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 June 30, 1995
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 Incorporation) (I.R.S. Employer
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 ___
Table of Contents
Item
Page
Part I
1. Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Selected Operating Data 9
2. Management's Discussion and Analysis of Results 11
of Operations 11
Results of Operations 12
Volumes of Business 13
Operating Revenues 14
Operating Expenses 15
Other Income Statement Items 15
Extraordinary Losses 16
Other Financing Activity 17
Restructuring of Telephone Operations 18
Additional Workforce Reductions 18
Regulatory and Competitive Environment 18
State Regulation 20
Federal Legislation 21
Business Developments 21
CWA Working Agreement
Part II
6. Exhibits and Reports on Form 8-K 22
PART I -- FINANCIAL INFORMATION
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Millions)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Operating Revenues:
Network and related services
Local service $1,793.4 $1,709.7 $3,561.7 $3,389.4
Interstate access 805.6 765.0 1,600.7 1,567.4
Intrastate access 227.0 230.4 453.1 460.5
Toll 265.7 300.4 546.6 600.6
Other 503.7 436.4 993.9 949.8
Total Operating Revenues 3,595.4 3,441.9 7,156.0 6,967.7
Operating Expenses:
Cost of services and products 1,270.4 1,293.9 2,557.7 2,609.6
Depreciation and amortization 764.7 728.5 1,511.1 1,457.4
Selling, general and 580.2 539.2 1,116.2 1,101.1
administrative
Total Operating Expenses 2,615.3 2,561.6 5,185.0 5,168.1
Operating Income 980.1 880.3 1,971.0 1,799.6
Interest Expense 149.9 126.3 290.3 261.8
Other Income, net 7.5 5.3 12.2 9.3
Income Before Income Taxes
and 837.7 759.3 1,692.9 1,547.1
Extraordinary Losses
Provision for Income Taxes 318.7 284.5 641.5 576.2
Income Before Extraordinary 519.0 474.8 1,051.4 970.9
Losses
Extraordinary Loss for
Discontinuance of (2,717.7) -- (2,717.7) --
SFAS No. 71, net of tax
(Note C)
Extraordinary Loss on Early
Extinguishment of Debt,
net of tax
(Note C) (15.8) -- (15.8) --
Net Income (Loss) $(2,214.5) $474.8 $(1,682.1) $970.9
Retained Earnings:
At beginning of period $3,654.4 $3,289.0 $ 3,521.5 $3,180.0
Add: Net Income (Loss) (2,214.5) 474.8 (1,682.1) 970.9
Deduct: Dividends 430.7 437.7 830.2 824.8
declared
At end of period $1,009.2 $3,326.1 $ 1,009.2 $3,326.1
The accompanying notes are an integral part of these financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
June 30, December 31,
1995 1994
ASSETS
Current Assets:
Cash and cash equivalents $101.3 $94.4
Accounts receivable, net of
allowance for uncollectibles of $97.2 and 2,618.1 2,316.5
$84.6
Material and supplies 344.3 375.2
Other current assets 206.5 380.1
3,270.2 3,166.2
Investments In and Advances to Affiliates 273.2 248.9
Property, Plant and Equipment, net 18,605.3 23,515.2
Deferred Charges and Other Assets
299.8 441.5
Total Assets $22,448.5 $27,371.8
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year $994.1 $1,218.2
Accounts payable 1,056.6 1,121.9
Other current liabilities 2,103.8 2,502.4
4,154.5 4,842.5
Long-Term Debt 6,804.6 6,511.8
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,205.3 2,992.1
Unamortized investment tax credits 394.6 443.3
Other liabilities and deferred credits 1,466.8 1,657.6
3,066.7 5,093.0
Shareholder's Equity:
Common stock, one share, no par value 7,413.5 7,403.0
Retained earnings 1,009.2 3,521.5
8,422.7 10,924.5
Total Liabilities and Shareholder's Equity $22,448.5 $27,371.8
The accompanying notes are an integral part of these financial
statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
For the Six Months
Ended June 30,
1995
1994
Cash Flows from Operating Activities:
Net income (loss) $(1,682.1) $ 970.9
Adjustments to net income:
Extraordinary loss for discontinuance.of SFAS No. 71 4,449.0 --
Extraordinary loss on early extinguishment of debt. 25.8 --
Payment of call premium (13.8) --
Depreciation 1,511.1 1,455.5
Provision for losses on bad debts 67.9 60.8
Deferred income taxes and unamortized investment tax (1,745.9) (89.2)
credits
Allowance for funds used during construction (7.0) (8.8)
Net change in accounts receivable and other current (18.2) (65.8)
assets
Change in accounts payable and other current (473.1) (320.3)
liabilities
Change in deferred charges and other assets 57.7 (36.3)
Net change in other liabilities and deferred credits 53.0 180.7
Other reconciling items, net
16.9 4.1
Net cash provided by operating activities 2,241.3 2,151.6
Cash Flows from Investing Activities:
Capital expenditures (1,460.2) (1,403.5)
Other investing activities, net (13.7) 71.7
Net cash used for investing activities (1,473.9)(1,331.8)
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 6,474.3 5,999.3
Repayment of short-term borrowings (6,702.5) (5,904.7)
Proceeds of long-term debt 600.0 --
Repayment of long-term debt (300.0) (.2)
Advances from parent and affiliates 295.4 291.6
Repayment of advances from parent and affiliates (302.2) (294.5)
Dividends paid to parent (821.9) (835.4)
Other (3.6) (54.0)
Net cash used for financing activities (760.5) (797.9)
Net Increase in Cash and Cash Equivalents 6.9 21.9
Cash and Cash Equivalents at Beginning of Period 94.4 84.3
Cash and Cash Equivalents at End of Period $101.3 $106.2
The accompanying notes are an integral part of these financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
(Unaudited)
Note 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 report on Form 10-Q. BellSouth Telecommunications is a
wholly-owned subsidiary of BellSouth Corporation (BellSouth).
Note 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 Six Months
Ended June 30,
1995 1994
Cash Paid For:
Income taxes $625.3 $734.2
Interest $318.2 $265.1
Note C -- Extraordinary Losses
Discontinuance of SFAS No. 71. As a result of its continuing
regulatory and marketplace assessments, BellSouth
Telecommunications has concluded that it is no longer appropriate
to prepare its external financial results using the accounting
method required for regulated enterprises. BellSouth
Telecommunications believes that based on the changing regulatory
environment and the increasing level of competition, it was
required to discontinue SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," for financial reporting purposes.
Discontinuance was required because most of BellSouth
Telecommunications' revenues will be generated under market-based
pricing and because it is doubtful that regulated rates sufficient
to recover the net book value of telephone plant could be charged
to and collected from customers. Accordingly, in the second
quarter, BellSouth Telecommunications
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Millions)
(Unaudited)
Note C -- Extraordinary Losses (continued)
discontinued application of SFAS No. 71 and recorded a non-cash
extraordinary charge of $2,717.7 (net of a deferred tax benefit of
$1,731.3). The components of the charge are as follows:
Pretax After tax
Reduction in recorded value of long ($4,896) ($3,002)
lived telephone plant
Full adoption of issue basis 317 194
accounting
Elimination of regulatory assets and 111 71
liabilities
Partial adjustment to unamortized
investment tax credits 19 19
Total ($4,449) ($2,718)
The reduction of telephone plant, $4,896 pretax, was recorded as an
increase to the related accumulated depreciation accounts, the
categories and amounts of which are as follows:
Category Amount
Buried metallic cable $1,345
Digital switching 1,305
Circuit-other 1,291
Metallic cable 630
Underground metallic cable 325
Total $4,896
Such reduction of plant was determined by an impairment analysis
that identified estimated amounts not recoverable from future
discounted cash flows. The analysis considered projected effects
of future competition as well as changes in technology and capital
requirements. The plant-related charge was further supported by
depreciation studies that identified inadequate levels of
accumulated depreciation for certain asset categories. These
studies give recognition to the historical underdepreciation of
assets resulting primarily from regulator-prescribed asset lives
that exceeded the estimated economic asset lives.
For financial reporting purposes, the average depreciable lives of
affected categories of long lived telephone plant have been reduced
to more closely reflect the economic and technological lives.
Differences between regulator-approved asset lives and the current
estimated economic asset lives are as follows:
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Millions)
(Unaudited)
Note C -- Extraordinary Losses (continued)
Composite of Estimated
Regulator- Economic Asset
Category Approved Lives (in Years)
Asset Lives (in
Years)
Buried metallic cable 20.0 14.0
Digital switching 17.0 10.0
Circuit-other 10.5 9.1
Aerial metallic cable 20.0 14.0
Underground metallic 25.0 12.0
cable
The remaining components of the extraordinary charge, which
partially offset the plant-related portion of the overall charge,
include $194 (after tax) related to the method by which BellSouth
Telecommunications reports its directory publishing revenues.
BellSouth's unregulated subsidiaries recognize directory publishing
revenues and production expenses using issue basis accounting.
Under issue basis accounting, revenues and product expenses are
recognized when directories are published rather than over the
lives of the directories (generally one year) as under the
prescribed regulatory accounting framework. BellSouth
Telecommunications will now begin reporting using issue basis
accounting consistent with BellSouth's unregulated subsidiaries and
with publishing companies in general. The overall extraordinary
charge was also reduced by $71 (after tax) to reflect the removal
of regulatory assets and liabilities that were recorded as a result
of previous actions by regulators. Virtually all of these
regulatory assets and liabilities arose in connection with the
incorporation of new accounting standards into the ratemaking
process, and were transitory in nature. The magnitude of the
regulatory assets and liabilities has been decreasing over time due
to the ongoing amortization prescribed as a part of the adoption in
1988 of the Federal Communications Commission's current Uniform
System of Accounts. In addition, the overall extraordinary charge
was reduced by $19 (after tax) for the partial acceleration of
unamortized investment tax credits associated with the reductions
in asset carrying values and in asset lives.
Early Extinguishment of Debt. In the second quarter, BellSouth
Telecommunications issued $300 of Ten Year Notes, the proceeds from
which were used to redeem and refinance an outstanding $300
Debenture issue, due August 1, 2029. In June, BellSouth
Telecommunications called the Debenture issue for redemption on
August 1 and executed an in-substance defeasance by depositing
$326.6 in an irrevocable trust for the purchase of U.S. government
obligations to cover the principal amount called, the call premium
of $13.8 and accrued interest due of $12.8. As a result, the $300
Debenture issue (and related deferred issuance costs of
approximately $12) was removed from the consolidated balance sheet
at June 30, 1995 and an extraordinary loss on early extinguishment
of debt of $15.8 (net of taxes of $10.0) was recognized in the
second quarter.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA
(Unaudited)
Network Access Lines in Service at Percent Change
June 30 (Thousands)(a):
1995 1994
vs. vs.
1995 1994 1993
By Type:
Residence 14,434.6 3.7% 3.4%
Business 6,000.2 7.7 6.6
Other 256.0 1.3 (1.8)
Total Access Lines 20,690.8 4.8 4.2
By State:
Florida 5,456.8 4.8 4.4
Georgia 3,456.0 6.2 5.0
Tennessee 2,388.9 4.6 4.5
Louisiana 2,079.5 3.9 3.3
North Carolina 2,048.3 5.7 4.9
Alabama 1,760.5 3.9 3.5
South Carolina 1,274.3 4.2 3.0
Mississippi 1,143.5 4.1 3.7
Kentucky 1,083.0 3.6 2.9
Total Access Lines 20,690.8 4.8 4.2
Percent Change
for
the Periods
Ended
1995 1994
vs. vs.
1995 1994 1993
Access Minutes of Use
(Millions)(a)(b):
Interstate:
Three months ended March 31 15,131.3 7.7% 7.9%
Three months ended June 30 15,597.1 8.2 7.6
Six months ended June 30 30,728.4 7.9 7.8
Intrastate:
Three months ended March 31 4,529.1 13.1 11.4
Three months ended June 30 4,789.9 14.7 9.9
Six months ended June 30 9,319.0 13.9 10.6
Total Minutes of Use:
Three months ended March 31 19,660.4 8.9 8.7
Three months ended June 30 20,387.0 9.6 8.1
Six months ended June 30 40,047.4 9.3 8.4
Toll Messages (Millions)(a):
Three months ended March 31 370.0 (4.3) 5.3
Three months ended June 30 352.0 (11.4) 2.1
Six months ended June 30 722.0 (7.9) 3.7
(a) Prior period operating data are often revised at later dates
to reflect updated 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.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA (Continued)
(Unaudited)
For the
Six
Months Year Ended December 31,
Ended
June
30,
1995 1994 1993 1992 1991 1990
Ratio of Earnings to Fixed 6.05 5.68 3.17 4.53 3.86 4.23
Charges (e)
(c) For the purpose of this ratio: (i) earnings have been
calculated by adding income before income taxes
and extraordinary losses, 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 June 30,
1995 1994
Debt Ratio (d) 48.0% 41.4%
(d) 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.
BELLSOUTH TELECOMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
(Dollars in Millions)
Management's Discussion and Analysis of Results of Operations (MD&A)
should be read in conjunction with MD&A in BellSouth
Telecommunications, Inc.'s (BellSouth Telecommunications)
latest annual report on Form 10-K and previous
quarterly report on Form 10-Q.
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 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 six-month periods ended June 30, 1995 and 1994
were from wireline services. Charges for local, access and toll
services for the six months ended June 30, 1995 accounted for
approximately 58%, 33% and 9%, 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 Six
Months Ended June
30,
1995 1994
Income Before Extraordinary Losses $1,051.4 $970.9
Extraordinary Loss for Discontinuance (2,717.7) --
of SFAS No. 71, net of tax
Extraordinary Loss on Early (15.8) --
Extinguishment of Debt, net of tax
Net Income (Loss) $(1,682.1) $970.9
For the six-month period ended June 30, 1995, Income Before
Extraordinary Losses increased by $80.5 (8.3%). The increase
resulted primarily from continued strong growth in key business
volumes and expense savings attributable to the restructuring plan
begun in 1993.
For a discussion of the second quarter 1995 extraordinary losses,
see "Extraordinary Losses" below and Note C to the Consolidated
Financial Statements.
Volumes of Business
The total number of access lines in service since June 30, 1994
increased by approximately 944,500 (4.8%) to 20,690,800, compared
to a 4.2% rate of increase for the same prior year period.
Business and residence access lines increased by 7.7% and 3.7%,
respectively, compared to growth rates of 6.6% and 3.4% in 1994.
The number of second residence lines, included in total residence
lines, increased by 212,700 (22.7%) to 1,150,000 and accounted for
approximately 41.6% and 22.5% of the overall increase in residence
access lines and total access lines, respectively, since June 30,
1994. The growth in all categories of access lines was primarily
attributable to continued economic improvement in the Southeast and
successful marketing programs..
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 3,393.7 million (9.3%) for
the six-month period ended June 30, 1995 compared to an increase of
8.4% for the same period last year. The increase in access minutes
of use was primarily 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 competition 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.
Toll messages are comprised of Message Telecommunications Service
and Wide Area Telecommunications Service. For the six-month period
ended June 30, 1995, toll messages decreased by 61.8 million (7.9%)
compared to an increase of 3.7% for the corresponding period in
1994. The decrease in 1995 was primarily attributable to the
expansion of local area calling plans in Florida, Kentucky,
Mississippi and South Carolina. These plans 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. Local
area calling 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.
Operating Revenues
Total Operating Revenues increased $188.3 (2.7%) for the six-month
period ended June 30, 1995 when compared to the corresponding 1994
period. The components of Total Operating Revenues were as
follows:
For the Six
Months Ended June 30,
1995 1994
Local Service $3,561.7 $3,389.4
Interstate Access 1,600.7 1,567.4
Intrastate Access 453.1 460.5
Toll 546.6 600.6
Other 993.9 949.8
Total Operating $7,156.0 $6,967.7
Revenues
Local Service revenues increased $172.3 (5.1%) for the six-month
period ended June 30, 1995 as compared to the same 1994 period.
The increase was due primarily to 4.8% growth in access lines in
service since June 30, 1994; an increase of $50 due to higher
customer demand for Touchstar and Custom Calling services; and the
effect of expanded local area calling plans. The increase was
partially offset by net rate reductions since June 30, 1994 of
approximately $52. Such rate reductions include a $31 refund in
Florida that had previously been accrued as a reduction in Other
Services revenues, pending determination of the specific revenue
category affected.
Interstate Access revenues increased $33.3 (2.1%) for the six-month
period ended June 30, 1995 as compared to the same prior year
period. The increase was attributable primarily to growth in
minutes of use of 7.9% and an increase in end-user charges of $24
attributable to growth in the number of access lines in service.
Also contributing was an increase of $18 due to higher demand for
special access services. The increase was partially offset by net
rate reductions since June 30, 1994, including revenue deferrals
under the Federal Communications Commission's (FCC) current price
cap plan, of approximately $44.
Intrastate Access revenues decreased $7.4 (1.6%) for the six-month
period ended June 30, 1995 from the comparable 1994 period. The
decrease was due primarily to rate reductions since June 30, 1994
of approximately $54, principally in Florida. The decrease was
partially offset by growth in minutes of use of 13.9%.
Toll revenues decreased $54.0 (9.0%) for the six-month period ended
June 30, 1995 when compared to the same prior year period. The
decrease was primarily attributable to a decline in toll messages
of 7.9% and net rate reductions since June 30, 1994 of
approximately $28. Such factors reflect the expansion of area
calling plans and increased competition.
Other revenues are principally comprised of revenues from
publishing rights fees, customer premises equipment (CPE) sales and
maintenance services, billing and collection services and other
nonregulated services (primarily inside wire services).
Other revenues increased $44.1 (4.6%) for the six-month period
ended June 30, 1995 when compared to the corresponding 1994 period.
The increase was attributable to reduced levels of revenue
reduction accruals related to potential sharing under certain state
regulatory plans, the effect of which increased Other revenues by
approximately $30, and the reclassification of a $31 revenue
reduction accrual to Local Service revenues, related to a refund in
Florida. The increase was also due in part to approximately $21
resulting from higher demand for voice messaging and inside wire
services, $14 for directory publishing fees and $9 for cellular
interconnect fees. The increase was partially offset by $9 for
accrual of a refund pending in Georgia, $15 due to reduced demand
for billing and collection services and approximately $33 related
to the sale in April 1994 of the out-of-region CPE sales and
service operations.
Operating Expenses
Total Operating Expenses increased $16.9 (0.3%) for the six-month
period ended June 30, 1995 compared to the same period in 1994. The
components of Total Operating Expenses were as follows:
For the Six
Months Ended June
30,
1995 1994
Depreciation and Amortization $1,511.1 $1,457.4
Other Operating Expenses:
Cost of Services and Products 2,557.7 2,609.6
Selling, General and 1,116.2 1,101.1
Administrative
3,673.9 3,710.7
Total Operating Expenses $5,185.0 $5,168.1
Depreciation and Amortization increased $53.7 (3.7%) for the six-
month period ended June 30, 1995 compared to the same period in
1994. The increase was due primarily to higher average levels of
property, plant and equipment since June 30, 1994 resulting from
continued growth in the customer base and continued modernization
of the network. The increase was also due in part to depreciation
rate adjustments in several states.
For a discussion of the impact of discontinuance of SFAS No. 71 on
depreciation expense in future periods, see "Extraordinary Losses -
Discontinuance of SFAS No. 71" below.
Other Operating Expenses are comprised of 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 and administrative expenses.
Other Operating Expenses decreased $36.8 (1.0%) for the six-month
period ended June 30, 1995 when compared to the corresponding 1994
period. The decrease for the period was due primarily to a
decrease of $89 in labor costs, including expenses for employee
benefits, in the core wireline business. Such decrease reflects
employee reductions since June 30, 1994 attributable to the
restructuring plan begun in 1993, partially offset by annual
compensation increases for management and represented employees.
Also contributing was a decrease of approximately $34 at the CPE
business, primarily attributable to the sale in April 1994 of the
out-of-region CPE sales and service operations. The decrease for
the period was partially offset by expenses for network services
necessitated primarily by volume growth, including contract
services, rents, materials and other costs.
Other Income Statement Items
The other income statement components were as follows:
For the Six
Months Ended June
30,
1995 1994
Interest Expense 290.3 261.8
Other Income, net 12.2 9.3
Provision for Income Taxes 641.5 576.2
Interest Expense increased $28.5 (10.9%) for the six month period
ended June 30, 1995 compared to the same period last year. The
increase was primarily attributable to higher average interest
rates on short-term borrowings.
Provision for Income Taxes increased $65.3 (11.3%) for the six-
month period ended June 30, 1995 over the comparable 1994 period.
BellSouth Telecommunications' effective tax rates were 37.9% and
37.2% for the six months ended June 30, 1995 and 1994,
respectively.
Extraordinary Losses
Discontinuance of SFAS No. 71. As a result of its continuing
regulatory and marketplace assessments, BellSouth
Telecommunications has concluded that it is no longer appropriate
to prepare its external financial results using the accounting
method required for regulated enterprises. BellSouth
Telecommunications believes that based on the changing regulatory
environment and the increasing level of competition, it was
required to discontinue SFAS No. 71 for financial reporting
purposes. Discontinuance was required because most of BellSouth
Telecommunications' revenues will be generated under market-based
pricing and because it is doubtful that regulated rates sufficient
to recover the net book value of telephone plant could be charged
to and collected from customers. Accordingly, in the second
quarter, BellSouth Telecommunications discontinued application of
SFAS No. 71 and recorded a non-cash extraordinary charge of
$2,717.7 (net of a deferred tax benefit of $1,731.3). The
extraordinary charge reflects $3,002 (after tax) to reduce the
recorded value of long lived telephone plant and equipment to the
level appropriate for non-regulated enterprises. The overall
charge was partially offset by $194 related to the method by which
BellSouth Telecommunications reports its directory publishing
revenues, $71 related to the elimination of regulatory assets and
liabilities and $19 for the partial acceleration of unamortized
investment tax credits associated with the reductions in asset
carrying values and in asset lives.
Recent changes in its regulatory framework and the simultaneous
elimination of legal and regulatory barriers for its competitors
both support discontinuance of SFAS No. 71. In the regulatory
arena, obtaining price regulation has been and continues to be a
cornerstone in BellSouth Telecommunications' corporate strategy.
Due in part to its actions in implementing this strategy, changes
in the regulatory framework are now occurring (see Regulatory and
Competitive Environment - State Regulation). As a result of such
changes, a significant portion of BellSouth Telecommunications'
revenue will no longer be regulated based on the recovery of
specific costs. Furthermore, BellSouth Telecommunications expects
that competition in its local exchange markets will accelerate.
The removal of legal and regulatory barriers is expected to
encourage potential competitors to accelerate deployment of
competing networks to either compete directly for local service or
to bypass the BellSouth Telecommunications network for long
distance access. Potential competitors have continued to make
investments in wireless licenses, cable properties and enhanced
interexchange networks, which serve as further evidence of
increased competition.
In connection with the discontinuance of SFAS No. 71, the average
depreciable lives of significant categories of long lived telephone
plant will be reduced to more closely reflect the economic and
technological lives. As a result of such shorter lives applicable
to both existing and newly acquired assets, BellSouth expects that
depreciation expense will increase about $22 in 1995 and about $70
in 1996. However, the impact on net income in these time periods
is not expected to be significant because of the elimination of the
amortization of regulatory assets and the acceleration of
unamortized investment tax credits due to the shorter lives of
telephone plant.
See Note C to the Consolidated Financial Statements.
Early Extinguishment of Debt. During the second quarter, BellSouth
Telecommunications recognized an extraordinary loss of $15.8 (net
of taxes of $10.0) related to the early extinguishment of an
outstanding debt issue. See Note C to the Consolidated Financial
Statements.
OTHER FINANCING ACTIVITY
During second quarter 1995, BellSouth Telecommunications issued
$300 of long-term debt and, with the net proceeds, refinanced
outstanding short-term debt. During the same period, BellSouth
Telecommunications issued an additional $300 of long-term debt and
refinanced an outstanding long-term debenture issue (see Note C to
the Consolidated Financial Statements). Additional refinancings of
both short- and long-term debt are possible during the remainder of
the year depending on prevailing market interest rates. As of July
31, 1995, a shelf registration statement was on file with the
Securities and Exchange Commission under which $700.0 of long-term
debt securities could be publicly offered.
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.
At June 30, 1995, the remaining liability associated with the 1993
restructuring plan was $329.9, all of which was classified as
current. Since inception of the restructuring plan, total employee
reductions were approximately 6,600, including 4,500 since June 30,
1994. As a result of this reduction of 4,500 employees, operating
expenses for the six- month period ended June 30, 1995 were reduced
by approximately $100.
A summary of employee reductions and expenditures through June 30,
1995 under the 1993 restructuring plan is as follows:
Second Year-to-
Quarter Date Year Year
1995 1995 1994 1993 Total
Employee Reductions 1,200 1,400 3,900 1,300 6,600
Expenditures By Component:
Consolidation and Elimination $80.8 $109.1 $164.6 $14.7 $288.4
of Operations
Systems 55.7 99.0 170.3 --- 269.3
Employee Separation 37.7 76.7 133.8 38.3 248.8
Total $174.2 $284.8 $468.7 $53.0 $806.5
Expenditures By Type:
Cash $159.8 $253.7 $390.2 $53.0 $696.9
Non-Cash 14.4 31.1 78.5 - 109.6
--
Total $174.2 $284.8 $468.7 $53.0 $806.5
Capital Expenditures (not included
in above expenditures) $ 54.6 $ 84.1 $203.6 $ -- $287.7
BellSouth Telecommunications expects to substantially complete the
1993 restructuring plan activities in 1995. In connection with the
1993 plan, total employee reductions in 1995 are projected to be
approximately 5,000, including the reductions of 200 and 1,200
which occurred in the first and second quarters, respectively.
ADDITIONAL WORKFORCE REDUCTIONS
In May 1995, BellSouth Telecommunications announced plans to reduce
its work force by an additional 9,000 to 11,000 employees over the
next two years. These employee reductions, which are in addition
to the employee reductions still pending under the 1993
restructuring plan (discussed above), are necessary to enable
BellSouth Telecommunications to effectively address the rapid
development of competition in its nine-state region. Planned
activities to facilitate these additional employee reductions will
include significant changes in the company's staff support
operations and business processes.
The specific financial impacts are currently not estimable; the
initial cost of such reductions will be recognized by the end of
1995 when the actual number and classification of employees
affected and the final terms and conditions of related separation
benefit plans are determined. As future process improvement plans
are identified and finalized, further employee reductions are
expected.
REGULATORY AND COMPETITIVE ENVIRONMENT
State Regulation
Tennessee. In June, a law was enacted which authorizes local
exchange competition in BellSouth Telecommunications' service areas
and allows qualified service providers to elect price regulation.
As permitted under the provisions of the law, BellSouth
Telecommunications filed an application for a price regulation plan
to be effective October 1, 1995. Under the terms of such plan, the
rates in effect on October 1, 1995 for basic services, which
include residence and business lines and other defined services,
would be capped for four years, after which an inflation-based
formula will be used to change basic rates. The rates in effect on
October 1, 1995 for all services other than basic services remain
in effect upon implementation of the price regulation plan, with
subsequent annual rate adjustments subject to an inflation-based
formula.
An interexchange carrier has filed pleadings with the Tennessee
Commission to block implementation of the plan. A decision is
pending.
Several companies have been approved by the Tennessee Commission to
provide various services, including local exchange and exchange
access, in competition with BellSouth Telecommunications.
Florida. In June, a law was enacted which, effective January 1,
1996, permits local exchange competition in BellSouth
Telecommunications' service areas. The law also allows qualified
service providers to elect price regulation, effective at the later
of January 1, 1996 or such time that an alternative local exchange
carrier is approved to provide services in BellSouth
Telecommunications' territory. Under price regulation, prices for
basic services, which are flat-rate residential and single-line
business local exchange services and other defined services, will
be capped for five years, after which an inflation-based formula
will be used to change basic rates. Prices for certain non-basic
services, including multi-line business service, will be capped for
three years at the rates in effect on July 1, 1995; prices for
other non-basic services may be adjusted annually subject to
defined limitations. The price regulation provisions also provide
that intrastate switched access rates will decrease by 5% annually
until such rates are at parity with interstate switched access
rates effective in 1994.
While BellSouth Telecommunications is eligible to elect price
regulation, it must also comply with the provisions of a previously-
disclosed settlement reached with Florida's Office of Public
Counsel in January 1994. Such settlement provides for scheduled
rate reductions of $80 in October 1995 and $84 in October 1996 as
well as the continuation of current earnings sharing provisions
through 1996 or 1997, subject to defined terms in the settlement.
BellSouth Telecommunications expects to file with the Florida
Commission later in 1995 a notice of election for price regulation.
Several companies have filed applications with the Florida
Commission to provide various services, including local exchange
and exchange access, in competition with BellSouth
Telecommunications.
Georgia. In June, the Georgia Public Service Commission, after a
review of BellSouth Telecommunications' rates and charges, ordered
BellSouth Telecommunications to refund $9 to existing customers and
reduce rates prospectively by $33. Of such $33, approximately $12
had been previously implemented or scheduled; the remaining $21
will be applied to intrastate switched access rates. In August,
the Georgia Commission granted the motion of the Consumers' Utility
Council to reconsider this order. A decision is pending.
In July, BellSouth Telecommunications filed an election for
alternative regulation with the Georgia Commission, to be effective
on August 5, 1995. Under alternative regulation, basic residence
and single-line business rates in effect on the date the company
becomes subject to alternative regulation will be capped for five
years, after which an inflation-based formula will be used to
change rates. Rates for intrastate switched access services will
be no higher than the rates charged for interstate switched access
services. As a result of the rate reductions discussed above, such
intrastate rates have been reduced below the required level. Also,
as of July 1995, competition for local exchange services in areas
served by BellSouth Telecommunications is authorized.
An interexchange carrier has requested that the Georgia Commission
stay BellSouth Telecommunications' election of alternative
regulation. A decision is pending.
Several companies have filed applications to provide various
services, including local exchange and exchange access, in
competition with BellSouth Telecommunications. The Georgia
Commission has announced it will conduct hearings with respect to
these applications; however, the dates of such hearings have not
been scheduled. In addition, at least one other company has filed
an application to resell local exchange services in Georgia.
Alabama. In June, a law was enacted which permits the Alabama
Public Service Commission to authorize alternative methods of
regulation for local exchange carriers, including BellSouth
Telecommunications. BellSouth Telecommunications has filed a price
regulation plan with the Alabama Commission. A decision is
pending.
Kentucky. In July, the Kentucky Public Service Commission approved
BellSouth Telecommunications' previously-filed price regulation
plan, with certain modifications.
In connection with approval of the plan, which is effective
immediately, the Kentucky Commission ordered reductions in rates
for access, toll and residential touch-tone services and other
defined charges, which together aggregate $29. BellSouth
Telecommunications is required to file revised tariffs reflecting
the provisions of the approved plan by August 21, 1995.
Under the plan, after giving effect to the rate reductions
discussed above, basic residential rates are capped for three
years, intrastate switched access rates are limited to rates in
effect for interstate switched access and prices for services
deemed competitive under the plan will be based solely on market
factors.
The Kentucky Commission has also opened a docket to consider local
exchange competition.
North Carolina. As permitted under the law enacted in April,
BellSouth Telecommunications expects to file in 1995 a price
regulation plan for approval by the North Carolina Utilities
Commission. Other companies have filed applications with the North
Carolina Commission to provide local exchange and exchange access
services in competition with BellSouth Telecommunications.
Mississippi. The Mississippi Public Service Commission has opened
a docket to consider a properly structured price regulation plan.
A decision is pending.
Federal Legislation
The U. S. Senate and House of Representatives have each passed
bills, S.652 and H.R.1555, respectively, which could, if enacted
into law, significantly affect BellSouth Telecommunications'
business operations and opportunities. Among other things, such
bills include, subject to defined terms and limitations, provisions
that open local exchange markets to competition while allowing Bell
Holding Companies, including BellSouth, to provide interLATA (long
distance) service. The ultimate disposition of this matter is
uncertain, pending reconciliation of differences in the bills'
provisions by a joint committee of the House and Senate; approval
of a revised bill by both the House and Senate; and signature by
the President.
BUSINESS DEVELOPMENTS
CWA Working Agreement
On August 8, 1995, BellSouth Telecommunications reached a tentative
agreement with the Communications Workers of America (CWA) on a new
three-year contract covering approximately 54,000 employees. The
contract, which is subject to ratification by CWA members, includes
basic wage increases of 10.9% (compounded) over three years. In addition,
the agreement provides a cash payment of one thousand one hundred dollars to
each eligible employee upon ratification and payments of one thousand
one hundred dollars per eligible employee in either cash or BellSouth
stock, at the option of the employee, on the 1996 and 1997 contract
anniversary dates. Other terms of the agreement include discontinuance of
annual wage adjustments based on cost of living increases and discontinuance
of annual incentive payments.
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.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
May 18, 1995 Workforce Reduction
June 30, 1995 Discontinuance of SFAS No. 71
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)
August 10, 1995
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
EXHIBIT 12
BellSouth Telecommunications Inc.
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the
Six
Months Year Ended December 31,
Ended
June 30,
1995 1994 1993 1992 1991 1990
1. Earnings
(a) Income
from continuing
operations before $1,983.1 $3,606.0 $2,034.1 $3,014.4 $2,722.5 $2930.1
deductions for
taxes and
interest
(b) Portion of
rental expense
representative of
interest factor 36.8 80.3 79.7 86.5 74.8 88.2
TOTAL $2,019.9 $3,686.3 $2,113.8 $3,100.9 $2,797.3 $3,018.3
2. Fixed Charges
(a) Interest $297.3 $568.2 $586.2 $598.6 $649.8 $626.2
(b) Portion of
rental expense
representative of
interest factor 36.8 80.3 79.7 86.5 74.8 88.2
TOTAL
$334.1 $648.5 $665.9 $685.1 $724.6 $714.4
Ratio (1
divided by 2) 6.05 5.68 3.17 4.53 3.86 4.23
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