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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) . . . . For the fiscal year ended
December 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-2222
MICHIGAN BELL TELEPHONE COMPANY
A Michigan Corporation I.R.S. Employer No.
38-0823930
444 Michigan Avenue
Detroit, Michigan 48226
Telephone Number 313-223-9900
Securities registered pursuant to Section 12(b) of the Act:
Forty Year 7 3/4% Debentures, due June 1, 2011
Forty Year 7% Debentures, due November 1, 2012
Exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION,
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS J(1)(a) AND (b) OF FORM
10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT
TO GENERAL INSTRUCTION J(2).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Submission of Matters to a Vote of Security Holders (Omitted pursuant to
General Instruction J(2)).
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable).
6. Selected Financial and Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . 10
7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction J(2)) . . . . . . . . . . . . . . . . . . . 11
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 16
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART III
10. Directors and Executive Officers of the Registrant (Omitted
pursuant to General Instruction J(2)).
11. Executive Compensation (Omitted pursuant to General Instruction J(2)).
12. Security Ownership of Certain Beneficial Owners
and Management (Omitted pursuant to General Instruction J(2)).
13. Certain Relationships and Related Transactions (Omitted
pursuant to General Instruction J(2)).
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . 32
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PART I
Item 1. Business.
The Company
Michigan Bell Telephone Company (Company), incorporated under the laws
of the State of Michigan, has its principal office at 444 Michigan Avenue,
Detroit, Michigan 48226 (telephone number 313-223-9900). The Company is a
wholly owned subsidiary of Ameritech Corporation (Ameritech), a Delaware
Corporation. Ameritech is the parent of the Company; Illinois Bell Telephone
Company; Indiana Bell Telephone Company, Incorporated; The Ohio Bell Telephone
Company and Wisconsin Bell, Inc. (referred to collectively as the "Ameritech
landline telephone subsidiaries"), as well as several other communications
businesses, and has its principal executive offices at 30 South Wacker Drive,
Chicago, Illinois 60606 (telephone number 312-750-5000). The Company is
managed by its sole shareowner rather than a Board of Directors as permitted by
Michigan law.
1994 was the first full year in which Ameritech operated its
redesigned business within the framework of a customer-specific business unit
strategy, delivering specialized services to various categories of customers,
each with unique requirements. The functions of the business units, which
include consumer, business, cellular, advertising and leasing services, as well
as services provided to other companies in the telecommunications industry,
overlap the legal entities, including the Company, which form the
infrastructure of Ameritech. The products and services of all the business
units are marketed under the "Ameritech" brand identity, but Ameritech's five
landline telephone subsidiaries remain responsible within their respective
service areas for providing phone and other telecommunications services,
subject to regulation by the Federal Communications Commission (FCC) and the
five respective state public utility commissions. The Company is regionally
identified as Ameritech Michigan.
Operations Under Line-of-Business Restrictions
The operations of the Company are subject to the requirements of a
consent decree entitled "Modification of Final Judgment" (Consent Decree)
approved by the United States District Court for the District of Columbia
(Court) in August 1982. The Consent Decree arose out of antitrust litigation
brought by the Department of Justice (DOJ) and required AT&T Corp. (AT&T),
formerly named American Telephone and Telegraph Company, to divest itself of
those assets relating to exchange telecommunications, exchange access
functions, printed directories and cellular mobile communications. The Consent
Decree, together with the Court approved Plan of Reorganization (Plan),
outlined the method of divestiture and established restrictions on the
post-divestiture activities of the seven regional holding companies (RHCs),
including Ameritech, formed to receive AT&T's divested assets. Effective
January 1, 1984, AT&T transferred to Ameritech its 100% ownership of the
exchange telecommunications, exchange access and printed directory advertising
portions of the Ameritech landline telephone subsidiaries, as well as a
cellular mobile communications company.
The Consent Decree, as originally approved, prohibited the RHCs from
providing long-distance telecommunications services or information services,
manufacturing telecommunications equipment, or providing any product or
service, except exchange telecommunications and exchange access service, that
is not a natural monopoly service actually regulated by tariff. The Consent
Decree allowed the RHCs to provide printed directory advertising and to
provide, but not manufacture, customer premises equipment.
Over time, the Court granted waivers to the RHCs to engage in
otherwise prohibited lines of business upon a showing to the Court that there
was no substantial possibility that the company could use its monopoly power to
impede competition in the market it sought to enter. In decisions handed down
in September 1987 and March 1988, the Court continued prohibitions relating to
equipment manufacture and long-distance services. The rulings allowed limited
provision of information services by transmission of information and provision
of information gateways, but excluded generation or manipulation of information
content. In addition, the rulings eliminated the need for a waiver for entry
into non-telephone related businesses. In July 1991, the Court lifted the
information services ban, but stayed the effect of the decision pending outcome
of the appeals process. Soon after, the stay was lifted on appeal and in July
1993, the U.S. Court of Appeals unanimously upheld the Court's order allowing
the RHCs to
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produce and package information for sale across business and home phone lines.
In November 1993, the U.S. Supreme Court declined to review the lower court
ruling.
In July 1994, four of the RHCs (Ameritech was not a participant) filed
a motion in the Court to vacate the entire Consent Decree. The filing was
supported by numerous affidavits from consultants to the companies which
largely suggested that RHC entry into restricted markets would not impede
competition in those markets, but actually spur competition and result in lower
prices for consumers. After a brief review by the Court, the matter was
referred to the DOJ which has taken comments from interested parties as part of
an extensive fact finding effort. The DOJ's recommendation is expected in late
1995 or early 1996. Ameritech is pursuing its own unique strategy to enter new
businesses. Ameritech's Customers First plan is discussed in the section on
Competition.
Several bills have been introduced in Congress which have called for
the modification or elimination of restrictions set by the Consent Decree. It
is impossible for the Company to predict either the probability of passage or
the impact of any new legislation on the business.
The Company furnishes a wide variety of advanced telecommunications
services, including local exchange and toll service, network access and
telecommunications products, in an operating area comprised of 3 Local Access
and Transport Areas (LATAs) in Michigan. These LATAs are generally centered on
a city or other identifiable community of interest, and each LATA marks the
boundary within which the Company may provide telephone service. The Company
provides two basic types of telecommunications services. First, it transports
telecommunications traffic between a subscriber's equipment and the telephone
exchange offices located within the same LATA (intraLATA service). These
services include local exchange, private line and intraLATA toll services
(including 800 and special services for data, radio and video transport).
Second, it provides exchange access service, which links a subscriber's
telephone or other equipment to the network of transmission facilities of
long-distance carriers, which in turn provide telecommunications service
between LATAs (interLATA, or long-distance, service).
About 82% of the population and 42% of the area of Michigan is served
by the Company. The remainder of the state is served by nonaffiliated
telephone companies. Muskegon is the only city of over 50,000 population in
the State in which local service is furnished by a nonaffiliated telephone
company.
The Company provides billing and collection services for several
companies, including billing for long-distance services offered by certain
long-distance carriers. The Company also provides directory assistance, local
and toll operator services, including collect calls, third number billing,
person-to-person and calling card calls, and offers such digital network
services as voice-mail, on-line database access and fax messaging, document
sharing functions, and video-conferencing for desktop computers.
The following table sets forth the number of access lines served by
the Company at the end of each of the last five years:
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Access lines in service (in thousands) . . . . . 4,747 4,563 4,431 4,314 4,242
% increase over prior year . . . . . . . . . . . 4.0 2.9 2.7 1.7 2.2
The Company has certain agreements with Ameritech Publishing, Inc.
(API), an Ameritech subsidiary, under which the Company will furnish to API
certain services and data to be used by API in producing and distributing
classified and alphabetical directories. In exchange, the Company will receive
a fixed fee plus compensation for the services and data.
Ameritech Services Inc. (ASI) is a company jointly owned by the
Company and the other Ameritech landline telephone subsidiaries. ASI provides
to those companies human resources, technical, marketing, regulatory planning,
and real estate asset management services, purchasing and material management
support, as well as labor contract bargaining oversight and coordination. ASI
acts as a shared resource for the Ameritech subsidiaries providing operational
support for the Ameritech landline telephone subsidiaries and integrated
communications and information systems for all the business units.
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In 1994, about 92% of the total operating revenues of the Company were
from telecommunications services and the remainder principally from billing and
collection services, rents, directory advertising and other miscellaneous
nonregulated operations. About 69% of the revenues from telecommunications
services were attributable to intrastate operations.
Regulatory Environment - Federal
The Company is subject to the jurisdiction of the FCC with respect to
interstate services. The FCC prescribes for communications companies a uniform
system of accounts, rules for apportioning costs between regulated and
nonregulated services and the principles and standard procedures (separations
procedures) used to separate regulated property costs, revenues, expenses,
taxes and reserves between those applicable to interstate services under the
jurisdiction of the FCC and those applicable to intrastate services under the
jurisdiction of the respective state regulatory authorities.
Access Services
The Company provides access services that allow long-distance carriers
and other customers to originate and terminate interstate and intrastate
telecommunications services using the facilities of the Company. These charges
recover the Company's access-related costs allocated to the two jurisdictions
under the FCC's jurisdictional cost allocation rules. Access charges are of
four types: common line, switched access, trunking and special access. There
are no common line charges applicable to intrastate operations.
The common line portion of interstate costs is recovered through
separate charges applied to end users (monthly end user common line charges)
and the long-distance carriers. The FCC has authorized end user common line
charges of up to $3.50 per access line per month for residential and single
line business customers and up to $6.00 per access line per month for multiple
line business customers.
Effective January 1, 1994, rates for local transport services were
restructured and a new trunking service category was created. Trunking
services consist of two types: those associated with the local transport
element of switched access and those associated with special access. Trunking
services associated with switched access handle the transmission of traffic
between a customer's premises and an Ameritech end office where local switching
occurs. Trunking services associated with special access handle the
transmission of telecommunications services between any two customer-designated
premises or between a customer-designated premise and a Company end office
where multiplexing, the transmission of two or more signals over a single
channel, occurs. Special access charges are monthly charges assessed to
customers for access to private line services.
Effective January 1, 1991, the FCC adopted a new system for regulating
the interstate rates of local exchange carriers, including the Company,
establishing a price cap mechanism that sets maximum limits on the prices they
can charge. The limits are adjusted each year to reflect inflation, a
productivity factor and certain other cost changes. Local exchange carriers
subject to price caps have increased flexibility to change the prices of
existing services within certain groupings of interstate services. Local
exchange carriers which operate under price caps are allowed to elect annually
by April 1 a productivity offset factor of 3.3% or 4.3%. If the lower offset
is chosen, such carriers will be allowed to earn up to a 12.25% overall rate of
return without sharing. If such carriers earn between 12.25% and 16.25%, half
of the earnings in this range will be flowed through to customers in the form
of a lower price cap index in the following year. All earnings over 16.25%
would be flowed through to customers. If such carriers elect a 4.3%
productivity offset, all earnings below 13.25% may be retained, earnings up to
17.25% would be shared, and earnings over 17.25% would flow through to
customers. Since price caps were implemented, Ameritech has chosen the 3.3%
offset.
In February 1994, the FCC initiated its review of price cap
regulation. The FCC identified three broad sets of issues for examination
including those related to the basic goals of price cap regulation, the
operation of price caps and the transition of local exchange services to a
fully competitive market. In the course of this proceeding, the Ameritech
landline telephone subsidiaries have advocated the elimination of earnings
sharing, increased pricing flexibility, and no change to the productivity
factor.
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Other Matters
In June 1994, the U.S. Court of Appeals for the District of Columbia
overturned a 1992 FCC decision requiring local exchange carriers to provide
space within their central office switching centers for physical collocation by
competitive access providers, long-distance carriers and end users. The court
also told the FCC to reconsider its requirement that local exchange carriers
allow competitors to arrange virtual collocation, interconnection adjacent to
but not in a central office. In light of this decision, Ameritech has
re-examined its collocation policy and the Ameritech landline telephone
subsidiaries are now offering virtual collocation.
Regulatory Environment - State
The Company is also subject to regulation by the Michigan Public
Service Commission (MPSC) with respect to certain intrastate rates and
services, issuance of securities and other matters. Ameritech's regulatory
environment is recognized as one of the nation's most progressive and in 1994,
it became the first regional company to replace rate of return regulation with
pure price regulation throughout its region.
Under the Michigan Telecommunications Act of 1991, effective January
1, 1992 for a four-year period, there is no cap on earnings or depreciation.
The prices of basic services, defined as residence and business access lines
and local calling, are subject to a price cap formula based on the Consumer
Price Index (CPI minus 1%) and can be changed upon MPSC approval within a
period from 90 days (for changes within the index) to 210 days (for changes
falling outside the index). IntraLATA toll prices are capped through December
31, 1995 at December 31, 1991 levels. Intrastate access rates cannot exceed
the levels for the comparable interstate access services without MPSC approval.
Prices of many other services (e.g. custom calling, advanced custom calling,
Caller ID and voice mail private line) can be changed immediately upon notice
to customers. Ameritech has committed to a $2 billion construction-related
program (capital investment and related expenses) in Michigan extending through
1995.
Other Matters
In addition, the Company is a party to various proceedings pending
before the MPSC which involve, among other things, terms and conditions of
services provided by the Company, intraLATA dialing parity, terms for
interconnecting networks, and reciprocal compensation arrangements
(compensation to be exchanged with competitive local service providers for
terminating other carriers' calls.)
Competition
General
The telecommunications industry is undergoing significant changes.
Local exchange and long-distance service companies, cable TV companies,
cellular service companies, computer concerns and the entertainment and
information services industries are converging, forming alliances and
positioning to provide a variety of services. Regulatory, legislative and
judicial decisions and technological advances, as well as heightened customer
interest in advanced telecommunications services, have expanded the types of
available communications services and products, as well as the number of
companies offering such services. Market convergence, already a reality, is
intensifying.
Ameritech has positioned itself for success in the competitive market
through a number of initiatives. Ameritech has aggressively promoted its
Customers First plan, agreeing to open its network to all competitors in
exchange for being allowed to enter the long-distance market. Such a trade-off
is a core principle of legislation that was considered by Congress in 1994 and
will be debated again in 1995. Ameritech has been successful in achieving more
flexibility on profits and pricing in Michigan and throughout the region. New
regulatory policies allow the Company to keep profits resulting from improved
efficiency. Achieving price regulation in the region and recognizing increased
competition, the Company and the other Ameritech landline telephone
subsidiaries adopted accounting used by competitive companies, discontinuing
the use of Statement of Financial Accounting Standards No. 71, (FAS 71)
"Accounting for the Effects of Certain Types of Regulation," and increasing the
Company's depreciation reserve to reflect lower values for assets in a
competitive market. Internally, the Company
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has streamlined its processes, reduced staffing and cut other costs to make
Ameritech the most efficient of the RHCs.
Local Market
New technologies have opened up competition in the local market.
These technologies include coaxial cable used to deliver cable TV, fiber-optic
cable used to upgrade the capacity of the current telephone network, and
cellular telephone systems.
US Signal, Inc. has permission to offer local phone services in Grand
Rapids. Additional certification requests are pending. MCI Communications
Corp., backed by investor British Telecom, plans to begin offering local phone
service in Chicago, Detroit, Indianapolis, Cleveland, Dayton and Columbus,
starting in 1996. MFS Communications Company, Inc. has applied for
certification to provide local service in the Detroit metropolitan area in
mid-1995.
AT&T and other long-distance companies are pursuing the Company's
intraLATA toll business, promoting discounts to encourage customers to use
their service instead of the Company's. Ameritech has responded with
advertising to counter those initiatives.
Providers of cellular services and personal communications services
(PCS) also constitute potential competition to the Company as well as to
Ameritech's cellular services business unit. The FCC licenses two carriers in
each cellular market area. In Michigan, AirTouch Communications, Inc.
(AirTouch) provides cellular service in competition with Ameritech. In 1994, a
number of companies allied to form expanded cellular networks. AT&T acquired
McCaw Cellular Communications, Inc., the largest domestic cellular
communications company, creating the possibility of a wireless network with
nationwide presence and brand-name recognition. US West, Inc. (US West) and
AirTouch plan to merge their cellular operations, as do Bell Atlantic
Corporation (Bell Atlantic) and NYNEX Corporation (NYNEX). The combined US
West/AirTouch and Bell Atlantic/NYNEX entities subsequently allied their
cellular networks and agreed to jointly bid for PCS licenses. In addition,
Sprint Communications Co. formed a joint venture with cable companies
Tele-Communications, Inc., Comcast Corp. and Cox Cable Communications, Inc. to
offer alternative wireless and landline local telephone service.
In March 1995, the FCC concluded its auction, which began in late
1994, of over 2,000 licenses for PCS. Various telecommunications groups,
including almost all the nation's largest telephone and cable companies,
competed for licenses to offer PCS in Ameritech's service region. At the
conclusion of the PCS major trading area license auctions, AT&T and the Sprint
consortium were the winners of PCS licenses in the Company's coverage area.
The Company may also face additional competition from wireless technology that
may be developed and introduced in the future.
Though most wireless calls still need to interconnect with the
existing wire-based telecommunications infrastructure, legislation permitting
cable TV companies to enter the local voice communications market would provide
a competing wireline infrastructure for cellular service providers. Alliances
have been formed between certain RHCs and large cable concerns which are
operating cable TV systems throughout the United States.
In addition, the FCC has awarded licenses to several companies which
hope to launch low earth orbit satellites that could be reached directly by a
new generation of telephones, paging devices and fax machines.
In this highly competitive era, the cable industry is consolidating in
the hands of a few companies anxious to compete with the telephone companies as
the two industries converge. In October 1994, a U.S. District Court in
Illinois ruled in favor of Ameritech in the Company's challenge, filed in
November 1993, to the video programming ban of the Cable Communications Policy
Act of 1984. Ameritech initially filed motions in federal courts in Michigan
and Illinois questioning the constitutionality of provisions that bar companies
from providing cable TV services and traditional video programming where they
also provide local telephone service. The cases subsequently were consolidated
in the Illinois court. The court's ruling applies throughout Ameritech's five
state region. Ameritech was the fourth RHC to win the right to provide cable
services.
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Regulatory Relief Strategy
Customers First: Ameritech's Advanced Universal Access Plan
Regulatory reform continues to be one of the most significant issues
facing the telecommunications industry today. Ameritech believes that relief
from regulation will benefit customers and ultimately shareowners by enabling
the industry to compete effectively and meet customers' expanding needs. To
that end, Ameritech has offered its Customers First plan.
Barred from offering long-distance service by the Consent Decree, in
October 1994 Ameritech took another step in its efforts to provide a full range
of communications services by requesting Illinois Commerce Commission (ICC)
certification to offer long-distance services throughout Illinois. In its
filing with the ICC, Ameritech requested permission to offer long-distance
service using its own network facilities or network capacity obtained from
other sources. Ameritech intends to offer a broad range of long-distance
services, from consumer short- and long-haul long-distance, to 800 service and
special high-capacity services used by large businesses.
In March 1993, Ameritech unveiled its Customers First plan, becoming
the first company in the U.S. communications industry to voluntarily offer to
open its local network to competitors. In the plan, filed with the FCC and the
ICC, Ameritech proposed to change the way local telecommunications services are
provided and regulated and to furnish a policy framework for advanced universal
access to modern telecommunications services -- voice, data and video
information. Ameritech wants to facilitate competition in the local exchange
business by allowing other service providers to purchase components of its
network and to repackage them with their own services for resale. Ameritech
believes this action is a predicate to entry into a currently prohibited
business - long-distance service. In addition, Ameritech has asked for
modifications to the current price cap rules and FCC approval to collect, in a
competitively neutral manner, the social subsidies currently embedded in the
rates the landline telephone companies charge long-distance carriers for
network access. Under the plan, customers would be able to choose from
competitive providers for local service as they now can choose a provider for
long-distance service.
Ameritech currently is awaiting authorization from the DOJ and the
U.S. District Court in Washington D.C. to proceed with a trial in certain areas
of the Ameritech region under which it would provide both local and
long-distance services, demonstrating conclusively the substantial customer and
economic benefits of full competition. In January 1995, ICC hearing examiners
issued a proposed order concerning implementation of the plan in the Chicago
area, which Ameritech largely endorsed. To speed the DOJ's recommendation and
the court's decision concerning Ameritech's entry into the long-distance
market, Ameritech agreed to open its local phone network to competition without
trying this agreement to its request to provide long-distance service.
Ameritech is awaiting the ICC's final order.
Ameritech's Video Dial Tone Network
In December 1994, the FCC approved Ameritech's request to begin
building a state-of-the-art digital video network capable of delivering
multicast and interactive services to 6 million customers by the year 2001.
Ameritech plans to spend $4.4 billion over the next 15 years to build the new
network, which will be separate from the Ameritech landline telephone
subsidiaries' local communications network. A computer network, fiber-optic
and coaxial cable will be used to connect the homes, businesses, libraries and
schools in the service territory.
In phase I of the video network project, Ameritech plans to offer
service to about 1.2 million potential customers by the end of 1996 in 134
communities in its Midwest region. The network could be expanded to
approximately 1 million additional potential customers in each of the next five
years. Construction is expected to begin as soon as Ameritech secures permits
from the local communities.
Ameritech will be only one of many users of the broadband network. A
multitude of competing video information providers, businesses, institutions,
long-distance carriers and video telephone customers will also have access to
the technology. Under the FCC's action, Ameritech will act as a common
carrier, transmitting programs from all sources willing to pay a transmission
fee. Some of these programs could be supplied by ventures in which Ameritech
has a financial interest. Although Federal regulations prevent Ameritech from
providing its own programming, Ameritech is pursuing alliances and partnerships
that will position it as a key participant in the emerging era of interactive
video experiences, exploring a variety of services with many different
suppliers of traditional cable TV offerings, video-on-
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demand, home health care, interactive educational courses, distance learning,
interactive games and shopping and other entertainment and information
services.
Patents, Trademarks and Licenses
The Company, through its parent company, has rights to use various
patents, copyrights and trademarks and other intellectual property which are
necessary for it to conduct its present business operations. It is not
anticipated that any of such property will be subject to expiration or
nonrenewal of rights which would materially and adversely affect the Company.
Employee Relations
As of December 31, 1994, the Company employed 12,761 persons, a
decrease from 14,561 at December 31, 1993. Work force restructuring at the
Company reduced staffing by approximately 2,271 employees.
In late 1994, Ameritech updated its estimate of the results of the
early retirement offer it made to its nonmanagement employees earlier in the
year, bringing the total number of expected employee retirements and
resignations to 11,500 by August 1995, including 2,787 employees of the
Company. Under terms of agreements between Ameritech, the Communications
Workers of America (CWA) and the International Brotherhood of Electrical
Workers (IBEW), Ameritech implemented an enhancement to the Ameritech pension
plan by adding three years to the age and the net credited service of eligible
nonmanagement employees who will leave the business during a designated period
ending in 1995. As of December 31, 1994, approximately 2,078 employees had
left the Company under this program. In addition, 193 management employees
left the payroll as a result of a work force restructuring program.
Restructuring of the work force reflects recognition of technological
improvements, consolidations and initiatives to balance cost structure with
emerging competition.
Approximately 83% of the Company's employees are represented by the
CWA which is affiliated with the AFL-CIO. When current contracts with the IBEW
and CWA expire in June and August 1995, respectively, new contracts will be
negotiated regionally.
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Item 2. Properties.
The properties of the Company do not lend themselves to description by
character and location of principal units. At December 31, 1994, the Company's
investment in property, plant and equipment consisted of the following:
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9%
Central office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Cable, wiring and conduit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Under construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
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100%
Central office equipment includes analog and digital switching
equipment, transmission equipment and related facilities. Buildings includes
principally central offices. Cable, wiring and conduit constitute outside
plant, and includes poles as well as cable, conduit and wiring primarily on or
under public roads, highways or streets or on or under private property.
Substantially all of the installations of central office equipment and
administrative offices are located in buildings owned by the Company and
situated on property it owns. Many garages and business offices and some
installations of central office equipment and administrative offices are in
leased quarters.
As a result of an extensive review of Company assets and an assessment
of future needs, the Company is selling, or will no longer use in the business,
certain real estate, thereby reducing costs and improving asset utilization.
Capital Investment Plans
Capital expenditures, the single largest use of Company funds, were as
follows for the last five years (in millions):
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $530
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
The Company has been making and expects to continue to make large
capital expenditures to respond to the market's demand for a modern, efficient
and productive network. The total investment in property, plant and equipment
increased from about $7.0 billion at December 31, 1989, to about $7.6 billion
at December 31, 1994, after giving effect to retirements but before deducting
accumulated depreciation at either date.
Capital expenditures are expected to be about $327 million in 1995,
including capital expenditures related to the Company's portion of Ameritech's
video network upgrade program.
8
11
Item 3. Legal Proceedings.
Pre-Divestiture Contingent Liabilities Agreement
The Plan provides for the recognition and payment of liabilities that
are attributable to pre-divestiture events (including transactions to implement
the divestiture) but that do not become certain until after divestiture. These
contingent liabilities relate principally to litigation and other claims with
respect to the former Bell System's rates, taxes, contracts, equal employment
matters, environmental matters and torts (including business torts, such as
alleged violations of the antitrust laws).
With respect to such liabilities, under agreements entered into at
divestiture, AT&T and the former Bell operating companies of AT&T (Bell
Companies) will share the costs of any judgment or other determination of
liability entered by a court or administrative agency, the costs of defending
the claim (including attorneys' fees and court costs) and the cost of interest
or penalties with respect to any such judgment or determination. Except to the
extent that affected parties may otherwise agree, the general rule is that
responsibility for such contingent liabilities will be divided among AT&T and
the Bell Companies on the basis of their relative net investment (defined as
total assets less reserves for depreciation) as of the effective date of
divestiture. Different allocation rules apply to liabilities which relate
exclusively to pre-divestiture interstate or intrastate operations. Effective
in 1994, Ameritech and the other six RHCs agreed to discontinue sharing of new
pre-divestiture claims and certain existing claims other than claims relating
to environmental matters. AT&T is not a party to this agreement.
Although complete assurance cannot be given as to the outcome of any
litigation, in the opinion of the Company's management any monetary liability
or financial impact to which the Company would be subject after final
adjudication of all of the foregoing actions would not be material in amount to
the Company.
9
12
PART II
Item 6. Selected Financial and Operating Data.
MICHIGAN BELL TELEPHONE COMPANY
Selected Financial and Operating Data
(Dollars in Millions)
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Revenues
Local service . . . . . . . . . . . . . $1,165.6 $1,092.1 $1,168.6 $1,097.7 $1,093.0
Interstate network access . . . . . . . 547.7 512.6 479.4 474.0 496.2
Intrastate network access . . . . . . . 202.3 201.5 199.9 182.0 186.4
Long-distance . . . . . . . . . . . . . 709.7 695.8 591.6 582.7 605.3
Other . . . . . . . . . . . . . . . . . 229.4 287.5 275.8 273.8 268.8
-------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . 2,854.7 2,789.5 2,715.3 2,610.2 2,649.7
Operating expenses * . . . . . . . . . . . . 2,379.7 2,195.0 2,139.5 2,078.6 2,070.0
-------- -------- -------- -------- --------
Operating income . . . . . . . . . . . . . . 475.0 594.5 575.8 531.6 579.7
Interest expense . . . . . . . . . . . . . . 97.1 104.8 108.4 123.1 114.6
Other (income) expense, net . . . . . . . . . (4.8) 6.0 10.6 (2.8) (1.5)
Income taxes . . . . . . . . . . . . . . . . 103.4 140.5 130.6 120.8 140.8
-------- -------- -------- -------- --------
Income before extraordinary item and
cumulative effect of change in
accounting principles . . . . . . . . . . . 279.3 343.2 326.2 290.5 325.8
Extraordinary item and cumulative effect
of change in accounting principles ** . . . (599.1) - (448.4) - -
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . $ (319.8) $ 343.2 $ (122.2) $ 290.5 $ 325.8
======== ======== ======== ======== ========
Total assets . . . . . . . . . . . . . . . . $4,033.8 $5,259.2 $5,289.9 $5,251.8 $5,192.8
======== ======== ======== ======== ========
Property, plant and equipment, net . . . . . $3,228.3 $4,382.8 $4,456.1 $4,446.5 $4,410.4
Capital expenditures-net . . . . . . . . . . $ 364.7 $ 452.1 $ 523.3 $ 542.2 $ 530.1
Long-term debt . . . . . . . . . . . . . . . $1,128.9 $1,132.4 $1,085.1 $1,071.0 $1,202.8
Debt ratio . . . . . . . . . . . . . . . . . 52.9% 46.3% 46.4% 41.9% 41.3%
Return on average equity . . . . . . . . . . (19.5)% 19.6% (7.1)% 14.0% 16.0%
Return on average total capital . . . . . . . (7.0)% 13.2% (0.6)% 11.0% 12.2%
Pretax interest coverage . . . . . . . . . . 4.7 5.3 4.9 4.1 4.7
Customer lines-at end of year (000's) . . . . 4,747 4,563 4,431 4,314 4,242
Customer lines served by-
Digital electronic offices . . . . . . . 76% 68% 53% 49% 44%
Analog electronic offices . . . . . . . 24% 31% 46% 49% 52%
Customer lines per employee . . . . . . . . . 372 313 293 272 261
Local calls per year (millions) # . . . . . . 15,677 14,198 14,555 14,136 14,072
Calls per customer line . . . . . . . . . . . 3,303 3,112 3,285 3,277 3,317
Employees-at end of year . . . . . . . . . . 12,761 14,561 15,142 15,836 16,234
* As discussed in Note E to the financial statements, 1994 operating expenses
include a nonmanagement work force restructuring charge of $174.4.
** As discussed in Note B, the Company had an extraordinary charge in 1994 of
$599.1 for the discontinuance of FAS 71. As discussed in Note E, the
Company had accounting changes in 1992 for FAS 106 and FAS 112 aggregating
$448.4.
# Effective August 1991 (MPSC No. U-9004), certain local calls from private
line circuits were reclassified to Access Service. The years 1990-1991
have been restated to be on a comparable basis.
10
13
Item 7. Management's Discussion and Analysis of Results of Operations.
(Dollars in Millions)
Following is a discussion and analysis of the results of operations of the
Company for the year ended December 31, 1994 and for the year ended
December 31, 1993, which is based on the Statements of Income and Reinvested
Earnings (Deficit). Other pertinent data are also given in the Selected
Financial and Operating Data.
Results of Operations
Revenues Total revenues increased by 2.3% to $2,854.7 in 1994. This increase
was primarily attributable to higher landline telephone network usage resulting
from access line growth, growth in custom calling features and increases in
switched access minutes of use and toll messages. Rate reductions, primarily
in the network access revenue categories, partially offset these increases.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Local service . . . . . . . . . . . . $1,165.6 $1,092.1 $73.5 6.7
Local service revenues include basic monthly service fees and usage charges,
fees for custom-calling features, public phone revenues and installation and
connection charges. Local service rates have generally been regulated by the
Michigan Public Service Commission (MPSC).
Higher network usage increased local service revenues by $64.0 during 1994.
The increase in calling volumes principally resulted from 4.0% growth to
4,747,000 from 4,563,000 in the number of access lines, fueled by second line
additions as well as greater sales of custom calling features. An additional
$11.3 increase resulted from rate increases for directory assistance, local
coin and call waiting services.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Network access
Interstate access . . . . . . . . . $547.7 $512.6 $35.1 6.8
Intrastate access . . . . . . . . . 202.3 201.5 0.8 0.4
Network access revenues are fees charged to interexchange carriers, such as
AT&T and MCI, that use the local telecommunications network to provide
long-distance services to their customers. In addition, end users pay flat
rate access fees to connect to the local network to obtain long-distance
service. These revenues are generated from both interstate and intrastate
services.
Interstate network access revenues increased $35.1 in 1994 due primarily to
higher network usage which resulted in additional revenues of $43.6, as well as
a $12.0 reduction in National Exchange Carrier Association (NECA) support
payments. Revenue sharing accrual differences contributed $1.6 to the 1994
revenue increases. These increases were partially offset by net rate
reductions of $17.3 and a $5.4 decrease related to anticipated settlements with
other telecommunications providers. Minutes of use related to interstate calls
increased by 6.1%.
Intrastate network access revenues increased $0.8 in 1994. This increase was
primarily attributable to higher network usage which resulted in an increase in
revenues of $18.6 and a net increase of $3.3 in various claims and settlements
with interexchange carriers. Minutes of use related to intrastate calls
increased by 13.3%. This increase was partially offset by rate reductions of
$19.6.
11
14
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Long-distance . . . . . . . . . . . . $709.7 $695.8 $13.9 2.0
Long-distance revenues result when a customer makes a call to a location
outside of the local calling area but within the same service area. The
increase in long-distance revenues for 1994 was primarily attributable to
volume related increases of $9.1 and a rate increase of $2.8.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Other . . . . . . . . . . . . . . . . $229.4 $287.5 $(58.1) (20.2)
Other revenues are derived from Ameritech Publishing Inc. (API), directory and
license fees, publishing telephone directories, billing and collection
services, inside wire installation and maintenance services and other
miscellaneous services.
The decrease in other revenue is primarily due to a renegotiated directory and
license fee contract with API. The renegotiated contract accounted for
approximately $56.0 of the decrease. Additional decreases resulted from a $5.0
reclassification of certain affiliate rent revenue to expense and reductions of
$7.0 in other rent and miscellaneous revenues. The decreases were partially
offset by growth of $10.1 in other nonregulated services.
Operating Expenses
Total operating expenses in 1994 increased $184.7 or 8.4% from 1993. This
increase was primarily attributable to restructuring charges of $174.4 in 1994,
as well as increases in advertising expenses, access charges and affiliated
services.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Employee-related expenses . . . . . . $691.7 $705.8 $(14.1) (2.0)
The decrease in employee-related expenses in 1994 was primarily attributable to
the effects of work force restructuring over the past year and increased
pension credits of $22.2. Partially offsetting the decreases were the effects
of higher wage rates, increased overtime payments, higher incentive accruals
and postretirement benefits.
There were 12,761 employees at December 31, 1994 compared to 14,561 at December
31, 1993. Work force restructuring at the Company resulted in a decline of
2,078 employees.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Depreciation and amortization . . . . $530.6 $543.3 $(12.7) (2.3)
The decrease in depreciation and amortization expense in 1994 resulted
primarily from the effects of the discontinuance of the application of FAS 71
in the fourth quarter of 1994 and to the expiration of FCC-authorized
amortization schedules at the end of June 1993. The net effect was a decrease
in rates of $22.0. This decrease was offset by an increase of $9.5 caused by
the continued expansion of the plant investment base.
12
15
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Other operating expenses . . . . . . $859.3 $813.7 $45.6 5.6
The increase in other operating expenses in 1994 was primarily attributable to
an increase of $79.0 in affiliated services due in part to a transfer of
certain work functions to Ameritech Services, Inc. (ASI), an increase of $7.1
in advertising at the Company, and an increase of $3.9 in access charges paid
to other carriers for access services. The increase was moderated by a net
credit of $9.9 million from a management separation program. The credit
results from pension settlement and curtailment gains exceeding severance
costs. The increase was further offset by a $21.3 decrease in materials and
supplies and a $15.3 decrease in contracted services fees.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Restructuring charges . . . . . . . . $174.4 $ -- $174.4 n/a
As discussed more fully in Note E to the financial statements, Ameritech
announced on March 25, 1994 that it intended to reduce its existing
nonmanagement work force by 6,000 employees by the end of 1995. Restructuring
of the work force reflects the Company's implementation of technological
improvements, consolidations, and initiatives to balance its cost structure
with emerging competition. Ameritech now expects its nonmanagement work force
to be reduced by about 11,500 employees through 1995 instead of the 6,000
originally estimated in March, including 2,787 at the Company. Charges related
to the original 6,000 employees (1,560 at the Company) were recorded in the
first quarter, and additional charges, net of settlement gains, were recorded
in the third and fourth quarters to reflect acceptance of the plan by the
additional employees. After recording offsetting noncash settlement gains of
$83.2 associated with lump-sum pension payments through December 31, 1994,
total restructuring charges recorded at the Company in 1994 were $174.4.
Additional settlement gains (estimated at $70.0) are anticipated in the future.
Gross Net Program Cost
Program Settlement ------------------------
Quarter Cost Gains Pretax After-tax
- ------- ---- ----- ------ ---------
First . . . . . . . . . . . . . . . . $137.8 $ -- $137.8 $ 89.2
Second . . . . . . . . . . . . . . . -- -- -- --
Third . . . . . . . . . . . . . . . . 87.1 (30.2) 56.9 36.8
Fourth . . . . . . . . . . . . . . . 32.7 (53.0) (20.3) (13.1)
-------- ------- -------- --------
Totals . . . . . . . . . . . . . . . $257.6 $(83.2) $174.4 $112.9
------ ------ ------ ------
Actual employee reductions by quarter in 1994 were: 396 in the second quarter,
570 in the third quarter and 1,112 in the fourth quarter. Estimates for 1995
are 68 in the first quarter, 317 in the second quarter and 324 in the third
quarter. Cash requirements of the company to fund the financial incentives
(principally contractual termination payments totaling approximately $60.0) are
being met as prescribed by applicable collective bargaining agreements.
Certain of these collective bargaining agreements require contractual
termination payments to be paid to employees in a manner other than lump-sum,
thus requiring cash payments beyond an employee's termination date.
The Company believes the restructuring program will reduce its annual
employee-related costs by approximately $50 thousand per departing employee.
The projected savings will be partially offset by the hiring of new employees
to accommodate growth, ensure high quality customer service and meet staffing
requirements for new business opportunities.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Taxes other than income taxes . . . . $123.7 $132.2 $(8.5) (6.5)
The decrease in taxes other than income taxes was primarily attributable to a
decrease in the provision for property taxes to recognize the impact of new
state legislation enacted in December 1993 which lowers property tax millage
rates in Michigan.
13
16
The Company has disputed the manner in which property taxes are assessed in
Michigan as discussed more fully in Note M to the financial statements.
Management believes the ultimate outcome will not adversely affect future cash
flows or its financial statements.
Other Income and Expenses
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Interest expense . . . . . . . . . . $97.1 $104.8 $(7.7) (7.4)
The decrease in interest expense during 1994 was due primarily to the calling
of certain long-term debt in 1993 which resulted in a decrease of $10.6 in
related interest. This called debt was refinanced in part at lower long-term
interest rates and by instruments with lower short-term interest rates as
compared to the original called debt. In addition, other interest decreased
$2.5 due primarily to adjustments in the interest component of the Company's
liability under the 1990 incentive regulation plan. Partially offsetting this
decrease were increases of $5.5 in interest on short-term borrowings from
Ameritech.
(Increase) Percent
1994 1993 Decrease Change
---- ---- -------- ------
Other (income) expense, net . . . . . $(4.8) $6.0 $(10.8) n/a
Other (income) expense, net includes earnings related to the Company's
investments, interest income and other nonoperating items.
Other (income) expense, net increased in 1994 as a result of certain
nonrecurring transactions reflected in 1993 results. 1993 results included
$7.0 in costs (call premiums and unamortized deferred costs) incurred in
connection with the early extinguishment of debt. Also contributing to the
increase were increased equity earnings from Ameritech Services, Inc. of $3.2.
Increase Percent
1994 1993 (Decrease) Change
---- ---- ---------- ------
Income taxes . . . . . . . . . . . . $103.4 $140.5 $(37.1) (26.4)
The decrease in income taxes in 1994 was due primarily to lower pretax income
as a result of work force restructuring charges of $174.4 ($112.9 after-tax).
Extraordinary Item - FAS 71
As described in Note B to the financial statements, the Company has
discontinued applying Statement of Financial Accounting Standards No. 71 (FAS
71), "Accounting for the Effects of Certain Types of Regulation." The Company
determined in the fourth quarter of 1994 that it no longer met the criteria for
following FAS 71. The factors that gave rise to this decision were changes in
the manner in which the Company is regulated and the heightened competitive
environment. The accounting impact to the Company was an extraordinary noncash
after-tax charge of $599.1.
As a result of the discontinuation of applying FAS 71, the Company expects 1995
depreciation expense to decrease due to a lower net plant base. Depreciation
expense in 1996 and beyond will likely be higher as the effects of shorter
lives intensifies at the Company.
Certain additional financial statement impacts occur as a result of no longer
following FAS 71. Specifically, future effective income tax rates are expected
to increase as a result of the elimination of excess deferred tax balances
previously amortized as a reduction to tax expense over the lives of the
related assets. In addition, business transactions will be recorded following
their economic substance, and regulatory assets and liabilities pursuant to FAS
71 will no longer be recognized. The Company also made certain retroactive
reclassifications to its statements of income to conform to the presentation of
unregulated enterprises. Specifically, the provision for uncollectibles
previously shown as a reduction in other revenues, has been reclassified to
other operating expenses. Further, interest during construction, previously a
component of other income, has been reclassified to reduce interest expense.
These
14
17
changes had no impact on net income. Determination of future uncollectibles
and capitalized interest expense is not expected to change materially.
Although Company recorded assets and net equity were substantially reduced as a
result of the discontinuance of application of FAS 71, no material impact on
future cash flows is anticipated. Further, income taxes, a major expense of
the Company, will be payable by the Company following the same schedule and
amounts as before. The rating agencies that report on the Company reviewed the
Company's assessment that no material future cash flow impact results from
discontinuance of FAS 71 and reaffirmed their credit ratings.
Changes in Accounting Principles
The Company changed its accounting for income taxes effective January 1, 1993,
as required by FAS 109, "Accounting for Income Taxes." The impact of adoption
on the Company's financial statements was not significant.
As more fully discussed in Note E to the financial statements, effective
January 1, 1992, the Company adopted FAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS 112, "Employers'
Accounting for Postemployment Benefits." As a result of implementing these
standards the Company recorded an after-tax noncash charge of approximately
$448.4 in 1992. This charge caused the Company to have a loss in 1992.
Significant Balance Sheet Changes
Certain amounts shown on the Company's 1994 balance sheet are substantially
different from a year ago due to the following. First, the effects from the
discontinuance of FAS 71 (all noncash) resulted in lower equity, net plant,
deferred income taxes, and regulated assets and liabilities, all of which are
detailed in Note B to the financial statements. Secondly, the net effects of
the nonmanagement work force restructuring increased its FAS 106 obligation by
$87.7.
Other Matters
See Regulatory Environment - State in Part I for a discussion of the current
regulatory environment.
15
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Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowner of Michigan Bell Telephone Company
We have audited the accompanying balance sheets of Michigan Bell
Telephone Company (a Michigan Corporation) as of December 31, 1994 and 1993,
and the related statements of income and reinvested earnings (deficit) and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Michigan Bell
Telephone Company as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note B to the financial statements, the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
in 1994. As discussed in Note E, the Company changed its method of accounting
for certain postretirement and postemployment benefits in 1992.
Our audits are made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule
included in Item 14(a)(2) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan
February 3, 1995
16
19
MICHIGAN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME AND REINVESTED EARNINGS (DEFICIT)
(Dollars in Millions)
Year Ended December 31,
1994 1993 1992
---- ---- ----
REVENUES . . . . . . . . . . . . . . . . . . . . $2,854.7 $2,789.5 $2,715.3
-------- -------- --------
OPERATING EXPENSES
Employee-related expenses . . . . . . . . . 691.7 705.8 701.8
Depreciation and amortization . . . . . . . 530.6 543.3 520.7
Other operating expenses . . . . . . . . . . 859.3 813.7 772.9
Restructuring charges . . . . . . . . . . . 174.4 - -
Taxes other than income taxes . . . . . . . 123.7 132.2 144.1
--------- --------- ---------
2,379.7 2,195.0 2,139.5
--------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . 475.0 594.5 575.8
Interest expense . . . . . . . . . . . . . . . . 97.1 104.8 108.4
Other (income) expense, net . . . . . . . . . . . (4.8) 6.0 10.6
--------- --------- ---------
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principles . . . . . . . . . . . . . 382.7 483.7 456.8
Income taxes . . . . . . . . . . . . . . . . . . 103.4 140.5 130.6
--------- --------- ---------
Income before extraordinary item and
cumulative effect of change in
accounting principles . . . . . . . . . . . . . 279.3 343.2 326.2
Extraordinary item . . . . . . . . . . . . . . . (599.1) - -
Cumulative effect of change in
accounting principles . . . . . . . . . . . . . - - (448.4)
--------- --------- ---------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . (319.8) 343.2 (122.2)
REINVESTED EARNINGS, BEGINNING OF YEAR . . . . . 21.4 2.8 348.5
LESS, DIVIDENDS . . . . . . . . . . . . . . . . . 261.9 324.6 223.5
--------- --------- ---------
REINVESTED EARNINGS (DEFICIT), END OF YEAR . . . $ (560.3) $ 21.4 $ 2.8
========= ========== =========
The accompanying notes are an integral part of the financial statements.
17
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MICHIGAN BELL TELEPHONE COMPANY
BALANCE SHEETS
(Dollars in Millions)
As Of December 31,
1994 1993
---- ----
ASSETS
Current assets
Cash and temporary cash investments . . . . . . . . . . . . $ 14.2 $ 17.0
Receivables, net
Customers and agents (less allowance for
uncollectibles of $38.2 and $44.9, respectively) . . . . . 503.5 452.9
Ameritech and affiliates . . . . . . . . . . . . . . . . . 11.3 15.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 20.8 27.8
Material and supplies . . . . . . . . . . . . . . . . . . . 26.7 26.4
Prepaid and other . . . . . . . . . . . . . . . . . . . . . 25.9 23.0
-------- --------
602.4 562.8
-------- --------
Property, plant and equipment
In service . . . . . . . . . . . . . . . . . . . . . . . . . 7,515.6 7,452.8
Under construction . . . . . . . . . . . . . . . . . . . . . 61.3 106.2
-------- --------
7,576.9 7,559.0
Less, accumulated depreciation . . . . . . . . . . . . . . . 4,348.6 3,176.2
-------- --------
3,228.3 4,382.8
-------- --------
Investments, principally in affiliates . . . . . . . . . . . . . 70.9 68.5
Other assets and deferred charges . . . . . . . . . . . . . . . . 132.2 245.1
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $4,033.8 $5,259.2
======== ========
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech . . . . . . . . . . . . . . . . . . . . . . . . $ 193.6 $ 382.9
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 3.2
Accounts payable
Ameritech Services, Inc. . . . . . . . . . . . . . . . . . 108.3 50.6
Ameritech and affiliates . . . . . . . . . . . . . . . . . 32.8 47.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 185.7 168.5
Other current liabilities . . . . . . . . . . . . . . . . . 296.2 322.9
-------- --------
819.5 975.1
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,128.9 1,132.4
-------- --------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes . . . . . . . . . . . . . 81.2 405.7
Unamortized investment tax credits . . . . . . . . . . . . . 69.8 93.7
Postretirement benefits other than pensions . . . . . . . . 726.0 636.8
Long-term payable to Ameritech Services, Inc. . . . . . . . 22.9 22.9
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 230.9
-------- --------
905.4 1,390.0
-------- --------
Shareowner's equity
Common stock ($14 2/7 par value; 120,810,000
authorized; 120,526,415 issued and outstanding) . . . . . 1,721.8 1,721.8
Proceeds in excess of par value . . . . . . . . . . . . . . 18.5 18.5
Reinvested earnings (deficit) . . . . . . . . . . . . . . . . (560.3) 21.4
--------- ---------
1,180.0 1,761.7
--------- ---------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY . . . . . . . . . . . . $4,033.8 $5,259.2
======== ========
The accompanying notes are an integral part of the financial statements.
18
21
MICHIGAN BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Year Ended December 31,
1994 1993 1992
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $(319.8) $343.2 $(122.2)
Adjustments to net income (loss):
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . 599.1 - -
Cumulative effect of change in accounting principles . . . . . . . - - 448.4
Restructuring charges, net of tax . . . . . . . . . . . . . . . . 112.9 - -
Depreciation and amortization . . . . . . . . . . . . . . . . . . 530.6 543.3 520.7
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . 15.1 (18.3) (15.0)
Investment tax credits, net . . . . . . . . . . . . . . . . . . . (14.9) (23.7) (18.9)
Interest during construction . . . . . . . . . . . . . . . . . . . (1.5) (1.4) (1.2)
Provision for uncollectibles . . . . . . . . . . . . . . . . . . . 44.0 42.7 36.4
Change in accounts receivable . . . . . . . . . . . . . . . . . . (83.2) (35.4) (56.2)
Change in material and supplies . . . . . . . . . . . . . . . . . (2.4) (2.2) 1.0
Change in other current assets . . . . . . . . . . . . . . . . . . (2.9) (7.1) 1.2
Change in accounts payable . . . . . . . . . . . . . . . . . . . . 60.7 14.1 (26.7)
Change in certain other current liabilities . . . . . . . . . . . (71.1) (5.2) (3.7)
Change in certain noncurrent assets and liabilities . . . . . . . (52.4) (45.9) 17.9
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.6) (0.7) (19.5)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . 812.6 803.4 762.2
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . (363.2) (449.5) (515.6)
Proceeds from (cost of) disposals of property,
plant and equipment . . . . . . . . . . . . . . . . . . . . . . . 2.1 (5.2) (11.3)
Additional equity investments, principally in ASI . . . . . . . . . - (7.8) (10.4)
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . (361.1) (462.5) (537.3)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net . . . . . . . . . . . . . . . . . . . . (189.3) 118.9 (37.5)
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . 4.5 200.0 450.0
Retirements of long-term debt . . . . . . . . . . . . . . . . . . . (7.6) (307.0) (412.2)
Costs of refinancing long-term debt . . . . . . . . . . . . . . . . - (11.2) (1.7)
Dividend payments . . . . . . . . . . . . . . . . . . . . . . . . . (261.9) (324.6) (223.5)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . (454.3) (323.9) (224.9)
-------- -------- --------
Net (decrease) increase in cash and temporary cash investments . . . . . (2.8) 17.0 -
Cash and temporary cash investments, beginning of year . . . . . . . . . 17.0 - -
-------- -------- --------
Cash and temporary cash investments, end of year . . . . . . . . . . . . $ 14.2 $ 17.0 $ -
======== ======== ========
The accompanying notes are an integral part of the financial statements.
19
22
MICHIGAN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
Michigan Bell Telephone Company (the Company) is a wholly owned subsidiary of
Ameritech Corporation (Ameritech).
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING - The financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP). In the fourth quarter of
1994, the Company discontinued following accounting, prescribed by Statement of
Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation" (see Note B).
TRANSACTIONS WITH AFFILIATES - The Company has various agreements with
affiliated companies. Below is a description of the significant arrangements
followed by a table of the amounts involved.
1. Ameritech Services, Inc. (ASI) - The Company has a 26% ownership
interest in ASI, an Ameritech-controlled affiliate, that provides
consolidated planning, development, management and support services to
all of the Ameritech landline telephone subsidiaries. The Company
also provides certain services, such as loaned employees and
facilities, to ASI.
1994 1993 1992
---- ---- ----
Purchases of materials and charges for services from ASI . . . . . . . $605.7 $526.5 $489.4
Recovery of costs for services provided to ASI . . . . . . . . . . . . 15.9 11.7 9.3
2. Ameritech (the Company's parent) - Ameritech provides various
administrative, planning, financial and other services to the Company.
These services are billed to the Company at cost.
1994 1993 1992
---- ---- ----
Charges incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . $29.2 $29.4 $29.7
3. Ameritech Publishing, Inc. (API), a wholly owned subsidiary of
Ameritech - The Company has an agreement under which payments are made
to the Company by API for license fees and billing and collection
services provided by the Company. The Company also purchases
directory services from API under the same agreement.
1994 1993 1992
---- ---- ----
Fees paid to the Company by API . . . . . . . . . . . . . . . . . . . . $109.3 $132.7 $130.5
Fees paid by the Company to API . . . . . . . . . . . . . . . . . . . . 14.5 19.8 18.9
4. Ameritech Information Systems, Inc. (AIS), a wholly owned subsidiary
of Ameritech - The Company has an agreement under which the Company
reimburses AIS for costs incurred by AIS in connection with the sale
of network services by AIS employees.
1994 1993 1992
---- ---- ----
Charges incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . $16.0 $13.9 $9.9
20
23
5. Bell Communications Research, Inc. (Bellcore) - Bellcore provides
research and technical support to the Company. ASI has a one-seventh
ownership interest in Bellcore and bills the Company for the costs.
1994 1993 1992
---- ---- ----
Charges incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . $28.7 $32.2 $40.7
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
principally at original cost. The provision for depreciation is based
principally on straight-line remaining life and straight-line equal life group
methods of depreciation applied to individual categories of plant with similar
characteristics. As a result of the discontinuation of applying FAS 71 in
1994, the Company recognized shorter, more economically realistic lives and
increased its accumulated depreciation balance by $984.8. (See Note B).
Generally, when depreciable plant is retired, the amount at which such plant
has been carried in property, plant and equipment is charged to accumulated
depreciation. The cost of maintenance and repair of plant is charged to
expense.
INVESTMENTS - The Company's investments in ASI (26% ownership and $71.1) are
reflected in the financial statements using the equity method of accounting.
All other investments are carried at cost. Derivative transactions are
generally handled by Ameritech. The Company had no derivatives in 1994.
MATERIAL AND SUPPLIES - Inventories of new and reusable material and supplies
are stated at the lower of cost or market with cost generally determined on an
average-cost basis.
INCOME TAXES - The Company is included in the consolidated federal income tax
return filed by Ameritech and its subsidiaries. Effective January 1, 1993 the
Company adopted FAS 109, "Accounting for Income Taxes." The new accounting
method is essentially a refinement of the liability method previously followed
by the Company and, accordingly, did not have a significant impact on the
Company's financial statements upon adoption. The Company's provision for
income taxes is determined effectively on a separate company basis.
Deferred tax assets and liabilities are based on differences between the
financial statement bases of assets and liabilities and the tax bases of those
same assets and liabilities. Under the liability method, deferred tax assets
and liabilities at the end of each period are determined using the statutory
tax rates in effect when these temporary differences are expected to reverse.
Deferred income tax expense is measured by the change in the net deferred
income tax asset or liability during the year.
The Company uses the deferral method of accounting for investment tax credits.
Therefore, credits earned prior to the repeal of the investment tax credit by
the Tax Reform Act of 1986, and also certain transitional credits earned after
the repeal, are being amortized as reductions in tax expense over the life of
the plant that gave rise to the credits.
TEMPORARY CASH INVESTMENTS - Temporary cash investments are stated at cost
which approximates market value. The Company considers all highly liquid,
short-term investments with an original maturity of three months or less to be
cash equivalents.
SHORT-TERM FINANCING ARRANGEMENT - During 1991, Ameritech entered into an
arrangement with its subsidiaries, including the Company, for the provision of
short-term financing and cash management services. Ameritech issues commercial
paper and notes and secures bank loans to fund the working capital requirements
of its subsidiaries and invests short-term, excess funds on their behalf.
Interest charged to the Company by Ameritech for financing was $13.0 in 1994,
$7.5 in 1993 and $8.8 in 1992. See Note F.
RECLASSIFICATIONS - The Company has made certain reclassifications to its
financial statements. The more significant ones are as follows. The Company's
provision for uncollectibles, previously shown as a reduction in other
revenues, has been reclassified to other operating expenses. Further, interest
capitalized during construction, previously a component of other income, has
been reclassified to reduce interest expense. These changes have been applied
retroactively and were made to correspond to financial reporting for
unregulated enterprises.
21
24
B. DISCONTINUATION OF REGULATORY ACCOUNTING - FAS 71
On a regular basis management has evaluated the continued applicability of FAS
71. In the fourth quarter of 1994, having achieved price regulation and
recognizing increased competition, the Company concluded that GAAP prescribed
by FAS 71 was no longer appropriate. As a result of the discontinuation of
applying FAS 71, the Company recorded a fourth-quarter extraordinary noncash
after-tax charge of $599.1. The following table is a summary of the
extraordinary charge.
Pretax After-Tax
------ ---------
Increase to the accumulated depreciation balance . . . . . . . . . . . $ 984.8 $637.6
Elimination of other net regulatory assets . . . . . . . . . . . . . . 16.6 11.0
Tax-related net regulatory liabilities . . . . . . . . . . . . . . . . - (40.4)
Accelerated amortization of tax credits . . . . . . . . . . . . . . . . - (9.1)
-------- ------
$1,001.4 $599.1
======== ======
The adjustment of $984.8 to net property, plant and equipment was necessary
since estimated useful lives and depreciation methods historically prescribed
by regulators did not keep up with the rapid pace of technological changes in
the Company and differed significantly from those used by unregulated
enterprises. Plant balances were adjusted by increasing the accumulated
depreciation balance. The increase to the accumulated depreciation balance was
determined by a discounted cash flow analysis which considered technological
changes, capital requirements and estimated impacts of future competition. To
corroborate this study, a depreciation reserve study was also performed that
identified inadequate accumulated depreciation levels by individual asset
categories. The Company believes these levels developed over the years as a
result of the systematic underdepreciation of assets resulting from the
regulatory process. When adjusting its net property, plant and equipment, the
Company gave effect to shorter, more economically realistic lives.
The discontinuance of FAS 71 also required the Company to eliminate from its
balance sheet, prepared for financial reporting purposes, the effects of any
actions of regulators that had been recognized as assets and liabilities
pursuant to FAS 71, but would not have been recognized as assets and
liabilities by enterprises in general. The elimination of other net regulatory
assets primarily related to certain deferred vacation pay, debt financing
costs, and certain deferred assets being reduced under regulatory principles
in accounting periods other than those required under GAAP, absent FAS 71.
The tax-related adjustments were required to adjust excess deferred tax levels
to the currently enacted statutory rates and to eliminate tax-related
regulatory assets and liabilities. Prior to the discontinuance of FAS 71, the
Company had recorded deferred income taxes on the cumulative amount of tax
benefits previously flowed through to ratepayers and recorded a regulatory
asset for the same amount ($112.5 at December 31, 1993). Also the Company had
recorded a regulatory liability for the difference between deferred taxes
recorded at higher historical tax rates compared to those currently enacted and
deferred taxes provided on unamortized investment tax credits ($210.4 at
December 31, 1993). These regulatory assets and liabilities were grossed up
for the tax effect anticipated when collected in future rates.
At the time the Company discontinued the application of FAS 71, the above
tax-related regulatory assets and liabilities were eliminated and deferred tax
balances adjusted to reflect application of FAS 109 consistent with other
unregulated enterprises.
The Company uses the deferral method of accounting for investment tax credits
and amortize the credits as a reduction to tax expense over the life of the
asset that gave rise to the tax credit. As asset lives were shortened, the
investment tax credits deemed already earned were credited to income ($9.1).
The effects on the Company's financial statements going forward without FAS 71
are discussed in Management's Discussion and Analysis of Results of Operations.
22
25
C. INCOME TAXES
The components of income tax expense follow:
1994 1993 1992
---- ---- ----
Federal
Current . . . . . . . . . . . . . . . . . . . . . . . . . . $162.7 $180.7 $162.5
Deferred, net . . . . . . . . . . . . . . . . . . . . . . . (45.9) (18.3) (14.8)
Investment tax credits, net . . . . . . . . . . . . . . . . (14.9) (23.7) (18.9)
------- ------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.9 138.7 128.8
------- ------- ------
State and local
Current . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 1.9 2.0
Deferred, net . . . . . . . . . . . . . . . . . . . . . . . (0.5) (0.1) (0.2)
--------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.8 1.8
-------- --------- ---------
Total income tax expense . . . . . . . . . . . . . . . . . . . . $103.4 $140.5 $130.6
====== ====== ======
Total income taxes paid were $211.9, $175.0 and $171.7 in 1994, 1993
and 1992, respectively.
The following is a reconciliation between the statutory federal income
tax rate for each of the past three years and the Company's effective tax rate:
1994 1993 1992
---- ---- ----
Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 34.0%
State income taxes, net of federal benefit . . . . . . . . . . . 0.3 0.2 0.3
Reduction in tax expense due to amortization of
investment tax credits . . . . . . . . . . . . . . . . . . . (3.9) (4.0) (3.8)
Benefit of tax rate differential under FAS 71 applied to
reversing temporary differences . . . . . . . . . . . . . . (3.3) (3.3) (3.2)
Effect of adjusting deferred income tax balances due
to tax law changes . . . . . . . . . . . . . . . . . . . . . - (1.4) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.1) 2.5 1.3
----- ----- -----
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . 27.0% 29.0% 28.6%
==== ==== ====
The Revenue Reconciliation Act of 1993, enacted in August 1993, increased the
statutory federal income tax rate to 35%. In accordance with the liability
method of accounting, the Company adjusted, on the enactment date, its deferred
income tax balances. The result was a reduction in deferred income tax expense
of $6.8, primarily from increasing the deferred tax assets associated with FAS
106 and 112 (see Note E).
23
26
As of December 31, 1994 and 1993, the components of long-term accumulated
deferred income taxes were as follows:
1994 1993
---- ----
Deferred tax assets
Postretirement and postemployment benefits . . . . . . . . . . . . . . $260.5 $232.4
FAS 71 accounting . . . . . . . . . . . . . . . . . . . . . . . . . . - 97.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4 19.0
------- -------
278.9 349.2
------- -------
Deferred tax liabilities
Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . . . 320.8 733.1
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . 30.4 21.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 0.3
------- -------
360.1 754.9
------- -------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . $ 81.2 $405.7
======= ======
Deferred income taxes in current assets and liabilities relate primarily to
temporary differences caused by work force restructuring charges (see Note E).
The Company has an immaterial valuation allowance against certain deferred tax
assets as of December 31, 1994.
D. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
1994 1993
---- ----
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.2 $ 30.9
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 637.9 626.1
Central office equipment . . . . . . . . . . . . . . . . . . . . . . . . . 2,904.6 2,967.5
Cable, wiring and conduit . . . . . . . . . . . . . . . . . . . . . . . . . 3,578.0 3,457.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365.9 370.9
-------- --------
7,515.6 7,452.8
Under construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.3 106.2
-------- --------
7,576.9 7,559.0
Less, accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . 4,348.6 3,176.2
-------- --------
$3,228.3 $4,382.8
======== ========
Depreciation expense on fixed assets was $523.6, $536.2 and $513.9 in 1994,
1993 and 1992, respectively. The large increase in the accumulated
depreciation balance in 1994 was due primarily to the discontinuation of
applying FAS 71.
24
27
E. EMPLOYEE BENEFIT PLANS
PENSION PLANS - Ameritech maintains noncontributory defined pension and death
benefit plans covering substantially all management and nonmanagement
employees. The pension benefit formula used in the determination of pension
cost is based on the average compensation earned during the five highest
consecutive years of the last ten years of employment for the management plan
and a flat dollar amount per year of service for the nonmanagement plan.
Pension credits are allocated to subsidiaries based upon the percentage of
compensation for the management plan and per employee for the nonmanagement
plan. The Company's funding policy is to contribute annually an amount up to
the maximum amount that can be deducted for federal income tax purposes.
However, due to the funded status of the plans, no contributions have been made
for the years reported below. The following data provides information on the
Company's credit for the Ameritech plans:
1994 1993 1992
---- ---- ----
Pension credits . . . . . . . . . . . . . . . . . . . . . . $(50.0) $(27.8) $(29.9)
------ ------ ------
Current year credits as a percent of salaries and wages . . (8.6)% (4.7)% (4.9)%
====== ====== ======
Pension credits were determined using the projected unit credit actuarial
method in accordance with FAS 87, "Employers' Accounting for Pensions." The
resulting pension credits are primarily attributable to favorable investment
performance and the funded status of the plans.
Certain disclosures are required to be made of the components of pension
credits and the funded status of the plans, including the actuarial present
value of accumulated plan benefits, accumulated projected benefit obligation
and the fair value of plan assets. Such disclosures are not presented for the
Company because the structure of the Ameritech plans does not permit the plans'
data to be readily disaggregated.
The assets of the Ameritech plans consist principally of debt and equity
securities, fixed income securities and real estate. As of December 31, 1994,
the fair value of plan assets available for plan benefits exceeded the
projected benefit obligation (calculated using a discount rate of 7.2% and 5.8%
as of December 31, 1994 and 1993, respectively). The assumed long-term rate of
return on plan assets used in determining pension credits (or income) was 7.25%
for 1994, 1993 and 1992. The assumed increase in future compensation levels,
also used in the determination of the projected benefit obligation, was 4.5%
in 1994 and 1993.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - Effective January 1, 1992, the
Company adopted FAS 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions." FAS 106 requires the cost of postretirement benefits
granted to employees to be accrued as expense over the period in which the
employee renders service and becomes eligible to receive benefits. The cost of
postretirement health care costs and postretirement life insurance benefits for
current and future retirees was recognized as determined under the projected
unit credit actuarial method.
In adopting FAS 106, the Company elected to immediately recognize, effective
January 1, 1992, the transition obligation for current and future retirees.
The transition obligation was $608.9 less deferred income taxes of $208.6 or
$400.3, net. To this amount is added the Company's 26% share of ASI's
transition benefit obligation of $16.0 for a total charge of $416.3.
Substantially all current and future retirees are covered under postretirement
benefit plans sponsored by Ameritech. Such benefits include medical, dental,
and group life insurance. Ameritech has been prefunding (including cash
received from the Company) certain of these benefits through Voluntary Employee
Benefit Association trust funds (VEBAs) and Retirement Funding Accounts (RFAs).
The associated plan assets (primarily corporate securities and bonds) were
considered in determining the transition obligation under FAS 106. Ameritech
intends to continue to fund its obligations appropriately and is exploring
other available funding and cost containment alternatives. Ameritech allocates
its retiree health care cost on a per participant basis, whereas group life
insurance is allocated based on compensation levels.
FAS 106 requires certain disclosures as to the components of postretirement
benefit costs and the funded status of the plans. Such disclosures are not
presented for the Company as the structure of the Ameritech
25
28
plans does not permit the data to be readily disaggregated. However, the
Company has been advised by Ameritech as to the following assumptions used in
determining FAS 106 costs.
As of December 31, 1994 the accumulated postretirement benefit obligation
exceeded the fair value of plan assets available for plan benefits. The
assumed discount rate used to measure the accumulated postretirement benefit
obligation was 8.5% as of December 31, 1994 and 7.0% as of December 31, 1993.
The assumed rate of increase in future compensation levels was 4.5% as of
December 31, 1994 and December 31, 1993. The expected long-term rate of return
on plan assets was 7.25% in 1994 and 1993 on the VEBAs and 8.0% in 1994 and
1993 on RFAs. The assumed health care cost trend rate in 1994 was 9.2% and
9.6% in 1993, and is assumed to decrease gradually to 4.0% in 2007 and remain
at that level. The assumed health care cost trend rate is 8.8% for 1995. The
health care cost trend rate has a significant effect on the amounts reported
for costs each year as well as in the accumulated postretirement benefit
obligation. Specifically, increasing the assumed health care cost trend rate
by one percentage point in each year would increase the 1994 annual expense by
approximately 16%.
Postretirement benefit cost under FAS 106 was $67.5 in 1994, $55.9 in 1993 and
$57.8 in 1992.
As of December 31, 1994, the Company had 12,871 retirees eligible to receive
health care and group life insurance benefits.
POSTEMPLOYMENT BENEFITS - Effective January 1, 1992, the Company adopted FAS
112, "Employers' Accounting for Postemployment Benefits." FAS 112 requires
employers to accrue the future cost of certain benefits such as workers'
compensation, disability benefits and health care continuation coverage. A
one-time charge related to adoption of FAS 112 was recognized as a change in
accounting principle, effective as of January 1, 1992. The charge, net of a
deferred tax benefit of $16.5, was $32.0. Current expense levels are dependent
upon actual claim experience but are not materially different than prior
charges to income.
NONMANAGEMENT WORK FORCE RESTRUCTURING - During 1994, Ameritech announced its
plan to restructure its existing nonmanagement work force. Approximately 2,787
employees will leave the Company under this program. Under terms of agreements
between Ameritech, the Communications Workers of America (CWA) and the
International Brotherhood of Electrical Workers (IBEW), Ameritech implemented
an enhancement to the Ameritech Pension Plan by adding three years to both the
age and the net credited service of eligible nonmanagement employees who leave
the business during a designated period that ends in mid-1995. In addition,
certain of Ameritech's business units are offering financial incentives under
terms of the current contracts with the CWA and the IBEW to selected
nonmanagement employees who leave the business before the end of 1995.
The Company recorded charges in 1994 of $174.4, or $112.9 after-tax, to reflect
the cost of restructuring. These charges reduced the company's prepaid pension
asset by $41.0 for pension enhancements and curtailment losses, net of
settlement gains. The charges also included curtailment losses of $87.7
related to FAS 106 and additional severance accruals of $45.7. The charges
reflect settlement gains of $83.2 associated with lump sum pension payments
through year-end. At December 31, 1994, the Company's remaining severance
accrual was $34.0.
As of December 31, 1994, approximately 2,078 employees had left the Company
under this program, with 709 to leave in 1995.
MANAGEMENT WORK FORCE RESTRUCTURING - During 1994, about 193 management
employees left the Company due to work force restructuring. The net cost of
this restructuring, including termination benefits, settlement and curtailment
gains from the pension plan, was a net credit to expense of $9.9. The plan was
in effect until December 31, 1994.
During 1993, 217 management employees left the Company. These programs,
including termination benefits, settlement and curtailment gains from the
pension plan, resulted in a credit to expense of $5.4.
During 1992, 210 management employees left the Company. The net cost of this
program, along with other transfers from the pension plan, including
termination benefits, and settlement and curtailment gains from the pension
plan was $0.4.
26
29
Funding of the 1992 termination benefits was primarily from the management
pension plan. The involuntary plans are funded from Company operations and
required cash payments of $7.1 and $12.4 in 1994 and 1993, respectively.
F. DEBT MATURING WITHIN ONE YEAR
Debt maturing within one year is included as debt in the computation of debt
ratios and consists of the following as of December 31:
1994 1993
---- ----
Notes payable - Ameritech . . . . . . . . . . . . . . . . . . . . . . . . . $193.6 $382.9
Long-term debt maturing within one year . . . . . . . . . . . . . . . . . . 2.9 3.2
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $196.5 $386.1
====== ======
Weighted average interest rate of notes payable, year-end . . . . . . . . . 5.7% 3.1%
====== ======
During 1991 Ameritech consolidated the short-term financing of its subsidiaries
at Ameritech Corporate. See Note A - short-term financing arrangements.
G. LONG-TERM DEBT
Long-term debt consists principally of debentures and notes issued by the
Company.
The following table sets forth interest rates and other information on
long-term debt outstanding at December 31.
1994 1993
---- ----
Thirty-six year 4.625% debentures due August 1, 1996. . . . . . . . . . . . $ 35.0 $ 35.0
Thirty-seven year 6.375% debentures due February 1, 2005 . . . . . . . . . 125.0 125.0
Forty year 7.000% debentures due November 1, 2012 . . . . . . . . . . . . . 75.0 75.0
Thirty year 7.500% debentures due February 15, 2023 . . . . . . . . . . . . 200.0 200.0
Forty year 7.750% debentures due June 1, 2011 . . . . . . . . . . . . . . . 150.0 150.0
Thirty year 7.850% debentures due January 15, 2022 . . . . . . . . . . . . 200.0 200.0
Ten year 6.375% notes due September 15, 2002 . . . . . . . . . . . . . . . 100.0 100.0
Seven year 5.875% notes due September 15, 1999 . . . . . . . . . . . . . . 150.0 150.0
Ten year 9.250% notes due November 15, 1998 . . . . . . . . . . . . . . . . 100.0 100.0
-------- --------
$1,135.0 $1,135.0
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 7.8
Unamortized discount, net . . . . . . . . . . . . . . . . . . . . . . . . (11.1) (10.4)
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,128.9 $1,132.4
======== ========
On February 15, 1993, the Company issued $200.0 of 7.5% debentures due February
15, 2023 under a $350.0 shelf registration filed in August 1992. The proceeds
from this issuance were used to repay long-term borrowings and for general
corporate purposes.
On October 29, 1993, the Company called $150.0 of 8.125% debentures due June 1,
2015. The redemption on December 2, 1993, was funded by short-term borrowings
from Ameritech.
On November 16, 1993, the Company filed a registration statement with the SEC
for issuance of up to $450.0 in unsecured debt securities. No issuances have
been made under this shelf registration.
27
30
H. LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its operations
under both operating and capital leases. Rental expense under operating leases
was $35.3, $40.5, and $43.6 for 1994, 1993 and 1992, respectively. At December
31, 1994, the aggregate minimum rental commitments under noncancelable leases
were approximately as follows:
Years Operating Capital
--------- -------
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.8 $ 4.2
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.3 2.5
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 1.6
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 0.9
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 0.9
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 2.9
----- -----
Total minimum rental commitments . . . . . . . . . . . . . . . . . . . . . $65.9 13.0
=====
Less: amount representing executory costs . . . . . . . . . . . . . . . . 2.5
amount representing interest costs . . . . . . . . . . . . . . . . 2.6
-----
Present value of minimum lease payments . . . . . . . . . . . . . . . . . . $ 7.9
=====
I. FINANCIAL INSTRUMENTS
The following table presents the estimated fair value of the Company's
financial instruments as of December 31, 1994 and 1993:
1994
----
Carrying Fair
Value Value
----- -----
Cash and temporary cash investments . . . . . . . . . . . . . . . . . . . . $ 14.2 $ 14.2
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,343.4 1,233.8
Long-term payable to ASI (for postretirement benefits) . . . . . . . . . . 22.9 22.9
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 3.8
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.3 32.3
1993
----
Carrying Fair
Value Value
----- -----
Cash and temporary cash investments . . . . . . . . . . . . . . . . . . . . $ 17.0 $ 17.0
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,532.8 1,583.3
Long-term payable to ASI (for postretirement benefits) . . . . . . . . . . 22.9 22.9
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 3.5
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.6 31.6
The following methods and assumptions were used to estimate the fair value of
financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS - Carrying value approximates fair value
because of short-term maturity of these instruments.
DEBT - The carrying amount (including accrued interest) of debt maturing within
one year approximates fair value because of the short-term maturities involved.
The fair value of long-term debt was estimated based on the year-end quoted
market price for the same or similar issues.
LONG-TERM PAYABLE TO ASI (FOR POSTRETIREMENT BENEFITS) - This item represents
the long-term payable to ASI for the Company's proportionate share of ASI's
transition benefit obligation related to adoption of FAS 106. Carrying value
approximates fair value for this item.
28
31
OTHER ASSETS AND LIABILITIES - These financial instruments consist primarily of
other investments and customer deposits. The fair values of these items are
based on expected cash flows or, if available, quoted market prices.
J. ADDITIONAL FINANCIAL INFORMATION
December 31,
1994 1993
---- ----
Balance Sheets
Other current liabilities:
Accrued payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23.9 $ 23.2
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.1 140.1
Compensated Absences . . . . . . . . . . . . . . . . . . . . . . . . . 44.9 50.3
Income taxes deferred one year. . . . . . . . . . . . . . . . . . . . . (30.6) (14.1)
Advance billings and customer deposits . . . . . . . . . . . . . . . . 59.3 58.2
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.9 26.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.7 38.7
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $296.2 $322.9
====== ======
1994 1993 1992
---- ---- ----
Statements of income
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . $ (1.5) $ (1.4) $ (1.2)
Provision for uncollectibles . . . . . . . . . . . . . . . . . . 44.0 42.7 36.4
Advertising and promotion costs . . . . . . . . . . . . . . . . . 37.9 30.8 22.3
Interest paid, net of amounts capitalized was $95.8, $102.4 and $106.4 in 1994,
1993 and 1992, respectively.
Revenues from AT&T Corp., principally for interstate network access and billing
and collection services, comprised approximately 11%, 11% and 12% of total
revenues in 1994, 1993 and 1992, respectively. No other customer accounted for
more than 10% of revenues.
K. OTHER (INCOME) EXPENSE, NET
The components of other (income) expense, net are as follows:
1994 1993 1992
---- ---- ----
Equity earnings of affiliates, primarily ASI * . . . . . . . . . $(13.1) $(9.9) $3.8
Early extinguishment of debt costs . . . . . . . . . . . . . . . - 7.0 9.9
Interest on company owned life insurance
and related programs . . . . . . . . . . . . . . . . . . . . (0.8) (1.0) (0.8)
Interest income on IRS audit settlement . . . . . . . . . . . . . - - (10.8)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 9.9 8.5
------- ----- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4.8) $ 6.0 $ 10.6
======= ===== ======
* Includes, in 1992, the Company's portion of ASI's equity (earnings) loss
related to the change in accounting principles.
29
32
L. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Net
Operating Income
Revenues Income (Loss)
-------- ------- ------
Calendar
1994
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . $ 707.7 $ 16.2 $ (4.5)
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . 717.0 173.6 105.2
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . 719.4 89.2 51.4
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . 710.6 196.0 (471.9)
-------- ------ -------
Total . . . . . . . . . . . . . . . . . . . . . . . . $2,854.7 $475.0 $(319.8)
======== ====== =======
1993
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . $ 678.2 $134.5 $ 74.3
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . 695.2 147.7 85.6
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . 706.6 142.1 90.6
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . 709.5 170.2 92.7
-------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . $2,789.5 $594.5 $ 343.2
======== ====== =======
Total nonmanagement work force restructuring charges in 1994 were $174.4 or
$112.9 after-tax as follows: $137.8 or $89.2 after-tax in the first quarter,
$56.9 or $36.8 after-tax in the third quarter, and a net credit of $20.3 or
$13.1 after-tax in the fourth quarter. The credit in the fourth quarter
results from pension settlement gains. The fourth quarter also includes a
$599.1 after-tax extraordinary charge related to the discontinuance of applying
FAS 71, as discussed in Note B above.
Several other significant income and expense items were reported in the fourth
quarter of both years, the net result of which in both years was not material
to the respective quarter or years except as follows. In 1993, the Company
recognized a charge of $7.0 for the early retirement of debt.
All adjustments necessary for a fair statement of results for each period have
been included.
M. CONTINGENCIES
The Company has disputed the manner in which property taxes are assessed in
Michigan. In 1994, the Michigan Supreme Court let stand a lower court decision
that awarded the Company a refund of taxes paid for the tax years 1984-1986.
However, there are certain outstanding issues before the Michigan Tax Tribunal
for taxes paid by the Company in 1987 and beyond, which could result in a
significant tax liability or refund to the Company for such years. The Company
has not recorded the court award pending clearer resolution of the issues in
1987 and beyond. Management of the Company believes that the ultimate
resolution of how property taxes are paid by the Company for the period 1987
through 1994 will not have a material adverse effect on the Company's financial
statements.
N. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of the Company for the years ended
December 31, 1994, 1993, 1992, 1991, and 1990 was 4.72, 5.27, 4.88, 4.12 and
4.70 respectively.
For the purpose of calculating this ratio: (i) earnings have been calculated
by adding to income before interest expense, extraordinary item and accounting
changes, the amount of related taxes on income, the Single Business Tax, and
the portion of rentals representative of the interest factor, (ii) the Company
considers one-third of rental expense to be the amount representing return on
capital, and (iii) fixed charges comprise total interest expense and such
portion of rentals.
30
33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No disagreements with accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure occurred during the period covered by this annual report.
31
34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of the report:
(1) Financial Statements:
Page
----
Selected Financial and Operating Data . . . . . . . . . . . . . . . . . . . . . 10
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . 16
Statements:
Statements of Income and Reinvested Earnings (Deficit) . . . . . . . . . . . 17
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 20
(2) Financial Statement Schedule:
II -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . 34
Financial statement schedules other than the one listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not required or
applicable.
(3) Exhibits
Exhibits identified in parenthesis below, on file with the SEC, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number
- -------
3 -- Articles of Incorporation of the Company as amended March 26,
1990, and By-laws of the Company as amended May 7, 1992 (Exhibit
3 to Form 10-K for 1993, File No. 1-3499).
4 -- No instrument which defines the rights of holders of long and
intermediate term debt of the Company is filed herewith pursuant
to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, the Company hereby agrees to furnish a copy of any
such instrument to the SEC upon request.
10 -- Reorganization and Divestiture Agreement between American
Telephone and Telegraph Company, Ameritech Corporation and
Affiliates, dated as of November 1, 1983 (Exhibit 10a to Form 10-K
for 1983 for Ameritech Corporation, File No. 1-8612).
12 -- Computation of ratio of earnings to fixed charges for the five
years ended December 31, 1994.
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for the year ended December 31, 1994.
(b) Reports on Form 8-K:
On December 1, 1994, the Company filed a Current Report on Form 8-K
dated November 28, 1994, to report on Item 5, Other Events, the Company's
discontinuation of the use of Statement of Financial Accounting Standards No.
71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation," and
on the resulting extraordinary, noncash charge recorded in the fourth quarter
of 1994.
32
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MICHIGAN BELL TELEPHONE COMPANY
By /s/ Richard A. Kuzmar
--------------------------------
(Richard A. Kuzmar,
Vice President and Comptroller)
March 21, 1995
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
/s/ James E. Wilkes
- ----------------------------------------------------------
(James E. Wilkes, President)
Principal Financial and Accounting Officer:
/s/ Richard A. Kuzmar
- ----------------------------------------------------------
(Richard A. Kuzmar, Vice President and Comptroller)
Ameritech Corporation:
/s/ Richard H. Brown
- ----------------------------------------------------------
(Richard H. Brown, Vice Chairman)
The sole shareowner of the registrant, which
is a statutory close corporation managed by
the shareowner rather than by a board of
directors.
March 21, 1995
33
36
SCHEDULE II
MICHIGAN BELL TELEPHONE COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(Dollars in Millions)
COL. A COL. B COL. C COL. D COL. E
---------- ----------- --------------------------------- ---------- ----------
Additions
---------------------------------
Balance at Charged Charged Balance
beginning to to other at end of
Classification of period expense(a) accounts(b) Deductions(c) period
-------------- ----------- ---------- ----------- ------------- ----------
Year 1994 . . . . . . . . . . . $44.9 $41.3 $56.6 $104.6 $38.2
Year 1993 . . . . . . . . . . . 40.6 42.7 57.5 95.9 44.9
Year 1992 . . . . . . . . . . . 38.2 36.4 50.4 84.4 40.6
(a) Excludes direct charges and credits to expense on the statements of
income and reinvested earnings (deficit) related to interexchange
carrier receivables.
(b) Includes principally amounts previously written off which were
credited directly to this account when recovered and amounts related
to interexchange carrier receivables which are being billed by the
company.
(c) Amounts written off as uncollectible.
34