<PAGE>cover
- ---------------------------------------------------------------------
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 June 30, 1999
- -------------------------------------------
or
- -------------------------------------------
[ ] 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 1-8612
Ameritech Corporation
-----------------------------
A Delaware Corporation
-----------------------------
30 S. Wacker Drive
Chicago, Illinois 60606
-----------------------------
I.R.S. Employer Identification
Number 36-3251481
Telephone number (800) 257-0902
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 June 30, 1999, 1,099,390,755 common shares were outstanding.
<PAGE>i
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM Page
- ---- ----
1. Financial Statements
Condensed Consolidated Statements of Income for
the three and six months ended
June 30, 1999 and 1998 1
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4-14
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-39
3. Quantitative and Qualitative
Disclosures About Market Risk 40
PART II
OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 41
Glossary 43-45
i
<PAGE>1
Item 1 - Financial Statements
-----------------------------
AMERITECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues
Local service................. $ 2,086 $ 1,739 $ 3,935 $ 3,421
Interstate network access..... 685 630 1,361 1,244
Intrastate network access..... 151 169 288 309
Long-distance service ........ 366 341 735 682
Cellular, directory and other. 1,514 1,410 2,913 2,766
------- ------- ------- -------
4,802 4,289 9,232 8,422
------- ------- ------- -------
Operating expenses
Employee-related expenses..... 1,080 1,012 2,107 2,054
Depreciation and amortization. 738 672 1,448 1,335
Other operating expenses...... 1,461 1,290 2,882 2,551
Restructuring................. -- -- (44) 104
Taxes other than income taxes. 147 151 309 309
------- ------- ------- -------
3,426 3,125 6,702 6,353
------- ------- ------- -------
Operating income................ 1,376 1,164 2,530 2,069
Interest expense................ 134 148 268 322
Other income, net............... 59 1,627 170 1,678
------- ------- ------- -------
Income before income taxes...... 1,301 2,643 2,432 3,425
Income taxes.................... 482 936 899 1,225
------- ------- ------- -------
Income before
cumulative effect of
change in accounting
principle .................... 819 1,707 1,533 2,200
Cumulative effect of change in
accounting principle (Note 2). -- -- 207 --
------- ------- ------- -------
Net income...................... $ 819 $ 1,707 $ 1,740 $ 2,200
======= ======= ======= =======
Basic earnings per share
Income before
cumulative effect of
change in accounting
principle .................... $ 0.75 $ 1.55 $ 1.39 $ 2.00
Cumulative effect of change in
accounting principle (Note 2). -- -- 0.19 --
------- ------- ------- -------
Net income..................... $ 0.75 $ 1.55 $ 1.58 $ 2.00
======= ======= ======= =======
Diluted earnings per share
Income before
cumulative effect of
change in accounting
principle..................... $ 0.74 $ 1.54 $ 1.38 $ 1.98
Cumulative effect of change in
accounting principle (Note 2). -- -- 0.19 --
------- ------- ------- -------
Net income ................... $ 0.74 $ 1.54 $ 1.57 $ 1.98
======= ======= ======= =======
Dividends declared per common
share.......................... $0.3175 $ 0.30 $0.635 $ 0.60
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements.
Page 1
<PAGE>2
AMERITECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
June 30, 1999 Dec. 31, 1998
------------- -------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
Current assets
Cash and temporary cash investments........ $ 292 $ 139
Receivables, net........................... 3,637 3,052
Installment receivable from
TCNZ share sale.......................... -- 940
Material and supplies...................... 361 345
Prepaid and other.......................... 429 654
-------- --------
4,719 5,130
-------- --------
Property, plant and equipment............... 37,591 36,344
Less, accumulated depreciation............. 23,157 22,039
-------- --------
14,434 14,305
-------- --------
Investments, primarily international........ 7,922 4,938
Other assets and deferred charges........... 6,168 5,926
-------- --------
Total assets................................ $ 33,243 $ 30,299
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Debt maturing within one year.............. $ 3,891 $ 2,619
Accounts payable........................... 2,013 1,905
Other...................................... 3,552 3,476
-------- --------
9,456 8,000
-------- --------
Long-term debt.............................. 6,157 5,557
-------- --------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes.......... 1,782 1,502
Unamortized investment tax credits......... 106 115
Postretirement benefits
other than pensions...................... 2,910 2,918
Other...................................... 1,359 1,310
-------- --------
6,157 5,845
-------- --------
Shareowners' equity
Common stock, par value $1; 2.4 billion
shares authorized, 1,177 million issued
in 1999 and 1998......................... 1,177 1,177
Proceeds in excess of par value............ 5,609 5,493
Reinvested earnings........................ 7,498 6,455
Treasury stock, at cost
(78 million shares in 1999 and 1998)..... (2,068) (1,923)
Deferred compensation...................... (37) (114)
Accumulated other comprehensive income..... (706) (191)
-------- --------
11,473 10,897
-------- --------
Total liabilities and shareowners' equity... $ 33,243 $ 30,299
======== ========
See Notes to Condensed Consolidated Financial Statements.
Page 2
<PAGE>3
AMERITECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six Months Ended
June 30
-------------
1999 1998
---- ----
Cash Flows from Operating Activities
Net income................................... $ 1,740 $ 2,200
Adjustments to net income
Cumulative effect of change
in accounting principle,
net of tax................................ (207) --
Restructuring, net of tax.................. (27) 64
Depreciation and amortization.............. 1,448 1,335
Deferred income taxes...................... 78 131
Investment tax credits..................... (9) (12)
Capitalized interest....................... (11) (14)
Change in accounts receivable, net......... 70 70
Change in material and supplies............ (31) (77)
Change in certain other current assets..... 27 (143)
Change in accounts payable................. 66 (27)
Change in certain other current
liabilities............................... 115 912
Change in certain other noncurrent
assets and liabilities.................... (272) (444)
Undistributed equity earnings
in affiliates............................. (42) (24)
Gain on sale of TCNZ shares................ -- (1,543)
Other operating activities, net............ 49 110
------- -------
Net cash from operating activities........... 2,994 2,538
------- -------
Cash Flows from Investing Activities
Capital expenditures......................... (1,383) (1,392)
Additional investments, principally
Bell Canada in 1999 and
Tele Danmark in 1998....................... (3,653) (3,173)
Proceeds from repayment of GEIS note......... -- 473
Proceeds from sale of TCNZ shares............ 971 1,078
Other investing activities, net.............. 7 17
------- -------
Net cash from investing activities........... (4,058) (2,997)
------- -------
Cash Flows from Financing Activities
Net change in short-term debt................ 1,208 (1,519)
Issuance of preferred stock by subsidiary.... -- 322
Issuance of long-term debt................... 741 2,500
Retirement of long-term debt................. (7) (244)
Dividend payments............................ (698) (659)
Proceeds from reissuance of treasury stock... 231 233
Repurchase of common stock................... (258) (133)
------- -------
Net cash from financing activities........... 1,217 500
------- -------
Net change in cash and temporary
cash investments........................... 153 41
Cash and temporary cash investments,
beginning of period........................ 139 239
------- -------
Cash and temporary cash investments,
end of period............................... $ 292 $ 280
======= =======
See Notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>4
AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and the quarterly report on Form 10-Q previously filed in
1999.
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 43 through 45.
Note 2: Change in accounting principle - Directory Publishing
During the quarter ended June 30, 1999, we changed our method of
accounting for directory publishing revenues and expenses from the
deferred method to the as published method. Under the as published
method, revenues and expenses are recognized when the directories are
issued rather than over the lives of the directories, as under the
deferred method. We believe the as published method is preferable
because it is the method generally followed in the industry and by
publishing companies.
Generally accepted accounting principles (GAAP) require an accounting
change such as this to be recorded on January 1, 1999 by reflecting the
cumulative effect of the change. We are also restating our first
quarter 1999 results to conform to our new method of accounting as
shown below:
Three Months Ended March 31, 1999
---------------------------------
(in millions, except per share amounts)
As previously
Reported As restated
------------- -----------
Revenues....................... $4,455 $4,430
Operating income............... $1,182 $1,154
Income before cumulative
effect of change in
accounting principle......... $732 $714
Net income after cumulative
effect of change in
accounting principle......... $732 $921
Basic earnings per share before
cumulative effect of change in
accounting principle......... $0.67 $0.65
Basic earnings per share....... $0.67 $0.84
Diluted earnings per share before
cumulative effect of change in
accounting principle......... $0.66 $0.64
Diluted earnings per share..... $0.66 $0.83
Page 4
<PAGE>5
AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 2: Change in accounting principle - Directory Publishing (cont'd.)
We recorded the cumulative effect of the change in accounting principle
effective January 1, 1999. The cumulative effect was a pretax gain of
$332 million ($207 million after-tax or $0.19 per share). In addition,
this change had a significant impact on our balance sheet as of January
1, 1999. Accounts receivable increased $600 million reflecting the
unbilled revenue impact and current assets (Prepaid and other)
decreased $189 million as a result of reducing costs previously deferred.
The effect of this accounting change in the second quarter increased
revenues by $17 million, operating income by $20 million, and net
income by $13 million or $0.01 per diluted share.
GAAP prohibits retroactive treatment for accounting changes like our
directory publishing policy. However, had we restated 1998 results,
the effect would have been to increase (decrease) the following items:
Diluted
Operating earnings
Revenues income Net income per share
---------- ---------- ---------- ----------
1st Quarter $ 25 $ (33) $ (21) $ (0.02)
2nd Quarter 26 15 9 0.01
3rd Quarter (11) (6) (4) --
4th Quarter 66 32 20 0.02
Note 3: Investment in Bell Canada
On June 1, 1999, Ameritech and BCE Inc., a publicly traded Canadian
communications company, finalized their strategic partnership announced
on March 24. This partnership provides for an equity investment by
Ameritech of Cdn $5.1 billion (US $3.4 billion) for a 20% minority
interest in Bell Canada, a wholly owned subsidiary of BCE Inc., and for
a number of joint development and operational cooperation projects.
BCE retains 80% of Bell Canada through a holding company.
As part of its investment, BCE also entered into a shareholders
agreement that provides us with the right to nominate two of ten
Directors to the Board of Directors of Bell Canada, nominate one
Director to the BCE Mobile Board of Directors, appoint the Chief
Financial Officer of Bell Canada and participate in an exchange of
approximately 15 other professionals. This agreement also provides for
other minority or protective rights between the parties. The
shareholders agreement with BCE also provides that at any time during
the periods July 1, 2002 through December 31, 2002, and July 1, 2004
through December 31, 2004, we have the option to sell all of our shares
acquired in this transaction to BCE. The selling price would be fair
market value plus 25%. Similarly, BCE has the right to purchase our
Bell Canada shares during the same time frames and at the same price.
The shareholders agreement also provides that Ameritech has the right
to sell its shares acquired in this transaction to BCE upon a change in
control of BCE. During the first five years we own our shares, the
price would be the highest of the following: (a) our original purchase
price plus 15%, compounded annually, adjusted downward for any returns
of capital or cash dividends already received by Ameritech;
Page 5
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AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 3: Investment in Bell Canada (cont'd.)
(b) fair market value plus 25%; or (c) the implied value in the
transaction that gave rise to the change in control at BCE. After the
fifth year, the price would be the higher of fair market value or the
implied value in the transaction that gave rise to the change in
control at BCE. Similarly, BCE may call our Bell Canada shares at any
time if there is a change in control of Ameritech (specifically
excluding the pending SBC Merger). BCE's price would be fair market
value. The shareholders agreement also provides for rights of first
refusal and rights of first offer.
Bell Canada currently owns 65% of the outstanding common shares of BCE
Mobile Communications Inc. The remaining common shares of BCE Mobile
are held by the public. On July 30, 1999, Bell Canada announced that
the board of directors of BCE Mobile accepted its offer to merge,
thereby eliminating all the minority common stockholders for a cash
price of Cdn $1.6 billion or approximately US $1.1 billion. The merger
must be approved by a simple majority of the votes cast by the minority
stockholders of BCE Mobile. The transaction, if approved by the
minority stockholders, will be funded by having BCE and Ameritech
contribute capital to Bell Canada, unless other sources of cash at Bell
Canada become available. Ameritech's 20% share would be approximately
US $210 million.
Note 4: 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, as discussed below. 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.
Federal regulatory approvals
- ----------------------------
On March 23, 1999, the Department of Justice negotiated and agreed to 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
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AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 4: Proposed Merger with SBC Communications Inc. (cont'd.)
Federal regulatory approvals (cont'd.)
- --------------------------------------
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. Approximately 1,500 of Ameritech's
cellular employees have been selected to transfer to GTE upon
completion of the sale.
The required 60-day comment period on the proposed consent decree ended
on June 28, 1999. No comments were received. The Department of
Justice has informed the U.S. District Court in Washington, D.C. that
the proposed consent decree is now ready for court approval and entry.
On June 29, 1999, the FCC staff announced a comprehensive set of
proposed Merger conditions negotiated with Ameritech and SBC. The FCC
staff has indicated that they expect to recommend to the Commission
that the Merger be approved with the proposed conditions, subject to
receipt of any comments from the public. The proposed conditions were
released for public comment and more than 50 comments were filed by the
July 19th deadline. A joint Ameritech/SBC reply and some additional
public comments were filed on July 26, 1999.
Some of the more significant Merger conditions negotiated with the FCC
include:
- - a 6-month acceleration of our combined (Ameritech and SBC) facilities-
based entry into 30 out-of-region local markets with potential to pay
$40 million for each failure to enter any of these markets;
- - common operational support systems across all 13 states served by the
combined Ameritech and SBC, providing competitors uniformity in
ordering, provisioning service and billing their customers (as well
as related training for small competitors);
- - large discounts for resold local service and unbundled loops (and the
provision of the unbundled network element platform) to encourage
competition in the residential market;
- - stringent performance monitoring, reporting and enforcement measures
with the potential for $1 billion in payments if performance measures
are not met;
- - implementation of advanced services such as ADSL, through a separate
subsidiary, with broad availability to include rural and low-income
urban customers;
- - waiver of minimum monthly charges for 3 years when we are allowed to
provide interLATA long-distance service;
- - extension of a program to provide financial assistance to low-income
customers in all 13 states; and
- - adoption and implementation of "shared transport" as currently
offered by SBC.
Page 7
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AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 4: Proposed Merger with SBC Communications Inc. (cont'd.)
State regulatory approvals
- --------------------------
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 certain workforce levels in Ohio 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
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. A group of Merger opponents filed a motion for a
rehearing with the PUCO, but the PUCO denied the motion on June 2, 1999.
On April 26, 1999, the hearing examiners of the Illinois Commerce
Commission (ICC) issued a revised proposed order approving the Merger
subject to certain conditions. However, upon review by the ICC, the
commissioners had further questions. In response, we and SBC amended
the joint application to provide additional information, and the record
was reopened to consider it. Three days of additional hearings were
held on July 13-15, 1999. We expect that the matter will be referred
to the ICC in August for a decision. Under Illinois law, the ICC must
render a decision in September 1999.
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 disagreed with the IURC's assertion of authority
to approve the Merger. We appealed to the Indiana Supreme Court this
assertion of authority by the IURC. On July 30, 1999, the Indiana
Supreme Court issued an opinion finding that the IURC did not have
jurisdiction over the Merger and vacated the IURC's May 5th order.
The Public Utilities Commission of Nevada (PUCN) issued an order on
July 29, 1999, requiring SBC to "show cause" why the PUCN does not have
jurisdiction to approve the Merger.
Note 5: Sale of Investment in Telecom Corporation of
New Zealand Limited
Beginning in 1990, Ameritech held an investment in Telecom Corporation
of New Zealand Limited (TCNZ), New Zealand's principal supplier of
domestic and international communications services. In April 1998, we
sold substantially all of our remaining 24.95% stake in TCNZ in a
global stock offering and recorded a gain of approximately $1 billion
in the second quarter of 1998. We originally received $1,078 million
with the remaining sale proceeds due in 1999. During the six months
ended June 30, 1999, we received additional sales proceeds of $971 million.
Note 6: Earnings Per Share
We compute basic earnings per common share by dividing net income by
the weighted average number of common shares outstanding during the
periods. We calculate diluted earnings per share by including all dilutive
potential common shares such as stock options. No adjustment to reported
net income is required when computing diluted earnings per share.
Page 8
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AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 6: Earnings Per Share (cont'd.)
The following represents the average common shares outstanding and
dilutive potential common shares for the periods indicated:
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Average common shares
outstanding (000s)...... 1,099,081 1,101,153 1,099,073 1,100,405
Dilutive potential common
shares (000s)........... 13,046 9,104 12,609 8,944
--------- --------- --------- ---------
Average shares with
dilution (000s)......... 1,112,127 1,110,257 1,111,682 1,109,349
========= ========= ========= =========
Note 7: Comprehensive Income
On January 1, 1998, we adopted Statement of Financial Accounting
Standards (FAS) 130, "Reporting Comprehensive Income." This statement
established standards for reporting and display of comprehensive income
and requires that all components of comprehensive income be reported in
financial statements having the same prominence as other financial
statements.
Comprehensive income for the three and six months ended June 30, 1999
and 1998 was as follows:
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Net income.................. $ 819 $ 1,707 $ 1,740 $ 2,200
Foreign currency translation
adjustment gain (loss).... (120) 71 (519) (43)
Unrealized gain (loss) on
available-for-sale
securities............... 1 23 9 23
Reclassification adjustment to
net income for cumulative
translation adjustment on
TCNZ shares sold......... -- 56 -- 56
Reclassification adjustment to
net income for realized gain
on sale of securities.... -- -- (5) --
------- ------- ------- -------
Comprehensive income........ $ 700 $ 1,857 $ 1,225 $ 2,236
======= ======= ======= =======
Our foreign operations and our investments in international ventures
are subject to certain risks related to fluctuations in foreign
currency exchange rates. Foreign exchange transaction gains and losses
incurred by wholly owned subsidiaries impact operating income, while
transaction gains and losses incurred by other international ventures
(primarily equity method investments) impact other income, net.
Translation adjustments result in a change in the investment balance
and a corresponding change in accumulated other comprehensive income in
the consolidated balance sheet. The change is negative when the U.S.
dollar strengthens against the local currency.
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AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 7: Comprehensive Income (cont'd.)
FAS 130 requires disclosure of the tax effects related to the
components of comprehensive income. The deferred tax effect of the
unrealized gain on available-for-sale securities was a $5 million
charge for the six months ended June 30, 1999. The deferred tax effect
of the realized gain for the six months ended June 30, 1999 was a $3
million charge. We do not recognize deferred income taxes on foreign
currency translation adjustments.
Note 8: Restructuring
In March 1998 we announced plans to significantly reduce future
operating expenses by the end of 2002. As part of this cost
containment program, we recorded a pretax restructuring charge of $104
million ($64 million after-tax or $0.06 per share) in March 1998 to
cover principally the costs of consolidating security monitoring
centers and closing 53 company-owned cellular retail stores. The
charge included employee-related (principally severance) costs of
approximately $54 million for the termination of the employment of
approximately 5,000 employees, as well as other costs of approximately
$50 million related to lease terminations and asset write-downs.
Subsequent to announcing this restructuring plan, we agreed to merge
with SBC. As a result, certain aspects of our restructuring plan
required modification due in part to our expectation that the U.S.
Department of Justice would require the parties to this Merger to
divest overlapping cellular properties. As previously discussed, on
March 23, 1999, the Department of Justice negotiated and agreed to a
consent decree with Ameritech and SBC delineating the overlapping
cellular properties required to be sold for that agency to approve the
Merger. On April 5, 1999, Ameritech entered into a definitive
agreement to sell these overlapping cellular properties. In view of
this agreement and other modifications to our 1998 restructuring plan,
we have reversed to income $44 million ($27 million after-tax or $0.03
per share) of the original restructuring charge in the first quarter
of 1999. This reversal also reflects several restructuring efforts
that were accomplished more cost efficiently than originally
projected. After giving effect to the reversal, as of June 30, 1999,
the company had $28 million remaining from this restructuring charge,
which we anticipate using later in 1999.
Note 9: Unconsolidated Investments
For investments accounted for using the equity method of accounting, we
increase our recorded investments for our allocable share of earnings
(adhering to purchase accounting and U.S. GAAP), reduce the investment
for distributions (dividends) received and give effect to any currency
translation adjustments. We received dividends of $164 million in the
second quarter of 1999, and dividends of $127 million in the second
quarter last year. We received dividends of $166 million in the six
months ended June 30, 1999 as compared with dividends of $157 million
in the comparable prior year period.
The following table presents summarized financial information of
significant investments accounted for using the equity method of
accounting after taking into account all adjustments necessary to
conform to U.S. GAAP, but excluding Ameritech's purchase adjustments,
including goodwill:
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AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 9: Unconsolidated Investments (cont'd.)
Three Months Ended June 30 (millions) Increase Percent
- -------------------------------------
1999 1998 (Decrease) Change
---- ---- -------- ------
Revenues $3,428 $3,098 $ 331 10.7
Operating income 685 640 45 7.0
Net income 456 388 68 17.7
Weighted average
owned by Ameritech* 27.7% 27.1% -- --
Six Months Ended June 30 (millions) Increase Percent
- -------------------------------------
1999 1998 (Decrease) Change
---- ---- -------- ------
Revenues $6,505 $6,360 $ 145 2.3
Operating income 1,400 1,458 (58) (4.0)
Net income 864 849 15 1.8
Weighted average
owned by Ameritech* 28.8% 26.7% -- --
* Represents Ameritech's weighted average share of revenues.
Results for the three and six months ended June 30, 1999 include the
results of our 20% interest in Bell Canada for one month. Results for
the three months ended June 30, 1998 include the results of TCNZ for a
half month, an investment we sold in April 1998. Results for the six
months ended June 30, 1998 include results for five and a half months
from our interest in Tele Danmark and results for three and a half
months from our investment in TCNZ. We purchased our 34% investment in
Tele Danmark in mid-January 1998. As part of the investment agreement,
Tele Danmark repurchased and retired all remaining shares owned by the
Danish government, effectively increasing our equity ownership to 41.6%
of Tele Danmark in April 1998.
Note 10: 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.
Since the implementation of SOP 98-1 on January 1, 1999, we decreased
operating expenses for the three months ended June 30, 1999 by $40
million ($25 million after-tax or $0.02 per share) and for the six
months ended June 30, 1999 by $61 million ($38 million after-tax or
$0.03 per share). We currently anticipate an annual net 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 11
<PAGE>12
AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 11: Long-term Debt Issuance
During May 1999, we sold $750 million of 6.25% unsecured Eurodollar
bonds. The bonds mature 10 years from the closing date. We used the
proceeds from this debt issuance to partially fund our investment in
Bell Canada (see Note 3). The financing was made through our financing
subsidiary, Ameritech Capital Funding Corporation.
Note 12: Segment Information
We have three reportable segments as defined by FAS 131, "Disclosures
About Segments of an Enterprise and Related Information." They are
communications, information and entertainment, and international. The
communications segment provides telecommunications services such as
landline telephone service, cellular telephone and paging services, and
call management and data services to business and residential customers
primarily in the states of Illinois, Indiana, Michigan, Ohio and
Wisconsin. Communications services also include network access and
interconnection services for interexchange carriers and competitive
providers of local telephone service. The information and
entertainment segment provides printed and online directories for
business and residential users, security and alarm monitoring services
for homes and businesses, and cable TV services. The international
segment manages those of our investments in foreign ventures which we
account for using the equity method of accounting. In addition to
these reportable segments, we derive revenues from other nonreportable
segments, including lease financing services.
Our reportable segments are strategic business units or aggregations of
strategic business units that offer different products or services.
They are managed separately based on differences in customer base,
strategic objectives or regulatory environment. With the exception of
the international segment, management evaluates segment performance
based upon direct margin, which represents total revenues less direct
expenses attributable to that segment. Results are normalized for one-
time items. Management does not allocate corporate overhead, centralized
information technology (IT) costs, interest income, interest expense, other
nonoperating items or income taxes when measuring segment results.
Corporate overhead and IT costs are shown as a reconciling item in the
reconciliation of segment profit to consolidated operating income below.
The international segment is evaluated based on income from equity-method
investees before one-time items.
Following is a summary of information about segment revenues, profits
and assets (dollars in millions):
COMMUNICATIONS
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues from
external customers........ $ 4,229 $ 3,777 $ 8,149 $ 7,390
Intersegment revenues........ 40 34 73 64
Segment profit............... 1,752 1,534 3,378 2,980
- ---------------------------------------------------------------------
Page 12
<PAGE>13
AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 12: Segment Information (cont'd.)
INFORMATION AND ENTERTAINMENT
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues from
external customers........ $ 558 $ 439 $ 1,085 $ 933
Intersegment revenues........ 2 1 6 2
Segment profit............... 155 102 258 262
- ---------------------------------------------------------------------
INTERNATIONAL
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Income from
equity-method investees... $ 99 $ 80 $ 210 $ 181
- ---------------------------------------------------------------------
OTHER BUSINESS ACTIVITIES
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues from
external customers........ $ 43 $ 38 $ 85 $ 76
Revenues from
operating segments........ 21 19 42 36
Profit....................... 27 22 52 43
- ---------------------------------------------------------------------
Page 13
<PAGE>14
AMERITECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 12: Segment Information (cont'd.)
A reconciliation of reportable segment results to pretax income follows:
Three Months Ended Six Months Ended
June 30 June 30
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Communications and information
and entertainment margins. $ 1,907 $ 1,636 $ 3,636 $ 3,242
Margin from other
business activities....... 27 22 52 43
Corporate and eliminations... (558) (494) (1,202) (1,112)
Operating income before
one-time items............ 1,376 1,164 2,486 2,173
One-time items
in operating income....... -- -- 44 (104)
------- ------- ------- -------
Operating income............. 1,376 1,164 2,530 2,069
Interest expense............. 134 148 268 322
Income from international
equity-method investees... 99 80 210 181
Other income (expense)....... (13) 4 (13) 8
Other one-time items......... (27) 1,543 (27) 1,489
------- ------- ------- -------
Pretax income................$ 1,301 $ 2,643 $ 2,432 $ 3,425
- ---------------------------------------------------------------------
Assets by reportable segment as of June 30, 1999 and December 31, 1998
follows:
1999 1998
---- ----
Communications............... $20,076 $19,899
Information and
entertainment............. 3,172 2,868
International................ 9,661 7,438
- ---------------------------------------------------------------------
Page 14
<PAGE>15
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
-----------------------------
AMERITECH CORPORATION AND SUBSIDIARIES
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 vs.
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS
- ---------------------
Results for the second quarter ended June 30, 1999 were impacted by a
pretax charge of $27 million ($21 million after-tax, or $0.02 per
share), for costs associated with our Bell Canada investment, primarily
a currency-related fair-value adjustment.
Also in the second quarter, we implemented an accounting change,
retroactive to the beginning of the year, to recognize directory
revenues and expenses at the time of publication rather than as billed
over the duration of the directory. The cumulative effect of this
change is an after-tax gain of $207 million or $0.19 per share and is
included in restated first-quarter results. Other than this gain, the
change did not have a material impact on operating results in the first
or second quarter of 1999.
Results for the six months ended June 30, 1999 were impacted by:
- - a pretax charge of $27 million ($21 million after-tax, or $0.02 per
share) for costs associated with our Bell Canada investment,
primarily a currency-related fair-value adjustment;
- - a pretax credit of $44 million ($27 million after-tax, or $0.03 per
share) related to a reduction of our 1998 accrual for restructuring
determined to be no longer needed; and,
- - an after-tax gain of $207 million, or $0.19 per share related to the
cumulative effect of the directory publishing accounting change
previously discussed.
Results for the second quarter ended June 30, 1998 included a one-time
pretax gain of $1,543 million ($1,012 million after-tax, or $0.91 per
share) resulting from the public sale of substantially all of our stake
in Telecom Corporation of New Zealand Limited (TCNZ).
Results for the six months ended June 30, 1998 were impacted by:
- - a pretax gain of $1,543 million ($1,012 million after-tax, or $0.91
per share) from the sale of substantially all of our shares in TCNZ;
- - a pretax charge of $104 million ($64 million after-tax, or $0.06 per
share) for restructuring related to a cost containment program
announced in March 1998; and,
- - a pretax charge of $54 million ($34 million after-tax, or $0.03 per
share), for a currency-related fair-value adjustment related to our
Tele Danmark investment completed in January 1998.
Page 15
<PAGE>16
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
RESULTS OF OPERATIONS (cont'd.)
- -------------------------------
Results for the three and six months ended June 30, 1999, compared with
the prior year period, were as follows (dollars in millions, except per
share amounts):
Three Months Ended June 30 Increase Percent
- --------------------------
1999 1998 (Decrease) Change
---- ---- -------- ------
Income before one-time items $ 840 $ 695 $ 145 20.9
EPS before one-time items
Basic 0.76 0.63 0.13 20.6
Diluted 0.76 0.63 0.13 20.6
Net income as reported 819 1,707 (888) (52.0)
EPS as reported
Basic 0.75 1.55 (0.80) (51.6)
Diluted 0.74 1.54 (0.80) (51.9)
Six Months Ended June 30 Increase Percent
- ------------------------
1999 1998 (Decrease) Change
---- ---- -------- ------
Income before one-time items $1,527 $1,286 $ 241 18.7
EPS before one-time items
Basic 1.39 1.17 0.22 18.8
Diluted 1.37 1.16 0.21 18.1
Net income as reported 1,740 2,200 (460) (20.9)
Basic EPS as reported
Income before
cumulative effect of change
in accounting principle 1.39 2.00 (0.61) (30.5)
Cumulative effect of change
in accounting principle 0.19 -- 0.19 n/a
------- ------- -------
Net income 1.58 2.00 (0.42) (21.0)
Diluted EPS as reported
Income before
cumulative effect of change
in accounting principle 1.38 1.98 (0.60) (30.3)
Cumulative effect of change
in accounting principle 0.19 -- 0.19 n/a
------- ------- -------
Net income 1.57 1.98 (0.41) (20.7)
- ---------------------------------------------------------------------
Segments
- --------
The following discussion makes reference to a new segment reporting
concept adopted in 1998. As discussed more fully in Note 12 to the
condensed consolidated financial statements on pages 12 through 14,
based on how we manage our business, we have three reportable segments.
Our largest segment is communications, which provides landline
telephone service, cellular telephone and paging services, as well as
call management and data services to business and residential
customers. Our second segment is information and entertainment, which
provides printed and online directories for business and residential
users, security and alarm monitoring services for homes and businesses,
and cable TV services. Our third reportable segment is international,
which manages our minority equity investments in foreign ventures. The
international segment has no revenues, as all accounting activity is
recorded using the one-line equity method of accounting. We evaluate
the performance of our two revenue-producing
Page 16
<PAGE>17
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Segments (cont'd.)
- ------------------
segments on a direct margin basis, which represents total revenues of
that segment less direct expenses attributed to it (excluding corporate
allocations, information technology costs, interest income or expense,
income taxes and certain other costs).
Our communications segment is characterized by stable revenue growth
and solid earnings. Revenue growth in the information and
entertainment segment is somewhat higher, in part due to acquisitions,
but earnings growth is more modest due to the start-up nature of our
cable TV operation and normal integration costs being incurred in our
security services business. Revenues in the information and
entertainment segment were impacted by the accounting change affecting
our directory business. Revenues increased in the second quarter of
1999 as a result of this change and decreased for the six months ended
June 30, 1999 due to the timing of the publication of the directories.
The international segment continues to contribute to earnings growth.
Total direct margin for reportable segments was $1,907 million in the
second quarter of 1999 and $1,636 million in the second quarter of
1998. Total direct margin for reportable segments was $3,636 million
for the first six months of 1999 and $3,242 million for the first six
months of 1998. Direct margin for the communications segment
represented approximately 92% of reportable segment margins in the
second quarter of 1999 compared with 94% for the same period of 1998,
and the direct margin from the information and entertainment segment
represented the remaining 8% and 6% for those same periods. Direct
margin for the communications segment represented approximately 93% of
reportable segment margins in the first six months of 1999 compared
with 92% for the same period of 1998, and the margins from the
information and entertainment segment represented the remaining 7% and
8% for those same periods.
Direct margin in the communications segment increased in the second
quarter and first six months of 1999 as compared with the 1998 periods
due to increased profitability in the cellular business, increased
revenues from higher margin call management services and steady growth
in our landline communications business.
Margins in the information and entertainment segment were also impacted
by the accounting change effecting our directory business. Margins
increased in the second quarter of 1999 as a result of this change and
decreased slightly for the six months ended June 30, 1999 due to the
timing of the publication of the directories. In general, margins in
the information and entertainment segment have been impacted by
acquisitions we have made in our security services business. While
these acquisitions have added to revenues, normal integration costs
have impacted our margins. Further, the start-up nature of our cable
TV business, which did not have any revenues until mid-1996 and now has
more than 200,000 customers, has also affected margins in this segment.
Segment assets in our international segment increased $2,223 million or
29.9% from $7,438 million as of December 31, 1998 to $9,661 million as
of June 30, 1999. This increase reflects our $3.4 billion investment
in Bell Canada, partially offset by the receipt of $940 million in
installment sales proceeds resulting from the sale of substantially all
our TCNZ shares, which were receivable as of December 31, 1998, and
translation adjustments resulting from a strong U.S. dollar when
compared with local foreign currency (see Note 7).
Page 17
<PAGE>18
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Revenues
- --------
We derive most of our revenues from the provisioning of landline
telephone service and supporting products, which represents
approximately 78% of total revenues from operating segments in the
second quarter and the first six months of 1999. Other significant
sources of revenue in the second quarter and the first six months of
1999 include cellular and paging, which contributed approximately 10%
of total revenues, and directory advertising, which represented
approximately 8% of total revenues.
Revenues increased by 12.0% to $4.80 billion in the second quarter of
1999, compared with $4.29 billion in the second quarter of 1998.
Revenues increased by 9.6% to $9.23 billion in the first six months of
1999, compared with $8.42 billion for the first six months of 1998.
Revenue growth resulted from strong gains in local service and data
services revenues. Rate reductions, resulting primarily from lower
access charges for landline communications services, partially offset
the increase. Revenue growth in the first half of 1999 was 10.3% in
our communications segment and 16.3% in our information and
entertainment segment, due to strong growth in our security, Internet
access and directory businesses.
- ---------------------------------------------------------------------
Local service
- -------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $2,086 $1,739 $ 347 20.0
Six Months Ended 3,935 3,421 514 15.0
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. These
revenues are included in the results of our communications segment.
Local service revenues increased for the three and six months ended
June 30, 1999 reflecting the revenues contributed by Clover
Technologies, acquired in the fourth quarter of 1998, and from
Ameritech Data Network Solutions, Inc., the North American integration
division of Anixter International, acquired in April 1999. Local
service revenues also increased for the three and six months ended June
30, 1999 due largely to rate increases, primarily related to local
calling usage and directory assistance at our Illinois landline
communications subsidiary. Local service revenues also increased in the
three and six month periods as compared to the prior year periods as a
result of a 15.6% and 14.1% increase, respectively, in revenues from
call management services, resulting from strong growth in the number of
activated features subscribed to on a monthly basis and sales of
additional lines. Total access lines in service grew by 2.1% over the
comparable prior year period, excluding the impact of 89,000 fewer
access lines sold to Century Telephone Enterprises, Inc., in December
1998.
There were 21,174,000 access lines in service as of June 30, 1999
compared with 20,746,000 as of June 30, 1998, excluding 89,000 access
lines sold to Century Telephone.
Page 18
<PAGE>19
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Network access
- --------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Interstate
- ----------
Three Months Ended $ 685 $ 630 $ 55 8.7
Six Months Ended 1,361 1,244 117 9.4
Intrastate
- ----------
Three Months Ended $ 151 $ 169 $ (18) (10.7)
Six Months Ended 288 309 (21) (6.8)
Network access revenues include 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
are generated from both interstate and intrastate services and are
included in the results of our communications segment.
Interstate network access revenues increased for the three and six
months ended June 30, 1999 reflecting strong growth in high-capacity
services. Demand for dedicated circuits grew as Internet service
providers and other high-capacity users increased their utilization of
our network. Interstate minutes of use increased by 4.9% for the three
months and 5.4% for the six months ended June 30, 1999, compared with
the same periods last year, due primarily to growth in the number of
calls handled for interexchange carriers. These increases were
partially offset by rate reductions effective July 1, 1998 under the
FCC annual access filing. These rate reductions were partially offset
by increased end user fees resulting from the number portability
surcharge effective February 1, 1999.
Intrastate network access revenues decreased for the three and six
months ended June 30, 1999 as a result of 1998 revenues including $20
million from a favorable court ruling which found that interexchange
carriers were not entitled to access charge discounts for intraLATA
toll services prior to the time that Ameritech is allowed to offer
interLATA long-distance services in the state of Michigan. Intrastate
access revenues also decreased as a result of rate decreases
implemented in July 1998 with the FCC annual access charge filing
reductions. We experienced volume increases, largely resulting from
growth in network usage by alternative providers of intraLATA toll
service in Indiana and Ohio, which implemented Dial 1 + capability in
February 1999, as well as in Michigan, where Dial 1 + capability was
expanded. These volume increases, combined with an increase in
revenues from special access services, partially offset the effect of
the prior year item and rate reductions. Intrastate minutes of use
increased by 4.5% for the three months and 6.8% for the six months
ended June 30, 1999, compared with the same periods last year.
- ---------------------------------------------------------------------
Long-distance service
- ---------------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 366 $ 341 $ 25 7.3
Six Months Ended 735 682 53 7.8
Most of our 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). We have also started to
provide long-distance services outside our five-state region. These
revenues are included in the results of our communications segment.
Page 19
<PAGE>20
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Long-distance service (cont'd.)
- -------------------------------
Long-distance service revenues increased for the three and six months
ended June 30, 1999, reflecting out-of-region volume increases and
strong growth in high-capacity circuits, partially offset by in-region
volume decreases. Out-of-region volume increases were attributable to
our long-distance unit, Ameritech Communications, Inc., which is
certified to provide long-distance service outside our region, and
Ameritech Global Gateway Services, a subsidiary offering international
switching and transport capabilities. In-region volume decreases
resulted largely from implementation of Dial 1 + capability in Indiana
and Ohio in February 1999, together with existing Dial 1 + capability
in Illinois, Michigan and Wisconsin, which increased competition in our
intraLATA toll markets. Pricing impacts, primarily in Michigan and
Wisconsin, also increased long-distance service revenues for the three
and six months ended June 30, 1999, as compared with the prior year
periods.
- ---------------------------------------------------------------------
Cellular, directory and other
- -----------------------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $1,514 $1,410 $ 104 7.4
Six Months Ended 2,913 2,766 147 5.3
Cellular, directory and other revenues include revenues from cellular
communications services, paging services, telephone directory
publishing, lease financing, billing and collection services, telephone
equipment sales and installation, security services and cable TV
programming. These revenues result from both our communications and
information and entertainment segments, as well as from other business
activities such as lease financing, not included in the results from
reportable segments.
Cellular, directory and other revenues increased for the three and six
months ended June 30, 1999, due to the following factors:
- - Increased directory revenues, resulting primarily from a revised
directory agreement for Illinois and parts of Indiana, as well as
higher revenues from our Internet yellow pages service;
- - Impact of the accounting change effecting our directory business
which increased revenues for the three months ended June 30, 1999 and
decreased revenues for the six-month period then ended due to the
timing of the publication of the directories;
- - Higher wireless revenues, resulting from growth in the number of
cellular subscribers compared with the same period last year. We had
3.7 million total cellular subscribers, compared with 3.5 million in
the comparable prior year period, reflecting our change in strategy
toward retention of high-margin cellular customers; and,
- - Other miscellaneous revenue increases, resulting primarily from
increased revenues from cable TV, capital services, security services
and voice mail.
Revenue increases for the three and six months ended June 30, 1999 were
partially offset by a $28 million retroactive revenue adjustment in the
first quarter of 1999, as well as the ongoing impact of lower rates,
resulting from an FCC ruling which lowered the pay phone per call
compensation we receive from other communications companies.
Page 20
<PAGE>21
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Operating expenses
- ------------------
Total operating expenses increased by $301 million, or 9.6%, to $3.43
billion in the second quarter of 1999. Total operating expenses
increased by $349 million, or 5.5%, to $6.70 billion for the six months
ended June 30, 1999, as compared with the prior year period. The
increases occurred primarily in our communications segment, reflecting
increased depreciation and amortization, cost of sales and access
charge expenses. These increases were partially offset by a
restructuring credit of $44 million in the first quarter of 1999, as
compared with a restructuring charge of $104 million in the first
quarter of 1998. The implementation of the new accounting
pronouncement, SOP 98-1, had the effect of reducing operating expenses
in the three and six month periods as compared with the prior year.
- ---------------------------------------------------------------------
Employee-related expenses
- -------------------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $1,080 $1,012 $ 68 6.7
Six Months Ended 2,107 2,054 53 2.6
Employee-related expenses increased for the three and six months ended
June 30, 1999, due primarily to wage rate increases reflecting new
union contracts effective in mid-1998 and increased overtime. This
increase was partially offset by lower employee levels across most
subsidiaries, except our data subsidiaries, where employee levels have
increased due to the acquisition of Clover Technologies and the North
American network integration division of Anixter International.
We employed 70,381 people as of June 30, 1999, compared with 72,342 as
of June 30, 1998.
- ---------------------------------------------------------------------
Depreciation and
amortization
- ------------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 738 $ 672 $ 66 9.8
Six Months Ended 1,448 1,335 113 8.5
Depreciation and amortization expense increased for the three and six
months ended June 30, 1999 due primarily to higher property, plant and
equipment balances. Higher depreciation rates on certain asset
categories contributed to the increase, as we used shorter depreciable
lives for newer technologies. Amortization of goodwill and other
intangibles also contributed to the increase.
- ---------------------------------------------------------------------
Other operating expenses
- ------------------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $1,461 $1,290 $ 171 13.3
Six Months Ended 2,882 2,551 331 13.0
Page 21
<PAGE>22
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other operating expenses (cont'd.)
- ----------------------------------
Other operating expenses increased for the three and six months ended
June 30, 1999. This was due primarily to higher access charge expenses
resulting from state commission rulings (which we are contesting)
requiring local exchange carriers to pay reciprocal compensation for
calls by their customers to the Internet via Internet service providers
(ISPs) who, in turn, are customers of competing local exchange
carriers. Access charges also increased at Ameritech Communications,
Inc., our out-of-region long-distance provider, and at Ameritech Global
Gateway Services, our international wholesale long-distance provider.
Cost of sales increased for the three and six months ended June 30,
1999 due primarily to growth in equipment sales at our cellular, data
and security services operations as well as sales of customer premises
equipment. Cost of sales also increased as a result of our acquisition
of Clover Technologies, a data integration company, in the fourth
quarter of 1998 and the April 1999 acquisition of the North American
network integration division of Anixter International. Material costs
at our landline communications subsidiaries also contributed to the
increase in other operating expenses. A decrease in contract services
expenses, due to our cost containment program, and advertising, due to
refocused sales and marketing efforts, partially offset these
increases.
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." This accounting pronouncement required the
capitalization of software that we would have previously expensed. The
impacts of this capitalization and related amortization are as follows:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
--------------- ---------------
Software costs capitalized... $ 41 $ 62
Amortization expense......... 1 1
------ ------
Pretax expense impact $ 40 $ 61
====== ======
- ---------------------------------------------------------------------
Restructuring
- -------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ -- $ -- $ -- n/a
Six Months Ended (44) 104 (148) (142.3)
As discussed more fully in Note 8, we recorded a restructuring charge
of $104 million in 1998 and reversed a portion of it ($44 million) in
1999. This restructuring was the principal reason for the employee
reductions previously noted.
Page 22
<PAGE>23
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Taxes other than income taxes
- -----------------------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 147 $ 151 $ (4) (2.6)
Six Months Ended 309 309 -- --
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 remained relatively unchanged for the three and six
months ended June 30, 1999. Increases in gross receipts taxes,
principally in Illinois and Wisconsin, were largely offset by property
tax decreases resulting from tax reform, primarily in Ohio, and lower
property tax assessments at our cellular unit.
- ---------------------------------------------------------------------
Other income and expenses
- -------------------------
Interest expense
- ----------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 134 $ 148 $ (14) (9.5)
Six Months Ended 268 322 (54) (16.8)
Interest expense decreased for the three and six months ended June 30,
1999, due primarily to our redemption of $1.3 billion in long-term debt
in late 1998. Increased interest expense resulting from the issuance
of $750 million of Eurodollar bonds in May 1999 and the use of
additional short-term debt to fund our investment in Bell Canada,
partially offset the decrease.
- ---------------------------------------------------------------------
Other income, net
- -----------------
Change
June 30 (Income) Percent
------------
(dollars in millions) 1999 1998 Expense Change
------------------- ---- ---- ------- ------
Three Months Ended $ 59 $1,627 $(1,568) (96.4)
Six Months Ended 170 1,678 (1,508) (89.9)
Other income, net includes earnings related to Ameritech's investments
(accounted for by the equity method of accounting), interest income and
other nonoperating items.
Other income, net decreased for the three and six months ended June 30,
1999 as compared with the prior year periods, as a result of certain
one-time items reflected in both years. Other income decreased for the
three and six months ended June 30, 1999 due primarily to the effects
of a one-time pretax gain of $1,543 million ($1,012 million after-tax)
resulting from the public sale of substantially all of our stake in
TCNZ in the second quarter of 1998. Other income also decreased for
the three and six months ended June 30, 1999 as a result of a pretax
charge of $27 million ($21 million after-tax) related to our investment
in Bell Canada. This charge related to a currency-related fair-value
adjustment and our share of restructuring costs at Bell Canada.
Results for the six months ended June 30, 1998 also were impacted by a
one-time pretax charge of $54 million ($34 million after-tax), for a
currency-related fair-value adjustment related to our Tele Danmark
investment, which partially offset the TCNZ gain for the six months
ended June 30, 1998.
Page 23
<PAGE>24
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other income, net (cont'd.)
- ---------------------------
After eliminating the effects of the above described one-time items,
other income was $86 million for the three months and $197 million for
the six months ended June 30, 1999. Similarly, other income was $84
million for the three months and $189 for the six months ended June 30,
1998. The increase in 1999 resulted primarily from increased equity
earnings from our international investments, including one month of
earnings from Bell Canada.
- ---------------------------------------------------------------------
Income taxes
- ------------
June 30 Increase Percent
------------
(dollars in millions) 1999 1998 (Decrease) Change
------------------- ---- ---- -------- ------
Three Months Ended $ 482 $ 936 $(454) (48.5)
Six Months Ended 899 1,225 (326) (26.6)
Income tax expense decreased for the three and six months ended June
30, 1999 due primarily to the tax impact of the gain resulting from the
sale of our TCNZ shares in the second quarter of 1998, discussed above.
After eliminating the effects of the one-time items, income tax expense
changed with the change in pretax income in each period.
- ---------------------------------------------------------------------
Cumulative effect of change in accounting principle
- ----------------------------------------------------
As described in Note 2 to the condensed consolidated financial
statements, we implemented an accounting change in the second quarter
of 1999 to recognize directory revenues and expenses at the time of
publication rather than over the life of the directory. Generally
accepted accounting principles (GAAP) require the cumulative effect of
such changes to be recorded at the beginning of the year. Accordingly,
we restated the previously issued first quarter results. The effect of
the change, other than the after-tax gain of $207 million for the
cumulative effect, did not have a material impact on results in the
first or second quarter.
- ---------------------------------------------------------------------
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Cash flows from operating activities
- ------------------------------------
Cash flows from operations were $2,994 million for the six months ended
June 30, 1999 compared with $2,538 million for the prior year period,
an increase of $456 million. The increase was due primarily to solid
growth in our business, combined with improved levels of working
capital.
- ---------------------------------------------------------------------
Cash flows from investing activities
- ------------------------------------
Cash flows used by investing activities were $4,058 million for the six
months ended June 30, 1999, compared with $2,997 million for the six
months ended June 30, 1998. Capital expenditures were $1,383 million
for the six months ended June 30, 1999, as compared with $1,392 million
for the comparable prior year period, reflecting steady investment in
the core communications segment. During the six months ended June 30,
1999, we invested $3,653 million, primarily in Bell Canada and to
acquire the North
Page 24
<PAGE>25
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Cash flows from investing activities (cont'd.)
- ----------------------------------------------
American network integration division of Anixter International. In
January 1998, we invested approximately $3.1 billion in Tele Danmark,
the national communications provider in Denmark. Also in the first
quarter of 1998, we received proceeds of approximately $1,078 million
from the original installment of proceeds from the sale of
substantially all our TCNZ shares and $473 million from the repayment
by General Electric of the note related to our GEIS investment. Also
in 1999, we received additional proceeds of $971 million, representing
second installment payments from the sale of our TCNZ shares.
- ---------------------------------------------------------------------
Cash flows from financing and other activities
- ----------------------------------------------
Cash flows generated by financing activities were $1,217 million for
the six months ended June 30, 1999, compared with cash generated by
financing activities of $500 million for the six months ended June 30,
1998. Financing activities for the first six months of 1999 included
new short-term borrowings of $1,208 million and long-term debt proceeds
of $741 million, primarily to finance our $3.4 billion investment in
Bell Canada. Our dividend payments increased to $698 million in the
first six months of 1999, reflecting the 5.8% increase in the rate of
our quarterly dividend on relatively constant shares outstanding. We
also received proceeds of $231 million from reissuance of treasury
shares, while repurchasing 4 million shares for $258 million.
Financing activity in the first six months of 1998 included issuance of
$2.5 billion of long-term debt, primarily to finance our acquisition of
Tele Danmark. Other financing activities for the first six months of
1998 included repayment of short-term borrowings of $1,519 million and
dividend payments of $659 million. We also reissued treasury shares
for $233 million, and repurchased shares of our stock for $133 million.
- ---------------------------------------------------------------------
Company stock repurchase program
- --------------------------------
Our Board of Directors has periodically authorized management to
repurchase shares of Ameritech stock in the open market. Management
has the authority to repurchase approximately $1,239 million of
additional Ameritech stock as of June 30, 1999; however, we have agreed
with SBC as part of the Merger Agreement to repurchase shares only in
connection with share issuance requirements under certain benefit
plans.
- ---------------------------------------------------------------------
Debt ratio
- ----------
Our debt ratio was 46.7% as of June 30, 1999, compared with 42.9% as of
December 31, 1998. The increase resulted primarily from additional
short-term and long-term debt financing to fund our $3.4 billion
investment in Bell Canada.
- ---------------------------------------------------------------------
Ratio of earnings to fixed charges
- ----------------------------------
The ratio of earnings to fixed charges for the six months ended June 30
was 7.79 in 1999 and 9.57 in 1998.
Page 25
<PAGE>26
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Other Matters
- -------------
Regulatory Environment
- ----------------------
The Telecommunications Act of 1996
The Telecommunications Act of 1996 (the 1996 Act) was intended to
stimulate competition in the market for communications services and to
remove barriers that prevented the telecommunications, cable TV and
broadcast industries from entering each others' businesses. The 1996
Act addresses various aspects of competition within, and regulation of,
the communications industry. In general, it includes provisions
designed to open local exchange markets to competition and afford the
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.
FCC Oversight
The FCC develops and implements policies concerning interstate
communications by radio, television, wire, satellite and cable. In
addition to developing regulations to carry out the intent of the 1996
Act, the FCC prescribes for certain communications companies a uniform
system of accounts and rules for apportioning costs between regulated
and nonregulated services. The FCC, in consultation with
representatives of state regulatory commissions, is also responsible
for the principles and standard procedures used to separate regulated
property, plant and equipment costs, revenues, expenses, taxes and
reserves between those applicable to interstate services under FCC
jurisdiction and those applicable to intrastate services under the
respective state regulatory commission's jurisdiction.
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. 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 Supreme 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 notification. It further ruled that the
Page 26
<PAGE>27
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
Local Interconnection and Unbundled Access (cont'd.)
FCC could bar ILECs from separating already combined unbundled 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 Court,
and will be addressed by the Eighth Circuit Court on remand. On June
10, 1999, the Eighth Circuit Court issued a briefing schedule for the
open issues on remand and we filed our opening brief on July 16, 1999.
The case is set for oral argument on September 17, 1999. Pending
judicial resolution of the appropriate pricing methodologies and a
determination by the FCC of which unbundled network elements must be
made available, our landline communications subsidiaries expect to
continue to negotiate and enter into interconnection agreements and
pursue, through appropriate state or federal proceedings, timely
recovery of their costs.
On June 1, 1999, the U.S. Supreme Court vacated and remanded a 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.
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 in-region state
commissions 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 future
revenues and margins in our communications segment.
Reciprocal Compensation
A number of CLECs are engaged in regulatory and judicial proceedings
with various ILECs, including our landline communications subsidiaries,
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
Page 27
<PAGE>28
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
Reciprocal Compensation (cont'd.)
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, we have 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. In the interim, the
FCC concluded that state commissions may determine in both arbitrations
and disputes under existing interconnection agreements whether
reciprocal compensation should be paid for this traffic.
A number of CLECs have filed petitions seeking federal 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.
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 Web
site, 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.
We believe that this FCC ruling confirms our 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. On June 18, 1999, however, the U.S. Court of
Appeals for the Seventh Circuit issued an opinion affirming an order of
the ICC directing our Illinois landline communications subsidiary to
pay reciprocal compensation on this traffic under existing
interconnection agreements. The Seventh Circuit reviewed only the
issue of whether the ICC's determination - that the parties intended
under their interconnection agreements that calls to ISPs would be
subject to reciprocal compensation - violated federal law. The Seventh
Circuit declined to review any contract issues and concluded that the
ICC's determination did not violate federal law since it was expressly
permitted under the FCC's ruling discussed above. We have sought
rehearing of this Seventh Circuit Court decision and will continue to
pursue judicial appeals of other contrary state commission
determinations.
Other appeals by our landline communications subsidiaries of adverse
decisions are currently pending before the U.S. District Courts in
Michigan, Indiana and Ohio. The U.S. District Court in Wisconsin
recently dismissed an appeal by our Wisconsin landline communications
subsidiary, without reaching the merits of the case. We intend to
appeal that dismissal.
Page 28
<PAGE>29
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
Reciprocal Compensation (cont'd.)
We continue to believe that reciprocal compensation is not required in
these circumstances under the February 1999 FCC order. However, there
can be no assurance as to the ultimate judicial or regulatory outcome
or that our landline communications subsidiaries will not be required
to continue to make such reciprocal compensation payments under
existing interconnection agreements or in future arbitrations.
Currently, all of our landline communications subsidiaries are making
reciprocal compensation payments (or arranging for future true-up
payments), under protest, pursuant to existing interconnection
agreements with CLECs providing services to ISPs.
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).
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.
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. 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
ICC) and Michigan (the Michigan Public Service Commission or MPSC), in
response to such filings, have ordered us 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 (IURC) 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.
Ameritech's interstate access revenues 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.
Page 29
<PAGE>30
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
Universal Service, Access Charge Reform and Price Caps (cont'd.)
Certain parties have sought judicial review of the Price Cap Order.
The D.C. Circuit issued a decision remanding the case to the FCC to
explain the productivity offset factor.
We 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 our landline communications subsidiaries, 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 was released on July 16,
1999, and required a reduced surcharge from $0.41 to $0.28 per line and
appropriate refunds, which were accrued in the second quarter of 1999.
Acquisitions of Security Services Assets
On September 25, 1998, the FCC issued a Memorandum Opinion and Order on
Remand and Order to Show Cause relating to an asset acquisition by our
security services subsidiary, SecurityLink from Ameritech, Inc.
(SecurityLink) in 1996. The FCC found that we had gained "financial
control" over the entity from which SecurityLink acquired the security
services assets, in violation of the 1996 Act, and required that,
within 30 days after issuance of the Order, we show cause why the FCC
should not require SecurityLink to divest the assets acquired in this
transaction. Previously, the FCC had ruled that the same transaction
was permissible under the 1996 Act, and the D.C. Circuit Court had
vacated and remanded such decision to the FCC. On October 26, 1998, we
filed our response with the FCC, contending that divestiture would not
be an appropriate remedy.
Previously, on July 8, 1998, the FCC issued a Memorandum Opinion and
Order to Show Cause, finding that three separate asset acquisitions by
SecurityLink in 1997 (made after the first FCC ruling on security
services described above and before the D.C. Circuit Court decision)
violated the same provision of the 1996 Act, and ordering SecurityLink
to show cause why the FCC should not require divestiture of the assets
acquired in such transactions. We filed our response with the FCC on
August 7, 1998, contending that divestiture would not be an appropriate
remedy. The FCC's decision on these Orders to Show Cause is pending.
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
Page 30
<PAGE>31
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
Pay Phone Per Call Compensation (cont'd.)
period from October 7, 1997 through the effective date of the FCC
order. Based on the February 1999 FCC ruling, which is under appeal,
in the first quarter of 1999 our pay phone revenues were reduced by
approximately $28 million to reflect the impact of all of these
retroactive reductions.
Audit Report on Continuing Property Records
On March 12, 1999, the FCC released the results of a staff-level audit
of the property records of certain central office equipment maintained
by the RHCs, including our landline communications subsidiaries. Based
solely on a physical verification audit using statistical sampling
techniques, this report alleged an overstatement, and consequently
recommended a write-off, of approximately $567 million of our central
office equipment. In releasing this audit report, the FCC stated that
it did not pass judgment on its accuracy or the reasonableness of the
audit's conclusions or recommendations.
We have 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 additional public comments on issues
raised by the audit results.
State Regulatory Commissions
ILLINOIS
In 1994, the ICC approved Advantage Illinois, providing a framework for
regulating Ameritech Illinois by capping prices for noncompetitive
services. At the same time, the ICC approved a cap on the monthly line
charge for 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 earnings to reflect the increasingly competitive communications
industry and to create incentives to invest in new technology, develop
new services and improve efficiency. In July 1999, Ameritech Illinois
reduced rates by approximately $34 million annually. Lower prices are
reflected in several product and service areas, but the largest portion
of the reductions comes from lower usage rates in certain parts of the
Chicago area. These rate reductions primarily impact local service
revenues. This is the fifth consecutive year of price reductions, now
totaling $807 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, 1999.
Ameritech Illinois has offered dialing parity in local toll markets
since 1996 by giving customers the ability to choose an alternate
carrier for intraLATA toll calls by dialing 1 before the phone number
(Dial 1 +).
Page 31
<PAGE>32
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
State Regulatory Commissions (cont'd.)
INDIANA
In 1994, the IURC approved the Opportunity Indiana plan. Under the
plan, we instituted market-based pricing and flexibility for
competitive services including Centrex, dedicated communications
services, 800 service, WATS, operator services and business intraLATA
toll service. In 1997, Ameritech Indiana filed a revised alternative
regulation plan and requested an interim extension of Opportunity
Indiana, which was due to expire at the end of 1997.
In December 1997, the IURC issued a final order on interim relief in
the Opportunity Indiana II proceeding. The order addressed the manner
in which Ameritech Indiana will be regulated until such time as a
longer term replacement regulatory structure is finalized. The ruling
extended most of the alternative regulation plan that had been in place
since 1994. However, Ameritech Indiana was ordered to reduce rates for
basic residential and business service by 4.6% and to continue
infrastructure spending on fiber optics for interested schools,
hospitals and government centers, and on contributions to a fund to
provide distance learning equipment and courses in schools all over the
state. Ameritech Indiana has appealed this order to the Indiana Court
of Appeals. Until such time as the Court of Appeals issues a ruling,
Ameritech Indiana will operate under the provisions of the IURC's
order, with the exception of the requirement to reduce basic local
service rates. Because Indiana law provides that Ameritech Indiana can
continue charging current rates until the order is entered on the
appeal, basic local rates will be maintained at current levels. In
January 1999, we submitted an updated Opportunity Indiana II plan in
order to renew the regulatory framework established by the IURC in
Opportunity Indiana.
Ameritech Indiana has offered Dial 1 + capability in local toll markets
since February 8, 1999.
MICHIGAN
The Michigan Telecommunications Act (MTA), which is in effect until
January 2001, regulates certain telecommunications services provided by
Ameritech Michigan. In 1996, the MPSC issued two orders requiring
Ameritech Michigan to provide statewide dialing parity on intraLATA
toll calls or to discount intraLATA toll access rates by 55% where
dialing parity was not implemented. The Michigan Court of Appeals
issued a stay of the MPSC orders in January 1997, pending a
determination of Ameritech Michigan's appeal on the merits, and
subsequently declined a motion to vacate the 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 MTA,
Ameritech 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 several
interexchange carriers, the MPSC and the Michigan Attorney General.
While its application for leave to appeal was pending, one
interexchange carrier filed another MPSC complaint asking the MPSC to
reinstate the 55% discount on access charges and to issue a new mandate
for dialing parity. The MPSC granted the interexchange carrier's
complaint and required immediate implementation for the
Page 32
<PAGE>33
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
State Regulatory Commissions (cont'd.)
MICHIGAN (cont'd)
remaining 30% of our access lines in its January 19, 1999 order.
Ameritech filed a motion for stay of the MPSC's order on January 22,
1999. The Michigan Court of Appeals granted that stay on February 9,
1999.
Pursuant to a March 23, 1999 FCC order, on April 9, 1999, Ameritech
Michigan 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.
On June 8, 1999, the Michigan Supreme Court issued an opinion which
affirmed in part and reversed in part the May 1998 Michigan Court of
Appeals decision. In its ruling, the Michigan Supreme Court concluded
that the MPSC's 1996 orders were illegal and of no effect, because the
MPSC's authority to require the implementation of intraLATA dialing
parity had been suspended from November 30, 1995 through July 1, 1997
by the MTA. The Court held that the MPSC's 1994 and 1995 orders
requiring statewide implementation were "grandfathered" and "saved" by
a savings clause in the MTA, and so were reinstated into effect
following July 1, 1997.
The Michigan Supreme Court found that the MPSC had authority to require
a 55% discount on access charges, but that such authority was linked to
its authority to require dialing parity. Thus, its authority to
require a discount was suspended for a similar time period from
November 30, 1995 to July 1, 1997. The Court remanded the case to the
MPSC solely for the purposes of calculating what monies might be due to
the parties in accordance with this ruling.
By separate order, the Michigan Supreme Court remanded Ameritech's
appeal of the MPSC's January 19, 1999 order to the Michigan Court of
Appeals for consideration in light of the Michigan Supreme Court's opinion.
OHIO
In January 1995, Ameritech Ohio implemented the Advantage Ohio price
regulation plan following approval by the PUCO. Rates for all services
were capped in 1995 and rates for basic access lines and usage were
capped for an additional five years. The plan provides for the ability
to flexibly price competitive and discretionary services. Since the
inception of the plan, Ameritech Ohio has reduced rates in excess of
$110 million. At the same time, Ameritech Ohio has invested $1.5
billion over four years improving the telecommunications network.
Ameritech Ohio has committed to meeting certain benchmarks for the
deployment of advanced technology to schools, hospitals and libraries,
funding of community computer centers, a discounted Lifeline telephone
service for low-income customers and $21 million in grants for new
technology in public schools and for economic development. As part of
the Merger settlement approval by the PUCO, rates for basic residential
service will be capped for an additional year, until January 2002.
Pursuant to an order of the PUCO, Ameritech Ohio implemented Dial 1 +
capability in all of its exchanges effective February 8, 1999.
Page 33
<PAGE>34
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Regulatory Environment (cont'd.)
- --------------------------------
State Regulatory Commissions (cont'd.)
WISCONSIN
Under telecommunications legislation passed in 1994, the Public Service
Commission of Wisconsin (PSCW) regulates Ameritech Wisconsin's prices
rather than earnings. Ameritech Wisconsin has reduced basic local
service rates twice since the switch to price regulation reducing basic
rates by 10%, or $14 million on an annualized basis, beginning in 1994,
and again by $2.5 million in October 1998. By year-end 1998, Ameritech
Wisconsin had exceeded its infrastructure commitment, which was to
spend at least $700 million by the Year 2000 on new equipment and
technology, deploying fiber optics to hundreds of secondary schools,
technical colleges, universities, hospitals and libraries in the state.
Intrastate access rates have also declined along with interstate access
rates. Since September 1996, all of Ameritech Wisconsin's service area
has had Dial 1 + capability.
Competitive environment
- -----------------------
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 our landline
communications subsidiaries 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 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. 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.
We have established a centrally managed, companywide initiative to
identify, evaluate and address Year 2000 issues. Begun in May 1996,
our Year 2000 effort covers our network and supporting infrastructure
for our provision of local switched and data telecommunications
services, cellular and paging services, cable TV service and security
services. Also within the scope of this initiative are our 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 our 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.
Page 34
<PAGE>35
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Year 2000 Readiness Disclosure (cont'd.)
- ----------------------------------------
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 June 30, 1999, we believe that the
inventory and assessment phases are complete and the remediation,
testing and deployment phases are substantially complete.
As of June 30, 1999, nearly all of our network elements requiring
corrective activity, including all of our 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 June 30,
1999, all of our identified IT applications, including those that we
have determined to be mission-critical, have been remediated. A
substantial majority of these corrected applications have completed
certification testing and been deployed back into production. We have
also made substantial progress in Year 2000 readiness preparations for
our remaining infrastructure components (buildings and physical
facilities, internal voice telephone systems, and desktop PCs), and
these efforts are expected to be completed during the third quarter of
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, tested and
deployed back into production, 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 late 1999.
We have 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, in
most instances, we have no method of compelling such disclosure, of
assessing the accuracy of information they may provide or of ensuring
that these suppliers will convert their critical systems and processes
in a timely manner. We are developing business contingency and
continuity plans (see discussion below), and are continuing to work
with our 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.
We currently estimate that we will incur expenses of approximately $230
million through 2001 in connection with our anticipated Year 2000
efforts, of which approximately $150 million had been incurred through
June 30, 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
Page 35
<PAGE>36
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Year 2000 Readiness Disclosure (cont'd.)
- ----------------------------------------
resources. We also expect to incur certain capital improvement costs
(totaling approximately $14 million) to support this project. Such
capital costs (approximately $12 million as of June 30, 1999) are being
incurred sooner than originally planned but, for the most part, would
have been required in the normal course of business.
We have significant minority investments in large telecommunications
providers in Belgium, Denmark, Hungary and Canada. Each of those
companies has plans in place and activities under way to address Year
2000 issues, and we are offering advice to these companies in their
efforts. Based on information reported to us, the estimated
proportionate share of these companies' Year 2000 conversion costs that
will flow through to our earnings is not expected to be material. As
is true for many companies outside the United States, we believe that
the Year 2000 readiness efforts for some of these carriers has not
progressed as far as our own, and we expect that the Year 2000
readiness conversion and testing activities at some of these companies
will continue into late 1999. There can be no assurance that a Year
2000 failure of one of these carriers would not have a material impact
on that company's results of operations, liquidity or financial
condition, with a potential effect on Ameritech's investment in, or
other income derived from, such companies.
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 our assessments and
work to date, we believe 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, electric, gas and other public
utilities, interconnecting carriers, and joint venture and foreign
investment interests), 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, we are evaluating scenarios that
may occur as a result of the century change and are continuing to
develop 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). Our 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 our 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.
Page 36
<PAGE>37
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Euro Conversion
- ---------------
On January 1, 1999, 11 of the 15 member countries of the European Union
formed the Economic and Monetary Union (EMU) and established fixed
conversion rates between their sovereign currencies and the future
European currency unit, the euro. The participating countries agreed
to adopt the euro as their common legal currency on that date. The
sovereign "legacy" currencies of these countries will continue in
circulation within the participating countries until at least January
1, 2002, with a complete transition scheduled for no later than July 1,
2002. At the time of final conversion, new euro-denominated bills and
coins will be used exclusively.
Our international business segment includes several significant
minority investments in Europe, including Belgacom in Belgium, Tele
Danmark in Denmark and Matav in Hungary. Of these, only Belgacom
participated in the first phase of the conversion to the Euro. These
companies to date have not experienced significant difficulties with
the initial phase and continue to work on conversion requirements
during the transition period.
Management at our European affiliates has informed us that remaining
conversion efforts continue on schedule. Based on information reported
to us, the estimated proportionate share of euro-related costs that
will flow through to our earnings is not expected to be material.
Effects of foreign currency fluctuations
- ----------------------------------------
Our foreign operations and investments in international ventures are
subject to certain risks related to fluctuation in foreign currency
exchange rates. For the quarter and six months ended June 30, 1999,
due to fluctuations in the U.S. dollar, we recognized some foreign
exchange transaction gains and losses and currency translation
adjustments related to these investments. Foreign exchange transaction
gains and losses incurred by wholly owned subsidiaries affected
operating income. Transaction gains and losses incurred by other
international ventures (primarily equity-method investments) affected
other income, net. Translation adjustments resulted in a change in the
investment balance and a corresponding change in accumulated other
comprehensive income on the consolidated balance sheet. While future
fluctuations in currency exchange rates could impact results of
operations or financial position, we expect foreign investments to
continue to provide strong financial results and earnings growth.
Disclosures about market risk
- -----------------------------
We are exposed to market risks primarily from changes in interest rates
and foreign currency exchange rates. To manage our exposure to these
fluctuations, we occasionally enter into various hedging transactions
that have been authorized according to documented policies and
procedures. We do not use derivatives for trading purposes, or to
generate income or to engage in speculative activity, and we never use
leveraged derivatives.
The amounts shown below represent the estimated potential loss that we
could incur from adverse changes in either interest rates or foreign
exchange rates using the value-at-risk estimation model. The value-at-
risk model uses historical foreign exchange rates and interest rates to
estimate the volatility and correlation of these
Page 37
<PAGE>38
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
Disclosures about market risk (cont'd.)
- ---------------------------------------
rates in future periods. It estimates a loss in fair market value
using a statistical modeling technique and includes substantially all
market risk exposures, specifically excluding equity-method
investments. The resulting fair value losses shown in the table below
are for a one-day time period with a confidence level of 95%. They
have no impact on our results of operations or financial condition.
June 30, 1999 Dec. 31, 1998
------------- -------------
Risk Category
Interest rates $ 36 $ 39
Foreign exchange -- --
The 95% confidence interval signifies our degree of confidence that
actual losses would not exceed the estimated losses shown above. The
amounts shown here disregard the possibility that interest rates and
foreign currency exchange rates could move in our favor. The value-at-
risk model assumes that all movements in these rates will be adverse.
Actual experience has shown that gains and losses tend to offset each
other over time, and it is highly unlikely that we could experience
losses such as these over an extended period of time. These amounts
should not be considered projections of future losses, since actual
results may differ significantly depending upon activity in the global
financial markets.
The fair market value at risk remained relatively constant as of June
30, 1999 as compared with the valuation at December 31, 1998. As
previously noted, the value-at-risk model does not consider our
significant foreign equity-method investments.
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, as amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000, 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 38
<PAGE>39
AMERITECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont'd.)
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, or for products and services by
companies in which we have substantial investments;
- - The effects of vigorous competition in the local exchange,
intraLATA toll, cellular, data, cable TV, directory advertising or
security services markets;
- - Federal regulatory developments that impact the telecommunications,
security services and cable TV industries, and pending regulatory
issues in state jurisdictions, as well as the outcome of any
related judicial reviews;
- - The timing of and costs associated with entry into the interLATA
long-distance market;
- - The timing of, and potential regulatory or other considerations
relating to, the consummation of our proposed Merger with SBC;
- - The potential impact of issues related to Year 2000 compliance;
- - Risks inherent in international operations, including possible
economic, political or monetary instability, as well as the
potential impact of Year 2000 compliance and euro currency
conversion issues; and,
- - The impact of new technologies and the potential effect of delays
in development or deployment of such technologies.
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 39
<PAGE>40
Item 3 - Quantitative and Qualitative
Disclosures about Market Risk
-----------------------------
AMERITECH CORPORATION AND SUBSIDIARIES
Information relating to market risk is included in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, in the Other Matters section under the caption "Disclosures
About Market Risk."
Page 40
<PAGE>41
AMERITECH CORPORATION AND SUBSIDIARIES
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
six months ended June 30, 1999 and 1998.
18 Letter of preferability from Arthur Andersen LLP related
to our directory accounting change.
27 Financial Data Schedules.
(b) Reports on Form 8-K
-------------------
We filed a Current Report on Form 8-K, dated April 5, 1999,
under Item 5, Other Events and Item 7, Financial Statements and
Exhibits, to report our agreement to sell 20 Midwestern
cellular properties for $3.27 billion in cash to a venture of
GTE and Georgetown Partners.
We filed a Current Report on Form 8-K dated April 20, 1999
under Item 5, Other Events and Item 7, Financial Statements and
Exhibits, to report our earnings for the first quarter of 1999.
Page 41
<PAGE>42
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, an
authorized company official has signed this report on our behalf.
Ameritech Corporation
Date: August 2, 1999 By: /s/ Barbara A. Klein
------------------------------
Barbara A. Klein
Vice President and Comptroller
(Principal Accounting Officer)
Page 42
<PAGE>43
GLOSSARY
Access charge -
- ---------------
a fee that local phone companies charge long-distance carriers for
connecting long-distance calls to customers on the local network.
Access line -
- -------------
a line for voice, data or video reaching from a local phone company
to a home or business.
ADSL (Asymmetric Digital Subscriber Line) -
- -------------------------------------------
a technology that uses the existing copper phone wiring serving
virtually all homes and businesses to provide customers network
access to the Internet and other popular multimedia and data services
at speeds 50 times faster than an ordinary phone line.
Advanced data services -
- ------------------------
services that use advanced technology to allow faster network access
to the Internet and other multimedia and data services.
Bell operating companies -
- ---------------------------
the former Bell telephone subsidiaries of AT&T, including Ameritech's
five landline communications subsidiaries in Illinois, Indiana,
Michigan, Ohio and Wisconsin.
Broadband -
- -----------
a transmission facility that has a capacity or "bandwidth" greater
than a voice-grade phone line. Broadband facilities - fiber optics
and coaxial cable, for example- may carry numerous voice, data and
video channels at the same time.
Call management services -
- --------------------------
software-based 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.
Cellular -
- -----------
a communications system that transmits voice, data or video over
radio frequencies.
Customer premises equipment (CPE) -
- -----------------------------------
communications equipment owned by customers, including telephones,
faxes and switches.
Data communications -
- ---------------------
digital transmissions through wired or wireless networks, usually
linking computers.
Dial 1 + (Dialing parity) -
- ---------------------------
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 the 1s and 0s of computer code for improved
clarity and quality.
Federal Communications Commission (FCC) -
- ------------------------------------------
an independent government agency whose mission is to encourage
competition in all communications markets and to protect the public
interest. The FCC develops and implements policy concerning
interstate communications by radio, television, wire, satellite, and
cable.
Financial Accounting Standards Board (FASB) -
- ---------------------------------------------
the independent body responsible for setting accounting and financial
reporting standards to be followed by U.S. business enterprises.
High-capacity lines -
- ---------------------
lines sold to customers that have large-volume data communications
needs such as long-distance carriers, Internet service providers and
large companies.
Page 43
<PAGE>44
GLOSSARY (cont'd.)
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 -
- ---------------------
the portion of revenues regulated by state rather than federal
authorities.
ISDN (Integrated Services Digital Network) -
- --------------------------------------------
a service that carries voice, data and video at the same time and
offers several times the capacity of a conventional phone line.
Landline -
- ----------
referring to conventional wired phone service.
Local access -
- --------------
the local completion of long-distance calls.
Local access and transport area (LATA) -
- ----------------------------------------
the boundary within which a local company may provide phone service.
A LATA usually is centered around a city or other identifiable
community of interest.
Local exchange carrier (LEC) -
- ------------------------------
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.
Long-distance -
- ---------------
voice, data and video communications to locations beyond local
service areas.
Managed services -
- ------------------
services that give business customers one point of contact for all
communications and computing needs. For example, desktop managed
services provide business customers one place to call for anything
involving personal computers, phones, videoconferencing, local area
networks, private phone systems and more.
Personal communications services (PCS) -
- ----------------------------------------
wireless services, such as cellular phone service and two-way paging,
that use digital technology to provide enhanced call security, longer
battery life and other convenience features.
Price caps -
- ------------
a form of regulation that sets maximum limits on the prices that
local exchange carriers can charge for access services instead of
limits on rate of return or profits.
Privatization -
- ---------------
a government sale of part or all of a national company to private
firms and investors.
Page 44
<PAGE>45
GLOSSARY (cont'd.)
Regional holding companies (RHCs) -
- -----------------------------------
the seven regional holding companies formed in connection with the
court-approved divestiture, effective January 1, 1984, of certain
assets of AT&T Corp. With the 1997 mergers of Pacific Telesis Group
into SBC Communications Inc. and NYNEX Corporation into Bell Atlantic
Corporation, five regional holding companies, including Ameritech,
remain.
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.
Security services -
- -------------------
services that help secure people and property at home and at work
such as burglar and fire alarm systems, closed circuit cameras and
electronic card access.
Switched minutes of use -
- -------------------------
the measure of time used to bill long-distance companies for access
to the local phone network on a usage-sensitive basis.
Total return -
- --------------
stock price appreciation plus reinvested dividends.
Unbundled network elements -
- --------------------------
separate components of a regulated service for which separate rates
are charged.
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 telecommunications operators.
Voice-grade equivalent -
- ------------------------
a channel or other portion of a high-capacity access line that can be
used to transmit voice or data traffic.
Voice mail -
- ------------
a service that automatically answers calls, records messages and
distributes them.
Wireless -
- ----------
voice, data and video communications that use radio frequencies
rather than wires for transmission. Includes cellular, paging and
personal communications services.
Page 45
EXHIBIT 12
AMERITECH CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
(Dollars in Millions)
Six Months Ended
June 30
--------------
1999 1998
---- ----
EARNINGS
- --------
Income before interest, income taxes
and undistributed equity earnings.......... $2,658 $3,723
Portion of rent expense
representing interest...................... 41 38
Michigan Single Business tax................ 24 22
Preferred dividends of subsidiaries (2)..... 34 24
------ ------
Total earnings (2)......................... $2,757 $3,807
------ ------
FIXED CHARGES
- -------------
Interest expense............................ $ 268 $ 322
Capitalized interest........................ 11 14
Portion of rent expense
representing interest...................... 41 38
Preferred dividends of subsidiaries (2)..... 34 24
------ ------
Total fixed charges......................... $ 354 $ 398
------ ------
Ratio of earnings to fixed charges.......... 7.79 9.57
====== ======
(1) Earnings represent income before income taxes and fixed charges.
Since we have already deducted the Michigan Single Business Tax
(the Tax) and rental expense to arrive at income before interest
and income taxes, the Tax and the one-third portion of rental
expense considered to be fixed charges are added back to arrive at
total earnings.
(2) As required by SEC rules, we have grossed up the preferred stock
dividends to an amount representing the pretax earnings needed to
cover the dividend requirements.
[Arthur Andersen logo]
Arthur Andersen LLP
33 West Monroe Street
Chicago, IL 60603-5385
July 30, 1999
Ameritech Corporation
30 South Wacker Drive
Chicago, Illinois 60606
Dear Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K
calling for a letter from a registrant's independent accountants
whenever there has been a change in accounting principle or
practice.
We have been informed that, as of June 30, 1999, the Company
changed its accounting for directory advertising revenues from
the deferred method to the as published method. Under the as
published method, revenues and expenses are recognized at the
time directories are issued rather than over the lives of the
directories, as occurs under the deferred method. According to
the management of the Company, this change was made to conform to
the method generally followed in the industry and by other
publishing companies.
A complete coordinated set of financial and reporting standards
for determining the preferability of accounting principles among
acceptable alternative principles has not been established by the
accounting profession. Thus, we cannot make an objective
determination of whether the change in accounting described in
the preceding paragraph is to a preferable method. However, we
have reviewed the pertinent factors, including those related to
financial reporting, in this particular case on a subjective
basis, and our opinion stated below is based on our determination
made in this manner.
We are of the opinion that the Company's change in method of
accounting is to an acceptable alternative method of accounting,
which, based upon the reasons stated for the change and our
discussions with you, is also preferable under the circumstances
in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your
management.
We have not audited the application of this change to the
financial statements of any period subsequent to December 31,
1998. Further, we have not examined and do not express any
opinion with respect to your financial statements for the three
and six months ended June 30, 1999.
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
***RESTATED FINANCIAL DATA SCHEDULE***
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION RESTATED FOR
AMERITECH CORPORATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS THEN ENDED
TO REFLECT THE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 666,000
<SECURITIES> 0<F1>
<RECEIVABLES> 3,770,000
<ALLOWANCES> (369,000)
<INVENTORY> 341,000
<CURRENT-ASSETS> 5,109,000
<PP&E> 36,976,000
<DEPRECIATION> 22,562,000
<TOTAL-ASSETS> 30,100,000
<CURRENT-LIABILITIES> 7,407,000
<BONDS> 5,521,000
0
0
<COMMON> 1,177,000
<OTHER-SE> 9,929,000
<TOTAL-LIABILITY-AND-EQUITY> 30,100,000
<SALES> 0<F2>
<TOTAL-REVENUES> 4,430,000
<CGS> 0<F3>
<TOTAL-COSTS> 3,276,000
<OTHER-EXPENSES> (111,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,000
<INCOME-PRETAX> 1,131,000
<INCOME-TAX> 417,000
<INCOME-CONTINUING> 714,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 207,000
<NET-INCOME> 921,000
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.83
<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 THE FINANCIAL STATEMENTS AND THE "TOTAL COST" TAG, PER
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AMERITECH CORPORATION'S JUNE 30, 1999 CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 292,000
<SECURITIES> 0<F1>
<RECEIVABLES> 4,009,000
<ALLOWANCES> (372,000)
<INVENTORY> 361,000
<CURRENT-ASSETS> 4,719,000
<PP&E> 37,591,000
<DEPRECIATION> 23,157,000
<TOTAL-ASSETS> 33,243,000
<CURRENT-LIABILITIES> 9,456,000
<BONDS> 6,157,000
0
0
<COMMON> 1,177,000
<OTHER-SE> 10,296,000
<TOTAL-LIABILITY-AND-EQUITY> 33,243,000
<SALES> 0<F2>
<TOTAL-REVENUES> 9,232,000
<CGS> 0<F3>
<TOTAL-COSTS> 6,702,000
<OTHER-EXPENSES> (170,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,000
<INCOME-PRETAX> 2,432,000
<INCOME-TAX> 899,000
<INCOME-CONTINUING> 1,533,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 207,000
<NET-INCOME> 1,740,000
<EPS-BASIC> 1.58
<EPS-DILUTED> 1.57
<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 THE FINANCIAL STATEMENTS AND THE "TOTAL COST" TAG, PER
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
