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, 1997
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, 1997, 120,526,415 common shares were outstanding.
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Part I - Financial Information
------------------------------
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
----------------
1997 1996
---- ----
Revenues
Local service...................... $ 368.3 $ 337.1
Interstate network access.......... 157.1 144.3
Intrastate network access.......... 50.3 44.5
Long distance services............. 193.3 189.8
Other.............................. 74.0 73.1
--------- ---------
843.0 788.8
--------- ---------
Operating expenses
Employee-related expenses.......... 160.7 165.3
Depreciation and amortization...... 132.6 126.5
Other operating expenses........... 227.9 225.3
Taxes other than income taxes...... 40.6 35.2
--------- ---------
561.8 552.3
--------- ---------
Operating income..................... 281.2 236.5
Interest expense..................... 21.1 21.1
Other income, net.................... 1.0 2.9
--------- ---------
Income before income taxes........... 261.1 218.3
Income taxes......................... 90.2 75.0
--------- ---------
Net income........................... 170.9 143.3
Accumulated deficit,
beginning of period................ (347.2) (418.2)
Less, dividends declared ......... 180.6 107.8
--------- ---------
Accumulated deficit,
end of period...................... $ (356.9) $ (382.7)
========= =========
See Notes to Condensed Financial Statements.
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CONDENSED BALANCE SHEETS
(Dollars in Millions)
March 31, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments......... $ 0.1 $ 0.2
Investment in Ameritech funding pool........ 23.5 --
--------- ---------
23.6 0.2
Receivables, net
Customers................................. 669.0 708.5
Ameritech and affiliates.................. 12.2 9.8
Other..................................... 21.5 19.1
Material and supplies....................... 8.2 6.5
Prepaid and other........................... 15.0 11.5
--------- ---------
749.5 755.6
--------- ---------
Property, plant and equipment................ 8,134.4 8,072.6
Less, accumulated depreciation............... 5,146.5 5,031.6
--------- ---------
2,987.9 3,041.0
--------- ---------
Investments, primarily in affiliates......... 62.6 69.7
Other assets and deferred charges............ 273.5 271.5
--------- ---------
Total assets................................. $ 4,073.5 $ 4,137.8
========= =========
See Notes to Condensed Financial Statements.
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CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
March 31, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech................................ $ -- $ 138.3
Other.................................... 1.8 2.1
Accounts payable
Ameritech Services, Inc. (ASI)............ 101.8 114.8
Ameritech and affiliates.................. 37.9 34.8
Other..................................... 123.8 140.9
Other current liabilities.................. 392.3 276.6
--------- ---------
657.6 707.5
--------- ---------
Long-term debt.............................. 1,093.7 1,094.2
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 134.2 134.8
Unamortized investment tax credits......... 45.4 47.5
Postretirement benefits
other than pensions...................... 675.0 675.1
Long-term payable to ASI................... 18.6 20.1
Other ..................................... 65.6 65.5
--------- ---------
938.8 943.0
--------- ---------
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........................ (356.9) (347.2)
--------- ---------
1,383.4 1,393.1
--------- ---------
Total liabilities and shareowner's equity... $ 4,073.5 $ 4,137.8
========= =========
See Notes to Condensed Financial Statements.
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CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
-------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 170.9 $ 143.3
Adjustments to net income
Depreciation and amortization............... 132.6 126.5
Deferred income taxes, net.................. -- (2.9)
Investment tax credits, net................. (2.1) (2.6)
Capitalized interest........................ (0.4) (0.5)
Change in accounts receivable, net.......... 34.7 (3.7)
Change in material and supplies............. (3.5) (1.1)
Change in certain other current assets...... (4.0) 1.9
Change in accounts payable.................. (27.0) (21.0)
Change in certain other current
liabilities................................ 114.9 99.8
Change in certain other noncurrent
assets and liabilities..................... (4.1) (9.9)
Other operating activities, net............ 8.4 8.1
-------- --------
Net cash from operating activities............ 420.4 337.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (79.3) (94.2)
Proceeds from (cost of) disposals of
property, plant and equipment................ 1.4 (0.2)
Other investing activities.................... 0.1 --
-------- --------
Net cash from investing activities............ (77.8) (94.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... (138.3) (0.7)
Retirements of long-term debt................. (0.3) (0.4)
Dividend payments............................. (180.6) (238.6)
-------- --------
Net cash from financing activities............ (319.2) (239.7)
-------- --------
Net increase in cash and
temporary cash investments................... 23.4 3.8
Cash and temporary cash investments,
beginning of period.......................... 0.2 17.1
-------- --------
Cash and temporary cash investments,
end of period................................ $ 23.6 $ 20.9
======== ========
See Notes to Condensed Financial Statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
MARCH 31, 1997
NOTE 1: Preparation of Interim Financial Statements
The condensed financial statements of Michigan Bell Telephone Company
(Michigan Bell or the Company) have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission
(SEC). 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. In the Company's opinion, these statements 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.
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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 three months of 1997 as compared with the first three months of
1996.
Results of Operations
- ---------------------
Revenues
- --------
Total revenues in the first three months of 1997 were $843.0 million
and were $788.8 million for the same period in 1996. The increase was
primarily attributable to growth in access lines and sales of call
management services, as well as increases in switched minutes of use
resulting from higher network usage volumes. These increases were
partially offset by net rate reductions.
- ---------------------------------------------------------------------
Local service
- -------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 368.3 $ 337.1 $ 31.2 9.3
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and
connection charges and public phone revenues. The increase in local
service revenues for the three months ended March 31, 1997 was due
largely to higher network usage volumes, resulting primarily from
access line growth of 2.8 percent over the prior year period. Second
line additions by residential and small business customers
contributed to the increase in access lines. Sales of call
management services, such as Call Forwarding, Call Waiting and Caller
ID continued to grow as well, fueled by customer demand for
additional flexibility and convenience.
There were 5,167,000 access lines in service as of March 31, 1997,
compared with 5,029,000 as of March 31, 1996.
- ---------------------------------------------------------------------
Network access
- --------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Three Months Ended $ 157.1 $ 144.3 $ 12.8 8.9
Intrastate
- ----------
Three Months Ended $ 50.3 $ 44.5 $ 5.8 13.0
Network access revenues are fees charged to interexchange carriers
that use the Company's local landline communications network to
connect customers to their long distance network. In addition, end
users pay flat rate access fees to connect to the long distance
network. These revenues are generated from both interstate and
intrastate services.
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Management's Discussion and Analysis
of Results of Operations (cont'd.)
Network access (cont'd.)
- ------------------------
The increase in interstate network access revenues for the three
months ended March 31, 1997 was primarily due to an increase in
network minutes of use, resulting from overall growth in the volume
of calls handled for interexchange carriers. Greater demand for
dedicated services by Internet service providers and other high-
capacity users also contributed to the increase. Interstate minutes
of use for the three months ended March 31, 1997 increased by 3.5
percent over the comparable prior year period.
The increase in intrastate network access revenues for the three
months ended March 31, 1997 was primarily due to volume increases,
partially offset by rate decreases. Minutes of use related to
intrastate calls increased by 10.1 percent over the comparable prior
year period.
- ---------------------------------------------------------------------
Long distance service
- ---------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 193.3 $ 189.8 $ 3.5 1.8
Long distance service revenues are derived from customer calls to
locations outside of their local calling areas, but within the same
Local Access and Transport Area (LATA). The increase in long
distance service revenues for the three months ended March 31, 1997
was due primarily to increased network usage.
- ---------------------------------------------------------------------
Other
- -----
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 74.0 $ 73.1 $ 0.9 1.2
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, 1997 was due
primarily to increases in inside wire installation and maintenance
and directory advertising revenues, partially offset by decreased
sales of equipment and other nonregulated services, such as voice
messaging.
- ---------------------------------------------------------------------
Operating expenses
- ------------------
Total operating expenses for the three months ended March 31, 1997
increased $9.5 million, or 1.7 percent to $561.8 million. The
increase resulted primarily from increased depreciation expense and
other taxes, partially offset by decreased employee-related expenses,
as discussed below.
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Management's Discussion and Analysis
of Results of Operations (cont'd.)
Employee-related expenses
- -------------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 160.7 $ 165.3 $ (4.6) (2.8)
The decrease in employee-related expenses for the three months ended
March 31, 1997 was due primarily to lower force levels and decreased
overtime and bonus expenses, partially offset by wage rate increases
and increased benefit expenses.
There were 11,950 employees as of March 31, 1997, compared with
12,441 as of March 31, 1996.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 132.6 $ 126.5 $ 6.1 4.8
The increase in depreciation and amortization expense for the three
months ended March 31, 1997 was due to higher average plant balances
and the use of higher depreciation rates in the first three months of
1997 due to the use of shorter depreciable lives for newer
technologies.
- ---------------------------------------------------------------------
Other operating expenses
- ------------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 227.9 $ 225.3 $ 2.6 1.2
The increase in other operating expenses for the three months ended
March 31, 1997 was due to increases in uncollectible and other
expenses related to increased sales efforts, as well as increases in
contract services costs and access charges paid to other
communications carriers for calls completed on their networks. These
increases were partially offset by a decrease in cost of sales for
customer equipment, as well as lower affiliated services expenses,
largely due to the timing of systems programming and reengineering
efforts.
- ---------------------------------------------------------------------
Taxes other than income taxes
- -----------------------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 40.6 $ 35.2 $ 5.4 15.3
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other taxes not directly related to earnings.
Increases in property taxes, resulting from higher assessed valuation
and property tax rates, as well as an increase in use taxes resulting
from higher revenues, accounted for the majority of the increase for
the three months ended March 31, 1997.
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Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Income and Expenses
- -------------------------
Interest expense
- ----------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 21.1 $ 21.1 $ -- --
There was no change in interest expense for the three months ended
March 31, 1997 as compared with the prior year period.
- ---------------------------------------------------------------------
Other income, net
- -----------------
Change
March 31 Income Percent
------------
(dollars in millions) 1997 1996 (Expense) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 1.0 $ 2.9 $ (1.9) (65.5)
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. The decrease in other income,
net for the three months ended March 31, 1997 was due primarily to
decreased equity earnings from Ameritech Services, Inc. (ASI), as
well as an increase in nonoperating expenses, partially offset by
increased interest income.
- ---------------------------------------------------------------------
Income taxes
- ------------
March 31 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 90.2 $ 75.0 $ 15.2 20.3
The increase in income taxes for the three months ended March 31,
1997 as compared with the prior year period was primarily
attributable to an increase in pretax earnings, as discussed in the
revenue and expense items above.
- ---------------------------------------------------------------------
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the three months ended
March 31, was 12.27 in 1997 and 10.34 in 1996.
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Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
- --------------
Competition and the Telecommunications Act of 1996
- --------------------------------------------------
The Company's local service markets have been opened to competition
from interexchange carriers and other local service providers, as
required by the Telecommunications Act of 1996 (the 1996 Act).
Interconnection agreements that the Company has signed require it to
allow access to network elements at cost-based rates or services at
discounted, wholesale rates. These agreements may result in some
downward pressure on local service revenues, as a portion of the
Company's revenue shifts from local service at retail rates to
network access at wholesale rates.
The 1996 Act was also designed to bring renewed scrutiny of the
current universal service funding policy. Historically, network
access charges have been used to help local exchange carriers ensure
universal basic telephone service to all customers. The FCC is
expected to review and possibly modify this policy during 1997. Any
modifications by the FCC may result in changes to the Company's
revenue stream related to network access charges.
The Company has signed a significant number of interconnection and
resale agreements with competitors, paving the way for entry into
the interLATA long distance market. However, FCC rules require that
interLATA long distance service be offered by a separate subsidiary
of Ameritech. Accordingly, Ameritech's entry into this market will
not generate long distance revenues for Michigan Bell. As a result,
the potential revenue decline brought by local service competition
will not be offset at the Company by gains in long distance revenue.
It is impossible to predict the specific impact of the Telecom Act
and other changes in the industry on Michigan Bell's business or
financial condition. Notwithstanding the potential for an adverse
effect on its revenue streams, the Company intends to pursue growth
opportunities in its local exchange business.
Dial 1+
- -------
On March 24, 1997, AT&T and MCI filed a joint motion with the
Michigan Court of Appeals seeking a determination that on July 1,
1997, the Company must implement intraLATA dialing parity in the rest
of Michigan. The Company already provides Dial 1+ capability to over
70 percent of its access lines. On April 1, 1997, the Company filed
a responsive brief, arguing that the Court of Appeals' December 4,
1996 order staying the Commission's dialing parity orders precluded
further implementation of dialing parity until that Court decided the
merits of the Company's appeal.
On April 10, 1997, the Court of Appeals denied AT&T's and MCI's joint
motion and left the December 4, 1996 order in effect.
On March 24, 1997, AT&T and MCI filed a similar joint motion with the
Commission. No hearing has been held, and no decision has been
issued by the Commission on that motion.
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Management's Discussion and Analysis
of Results of Operations (cont'd.)
Private Securities Litigation Reform Act Safe Harbor Statement
- ------------------------------------------------------------------
Except for historical information contained herein, the above
discussion contains certain forward-looking statements that involve
potential risks and uncertainties. The Company's future results
could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not
limited to, changes in economic and market conditions, effects of
state and federal regulation and the impact of new technologies.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or update these forward-
looking statements to reflect events or circumstances that arise
after the date hereof or to reflect the occurrence of unanticipated
events.
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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, 1997 and March 31, 1996.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No Form 8-K was filed by the registrant during the quarter for
which this report is filed.
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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 6, 1997 /s/ Ronald G. Pippin
--------------------------
Ronald G. Pippin
Comptroller
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