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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
(Mark one)
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[x] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
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or
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[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-3499
Michigan Bell Telephone Company
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A Michigan Corporation
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444 Michigan Avenue
Detroit, Michigan 48226
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I.R.S. Employer Identification
Number 38-0823930Telephone
number (800) 257-0902
MICHIGAN BELL IS A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION AND
MEETS THE CONDITIONS IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q.
WE ARE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT UNDER GENERAL
INSTRUCTION H(2).
We have filed all reports required to be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12 months, and
have been subject to those filing requirements for the past 90 days.
Yes X No
---- ----
At October 31, 1997, 120,526,415 common shares were outstanding.
TABLE OF CONTENTS
PART I
ITEM Page
- ---- ----
1. Financial Statements
Condensed Statements of Income and Accumulated Deficit for
the three and nine months ended
September 30, 1997 and 1996 1
Condensed Balance Sheets as of
September 30, 1997 and December 31, 1996 2-3
Condensed Statements of Cash Flows for
the nine months ended September 30, 1997 and 1996 4
Notes to Condensed Financial Statements 5
2. Management's Discussion and Analysis
of Results of Operations 6-13
PART II
6. Exhibits and Reports on Form 8-K 14
Glossary 16-17
i
Part I - Financial Information
------------------------------
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues
Local service................. $ 380.3 $ 354.5 $ 1,130.5 $ 1,042.2
Interstate network access..... 156.8 149.2 477.3 438.1
Intrastate network access..... 52.1 48.2 154.8 139.1
Long distance service......... 177.3 191.0 550.6 573.5
Other......................... 62.3 72.7 215.0 212.1
--------- --------- --------- ---------
828.8 815.6 2,528.2 2,405.0
--------- --------- --------- ---------
Operating expenses
Employee-related expenses..... 176.8 162.7 504.0 491.3
Depreciation and amortization. 129.8 131.1 390.2 389.1
Other operating expenses...... 265.8 236.6 742.6 688.6
Taxes other than income taxes. 37.8 35.6 115.5 105.9
--------- --------- --------- ---------
610.2 566.0 1,752.3 1,674.9
--------- --------- --------- ---------
Operating income................ 218.6 249.6 775.9 730.1
Interest expense................ 20.6 21.1 62.2 63.3
Other income, net............... 3.1 2.3 6.0 7.5
--------- --------- --------- ---------
Income before income taxes...... 201.1 230.8 719.7 674.3
Income taxes.................... 74.0 81.0 253.0 234.9
--------- --------- --------- ---------
Net income...................... 127.1 149.8 466.7 439.4
Accumulated deficit,
beginning of period........... (320.0) (372.4) (347.2) (418.2)
Less, dividends declared.... 124.5 132.2 436.9 376.0
--------- --------- --------- ---------
Accumulated deficit,
end of period................. $ (317.4) $ (354.8) $ (317.4) $ (354.8)
========= ========= ========= =========
See Notes to Condensed Financial Statements.
Page 1
CONDENSED BALANCE SHEETS
(Dollars in Millions)
Sept. 30, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments......... $ 0.9 $ 0.2
Receivables, net
Customers................................. 641.5 708.5
Ameritech and affiliates.................. 1.2 9.8
Other..................................... 25.0 19.1
Material and supplies....................... 8.4 6.5
Prepaid and other........................... 15.1 11.5
--------- ---------
692.1 755.6
--------- ---------
Property, plant and equipment................ 8,281.1 8,072.6
Less, accumulated depreciation............... 5,344.2 5,031.6
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2,936.9 3,041.0
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Investments, primarily in affiliates......... 89.8 69.7
Other assets and deferred charges............ 292.0 271.5
--------- ---------
Total assets................................. $ 4,010.8 $ 4,137.8
========= =========
See Notes to Condensed Financial Statements.
Page 2
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
Sept. 30, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech................................ $ 87.9 $ 138.3
Other.................................... 1.5 2.1
Accounts payable
Ameritech Services, Inc. (ASI)............ 47.3 114.8
Ameritech and affiliates.................. 31.7 34.8
Other..................................... 146.2 140.9
Other current liabilities.................. 232.6 276.6
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547.2 707.5
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Long-term debt.............................. 1,093.8 1,094.2
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Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 132.4 134.8
Unamortized investment tax credits......... 41.0 47.5
Postretirement benefits
other than pensions...................... 673.6 675.1
Long-term payable to ASI................... 18.6 20.1
Other ..................................... 66.4 65.5
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932.0 943.0
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Shareowner's equity
Common shares - ($14 2/7 par value;
120,810,000 shares authorized;
120,526,415 issued and outstanding)...... 1,721.8 1,721.8
Proceeds in excess of par value............ 33.4 18.5
Accumulated deficit........................ (317.4) (347.2)
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1,437.8 1,393.1
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Total liabilities and shareowner's equity... $ 4,010.8 $ 4,137.8
========= =========
See Notes to Condensed Financial Statements.
Page 3
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine Months Ended
September 30
-------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 466.7 $ 439.4
Adjustments to net income
Depreciation and amortization............... 390.2 389.1
Deferred income taxes, net.................. (0.4) (5.1)
Investment tax credits, net................. (6.5) (7.3)
Capitalized interest........................ (1.0) (1.5)
Change in accounts receivable, net.......... 69.7 (62.0)
Change in material and supplies............. (7.4) (2.9)
Change in certain other current assets...... (3.9) 6.9
Change in accounts payable.................. (65.3) (77.5)
Change in certain other current
liabilities................................ (46.1) (17.7)
Change in certain other noncurrent
assets and liabilities..................... (9.2) (25.3)
Other operating activities, net............. 4.8 1.3
-------- --------
Net cash from operating activities............ 791.6 637.4
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (282.2) (313.3)
Additional investments........................ (23.2) --
Proceeds from (cost of) disposals of
property, plant and equipment................ 2.1 (1.9)
Other investing activities, net............... 0.8 0.2
-------- --------
Net cash from investing activities............ (302.5) (315.0)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... (50.4) 204.5
Retirements of long-term debt................. (1.2) (36.9)
Dividend payments............................. (436.9) (506.9)
Other financing activities, net............... 0.1 --
-------- --------
Net cash from financing activities............ (488.4) (339.3)
-------- --------
Net increase (decrease) in cash and
temporary cash investments................... 0.7 (16.9)
Cash and temporary cash investments,
beginning of period.......................... 0.2 17.1
-------- --------
Cash and temporary cash investments,
end of period................................ $ 0.9 $ 0.2
======== ========
See Notes to Condensed Financial Statements.
Page 4
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
SEPTEMBER 30, 1997
NOTE 1: Preparation of Interim Financial Statements
We have prepared the unaudited condensed financial statements in this
report by following Securities and Exchange Commission rules that
permit reduced disclosure for quarterly period reports. These
financial statements include estimates and assumptions that affect
the reported amounts of assets and liabilities and the amounts of
revenues and expenses. Actual amounts could differ from those
estimates. We believe these statements include all adjustments
necessary for a fair statement of results for each period shown. We
believe our disclosures are adequate to make the presented
information clear. You should read these financial statements in
conjunction with the financial statements and notes included in our
1996 Annual Report on Form 10-K and the quarterly reports on Form 10-
Q previously filed in 1997.
When reading these financial statements, you should be familiar with
the terminology unique to our business. We have defined a number of
terms in the glossary on pages 16 and 17.
NOTE 2: Investment in Affiliate
In June 1997, our parent company, Ameritech, centralized the
administration of benefits for employees who had retired from the
Company as of December 31, 1996. In connection therewith, we hold
approximately $23.2 million in preferred stock issued by the
Ameritech subsidiary responsible for administration of these
benefits. This subsidiary began paying benefits on our behalf in
July 1997. We account for these benefit payments made on our behalf
as a capital contribution in the shareowner's equity section of the
condensed balance sheets, with a corresponding reduction in the
postretirement benefit obligation. This contribution for the period
ended September 30, 1997 was $14.7 million.
Page 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following is a discussion and analysis of the changes in
revenues, operating expenses and other income and expenses for the
first nine months of 1997 as compared with the first nine months of
1996.
RESULTS OF OPERATIONS
- ---------------------
Revenues
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Our revenues in the first nine months of 1997 were $2,528.2 million
and were $2,405.0 million for the same period in 1996, an increase of
$123.2 million. Growth in access lines and sales of call management
services, as well as increases in switched minutes of use resulting
from higher network usage volumes were the primary reasons for the
increase. Net rate reductions and decreased long distance revenues
partially offset these increases.
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Local service
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September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $1,130.5 $1,042.2 $ 88.3 8.5
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and
connection charges and public phone revenues. Local service revenues
increased for the nine months ended September 30, 1997 due largely to
increased sales of call management services. These increases
resulted from growth in the number of features in service, as well as
increases in usage of services on a pay-per-use basis. Higher
network usage volumes, resulting primarily from access line growth of
3.1 percent, also contributed to the increases. Second line
additions by residential and small business customers contributed to
access line growth, due to continuing demand for Internet access and
data transport capabilities. Rate increases also contributed to the
revenue increase.
There were 5,254,000 access lines in service as of September 30,
1997, compared with 5,097,000 as of September 30, 1996.
- ---------------------------------------------------------------------
Network access
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September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
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Nine Months Ended $ 477.3 $ 438.1 $ 39.2 8.9
Intrastate
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Nine Months Ended $ 154.8 $ 139.1 $ 15.7 11.3
Network access revenues are fees charged to interexchange carriers
that use our local landline communications network to connect
customers to their long distance networks. In addition, end users
pay flat rate access fees to connect to the long distance network.
These revenues result from both interstate and intrastate services.
Page 6
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Network access (cont'd.)
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Interstate network access revenues increased for the nine months
ended September 30, 1997 primarily due to an increase in minutes of
use, resulting from overall growth in the volume of calls handled for
interexchange carriers. Greater demand for dedicated services by
Internet service providers and other high-capacity users also
contributed to the increase. Interstate minutes of use for the nine
months ended September 30, 1997 increased by 4.9 percent over the
same period last year.
Intrastate network access revenues increased for the nine months
ended September 30, 1997 due primarily to volume increases, partially
offset by rate decreases. Intrastate minutes of use for the nine
months ended September 30, 1997 increased by 14.5 percent over the
same period last year.
- ---------------------------------------------------------------------
Long distance service
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September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 550.6 $ 573.5 $ (22.9) (4.0)
Long distance service revenues result from customer calls to
locations outside of their local calling areas, but within the same
Local Access and Transport Area (LATA). Long distance service
revenues decreased for the nine months ended September 30, 1997 due
primarily to volume decreases, resulting largely from increased
competition from alternative intraLATA toll providers. We have
implemented Dial 1+ capability on over 70 percent of our access
lines. Rate increases partially offset these volume decreases.
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Other
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September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 215.0 $ 212.1 $ 2.9 1.4
Other revenues include revenues derived from directory advertising,
billing and collection services, inside wire installation and
maintenance services and other miscellaneous services. Other
revenues increased for the nine months ended September 30, 1997 due
primarily to an increase in inside wire installation and maintenance
revenues. Increased sales of equipment and other nonregulated
services, such as voice messaging, also contributed to the increase.
We have entered into a new agreement with Ameritech Publishing, Inc.
(API), a wholly owned Ameritech subsidiary, for the publishing and
distribution of directories. This agreement, which was effective
July 1, 1997, will reduce our revenues from directory services by
approximately $77.2 million on an annual basis, or $38.6 million in
1997. Directory revenues decreased by approximately $19.3 million in
the third quarter of 1997 as a result of this agreement. For a
complete discussion of the new directory agreement, see the section
entitled "Other Matters - Directory Publishing Agreement."
Page 7
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Operating expenses
- ------------------
Total operating expenses for the nine months ended September 30, 1997
increased $77.4 million, or 4.6 percent to $1,752.3 million.
Increases in other operating expenses and employee-related expenses
were the primary reasons for the increase, as discussed below.
- ---------------------------------------------------------------------
Employee-related expenses
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September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 504.0 $ 491.3 $ 12.7 2.6
Employee-related expenses increased for the nine months ended
September 30, 1997 due primarily to wage rate increases and increased
benefit expenses, partially offset by lower force levels and
decreased bonus expenses.
We employed 12,144 employees as of September 30, 1997, compared with
12,211 as of September 30, 1996.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 390.2 $ 389.1 $ 1.1 0.3
Depreciation and amortization expense increased for the nine months
ended September 30, 1997 due primarily to higher property, plant and
equipment balances. Higher depreciation rates on certain asset
categories also contributed to the increase as we used shorter
depreciable lives for newer technologies.
- ---------------------------------------------------------------------
Other operating expenses
- ------------------------
September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 742.6 $ 688.6 $ 54.0 7.8
Other operating expenses increased for the nine months ended
September 30, 1997 due to increases in uncollectibles and other
expenses related to increased sales efforts, as well as increases in
contract and affiliated services costs related to systems programming
and data center management. Access charges paid to other
communications carriers for calls completed on their networks also
increased. A decrease in cost of sales for customer equipment
partially offset these increases.
Page 8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Taxes other than income taxes
- -----------------------------
September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 115.5 $ 105.9 $ 9.6 9.1
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other taxes not directly related to earnings.
Increases in property taxes, resulting from higher assessed valuation
and property tax rates, as well as an increase in use taxes resulting
from higher revenues, contributed to the increase.
- ---------------------------------------------------------------------
Other income and expenses
- -------------------------
Interest expense
- ----------------
September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 62.2 $ 63.3 $ (1.1) (1.7)
Interest expense decreased for the nine months ended September 30,
1997 due primarily to a decrease in interest on short-term debt,
reflecting lower average balances in the Ameritech short-term funding
pool.
- ---------------------------------------------------------------------
Other income, net
- -----------------
Change
September 30 Income Percent
------------
(dollars in millions) 1997 1996 (Expense) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 6.0 $ 7.5 $ (1.5) (20.0)
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. Other income decreased for the
nine months ended September 30, 1997 due primarily to decreased
equity earnings from Ameritech Services, Inc. (ASI). Higher
nonoperating expenses also contributed to the decrease, partially
offset by increased interest income.
- ---------------------------------------------------------------------
Income taxes
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September 30 Increase Percent
------------
(dollars in millions) 1997 1996 (Decrease) Change
------------------- ---- ---- -------- ------
Nine Months Ended $ 253.0 $ 234.9 $ 18.1 7.7
Income taxes increased for the nine months ended September 30, 1997
due primarily to the increase in pretax earnings discussed above.
- ---------------------------------------------------------------------
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the nine months ended
September 30, was 11.33 in 1997 and 10.41 in 1996.
Page 9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
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Recent FCC Orders
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On May 7, 1997, the FCC issued three closely-related orders
addressing revisions to the price cap plan for local exchange
carriers (LECs), interstate access charge reform and funding for
universal service. In its access charge reform order, the FCC
adopted changes to its tariff structure requiring LECs to use rates
that reflect the type of costs incurred. In general, the order ruled
that:
- -only costs incurred on a minute-of-use basis should be included in
per-minute access charges;
- -costs not incurred on a minute-of-use basis should be recovered
through flat-rate charges; and
- -LECs may not assess interstate access charges on Internet service
providers.
The new price cap rules will reduce access charges by increasing the
price cap productivity offset factor to 6.5 percent from the current
5.3 percent and by applying this factor uniformly to all access
providers. The new rates were effective July 1, 1997 and LECs were
required to compute the new rates as if the 6.5 percent productivity
factor had been in effect since July 1, 1996.
The new rules also create a multi-billion-dollar interstate
"universal service" fund for linking schools and libraries to the
Internet and subsidizing low-income consumers and rural health care
providers. Telecommunications service providers will pay into the
universal service fund starting January 1, 1998, but regulators have
not yet determined the size of the fund. The FCC intends to develop
suitable forward-looking cost studies for determining the level of
universal service support in a separate proceeding later in 1997.
State commissions may elect to use the FCC's cost methodology or
their own forward-looking mechanism. The FCC expects to select a
mechanism for determining support for nonrural carriers by the end of
this year. Subsidies to low-income and rural customers will be
available by January 1, 1998, and funds for linking schools and
libraries to the Internet will be available as needed.
We do not expect these reforms to have a material impact on our
revenue streams; however, the nature and timing of these reforms may
evolve as the FCC considers input from state commissions, potential
legal challenges and the ongoing implementation of other provisions
of the Telecommunications Act of 1996.
Competition and the Telecommunications Act of 1996
- --------------------------------------------------
As a result of our plan to capture the full potential of the
communications industry and the supporting provisions of the
Telecommunications Act of 1996 (the 1996 Act), we have taken several
key steps toward fostering a fully competitive market. We have made
our network available for use by our competitors at unbundled cost-
based prices and at bundled prices representing discounts from
established retail levels. Additionally, we have entered into
numerous interconnection agreements with other local communications
carriers, indicating a growing wholesale business.
Page 10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters (cont'd.)
- ----------------------
Competition and the Telecommunications Act of 1996 (Cont'd.)
- ------------------------------------------------------------
In August 1997, the FCC denied Ameritech's application to provide
long distance service in Michigan, stating in its order that
Ameritech failed to meet three of the requirements included in the 14-
point competitive checklist contained in the 1996 Act. The order set
forth various actions that Ameritech must take in order to
demonstrate compliance with the checklist, and Ameritech is working
with the FCC and the Michigan Public Service Commission to determine
the technical feasibility of these requirements.
In July 1997, the Federal Circuit Court of Appeals in St. Louis
struck down several provisions of an August 1996 FCC order designed
to implement the interconnection provisions of the 1996 Act. The
Court ruled that:
- -the FCC's pricing guidelines intrude upon the rights of state
commissions to implement key elements of the 1996 Act;
- -the FCC lacks jurisdiction to review state commission decisions
regarding interconnection agreements between incumbent LECs and
their competitors;
- -the FCC's rule that would allow requesting carriers to pick and
choose among individual provisions of other interconnection
agreements does not promote negotiated agreements and is
unreasonable;
- -LECs must provide unbundled network elements in a manner that
allows competing carriers to combine them, but LECs need not
actually combine the elements; and,
- -the 1996 Act does not require incumbent LECs to provide competitors
with superior quality connections.
The Court upheld the FCC's interpretation of "network element" to
include operations support systems (OSS) and certain other services.
It did not rule on the LECs' claims regarding infringement of
intellectual property rights and Fifth Amendment confiscation.
The FCC has appealed the Circuit Court's ruling to the U.S. Supreme
Court. We do not believe that this appeal will by itself delay
Ameritech's entry into the long distance market. However, FCC rules
require that interLATA long distance service be offered by a separate
subsidiary of Ameritech. Accordingly, Ameritech's entry into this
market will not generate long distance revenues for Michigan Bell.
As a result, the potential revenue decline brought by local service
competition will not be offset at the Company by gains in long
distance revenue.
In October 1997, the Circuit Court overturned an FCC ruling that
required Michigan Bell and other incumbent local exchange carriers to
resell bundled network services at unbundled discounted rates. As a
result of the Court's decision, if new entrants to the local exchange
market wish to purchase network elements at unbundled discounted
prices, they must recombine the elements themselves.
Due in part to these Circuit Court rulings, uncertainty over the
implementation of the 1996 Act continues. We are unable to predict
the impact that these rulings and related subsequent litigation may
have on our existing interconnection agreements. Although the
potential for an adverse effect on our revenue streams exists, we
will continue to pursue growth opportunities in our local exchange
business.
Page 11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters (cont'd.)
- ----------------------
Dial 1+
- -------
On March 24, 1997, AT&T and MCI filed a joint motion with the
Michigan Court of Appeals seeking a determination that on July 1,
1997, we must implement intraLATA dialing parity in the rest of
Michigan. We already provide Dial 1+ capability to over 70 percent
of our access lines. On April 1, 1997, we filed a responsive brief,
arguing that the Court of Appeals' December 4, 1996 order staying the
Michigan Public Service Commission's dialing parity orders precluded
further implementation of dialing parity until that Court decided the
merits of our appeal. On April 10, 1997, the Court of Appeals denied
AT&T's and MCI's joint motion and left the December 4, 1996 order in
effect.
On March 24, 1997, AT&T and MCI filed a similar joint motion with the
Commission. The Commission has not held any hearings or issued a
decision on that motion. On July 15, 1997, AT&T and MCI filed a
Motion to Vacate Stay with the Court of Appeals. On July 30, 1997,
the Court of Appeals denied the Motion. On August 20, 1997, AT&T and
MCI filed with the Michigan Supreme Court an Application for Leave to
Appeal and Motion to Reverse the Court of Appeals and Vacate Stay,
which the Michigan Supreme Court denied on October 21, 1997.
The Court of Appeals held oral arguments on the main appeal on
October 14, 1997, but has not yet issued a decision.
Directory Publishing Agreement
- ------------------------------
We had an agreement with Ameritech Publishing, Inc. (API), a wholly
owned Ameritech subsidiary doing business as Ameritech Advertising
Services, under which API published and distributed classified
directories under our license and provided services to us relating to
both classified and alphabetical directories. API paid license fees
to us under the agreement. That agreement terminated effective June
30, 1997. We have entered into a subsequent agreement with API
effective July 1, 1997 under which we will furnish to API certain
services and data to be used by them in publishing and distributing
classified and alphabetical directories. In exchange, we will
receive compensation for the services and data.
Year 2000 Software Compliance
- -----------------------------
We currently operate numerous date-sensitive computer applications
and systems throughout our business. As the century change
approaches, it will be essential for us to ensure that these systems
properly recognize the year 2000 and continue to process critical
operational and financial information. We have initiated a project
to determine the scope of system changes that may be required and to
ensure that our systems continue to meet our operational needs and
those of our customers. Although we have not yet determined a final
cost estimate for this project, we will incur a substantial portion
of the costs over the next two years.
Page 12
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters (cont'd.)
- -----------------------
New Accounting Pronouncements
- -----------------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standards (FAS) No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of
comprehensive income and requires that all components of
comprehensive income be reported in a financial statement having the
same prominence as other financial statements. For us, FAS No. 130
is effective next year, and it requires reclassification of prior
period financial statements provided for comparative purposes.
Adoption of this standard should have little effect on our financial
statements, since the new requirements primarily involve
modifications to the way that existing information is displayed.
Also in June 1997, the FASB issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
supersedes FAS No. 14, "Financial Reporting of Segments of a Business
Enterprise," by establishing new standards for the way that a public
business enterprise reports operating segment information in its
annual and interim financial statements. In general, FAS No. 131
requires reporting of financial information as it is used by senior
company management for evaluating performance and deciding how to
allocate resources. The statement is effective in 1998, but need not
be applied to interim financial statements in that year. Comparative
information for earlier years must be restated. We expect adoption
of this standard to have little effect on our financial statements.
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
The above discussion contains certain forward-looking statements that
involve potential risks and uncertainties. Our future results could
differ materially from those discussed here. Some of the factors
that could cause or contribute to such differences include:
- -changes in economic and market conditions;
- -effects of state and federal regulation;
- -the impact of new technologies.
You should not place undue reliance on these forward-looking
statements, which are applicable only as of November 12, 1997. We
have no obligation to revise or update these forward-looking
statements to reflect events or circumstances that arise after
November 12, 1997 or to reflect the occurrence of unanticipated
events.
Page 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
12 Computation of Ratio of Earnings to Fixed Charges for
the nine months ended September 30, 1997 and September
30, 1996.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
We did not file a Form 8-K during the quarter ended
September 30, 1997.
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SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, an
authorized company official has signed this report on our behalf.
MICHIGAN BELL TELEPHONE COMPANY
-------------------------------
(Registrant)
Date: November 12, 1997 /s/ Ronald G. Pippin
----------------------
Ronald G. Pippin
Vice President and Comptroller
(Principal Accounting Officer)
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GLOSSARY
Access charges -
- ---------------
fees that local phone companies charge to long distance carriers for
the handling of long distance calls on our local network.
Access line -
- ------------
a telephone line for voice, data or video reaching from a local phone
company to a home or business.
Call management services -
- -------------------------
services that add value and convenience for phone customers, such as
Call Waiting, Call Forwarding and Caller ID. These services are sold
to customers individually or in "packages".
Customer premises equipment (CPE) -
- ----------------------------------
communications equipment owned by customers, including telephones,
faxes and switches.
Dial 1 + -
- ---------
a feature that allows local phone customers to designate a carrier
other than the local service provider for toll calls within their
calling area by simply dialing 1 plus the telephone number.
Digital -
- --------
an alternative to traditional analog communications, digital systems
transport information in computer code for improved clarity and
quality.
Federal Communications Commission (FCC) -
- ----------------------------------------
the federal agency responsible for regulating the interstate aspects
of telecommunications activities.
Financial Accounting Standards Board (FASB) -
- --------------------------------------------
the independent body responsible for setting accounting and financial
reporting standards to be followed by U.S. business enterprises.
Gross receipts taxes -
- ---------------------
state and local taxes based upon the gross operating revenues earned
in a particular jurisdiction. These taxes may be imposed on general
businesses or public utilities in lieu of other taxes.
Interconnection -
- ----------------
allowing a competitive local service provider to use the local phone
company's network, or elements of the network, to provide local phone
service to its customers.
Interexchange carriers (IXCs) -
- ------------------------------
those companies primarily involved in providing long distance voice
and data transmission services, such as AT&T, MCI and Sprint.
Internet -
- ---------
the global web of networks that connects computers around the world,
providing rapid access to information from multiple sources.
Internet service providers (ISPs) -
- ----------------------------------
those companies providing access to the Internet and other computer-
based information networks.
Intrastate revenues -
- --------------------
that portion of revenues regulated by state rather than federal
authorities.
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GLOSSARY (cont'd.)
Local access and transport area (LATA) -
- ---------------------------------------
the boundary within which a local telephone company may provide phone
service. It is usually centered around a city or other identifiable
community of interest.
Local exchange carriers (LECs) -
- -------------------------------
those companies primarily involved in providing local phone service
and access to the local phone network, including Ameritech's landline
communications subsidiaries in Illinois, Indiana, Michigan, Ohio and
Wisconsin.
Operations support systems (OSS) -
- ---------------------------------
the databases and information used to support the provision of
telephone service to end users.
Price caps -
- -----------
a form of regulation that sets maximum limits on the prices that LECs
can charge for access services instead of limits on rate of return or
profits.
Productivity factor -
- --------------------
a portion of the interstate price cap formula that requires LECs to
reduce the price cap based on an assumed increase in productivity.
Securities and Exchange Commission (SEC) -
- -----------------------------------------
the federal agency that regulates the issuance and trading of public
debt and equity securities in the United States and monitors
compliance with these regulations.
Switched Minutes of Use -
- -----------------------
the measure of time used to bill IXC's for access to our public
switched network.
Universal service -
- ------------------
a concept designed to ensure access to the telecommunications network
in rural and low-income areas at affordable prices. Funding
typically comes from urban telecommunication operators.
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