, 1996 and related relief, including access
charge discounts for late implementation. On May 9, Ameritech filed a brief
opposing the relief sought in the motion. The outcome of this filing cannot be
determined at this time.
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
12 Computation of Ratio of Earnings to Fixed Charges for
the three months ended March 31, 1996 and March 31,
1995, and for the five years ended December 31, 1995.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No Form 8-K was filed by the registrant during the quarter
which this report is filed.
14
SIGNATURES
Pursuant to the requirements 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
-------------------------------
(Registrant)
Date: May 10, 1996 /s/ Laurie L. Streling
----------------------
Laurie L. Streling
Comptroller
State Finance Organization
(Principal Accounting Officer)