<PAGE>
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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
(Mark one)
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[x] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
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or
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[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-2222
Illinois Bell Telephone Company
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An Illinois Corporation
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225 W. Randolph Street
Chicago, Illinois 60606
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I.R.S. Employer Identification
Number 36-1253600
Telephone number (800) 257-0902
ILLINOIS 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, 81,938,121 common shares were outstanding.
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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 8-20
PART II
OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 21
Glossary 23-24
i
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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...................... $ 637.8 $ 562.8
Interstate network access.......... 231.0 198.2
Intrastate network access.......... 33.0 34.4
Long-distance services............. 63.9 54.2
Other.............................. 107.2 122.3
--------- ---------
1,072.9 971.9
--------- ---------
Operating expenses
Employee-related expenses.......... 206.2 208.9
Depreciation and amortization...... 173.8 163.3
Other operating expenses........... 323.4 317.1
Taxes other than income taxes...... 20.2 20.0
--------- ---------
723.6 709.3
--------- ---------
Operating income..................... 349.3 262.6
Interest expense..................... 20.9 30.9
Other income, net ................... 2.1 0.8
--------- ---------
Income before income taxes........... 330.5 232.5
Income taxes......................... 138.2 98.7
--------- ---------
Net income........................... 192.3 133.8
Accumulated deficit,
beginning of period................ (90.1) (337.4)
Less, dividends declared......... 174.3 141.9
--------- ---------
Accumulated deficit,
end of period...................... $ (72.1) $ (345.5)
========= =========
See Notes to Condensed Financial Statements.
Page 1
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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......... $ 9.6 $ 10.1
Receivables, net
Customers................................. 698.4 757.5
Ameritech and affiliates.................. 4.9 5.4
Other..................................... 27.8 29.4
Material and supplies....................... 29.5 29.6
Prepaid and other........................... 39.2 36.8
--------- ---------
809.4 868.8
--------- ---------
Property, plant and equipment................ 10,245.9 10,103.8
Less, accumulated depreciation............... 6,148.0 6,013.6
--------- ---------
4,097.9 4,090.2
--------- ---------
Investments, primarily in affiliates......... 106.6 116.0
Other assets and deferred charges............ 535.5 538.5
--------- ---------
Total assets................................. $ 5,549.4 $ 5,613.5
========= =========
See Notes to Condensed Financial Statements.
Page 2
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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................................. $ 828.7 $ 1,138.6
Other..................................... 1.1 1.2
Accounts payable
Ameritech Services, Inc. (ASI)............ 204.3 106.5
Ameritech and affiliates.................. 77.3 55.7
Other..................................... 262.1 257.0
Other current liabilities.................. 490.1 417.2
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1,863.6 1,976.2
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Long-term debt.............................. 544.8 544.9
--------- ---------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 360.3 345.3
Unamortized investment tax credits......... 32.4 33.8
Postretirement benefits
other than pensions...................... 884.2 886.6
Long-term payable to ASI................... 20.0 21.8
Other...................................... 78.3 75.4
--------- ---------
1,375.2 1,362.9
--------- ---------
Shareowner's equity
Common shares - ($20 par value;
100,000,000 shares authorized;
81,938,121 issued and outstanding)....... 1,638.8 1,638.8
Proceeds in excess of par value............ 199.1 180.8
Accumulated deficit........................ (72.1) (90.1)
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1,765.8 1,729.5
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Total liabilities and shareowner's equity... $ 5,549.4 $ 5,613.5
========= =========
See Notes to Condensed Financial Statements.
Page 3
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CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended
March 31
-------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 192.3 $ 133.8
Adjustments to net income
Depreciation and amortization............... 173.8 163.3
Deferred income taxes, net.................. 6.3 (9.1)
Investment tax credits, net................. (1.4) (1.7)
Capitalized interest........................ (0.6) (0.7)
Change in accounts receivable, net.......... 61.2 17.8
Change in material and supplies............. (2.3) (24.3)
Change in certain other current assets...... (2.4) (0.9)
Change in accounts payable.................. 124.5 55.7
Change in certain other current
liabilities................................ 81.6 82.6
Change in certain other noncurrent
assets and liabilities..................... 18.9 7.7
Other operating activities, net............. 9.9 9.6
-------- --------
Net cash from operating activities............ 661.8 433.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (177.9) (163.2)
Proceeds from (cost of) disposals of
property, plant and equipment................ 0.3 (0.1)
-------- --------
Net cash from investing activities............ (177.6) (163.3)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany financing, net................... (310.0) (264.0)
Retirements of long-term debt................. (0.4) (0.5)
Dividend payments............................. (174.3) --
-------- --------
Net cash from financing activities............ (484.7) (264.5)
-------- --------
Net change in cash and
temporary cash investments................... (0.5) 6.0
Cash and temporary cash investments,
beginning of period.......................... 10.1 20.9
-------- --------
Cash and temporary cash investments,
end of period................................ $ 9.6 $ 26.9
======== ========
See Notes to Condensed Financial Statements.
Page 4
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
March 31, 1999
NOTE 1: Preparation of Interim Financial Statements
We have prepared the unaudited condensed consolidated 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 23 and 24.
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
serve 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
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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 $10.0 million in the first quarter of 1999.
Page 6
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
March 31, 1999
Note 4: Segment Information
Illinois 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 Illinois Bell are included in
the results of several business units, and accordingly, Illinois Bell
is not managed as a separate entity. However, all of the business
units that include the results of Illinois Bell are reflected in
Ameritech's communications segment. Illinois 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 $$1.5 million at Illinois 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
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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 $1,072.9 million
and were $971.9 million for the same period in 1998, an increase of
$101.0 million. Increased demand for call management and data
services, combined with access line growth and higher network usage
volumes, drove 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 $ 637.8 $ 562.8 $ 75.0 13.3
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 2.7% over the comparable prior year period, as
well as net rate increases, also contributed to the increase.
There were 7,080,000 access lines in service as of March 31, 1999
compared with 6,896,000 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 $ 231.0 $ 198.2 $ 32.8 16.5
Intrastate
- ----------
Three Months Ended $ 33.0 $ 34.4 $ (1.4) (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 networks.
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
Page 8
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
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, 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 8.1%
over the same period last year.
Intrastate network access revenues decreased for the three months
ended March 31, 1999 due primarily to rate decreases, effective in
July 1998 with the FCC annual access filing reductions and changes in
the intrastate primary interexchange carrier charge (PICC). This
decrease was partially offset by increased network usage. Intrastate
minutes of use for the three months ended March 31, 1999 increased by
3.4% over the same period last year.
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Long-distance service
- ---------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 63.9 $ 54.2 $ 9.7 17.9
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 increased for the three months ended
March 31, 1999 due primarily to usage increases, primarily resulting
from increased call volumes in early January 1999 resulting from
severe winter weather. February and March volumes decreased in line
with recent experience in the fourth quarter of 1998, but did not
offset the strong January volume experienced. Rate increases,
implemented in July 1998, also contributed to the increase.
- ---------------------------------------------------------------------
Other
- -----
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 107.2 $ 122.3 $ (15.1) (12.3)
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 decreased for the three months ended March
31, 1999 due primarily to a $10.0 million revenue reduction resulting
from a FCC ruling which lowered the pay phone per call compensation
we receive from other communications companies. Nonregulated service
revenues increased as a result of higher revenues from inside wire
installation and maintenance services resulting from price increases,
partially offset by decreased equipment sales.
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Operating expenses
- ------------------
Total operating expenses for the three months ended March 31, 1999
increased by $14.3 million or 2.0 percent to 723.6 million. The
increase was due primarily to higher depreciation expense and other
operating expenses, resulting from higher cost of sales and access
charges, as discussed below.
Page 9
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Employee-related expenses
- -------------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 206.2 $ 208.9 $ (2.7) (1.3)
Employee-related expenses decreased for the three months ended March
31, 1999 primarily due to lower average force levels compared with
the prior year period, as well as decreased bonus and overtime costs.
These decreases were partially offset by increases in wage rates
reflecting new union contracts effective in mid-1998, as well as
increases in benefits and other employee-related expenses.
We employed 13,876 employees as of March 31, 1999, compared with
14,951 as of March 31, 1998.
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Depreciation and
amortization
- ------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 173.8 $ 163.3 $ 10.5 6.4
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 increase, as we used shorter
depreciable lives for newer technologies.
- ---------------------------------------------------------------------
Other operating expenses
- ------------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 323.4 $ 317.1 $ 6.3 2.0
Other operating expenses increased for the three months ended March
31, 1999 due primarily to higher access charge expenses, resulting
from state commission rulings regarding calls to the Internet via
Internet service providers (ISPs). These rulings (which we are
contesting) require local exchange carriers to pay reciprocal
compensation for calls by their customers to the Internet via ISPs
who, in turn, are customers of competing local exchange carriers.
Also contributing to the increase were higher material costs compared
with the prior year period, partially offset by decreased
professional and contract services, affiliated services, bad debt
expenses and advertising, reflecting cost containment and refocused
sales and marketing efforts. Effective January 1, 1999, we adopted
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which required the
capitalization of $1.5 million in software costs previously expensed.
(See Note 5).
Page 10
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Taxes other than income taxes
- -----------------------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 20.2 $ 20.0 $ 0.2 1.0
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 for the three months ended
March 31, 1999 due primarily to an increase in gross receipts taxes.
This increase was partially offset by lower infrastructure
maintenance fees and other operating taxes.
- ---------------------------------------------------------------------
Other income and expenses
- -------------------------
Interest expense
- ----------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 20.9 $ 30.9 $ (10.0) (32.4)
Interest expense decreased for the three months ended March 31, 1999
due primarily to lower average interest rates, resulting from the
redemption of $475 million of long-term debt in December 1998.
- ---------------------------------------------------------------------
Other income, net
- -----------------
Change
March 31 Income Percent
------------
(dollars in millions) 1999 1998 (Expense) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 2.1 $ 0.8 $ 1.3 162.5
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, 1999 due primarily to a decrease in
miscellaneous nonoperating expenses, partially offset by decreased
equity earnings from Ameritech Services, Inc. (ASI).
- ---------------------------------------------------------------------
Income taxes
- ------------
March 31 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 138.2 $ 98.7 $ 39.5 40.0
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. The increase in pretax earnings discussed
above also contributed to the increase.
- ---------------------------------------------------------------------
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the three months ended
March 31 was 14.23 in 1999 and 7.90 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 $475 million of long-
term debt in December 1998, results in the increase in the ratio.
Page 11
<PAGE>
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 12
<PAGE>
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 Illinois 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
Page 13
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory Considerations (cont'd.)
- -----------------------------------
Reciprocal Compensation (cont'd.)
appellate court review of 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, Illinois Bell and
Ameritech's Michigan 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.
Page 14
<PAGE>
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.)
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. 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 Michigan Public Service Commission or 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. Ameritech has
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 Illinois 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.
Advantage Illinois
We are subject to regulation by the ICC with respect to certain
intrastate rates and services. In 1994, the ICC approved Advantage
Illinois, providing a framework for regulating Illinois Bell by
capping prices for noncompetitive services. At the same time, the
ICC approved a cap on the monthly line charge for our residential
customers and residential calling rates within local calling areas at
March 1992 levels for five years ending October 1999. In return for
these price protections, the ICC removed a ceiling on our earnings to
reflect the increasingly competitive
Page 15
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Regulatory Considerations (cont'd.)
- -----------------------------------
Advantage Illinois (cont'd.)
communications industry and to create incentives for us to invest in
new technology, develop new services and improve efficiency. In
1996, we offered dialing parity in our local toll markets, giving our
customers the ability to choose an alternate carrier for intraLATA
toll calls. In July 1998, we reduced rates by approximately $19
million annually. Lower prices are reflected in several product and
service areas, but the largest portion of the reductions comes from
increased volume discounts for certain local calls. This is the
fifth consecutive year of price reductions, now totaling $747
million, under the Advantage Illinois price cap plan.
The ICC approved an Interim Order in December 1998 in Phase I of a
proceeding investigating access charges and universal service. Phase
I dealt with tariff compliance issues. Phase II hearings, which
dealt with policy issues for non-rural local exchange carriers,
concluded on March 26.
Long-distance Services
- ----------------------
InterLATA long-distance is a $2.8 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 service
to their local landline customers. In considering an application to
offer interLATA long-distance services, 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.
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
Illinois Bell.
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
Page 16
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Evolution of the Industry (cont'd.)
- -----------------------------------
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 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.
Page 17
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Year 2000 Readiness Disclosure (cont'd.)
- ----------------------------------------
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 Illinois 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
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.
Page 18
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Year 2000 Readiness Disclosure (cont'd.)
- ----------------------------------------
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 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.
Page 19
<PAGE>
Management's Discussion and Analysis
of Results of Operations (cont'd.)
Audit Report on Continuing Property Records (cont'd.)
- -----------------------------------------------------
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 Illinois 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;
- - The effects of growing demand for wireless technology which may
reduce or replace landline services provided by Illinois 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 20
<PAGE>
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 21
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, an
authorized company official has signed this report on our behalf.
ILLINOIS BELL TELEPHONE COMPANY
-------------------------------
(Registrant)
Date: May 13, 1999 /s/ Ronald G. Pippin
----------------------
Ronald G. Pippin
Vice President and Comptroller
(Principal Accounting Officer)
Page 22
<PAGE>
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 23
<PAGE>
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 24
EXHIBIT 12
ILLINOIS BELL TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
(Dollars in Millions)
Three Months Ended
March 31
---------------
1999 1998
---- ----
1. EARNINGS
a) Income before interest expense,
income taxes and undistributed
equity earnings..................... $ 361.6 $ 272.5
b) Portion of rental expense
representative of the
interest factor (1)................. 4.2 3.3
-------- --------
Total 1(a) and 1(b)..................... $ 365.8 $ 275.8
-------- --------
2. FIXED CHARGES
a) Total interest expense including
capital lease obligations........... $ 20.9 $ 30.9
b) Capitalized interest................. 0.6 0.7
c) Portion of rental expense
representative of the
interest factor (1)................. 4.2 3.3
-------- --------
Total 2(a) through 2(c)................. $ 25.7 $ 34.9
-------- --------
3. RATIO OF EARNINGS TO FIXED CHARGES....... 14.23 7.90
===== =====
(1) We consider one third of total rental expense to represent return on
capital.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ILLINOIS BELL TELEPHONE COMPANY'S MARCH 31, 1999 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,600
<SECURITIES> 0<F1>
<RECEIVABLES> 843,000
<ALLOWANCES> (111,900)
<INVENTORY> 29,500
<CURRENT-ASSETS> 809,400
<PP&E> 10,245,900
<DEPRECIATION> 6,148,000
<TOTAL-ASSETS> 5,549,400
<CURRENT-LIABILITIES> 1,863,600
<BONDS> 544,800
0
0
<COMMON> 1,638,800
<OTHER-SE> 127,000
<TOTAL-LIABILITY-AND-EQUITY> 5,549,400
<SALES> 0<F1><F2>
<TOTAL-REVENUES> 1,072,900
<CGS> 0<F3>
<TOTAL-COSTS> 723,600
<OTHER-EXPENSES> (2,100)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,900
<INCOME-PRETAX> 330,500
<INCOME-TAX> 138,200
<INCOME-CONTINUING> 192,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,300
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>WE HAVE NOT STATED SECURITIES SEPARATELY IN THE FINANCIAL STATEMENTS
BECAUSE THEY ARE NOT MATERIAL. WE HAVE INCLUDED THEM IN THE "CASH" TAG.
<F2>NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES. WE THEREFORE HAVE NOT STATED THESE SALES SEPARATELY IN THE
FINANCIAL STATEMENTS, PER REGULATION S-X, RULE 5-03(B). WE HAVE INCLUDED
THESE SALES IN THE "TOTAL REVENUES" TAG.
<F3>WE HAVE INCLUDED COST OF TANGIBLE GOODS SOLD IN COST OF SERVICE AND
PRODUCTS IN OUR FINANCIAL STATEMENTS AND THE "TOTAL COST" TAG, PER REGULATION
S-X, RULE 5-03(B).
</FN>
</TABLE>
