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 June 30, 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 July 31, 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
and the quarterly report on Form 10-Q previously filed in the current
year.
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues........................ $ 800.6 $ 736.4 $ 1,589.4 $ 1,441.7
--------- --------- --------- ---------
Operating expenses
Employee-related expenses..... 163.3 167.5 328.6 330.6
Depreciation and amortization. 131.5 119.6 258.0 239.1
Other operating expenses...... 226.7 200.5 452.0 413.7
Restructuring credit ......... -- -- -- (72.8)
Taxes other than income taxes. 35.1 34.1 70.3 67.6
--------- --------- --------- ---------
556.6 521.7 1,108.9 978.2
--------- --------- --------- ---------
Operating income................ 244.0 214.7 480.5 463.5
Interest expense................ 21.1 22.3 42.2 45.1
Other income, net ..... 2.3 1.0 5.2 1.0
--------- --------- --------- ---------
Income before income taxes...... 225.2 193.4 443.5 419.4
Income taxes.................... 78.9 65.4 153.9 143.0
--------- --------- --------- ---------
Net income...................... 146.3 128.0 289.6 276.4
Accumulated deficit,
beginning of period........... (382.7) (539.0) (418.2) (560.3)
Less, dividends............. 136.0 111.4 243.8 238.5
--------- --------- --------- ---------
Accumulated deficit,
end of period................. $ (372.4) $ (522.4) $ (372.4) $ (522.4)
========= ========= ========= =========
See Notes to Condensed Financial Statements.
3
CONDENSED BALANCE SHEETS
(Dollars in Millions)
June 30, 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 -- 17.0
--------- ---------
0.1 17.1
Receivables, net
Customers................................. 694.5 634.2
Ameritech and affiliates.................. 0.3 9.2
Other..................................... 16.7 20.7
Material and supplies....................... 8.1 7.4
Prepaid and other........................... 16.2 22.1
--------- ---------
735.9 710.7
--------- ---------
Property, plant and equipment................ 7,901.7 7,775.9
Less, accumulated depreciation............... 4,837.0 4,657.7
--------- ---------
3,064.7 3,118.2
--------- ---------
Investments, primarily in affiliates......... 66.0 68.7
Other assets and deferred charges............ 239.4 238.0
--------- ---------
Total assets................................. $ 4,106.0 $ 4,135.6
========= =========
See Notes to Condensed Financial Statements.
4
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
June 30, 1996 Dec. 31, 1995
------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech................................ $ 42.6 $ --
Other..................................... 37.0 38.0
Accounts payable
Ameritech Services, Inc. (ASI)............ 135.3 116.8
Ameritech and affiliates.................. 30.8 31.0
Other..................................... 155.9 197.1
Other current liabilities.................. 340.0 415.5
--------- ---------
741.6 798.4
--------- ---------
Long-term debt.............................. 1,094.0 1,093.1
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 100.1 105.7
Unamortized investment tax credits......... 51.0 55.9
Postretirement benefits
other than pensions...................... 669.0 676.2
Long-term payable to ASI................... 20.0 21.5
Other ..................................... 62.4 62.7
--------- ---------
902.5 922.0
--------- ---------
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........................ (372.4) (418.2)
--------- ---------
1,367.9 1,322.1
--------- ---------
Total liabilities and shareowner's equity... $ 4,106.0 $ 4,135.6
========= =========
See Notes to Condensed Financial Statements.
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CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30
-------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 289.6 $ 276.4
Adjustments to net income
Restructuring credit, net of tax............ -- (47.1)
Depreciation and amortization............... 258.0 239.1
Deferred income taxes, net.................. (4.9) 0.8
Investment tax credits, net................. (4.9) (7.1)
Capitalized interest........................ (1.0) (0.8)
Provision for uncollectibles................ 32.8 16.4
Change in accounts receivable............... (80.2) (45.9)
Change in material and supplies............. (4.0) (0.7)
Change in certain other current assets...... 5.9 (12.7)
Change in accounts payable.................. (22.9) (47.6)
Change in certain other current
liabilities .......................... 54.5 86.7
Change in certain other noncurrent
assets and liabilities..................... (11.2) (26.2)
Other....................................... -- 5.9
-------- --------
Net cash from operating activities............ 511.7 437.2
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (194.3) (170.6)
Cost of disposals of
property, plant and equipment................ (1.0) (0.6)
Other investing activity...................... 0.1 0.4
-------- --------
Net cash from investing activities............ (195.2) (170.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... 41.8 (152.3)
Retirements of long-term debt................. (0.7) (1.3)
Dividend payments............................. (374.6) (127.0)
-------- --------
Net cash from financing activities............ (333.5) (280.6)
-------- --------
Net decrease in cash and
temporary cash investments................... (17.0) (14.2)
Cash and temporary cash investments,
beginning of period.......................... 17.1 14.2
-------- --------
Cash and temporary cash investments,
end of period................................ $ 0.1 $ --
======== ========
See Notes to Condensed Financial Statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
JUNE 30, 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 six 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 six 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. The total accrual amount remaining related to work force
restructuring charges was not significant as of June 30, 1996. See further
discussion in Management's Discussion and Analysis below.
NOTE 2: Reclassifications
Certain reclassifications were made to the December 31, 1995 balances to
correspond to the presentation as of June 30, 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following is a discussion and analysis of the changes in revenues,
operating expenses and other income and expenses for the first six
months of 1996 as compared with the first six months of 1995.
Results of Operations
---------------------
Revenues
--------
Total revenues in the first six months of 1996 were $1,589.4 million
and were $1,441.7 million for the same period in 1995. The following
paragraphs explain the components of that change.
----------------------------------------------------------------------
Local service
-------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 687.7 $ 608.6 $ 79.1 13.0
The increase in local service revenues in the first six months of 1996
was primarily attributable to higher network usage volumes, which
increased local service revenues by $72.7 million. The increased
network usage volumes resulted principally from growth in the number
of access lines, which increased 4.3 percent to 5,062,000 as of June
30, 1996 as compared to 4,851,000 at June 30, 1995, and greater sales
of call management services, such as Call Forwarding and Caller ID.
Local service revenues also increased by $6.4 million due to net rate
increases.
----------------------------------------------------------------------
Network access
--------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
----------
Six months Ended $ 288.9 $ 278.6 $ 10.3 3.7
Intrastate
----------
Six months Ended $ 90.9 $ 97.3 $ (6.4) (6.6)
The increase in interstate network access revenues for the six months
ended June 30, 1996 was primarily due to higher network usage of $27.3
million. Partially offsetting this increase were net rate reductions
of $14.4 million and higher National Exchange Carrier Association
common line support payments. Minutes of use related to interstate
calls increased 8.5 percent in 1996 compared to the prior year period.
The decrease in intrastate network access revenues for the six months
ended June 30, 1996 was primarily due to rate decreases of $16.7
million, as well as a revenue decrease of $13.1 million due to a
reclassification of certain revenues to the long distance category.
These decreases were partially offset by higher network usage of $23.4
million. Minutes of use related to intrastate calls increased 9.0
percent in 1996 compared to the prior year period.
8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Long distance service
---------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 382.5 $ 350.9 $ 31.6 9.0
The increase in long distance service revenues for the six months
ended June 30, 1996 was due primarily to volume increases, resulting
in an increase of $16.6 million, as well as rate increases of $1.4
million and an increase of $13.1 million due to a reclassification of
certain revenues from the intrastate network access category.
----------------------------------------------------------------------
Other
-----
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 139.4 $ 106.3 $ 33.1 31.1
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 six months ended June 30, 1996 was due
primarily to growth in voice messaging and sales of equipment and
other nonregulated services of $29.2 million, as well as an increase
in directory advertising revenue of $3.9 million.
----------------------------------------------------------------------
Operating expenses
------------------
Total operating expenses for the six months ended June 30, 1996
increased $130.7 million, or 13.4 percent to $1,108.9 million. The
increase was partially attributable to work force restructuring, which
resulted in a credit of $72.8 million in the first six months of 1995
related to noncash settlement gains from the pension plan, as well as
increases in depreciation expense and other operating expenses, such
as advertising and cost of sales, as discussed below.
9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Employee-related expenses
-------------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 328.6 $ 330.6 $ (2.0) (0.6)
The decrease in employee-related expenses for the six months ended
June 30, 1996 was due primarily to decreases in benefits and other
employee-related expenses, largely resulting from renegotiated health-
care contracts, as well as wage rate decreases. These decreases were
partially offset by increased incentive accruals, overtime and payroll
taxes.
There were 12,691 employees at June 30, 1996, compared with 12,434 at
June 30, 1995.
----------------------------------------------------------------------
Depreciation and
amortization
------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 258.0 $ 239.1 $ 18.9 7.9
The increase in depreciation and amortization expense for the six
months ended June 30, 1996 was due to higher average plant balances,
which resulted in an increase of $11.4 million in depreciation
expense, as well as a $7.5 million increase resulting from the use of
higher depreciation rates in the first six months of 1996 related to
newer technologies.
----------------------------------------------------------------------
Other operating expenses
------------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 452.0 $ 413.7 $ 38.3 9.3
The increase in other operating expenses for the six months ended June
30, 1996 was due to increases of $54.6 million in uncollectible and
other expenses related to increased sales efforts for equipment and
call management services and cost of sales increases 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 $3.0 million in access charge
expenses.
10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Restructuring credit
--------------------
June 30 Percent
----------
(dollars in millions) 1996 1995 Change Change
------------------- ---- ---- -------- ------
Six months Ended $ -- $ (72.8) $ 72.8 n/a
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 June 30, 1995, 2,322 employees had left the
Company, with 244 leaving in the first six months of 1995. A pretax,
noncash settlement gain of $72.8 million was recorded in the first six
months of 1995, associated with lump-sum pension payments to former
employees. No restructuring charges or credits were recorded in the
first six months of 1996.
----------------------------------------------------------------------
Taxes other than income taxes
-----------------------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 70.3 $ 67.6 $ 2.7 4.0
The increase in taxes other than income taxes for the six months ended
June 30, 1996 was due primarily to increases in property taxes and
other operating taxes.
----------------------------------------------------------------------
Other Income and Expenses
-------------------------
Interest expense
-----------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 42.2 $ 45.1 $ (2.9) (6.4)
The decrease in interest expense for the six months ended June 30,
1996 was due primarily to lower interest on borrowings from the
Ameritech short-term funding pool, reflecting lower average short-term
balances.
11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other income, net
-----------------
Change
June 30 Income Percent
----------
(dollars in millions) 1996 1995 (Expense) Change
------------------- ---- ---- -------- ------
Six months Ended $ 5.2 $ 1.0 $ 4.2 n/m
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. The increase in other income,
net for the six months ended June 30, 1996 is due primarily to
increases in interest income and increased equity earnings from ASI.
----------------------------------------------------------------------
Income taxes
------------
June 30 Increase Percent
----------
(dollars in millions) 1996 1995 (Decrease) Change
------------------- ---- ---- -------- ------
Six months Ended $ 153.9 $ 143.0 $ 10.9 7.6
The increase in income taxes in the six months ended June 30, 1996 as
compared with the prior year period was primarily attributable to the
increase 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 six months ended June
30, was 10.36 in 1996 and 9.42 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.
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 on February 8,
1996. This legislation defines the conditions under which Ameritech,
including the Company, 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
through an affiliate, 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.
On August 1, 1996 the Federal Communications Commission adopted rules
by which competitors will connect to local network facilities. The
rules address, among other things, unbundling of network elements,
pricing for interconnection and unbundled elements, and resale of
network services. The Company has not yet determined the impact of
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.
On June 26, 1996, the Commission ordered the Company to either
implement (1) intraLATA dialing parity in an additional 72% of its
exchanges by July 26, 1996, and another 17% of its exchanges by
December 7, 1996, or (2) implement a 55% discount on intraLATA access
charges for interexchange carriers whose customers must use an access
code to place an intraLATA toll call in exchanges where there was no
implementation of dialing parity. On July 9, 1996, the Company filed
Motions for Rehearing, Reopening, and Stay of Order, which are still
pending before the Commission. On July 26, 1996, Ameritech
implemented the 55% discount in access charges pending further legal
developments. The discount represents approximately $14.3 million of
annual revenue.
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
six months ended June 30, 1996 and June 30, 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: August 7, 1996 /s/ Laurie L. Streling
------------------------
Laurie L. Streling
Comptroller
State Finance Organization
(Principal Accounting Officer)