SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
_
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
_
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1049
BellSouth Telecommunications, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-0436120
(State of (I.R.S. Employer
Incorporation) Identification Number)
675 West Peachtree Street, N. E., Atlanta, Georgia 30375
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 404 529-8611
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
<PAGE>
PART I -- FINANCIAL INFORMATION
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Millions)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
(Restated)
Operating Revenues:
Local service $1,728.2 $1,669.9 $5,117.6 $4,912.9
Interstate access 770.8 759.8 2,338.2 2,227.7
Intrastate access 226.6 222.6 687.1 655.8
Toll 298.4 305.7 899.0 910.8
Other 486.1 489.5 1,435.9 1,398.3
Total Operating Revenues 3,510.1 3,447.5 10,477.8 10,105.5
Operating Expenses:
Cost of services
and products 1,341.5 1,286.4 3,951.1 3,909.4
Depreciation and amortization 735.5 722.4 2,192.9 2,138.0
Selling, general
and administrative 581.7 607.6 1,682.8 1,717.5
Total Operating Expenses 2,658.7 2,616.4 7,826.8 7,764.9
Operating Income 851.4 831.1 2,651.0 2,340.6
Interest Expense 146.2 128.1 408.0 425.0
Other Income, net 3.8 9.7 13.1 13.3
Income Before Income Taxes,
Extraordinary Loss and
Cumulative Effect of Change
in Accounting Principle 709.0 712.7 2,256.1 1,928.9
Provision for Income Taxes 247.9 271.7 824.1 689.7
Income Before Extraordinary
Loss and Cumulative Effect
of Change in Accounting
Principle 461.1 441.0 1,432.0 1,239.2
Extraordinary Loss on Early
Extinguishment of Debt,
net of tax _ (7.8) - (63.2)
Cumulative Effect of Change
in Accounting Principle,
net of tax - - - (64.8)
Net Income $ 461.1 $ 433.2 $1,432.0 $1,111.2
Retained Earnings:
At beginning of period $3,326.1 $3,853.7 $3,180.0 $3,967.0
Net Income 461.1 433.2 1,432.0 1,111.2
Dividends declared (365.8) (366.9) (1,190.6) (1,158.2)
Other adjustments - (9.7) - (9.7)
At end of period $3,421.4 $3,910.3 $3,421.4 $3,910.3
The accompanying notes are an integral part of these financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
September 30, December 31,
1994 1993
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 121.0 $ 84.3
Accounts receivable, net of
allowance for uncollectibles of $91.8
and $84.6 2,238.7 2,229.0
Material and supplies 338.2 374.3
Other current assets 200.0 253.8
2,897.9 2,941.4
Investments In and Advances to Affiliates 246.9 238.2
Property, Plant and Equipment, net 23,628.7 23,444.4
Deferred Charges and Other Assets 466.9 471.2
Total Assets $27,240.4 $27,095.2
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year $ 1,168.4 $ 1,094.6
Accounts payable 1,107.9 1,037.1
Other current liabilities 2,100.6 2,415.4
4,376.9 4,547.1
Long-Term Debt 6,537.1 6,546.5
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 2,789.3 2,831.4
Unamortized investment tax credits 463.5 515.9
Other liabilities and deferred credits 2,219.6 1,994.7
5,472.4 5,342.0
Shareholder's Equity:
Common stock, one share, no par value 7,432.6 7,479.6
Retained earnings 3,421.4 3,180.0
10,854.0 10,659.6
Total Liabilities and Shareholder's Equity $27,240.4 $27,095.2
The accompanying notes are an integral part of these financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
For the Nine Months
Ended September 30,
1994 1993
Cash Flows from Operating Activities:
Net income....................................... $1,432.0 $1,111.2
Adjustments to net income:
Depreciation.................................. 2,190.0 2,136.1
Provision for losses on bad debts............. 92.4 98.7
Write-off of unamortized debt issuance
costs due to early extinguishment of debt.... - 106.4
Payment of call premium....................... - (76.4)
Change in accounting principle, net of tax.... - 64.8
Deferred income taxes and unamortized
investment tax credits....................... (138.4) (171.7)
Allowance for funds used during construction.. (14.0) (18.7)
Change in accounts receivable................. (126.0) (251.7)
Change in material and supplies............... (79.0) (44.9)
Change in accounts payable and
other current liabilities.................... (218.2) 28.9
Change in deferred charges and other
assets........................................ 49.7 (3.1)
Change in other liabilities and
deferred credits............................. 269.4 119.6
Other reconciling items, net.................. 13.0 (.8)
Net cash provided by operating activities.. 3,470.9 3,098.4
Cash Flows from Investing Activities:
Capital expenditures............................. (2,320.1) (2,153.5)
Proceeds from disposals of property, plant
and equipment................................... 48.2 53.9
Investment dispositions.......................... 45.2
Purchase of BellSouth Common Stock............... - (190.1)
Other investing activities, net.................. .6 (.5)
Net cash (used for) investing activities... (2,226.1) (2,290.2)
Cash Flows from Financing Activities:
Proceeds from short-term borrowings.............. 9,553.3 8,349.3
Repayment of short-term borrowings............... (9,477.7) (8,116.0)
Advances from parent and affiliates.............. 381.0 287.0
Repayment of advances from parent
and affiliates.................................. (388.9) (286.8)
Proceeds of long-term debt....................... - 2,176.0
Repayment of long-term debt...................... (.3) (2,077.5)
Payment of capital lease obligations............. (11.6) (9.0)
Equity investment of parent...................... (47.0) 18.3
Dividends paid to parent......................... (1,216.9) (1,151.5)
Net cash (used for)
financing activities......................... (1,208.1) (810.2)
<PAGE>
Net Increase/(Decrease) in Cash and
Cash Equivalents................................... 36.7 (2.0)
Cash and Cash Equivalents at Beginning of Period.... 84.3 133.0
Cash and Cash Equivalents at End of Period.......... $ 121.0 $ 131.0
The accompanying notes are an integral part of these financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
(Unaudited)
(a) Preparation of Interim Financial Statements
The consolidated financial statements of BellSouth Telecommunications, Inc.
(BellSouth Telecommunications) have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
amounts have been reclassified from previous presentations. In the opinion of
BellSouth Telecommunications, these statements include all adjustments
necessary for a fair presentation of the results of all interim periods
reported herein. All adjustments are of a normal recurring nature unless
otherwise disclosed. Certain information and footnote disclosures prepared in
accordance with generally accepted accounting principles have been either
condensed or omitted pursuant to SEC rules and regulations. However,
BellSouth Telecommunications believes that the disclosures made are adequate
for a fair presentation of results of operations, financial position and cash
flows. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included in
BellSouth Telecommunications' latest annual report on Form 10-K and previous
quarterly reports on Form 10-Q. BellSouth Telecommunications is a
wholly-owned subsidiary of BellSouth Corporation (BellSouth).
(b) Supplemental Cash Flow Information
BellSouth Telecommunications considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. The
following supplemental information is presented in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 95,
"Statement of Cash Flows":
For the Nine Months
Ended September 30,
1994 1993
Cash paid during the period for:
Income taxes.................................... $951.3 $767.7
Interest........................................ $453.2 $501.0
(c) SFAS No. 112, "Employers' Accounting for Postemployment Benefits"
In the fourth quarter of 1993, BellSouth Telecommunications adopted SFAS No.
112, "Employers' Accounting for Postemployment Benefits." The cumulative
effect of the change in accounting principle was $64.8. Because the change in
accounting was retroactive to January 1, 1993, the consolidated financial
statements at September 30, 1993 and for the nine months then ended (including
Retained Earnings at July 1, 1993) have been restated to reflect the adoption
of the accounting standard.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA
(Unaudited)
Network Access Lines in Service at September 30 (In Thousands)(a):
Percentage
Gain/(Loss) for the
Periods Ended
September 30,
1994 vs. 1993 vs.
1994 1993 1992
By Category:
Residence 14,058.7 3.45 2.93
Business 5,680.7 6.97 5.12
Other 253.8 (.12) (4.26)
Total Access Lines 19,993.2 4.38 3.42
By State:
Alabama 1,712.8 3.49 3.34
Florida 5,269.8 4.67 3.94
Georgia 3,309.6 5.54 3.92
Kentucky 1,053.7 2.99 2.67
Louisiana 2,020.2 3.53 2.03
Mississippi 1,110.2 3.98 2.92
North Carolina 1,971.0 4.87 3.71
South Carolina 1,235.1 3.34 2.50
Tennessee 2,310.8 4.49 3.72
Total Access Lines 19,993.2 4.38 3.42
Percentage
Gain/(Loss) for the
Periods Ended
1994 vs. 1993 vs.
1994 1993 1992
Access Minutes of Use (In Millions)(a)(b):
Interstate:
Three months ended March 31 14,050.8 7.94 5.55
Three months ended June 30 14,422.3 7.59 6.03
Three months ended September 30 14,482.1 8.63 4.74
Nine months ended September 30 42,955.2 8.05 5.44
Intrastate:
Three months ended March 31 4,005.6 11.39 6.74
Three months ended June 30 4,175.0 9.90 8.79
Three months ended September 30 4,293.2 10.45 9.31
Nine months ended September 30 12,473.8 10.57 8.30
Total Minutes of Use:
Three months ended March 31 18,056.4 8.69 5.80
Three months ended June 30 18,597.3 8.10 6.63
Three months ended September 30 18,775.3 9.04 5.74
Nine months ended September 30 55,429.0 8.61 6.06
Toll Messages (In Millions)(a)(c)
Three months ended March 31 386.6 5.28 (2.40)
Three months ended June 30 397.2 2.12 7.14
Three months ended September 30 387.2 1.70 4.03
Nine months ended September 30 1,171.0 3.00 2.86
<PAGE>
(a) Prior period operating data are often revised at later dates to reflect
the most current information. The above information reflects the
latest data available for the periods indicated.
(b) Minutes of Use are classified as either interstate or intrastate based
on the percentage interstate usage factor. This factor is updated
periodically.
(c) Effective in 1994, toll messages include messages completed under
optional calling plans. Prior period toll message volumes have been
restated to reflect this change. See "Management's Discussion and
Analysis of Results of Operations - Business Volumes."
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA - continued
For the Nine
Months Ended
September 30, Year Ended December 31,
1994 1993 1992 1991 1990 1989
Ratio of Earnings to Fixed Charges (d) 5.72 3.17 4.53 3.86 4.23 4.15
(d) For the purpose of this ratio: (i) earnings have been calculated by adding
income before income taxes, gross interest expense and such portion of
rental expense representative of the interest factor on such rentals; (ii)
fixed charges are comprised of gross interest expense and such portion of
rental expense representative of the interest factor on such rentals.
At September 30,
1994 1993
Debt Ratio (e)........................................ 41.1% 39.6%
_______________
(e) This ratio is calculated by dividing the sum of debt maturing within one
year and long-term debt, net of unamortized debt issuance costs, by the sum
of shareholder's equity, debt maturing within one year and long-term debt,
net of unamortized debt issuance costs.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Dollars in Millions)
BellSouth Telecommunications, Inc. (BellSouth Telecommunications) is a
wholly-owned subsidiary of BellSouth Corporation (BellSouth) and is
headquartered in Atlanta, Georgia. BellSouth Telecommunications serves, in the
aggregate, approximately two-thirds of the population and one-half of the
territory within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. BellSouth Telecommunications
primarily provides local exchange service and toll communications services
within court-defined geographic areas, called Local Access and Transport Areas
(LATAs), and provides network access services to enable interLATA
communications using the long-distance facilities of interexchange carriers.
Through subsidiaries, other telecommunications services and products are
provided both inside and outside the nine-state BellSouth Telecommunications
region.
Approximately 86% of BellSouth Telecommunications' Total Operating Revenues for
the nine-month periods ended September 30, 1994 and 1993 were from wireline
services. Charges for local service, access services and toll messages for the
nine months ended September 30, 1994 accounted for approximately 57%, 33% and
10%, respectively, of the wireline revenues discussed above. The remainder of
BellSouth Telecommunications' Total Operating Revenues was derived principally
from directory publishing fees, customer premises equipment sales and other
nonregulated services.
Results of Operations
For the Nine
Months Ended September 30,
1994 1993
Net Income $1,432.0 $1,111.2
Net Income increased $320.8 (28.9%) for the nine-month period ended September
30, 1994 when compared to the same prior year period. The increase was
attributable in part to revenue growth, driven by improvements in key business
volumes and cost control efforts, including expense savings attributable to the
restructuring plan implemented in 1993. In addition, the increase was due to
the effect of 1993 charges of $64.8 for the retroactive adoption of Statement of
Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits" (see Note (c)), $63.2 for the refinancing of certain
long-term debt issues at lower interest rates and approximately $25 associated
with severe 1993 winter weather conditions. After adjusting for the effect of
the 1993 charges, Net Income for the nine-month period ended September 30, 1994
increased $167.8 (13.3%) when compared to the same period last year.
Business Volumes
The rate of growth in access lines continued to be particularly strong. The
number of access lines in service since September 30, 1993 increased by
approximately 839,400, or 4.38%, to 19,993,200, compared to a 3.42% rate of
increase for the same prior year period. The overall increase, led by growth in
Georgia, North Carolina, Florida and Tennessee, was primarily attributable to
continued economic improvement, including expanding employment in BellSouth
<PAGE>
Telecommunications' nine-state region, and an increase in the number of second
residential lines. Second residential lines accounted for approximately 41.5%
and 23.2% of the overall increase in residence access lines and total access
lines, respectively, since September 30, 1993. The growth rates in 1994 for
total residence and business lines of 3.45% and 6.97%, respectively, improved
compared to growth rates of 2.93% and 5.12%, respectively, in 1993.
Access minutes of use represent the volume of traffic carried by interexchange
carriers between LATAs, both interstate and intrastate, using BellSouth
Telecommunications' local facilities. Total access minutes of use increased by
4,394.0 million (8.61%) for the nine-month period ended September 30, 1994
compared to an increase of 6.06% for the same period last year. The increase in
access minutes of use was partially attributable to access line growth,
promotions by the interexchange carriers and intraLATA toll competition, which
has the effect of increasing access minutes of use while reducing toll messages
carried over BellSouth Telecommunications' facilities. The growth rate in total
minutes of use continues to be negatively impacted by the effects of bypass and
the migration of interexchange carriers to categories of service (e.g., special
access) that have a fixed charge as opposed to a volume-driven charge and to
high capacity services, which causes a decrease in minutes of use.
Toll messages are comprised of Message Telecommunications Service and Wide Area
Telecommunications Service. Also, effective in 1994, toll messages include
messages completed under Optional Calling Plans (OCPs), which provide reduced
rates for toll calls within a LATA. Prior period toll message volumes have been
restated to reflect this change. The pricing of services provided under OCPs
has stimulated volume growth. Accordingly, the trend of declining toll message
volumes in prior periods has been mitigated to some extent by the inclusion of
messages completed under these plans.
For the nine-month period ended September 30, 1994, toll messages increased by
34.1 million (3.00%) compared to a restated increase of 2.86% for the
corresponding period in 1993. The increase was attributable in part to the
growth of messages completed under OCPs. Other than a plan implemented in South
Carolina during September 1994, which had only a negligible impact on 1994
volumes, no new significant local area calling plans have been implemented since
1992. The South Carolina plan and future implementation of other such plans in
BellSouth Telecommunications' service region, coupled with competition in the
intraLATA toll market, will adversely impact future toll message volumes. These
plans and the effects of competition result in the transfer of calls from toll
to local service and access categories, respectively, but the corresponding
revenues are not generally shifted at commensurate rates.
See "Selected Operating Data."
Operating Revenues
Total Operating Revenues increased $372.3 (3.7%) for the nine-month period ended
September 30, 1994, respectively, when compared to the corresponding 1993
period. The components of Total Operating Revenues were as follows:
<PAGE>
For the Nine
Months Ended September 30,
1994 1993
Local Service $5,117.6 $4,912.9
Interstate Access 2,338.2 2,227.7
Intrastate Access 687.1 655.8
Toll 899.0 910.8
Other 1,435.9 1,398.3
Total Operating
Revenues $10,477.8 $10,105.5
Local Service revenues increased $204.7 (4.2%) for the nine-month period ended
September 30, 1994 as compared to the same 1993 period. The increase was
attributable to an increase in access lines in service since September 30, 1993.
In addition, growth in revenues from optional extended area calling plans, which
shift revenues from Toll to Local Service, contributed to the increase for the
period. The increase was partially offset by the effect of net rate reductions
since September 30, 1993, principally in Louisiana and, to a lesser extent, in
Florida, Alabama and North Carolina.
Interstate Access revenues increased $110.5 (5.0%) for the nine-month period
ended September 30, 1994 as compared to the same prior year period. The
increase was attributable to growth in minutes of use, additional end user
charges due primarily to access line growth and the effect of billing
adjustments recorded in first quarter 1993, which reduced revenues for that
period. The increases were partially offset by the net effect of rate
reductions, including revenue deferrals under the Federal Communications
Commission's (FCC) price cap plan, and decreased net settlements with the
National Exchange Carriers Association. Since BellSouth Telecommunications'
earnings remain in the sharing range of the FCC's current price cap plan and
because of other factors, it is unlikely that significant revenue growth in this
category can be sustained over the long term.
Intrastate Access revenues increased $31.3 (4.8%) for the nine-month period
ended September 30, 1994 from the comparable 1993 period. The increase was due
to growth in minutes of use, increased net settlements with independent
telephone companies and the effect of billing adjustments recorded in first
quarter 1993, which reduced revenues for that period. The increase was
partially offset by rate reductions since September 30, 1993, principally in
Alabama, Florida and Tennessee.
Toll revenues decreased $11.8 (1.3%) for the nine-month period ended September
30, 1994 when compared to the same prior year period. The decrease was
primarily attributable to net rate reductions since September 30, 1993 and the
impact of optional extended area calling plans which shift revenues to Local
Service. The decrease was partially offset by growth in toll message volumes,
reflecting improvements related in part to optional calling plans.
<PAGE>
Other revenues are principally comprised of revenues from publishing rights
fees, customer premises equipment (CPE) sales and maintenance services, billing
and collection services, cellular interconnect services and other nonregulated
services (primarily inside wire services).
Other revenues increased $37.6 (2.7%) for the nine-month period ended September
30, 1994 when compared to the corresponding 1993 period. The increase was
attributable to growth in publishing rights and cellular interconnect fees and
higher demand for voice messaging and inside wire services. In addition, the
effect of adjustments, related primarily to billing and collection services, and
volume growth in the CPE businesses, substantially offset by the impact of the
sale in April 1994 of the out-of-region CPE sales and service operations,
contributed to the increase. Overall revenue growth for the period was reduced
by increased sharing accruals related to state regulatory plans.
See "Business Volumes."
Operating Expenses
The components of Total Operating Expenses are Depreciation and Amortization,
Cost of Services and Products and Selling, General and Administrative. Cost of
Services and Products includes employee and employee-related expenses associated
with network repair and maintenance, material and supplies expense, cost of
tangible goods sold and other expenses associated with providing services.
Selling, General and Administrative includes expenses related to sales
activities such as salaries, commissions, benefits, travel, marketing and
advertising expenses. Total Operating Expenses increased $61.9 (0.8%) for the
nine-month period ended September 30, 1994 compared to the same period in 1993,
the components of which were as follows:
For the Nine
Months Ended September 30,
1994 1993
Depreciation and
Amortization $2,192.9 $2,138.0
Other Operating Expenses:
Cost of Services
and Products 3,951.1 3,909.4
Selling, General and
Administrative 1,682.8 1,717.5
5,633.9 5,626.9
Total Operating
Expenses $7,826.8 $7,764.9
Depreciation and Amortization increased $54.9 (2.6%) for the nine-month period
ended September 30, 1994 compared to the same period in 1993. The increase was
due to higher levels of property, plant and equipment since September 30, 1993
resulting from continued growth in the customer base and continued modernization
of the network. In addition, higher depreciation rates in certain jurisdictions
contributed to the increase. The effect of the expiration of inside wire and
reserve deficiency amortizations partially offset the increase for the period.
<PAGE>
Other Operating Expenses increased $7.0 (0.1%) for the nine-month period ended
September 30, 1994 when compared to the corresponding 1993 period. The increase
reflects expenses attributable to growth in the customer base and related
volumes, as well as the impact of continuing workforce reductions. The volume
growth has resulted in increased network-related expenses, including software
license fees and materials. An increase in overall labor costs, due to annual
compensation increases for management and craft employees and increased overtime
attributable to volume growth and network service activities, was partially
offset by expense savings from a net reduction of approximately 3,150 employees
since September 30, 1993. The net reduction in employees reflects reductions of
approximately 3,100 attributable to the restructuring plan announced in the
fourth quarter of 1993 and approximately 750 from the sale in April 1994 of the
out-of-region CPE sales and service operations, partially offset by the addition
of about 700 employees primarily for the support of network and other business
functions. For the nine month period, the increase in Other Operating Expenses
was partially offset by the inclusion in 1993 of approximately $40 of expenses
related to severe weather conditions.
For the Nine
Months Ended September 30,
1994 1993 _
Interest Expense $408.0 $425.0
Other Income, net 13.1 13.3
Provision for
Income Taxes 824.1 689.7
Interest Expense decreased $17.0 (4.0%) for the nine-month period ended
September 30, 1994 compared to the same period last year. The decrease was due
to interest savings resulting from the refinancings of long-term debt at lower
interest rates throughout 1993, partially offset by higher interest rates on
short-term borrowings and higher average levels of debt.
Provision for Income Taxes increased $134.4 (19.5%) for the nine-month period
ended September 30, 1994 over the comparable 1993 period. The increase was
primarily attributable to a higher level of pre-tax income.
Other Matters
Restructuring of Telephone Operations
In the fourth quarter of 1993, BellSouth Telecommunications recognized a
$1,136.4 restructuring charge in connection with a plan to redesign, consolidate
and streamline the fundamental processes and work activities in its telephone
operations. The restructuring is being undertaken in response to an
increasingly competitive business environment. Upon completion, restructuring
of the telephone operations is expected to improve overall responsiveness to
customer needs and reduce costs. The charge consists of $368.2 for Employee
Separation, $342.8 for Consolidation/Elimination of Operations and $425.4 for
Systems.
<PAGE>
Employee Separation. Employee separation costs include severance payments,
health care coverage, education benefits, and costs of relocating employees to
new job locations, as well as pension curtailment expenses. These costs relate
to BellSouth Telecommunications' targeted reduction of 10,200 employees by the
end of 1996. Such reductions will result in future cost savings and, as a
result, are expected to improve BellSouth Telecommunications' competitive
position.
Consolidation/Elimination of Operations. Consolidation and elimination of
various operations involve the redesign of key work processes and the design of
new processes, both of which facilitate the consolidation of service functions
and permit the targeted employee reductions. These costs include those to
implement changes such as: the consolidation of data centers from 11 to 6;
consolidation of comptrollers offices from 48 to 11; and consolidation of repair
and installation centers from 288 to 80. Through these changes, BellSouth
Telecommunications expects to establish and implement enhanced customer service
processes.
Systems. The information management systems in use prior to the restructuring
effort are inadequate to deal with increased competition and changing
technology. Accordingly, as a part of the restructuring plan, a major redesign
of information systems throughout the company is being undertaken to attain a
systems framework that both facilitates the targeted employee reductions and
correlates to the increasingly competitive business environment. This effort
entails significant changes to the overall computing platform, architecture and
corporate systems structure.
Progress Under the Plan. Since inception of the restructuring plan in fourth
quarter 1993, cumulative employee reductions and total amounts charged against
the restructuring reserve are 3,100 and $300, respectively, detailed as follows:
Three Months Ended Three Months Ended Nine Months Ended
December 31, 1993 September 30, 1994 September 30, 1994
Employees Amount Employees Amount Employees Amount
1,300 $ 53.0 1,000 $120.7 1,800 $247.0
As of September 30, 1994, the recorded liability associated with the
restructuring plan was $836.4. For the nine-month period ended September 30,
1994, cash expenditures relating to the ongoing implementation of the
restructuring plan were approximately $204. The levels of restructuring
activities and cash expenditures related to this plan are expected to increase
over the restructuring period.
<PAGE>
Regulatory Environment
Accounting Under SFAS No. 71
BellSouth Telecommunications continues to account for the economic effects of
regulation under SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." Where appropriate, the provisions of SFAS No. 71 give recognition
to the effect of actions of regulators, which can provide reasonable assurance
of the existence of an asset, reduce or eliminate the value of an asset or
impose or eliminate a liability on a regulated entity. As a result of such
actions by regulators, BellSouth Telecommunications' balance sheet at September
30, 1994 reflects deferred charges (regulatory assets) of approximately $129,
primarily related to compensated absences and unamortized issuance costs for
debt that has been refinanced, and deferred credits (regulatory liabilities) of
approximately $39, related to income tax issues. Virtually all of the current
regulatory assets and liabilities arose in connection with the incorporation of
new accounting standards into the ratemaking process, and are transitory in
nature. The magnitude of the regulatory assets and liabilities is decreasing
over time due to the ongoing amortization prescribed as a part of the adoption
in 1988 of the FCC's current Uniform System of Accounts. Additional regulatory
assets and liabilities may arise in the future as long as BellSouth
Telecommunications remains subject to the provisions of SFAS No. 71. SFAS No.
71 also requires that telephone plant and equipment be depreciated using asset
lives prescribed by regulators. Generally as a result of increasing
competition, such regulator-prescribed lives extend beyond the telephone
plant's actual economic and technological lives. Consequently, the recorded
net book value of the telephone plant is greater than that which would
otherwise be recorded by unregulated enterprises.
Various forms of earnings-based regulation remain in effect at the federal
level and in all nine states served by BellSouth Telecommunications. However,
recent legislative and regulatory initiatives suggest that fully competitive
markets for telecommunications services will eventually be established. In its
recently-completed session, the United States Congress considered legislation
designed specifically to open all telecommunications services to full
competition. Although no such legislation was enacted into law, BellSouth
Telecommunications expects that Congress will again consider legislation of
this type in its next session. Furthermore, in the regulatory arena, BellSouth
Telecommunications continues to pursue modification of the existing regulatory
framework. Price regulation plans, whereby prices of basic local exchange
service are directly regulated and prices for other telecommunications products
and services are based on market factors, have been proposed for implementation
and are under review in four of nine states in the service area.
BellSouth Telecommunications would be required to discontinue accounting under
SFAS No. 71 if the existing and anticipated levels of competition no longer
allow for service and product pricing that provides for the recovery of costs.
Additionally, SFAS No. 71 would no longer apply if BellSouth Telecommunications
is successful in altering the existing regulatory framework and achieving price
regulation since such plans do not provide for the recovery of specific costs.
While accounting under SFAS No. 71 is currently appropriate, it is increasingly
likely that the company will discontinue accounting under SFAS No. 71 due to
<PAGE>
the effect of one or both of these conditions. In that event, the impact on
BellSouth Telecommunications' financial position and results of operations
would be material. Under such circumstances, BellSouth Telecommunications
would be required to reduce the recorded value for telephone plant and
equipment in recognition of amounts that are not recoverable or are overstated
due to longer regulator-prescribed asset lives. In addition, BellSouth
Telecommunications would be required to eliminate its regulatory assets and
liabilities, adjust the level of its unamortized investment tax credits and
fully adopt issue basis accounting for its directory publishing fees. Specific
financial impacts of discontinuing SFAS No. 71 would depend on the timing and
magnitude of changes, both in the marketplace and in the overall regulatory
framework.
Judicial Update
In September 1994, the U.S. District Court for the Northern District of Alabama
declared as unconstitutional a provision of the Cable Communications Policy Act
of 1984 that prohibits BellSouth and its affiliates from providing cable
television programming in the areas served by BellSouth Telecommunications. As
a result of the Court's decision, which was rendered in response to a suit
filed by BellSouth in 1993 and is now pending appeal by the United States,
BellSouth and its affiliates, including BellSouth Telecommunications, may seek
the appropriate governmental authorizations to provide video programming and
interactive services directly to consumers within the areas of the Court's
jurisdiction. Initially, BellSouth plans to provide such services to residents
of Vestavia Hills, Alabama, subject to finality of the Court's decision and
approval by the FCC and the City of Vestavia Hills. The cost of constructing
the network for approximately 7,600 households in Vestavia Hills is estimated
to be $7 to $8.
State Regulation
South Carolina. In August, the South Carolina Public Service Commission
concluded its hearings concerning BellSouth Telecommunications' curent rates
and 1992 earnings. An order is expected to be issued by the South Carolina
Commission in the near term.
Mississippi. In response to an order issued by the Mississippi Public Service
Commission, BellSouth Telecommunications filed in September a model price
regulation plan. Under the model plan, the regulatory focus would shift from
the company's earnings to rates that customers pay for services. The proposal
includes provisions that basic rates will not increase for three years and the
rates for interconnection services and other services (as defined in the model
plan) would be set by BellSouth Telecommunications based on market
considerations, subject to certain defined limitations. Hearings are scheduled
during the first quarter of 1995.
Kentucky. Pursuant to an order issued by the Kentucky Public Service
Commission, hearings originally scheduled for the fall of 1994 on BellSouth
Telecommunications' proposed price regulation plan have been postponed. Such
hearings have not yet been rescheduled.
Louisiana. In October, hearings regarding BellSouth Telecommunications'
proposed price regulation plan were completed. The Louisiana Public Service
Commission has not issued an order.
Georgia. The Georgia Public Service Commission is currently reviewing the
company's earnings in conjunction with hearings on the proposed price
regulation plan filed in June by BellSouth Telecommunications.
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4 No instrument which defines the rights of
holders of long and intermediate term debt of
BellSouth Telecommunications, Inc. is filed
herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this
regulation, BellSouth Telecommunications, Inc.
hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
12 Computation of Ratio of Earnings to Fixed
Charges. (See "Selected Operating Data"
section of this Form 10-Q.)
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELLSOUTH TELECOMMUNICATIONS, INC.
By /s/ Patrick H. Casey
PATRICK H. CASEY
Vice President and Comptroller
(Principal Accounting Officer)
November 9, 1994
<PAGE>
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed
Charges. (See "Selected Operating Data"
section of this Form 10-Q.)
27 Financial Data Schedule.
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