- ---------------------------------------------------------------------
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, 1999
- -------------------------------------------
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, 1999, 120,526,415 common shares were outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM Page
- ---- ----
1. Financial Statements
Condensed Statements of Income and Accumulated Deficit for
the three months ended
March 31, 1999 and 1998 1
Condensed Balance Sheets as of
March 31, 1999 and December 31, 1998 2-3
Condensed Statements of Cash Flows for
the three months ended March 31, 1999 and 1998 4
Notes to Condensed Financial Statements 5-7
2. Management's Discussion and Analysis
of Results of Operations 8-22
PART II
OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 23
Glossary 25-26
Page i
Item 1 - Financial Statements
-----------------------------
CONDENSED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
----------------
1999 1998
---- ----
Revenues
Local service...................... $ 415.6 $ 389.5
Interstate network access.......... 175.4 161.3
Intrastate network access.......... 49.6 51.7
Long-distance services............. 180.1 181.2
Other.............................. 67.3 66.0
--------- ---------
888.0 849.7
--------- ---------
Operating expenses
Employee-related expenses.......... 163.1 161.4
Depreciation and amortization...... 147.7 136.3
Other operating expenses........... 268.2 260.4
Taxes other than income taxes...... 40.5 39.6
--------- ---------
619.5 597.7
--------- ---------
Operating income..................... 268.5 252.0
Interest expense..................... 14.5 20.8
Other income, net.................... 1.7 2.2
--------- ---------
Income before income taxes........... 255.7 233.4
Income taxes......................... 94.2 85.9
--------- ---------
Net income........................... 161.5 147.5
Accumulated deficit,
beginning of period................ (275.4) (299.5)
Less, dividends declared ......... 149.4 143.0
--------- ---------
Accumulated deficit,
end of period...................... $ (263.3) $ (295.0)
========= =========
See Notes to Condensed Financial Statements.
Page 1
CONDENSED BALANCE SHEETS
(Dollars in Millions)
March 31, 1999 Dec. 31, 1998
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments......... $ 14.8 $ 13.2
Receivables, net
Customers................................. 594.2 645.8
Ameritech and affiliates.................. 3.9 --
Other..................................... 25.4 28.2
Material and supplies....................... 18.8 20.6
Prepaid and other........................... 28.0 26.9
--------- ---------
685.1 734.7
--------- ---------
Property, plant and equipment................ 8,792.2 8,695.6
Less, accumulated depreciation............... 5,953.6 5,830.0
--------- ---------
2,838.6 2,865.6
--------- ---------
Investments, primarily in affiliates......... 86.6 94.0
Other assets and deferred charges............ 397.7 396.4
--------- ---------
Total assets................................. $ 4,008.0 $ 4,090.7
========= =========
See Notes to Condensed Financial Statements.
Page 2
CONDENSED BALANCE SHEETS (continued)
(Dollars in Millions)
March 31, 1999 Dec. 31, 1998
-------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Debt maturing within one year
Ameritech................................ $ 188.6 $ 389.6
Other.................................... 154.6 155.1
Accounts payable
Ameritech Services, Inc. (ASI)............ 70.1 69.0
Ameritech and affiliates.................. 48.9 54.2
Other..................................... 184.1 171.4
Other current liabilities.................. 387.5 298.5
--------- ---------
1,033.8 1,137.8
--------- ---------
Long-term debt.............................. 496.0 496.1
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 138.3 138.9
Unamortized investment tax credits......... 29.1 30.5
Postretirement benefits
other than pensions...................... 645.4 648.0
Long-term payable to ASI................... 15.8 17.2
Other ..................................... 71.2 69.7
--------- ---------
899.8 904.3
--------- ---------
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............ 119.9 106.1
Accumulated deficit........................ (263.3) (275.4)
--------- ---------
1,578.4 1,552.5
--------- ---------
Total liabilities and shareowner's equity... $ 4,008.0 $ 4,090.7
========= =========
See Notes to Condensed Financial Statements.
Page 3
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
-------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 161.5 $ 147.5
Adjustments to net income
Depreciation and amortization............... 147.7 136.3
Deferred income taxes, net.................. (6.1) (8.1)
Investment tax credits, net................. (1.4) (1.7)
Capitalized interest........................ (0.3) (0.4)
Change in accounts receivable, net.......... 50.5 14.6
Change in material and supplies............. 0.7 (16.3)
Change in certain other current assets...... (0.2) (1.7)
Change in accounts payable.................. 8.5 4.3
Change in certain other current
liabilities................................ 94.5 148.9
Change in certain other noncurrent
assets and liabilities..................... 9.2 (0.9)
Other operating activities, net............. 7.5 8.1
-------- --------
Net cash from operating activities............ 472.1 430.6
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (118.9) (103.8)
Proceeds from disposals of
property, plant and equipment................ (0.5) 1.2
-------- --------
Net cash from investing activities............ (119.4) (102.6)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... (201.0) (50.2)
Retirements of long-term debt................. (0.7) (0.2)
Dividend payments............................. (149.4) --
-------- --------
Net cash from financing activities............ (351.1) (50.4)
-------- --------
Net change in cash and
temporary cash investments................... 1.6 277.6
Cash and temporary cash investments,
beginning of period.......................... 13.2 12.8
-------- --------
Cash and temporary cash investments,
end of period................................ $ 14.8 $ 290.4
======== ========
See Notes to Condensed Financial Statements.
Page 4
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
MARCH 31, 1999
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
1998 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 25 and 26.
Note 2: Proposed Merger with SBC Communications Inc.
On May 11, 1998, Ameritech and SBC Communications Inc. (SBC) jointly
announced their signing of a definitive merger agreement (Merger
Agreement). The Merger Agreement provides that a wholly owned
subsidiary of SBC will be merged into Ameritech (the Merger) and
Ameritech will become a wholly owned subsidiary of SBC. The Merger
is intended to be accounted for as a pooling of interests and to be a
tax-free reorganization. In the Merger, each share of Ameritech
common stock (other than shares owned by Ameritech, SBC or their
respective subsidiaries) will be converted into and exchanged for
1.316 shares of SBC common stock.
The Merger has been approved by the Board of Directors and the
shareowners of each company, but remains subject to various
regulatory approvals, principally by the Federal Communications
Commission (FCC) and the Illinois Commerce Commission (ICC).
On March 23, 1999, the Department of Justice entered into a consent
decree with Ameritech and SBC that would provide a basis for
Department of Justice clearance of both the Merger and SBC's proposed
acquisition of Comcast Cellular Corporation. The consent decree
requires the parties to divest certain "overlapping" cellular
properties in 17 markets in Illinois, Indiana and Missouri,
including, as previously undertaken by Ameritech and SBC, those in
Chicago and St. Louis.
On April 5, 1999, Ameritech announced an agreement to sell 20
Midwestern cellular properties for $3.27 billion in cash to a venture
of GTE Corporation and Georgetown Partners, effectively meeting U.S.
Department of Justice conditions for approval of the SBC-Ameritech
Merger. The sale, which is contingent on the closing of the Merger,
eliminates the overlapping cellular properties that would result from
the Merger. The venture, led by GTE and including Georgetown
Partners, will acquire Ameritech's cellular properties in Chicago,
St. Louis and surrounding areas of Illinois, northwestern Indiana and
Missouri. These properties include a population of 11.4 million and
server nearly 1.5 million cellular customers. Up to 1,700 of
Ameritech's cellular employees may transfer to GTE upon completion of
the sale.
Page 5
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
MARCH 31, 1999
Note 2: Proposed Merger with SBC Communications Inc. (cont'd.)
After a required 60-day comment period on the proposed consent
decree, which ends on June 28, 1999, the Department of Justice is
expected to reply to any public comments and seek final approval and
entry of the decree by the U.S. District Court in Washington, D.C.
On April 26, 1999, the hearing examiners of the ICC issued their
revised proposed order approving the Merger subject to certain
conditions. The more significant proposed conditions are to return
to customers 25% of the actual net merger-related savings, which may
be increased to 50% if certain performance requirements are not met.
It is further proposed that SBC must not reduce certain employment
levels due to the Merger, and that capital investments and charitable
contributions in Illinois are continued generally at historical
levels. The proposed order now goes to the commissioners of the ICC
for deliberations and a vote. Under Illinois law, such vote must
occur on or before June 24, 1999.
On April 8, 1999, the Public Utilities Commission of Ohio (PUCO)
approved the Merger based on a settlement agreement between the PUCO
staff, Ameritech, SBC, the Ohio Consumers' Counsel and certain
consumer groups and new competitors of Ameritech in Ohio. The
settlement, among other things, guarantees Ohio Bell workforce levels
for two years, extends the Advantage Ohio price cap plan for basic
residential phone rates, provides for certain discounts for resold
local residential service and residential unbundled local loops to
foster facilities-based residential competition, sets various
competitive and service quality benchmarks and establishes monetary
penalties if those benchmarks are not met, and provides financing for
consumer education and community technology funds.
On May 5, 1999, the Indiana Utility Regulatory Commission (IURC)
issued an order asserting that the Merger is subject to IURC approval
under state law. Ameritech disagrees with the IURC's assertion of
authority to vote on the Merger.
More detailed information relating to the terms and conditions of the
Merger is contained in the Joint Proxy Statement/Prospectus of
Ameritech and SBC dated October 15, 1998.
Note 3: Pay Phone Per Call Compensation
In February 1999, the FCC ruled on remand from the D.C. Circuit Court
that the rate interexchange carriers are to pay us for their
customers' "dial-around" access or toll-free calls originating on our
pay phones be decreased from $0.284 per call to $0.24 per call
commencing on the April 1999 effective date of the order. The FCC
also directed that a reduced rate of $0.238 per call be applied
retroactively for the period from October 7, 1997 through the
effective date of the FCC order. Based on the February 1999 FCC
ruling, which is under appeal, our pay phone revenues were reduced by
approximately $6.9 million in the first quarter of 1999.
Page 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
MARCH 31, 1999
Note 4: Segment Information
Michigan Bell is a wholly owned subsidiary of Ameritech Corporation.
Ameritech has organized its operations using customer-focused
business units, and Ameritech's management reviews operating results
and allocates resources based on this structure. These business
units aggregate to three reportable segments for Ameritech as a
consolidated entity: communications; information and entertainment;
and international. The operations of Michigan Bell are included in
the results of several business units, and accordingly, Michigan Bell
is not managed as a separate entity. However, all of the business
units that include the results of Michigan Bell are reflected in
Ameritech's communications segment. Michigan Bell therefore has
operations in only one reportable segment: communications. We derive
revenues from local service, network access, long-distance service
and other miscellaneous products and services. Revenues derived from
each of these services are shown in separate captions on the income
statements on page 1.
Note 5: Accounting for Software Costs
We implemented a new accounting requirement, Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," effective January 1, 1999. This SOP,
issued by the American Institute of Certified Public Accountants
(AICPA) in March 1998, provides authoritative guidance for the
capitalization of certain costs related to computer software
developed or obtained for our internal applications.
With the implementation of the SOP in the first quarter of 1999,
Ameritech and all of its subsidiaries decreased operating expenses by
$21 million, including $1.1 million for Michigan Bell. Ameritech
currently anticipates an annual operating expense reduction of $200
million for all of 1999. We have historically expensed most computer
software costs as incurred and will be required to continue to
expense all Year 2000 modification costs as incurred. We are
amortizing most capitalized software over five years.
Page 7
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 1999 as compared with the first three months of
1998.
RESULTS OF OPERATIONS
- ---------------------
Revenues
- --------
Our revenues in the first three months of 1999 were $888.0 million
and were $849.7 million for the same period in 1998, an increase of
$38.3 million. Growth in sales of call management services and
access lines, as well as increases in switched minutes of use were
the primary reasons for the increase. Net rate reductions, resulting
primarily from annual access charge reductions, partially offset
these increases.
- ---------------------------------------------------------------------
Local service
- -------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 415.6 $ 389.5 $ 26.1 6.7
Local service revenues include basic monthly service fees and usage
charges, fees for call management services, installation and
connection charges, certain data services and most public phone
revenues. Local service revenues increased for the three months
ended March 31, 1999 due largely to increased sales of call
management services, resulting from strong growth in both the number
of features in service and services provided on a pay-per-use basis.
Access line growth of 2.5% over the prior year period, as well as
rate increases, also contributed to the increase.
There were 5,479,000 access lines in service as of March 31, 1999,
compared with 5,345,000 as of March 31, 1998 (restated to standardize
counting of voice-grade equivalent lines).
- ---------------------------------------------------------------------
Network access
- --------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Three Months Ended $ 175.4 $ 161.3 $ 14.1 8.7
Intrastate
- ----------
Three Months Ended $ 49.6 $ 51.7 $ (2.1) (4.1)
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.
Interstate network access revenues increased for the three months
ended March 31, 1999 due primarily to an increase in network 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.
Page 8
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Network access (cont'd.)
- ------------------------
Rate reductions, resulting primarily from the FCC annual access
charge filing effective July 1, 1998, partially offset the increase.
These rate reductions were partially offset by increased end user
fees resulting from the number portability surcharge effective
February 1, 1999. Interstate minutes of use for the three months
ended March 31, 1999 increased by 5.6% over the same period last
year.
Intrastate network access revenues decreased for the three months
ended March 31, 1999 as a result of rate decreases implemented in
July 1998 with the FCC annual access filing reductions and due to the
unfavorable MPSC primary interexchange carrier charge (PICC) ruling.
These rate decreases were largely offset by a favorable court ruling
in Michigan which found that interexchange carriers are not entitled
to access charge discounts for intraLATA toll services prior to the
time that Ameritech is allowed to offer interLATA long-distance
service in the state of Michigan.
The Michigan Supreme Court granted applications for leave to appeal
filed by AT&T, MCI WorldCom (MCI), the MPSC and the Michigan Attorney
General. Oral argument was held on March 11, 1999 and a decision on
the merits of the appeal is expected in mid-1999. While its
application for leave to appeal was pending, MCI filed another MPSC
complaint asking the Commission to reinstate the 55% discount on
access charges and to issue a new mandate for dialing parity. The
MPSC granted MCI's complaint and required reinstatement of the 55%
discount and immediate implementation for the remaining 30% of our
access lines in its January 19, 1999 Order. Ameritech filed a motion
for stay of the MPSC's Order with the Michigan Court of Appeals on
January 22, 1999. The Michigan Court of Appeals granted that stay on
February 9, 1999. On February 10, 1999, AT&T and MCI WorldCom filed
a Motion with the Supreme Court to Vacate Stay to Bypass the Court of
Appeals. On February 16, 1999, Michigan Bell filed a response to the
Motion. The Supreme Court has not ruled on the Motion.
Intrastate minutes of use for the three months ended March 31, 1999
increased by 14.1% over the same period last year.
- ---------------------------------------------------------------------
Long-distance service
- ---------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 180.1 $ 181.2 $ (1.1) (0.6)
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, 1999 due
primarily to volume decreases, resulting from increased competition
from alternative intraLATA toll providers. Rate increases partially
offset these volume decreases.
- ---------------------------------------------------------------------
Other
- -----
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 67.3 $ 66.0 $ 1.3 2.0
Page 9
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other (cont'd.)
- ---------------
Other revenues include revenues derived from the sale of white page
directory listings, billing and collection services, inside wire
installation and maintenance services and other miscellaneous
services. Other revenues increased for the three months ended March
31, 1999 due primarily to an increase in miscellaneous nonoperating
revenues, due to implementation of a late payment charge, as well as
increased voice mail, inside wire installation and maintenance
services and white page directory listing revenues. Other revenues
also increased as a result of an increase in equipment sales. These
increases were largely offset by a $6.9 million revenue reduction
resulting from a FCC ruling which lowered the pay phone per call
compensation we receive from other communications companies.
- ---------------------------------------------------------------------
Operating expenses
- ------------------
Total operating expenses for the three months ended March 31, 1999
increased $21.8 million, or 3.6% to $619.5 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) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 163.1 $ 161.4 $ 1.7 1.1
Employee-related expenses increased for the three months ended March
31, 1999 primarily due to increases in wage rates reflecting a new
union contract effective in mid-1998, as well as an increase in
benefits expense. These increases were partially offset by lower
average force levels compared with the prior year period, as well as
decreased overtime costs.
We employed 11,004 employees as of March 31, 1999, compared with
11,920 as of March 31, 1998.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 147.7 $ 136.3 $ 11.4 8.4
Depreciation and amortization expense increased for the three months
ended March 31, 1999 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.
Page 10
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other operating expenses
- ------------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 268.2 $ 260.4 $ 7.8 3.0
Other operating expenses increased for the three months ended March
31, 1999 due primarily to higher material, professional services, bad
debt and other expenses. These increases were partially offset by
decreased affiliate services, advertising and access charge expenses,
Effective January 1, 1999, we adopted Statement of Position (SOP) 98-
1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which required the capitalization of $1.1
million in software costs previously expensed. (see Note 5).
- ---------------------------------------------------------------------
Taxes other than income taxes
- -----------------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 40.5 $ 39.6 $ 0.9 2.3
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 increased in the period ended March 31,
1999 due primarily to an increase in property taxes.
- ---------------------------------------------------------------------
Other income and expenses
- -------------------------
Interest expense
- ----------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 14.5 $ 20.8 $ (6.3) (30.3)
Interest expense decreased for the three months ended March 31, 1999
due primarily to lower average long-term debt balances, resulting
from the redemption of $350 million in long-term debt in December
1998. This decrease was partially offset by increased interest on
short-term debt, reflecting higher average short-term debt balances
following the long-term debt redemption.
- ---------------------------------------------------------------------
Other income, net
- -----------------
Change
March 31 Income Percent
------------
(dollars in millions) 1999 1998 (Expense) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 1.7 $ 2.2 $ (0.5) (22.7)
Other income, net includes equity in earnings of affiliates, interest
income and other nonoperating items. Other income decreased for the
three months ended March 31, 1999 due primarily to a decrease in
equity earnings from Ameritech Services, Inc. (ASI) and decreased
interest income, partially offset by a decrease in miscellaneous
nonoperating expenses.
Page 11
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Income taxes
- ------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 94.2 $ 85.9 $ 8.3 9.7
Income taxes increased for the three months ended March 31, 1999 due
primarily to the tax impacts of the centralization of administration
of benefits for employees. A decrease in pretax earnings, as
discussed above, partially offset the increase.
- ---------------------------------------------------------------------
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the three months ended
March 31 was 16.20 in 1999 and 11.30 in 1998.
The increase in the ratio is the result of revenue increases only
partially offset by increased expenses, due to cost containment
efforts. This increase in operating income, combined with decreased
interest expense following the redemption of $350 million of long-
term debt in December 1998, results in the increase in the ratio.
Page 12
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Other Matters
- -------------
Regulatory Considerations
- -------------------------
The Telecommunications Act of 1996
In general, the Telecommunications Act of 1996 (the 1996 Act)
includes provisions designed to open local exchange markets to
competition and to afford the regional holding companies (RHCs) and
their affiliates the competitive opportunity to provide interLATA
(long-distance) services. Under the 1996 Act, the RHCs ability to
provide in-region long-distance services is dependent upon their
satisfaction of, among other conditions, a 14-point "competitive
checklist" of specific requirements for opening the local market to
competition.
Local Interconnection and Unbundled Access
In January 1999, the U.S. Supreme Court issued its opinion on various
cross-appeals of the 1997 decision of the U.S. Circuit Court of
Appeals for the Eighth Circuit (the Eighth Circuit Court) relating to
the FCC's 1996 order on the local interconnection provisions of the
1996 Act (the Interconnection Order).
The Supreme Court reversed portions of the Eighth Circuit Court's
earlier decision that had vacated several provisions of the
Interconnection Order. The Court decided that the FCC has rulemaking
authority to implement the local competition provisions of the 1996
Act, including pricing methodology. This overturned the Eighth
Circuit Court's ruling that the states were vested with exclusive
jurisdiction over the pricing for local interconnection, unbundled
network elements and local service resale provided by incumbent local
exchange carriers (ILECs) to competitive local exchange carriers
(CLECs). The Supreme Court also reinstated the FCC's "pick and
choose" rules allowing CLECs to select among individual provisions
from other existing interconnection agreements.
The Supreme Court upheld the FCC's determination that the definition
of a network element could include items beyond physical facilities
and equipment, such as operational support systems, operator
services, directory assistance and vertical services such as call
forwarding and caller identification. It further ruled that the FCC
could bar ILECs from separating already combined network elements.
However, the Supreme Court overturned the FCC's rule identifying and
requiring ILECs to offer specific network elements, finding that the
FCC had not adequately considered, as required by the 1996 Act,
whether those specific unbundled network elements were "necessary" or
whether the failure to provide access to them might "impair" the
ability of CLECs to provide competitive services. We believe that
this ruling supports our view that the objectives of the 1996 Act,
including development and deployment of advanced technologies desired
by customers, will best be served by encouraging infrastructure
investments, rather than through unlimited blanket access to all ILEC
network elements. On April 16, 1999, in response to the Supreme
Court's decision, the FCC issued a Second Further Notice of
Rulemaking regarding which network elements should be made available
to competitors.
Since the Eighth Circuit Court's 1997 opinion, local interconnection
matters and unbundled network element pricing have been resolved
primarily through negotiated interconnection agreements or state
commission arbitration proceedings. The substantive validity of the
FCC's pricing rules, including its total element long-run incremental
cost (TELRIC) pricing methodology, was not before the Supreme
Page 13
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory Considerations (cont'd.)
- -----------------------------------
Local Interconnection and Unbundled Access (cont'd.)
Court, and will be addressed by the Eighth Circuit Court on remand.
Pending judicial resolution of the appropriate pricing methodologies
and a determination by the FCC of which unbundled network elements
must be made available, we expect to continue to negotiate and enter
into interconnection agreements and pursue, through appropriate state
or federal proceedings, timely recovery of our costs.
In February 1999, Ameritech sought review by the U.S. Supreme Court
of the separate 1998 Eighth Circuit Court decision regarding shared
transport. In that earlier decision, the Eighth Circuit Court had
upheld the FCC's determination that "shared transport," which would
include access to all of an ILEC's transport facilities, is a network
element that should be made available to competitors on an unbundled
basis. In April 1999, the Government filed its opposition to
Ameritech's petition.
The outcome of future regulatory and judicial developments in this
area is subject to continuing uncertainty. We believe that the
pricing rules and methodologies generally adopted by our state
commission with respect to our existing interconnection agreements
should not differ materially from those that may be applied under
proposed FCC pricing methodologies. We further expect that future
judicial or regulatory decisions will define reasonable limiting
standards, consistent with the purposes of the 1996 Act, as to which
of our existing network elements must be made available to
competitors. We can give no assurance, however, that future
regulatory and judicial determinations may not have a material
adverse effect on our future revenues and operating margins.
Reciprocal Compensation
A number of CLECs are engaged in regulatory and judicial proceedings
with various ILECs, including Michigan Bell, with respect to the
payment of reciprocal compensation to the CLECs for calls originating
on the ILECs' networks for dial-up connections to access the Internet
via Internet service providers (ISPs) served by the CLECs' networks.
The CLECs have asserted that reciprocal compensation for such calls
is provided for by interconnection agreements between the CLECs and
the ILECs. Together with other ILECs, Ameritech has maintained that
we are not required to make such reciprocal compensation payments
pursuant to those agreements because such traffic is interstate
access service, not local.
On February 26, 1999, the FCC ruled that a substantial portion of
Internet traffic is interstate and therefore under federal law it is
not subject to reciprocal compensation obligations. As a result, the
FCC issued a notice of proposed rulemaking to develop a federal inter-
carrier compensation rule for Internet traffic. During the interim,
the FCC concluded that state commissions may determine in
arbitrations whether reciprocal compensation should be paid for this
traffic. In finding that dial-up calls to ISPs are largely
interstate, the FCC concluded that dial-up traffic to the Internet
does not terminate at the ISP's local server, but continues to the
ultimate Internet website, which is often in another state. This
echoed an earlier FCC opinion and order in response to a federal
tariff application for a high-speed dedicated Internet connection.
The FCC noted, however, that carriers remain bound by their existing
interconnection agreements, and thus may be subject to reciprocal
compensation obligations to the extent provided by such
interconnection agreements. A number of CLECs have filed petitions
seeking federal appellate court review of
Page 14
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory Considerations (cont'd.)
- -----------------------------------
Reciprocal Compensation (cont'd.)
the FCC's ruling on the interstate nature of dial-up calls to ISPs.
Various ILECs have challenged the FCC's order with respect to the
ability of state commissions to impose reciprocal compensation on
Internet traffic.
Ameritech believes that this FCC ruling confirms its view that
Internet traffic is appropriately classified as interstate and that
reciprocal compensation is not payable in connection with dial-up
access to the Internet via ISPs. Ameritech therefore intends to
continue to pursue judicial appeals of the contrary state commission
determinations that preceded this FCC ruling. Cases that involve
appeals by Ameritech's landline communications subsidiaries of
adverse decisions are currently pending before the U.S. Court of
Appeals for the Seventh Circuit and U.S. District Courts in Michigan
and Wisconsin. In Ohio, the PUCO recently ruled on rehearing that
Ameritech's Ohio landline communications subsidiary is required to
make reciprocal compensation payments. Ameritech intends to appeal
that order to the U.S. District Court. Ameritech has filed a
petition for rehearing of a similar adverse determination by the
Indiana Utility Regulatory Commission (IURC).
Ameritech believes that its view, that reciprocal compensation is not
payable in these circumstances, ultimately should be upheld.
However, there can be no assurance as to that outcome or that we will
not be required to continue to make such reciprocal compensation
payments under existing interconnection agreements. Pending the
outcome of our current judicial appeals, Michigan Bell and
Ameritech's Illinois and Wisconsin landline communications
subsidiaries are making reciprocal compensation payments, under
protest, pursuant to existing interconnection agreements with CLECs
providing services to ISPs. Ameritech's Ohio landline communications
subsidiary has been ordered to begin to make reciprocal compensation
payments on or about June 19, 1999. In addition to such payments,
Ameritech is making accruals of amounts which may become payable in
Indiana in the event its view is not ultimately upheld.
Universal Service, Access Charge Reform and Price Caps
In May 1997, the FCC issued three closely related orders that
established rules to implement the universal service provisions of
the 1996 Act (the Universal Service Order) and to revise both
interstate access charge pricing (the Access Reform Order) and the
price cap plan for ILECs (the Price Cap Order).
Universal Service The FCC's Universal Service Order provides that
all interstate telecommunications providers will be required to
contribute to universal service funding, based on retail
telecommunications revenues. The Universal Service Order establishes
a multi-billion dollar interstate universal service fund to help link
eligible schools and libraries and low-income consumers and rural
health care providers to the global telecommunications network
(including the Internet). The FCC directed the phase-in of these
funds through 1999.
Access Charge Reform In its Access Reform Order, the FCC
restructured interstate access pricing and adopted changes to its
tariff structure that require ILECs to use rates that reflect the
type of costs incurred.
In addition to the changes introduced in connection with the Access
Reform Order, we have implemented state changes that mirror the
federal access reform structure.
Page 15
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory Considerations (cont'd.)
- -----------------------------------
Universal Service, Access Charge Reform and Price Caps (cont'd.)
Access Charge Reform (cont'd.)
Various interexchange carriers opposing such changes have filed with
the Illinois, Michigan and Wisconsin state commissions seeking lower
access charges. The state commissions in Illinois (the Illinois
Commerce Commission) and Michigan (the MPSC), in response to such
filings, have ordered Ameritech to split the intrastate primary
interexchange carrier charge (PICC) into two separate per-line
components, with one-half of the total charge payable by the
intraLATA toll carrier and the other half by the interLATA toll
carrier. A similar split of the intrastate PICC was ordered by the
Indiana Utility Regulatory Commission in its ongoing investigation of
universal service and access reform. Accordingly, the revenues we
receive from this charge will decrease to the extent that we are the
intraLATA toll carrier. In addition, the MPSC required that these
changes be made retroactive to January 1, 1998, when the initial
tariffs for this charge were filed. We have appealed the MPSC's
order.
Price Caps Our interstate access services are subject to price cap
regulation, which limits prices rather than profits. The Price Cap
Order effectively reduced access charges by increasing the price cap
productivity offset factor to 6.5% from the previous 5.3% and by
applying this factor uniformly to all access providers. The order
also required ILECs subject to price cap regulation to set their 1997
price cap index assuming that the 6.5% factor had been in effect
since July 1996. Certain parties have sought judicial review of the
Price Cap Order, and a decision by the D.C. Circuit Court with
respect to these matters currently is pending.
We currently cannot predict the precise impact of these regulatory
changes on our business, especially as their nature and timing may
evolve in connection with judicial and FCC consideration of other
provisions of the 1996 Act.
Number Portability
On May 5, 1998, the FCC entered an order to allow telecommunications
carriers, such as Michigan Bell, to recover over a five-year period
their carrier-specific costs of implementing long-term number
portability. Long-term number portability allows customers to retain
their local telephone numbers in the event they change local exchange
carriers. We are completing implementation of long-term number
portability in compliance with an FCC-mandated schedule. Our number
portability surcharge became effective February 1, 1999, subject to a
designation order, which could result in a reduced surcharge and a
partial refund.
Dial 1 +
In 1996, the MPSC issued two Orders requiring Michigan Bell to
provide statewide dialing parity (the ability to choose an alternate
carrier for intraLATA toll calls by dialing 1 before the phone
number), or to discount intraLATA toll access rates by 55% where
dialing parity was not implemented. In January 1997, the Michigan
Court of Appeals issued a stay of the MPSC Orders pending a
determination of Michigan Bell's appeal on the merits. In August,
the Michigan Supreme Court declined AT&T's and MCI's motion to vacate
the Court of Appeals stay.
In May 1998, the Court of Appeals issued a decision which reversed
the 1996 MPSC Orders. The Court concluded that, under the plain
language of the Michigan
Page 16
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory Considerations (cont'd.)
- -----------------------------------
Dial 1 + (cont'd.)
Telecommunications Act (MTA), Michigan Bell was required to provide
intraLATA toll dialing parity to no more than 10% of its customers on
January 1, 1996, until Ameritech obtained interLATA relief. The
Court of Appeals also reversed the imposition of a 55% discount on
access charges.
The Michigan Supreme Court granted applications for leave to appeal
filed by AT&T, MCI, the MPSC and the Michigan Attorney General. Oral
argument was held on March 11, 1999 and a decision on the merits of
the appeal is expected in later this year. While its application for
leave to appeal was pending, MCI filed another MPSC complaint asking
the Commission to reinstate the 55% discount on access charges and to
issue a new mandate for dialing parity. The MPSC granted MCI's
complaint and required immediate implementation for the remaining 30%
of our access lines in its January 19, 1999 Order. Ameritech filed a
motion for stay of the MPSC's Order with the Michigan Court of
Appeals on January 22, 1999. The Michigan Court of Appeals granted
that stay on February 9, 1999. On February 10, 1999, AT&T and MCI
WorldCom filed a Motion with the Supreme Court to Vacate Stay to
Bypass the Court of Appeals. On February 16, 1999, Michigan Bell
filed a response to the Motion. The Supreme Court has not ruled on
the Motion.
On April 9, 1999, we filed an amended implementation plan with
respect to the remaining 30% of access lines for which dialing parity
had not been implemented. On April 12, 1999, the MPSC approved the
plan. Intrastate toll dialing parity was implemented statewide for
Michigan Bell access lines on May 12, 1999.
Long-distance Services
- ----------------------
InterLATA long-distance is a $2.3 billion market in our local service
area. Under the 1996 Act, Ameritech and the other RHCs must open
their respective local markets to competition by implementing a 14-
point checklist before they can offer interLATA long-distance
services to their local landline customers. In considering an
application to offer interLATA long-distance service, the FCC must
determine whether or not an RHC has satisfied the statutory criteria,
including the competitive checklist and various structural and
accounting rules, and whether its entry into long-distance is
consistent with the public interest. An RHC is restricted from
providing interLATA long-distance service until the FCC determines
that these criteria have been met. The FCC gives substantial weight
to Department of Justice recommendations in reviewing RHC
applications to enter the market. In preparation, we have negotiated
or arbitrated numerous agreements with competitors to allow
interconnection access to our network elements at cost-based rates
and purchase of our local services at wholesale rates for resale to
the public.
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 14 requirements included in the
competitive checklist. The order set forth various actions that we
must take in order to demonstrate compliance with the checklist. We
continue to work toward full long-distance entry consistent with the
1996 Act and under terms and conditions that make economic sense for
Ameritech.
FCC rules require that interLATA long-distance service be offered by
Ameritech's long-distance subsidiary, Ameritech Communications Inc.,
which is certified to provide long-distance service in all states
outside the Ameritech five-state region. Accordingly, Ameritech's
entry into this market will not generate long-distance revenues for
Michigan Bell.
Page 17
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Evolution of the Industry
- -------------------------
Growing customer need for new services, new technologies, regulatory
reform and corporate alliances are accelerating the pace of change
and creating intense competition in the communications industry. We
believe that more competition in our industry is inevitable.
With the passage of the 1996 Act and other regulatory initiatives,
our local service markets have been more extensively opened to new
competitors, many of which are believed to have initially targeted
high-volume business customers in densely populated areas.
Interconnection agreements with competitive service providers require
us to provide interconnection or access to unbundled network elements
at cost-based rates and telecommunications services at discounted,
wholesale rates. These agreements and applicable tariffs may result
in some downward pressure on our local service revenues, as a portion
of our revenue shifts from local service at retail prices to network
access and wholesale services at lower rates and as some competitors
provide services using their own networks, in whole or in part. We
cannot predict with certainty the impact that these and other
developments ultimately may have on our future business, results of
operations or financial condition.
Year 2000 Readiness Disclosure
- ------------------------------
The Year 2000 issue exists because many computer systems and
applications, including those embedded in equipment and facilities,
use two-digit rather than four-digit date fields to designate an
applicable year. As a result, the systems and applications may not
properly recognize the year 2000 or process data that includes it,
potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures.
Ameritech has established a centrally managed, companywide initiative
to identify, evaluate and address Year 2000 issues. Begun in May
1996, Ameritech's Year 2000 effort covers our network and supporting
infrastructure for the provision of local switched and data
telecommunications services. Also within the scope of this
initiative are operational and financial information technology (IT)
systems and applications, end-user computing resources and building
systems, such as security, elevator, and heating and cooling systems.
In addition, the project includes a review of the Year 2000
compliance efforts of Ameritech's key suppliers and other principal
business partners and, as appropriate, the development of joint
business support and continuity plans for Year 2000 issues. While
this initiative is broad in scope, it is structured to identify and
prioritize our efforts for mission-critical systems, network elements
and products and key business partners.
Work is progressing in the following phases: inventory, assessment,
remediation, testing, deployment and monitoring. Although the pace
of the work varies among our business units and the phases often are
conducted in parallel, as of March 31, 1999, the inventory and
assessment phases have been substantially completed, the remediation
and testing phases are nearing completion, and the deployment phase
is well under way.
As of March 31, 1999, nearly all of the network elements requiring
corrective activity, including substantially all of the core network
switches and other network components that we regard as mission-
critical, have been made Year 2000 ready and deployed back into
production. As of March 31, 1999, more than 98% of Ameritech's total
identified IT applications, including substantially all determined
Page 18
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Year 2000 Readiness Disclosure (cont'd.)
- ----------------------------------------
to be mission-critical, have been remediated, and a majority of all
corrected applications have completed certification testing and been
deployed back into production. Ameritech has also made substantial
progress in Year 2000 readiness preparations for its remaining
infrastructure components (buildings and physical facilities,
internal voice telephone systems, and desktop PCs), and these efforts
are scheduled to be completed in mid-1999. Final integration testing
for certain critical systems and processes is scheduled to be
completed by the end of the third quarter of 1999.
With the majority of our various systems remediated and a substantial
portion of those already tested and deployed back into production,
Ameritech believes we are well positioned to complete the remediation
and deployment of our remaining systems, any additional testing that
may be necessary, and the development of our business contingency and
continuity plans in advance of the Year 2000 transition. However,
our ability to meet that goal remains dependent upon a variety of
factors, including the timely provision of necessary upgrades and
modifications by our suppliers and contractors. In some instances,
upgrades or modifications are not expected to be available until mid-
or late-1999.
Ameritech has sought Year 2000 readiness information from various
third-party suppliers on whom we depend for certain products or
essential services (such as electric utilities, interexchange
carriers, etc.), but Ameritech has no method of ensuring that these
suppliers will convert their critical systems and processes in a
timely manner. Ameritech is developing business contingency and
continuity plans (see discussion below), and is continuing to work
with key suppliers as part of a supplier compliance program to seek
to minimize such risks.
There also may be Year 2000 issues in customer premises equipment
(CPE), including CPE that we have sold or maintained and CPE that is
used in connection with 911 services. Although the customer
generally is responsible for CPE, customers could attribute a Year
2000 disruption in their CPE to a malfunction of our network service.
We have taken steps to encourage many of our customers potentially at
risk to undertake the necessary assessment and remedial activities to
avoid a Year 2000 problem with their equipment and systems.
Ameritech currently estimates that it and all of its subsidiaries
combined, including Michigan Bell, will incur expenses of
approximately $250 million through 2001 in connection with our
anticipated Year 2000 efforts, of which approximately $128 million
had been incurred through March 31, 1999. The timing of our expenses
may vary and is not necessarily indicative of readiness efforts or
progress to date. We anticipate that a portion of our Year 2000
expenses will not be incremental costs, but rather will represent the
redeployment of existing IT resources. Ameritech also expects to
incur certain capital improvement costs (totaling approximately $14
million) to support this project. Such capital costs ($12 million as
of March 31, 1999) are being incurred sooner than originally planned
but, for the most part, would have been required in the normal course
of business.
As with other communications services providers, there exists a worst
case scenario possibility that a failure to correct a Year 2000
program in one or more of our mission-critical network elements or IT
applications could cause a significant disruption of or interruption
in certain of our normal business functions. Based on Ameritech's
assessments and work to date, Ameritech believes that any such
Page 19
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Year 2000 Readiness Disclosure (cont'd.)
- ----------------------------------------
material disruption to our operations due to failure of an internal
system is unlikely. However, due to the uncertainty inherent in Year
2000 issues generally and those that are beyond our control in
particular (e.g., the final Year 2000 readiness of our suppliers,
customers, utilities and interconnecting carriers), there can be no
assurance that one or more such failures would not have a material
impact on our results of operations, liquidity or financial
condition.
As part of our Year 2000 initiative, Ameritech is evaluating
scenarios that may occur as a result of the century change and is in
the process of developing contingency and business continuity plans
tailored for Year 2000-related occurrences. Contingency planning to
maintain and restore service in the event of natural disasters, power
failures and software-related problems has been part of our standard
operation for many years, and we are working to leverage this
experience in the development of contingency and continuity plans
tailored to meet Year 2000-related challenges. This work is being
performed through centrally managed, companywide teams organized by
critical business functions (including ordering, provisioning,
maintenance, billing and power). Ameritech's contingency and
business continuity plans are expected to assess the potential for
business disruption in various scenarios, and to provide for key
operational back-up, recovery and restoration alternatives.
The above information is based on Ameritech's current best estimates,
which were derived using numerous assumptions of future events,
including the availability and future costs of certain technological
and other resources, third-party modification actions and other
factors. Given the complexity of these issues and possible
unidentified risks, actual results may vary materially from those
anticipated and discussed above. Specific factors that might cause
such differences include, among others, the availability and cost of
personnel trained in this area, the ability to locate and correct all
affected computer code, the timing and success of Year 2000 remedial
efforts of our customers and suppliers, and similar uncertainties.
New Accounting Pronouncements
- -----------------------------
FAS 133
In June 1998, the Financial Accounting Standards Board (FASB) issued
FAS 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement provides standardized accounting and
disclosure guidance for derivative instruments and the derivative
portion of certain similar contracts. It amends FAS 52, "Foreign
Currency Translation," and FAS 107, "Disclosures about Fair Values of
Financial Instruments," and it supersedes a number of other financial
accounting standards.
The statement requires entities that use derivative instruments to
measure these instruments at fair value and record them as assets or
liabilities on the balance sheet. It also requires entities to
reflect the gains or losses associated with changes in the fair value
of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying
contract or transaction.
FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, and is to be adopted as of the
beginning of the fiscal year. At the time of adoption, all
derivative instruments are to be measured at fair value and
Page 20
Management's Discussion and Analysis
of Results of Operations (cont'd.)
New Accounting Pronouncements (cont'd.)
- --------------------------------------
FAS 133 (cont'd.)
recorded on the balance sheet. Any differences between fair value
and carrying amount at that time will be recorded as a cumulative
effect of a change in accounting principle, in either net income or
other comprehensive income, as appropriate. Adoption of this
statement may or may not have a material impact on our results of
operations or financial position, depending on the nature and
magnitude of derivative activity in which we engage and the changes
in market conditions with respect to foreign currencies, interest
rates or other underlying values. We have not yet quantified the
impacts of the initial adoption of FAS 133 on our results of
operations or financial condition, nor have we determined when we
will implement the new standard.
Audit Report on Continuing Property Records
- -------------------------------------------
On March 12, 1999, the FCC released the result of a staff-level audit
of the property records of certain central office equipment
maintained by Ameritech's landline communications subsidiaries,
including Michigan Bell, and the other RHCs. Based solely on a
physical verification audit, this report alleged an overstatement,
and consequently recommended a write-off, of approximately $567
million of Ameritech's central office equipment; however no
allocation of the write-off among Ameritech's five landline
communication subsidiaries was reflected in the audit. In releasing
this audit report, the FCC stated that it did not pass judgment on
its accuracy or the reasonableness of its conclusions or
recommendations.
Ameritech has issued a response to the audit that, among other
things, disputes the validity of its auditing and statistical
sampling methods. We also dispute the practical consequences of the
FCC's property audit while under a price cap regulatory plan.
Further, in the event the FCC required us to write central office
equipment off our books, we believe there would be no accounting
impact on net plant because we follow the group method of
depreciation. Under this method plant retirements are charged
against the accumulated depreciation balance.
The FCC is currently seeking public comment on issues raised by the
audit results.
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;
- - The effects of vigorous competition in the local exchange,
intraLATA toll or data markets;
- - Federal regulatory developments that impact the telecommunications
industry and pending regulatory issues under state jurisdiction;
- - Potential additional costs to comply with the regulatory
requirements of entry into the interLATA long-distance market;
Page 21
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Private Securities Litigation Reform Act Safe Harbor Statement
(cont'd.)
- ---------------------------------------------------------------------
- ---
- - The effects of growing demand for wireless technology which may
reduce or replace landline services provided by Michigan Bell;
- - The timing of, and potential regulatory or other considerations
relating to, the consummation of Ameritech's proposed merger with
SBC;
- - 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 compliance.
The words "expect," "believe," "anticipate," "estimate," "project,"
and "intend" and similar expressions are intended to identify forward-
looking statements. These forward-looking statements are found at
various places throughout the Management's Discussion and Analysis
and elsewhere in this report.
You should not place undue reliance on these forward-looking
statements, which are applicable only as of the date hereof. We have
no obligation to revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof or
to reflect the occurrence of unanticipated events.
Page 22
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, 1999 and March 31,
1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
We did not file a Form 8-K during the quarter ended March
31, 1999.
Page 23
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 13, 1999 /s/ Ronald G. Pippin
----------------------
Ronald G. Pippin
Vice President and Comptroller
(Principal Accounting Officer)
Page 24
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.
Advanced data services -
- ----------------------
services that use advanced technology to allow faster network access
to the Internet and other multimedia and data services.
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 WorldCom 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.
Landline communications subsidiaries -
- -----------------------------------
the subsidiaries of Ameritech engaged primarily in providing local
phone service and network access in the states of Illinois, Indiana,
Michigan, Ohio and Wisconsin.
Page 25
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.
Unbundled network element -
- -------------------------
any feature, function or capability used in the provision of
telecommunications service that is made available by local exchange
carriers to other telecommunications providers separate from other
network elements and for a separate fee.
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.
Voice-grade equivalent line -
- ----------------------------
a channel or other portion of a high capacity access line that can be
used to transmit voice or data traffic. For example, one DS1 circuit
is capable of handling 24 voice-grade and/or data lines.
Page 26