- ---------------------------------------------------------------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
- -------------------------------------------
Form 10-Q
(Mark one)
- -------------------------------------------
[x] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
- -------------------------------------------
or
- -------------------------------------------
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
- -------------------------------------------
Commission File Number 1-3499
Michigan Bell Telephone Company
-----------------------------
A Michigan Corporation
-----------------------------
444 Michigan Avenue
Detroit, Michigan 48226
-----------------------------
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 April 30, 1998, 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 months ended
March 31, 1998 and 1997 1
Condensed Balance Sheets as of
March 31, 1998 and December 31, 1997 2-3
Condensed Statements of Cash Flows for
the three months ended March 31, 1998 and 1997 4
Notes to Condensed Financial Statements 5
2. Management's Discussion and Analysis
of Results of Operations 6-15
PART II
6. Exhibits and Reports on Form 8-K 16
Glossary 18-19
Page i
Item 1 - Financial Statements
-----------------------------
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
----------------
1998 1997
---- ----
Revenues
Local service...................... $ 389.5 $ 368.3
Interstate network access.......... 161.3 157.1
Intrastate network access.......... 51.7 50.3
Long distance services............. 181.2 193.3
Other.............................. 66.0 74.0
--------- ---------
849.7 843.0
--------- ---------
Operating expenses
Employee-related expenses.......... 161.4 160.7
Depreciation and amortization...... 136.3 132.6
Other operating expenses........... 260.4 227.9
Taxes other than income taxes...... 39.6 40.6
--------- ---------
597.7 561.8
--------- ---------
Operating income..................... 252.0 281.2
Interest expense..................... 20.8 21.1
Other income, net.................... 2.2 1.0
--------- ---------
Income before income taxes........... 233.4 261.1
Income taxes......................... 85.9 90.2
--------- ---------
Net income........................... 147.5 170.9
Accumulated deficit,
beginning of period................ (299.5) (347.2)
Less, dividends declared ......... 143.0 180.6
--------- ---------
Accumulated deficit,
end of period...................... $ (295.0) $ (356.9)
========= =========
See Notes to Condensed Financial Statements.
Page 1
CONDENSED BALANCE SHEETS
(Dollars in Millions)
March 31, 1998 Dec. 31, 1997
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments......... $ 19.7 $ 12.8
Investment in Ameritech funding pool........ 270.7 --
--------- ---------
290.4 12.8
Receivables, net
Customers................................. 639.7 654.3
Ameritech and affiliates.................. 2.9 4.4
Other..................................... 23.1 21.6
Material and supplies....................... 21.2 6.8
Prepaid and other........................... 19.2 18.2
--------- ---------
996.5 718.1
--------- ---------
Property, plant and equipment................ 8,444.1 8,363.1
Less, accumulated depreciation............... 5,538.3 5,425.9
--------- ---------
2,905.8 2,937.2
--------- ---------
Investments, primarily in affiliates......... 86.2 92.5
Other assets and deferred charges............ 335.4 324.7
--------- ---------
Total assets................................. $ 4,323.9 $ 4,072.5
========= =========
See Notes to Condensed Financial Statements.
Page 2
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
March 31, 1998 Dec. 31, 1997
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech................................ $ -- $ 50.2
Other.................................... 108.4 101.5
Accounts payable
Ameritech Services, Inc. (ASI)............ 41.2 53.0
Ameritech and affiliates.................. 35.5 41.0
Other..................................... 178.6 157.0
Other current liabilities.................. 560.2 277.0
--------- ---------
923.9 679.7
--------- ---------
Long-term debt.............................. 993.8 993.8
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 132.2 138.5
Unamortized investment tax credits......... 35.8 37.5
Postretirement benefits
other than pensions...................... 661.5 663.6
Long-term payable to ASI................... 17.2 18.6
Other ..................................... 69.5 70.3
--------- ---------
916.2 928.5
--------- ---------
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............ 63.2 48.2
Accumulated deficit........................ (295.0) (299.5)
--------- ---------
1,490.0 1,470.5
--------- ---------
Total liabilities and shareowner's equity... $ 4,323.9 $ 4,072.5
========= =========
See Notes to Condensed Financial Statements.
Page 3
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
-------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 147.5 $ 170.9
Adjustments to net income
Depreciation and amortization............... 136.3 132.6
Deferred income taxes, net.................. (8.1) --
Investment tax credits, net................. (1.7) (2.1)
Capitalized interest........................ (0.4) (0.4)
Change in accounts receivable, net.......... 14.6 34.7
Change in material and supplies............. (16.3) (3.5)
Change in certain other current assets...... (1.7) (4.0)
Change in accounts payable.................. 4.3 (27.0)
Change in certain other current
liabilities................................ 148.9 114.9
Change in certain other noncurrent
assets and liabilities..................... (0.9) (4.1)
Other operating activities, net............. 8.1 8.4
-------- --------
Net cash from operating activities............ 430.6 420.4
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (103.8) (79.3)
Proceeds from disposals of
property, plant and equipment................ 1.2 1.4
Other investing activities, net............... -- 0.1
-------- --------
Net cash from investing activities............ (102.6) (77.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... (50.2) (138.3)
Retirements of long-term debt................. (0.2) (0.3)
Dividend payments............................. -- (180.6)
-------- --------
Net cash from financing activities............ (50.4) (319.2)
-------- --------
Net change in cash and
temporary cash investments................... 277.6 23.4
Cash and temporary cash investments,
beginning of period.......................... 12.8 0.2
-------- --------
Cash and temporary cash investments,
end of period................................ $ 290.4 $ 23.6
======== ========
See Notes to Condensed Financial Statements.
Page 4
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
MARCH 31, 1998
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
1997 Annual Report on Form 10-K.
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 18 and 19.
NOTE 2: Subsequent Event - Merger Agreement
On May 11, 1998, our parent (Ameritech Corporation) jointly announced
with SBC Communications Inc. (SBC) a definitive agreement to merge an
SBC subsidiary with Ameritech in a transaction in which each share of
Ameritech common stock will be converted into and exchanged for 1.316
shares of SBC common stock. After the merger, Ameritech will be a
wholly owned subsidiary of SBC. The transaction, which has been
approved by the Board of Directors of each company, is intended to be
accounted for as a pooling of interests and to be a tax-free
reorganization. The merger is subject to the satisfaction of certain
conditions and regulatory approvals, as well as approval by the
shareowners of each company.
Page 5
Item 2 - Management's Discussion and Analysis
of Results of Operations
The following is a discussion and analysis of the changes in
revenues, operating expenses and other income and expenses for the
first three months of 1998 as compared with the first three months of
1997.
RESULTS OF OPERATIONS
- ---------------------
Revenues
- --------
Our revenues in the first three months of 1998 were $849.7 million
and were $843.0 million for the same period in 1997, an increase of
$6.7 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.
- ---------------------------------------------------------------------
Local service
- -------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 389.5 $ 368.3 $ 21.2 5.8
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and
connection charges and most public phone revenues. Local service
revenues increased for the three months ended March 31, 1998 due
largely to increased sales of call management services, due to strong
growth in both the number of features in service and usage of
services on a pay-per-use basis. Higher network usage volumes,
resulting primarily from access line growth of 3.6% over the prior
year period, also contributed to the increase.
There were 5,353,000 access lines in service as of March 31, 1998,
compared with 5,167,000 as of March 31, 1997.
- ---------------------------------------------------------------------
Network access
- --------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Three Months Ended $ 161.3 $ 157.1 $ 4.2 2.7
Intrastate
- ----------
Three Months Ended $ 51.7 $ 50.3 $ 1.4 2.8
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.)
- ------------------------
Interstate network access revenues increased for the three months
ended March 31, 1998 due primarily to an increase in minutes of use,
resulting from overall growth in the volume of calls handled for
interexchange carriers, and greater demand for dedicated services by
Internet service providers and other high-capacity users. Rate
reductions, combined with a change in reporting classification of pay
phone revenues received from network access to other revenues
beginning in the first quarter of 1998, partially offset these
increases. Interstate minutes of use for the three months ended
March 31, 1998 increased by 5.7% over the same period last year.
Intrastate network access revenues increased for the three months
ended March 31, 1998 due primarily to volume increases, largely
resulting from increased network usage by alternative providers of
intraLATA toll service. Rate decreases, combined with a change in
reporting classification of certain pay phone revenues received from
network access to other revenues partially offset the volume
increases. Intrastate minutes of use for the three months ended
March 31, 1998 increased by 17.2% over the same period last year.
- ---------------------------------------------------------------------
Long distance service
- ---------------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 181.2 $ 193.3 $ (12.1) (6.3)
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 three months ended March 31, 1998 due
primarily to volume decreases. Rate increases partially offset these
volume decreases.
- ---------------------------------------------------------------------
Other
- -----
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 66.0 $ 74.0 $ (8.0) (10.8)
Other revenues include revenues derived from directory advertising,
billing and collection services, inside wire installation and
maintenance services and other miscellaneous services. Other
revenues decreased for the three months ended March 31, 1998 due
primarily to a decrease in directory advertising revenues, combined
with a decrease in revenues from inside wire installation and
maintenance services. Increased sales of equipment and other
nonregulated services, such as voice messaging, partially offset the
decrease.
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. Directory revenues
decreased by approximately $19.3 million in the first quarter of 1998
as a result of this agreement.
Page 7
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Operating expenses
- ------------------
Total operating expenses for the three months ended March 31, 1998
increased $35.9 million, or 6.4 percent to $597.7 million. Increases
in other operating expenses and depreciation and amortization
expenses were the primary reasons for the increase, as discussed
below.
- ---------------------------------------------------------------------
Employee-related expenses
- -------------------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 161.4 $ 160.7 $ 0.7 0.4
Employee-related expenses increased for the three months ended March
31, 1998 due primarily to wage rate increases and increased overtime
expenses, partially offset by lower force levels and decreased bonus
expenses.
We employed 11,920 employees as of March 31, 1998, compared with
11,950 as of March 31, 1997.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 136.3 $ 132.6 $ 3.7 2.8
Depreciation and amortization expense increased for the three months
ended March 31, 1998 due primarily to higher property, plant and
equipment balances. Higher depreciation rates on certain asset
categories also contributed to the increases, as we used shorter
depreciable lives for newer technologies.
- ---------------------------------------------------------------------
Other operating expenses
- ------------------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 260.4 $ 227.9 $ 32.5 14.3
Other operating expenses increased for the three months ended March
31, 1998 due primarily to increased contract and affiliated services
related to systems programming and network support. Higher access
charge expenses resulting from state commission rulings regarding
calls to the Internet also contributed to the increase. These
rulings (which we are contesting) require local exchange carriers to
pay reciprocal compensation for calls by their customers to the
Internet via Internet service providers (ISPs) who, in turn, are
customers of competing local exchange carriers. A decrease in
uncollectibles resulting from improved credit screening and
collection efforts, combined with lower materials costs, partially
offset these increases.
Page 8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Taxes other than income taxes
- -----------------------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 39.6 $ 40.6 $ (1.0) (2.5)
Taxes other than income taxes consist of property taxes, gross
receipts taxes and other taxes not directly related to earnings.
Taxes other than income taxes decreased in the period ended March 31,
1998 due primarily to lower sales and use tax expenses in the first
quarter of 1998 compared with the prior year period. Increased property
taxes, resulting from higher assessed valuation and property tax rates,
partially offset the decrease.
- ---------------------------------------------------------------------
Other income and expenses
- -------------------------
Interest expense
- ----------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 20.8 $ 21.1 $ (0.3) (1.4)
Interest expense decreased for the three months ended March 31, 1998
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
March 31 Income Percent
------------
(dollars in millions) 1998 1997 (Expense) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 2.2 $ 1.0 $ 1.2 120.0
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. Other income increased for the
three months ended March 31, 1998 due primarily to increased income
on funds deposited in the Ameritech short-term funding pool,
partially offset by decreased equity earnings from Ameritech
Services, Inc. (ASI).
- ---------------------------------------------------------------------
Income taxes
- ------------
March 31 Increase Percent
------------
(dollars in millions) 1998 1997 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 85.9 $ 90.2 $ (4.3) (4.8)
Income taxes decreased for the three months ended March 31, 1998 due
primarily to the decrease in pretax earnings discussed above. The
tax impacts of the centralization of administration of benefits for
employees partially offset the decrease.
Page 9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the three months ended
March 31 was 11.28 in 1998 and 12.27 in 1997.
Page 10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
- -------------
Competition
- -----------
The communications landscape is rapidly changing. The
Telecommunications Act of 1996 (the 1996 Act), among other things,
was designed to foster local exchange competition by establishing a
regulatory framework to govern the provision of local and long
distance telecommunications services. The 1996 Act permits Ameritech
and the other Regional Holding Companies (RHCs) to provide interLATA
long distance services only after satisfying the conditions of the
new law for opening local markets to competition and demonstrating to
the FCC that such provision is in the public interest. The 1996 Act
establishes a national policy that calls for competition and open
markets, not regulatory management, as the basic business
environment. This public policy change opens a host of business
opportunities for providers of all forms of communications, enabling
them to become full service providers of voice, video, data, local
and long distance services for their customers. As a result of the
new law, consumers can expect to see more choices and receive greater
value for these and other services.
With the passage of the 1996 Act and earlier regulatory initiatives,
our local service markets have been opened to competition from
interexchange carriers, cable TV providers and other local service
providers. Interconnection agreements with these providers require
us to allow access to network elements at cost-based rates or
telecommunications services at wholesale rates for resale to the
public. Competitive entry by these providers may result in some
downward pressure on local service revenues as a portion of our
revenue shifts from local service at retail prices to network access
at lower rates.
In 1996, we were required to implement Dial 1 + capability in
portions of our local toll markets. Dial 1 + gives customers the
ability to choose an alternate long distance carrier for intraLATA
toll calls by dialing 1 before the phone number. Competition for
toll service revenues has intensified in these areas. The increased
competition, however, should stimulate growth in overall demand for
toll calls and corresponding network access services.
We have signed a significant number of interconnection and resale
agreements with competitors as required by the 1996 Act to gain
permission for Ameritech to offer interLATA long distance service.
FCC rules require that interLATA long distance service be offered by
a separate Ameritech subsidiary. As a result, Ameritech's entry into
this market will not generate long distance revenues for Michigan
Bell to offset the potential revenue decline brought by local service
competition.
It is impossible to predict the specific impact of the 1996 Act and
other changes in the industry on our business or financial results.
Notwithstanding the potential for an adverse effect on our revenue
streams, we intend to pursue growth opportunities in our local
exchange business.
Regulatory Developments
- -----------------------
In July 1997, the Eighth Circuit Court of Appeals in St. Louis struck
down several provisions of an August 1996 FCC order regarding the
interconnection provisions of the 1996 Act. The Court ruled, among
other things, that the FCC's pricing guidelines intrude upon the
rights of state commissions to implement key elements of the 1996 Act
and that the FCC lacks jurisdiction to review state commission
Page 11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters (cont'd.)
- ----------------------
Regulatory Developments (cont'd.)
- --------------------------------
decisions regarding interconnection agreements between incumbent
local exchange carriers (LECs) and their competitors. The Court also
ruled that the FCC's requirement allowing requesting carriers to pick
and choose among individual provisions of other interconnection
agreements does not promote negotiated agreements and is
unreasonable.
The Court also ruled, and clarified in a subsequent October rehearing
order, that if new entrants to the local exchange market wish to
purchase network elements at cost-based prices, they must combine the
elements themselves. The United States Supreme Court is scheduled to
review these and related rulings in October 1998, with a decision
expected next year.
In August, 1997, the FCC revised its Local Competition rules and
required a new purported network element known as "shared transport,"
which is access to all of the incumbent's interoffice transmission
facilities combined with switching. This rule is before the Eighth
Circuit Court of Appeals on petitions for review filed by Ameritech
and other local carriers, with a decision expected this year.
In December 1997, the United States District Court in Wichita Falls,
Texas, declared unconstitutional a key part of the 1996 Act that
excludes only the RHCs' landline communications companies from the
long distance market. Two of those companies, SBC Communications
Inc. and US West Communications, Inc. initiated the lawsuit. Long
distance industry opponents of the ruling, the FCC and the Department
of Justice asked the court for an injunction barring SBC
Communications, US West and Bell Atlantic Corporation, which joined
in the suit, from preparing to provide in-region long distance
service until the court ruled on their stay requests. In February
1998, the court issued two orders - the final judgment giving legal
effect to the court's earlier opinion and an order staying that
decision pending resolution of appeals from it. The court denied the
motions for injunctions.
In addition, BellSouth Communications, Inc. brought two appeals to
the United States Court of Appeals for the District of Columbia
challenging the constitutionality of many of the same provisions of
the 1996 Act for which SBC Communications and US West sought review
in the Texas District Court. One action challenges the section of
the 1996 Act covering electronic publishing and another challenges
the sections which address long distance. Ameritech has intervened
in this later appeal. Consequently, the Fifth Circuit Court and the
D.C. Circuit Court are deciding the constitutionality of the
provisions of the 1996 Act specifically applicable to the RHCs'
landline communications companies.
In January 1998, the Eighth Circuit Court ordered the FCC to uphold
the court's earlier ruling transferring the power of the federal
agency to set terms on prices and connections to local phone networks
to the state commissions.
On May 7, 1997, the FCC issued three closely related orders
addressing revisions to the price cap plan for 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.
Page 12
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters (cont'd.)
- ----------------------
Regulatory Developments (cont'd.)
- --------------------------------
The new price cap rules are reducing access charges by increasing the
price cap productivity offset factor to 6.5% from the prior 5.3% 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% productivity factor had been in effect
since July 1, 1996.
The new rules also require creation of a multi-billion-dollar
interstate universal service fund for subsidizing low-income
customers, high cost service areas, rural health care providers,
schools and libraries. Telecommunications service providers began
paying into the universal service fund starting January 1, 1998.
Subsidies to low-income and rural customers became available 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.
Dial 1 +
- --------
In 1996, the MPSC ordered us to provide statewide dialing parity (the
ability to choose an alternate carrier for intraLATA toll calls by
dialing 1 before the phone number) on intraLATA toll calls or to
discount intraLATA toll access rates. In January 1997, the Michigan
Court of Appeals issued a stay of the MPSC order. In August, the
Michigan Supreme Court declined AT&T's and MCI's motion to vacate the
Court of Appeals' stay. The Court of Appeals held oral arguments on
the main appeal in October, but has not issued a decision. To date we
are providing Dial 1 + capability in Michigan in over 70% of our
access lines on a voluntary basis. We have reduced certain access
fees to long distance companies in Michigan by 55% where Dial 1 +
capability does not exist.
Year 2000 Costs
- ---------------
We currently operate date-sensitive computer applications and systems
throughout our business. As the century change approaches, we
recognize the importance of ensuring that these systems properly
recognize the year 2000 and continue to process critical operational
and financial information. In May 1996 we began our internal
assessment of our requirements and made appropriate inquiries of
vendors and consultants. We believe that we have identified most
application software and systems issues and we are making changes to
allow for almost a full year of additional testing in 1999.
Ameritech and all of its subsidiaries, including Michigan Bell,
expect to incur total costs of approximately $200 million in
conjunction with this effort, and believe that these costs can be
incurred without adversely affecting individual quarterly results.
However, given the complexity of the issue and possible as yet
unidentified risks, actual costs may vary from our estimate. We
currently believe these efforts will assure that our essential
systems and operations will be ready for the century change.
However, the failure of third parties on whom we depend to convert
their critical systems and processes in a timely manner could
significantly disrupt our business. We are working with our key
customers and suppliers to minimize such risks.
Page 13
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters (cont'd.)
- ----------------------
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) 131, "Disclosures
about Segments of an Enterprise and Related Information." This
statement supersedes FAS 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 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 this year. Comparative
information for earlier years must be restated. We expect to adopt
FAS 131 in the fourth quarter of 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP
provides authoritative guidance for the capitalization of certain
computer software costs developed or obtained for our internal
applications, such as:
- -external direct costs of materials and services, such as
programming costs,
- -payroll costs for employees devoting time to the software project,
and
- -interest costs to be capitalized.
Costs incurred during the preliminary project stage, as well as
training and data conversion costs, are to be expensed as incurred.
The SOP is effective for fiscal years beginning after December 15,
1998, however earlier application is encouraged. We have not yet
quantified the impacts of adopting this SOP on our financial
statements and have not determined the timing of our adoption. We
have historically expensed most computer software costs as incurred.
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
Some of the information presented in, or in connection with, this
report may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995
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 that impact the demand
for our products and services;
- - greater than anticipated competition from new entrants into the
local exchange, intraLATA toll or data markets;
- - regulatory developments that impact the telecommunications
industry, as well as pending regulatory issues under state
jurisdiction;
Page 14
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters (cont'd.)
- ----------------------
Private Securities Litigation Reform Act Safe Harbor Statement
(cont'd.)
- ---------------------------------------------------------------------
- - potential additional costs to comply with the regulatory
requirements of entry into the interLATA long distance market;
- - the impact of new technologies and the potential effect of delays
in development or deployment of such technologies; and,
- - the potential impact of issues related to year 2000 software
compliance.
You should not place undue reliance on these forward-looking
statements, which are applicable only as of May 12, 1998. We have no
obligation to revise or update these forward-looking statements to
reflect events or circumstances that arise after May 12, 1998 or to
reflect the occurrence of unanticipated events.
Page 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
12 Computation of Ratio of Earnings to Fixed Charges for
the three months ended March 31, 1998 and March 31,
1997.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
We did not file a Form 8-K during the quarter ended March
31, 1998.
Page 16
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: May 12, 1998 /s/ Ronald G. Pippin
----------------------
Ronald G. Pippin
Vice President and Comptroller
(Principal Accounting Officer)
Page 17
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.
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.
Page 18
GLOSSARY (cont'd.)
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.
Page 19