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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.
A GEORGIA I.R.S. EMPLOYER
CORPORATION NO. 58-0436120
675 WEST PEACHTREE STREET, N. E., ATLANTA, GEORGIA 30375
TELEPHONE NUMBER 404 529-8611
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------- ---------------------------------------
SEE ATTACHMENT. NEW YORK
Securities registered pursuant to Section 12(g) of the Act:
None.
At February 19, 1996 one share of Common Stock was outstanding.
------------------------
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b) OF FORM 10-K
AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION J(2).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [NOT APPLICABLE]
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 ___
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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ATTACHMENT
<TABLE>
<C> <S>
Title of each class
DEBENTURES
South Central Bell Telephone Company
$100,000,000 Principal Amount of Forty Year 7 3/8% Debentures, due August 1, 2012
Issues denominated as Southern Bell Telephone and Telegraph Company Debentures
$75,000,000 Principal Amount of Thirty-Seven Year 5% Debentures, due December 1, 1997
$70,000,000 Principal Amount of Thirty-Seven Year 4 3/8% Debentures, due March 1, 1998
$75,000,000 Principal Amount of Thirty-Nine Year 4 3/8% Debentures, due April 1, 2001
$70,000,000 Principal Amount of Forty Year 4 3/8% Debentures, due August 1, 2003
$100,000,000 Principal Amount of Thirty-Five Year 4 3/4% Debentures, due September 1, 2000
$100,000,000 Principal Amount of Thirty-Eight Year 6% Debentures, due October 1, 2004
$150,000,000 Principal Amount of Thirty-Eight Year 7 3/8% Debentures, due July 15, 2010
$350,000,000 Principal Amount of Forty Year 7 5/8% Debentures, due March 15, 2013
BellSouth Telecommunications, Inc.
$250,000,000 Principal Amount of Forty Year 8 1/4% Debentures, due July 1, 2032
$300,000,000 Principal Amount of Forty Year 7 7/8% Debentures, due August 1, 2032
$300,000,000 Principal Amount of Forty Year 7 1/2% Debentures, due June 15, 2033
$350,000,000 Principal Amount of Fifteen Year 5 7/8% Debentures, due January 15, 2009
$400,000,000 Principal Amount of Forty Year 6 3/4% Debentures, due October 15, 2033
$300,000,000 Principal Amount of Forty Year 7 5/8% Debentures, due May 15, 2035
$300,000,000 Principal Amount of Thirty Year 7% Debentures, due October 1, 2025
$300,000,000 Principal Amount of Fifty Year 5.85% Debentures, due November 15, 2045
$500,000,000 Principal Amount of One Hundred Year 7% Debentures, due December 1, 2095
$375,133,000 Principal Amount of Twenty Year 6.30% Amortizing Debentures, due December 15,
2015
$500,000,000 Principal Amount of One Hundred Year 6.65% Zero-To-Full Debentures, due
December 15, 2095
NOTES
BellSouth Telecommunications, Inc.
$275,000,000 Principal Amount of Seven Year 6 1/2% Notes, Due February 1, 2000
$150,000,000 Principal Amount of Twelve Year 7% Notes, Due February 1, 2005
$450,000,000 Principal Amount of Ten Year 6 1/4% Notes, Due May 15, 2003
$200,000,000 Principal Amount of Eleven Year 6 3/8% Notes, Due June 15, 2004
$300,000,000 Principal Amount of Ten Year 6 1/2% Notes, Due June 15, 2005
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
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<C> <S> <C>
PART I
1. Business........................................................................ 1
General......................................................................... 1
Modification of Final Judgment and Telecommunications Act of 1996............... 1
Business Operations............................................................. 2
Telephone Company Operations.................................................... 2
Other Business Operations....................................................... 8
Competition..................................................................... 9
Research and Development........................................................ 12
Licenses and Franchises......................................................... 12
Employees....................................................................... 12
2. Properties...................................................................... 13
General......................................................................... 13
Capital Expenditures............................................................ 13
Environmental Matters........................................................... 14
3. Legal Proceedings............................................................... 15
4. Submission of Matters to a Vote of Shareholders (Omitted pursuant to General
Instruction J(2))
5. Market for Registrant's Common Equity and Related Stockholder Matters
(Inapplicable)
PART II
6. Selected Financial and Operating Data........................................... 16
7. Management's Discussion and Analysis of Results of Operations (Abbreviated
pursuant to General Instruction J(2)).......................................... 17
Results of Operations........................................................... 17
Volumes of Business............................................................. 18
Operating Revenues.............................................................. 19
Operating Expenses.............................................................. 20
Other Income Statement Items.................................................... 22
Extraordinary Losses............................................................ 23
Financing Activity.............................................................. 23
Operating Environment and Trends of the Business................................ 24
Other Matters................................................................... 26
8. Consolidated Financial Statements and Supplementary Data........................ 27
Report of Management............................................................ 27
Audit Committee Chairman's Letter............................................... 28
Report and Consent of Independent Accountants................................... 29
Consolidated Statements of Income and Retained Earnings......................... 30
Consolidated Balance Sheets..................................................... 31
Consolidated Statements of Cash Flows........................................... 32
Notes to Consolidated Financial Statements...................................... 33
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 47
PART III
10. Directors and Executive Officers of the Registrant (Omitted pursuant to General
Instruction J(2))
11. Executive Compensation (Omitted pursuant to General Instruction J(2))
12. Security Ownership of Certain Beneficial Owners and Management (Omitted pursuant
to General Instruction J(2))
13. Certain Relationships and Related Transactions (Omitted pursuant to General
Instruction J(2))
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 47
Signatures............................................................................. 48
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
BellSouth Telecommunications, Inc. (BellSouth Telecommunications) is a
corporation wholly-owned by BellSouth Corporation (BellSouth). BellSouth
Telecommunications provides predominantly tariffed wireline telecommunications
services to 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.
On December 31, 1983, pursuant to a consent decree approved by the United
States District Court for the District of Columbia (the D. C. District Court)
entitled "Modification of Final Judgment" (the MFJ) settling antitrust
litigation brought by the United States Department of Justice (the Justice
Department) in 1974 and the related Plan of Reorganization, American Telephone
and Telegraph Company, now AT&T Corp. (AT&T), transferred to BellSouth its 100%
ownership of South Central Bell Telephone Company (South Central Bell) and
Southern Bell Telephone and Telegraph Company (Southern Bell). On the same date,
South Central Bell and Southern Bell were reincorporated through mergers into
Georgia corporations. On January 1, 1984, ownership of BellSouth was divested
from AT&T and BellSouth became a publicly traded company. BellSouth
Telecommunications is the surviving corporation from the merger of South Central
Bell and Southern Bell, effective at midnight on December 31, 1991. While
BellSouth Telecommunications continues to use the names South Central Bell and
Southern Bell for various purposes, its services were unified under the
BellSouth brand name in October 1995 to give BellSouth Telecommunications a
clear, consistent identity in the marketplace.
BellSouth Telecommunications has its principal executive offices at 675 West
Peachtree Street, N.E., Atlanta, Georgia 30375 (telephone number 404-529-8611).
MODIFICATION OF FINAL JUDGMENT AND TELECOMMUNICATIONS ACT OF 1996
Pursuant to the MFJ, AT&T divested the 22 wholly-owned operating telephone
companies, including South Central Bell and Southern Bell, that were formerly
part of the Bell System. The ownership of such 22 operating telephone companies
was transferred by AT&T to seven holding companies (the Holding Companies),
including BellSouth. All territory in the continental United States served by
the operating telephone companies was divided into geographical areas termed
"Local Access and Transport Areas" (LATAs). These LATAs are generally centered
on a city or other identifiable community of interest.
The MFJ limited the telecommunications-related scope of the post-divestiture
business activities of the operating telephone companies and their successors
(the Operating Telephone Companies), and the D. C. District Court retained
jurisdiction over construction, implementation, modification and enforcement of
the MFJ*. Under the MFJ, the Operating Telephone Companies could provide local
exchange, exchange access, information access and toll telecommunications
services within the LATAs. Although prohibited from providing service between
LATAs, the Operating Telephone Companies provided exchange access services that
linked a subscriber's telephone or other equipment in one of their LATAs to the
transmission facilities of carriers (the Interexchange Carriers), which provided
toll telecommunications services between different LATAs. The Operating
Telephone Companies could market, but not design or manufacture,
telecommunications equipment used by customers to originate or receive, or by
carriers to provide, telecommunications services. The MFJ required
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*The provisions of the MFJ were also applicable to the Holding Companies.
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that the Operating Telephone Companies provide, upon a bona fide request by any
Interexchange Carrier or information service provider, exchange access,
information access and exchange services for such access equal to that provided
to AT&T in quality, type and price.
On February 8, 1996, the President signed into law the Telecommunications
Act of 1996 (the 1996 Act). This legislation provides for the development of
competitive local telecommunications markets; terminates on a prospective basis
the MFJ, enabling the provision by the Operating Telephone Companies of
interLATA telecommunications and the design and manufacture by the Operating
Telephone Companies of telecommunications equipment; and repeals the laws
prohibiting the Operating Telephone Companies and their affiliates from
providing video services within their service areas. The ability of the
Operating Telephone Companies to enter businesses previously proscribed to them
by the MFJ is, however, generally subject to numerous criteria and the
development of and compliance with newly mandated federal regulations.
BUSINESS OPERATIONS
Approximately 86% of BellSouth Telecommunications' operating revenues for
the years ended December 31, 1995, 1994 and 1993, respectively, were from
wireline telecommunications services and the remainder of revenues was
principally from directory publishing fees and other nonregulated services.
Certain communications services and products are provided to business
customers by BellSouth Business Systems, Inc., BellSouth Communication Systems,
Inc. and Dataserv, Inc., subsidiaries of BellSouth Telecommunications.
Respectively, these companies provide sales, marketing, product management and
customer service for BellSouth Telecommunications' large business customers
within traditional telephone operating company service areas and nationwide;
sell, install and maintain telecommunications equipment; and maintain and
provide parts and integration services for computer and data processing
equipment.
Revenues from services provided to AT&T, BellSouth Telecommunications'
largest customer, comprised approximately 12%, 13% and 16% of 1995, 1994 and
1993 operating revenues, respectively.
TELEPHONE COMPANY OPERATIONS
BellSouth Telecommunications provides, predominantly, local exchange,
exchange access and intraLATA toll services within each of the 38 LATAs in its
combined nine-state wireline operating area. BellSouth Telecommunications
provided approximately 21,133,000 customer access lines at December 31, 1995 an
overall increase of 4.5% since December 31, 1994. The increase was primarily
attributable to continued economic growth in BellSouth Telecommunications'
nine-state service region, including an increase in the number of second
residential lines. Growth in second residential lines accounted for
approximately 48.0% and 24.1% of the overall increase in residence access lines
and total access lines, respectively, since December 31, 1994. (See
"Management's Discussion and Analysis of Results of Operations -- Volumes of
Business.")
At December 31, 1995, approximately 75% of access lines were in 47
metropolitan areas, each having a population of 125,000 or more. Many localities
and some sizable areas in the states in which BellSouth Telecommunications
operates are served by non-affiliated telephone companies, which had
approximately 29% of the network access lines in such states on December 31,
1995. BellSouth Telecommunications does not furnish local exchange, access or
toll services in the areas served by such companies.
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LOCAL AND TOLL SERVICES
Charges for local services for each of the years ended December 31, 1995,
1994 and 1993 accounted for approximately 50%, 49% and 48%, respectively, of
BellSouth Telecommunications' operating revenues. Local services operations
provide lines from telephone exchange offices to subscribers' premises for the
origination and termination of telecommunications including the following: basic
local telephone service provided through the regular switching network;
dedicated private line facilities for voice and special services, such as
transport of data, radio and video and foreign exchange services; switching
services for customers' internal communications through facilities owned by
BellSouth Telecommunications; services for data transport that include managing
and configuring special service networks; and dedicated low or high capacity
public or private digital networks. Other local services revenue is derived from
intercept and directory assistance, public telephones and various secondary
central office features.
Secondary central office features may be purchased by access line
subscribers for a charge in addition to the basic monthly fee. They include
Custom Calling service (including Call Waiting, 3-Way Calling, Call Forwarding
and Speed Dialing services) and Touchtone service. During 1995, revenues from
secondary central office features comprised approximately 17% of local service
revenues.
In addition to secondary central office features, BellSouth
Telecommunications offers certain enhanced services through its network.
Enhanced services differ from basic services and secondary central office
features in that they employ computer processing applications to alter the
subscriber's transmitted information; provide the subscriber additional,
different or restructured information; or involve subscriber interaction with
stored information. The terms of enhanced service offerings are not regulated
under the rules of the Federal Communications Commission (FCC), but the FCC
prescribes the method by which such services may be provided (for example,
through structurally separated subsidiaries or arrangements providing access to
competitive providers). Such offerings include voice messaging and storage
services, such as MemoryCall-Registered Trademark- voice messaging service.
BellSouth Telecommunications provides intraLATA toll services within (but
not between) its 38 LATAs. Such toll services provided approximately 7%, 8% and
9% of BellSouth Telecommunications' operating revenues for the years ended
December 31, 1995, 1994 and 1993, respectively. These services include the
following: intraLATA service beyond the local calling area; Wide Area
Telecommunications Service (WATS or 800 services) for customers with highly
concentrated demand; and special services, such as transport of data, radio and
video.
REGULATION OF LOCAL AND TOLL SERVICES
BellSouth Telecommunications is subject to state regulatory authorities in
each state in which it provides intrastate telecommunications services with
respect to rates, services and other issues. Traditionally, BellSouth
Telecommunications' rates were set in each state in its service areas at levels
which were anticipated to generate revenues sufficient to cover its allowed
expenses and to provide an opportunity to earn a fair rate of return on its
capital investment. Such a regulatory structure was satisfactory in a less
competitive era; however, the regulatory processes have changed in response to
the increasingly competitive telecommunications environment.
Under one form of alternative regulation, economic incentives are provided
to lower costs and increase productivity through the potential availability of
"shared" earnings over a benchmark rate of return. Generally, when levels above
targeted returns are reached, earnings are "shared" by providing refunds or rate
reductions to customers.
Another alternative form of regulation, generally known as price regulation,
establishes maximum prices that can be charged for certain telecommunications
services. While such a plan limits the amount of increases in prices for
specified services, it enhances the company's ability to adjust prices and
service options to more effectively respond to changing market conditions and
competition and enables it to more fully benefit from productivity enhancements.
For these reasons, BellSouth Telecommunications is focusing its regulatory and
legislative efforts on establishing price regulation. Such
3
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plans have been approved or authorized by the requisite legislative or
regulatory bodies in Alabama, Florida (although a sharing requirement exists at
least through 1996), Georgia, Kentucky, Mississippi, South Carolina and
Tennessee, and approval of a plan is pending in North Carolina. BellSouth
Telecommunications has filed a proposed price regulation plan in Louisiana.
Despite the potential advantages offered to BellSouth Telecommunications by
sharing and price regulation plans over traditional rate of return regulation,
in some cases rate reductions have been required in connection with their
adoption and operation.
ALABAMA
An incentive regulation plan in effect in Alabama from December 1988 to
September 1995 provided for a return on average total capital* in the range of
11.65% to 12.30%.
In response to a law enacted in 1995 permitting the Alabama Public Service
Commission to authorize alternative methods of regulation that are not based on
rate of return for local exchange carriers, the Alabama Commission approved a
price regulation plan, effective September 1995. Under this plan, prices for
basic services, including local exchange services for residence and business
customers, are capped for five years, after which an inflation-based formula
will be used to change prices; prices for non-basic services are capped for one
year, after which aggregate price increases are limited to 10% annually; and
intrastate switched access charges are reduced below interstate switched access
rates. Additional terms of the price regulation plan require annual price
reductions aggregating $57 million through 1999 excluding intrastate switched
access reductions. Reductions related to intrastate switched access are
estimated to be $25 million.
FLORIDA
From 1988 through 1992, the Florida incentive regulation plan provided for a
return on equity* of 11.5% to 16%, with earnings above 14% to be shared with
customers through rate reductions. In 1994, the Florida Public Service
Commission extended the plan through 1997, with required rate reductions
aggregating approximately $300 million over a three-year period. Basic service
rates will be capped at their current levels through 1997.
The plan provides for a return on equity sharing level of 12% with an
after-sharing cap of 14% for 1994, increasing in 1995 to a 12.5% sharing level
with an after-sharing cap of 14.5%. Rates of return beyond 1995 will vary based
upon changes in utility bond yields but would change no more than 75 basis
points from 1995 levels.
In 1995, a law was enacted which allows qualified service providers to elect
price regulation. Under price regulation, prices for basic services, which
include flat-rate residential and single-line business local exchange 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 in July 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. In November 1995, BellSouth Telecommunications filed with the Florida
Commission an election for price regulation, which became effective in January
1996.
Although BellSouth Telecommunications is currently operating under price
regulation, it must comply with the sharing provisions of the incentive plan
described above through 1997. However, BellSouth Telecommunications can request
the plan be modified to eliminate the sharing requirement, effective January
1997, if there are material changes in the industry.
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*As defined in the plan for this state.
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GEORGIA
A Georgia incentive regulation plan was adopted in 1990, providing that
BellSouth Telecommunications would retain all earnings up to a 14% return on
equity*. Subject to the attainment of service standards and productivity
improvement provisions, BellSouth Telecommunications could retain a portion of
earnings between 14% and 16%. Effective in January 1994, the Georgia Public
Service Commission extended the plan for six months and modified the return on
equity level at which sharing would occur from 14% to 13%. In August 1994, the
Georgia Commission changed the sharing range to 13.5%-15.5%. In June 1995, the
Georgia Commission ordered refunds of $9 million and rate reductions aggregating
$33 million on an annual basis.
In April 1995, a law was enacted which, effective in July 1995, allows
BellSouth Telecommunications to elect the price regulation plan as described in
the legislation. In July 1995, BellSouth Telecommunications filed an election
for alternative regulation with the Georgia Commission; such election became
effective in August 1995. Following implementation of alternative regulation,
basic residence and single-line business rates are 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.
The Georgia Commission approved an approximate $10 million rate reduction in
intrastate switched access to be effective in July 1996. BellSouth
Telecommunications plans to offset this reduction by increasing rates for other
services.
KENTUCKY
Effective in May 1991, under the Kentucky incentive regulation plan,
BellSouth Telecommunications was authorized to earn a return on average total
capital* in the range of 10.99% to 11.61% with sharing of earnings exceeding
that range. BellSouth Telecommunications achieved the sharing level during 1993
and 1994.
In July 1995, the Kentucky Public Service Commission approved a price
regulation plan. In connection with approval of the plan, the Kentucky
Commission ordered reductions in rates aggregating $29 million on an annual
basis.
Under the plan, after giving effect to the rate reductions discussed above,
basic residential rates are capped for three years, after which an
inflation-based formula will be used to change rates, 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 market based.
LOUISIANA
In February 1992, in settlement of several years of regulatory and judicial
proceedings, BellSouth Telecommunications and the Louisiana Public Service
Commission agreed to a three-year incentive regulation plan providing for a $55
million refund and a rate reduction of $31 million on an annual basis and an
authorized return on investment* in the range of 10.7% to 11.7%, with sharing of
earnings above 11.7%. Through 1995, BellSouth Telecommunications has reduced
rates by an aggregate of $38 million, reflecting its sharing obligation under
the plan.
Effective February 1995, the Louisiana Commission extended the incentive
regulation plan, reducing the authorized return on investment* to a range of
9.98% to 10.98% with sharing of earnings between 10.98% and 11.98%.
In April 1995, BellSouth Telecommunications filed a proposed price
regulation plan with the Louisiana Commission. The plan proposes a three-year
cap on residence and business basic local exchange services after which rate
changes would be based on an inflation-based formula. Intrastate switched access
would also be capped for three years. Non-basic service prices would be set
based on
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*As defined in the plan for this state.
5
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market factors. The Louisiana Commission staff has issued a proposed rule on
price regulation. In addition to an inflation-based formula, the Commission's
proposal includes an earnings-based sharing formula.
MISSISSIPPI
In June 1990, the Mississippi Public Service Commission authorized
implementation of an incentive regulation plan with sharing of earnings falling
outside a return on average net investment* range of 10.74% to 11.74%. Rate
reductions totaling $23 million on an annual basis were required prior to
implementation of the plan.
Additional rate reductions of approximately $12 million on an annual basis
related to intrastate access and area calling plan impacts became effective in
January 1993. In June 1993, the Mississippi Commission renewed the incentive
plan for two years and ordered BellSouth Telecommunications to reduce rates,
based on a targeted 11.24% return.
In November 1995, the Mississippi Commission approved a five-year price
regulation plan, effective in January 1996. Reviews of this plan will be
conducted by the Mississippi Commission after three years. Under the provisions
of the plan, rates for basic services, which include the provision of local
telephone service, are capped for three years after which such basic service
revenues will be reduced annually by 1% for the duration of the plan. In
addition, intrastate switched access rates are capped at the same level as
interstate rates over the life of the plan. The terms of the plan provide for
rate reductions over the life of the plan which total approximately $34 million
on an annual basis.
NORTH CAROLINA
In April 1995, a law was enacted that allows BellSouth Telecommunications to
elect to operate under a price regulation plan, which must be approved by the
North Carolina Utilities Commission. In October 1995, BellSouth
Telecommunications filed with the North Carolina Commission a proposed price
regulation plan. A modified plan has been negotiated and stipulated between
BellSouth Telecommunications and the Public Staff of the North Carolina
Commission. The North Carolina Commission has held hearings on the stipulated
plan and a decision is expected by the Spring of 1996.
SOUTH CAROLINA
Prior to 1996, BellSouth Telecommunications' rates were regulated on a
traditional rate of return basis. In December 1994, the South Carolina Public
Service Commission issued an order requiring that rates be reduced prospectively
by approximately $26 million on an annual basis and with no change in the
previously authorized return on equity of 13%. Based upon an investigation by
the South Carolina Commission of BellSouth Telecommunications' 1992 earnings,
refunds of approximately $29 million were ordered. BellSouth Telecommunications
has appealed this order. As a result of the South Carolina Commission's
investigation of BellSouth Telecommunications' 1994 earnings, rate reductions of
approximately $42 million on an annual basis were ordered and the authorized
return on equity was set at 12.75%.
In January 1996, the South Carolina Commission approved a price regulation
plan which includes provisions that basic local exchange residence and business
service rates will not increase for five years after which an inflation-based
formula will be used to change rates. Intrastate switched access rates will be
capped for three years after which an inflation-based formula will be used to
change rates. The rates for non-basic services would be set by BellSouth
Telecommunications based on market considerations, with defined limitations on
price increases.
TENNESSEE
In August 1993, the Tennessee Public Service Commission approved a
three-year revised incentive regulation plan which lowered the sharing range as
a percentage return on average net investment* from 11.0%-12.2% to
10.65%-11.85%.
In June 1995, a law was enacted which allows qualified service providers to
elect price regulation. BellSouth Telecommunications elected price regulation
under which the rates for basic services are to be capped for four years, after
which an inflation-based formula is to be used to change the basic rates. Rates
for services other than basic services are to be adjusted based on an
inflation-based formula.
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* As defined in the plan for this state.
6
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In order to implement the price regulation election, the Tennessee
Commission has required BellSouth Telecommunications to reduce rates by
approximately $56 million on an annual basis. Price regulation is to be
effective concurrent with rate reductions in March 1996, subject to compliance
with a number of other preconditions. BellSouth Telecommunications has appealed
the rate reduction.
------------------------
In addition to the above matters, BellSouth Telecommunications is a party to
numerous proceedings pending before state regulatory bodies which involve, among
other things, terms and conditions of services provided by BellSouth
Telecommunications, rates charged for such services and relationships with
competitive service providers and affiliates. No assurance can be given as to
the outcome of any such matters.
ACCESS SERVICES
BellSouth Telecommunications provides access services by connecting the
communications networks of Interexchange Carriers with the equipment and
facilities of subscribers. These connections are provided by linking these
carriers and subscribers through the public switched network of BellSouth
Telecommunications or through dedicated private lines furnished by BellSouth
Telecommunications. Rates and other aspects of interstate access services are
regulated by the FCC, and state regulatory commissions have jurisdiction over
the provision of access to the Interexchange Carriers to complete intrastate
telecommunications.
Access charges, which are payable both by Interexchange Carriers and
subscribers, provided approximately 29% of BellSouth Telecommunications'
operating revenues for the years ended December 31, 1995, 1994 and 1993,
respectively. These charges are designed to recover the costs of the common and
dedicated facilities and switching equipment used to connect networks of
Interexchange Carriers with the telephone company's local network. In addition,
an interstate subscriber line access charge of $3.50 per line per month applies
to single-line business and residential customers. The interstate subscriber
access charge for multi-line business customers varies by state but cannot
exceed $6.00 per line per month. The state commissions have authorized BellSouth
Telecommunications to collect from the Interexchange Carriers and, in several
states, from customers charges for providing intrastate access services.
In October 1990, the FCC authorized an alternative to traditional rate of
return regulation called "price caps," which became mandatory for certain local
exchange carriers (LECs), including BellSouth Telecommunications. In contrast to
traditional rate of return regulation, a price cap plan limits the prices
telephone companies can charge for their services. The price cap plan limits
aggregate price changes to the rate of inflation minus an LEC-selected
productivity offset, plus or minus exogenous cost changes recognized by the FCC.
Price cap regulation provides LECs with enhanced incentives to increase
productivity and efficiency. To the extent an LEC's actual rate of return
exceeds the allowed rate of return, a portion of such excess must be shared with
customers through prospective rate reductions.
In February 1994, the FCC initiated its review of the price cap plan. The
FCC identified three broad sets of issues for examination including those
related to the basic goals of price cap regulation, the operation of price caps
and the transition of local exchange services to a fully competitive market. In
connection with this review, in March 1995, the FCC adopted an interim plan
which became effective in August 1995. This plan established three productivity
factor options, which are offsets to the inflation-based increase in rates that
LECs are permitted to make each year. Similar to the above plan, two of the
productivity options in the interim plan, 4.0% and 4.7%, provide defined
earnings limitations with a sharing mechanism. A third option in the interim
plan, 5.3%, removes both earnings limitations and sharing requirements.
Consistent with a pricing strategy that BellSouth Telecommunications
considered compatible with an increasingly competitive business environment, it
selected a 5.3% productivity factor, which, together with other adjustments,
would decrease interstate access revenues by approximately $220 million on an
annual basis at 1994 access volume levels. BellSouth Telecommunications
continues to believe and advocates that a revised price cap plan should be
structured to provide increased pricing flexibility for services as competition
evolves in the telecommunications markets and that sharing be eliminated from
the plan.
7
<PAGE>
The FCC is expected to consider further the interim rules as well as other
issues related to competition, streamlined regulation and other matters
contained in the 1996 Act. A final order is expected to be issued in 1996.
In addition to the above matters, BellSouth Telecommunications is a party to
numerous proceedings pending before the FCC which involve, among other things,
terms and conditions of services provided by BellSouth Telecommunications, rates
charged for such services and relationships with affiliates. No assurance can be
given as to the outcome of any such matters.
BILLING AND COLLECTION SERVICES
BellSouth Telecommunications provides, under contract and/or tariff, billing
and collection services for certain long distance services of AT&T and several
other Interexchange Carriers. The agreement with AT&T extends through the year
2000 subject to the right of AT&T to assume billing and collection for certain
of its services prior to the expiration of the agreement. Revenues from such
services have been decreasing and this trend is expected to continue as AT&T and
other carriers assume more direct billing for their own services.
OPERATOR SERVICES
Directory assistance and local and toll operator services are provided by
BellSouth Telecommunications in its service areas. Toll operator services
include alternate billing arrangements, such as collect calls, third number
billing, person-to-person and calling card calls; dialing instructions; pre-
billed credit; and rate information. In addition, directory assistance is
provided for some Interexchange Carriers which do not directly provide such
services for their own customers.
OTHER BUSINESS OPERATIONS
DIRECTORY PUBLISHING FEES
BellSouth Telecommunications has a contractual agreement with BellSouth
Advertising & Publishing Corporation (BAPCO), an affiliated company, wherein
BAPCO publishes certain telephone directories and in return pays publication
fees to BellSouth Telecommunications for publishing rights and other services.
For the years ended December 31, 1995, 1994 and 1993, these fees, included in
Other Operating Revenue, were $721, $638 and $616, respectively.
In response to changes in the telecommunications environment and to enhance
competitive flexibility, BellSouth Telecommunications and BAPCO intend to
establish a new contract, based on fees for services rendered between the
companies, to be effective for all or part of the region during the first
quarter of 1996. For additional information, see "Management's Discussion and
Analysis of Results of Operations -- Other Matters -- Affiliated Transactions."
SELLING AND MAINTAINING EQUIPMENT
To a limited extent, through its subsidiaries, BellSouth Telecommunications
sells and maintains telecommunications equipment, computers and related office
equipment. The Holding Companies, AT&T and other substantial enterprises compete
in the provision of these services and products. In April 1994, BellSouth
Communications Systems, Inc., a wholly-owned subsidiary, disposed of its
customer premises equipment sales and service operations outside the nine-state
region served by BellSouth Telecommunications.
8
<PAGE>
COMPETITION
GENERAL
BellSouth Telecommunications is subject to increasing competition in all
areas of its business. Regulatory, legislative and judicial actions and
technological developments have expanded the types of available services and
products and the number of companies that may offer them. Increasingly, this
competition is from large companies which have substantial capital,
technological and marketing resources.
A technological convergence is occurring in the telephone, cable and
broadcast television, computer, entertainment and information services
industries. The technologies utilized and being developed in these industries
will enable companies to provide multiple and integrated forms of communications
offerings.
NETWORK AND RELATED SERVICES
LOCAL SERVICE
Over the past several years, a number of states in BellSouth
Telecommunications' wireline territory have passed legislation providing for
competition in areas where previously it had an exclusive operating franchise.
The state public service commissions in such jurisdictions have granted, or are
in the process of considering, applications for authority to compete with
BellSouth Telecommunications. Such competitors include AT&T, MCI
Telecommunications Corporation (MCI), U S West, Inc. (U S West) and other
substantial companies. The 1996 Act further preempts all existing state
legislative and regulatory barriers to competition for local telephone service,
subject only to competitively neutral requirements to assure quality service
consistent with public safety, convenience and consumer welfare. BellSouth
Telecommunications expects multiple companies to apply to public service
commissions in its territory for the authority to provide competitive local
telecommunications services. Because of the expense of constructing facilities
to provide these services, many of such carriers may resell the services of
BellSouth Telecommunications or jointly contruct a competing network.
An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by competitive access
providers and other carriers in metropolitan areas, including Atlanta, Georgia,
Charlotte, North Carolina and Jacksonville, Miami and Orlando, Florida, which
offer certain high volume users a competitive alternative to the public and
private line offerings of the LECs. In addition, the networks of some cable
television systems will be capable of carrying two-way interactive data messages
and will be configured to provide voice communications. Furthermore, wireless
services, such as cellular telephone and paging services and PCS services when
operational, increasingly compete with wireline communications services.
In 1994, AT&T acquired McCaw Communications, Inc. (McCaw), the largest
domestic cellular communications company, which serves customers in 10 cities in
BellSouth Telecommunications' local wireline territory. Furthermore, alliances
are also being formed between other Holding Companies and large corporations
that operate cable television systems in many localities throughout the United
States, for example, U S West, Inc./Time Warner Communications and NYNEX
Corporation/ Viacom, Inc. As technological and regulatory developments make it
more feasible for cable television to carry data and voice communications, it is
probable that BellSouth Telecommunications will face competition within its
region from the other Holding Companies through their cable television venture
arrangements.
In July 1994, U S West and Time Warner announced plans to upgrade certain of
their cable TV systems to full-service networks which would support new
interactive and telephone services that would compete with the incumbent LECs.
One of these full-service networks is being built in Orlando, Florida, and a
limited trial of services has begun. Tele-Communications, Inc. has announced
plans to offer similar services in South Florida and Louisville, Kentucky. Time
Warner and U S West have made major cable system acquisitions that are expected
to provide voice and video competition in BellSouth Telecommunications' service
areas. In December 1994, U S West acquired Atlanta's two largest cable
9
<PAGE>
operators and, in February 1996, announced a definitive agreement to acquire
Continental Cablevision, Inc., a provider with a major presence in Florida. The
pending acquisition by Time Warner of Turner Broadcasting Corporation will
increase concentration in the cable and programming industries.
Competition for local service revenues could adversely affect BellSouth
Telecommunications net income. However, the existence of facilities-based
competitive local service will allow the Operating Telephone Companies to
qualify to offer in-region interLATA service, as contemplated in the 1996 Act.
(See "BellSouth Telecommunications Competitive Strategy.")
ACCESS SERVICE
The FCC has adopted rules requiring LECs to offer expanded interconnection
for interstate special and switched transport. As a result, BellSouth
Telecommunications is required to permit competitive carriers and customers to
terminate their transmission facilities in its central office buildings through
collocation arrangements. The effects of the rules are to increase competition
for access transport.
TOLL SERVICE
A number of firms compete with BellSouth Telecommunications in its
nine-state region for intraLATA toll business by reselling toll services
obtained at bulk rates from BellSouth Telecommunications or, subject to the
approval of the applicable state public utility commission, providing toll
services over their own facilities. Commissions in the states in BellSouth
Telecommunications' operating territory have allowed the latter type of
intraLATA toll calling, whereby the Interexchange Carriers are assigned a
multiple digit access code (10XXX) which customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislature or
commissions in three states have authorized competing carriers to provide
intraLATA toll presubscribed calling with a single digit access code (1+),
giving them dialing parity with the LEC in that area. Commissions in several
other states are considering how and when such authorization should be
implemented. However, the 1996 Act prohibits states from ordering the
implementation of new toll dialing parity until the earlier of (a) three years
from the enactment of the 1996 Act or (b) such time as the Operating Telephone
Company has qualified to provide in-region interLATA services. Other Holding
Companies will be permitted to offer BellSouth's local customers interLATA toll
service before BellSouth is eligible under the 1996 Act to offer such service to
its customers. BellSouth expects Holding Companies and interexchange carriers,
including AT&T and MCI, to compete for interLATA toll service.
PERSONAL COMMUNICATIONS SERVICES (PCS)
Personal communications services (PCS) are in the developmental stage and
are anticipated to provide a wide range of wireless communications services.
BELLSOUTH TELECOMMUNICATIONS COMPETITIVE STRATEGY
REGULATORY AND LEGISLATIVE CHANGES
BellSouth Telecommunications' primary regulatory focus continues to be
directed toward modifying the regulatory process to one that is more closely
aligned with changing market conditions and overall public policy objectives. As
an alternative to regulation of earnings, BellSouth Telecommunications is
seeking price regulation where it does not exist, whereby prices of basic local
exchange service would be regulated and prices for other products and services
would be based on market factors. As such, BellSouth Telecommunications has
price regulation plans approved or authorized in seven states, and approvals are
pending in two states.
As a result of the 1996 Act, BellSouth Telecommunications and the other
Operating Telephone Companies are freed from many of the laws, regulations and
judicial restrictions (including the MFJ) that constrained the provision of
voice, data and video communications throughout their wireline service
territories and elsewhere. The FCC has commenced rulemaking proceedings relating
to the provision of interLATA service by the Operating Telephone Companies.
After necessary federal and state proceedings, these companies may apply to the
FCC to offer in-region interLATA wireline
10
<PAGE>
services, and the FCC must act on such application within 90 days. The FCC must
grant such application if it determines that the applicant (a) has met a
competitive checklist; (b) has shown (i) the presence of facilities-based
competition for residential and business local service or (ii) in the absence
thereof, a statement of the terms under which it would be willing to
interconnect with a competitive local carrier; (c) will operate consistently
with the separate subsidiary requirement; and (d) will meet the 1996 Act's
public interest requirement in so offering the services on the foregoing
conditions.
The Operating Telephone Companies are not required to obtain such FCC
approval prior to offering out-of-region interLATA wireline services. BellSouth
Telecommunications plans to begin offering interLATA wireline service within its
nine-state territory as soon as possible after completion of FCC and state
regulatory proceedings, expected to be concluded in late 1996 or early 1997;
however, no assurance can be provided with respect to when BellSouth
Telecommunications will be authorized to initiate such interLATA wireline
service. BellSouth Telecommunications has no plans to offer out-of-region
interLATA wireline services on a significant scale.
After some modifications to its network and operating systems, wireline
interLATA services can be offered by BellSouth Telecommunications. However, many
of the telecommunications services that BellSouth Telecommunications and the
other Operating Telephone Companies may provide may be subject to extensive
regulations to be adopted by the FCC and state regulatory commissions.
The 1996 Act allows, without additional approval, BellSouth to market its
wireless services jointly with its wireline local exchange services; before,
separate marketing was required for cellular services. In addition, such joint
marketing will include interLATA wireline services in the nine-state territory
when authorized. BellSouth expects to begin a joint marketing trial for wireline
local exchange and cellular services later in 1996.
Technological changes and the effects of competition reduce the economic
useful lives of BellSouth Telecommunications' fixed assets. In connection with
BellSouth Telecommunications' discontinuance in 1995 of Statement of Financial
Accounting Standards No. 71 (SFAS No. 71), BellSouth Telecommunications reduced
the regulator-approved asset lives for certain categories of fixed assets to
reflect their estimated economic asset lives. (See "Management's Discussion and
Analysis of Results of Operations (MD&A) -- Results of Operations --
Extraordinary Losses -- Discontinuance of SFAS No. 71.")
ENTRY INTO NEW MARKETS
Notwithstanding the risks associated with increased competition, BellSouth
Telecommunications will have the opportunity to benefit from entry into new
business markets. BellSouth Telecommunications believes that in order to remain
competitive in the future, it must aggressively pursue a corporate strategy of
expanding its offerings beyond its traditional businesses and markets. These
offerings may include interLATA services, information services and video and
electronic commerce services.
In August 1992, the FCC issued an order allowing LECs to offer video dial
tone for transmitting video services. In February 1995, the FCC approved
BellSouth Telecommunications' application to conduct a trial of video dial tone
services. BellSouth Telecommunications is constructing a network in the
Chamblee, Georgia area that is planned to begin service during the second
quarter of 1996 and will provide 70 analog channels, 160 digital broadcast
channels and 480 digital switched channels to deliver video programming and
interactive services, which will be provided by both affiliated and non-
affiliated programming service providers. BellSouth Telecommunications' network
will support new services such as broadcast entertainment; interactive video
services, such as video games; enhanced personal computer and communications
services, including electronic mail; transactional services, such as home
shopping and banking; and customer-choice video services, such as movies on
demand.
The 1996 Act eliminates the previous prohibition on telephone companies
providing cable television services in their service territories, although many
federal courts had already held such prohibition unconstitutional. In general,
however, local exchange carriers may not acquire or joint venture with
established cable television providers in their wireline territories.
11
<PAGE>
WORK FORCE REDUCTION/RESTRUCTURING
In 1995, BellSouth Telecommunications completed the restructuring of its
telephone operations that was announced in 1993. Also, BellSouth
Telecommunications announced in 1995 a plan to reduce its work force by
approximately 11,300 additional employees by the end of 1997. For a discussion
of the work force reduction/restructuring see "MD&A -- Results of Operations --
Operating Expenses -- Work Force Reduction/Restructuring Charges."
RESEARCH AND DEVELOPMENT
The majority of BellSouth Telecommunications' research and development
activity is conducted at Bell Communications Research, Inc. (Bellcore),
one-seventh of which is owned by BellSouth, through BellSouth
Telecommunications, with the remainder owned by the other Holding Companies.
Bellcore provides research and development and other services for its owners and
is the central point of contact for coordinating the Federal government's
telecommunications requirements relating to national security and emergency
preparedness.
In April 1995, the Holding Companies announced their intention to dispose of
their respective interests in Bellcore. Neither the method of disposition nor
the timing thereof has been determined. A final decision regarding the
disposition of Bellcore and the structure of such a transaction is subject to
obtaining satisfactory financial and other terms and all necessary approvals.
There can be no assurance that a disposition will occur. In anticipation of such
disposition, however, BellSouth Telecommunications has negotiated an agreement
for Bellcore to provide continuing research and development services for a
number of years.
LICENSES AND FRANCHISES
BellSouth Telecommunications' local exchange business is typically provided
under certificates of public convenience and necessity granted pursuant to state
statutes and public interest findings of the various public utility commissions
of the states in which BellSouth Telecommunications does business. These
certificates provide for a franchise of indefinite duration, subject to the
maintenance of satisfactory service at reasonable rates.
BellSouth Telecommunications believes that it owns or has licenses to use
all patents, copyrights, trademarks and other intellectual property necessary
for it to conduct its present business operations. It is not anticipated that
any of such property will be subject to expiration or non-renewal of rights
which would materially and adversely affect BellSouth Telecommunications or its
subsidiaries.
EMPLOYEES
At December 31, 1995, 1994 and 1993 BellSouth Telecommunications employed
approximately 71,400, 76,700 and 81,400 persons, respectively. Of these amounts
at these dates, approximately 68,600, 73,800 and 78,000 persons were telephone
employees. About 72% of these employees at December 31, 1995 were represented by
the Communications Workers of America (the CWA), which is affiliated with the
AFL-CIO. In October 1995, members of the CWA ratified new three-year contracts
with BellSouth Telecommunications. These contracts were effective in August
1995. The contracts include basic wage increases of 10.9% (compounded) over
three years. In addition, the agreement provided a cash payment of one thousand
one hundred dollars to each eligible employee upon ratification and further
provides 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.
During 1995, BellSouth Telecommunications completed the 1993 plan to reduce
its work force by approximately 10,200 employees. For the years ended December
31, 1995, 1994 and 1993, total employee reductions under this plan were 5,000,
3,900 and 1,300, respectively. Also during 1995,
12
<PAGE>
BellSouth Telecommunications announced a plan to reduce its work force by
approximately 11,300 employees by the end of 1997. (See "MD&A -- Results of
Operations -- Operating Expenses -- Work Force Reduction/Restructuring
Charges.")
ITEM 2. PROPERTIES
GENERAL
BellSouth Telecommunications' properties do not lend themselves to
description by character and location of principal units. BellSouth
Telecommunications' investment in property, plant and equipment consisted of the
following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Outside plant........................... 46% 46%
Central office equipment................ 37 37
Land and buildings...................... 7 7
Furniture and fixtures.................. 5 5
Operating and other equipment........... 4 4
Plant under construction................ 1 1
--- ---
100% 100%
--- ---
--- ---
</TABLE>
Outside plant consists of connecting lines (aerial, underground and buried
cable) not on customers' premises, the majority of which are on or under public
roads, highways or streets, while the remainder is on or under private property.
BellSouth Telecommunications currently self-insures all of its outside plant
against casualty losses. Central office equipment consists of analog switching
equipment, digital electronic switching equipment and circuit equipment. Land
and buildings are occupied principally by central offices. Operating and other
equipment consists of embedded intrasystem wiring, substantially all of which is
on the premises of customers, motor vehicles and equipment. Central office
equipment, buildings, furniture and fixtures and certain operating and other
equipment are insured under a blanket property insurance program. This program
provides substantial limits of coverage against "all risks" of loss including,
fire, windstorm, flood, earthquake and other perils not specifically excluded.
Substantially all of the installations of central office equipment and
administrative offices are located in buildings and on land owned by BellSouth
Telecommunications. Many garages, business offices and telephone service centers
are in leased quarters.
BellSouth Telecommunications' customers are now served by electronic
switching systems that provide a wider variety of services than their mechanical
predecessors. The BellSouth Telecommunications network has been transitioned
from an analog to a digital network, which provides capabilities for BellSouth
Telecommunications to furnish advanced data transmission and information
management services.
CAPITAL EXPENDITURES
Capital expenditures consist of gross additions to property, plant and
equipment having an estimated service life of one year or more, plus the
incidental costs of preparing the asset for its intended use.
The total investment in property, plant and equipment has increased from
$35,782 million at January 1, 1991 to $43,521 million at December 31, 1995, not
including deductions of accumulated depreciation. Significant additions to
property, plant and equipment will be required to meet the demand for
telecommunications services and to further modernize and improve such services
to meet competitive demands. Population and economic expansion is projected by
BellSouth Telecommunications in certain growth centers within its nine-state
area during the next five to ten years. Expansion of the network will be needed
to accommodate such projected growth.
13
<PAGE>
BellSouth Telecommunications' capital expenditures for 1991 through 1995
were as follows:
<TABLE>
<CAPTION>
MILLIONS
---------
<S> <C>
1995............................................................ $ 3,123
1994............................................................ 2,971
1993............................................................ 2,995
1992............................................................ 2,846
1991............................................................ 2,747
</TABLE>
BellSouth Telecommunications currently projects capital expenditures to be
approximately $3.0 billion for 1996. In 1995, BellSouth Telecommunications
generated substantially all of its funds for capital expenditures internally. In
1996, such capital expenditures are expected to be financed primarily through
internally generated funds and, to the extent necessary, from external sources.
ENVIRONMENTAL MATTERS
BellSouth Telecommunications is subject to a number of environmental matters
as a result of its operations and the shared liability provisions in the Plan of
Reorganization (POR). As a result, BellSouth Telecommunications expects that it
will be required to expend funds to remedy certain facilities, including those
Superfund sites for which BellSouth Telecommunications has been named as a
potentially responsible party, for the remediation of sites with underground
fuel storage tanks and other expenses associated with environmental compliance.
At December 31, 1995, BellSouth Telecommunications' recorded liability related
primarily to remediation of these sites was approximately $32 million.
BellSouth Telecommunications continually monitors its operations with
respect to potential environmental issues, including changes in legally mandated
standards and remediation technologies. BellSouth Telecommunications' recorded
liability reflects those specific issues where remediation activities are
currently deemed to be probable and where the cost of remediation is estimable.
BellSouth Telecommunications continues to believe that expenditures in
connection with additional remedial actions under the current environmental
protection laws or related matters would not be material to its financial
position, annual operating results or cash flows.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The MFJ and the related POR provide for the recognition and payment of
liabilities by AT&T and the Operating Telephone Companies that are attributable
to pre-divestiture events but that did not become certain until after
divestiture. These contingent liabilities relate principally to litigation and
other claims with respect to the former Bell System's environmental liabilities,
rates, taxes, contracts and torts (including business torts, such as alleged
violations of the antitrust laws). Contingent liabilities attributable to
pre-divestiture events have been shared by AT&T and the Operating Telephone
Companies in accordance with formulae prescribed by the POR, whether or not an
entity was a party to the proceeding and regardless of whether an entity was
dismissed from the proceeding by virtue of settlement or otherwise. BellSouth
Telecommunications' share of these liabilities to date has not been material to
its financial position, annual operating results or cash flows.
The Operating Telephone Companies have agreed among themselves to disengage
from the sharing of most categories of contingent liabilities formerly subject
to the POR sharing mechanism. Sharing under the POR would continue for matters
for which notice was given as of May 23, 1994 and certain pre-divestiture
environmental claims. The sharing of liabilities for pre-divestiture claims
between AT&T and one or more Operating Telephone Companies are not affected by
this agreement.
BellSouth Telecommunications and its subsidiaries are subject to claims and
proceedings arising in the ordinary course of business involving allegations of
personal injury, breach of contract, anti-competitive conduct, employment law
issues and other matters. While complete assurance cannot be given as to the
outcome of any pending or threatened legal actions, BellSouth Telecommunications
believes that any financial impact would not be material to its financial
position, annual operating results or cash flows.
15
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues...................... $14,540 $14,040 $13,580 $13,182 $12,768
Operating Expenses (1).................. 11,759 10,452 11,591 10,258 10,046
-------- -------- -------- -------- --------
Operating Income........................ 2,781 3,588 1,989 2,924 2,722
Interest Expense........................ 573 549 562 583 650
Other Income, net....................... 27 18 21 75 1
Provision for Income Taxes.............. 818 1,105 461 801 647
Extraordinary Losses, net of tax (2).... (2,796) -- (87) (41) --
Accounting Change, net of tax........... -- -- (65) -- --
-------- -------- -------- -------- --------
Net Income (Loss)..................... $(1,379) $ 1,952 $ 835 $ 1,574 $ 1,426
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Assets............................ $23,933 $27,372 $27,095 $26,442 $26,322
Capital Expenditures.................... $ 3,123 $ 2,971 $ 2,995 $ 2,846 $ 2,747
Long-Term Debt.......................... $ 6,853 $ 6,512 $ 6,547 $ 6,336 $ 6,403
Ratio of Earnings to Fixed Charges...... 4.38 5.68 3.17 4.53 3.86
Return to Average Common Equity......... (14.36%) 18.02% 7.32% 13.78% 12.49%
Debt Ratio at End of Period (3)......... 51.87% 41.01% 41.29% 38.46% 38.17%
Telephone Employees (4)................. 68,585 73,764 77,958 79,453 79,743
Other Operations Employees.............. 2,797 2,944 3,457 3,413 2,502
-------- -------- -------- -------- --------
Total Employees....................... 71,382 76,708 81,415 82,866 82,245
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Telephone Employees per 10,000 Access
Lines.................................. 32.5 36.5 40.3 42.6 44.1
Business Volumes: (5)
Network Access Lines in Service
(thousands)............................ 21,133 20,220 19,333 18,650 18,035
Access Minutes of Use (millions):
Interstate............................ 62,411 57,778 53,345 50,546 47,255
Intrastate............................ 19,197 16,888 15,261 13,994 13,238
Toll Messages (millions)................ 1,374 1,559 1,511 1,462 1,504
<FN>
- ------------------------
(1) Operating Expenses for 1995 include a work force reduction charge of
$1,082, which reduced net income by $663. Operating Expenses for 1993
include a charge for restructuring of $1,136, which reduced net income by
$697. See Note J to the Consolidated Financial Statements.
(2) For 1995, reflects charges of $2,718 for the discontinuance of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" and $78 related to the refinancing of
long-term debt issues. See Notes B and F to the Consolidated Financial
Statements.
(3) The debt ratio at December 31, 1995 has been adjusted to exclude $485 of
debentures to be redeemed in January 1996.
(4) Telephone employees exclude those employees in BellSouth
Telecommunications' subsidiaries which are unrelated to telephone
operations.
(5) Prior period operating data are revised at later dates to reflect the most
current information. The above information reflects the latest data
available for the periods indicated.
</TABLE>
16
<PAGE>
ITEM 7. 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). 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 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 primarily within the nine-state BellSouth Telecommunications
region.
Approximately 86% of BellSouth Telecommunications' Total Operating Revenues
for the years ended December 31, 1995 and 1994 were from wireline services.
Charges for local, access and toll services for the year ended December 31, 1995
accounted for approximately 59%, 33% and 8%, respectively, of the wireline
revenues discussed above. The remainder of BellSouth Telecommunications' Total
Operating Revenues was derived principally from directory publishing fees, sales
and maintenance of customer premises equipment and other nonregulated services.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1995 1994 % CHANGE
--------- --------- ----------
<S> <C> <C> <C>
Income Before Extraordinary Losses........................... $ 1,417 $ 1,952 (27.4)
Extraordinary Loss for Discontinuance of SFAS No. 71, net of
tax......................................................... (2,718) -- --
Extraordinary Loss on Early Extinguishment of Debt, net of
tax......................................................... (78) -- --
--------- ---------
Net Income (Loss)............................................ $ (1,379) $ 1,952 --
--------- ---------
--------- ---------
</TABLE>
For a discussion of the extraordinary losses in 1995, see "Extraordinary
Losses" below.
Income Before Extraordinary Losses decreased $535 (27.4%) compared to 1994.
The decrease was primarily due to a work force reduction charge in 1995 of $663
(after tax). For a discussion of such charge, see "Operating Expenses -- Work
Force Reduction/Restructuring Charges" below. The decrease was partially offset
by revenue growth, driven by continued growth of access lines, and cost control
measures, including salary and wage savings attributable to the restructuring
plan initiated in 1993.
See "Other Matters -- Affiliated Transactions."
17
<PAGE>
VOLUMES OF BUSINESS
Network Access Lines in Service at December 31 (thousands):
<TABLE>
<CAPTION>
1995 1994 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
By Type:
Residence......................................... 14,653 14,195 3.2%
Business.......................................... 6,225 5,771 7.9
Other............................................. 255 254 0.4
--------- ---------
Total......................................... 21,133 20,220 4.5
--------- ---------
--------- ---------
By State:
Florida........................................... 5,597 5,350 4.6
Georgia........................................... 3,550 3,354 5.8
Tennessee......................................... 2,435 2,337 4.2
Louisiana......................................... 2,108 2,037 3.5
North Carolina.................................... 2,101 1,994 5.4
Alabama........................................... 1,792 1,726 3.8
South Carolina.................................... 1,292 1,244 3.9
Mississippi....................................... 1,158 1,118 3.6
Kentucky.......................................... 1,100 1,060 3.8
--------- ---------
Total......................................... 21,133 20,220 4.5
--------- ---------
--------- ---------
</TABLE>
The total number of access lines in service since December 31, 1994
increased by approximately 913,000 (4.5%) to 21,133,000, compared to a 4.6% rate
of increase in 1994. Business and residence access lines increased by 7.9% and
3.2%, respectively, compared to growth rates of 7.1% and 3.7% in 1994. The
number of second residence lines, included in total residence lines, increased
by 220,000 (20.9%) to 1,271,000 and accounted for approximately 48.0% and 24.1%
of the overall increase in residence access lines and total access lines,
respectively, since December 31, 1994. Such second residence lines are generally
used for home office purposes, access to on-line computer services and
children's phones. 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 (millions):
<TABLE>
<CAPTION>
1995 1994 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Interstate.......................................... 62,411 57,778 8.0%
Intrastate.......................................... 19,197 16,888 13.7
--------- ---------
Total............................................. 81,608 74,666 9.3
--------- ---------
--------- ---------
</TABLE>
Access minutes of use represent the volume of traffic carried by
interexchange carriers between LATAs, both interstate and intrastate, using
BellSouth Telecommunications' local facilities. In 1995, total access minutes of
use increased by 6,942 million (9.3%) compared to an increase of 8.8% in 1994.
The 1995 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' network. 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, which causes a decrease in minutes of use.
<TABLE>
<CAPTION>
1995 1994 % CHANGE
--------- --------- -------------
<S> <C> <C> <C>
Toll Messages (millions).............................. 1,374 1,559 (11.9%)
</TABLE>
Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 185 million (11.9%)
in 1995 compared to an increase of
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<PAGE>
3.2% in 1994. The decrease in 1995 was primarily attributable to the expansion
of local area calling plans in Florida, Georgia, South Carolina, North Carolina
and Mississippi. These plans and future implementation of other such plans in
BellSouth Telecommunications' service region, coupled with competition from the
interchange carriers 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 $500 (3.6%) in 1995. The components of
Total Operating Revenues were as follows:
<TABLE>
<CAPTION>
1995 1994 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Local Service.................................... $ 7,294 $ 6,863 6.3%
Interstate Access................................ 3,275 3,127 4.7
Intrastate Access................................ 884 908 (2.6)
Toll............................................. 1,009 1,190 (15.2)
Other............................................ 2,078 1,952 6.5
--------- ---------
Total Operating Revenues....................... $ 14,540 $ 14,040 3.6
--------- ---------
--------- ---------
</TABLE>
LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network and secondary central
office feature services, such as custom calling features and custom dialing
packages. (Revenues from cellular interconnection and other mobile services are
included in Other operating revenues for both periods presented.) Local Service
revenues increased $431 (6.3%) in 1995.
The increase in 1995 was due primarily to an increase of 913,000 access
lines since December 31, 1994, an increase of $107 due to higher customer demand
for TouchStar-Registered Trademark- and Custom Calling services, and the effect
of expanded local area calling plans. The increase in 1995 was partially offset
by net rate reductions since December 31, 1994 of approximately $46.
INTERSTATE ACCESS revenues result from the provision of access services to
interexchange carriers to provide telecommunications services between states.
Interstate Access revenues increased $148 (4.7%) in 1995.
The increase for 1995 was due primarily to growth in minutes of use of 8.0%,
an increase in end-user charges of $52 attributable to growth in the number of
access lines in service and an increase of $42 due to higher demand for special
access services. The 1995 increase was partially offset by net rate reductions
since December 31, 1994 of approximately $58.
See "Operating Environment and Trends of the Business."
INTRASTATE ACCESS revenues result from the provision of access services to
interexchange carriers which provide telecommunications services between LATAs
within a state. In 1995, Intrastate Access revenues decreased $24 (2.6%). Such
decrease was due primarily to net rate reductions of $100, partially offset by
13.7% growth in minutes of use.
TOLL revenues are received from the provision of long-distance services
within (but not between) LATAs. These services include intraLATA service beyond
the local calling area; Wide Area Telecommunications Service (WATS or 800
services) for customers with highly concentrated demand; and special services,
such as transport of voice, data and video. Toll revenues decreased $181 (15.2%)
in 1995.
The decrease was due primarily to a decline in toll messages of 11.9%. The
decline in toll messages reflects the expansion of local area calling plans and
increased competition from interexchange carriers. The overall decline in toll
revenues is expected to continue over the long term.
19
<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 $126 (6.5%)
in 1995.
The increase was due primarily to reduced levels of revenue reduction
accruals related to potential sharing under certain state regulatory plans
coupled with the reclassification of certain such accruals to Local Service
revenues, the combined effect of which increased Other revenues by approximately
$76. The increase was also due to approximately $41 resulting from higher demand
for voice messaging and inside wire services and an overall increase of $83 in
directory publishing fees. The increase was partially offset by a reduction of
$37 in revenues from billing and collection services and by approximately $33
related to the sale in April 1994 of the out-of-region CPE sales and service
operations.
See "Other Matters -- Affiliated Transactions."
OPERATING EXPENSES
Primarily as a result of the work force reduction charge in 1995, Total
Operating Expenses increased $1,307 (12.5%) in 1995. The components of Total
Operating Expenses were as follows:
<TABLE>
<CAPTION>
1995 1994 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Depreciation and Amortization.................... $ 3,065 $ 2,954 3.8%
--------- ---------
Other Operating Expenses:
Cost of Services and Products.................. 5,268 5,235 0.6
Selling, General and Administrative............ 2,344 2,263 3.6
--------- ---------
7,612 7,498 1.5
--------- ---------
Subtotal....................................... 10,677 10,452 2.2
Work Force Reduction/Restructuring Charges..... 1,082 -- --
--------- ---------
Total Operating Expenses..................... 11,759 $ 10,452 12.5
--------- ---------
--------- ---------
</TABLE>
DEPRECIATION AND AMORTIZATION increased $111 (3.8%) in 1995. The increase
was due primarily to higher levels of property, plant and equipment since
December 31, 1994 resulting from sustained growth in the customer base and
continued modernization of the network. For a discussion of the impact of
discontinuance of SFAS No. 71 on depreciation expense in 1995 and 1996, 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 increased $114 (1.5%) in 1995.
The increase for the period was due primarily to volume growth, partially
offset by a decrease of approximately $130 for labor costs, including expenses
for employee benefits, in the core wireline business. The decrease in such labor
costs reflects employee reductions attributable to the restructuring plan begun
in 1993, partially offset by annual compensation increases for management and
represented employees.
WORK FORCE REDUCTION/RESTRUCTURING CHARGES. In the fourth quarter of 1995,
BellSouth Telecommunications recognized a pretax charge of $1,082 ($663 after
tax), comprised of $942 ($577 after tax) related to planned work force
reductions by the end of 1997, $85 ($52 after tax) for expected severance
benefit payments after 1997 and $55 ($34 after tax) for additional net
curtailment losses related to employee reductions under the restructuring plan
initiated in 1993.
20
<PAGE>
Each component of the overall 1995 work force reduction charge, as well as
the 1993 restructuring charge, is discussed below.
1995 WORK FORCE REDUCTION CHARGE. In connection with a previously-disclosed
plan to significantly reduce its work force by the end of 1997, BellSouth
recorded a pretax charge of $942 in the fourth quarter of 1995. Under this plan,
BellSouth Telecommunications expects to reduce the work force of the core
wireline business by approximately 11,300 employees by the end of 1997 including
a reduction of 800 employees which occurred in December 1995.
The work force reduction will be accomplished through the separation of
approximately 13,200 employees, partially offset by the planned hiring of new
employees primarily to replace those not expected to relocate in connection with
the consolidation of work locations.
The $942 pretax charge is comprised of approximately $561 under the
provisions of SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
related to those employees who are expected to receive severance benefits under
preexisting separation plans, and approximately $381 for curtailment losses
under the provisions of SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Substantially all of the curtailment losses relate to postretirement
benefits other than pensions.
Once the plan to reduce 11,300 employees is completed, annual employee cost
savings are estimated to be approximately $560. Such annual savings will be
partially offset by increased costs of approximately $60 for outsourced
services.
POSTEMPLOYMENT BENEFITS CHARGE. The pretax charge of $85 represents
estimated future postemployment severance benefits to be paid after 1997, also
in accordance with the provisions of SFAS No. 112. This component is based on
BellSouth Telecommunications' belief that work force reductions will continue
under existing separation plans, although at reduced separation benefit levels.
1993 RESTRUCTURING OF TELEPHONE OPERATIONS. During 1993, BellSouth
Telecommunications recognized a $1,136 restructuring charge in connection with a
plan to redesign, consolidate and streamline the fundamental processes and work
activities in its telephone operations. Consistent with previously-disclosed
expectations, the restructuring was completed in 1995, about one year earlier
than initially planned.
As a part of the restructuring, BellSouth Telecommunications consolidated
and centralized its existing operations. These efforts involved redesign of key
work processes and the design of new processes that facilitated the
consolidation of service functions and the reduction of 10,200 employees.
Since inception of the restructuring plan, total employee reductions were
approximately 10,200, including 5,000 since December 31, 1994. As a result of
employee reductions in 1994 and 1995, employee-related expenses, included as a
component of operating expenses, for the year 1995 were reduced by approximately
$180 compared to the 1994 level. The cumulative reduction of 10,200 employees
since inception of the plan reduced 1995 employee-related expenses by
approximately $375. For the year 1996, the cumulative employee reductions under
the plan are projected to reduce employee-related expenses by approximately
$600.
21
<PAGE>
A summary of employee reductions and expenditures through December 31, 1995
under the 1993 restructuring plan is as follows:
<TABLE>
<CAPTION>
1993 1994 1995 TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee Reductions................................. 1,300 3,900 5,000 10,200
--------- --------- --------- ---------
--------- --------- --------- ---------
Expenditures By Component:
Consolidation and Elimination of Operations....... $ 15 $ 165 $ 231 $ 411
Systems........................................... -- 170 244 414
Employee Separation............................... 38 134 251 423
--------- --------- --------- ---------
Total........................................... $ 53 $ 469 $ 726 $ 1,248
--------- --------- --------- ---------
--------- --------- --------- ---------
Expenditures By Type:
Cash.............................................. $ 53 $ 390 $ 648 $ 1,091
Noncash........................................... -- 79 78 157
--------- --------- --------- ---------
Total........................................... $ 53 $ 469 $ 726 $ 1,248
--------- --------- --------- ---------
--------- --------- --------- ---------
Capital Expenditures (not included in above
expenditures)...................................... $ -- $ 204 $ 250 $ 454
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Total expenditures of $1,248 include $55 of additional net curtailment
losses resulting from a greater number of retirement-eligible employees
separating under the plan than originally expected. These additional net
curtailment losses were included in the 1995 work force reduction charge
discussed above.
At inception of the restructuring plan in 1993, the projected employee
reductions and expenditures for each component of the charge by year were as
follows:
<TABLE>
<CAPTION>
1993 1994 1995 1996 TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Employee Reductions...................... 1,300 3,700 2,900 2,300 10,200
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Consolidation and Elimination of
Operations.............................. $ 15 $ 185 $ 87 $ 56 $ 343
Systems.................................. -- 185 156 84 425
Employee Separation...................... 38 143 105 82 368
--------- --------- --------- --------- ---------
Total.................................. $ 53 $ 513 $ 348 $ 222 $ 1,136
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
1995 1994 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Interest Expense.............................................. $ 573 $ 549 4.4%
Other Income, net............................................. 27 18 50.0
Provision for Income Taxes.................................... 818 1,105 (26.0)
</TABLE>
INTEREST EXPENSE includes interest on debt, certain other accrued
liabilities and capital leases, partially offset by interest capitalized as a
cost of installing equipment and constructing plant. Interest expense increased
$24 (4.4%) in 1995. The increase was primarily attributable to higher average
interest rates on short-term borrowings and higher average debt levels for
long-term borrowings. The average interest rate on long-term borrowings was
slightly lower in 1995 compared to 1994, reflecting the initial impact of 1995
debt refinancings at more favorable interest rates.
PROVISION FOR INCOME TAXES decreased $287 (26.0%) in 1995. BellSouth
Telecommunications' effective tax rates were 36.6% and 36.2% in 1995 and 1994,
respectively. A reconciliation of the statutory Federal income tax rates to
these effective tax rates is provided in Note K. A discussion of the 1993
adoption of SFAS No. 109, "Accounting for Income Taxes," also is included
therein.
22
<PAGE>
EXTRAORDINARY LOSSES
DISCONTINUANCE OF SFAS NO. 71. As a result of its continuing regulatory and
marketplace assessments, BellSouth Telecommunications 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 recent changes in the regulatory
framework 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 not be
generated under cost-based regulation 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 due to the expected levels of future
competition. Accordingly, in the second quarter of 1995, BellSouth
Telecommunications discontinued application of SFAS No. 71 and recorded a
noncash extraordinary charge of $2,718 (net of a deferred tax benefit of
$1,731). The extraordinary charge reflects $3,002 (after tax) to reduce the
recorded value of long lived telephone plant and equipment, all of which was
within the regulatory framework, to the level appropriate for nonregulated
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, implementation of price regulation has
been and continues to be a cornerstone in BellSouth Telecommunications'
corporate strategy. Due in part to this strategy, changes in the regulatory
framework are now being implemented (see "Operating Environment and Trends of
the Business"). 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 serves 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 were
reduced to more closely reflect the economic and technological lives. The
application of such shorter lives does not result in a material increase in
depreciation expense.
See Note B to the Consolidated Financial Statements.
EARLY EXTINGUISHMENT OF DEBT. During 1995 and 1993, BellSouth
Telecommunications recognized extraordinary losses of $78 (net of a current tax
benefit of $49) and $87 (net of a current tax benefit of $59), respectively,
related to the early extinguishment of outstanding debt issues. See Note F to
the Consolidated Financial Statements.
FINANCING ACTIVITY
During 1995, BellSouth Telecommunications issued $300 of long-term debt and,
with net proceeds, refinanced outstanding short-term debt. Also during 1995,
BellSouth Telecommunications issued approximately $1,900 of long-term debt to
refinance $1,885 of outstanding long-term debentures, including $485 of
debentures redeemed in January 1996. The funds to redeem the $485 of debentures
in January 1996 are included in Cash and Cash Equivalents in the Consolidated
Balance Sheet at December 31, 1995. In addition, Cash and Cash Equivalents
includes $500 which was used to redeem commercial paper on January 2, 1996.
BellSouth Telecommunications has committed credit lines aggregating $1,240
with various banks. BellSouth Telecommunications also maintains uncommitted
credit lines of $75. There were no
23
<PAGE>
borrowings under the lines of credit at December 31, 1995. As of February 15,
1996, shelf registration statements were on file with the Securities and
Exchange Commission under which approximately $1,200 of long-term debt
securities could be publicly offered.
BellSouth Telecommunications' debt to total capitalization ratio, adjusted
to exclude the $485 of debentures redeemed in January 1996, increased to 51.9%
at December 31, 1995 from 41.0% at December 31, 1994. The increase was primarily
caused by the reduction in equity due to the extraordinary loss from the
discontinuance of SFAS No. 71.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
REGULATORY ENVIRONMENT. In providing telecommunications services, BellSouth
Telecommunications is subject to regulation by both state and federal regulators
with respect to rates, services and other issues. BellSouth's primary regulatory
focus continues to be directed toward modifying the regulatory process to one
that is more closely aligned with changing market conditions and overall public
policy objectives. BellSouth Telecommunications believes that price regulation,
whereby prices of basic local exchange services are regulated based on factors
other than rate of return and prices for other products and services are based
on market factors, is a logical progression to competitive fairness and provides
advantages for consumers. While price regulation plans limit the amount of
increases in prices for specified services, such plans enhance the company's
ability to adjust prices and service options to more effectively respond to
changing market conditions and competition and enable it to more fully benefit
from productivity enhancements. Price regulation plans have been approved or
authorized by the requisite legislative or regulatory bodies in Alabama, Florida
(although a sharing requirement exists at least through 1996), Georgia,
Kentucky, Mississippi, South Carolina and Tennessee, and approval of a price
regulation plan is pending in North Carolina. In addition, BellSouth
Telecommunications has filed a proposed price regulation plan in Louisiana. At
the federal level, BellSouth Telecommunications is operating under an interim
price regulation plan established by the Federal Communications Commission (FCC)
in 1995. This plan provided a productivity option, which BellSouth
Telecommunications selected, that eliminated both earnings limitations and
sharing requirements. The FCC is expected to consider further the interim rules
as well as other issues related to competition, streamlined regulation and other
matters contained in the Telecommunications Act of 1996 (the 1996 Act). A final
order is expected to be issued in 1996.
ECONOMY. The nation's output of goods and services, which grew 4% in 1994,
expanded 3.2% in 1995. Employment in nonfarm business establishments grew 2.3%
during the year and the unemployment rate averaged 5.6%. The nine-state region
served by BellSouth Telecommunications wireline telephone business outperformed
the nation again in 1995. The number of jobs in nonfarm businesses grew 2.8% as
the unemployment rate averaged 5.1% for the year. Real income expanded at an
estimated 4.5% rate. Net in-migration added approximately 375,000 persons,
accounting for half of the region's population growth. The demand for
telecommunications services in the region reflected the strength of its economic
and population growth. While the economic expansion is expected to continue
through 1996, boosted in Georgia in particular by the Olympic games to be held
in July and August, tight labor markets, slow labor force growth and modest
productivity growth will likely result in slower output growth. Its cost
advantages and strong net in-migration promise to keep the region's economic
performance comparatively better than the nation's and to bring increased demand
for telecommunications services. However, increasing competition makes BellSouth
Telecommunications' financial performance more susceptible to changes in the
economy than previously, as its operations reflect the more competitive business
environment and the greater demand elasticities for its products and services.
COMPETITION. Developments in the telecommunications marketplace continue to
indicate that a technological convergence is occurring in the telephone, cable
and broadcast television, computer, entertainment and information services
industries. The technologies utilized and being developed in these industries
are able to provide multiple and integrated communications offerings. A number
of large companies, including AT&T Corp. (AT&T) and the other major
interexchange carriers, other Bell Holding Companies and cable and other video
and entertainment companies, have completed
24
<PAGE>
acquisitions and entered into business alliances that will ultimately intensify
and expand competition for local and toll communications and other services
currently provided over BellSouth Telecommunications' networks. Other
competitors have announced plans to build, and in certain locations have begun
construction of, local phone connections and private networks that would permit
business and residential customers to bypass the facilities of local telephone
companies, including those of BellSouth Telecommunications in certain cities in
its service territory.
In conjunction with the approval of state price regulation plans,
competition for local service has been authorized by legislative or regulatory
action in Alabama, Florida, Georgia, North Carolina and Tennessee, and
proceedings to consider local service competition are pending in Kentucky,
Louisiana and Mississippi. In addition, the 1996 Act preempts state legislative
and regulatory barriers to competition for local telephone service, subject only
to competitively neutral requirements to assure quality service consistent with
public safety, convenience and consumer welfare. AT&T, MCI Telecommunications
Corporation (MCI), U S West, Inc. (U S West) and a number of other carriers have
filed applications and have announced their intent to provide local service in
many of the areas in which BellSouth Telecommunications provides service. The
new legislation allows for the Bell Holding Companies, including BellSouth, to
compete for interLATA toll business in states outside their local service
territories prior to the time that such companies can offer interLATA toll
services in states within their local service territories. BellSouth expects
Bell Holding Companies and interexchange carriers, including AT&T and MCI, to
compete for interLATA toll service and local service business. Those competitors
that choose to provide local service predominantly over their own facilities may
bundle local and toll service offerings. Such services could be provided before
BellSouth becomes eligible to provide interLATA service within the states in its
region.
Notwithstanding the risks associated with increased competition, BellSouth
and BellSouth Telecommunications will have opportunities to benefit from entry
into new business markets. For example, the presence of competition will allow
the entry by BellSouth into interLATA wireline businesses under provisions
contained in the new federal telecommunications legislation. BellSouth believes
that in order to remain competitive in the future, it must aggressively pursue a
corporate strategy of expanding its offerings beyond its traditional businesses
and markets. These offerings may include interLATA services, information
services and video and electronic commerce services. As a part of this strategy,
BellSouth is conducting a trial of video dial tone services; acquiring broadband
PCS licenses in certain areas of its wireline territories; and forming business
alliances and partnerships, both domestically and internationally, related to
the provision of interactive and traditional video programming services as well
as wireless and wireline communications services.
As a result of the 1996 Act, BellSouth is freed from many of the laws,
regulations and judicial restrictions (including the Modification of Final
Judgment) that constrained the provision of voice, data and video communications
throughout its wireline service territory and elsewhere. The FCC has commenced
rulemaking proceedings relating to the provision of interLATA service by the
Bell Holding Companies. After necessary federal and state proceedings, BellSouth
may apply to the FCC to offer interLATA wireline services within its nine-state
region, and the FCC must act on such application within 90 days. The FCC must
grant such application if it determines that BellSouth (a) has met a competitive
checklist; (b) has shown (i) the presence of facilities-based competition for
residential and business local service or (ii) in the absence thereof, a
statement of the terms under which it would be willing to interconnect with a
competitive local carrier; (c) will operate consistently with the separate
subsidiary requirement; and (d) will meet the 1996 Act's public interest
requirement in so offering the services on the foregoing conditions.
BellSouth is not required to obtain such FCC approval prior to offering
out-of-region interLATA wireline services. BellSouth plans to offer interLATA
wireline service within its nine-state territory as soon as possible after
completion of FCC and state regulatory proceedings, expected to be concluded in
late 1996 or early 1997; however, no assurance can be provided with respect to
when BellSouth will be authorized to initiate such interLATA wireline service.
BellSouth has no plans to offer out-of-region interLATA wireline services on a
significant scale.
25
<PAGE>
After some modifications to its network and operating systems, wireline
interLATA services can be offered by BellSouth Telecommunications. However, many
of the telecommunications services that BellSouth Telecommunications may provide
may be subject to extensive regulations to be adopted by the FCC and state
regulatory commissions.
The 1996 Act allows, without additional approval, BellSouth to market its
wireless services jointly with its wireline local exchange services; before,
separate marketing was required for cellular services. In addition, such joint
marketing will include interLATA wireline services in the nine-state territory
when authorized. BellSouth expects to begin a joint marketing trial for wireline
local exchange and cellular services later in 1996.
As another part of its competitive strategy, BellSouth Telecommunications
has completed a 1993 restructuring plan to streamline its telephone operations
and to improve its overall cost structure and has undertaken a plan to further
reduce its work force by the end of 1997. BellSouth Telecommunications is
continuing to seek additional ways to better enhance customer service and
productivity and to further improve its cost structure. As a result of these
ongoing efforts, additional changes to fundamental business processes and work
activities are expected.
OTHER MATTERS
CWA CONTRACTS. In October 1995, members of the Communications Workers of
America (CWA) ratified new three-year contracts with BellSouth
Telecommunications. These contracts were effective in August 1995. The contracts
include basic wage increases of 10.9% (compounded) over three years. In
addition, the agreement provided a cash payment of one thousand one hundred
dollars to each eligible employee upon ratification and provides 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.
ACCOUNTING PRONOUNCEMENTS. In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which BellSouth
Telecommunications is required to adopt effective January 1, 1996. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. The adoption of SFAS No. 121 is
not expected to have a material impact on BellSouth Telecommunications'
financial position, annual operating results or cash flows.
AFFILIATED TRANSACTIONS. BellSouth Telecommunications has a contractual
agreement with BellSouth Advertising & Publishing Corporation (BAPCO), an
affiliated company, wherein BAPCO publishes certain telephone directories and in
return pays publication fees to BellSouth Telecommunications for publishing
rights and other services. For the years ended December 31, 1995, 1994 and 1993,
these fees, included in Other Operating Revenue, were $721, $638 and $616,
respectively.
In response to changes in the telecommunications environment and to enhance
competitive flexibility, BellSouth Telecommunications and BAPCO intend to
establish a new contract, based on fees for services rendered between the
companies, to be effective for all or part of the region during the first
quarter of 1996. The new contract is expected to generate fees of about $75 for
BellSouth Telecommunications in 1996, resulting in projected BellSouth
Telecommunications' 1996 revenues of about $625 less than they would have been
under the old contract.
Based on discussions with debt rating agencies, BellSouth Telecommunications
does not believe that this contractual change will affect its credit ratings. In
addition, because BellSouth Telecommunications and BAPCO are wholly-owned
subsidiaries, BellSouth's consolidated financial results will not be affected by
this change.
26
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
These financial statements have been prepared in conformity with generally
accepted accounting principles and have been audited by Coopers & Lybrand
L.L.P., independent accountants, whose report is contained herein.
The integrity and objectivity of the data in these financial statements,
including estimates and judgments relating to matters not concluded by the end
of the year, are the responsibility of the management of BellSouth
Telecommunications. Management has also prepared all other information included
in this Annual Report unless indicated otherwise.
Management maintains a system of internal accounting controls which is
continuously reviewed and evaluated. However, there are inherent limitations
that should be recognized in considering the assurances provided by any system
of internal accounting controls. The concept of reasonable assurance recognizes
that the cost of a system of internal accounting controls should not exceed, in
management's judgment, the benefits to be derived. Management believes that
BellSouth Telecommunications' system does provide reasonable assurance that the
transactions are executed in accordance with management's general or specific
authorizations and are recorded properly to maintain accountability for assets
and to permit the preparation of financial statements in conformity with
generally accepted accounting principles. Management also believes that this
system provides reasonable assurance that access to assets is permitted only in
accordance with management's authorizations, that the recorded accountability
for assets is compared with the existing assets at reasonable intervals and that
appropriate action is taken with respect to any differences. Management also
seeks to assure the objectivity and integrity of its financial data by the
careful selection of its managers, by organizational arrangements that provide
an appropriate division of responsibility and by communications programs aimed
at assuring that its policies, standards and managerial authorities are
understood throughout the organization. Management is also aware that changes in
operating strategy and organizational structure can give rise to disruptions in
internal controls. Special attention is given to controls while the changes are
being implemented.
Management maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. In addition, as part of its audit of these financial
statements, Coopers & Lybrand L.L.P. completed a review of the accounting
controls to establish a basis for reliance thereon in determining the nature,
timing and extent of audit tests to be applied. Management has considered the
internal auditor's and Coopers & Lybrand L.L.P.'s recommendations concerning the
system of internal control and has taken actions that we believe are
cost-effective in the circumstances to respond appropriately to these
recommendations. Management believes that as of December 31, 1995, the system of
internal controls was adequate to accomplish the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical
climate so that BellSouth Telecommunications' affairs are conducted according to
the highest standards of personal and corporate conduct. This responsibility is
communicated to all employees through policies and guidelines addressing such
issues as conflict of interest, safeguarding of BellSouth Telecommunications'
real and intellectual properties, providing equal employment opportunities and
ethical relations with customers, suppliers and governmental representatives.
BellSouth Telecommunications maintains a program to assess compliance with these
policies.
/s/ Jere A. Drummond /s/ Patrick H. Casey
PRESIDENT AND CHIEF EXECUTIVE OFFICER VICE PRESIDENT AND COMPTROLLER
February 5, 1996
27
<PAGE>
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee of the Board of Directors consists of two members who
are neither officers nor employees of BellSouth Telecommunications. The Audit
Committee met four times during 1995 and reviewed with the Chief Corporate
Auditor, Coopers & Lybrand L.L.P., and management current audit activities,
plans and the results of selected internal audits. The Audit Committee also
reviewed the objectivity of the financial reporting process and the adequacy of
internal controls. The Audit Committee recommended the appointment of the
independent accountants and considered factors relating to their independence.
The Chief Corporate Auditor and Coopers & Lybrand L.L.P. each met privately with
the Audit Committee on occasion to encourage confidential discussions as to any
auditing matters.
/s/ Harry M. Lightsey, Jr.
CHAIRMAN, AUDIT COMMITTEE
February 5, 1996
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
BellSouth Telecommunications, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of BellSouth
Telecommunications, Inc. and Subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of income and retained earnings and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BellSouth
Telecommunications, Inc. and Subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note B to the consolidated financial statements, BellSouth
Telecommunications discontinued accounting for its operations in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation," effective June 30, 1995. Also, as discussed in
Notes I and K to the consolidated financial statements, BellSouth
Telecommunications changed its method of accounting for postretirement benefits
other than pensions, postemployment benefits, and income taxes in 1993.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 5, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of BellSouth Telecommunications, Inc. on Form S-3 (File Nos. 33-63661 and
33-00649) of our report dated February 5, 1996, which includes an explanatory
paragraph stating that the Company discontinued accounting for its operation in
accordance with Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation," effective June 30, 1995, and
changed its method of accounting for postretirement benefits other than
pensions, postemployment benefits and income taxes in 1993, on our audits of the
consolidated financial statements of BellSouth Telecommunications, Inc. listed
in Item 14(a) of this Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 27, 1996
29
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Operating Revenues:
Local service................................................................ $ 7,294 $ 6,863 $ 6,577
Interstate access............................................................ 3,275 3,127 2,991
Intrastate access............................................................ 884 908 882
Toll......................................................................... 1,009 1,190 1,220
Other........................................................................ 2,078 1,952 1,910
--------- --------- ---------
Total Operating Revenues................................................... 14,540 14,040 13,580
--------- --------- ---------
Operating Expenses:
Cost of services and products................................................ 5,268 5,235 5,170
Depreciation and amortization................................................ 3,065 2,954 2,903
Selling, general and administrative.......................................... 2,344 2,263 2,382
Work force reduction/restructuring charges (Note J).......................... 1,082 -- 1,136
--------- --------- ---------
Total Operating Expenses................................................... 11,759 10,452 11,591
--------- --------- ---------
Operating Income............................................................... 2,781 3,588 1,989
Interest Expense............................................................... 573 549 563
Other Income, net.............................................................. 27 18 22
--------- --------- ---------
Income Before Income Taxes, Extraordinary Losses
and Cumulative Effect of Change in Accounting Principle....................... 2,235 3,057 1,448
Provision for Income Taxes (Note K)............................................ 818 1,105 461
--------- --------- ---------
Income Before Extraordinary Losses and Cumulative
Effect of Change in Accounting Principle...................................... 1,417 1,952 987
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note B)........................................................... (2,718) -- --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note F)........................................................... (78) -- (87)
Cumulative Effect of Change in Accounting Principle,
net of tax (Note I)........................................................... -- -- (65)
--------- --------- ---------
Net Income (Loss).......................................................... $ (1,379) $ 1,952 $ 835
--------- --------- ---------
--------- --------- ---------
Retained Earnings:
At beginning of year......................................................... $ 3,522 $ 3,180 $ 3,967
Net income (loss)............................................................ (1,379) 1,952 835
Dividends declared........................................................... (1,588) (1,610) (1,612)
Other adjustments............................................................ -- -- (10)
--------- --------- ---------
At end of year............................................................... $ 555 $ 3,522 $ 3,180
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................ $ 1,084 $ 94
Accounts receivable, net of allowance for uncollectibles of $94 and $82.................. 2,941 2,317
Material and supplies.................................................................... 347 375
Other current assets..................................................................... 281 380
--------- ---------
Total Current Assets................................................................... 4,653 3,166
--------- ---------
Investments In and Advances to Affiliates (Note C)......................................... 279 249
Property, Plant and Equipment, net (Note D)................................................ 18,744 23,515
Deferred Charges and Other Assets.......................................................... 257 442
--------- ---------
Total Assets........................................................................... $ 23,933 $ 27,372
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year: (Note F)
Debentures to be redeemed in January 1996.............................................. $ 485 $ --
Other.................................................................................. 1,780 1,218
Accounts payable......................................................................... 1,332 1,122
Other current liabilities (Note E)....................................................... 1,934 2,502
--------- ---------
Total Current Liabilities.............................................................. 5,531 4,842
--------- ---------
Long-Term Debt (Note F).................................................................... 6,853 6,512
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes........................................................ 1,000 2,992
Unamortized investment tax credits....................................................... 355 443
Other liabilities and deferred credits (Note G).......................................... 2,227 1,658
--------- ---------
Total Deferred Credits and Other Liabilities........................................... 3,582 5,093
--------- ---------
Shareholder's Equity:
Common stock, one share, no par value.................................................... 7,412 7,403
Retained earnings........................................................................ 555 3,522
--------- ---------
Total Shareholder's Equity............................................................. 7,967 10,925
--------- ---------
Total Liabilities and Shareholder's Equity........................................... $ 23,933 $ 27,372
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................................................... $ (1,379) $ 1,952 $ 835
Adjustments to net income (loss):
Extraordinary loss for discontinuance of SFAS No. 71...................... 4,449 -- --
Extraordinary loss on early extinguishment of debt........................ 127 -- 145
Payment of call premium................................................... (74) -- (100)
Change in accounting principle............................................ -- -- 108
Work force reduction/restructuring charges................................ 1,082 -- 1,136
Depreciation.............................................................. 3,065 2,950 2,900
Provision for losses on bad debts......................................... 124 111 129
Deferred income taxes and unamortized investment tax credits.............. (1,973) (35) (718)
Change in accounts receivable and other current assets.................... (454) (483) (673)
Change in accounts payable and other current liabilities.................. (632) (400) 142
Change in deferred charges and other assets............................... (33) 78 273
Change in other liabilities and deferred credits.......................... 62 299 148
Other reconciling items, net.............................................. 3 (14) (68)
---------- ---------- ----------
Net cash provided by operating activities............................... 4,367 4,458 4,257
---------- ---------- ----------
Cash Flows from Investing Activities:
Capital expenditures........................................................ (3,123) (2,971) (2,995)
Proceeds from disposals of property, plant and equipment.................... 30 80 87
Purchase of BellSouth Common Stock.......................................... (19) -- (200)
Other investing activities, net............................................. (10) 43 14
---------- ---------- ----------
Net cash used for investing activities.................................. (3,122) (2,848) (3,094)
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings......................................... 14,410 13,100 10,866
Repayments of short-term borrowings......................................... (13,817) (13,003) (10,645)
Proceeds from long-term debt................................................ 2,202 -- 2,911
Repayments of long-term debt................................................ (1,430) -- (2,778)
Advances from parent and affiliates......................................... 613 435 360
Repayments of advances from parent and affiliates........................... (610) (437) (357)
Dividends paid to parent.................................................... (1,594) (1,621) (1,587)
Equity investment of parent................................................. 9 (59) 29
Other financing activities, net............................................. (38) (15) (11)
---------- ---------- ----------
Net cash used for financing activities.................................. (255) (1,600) (1,212)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.......................... 990 10 (49)
Cash and Cash Equivalents at Beginning of Period.............................. 94 84 133
---------- ---------- ----------
Cash and Cash Equivalents at End of Period.................................... $ 1,084 $ 94 $ 84
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
NOTE A -- ACCOUNTING POLICIES
ORGANIZATION. BellSouth Telecommunications, Inc. (BellSouth
Telecommunications) is a wholly-owned subsidiary of BellSouth Corporation
(BellSouth). 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 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 primarily within the nine-state BellSouth
Telecommunications region.
BellSouth Telecommunications' Operating Revenues were primarily from
wireline services. Charges for local, access and toll services for the year
ended December 31, 1995 accounted for approximately 59%, 33% and 8%,
respectively, of those wireline revenues. The remainder of BellSouth
Telecommunications' Operating Revenues were derived principally from directory
publishing fees, sales and maintenance of customer premises equipment and other
nonregulated services.
BASIS OF PRESENTATION AND ACCOUNTING. The consolidated financial statements
include the accounts of BellSouth Telecommunications and subsidiaries in which
it has a controlling financial interest presented in accordance with Generally
Accepted Accounting Principles. Such financial statements include estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the amounts of revenues and
expenses. Actual results could differ from those estimates. Certain amounts in
the prior period consolidated financial statements have been reclassified to
conform to the current year's presentation.
Effective June 30, 1995, BellSouth Telecommunications discontinued
application of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." See Note B for
further discussion of the impacts of discontinuance of SFAS No. 71.
CASH AND CASH EQUIVALENTS. BellSouth Telecommunications considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
MATERIAL AND SUPPLIES. New and reusable material is carried in inventory,
principally at average original cost, except that specific costs are used in the
case of large individual items. Nonreusable material is carried at estimated
salvage value.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is stated at original cost. For plant dedicated to providing regulated
telecommunications services, depreciation is based on the remaining life method
of depreciation and straight-line composite rates determined on the basis of
equal life groups of certain categories of telephone plant acquired in a given
year. When such plant is disposed of, the original cost less net salvage value
is charged to accumulated depreciation. Other depreciable plant is depreciated
using either straight-line or accelerated methods over the estimated useful
lives of the assets. Gains and losses on disposal of other depreciable plant are
recognized in the year of disposition as an element of other nonoperating
income.
REVENUE RECOGNITION. Revenues are recognized when earned. Certain revenues
derived from local telephone services are billed monthly in advance and are
recognized the following month when services are provided. Revenues derived from
other telecommunications services, principally network
33
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
access and toll, are recognized monthly as services are provided. Directory
publishing fees are recognized upon publication of the related directories by an
affiliated company. Allowances for uncollectible billed services are adjusted
monthly. The provision for such uncollectible accounts was $124, $111 and $129
for the years ended December 31, 1995, 1994 and 1993, respectively.
Revenues from services provided to AT&T Corp., BellSouth Telecommunications'
largest customer, were approximately 12%, 13% and 16% of consolidated operating
revenues for 1995, 1994 and 1993, respectively.
MAINTENANCE AND REPAIRS. The cost of maintenance and repairs of plant,
including the cost of replacing minor items not effecting substantial
betterments, is charged to operating expenses.
INCOME TAXES. The balance sheet reflects deferred tax balances associated
with the anticipated tax impact of future income or deductions implicit in the
balance sheet in the form of temporary differences. Temporary differences
primarily result from the use of accelerated methods and shorter lives in
computing depreciation for tax purposes.
For financial reporting purposes, BellSouth Telecommunications is amortizing
deferred investment tax credits earned prior to the 1986 repeal of the
investment tax credit and also some transitional credits earned after the
repeal. The credits are being amortized as a reduction to the provision for
income taxes over the estimated useful lives of the assets to which the credits
relate.
NOTE B -- DISCONTINUANCE OF SFAS NO. 71
As a result of its continuing regulatory and marketplace assessments,
BellSouth Telecommunications concluded during the second quarter 1995 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 recent changes in the regulatory
framework 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 not be generated
under cost-based regulation 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 due to the expected levels of future competition.
Accordingly, in the second quarter, BellSouth Telecommunications discontinued
application of SFAS No. 71 and recorded a noncash extraordinary charge of $2,718
(net of a deferred tax benefit of $1,731). The components of the charge are as
follows:
<TABLE>
<CAPTION>
PRETAX AFTER TAX
--------- ---------
<S> <C> <C>
Reduction in recorded value of long
lived telephone plant.................. $ (4,896) $ (3,002)
Full adoption of issue basis
accounting............................. 317 194
Elimination of regulatory assets and
liabilities............................ 111 71
Partial adjustment to unamortized
investment tax credits................. 19 19
--------- ---------
Total................................. $ (4,449) $ (2,718)
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE B -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
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:
<TABLE>
<S> <C>
Central Office Equipment:
Digital switching................................................ $ 1,305
Circuit-other.................................................... 1,291
---------
Total Central Office Equipment................................. 2,596
---------
Outside Plant:
Buried metallic cable............................................ 1,345
Aerial metallic cable............................................ 630
Underground metallic cable....................................... 325
---------
Total Outside Plant............................................ 2,300
---------
Total.......................................................... $ 4,896
---------
---------
</TABLE>
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, all of
which related to assets within the regulatory framework, 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:
<TABLE>
<CAPTION>
COMPOSITE OF ESTIMATED
REGULATOR-APPROVED ECONOMIC ASSET
CATEGORY ASSET LIVES (IN YEARS) LIVES (IN YEARS)
- -------------------------------------------------------- ----------------------- -----------------
<S> <C> <C>
Digital switching....................................... 17.0 10.0
Circuit-other........................................... 10.5 9.1
Buried metallic cable................................... 20.0 14.0
Aerial metallic cable................................... 20.0 14.0
Underground metallic cable.............................. 25.0 12.0
</TABLE>
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 is now 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
35
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE B -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
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
Communication Commission's (FCC) 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.
NOTE C -- INVESTMENTS IN AND ADVANCES TO AFFILIATES
At December 31, 1995 and 1994, Investments In and Advances to Affiliates
consists primarily of 8,132,474 and 7,532,398 shares of BellSouth common stock,
respectively. During 1995 and 1993, grantor trusts established by BellSouth
Telecommunications purchased for $19 and $200, respectively, such BellSouth
common stock to provide partial funding for the benefits payable under certain
nonqualified benefit plans. Dividend income earned from the BellSouth shares,
included as a component of Other Income, net, was $11, $10 and $8 for 1995, 1994
and 1993, respectively.
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Outside plant.......................................................... $ 20,092 $ 19,292
Central office equipment............................................... 16,132 15,443
Building and building improvements..................................... 2,879 2,785
Furniture and fixtures................................................. 2,408 2,216
Operating and other equipment.......................................... 912 908
Station equipment...................................................... 626 601
Plant under construction............................................... 304 289
Land................................................................... 168 162
--------- ---------
43,521 41,696
Less: Accumulated depreciation......................................... 24,777 18,181
--------- ---------
Total Property, Plant and Equipment, net............................. $ 18,744 $ 23,515
--------- ---------
--------- ---------
</TABLE>
See Note B for a discussion of the discontinuance of SFAS No. 71 and its
effect on Property, Plant and Equipment.
NOTE E -- OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Advanced billing and customer deposits................................... $ 400 $ 416
Compensated absences..................................................... 288 307
Salaries and wages payable............................................... 281 306
Postemployment benefits (see Note J)..................................... 273 --
Interest and rents accrued............................................... 232 250
Taxes accrued............................................................ 203 314
Dividends payable to parent.............................................. 113 154
1993 Restructuring accrual (see Note J).................................. -- 615
Other.................................................................... 144 140
--------- ---------
Total Other Current Liabilities...................................... $ 1,934 $ 2,502
--------- ---------
--------- ---------
</TABLE>
36
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE F -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Debentures to be Redeemed in January 1996............................ $ 485 $ --
----------- -----------
Commercial paper..................................................... 1,775 1,181
Current maturities of long-term debt................................. 5 37
----------- -----------
Total Other Debt Maturing Within One Year 1,780 1,218
----------- -----------
Total Debt Maturing Within One Year.............................. $ 2,265 $ 1,218
----------- -----------
----------- -----------
Weighted average interest rate at end of period:
Commercial paper................................................... 5.83% 5.87%
</TABLE>
BellSouth Telecommunications has committed credit lines aggregating $1,240
with various banks. BellSouth Telecommunications also maintains uncommitted
lines of credit of $75. There were no borrowings under the lines of credit at
December 31, 1995. There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
LONG-TERM: The table below summarizes debt outstanding as of December 31.
Interest rates and maturities are for amounts outstanding at December 31, 1995.
<TABLE>
<CAPTION>
CONTRACTUAL
INTEREST
RATES MATURITIES 1995 1994
------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Debentures: 4 3/8%-6 3/4% 1997-2045 $ 1,915 $ 1,270
6.65%-7% 2095 626 --
7%-8 1/4% 1996-2035 2,535 1,935
8 1/2%-8 3/4% -- -- 1,400
--------- ---------
5,076 4,605
Notes...................................... 5 1/4%-7% 1998-2008 2,175 1,875
Other...................................... 124 129
Unamortized discount, net of premium....... (32) (60)
--------- ---------
7,343 6,549
Current maturities......................... (490) (37)
--------- ---------
Total Long-Term Debt................... $ 6,853 $ 6,512
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt outstanding (principal amounts) at December 31,
1995 are summarized below. Maturities after the year 2000 include $500 principal
amount 6.65% debentures due in 2095. At December 31, 1995, such debentures had
an accreted book value of $126.
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturities................. $490 $ 75 $570 $-- $375 $6,239 $7,749
---- ---- ---- ---- ---- ---------- ------
---- ---- ---- ---- ---- ---------- ------
</TABLE>
During 1995, BellSouth Telecommunications refinanced certain long-term debt
issues at more favorable interest rates. The approximate $1,900 gross proceeds
of debentures issued during the year to accomplish these refinancings are
included in Long-Term Debt. Of the total $1,885 aggregate principal amount of
debentures called for redemption during 1995, $1,400 had actually been redeemed
37
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE F -- DEBT (CONTINUED)
as of December 31, 1995. The remaining $485 of debentures, redeemed in January
1996, are included in the Consolidated Balance Sheet at December 31, 1995 as a
separate component of Debt Maturing Within One Year.
As a result of the early extinguishment of these issues, including the
issues redeemed in January 1996, an extraordinary loss of $78 net of a current
tax benefit of $49, was recognized in 1995. Also, during 1993, an extraordinary
loss of $87, net of a current tax benefit of $59, was recognized due to early
extinguishments of debt during that year.
At December 31, 1995, a shelf registration statement was on file with the
Securities and Exchange Commission under which approximately $100 of long-term
debt securities could be publicly offered.
NOTE G -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits are summarized as follows at December
31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Postretirement benefits other than
pensions (see Notes I and J)............................................ $ 656 $ 81
Postemployment benefits (see Note J)..................................... 485 128
Accrued pension cost (see Notes I and J)................................. 465 567
Compensation related..................................................... 354 307
Sharing accrual under FCC price cap plan................................. 186 141
Regulatory liability related to income taxes (see Note K)................ -- 304
Other.................................................................... 81 130
--------- ---------
Total Other Liabilities and Deferred Credits......................... $ 2,227 $ 1,658
--------- ---------
--------- ---------
</TABLE>
NOTE H -- TRANSACTIONS WITH AFFILIATES
BellSouth Telecommunications has a contractual agreement with BellSouth
Advertising & Publishing Corporation (BAPCO), an affiliated company, wherein
BAPCO publishes certain telephone directories and in return pays publication
fees to BellSouth Telecommunications for publishing rights and other services.
For the years ended December 31, 1995, 1994 and 1993, these fees, included in
Other Operating Revenue, were $721, $638 and $616, respectively.
BellSouth Telecommunications and BAPCO intend to establish a new contract,
based on fees for services rendered between the companies, to be effective for
all or part of the region during the first quarter of 1996. The prices for such
services have not yet been established, but are expected to result in a
substantial reduction in payments to, and a commensurate reduction in revenues
for, BellSouth Telecommunications.
At December 31, 1995 and 1994, amounts receivable from affiliated companies
were $8 and $21, respectively. Amounts payable to affiliated companies at
December 31, 1995 and 1994, both short- and long-term, were $397 and $432,
respectively.
NOTE I -- EMPLOYEE BENEFITS
PENSION PLANS. Substantially all employees of BellSouth Telecommunications
are covered by noncontributory defined benefit pension plans sponsored by
BellSouth. Principal plans are discussed below; other plans are not significant
individually or in the aggregate.
The plan covering nonrepresented employees is a cash balance plan which
provides pension benefits determined by a combination of compensation-based
service and additional credits and
38
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE I -- EMPLOYEE BENEFITS (CONTINUED)
individual account-based interest credits. The cash balance plan is subject to a
minimum benefit determined under a plan in existence for nonrepresented
employees prior to July 1, 1993 which provided benefits based upon credited
service and employees' average compensation for a specified period. The minimum
benefit under the prior plan is applicable to employees retiring through 2005.
Both the 1995 and 1994 projected benefit obligations assume interest and
additional credits greater than the minimum levels specified in the written
plan. Pension benefits provided for represented employees are based on specified
benefit amounts and years of service and include the projected effect of future
bargained-for improvements.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all pension benefits for
which BellSouth is liable. Contributions are actuarially determined using the
aggregate cost method, subject to ERISA and Internal Revenue Service
limitations. Pension plan assets consist primarily of equity securities and
fixed income investments.
Effective January 1, 1994, the nonrepresented cash balance plan was divided
from one into four cash balance plans which allowed for costs to be accounted
for more precisely based upon specific company demographic information. The plan
division had no material impact on BellSouth Telecommunications' 1994 costs.
The components of net pension income for the nonrepresented plan are
summarized below:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Service cost -- benefits earned during the year......................... $ 68 $ 81
Interest cost on projected benefit obligation........................... 328 325
Actual loss (return) on plan assets..................................... (1,255) 58
Net amortization and deferral........................................... 788 (506)
--------- ---------
Net pension income.................................................. $ (71) $ (42)
--------- ---------
--------- ---------
</TABLE>
The following table sets forth the funded status of the plan at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation.............................................. $ 3,927 $ 3,471
--------- ---------
--------- ---------
Accumulated benefit obligation......................................... $ 4,194 $ 3,740
--------- ---------
--------- ---------
Projected benefit obligation........................................... $ 4,622 $ 4,105
Plan assets at fair value................................................ 6,042 5,282
--------- ---------
Plan assets in excess of projected benefit obligation.................... 1,420 1,177
Unrecognized net gain due to past experience different from assumptions
made.................................................................... (1,067) (880)
Unrecognized prior service cost.......................................... (249) (304)
Unrecognized net asset at transition..................................... (43) (49)
--------- ---------
Prepaid (accrued) pension cost......................................... $ 61 $ (56)
--------- ---------
--------- ---------
</TABLE>
Prior to 1994, BellSouth Telecommunications was allocated a portion of the
expenses for both the nonrepresented and represented plans' pension expense.
Pension cost allocated to BellSouth Telecommunications in 1995 and 1994 for the
represented plan was $14 and $64, respectively, and for both nonrepresented and
represented plans in 1993 was $113. Net pension cost (income) is affected by
39
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE I -- EMPLOYEE BENEFITS (CONTINUED)
changes in the discount rate and other actuarial assumptions. The consolidated
net pension income amounts reflected above are exclusive of curtailment effects
reflected in the work force reduction and restructuring activities discussed
below.
SFAS No. 87, "Employers' Accounting for Pensions," requires certain
disclosures to be made with respect to the components of net pension cost for
the period and a reconciliation of the funded status of the plan with amounts
reported in the balance sheets. Such disclosures are not presented in 1995 and
1994 for the represented plan and for years prior to 1994 for both
nonrepresented and represented plans because the structure of the BellSouth
plans does not permit disaggregation of relevant plan information on an
individual company basis.
The significant actuarial assumptions at December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Weighted average discount rate.......... 7.0% 8.25%
Weighted average rate of compensation
increase............................... 5.5% 5.7%
Expected long-term rate of return on
plan assets............................ 8.0% 8.0%
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. Substantially all
nonrepresented and represented employees of BellSouth Telecommunications
participate in BellSouth's postretirement health and life insurance welfare
plans. Effective January 1, 1993, BellSouth adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," to account for
these plans. BellSouth's transition benefit obligation of $1,486 is being
amortized over 15 years, the average remaining service period of active plan
participants at adoption. The accounting for the health care plan does not
anticipate future adjustments to the cost-sharing arrangements provided for in
the written plan for employees retiring after December 31, 1991. As a result of
the adoption of SFAS No. 106, net income for 1993 was reduced by approximately
$16.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all health and life benefits
for which BellSouth is liable. Contributions are actuarially determined using
the aggregate cost method, subject to ERISA and Internal Revenue Service
limitations. Assets in the health and life plans consist primarily of equity
securities and fixed income investments.
Postretirement benefit cost allocated to BellSouth Telecommunications was
$264, $289 and $244 for 1995, 1994 and 1993, respectively. The consolidated net
postretirement benefit cost amounts reflected above are exclusive of curtailment
effects reflected in the work force reduction and restructuring activities
discussed below. SFAS No. 106 requires certain disclosures to be made with
respect to the components of net periodic postretirement benefit cost for the
period and a reconciliation of the funded status of the plan with amounts
reported in the balance sheets. Such disclosures are not presented because the
structure of the BellSouth plan does not permit disaggregation of relevant plan
information on an individual company basis.
40
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE I -- EMPLOYEE BENEFITS (CONTINUED)
The significant actuarial assumptions at December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
Weighted average discount rate.......... 7.0% 8.75%
Weighted average rate of compensation
increase............................... 5.7% 5.7%
Health care cost trend rate (1)......... 9.0% 11.0%
Expected long-term rate of return on
plan assets (2)........................ 8.0% 8.0%
</TABLE>
- ------------------------
(1) Trend rate used to value the accumulated postretirement benefit obligation
in 1995 is assumed to decrease gradually to 5% in 2003; trend rate used in
1994 was assumed to decrease gradually to 5% in 2007
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
trust for 1995 and 1994
The health care cost trend rate assumption affects the amounts reported. A
one-percentage-point increase in the assumed health care cost trend rates for
each future year would increase BellSouth Telecommunications' accumulated
postretirement benefit obligation by $204 at December 31, 1995 and the estimated
aggregate service and interest cost components of the 1995 postretirement
benefit cost by $9.
EFFECT OF 1995 WORK FORCE REDUCTION AND 1993 RESTRUCTURING ON PENSIONS AND
OTHER POSTRETIREMENT BENEFITS. As a part of the work force reduction charge in
1995 (see Note J), BellSouth Telecommunications recorded an estimated liability
of $381 for curtailment losses expected to impact BellSouth Telecommunications'
pension and postretirement health plans from January 1, 1996 through December
31, 1997. Substantially all of such losses relate to postretirement health
plans. The expected benefits from curtailment gains will be recognized as they
occur in 1996 and 1997.
As a part of the restructuring charge in 1993 (see Note J), BellSouth
Telecommunications recorded a liability of $88 for estimated net curtailment
losses expected to impact BellSouth's pension and postretirement health plans;
subsequently, the estimate has been revised for actual results and additional
charges based upon revised projections. Having recognized through 1995 the total
net curtailments originally projected for the restructuring, BellSouth
Telecommunications has reevaluated the original estimate and charged an
additional $55 for net curtailment losses reflected in the income statement on a
line item combined with the 1995 work force reduction charge. The additional net
curtailment charge is a result of a greater number of employees terminating in a
retirement eligible status than originally expected, thus generating additional
losses in retiree health benefits and reduced gains in pensions.
DEFINED CONTRIBUTION PLANS. BellSouth maintains contributory savings plans
which cover substantially all employees of BellSouth Telecommunications.
Employees' eligible contributions are matched with BellSouth common stock based
on defined percentages determined annually by the Board of Directors. BellSouth
Telecommunications recognized compensation expense of $110, $113 and $107 in
1995, 1994 and 1993, respectively, related to these plans.
POSTEMPLOYMENT BENEFITS. Effective January 1, 1993, BellSouth
Telecommunications adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 requires employers to accrue the cost of
postemployment benefits provided to former or inactive employees after
employment but before retirement, including but not limited to workers'
compensation, disability, and continuation of health care benefits. Previously,
BellSouth Telecommunications used the cash
41
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE I -- EMPLOYEE BENEFITS (CONTINUED)
method to account for such costs. A one-time charge of $65, net of a deferred
tax benefit of $41, related to adoption of this statement was recognized as a
change in accounting principle. The effect of the change on BellSouth
Telecommunications' 1993 operating results was not material.
NOTE J -- WORK FORCE REDUCTION/RESTRUCTURING CHARGES
1995 WORK FORCE REDUCTION CHARGE. In the fourth quarter of 1995, BellSouth
Telecommunications recognized a pretax charge of $1,082 related to work force
reductions. The primary component of the charge, $942 for planned work force
reductions in the core wireline business by the end of 1997, consists of $561
under the provisions of SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," related to those employees who are expected to receive severance
benefits under preexisting separation plans, and $381 for curtailment losses
under the provisions of SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Substantially all of the curtailment losses relate to postretirement
benefits other than pensions. The remaining components of the charge are $85 for
expected severance benefit payments after 1997, also under SFAS No. 112, and $55
for additional net curtailment losses related to employee reductions under the
1993 restructuring plan.
1993 RESTRUCTURING CHARGE. The results of operations for the year ended
December 31, 1993 include a $1,136 restructuring charge. The restructuring,
which was completed in 1995, was undertaken to redesign and streamline the
fundamental processes and work activities in the telephone operations to better
respond to an increasingly competitive business environment.
The material components of the charge related to the reduction of the
workforce by 10,200 employees. Through December 31, 1995, employee reductions
related to the restructuring plan were 1,300 in 1993, 3,900 in 1994 and 5,000 in
1995. The components of the charge consisted of provisions of $368 for
separation payments and relocations of remaining employees, $343 for
consolidation and elimination of certain operations facilities and $425 for
enabling changes to information systems, primarily those used to provide
services to existing customers.
NOTE K -- INCOME TAXES
Effective January 1, 1993, BellSouth Telecommunications adopted SFAS No.
109, "Accounting for Income Taxes," which applies a balance sheet approach to
income tax accounting. In accordance with the standard, the balance sheet
reflects the anticipated tax impact of future taxable income or deductions
implicit in the balance sheet in the form of temporary differences. These
temporary differences reflect the difference between the basis in assets and
liabilities as measured in the financial statements and as measured by tax laws
using enacted tax rates. The cumulative effect of the adoption of SFAS No. 109
was not material.
Upon adoption in 1993, BellSouth Telecommunications, for its regulated
operations, reflected only the balance sheet impact of SFAS No. 109.
Specifically, BellSouth Telecommunications recorded a net regulatory liability
of $538 to correspond to the net reduction in deferred tax liabilities; the
reduction resulted from changes in tax rates and from temporary differences
which were previously flowed through. The balance of such net liability at
December 31, 1994, included in Other Liabilities and Deferred Credits, was $304.
In 1995, this net regulatory liability was eliminated in conjunction with the
discontinuance of SFAS No. 71.
BellSouth Telecommunications is included in the consolidated Federal income
tax return filed by BellSouth. Consolidated tax expense is allocated among the
separate members of the group in accordance with the applicable sections of the
Internal Revenue Code.
42
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE K -- INCOME TAXES (CONTINUED)
Generally, under this method each company calculates its current tax expense
as if it filed a separate return. The sum of the separate company liabilities is
compared to the consolidated return liability. The resulting difference, the
benefit of consolidation, is allocated to companies contributing benefits
(operating losses, excess credits and capital losses) in proportion to the
amounts contributed. Deferred taxes are not allocated among the members of the
group.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current...................................................... $ 904 $ 983 $ 973
Deferred, net................................................ (145) 20 (513)
Investment tax credits, net.................................. (69) (72) (88)
--------- --------- ---------
690 931 372
--------- --------- ---------
State:
Current...................................................... 156 157 152
Deferred, net................................................ (28) 17 (63)
--------- --------- ---------
128 174 89
--------- --------- ---------
Total provision for income taxes........................... $ 818 $ 1,105 $ 461
--------- --------- ---------
--------- --------- ---------
</TABLE>
Extraordinary losses in 1995 are presented in the Consolidated Statement of
Income net of tax benefits totaling $1,780, of which $49 is current and $1,731
is deferred. In 1993, the extraordinary loss and accounting change were net of
tax benefits totaling $102 of which $59 was current and $43 was deferred.
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Compensation related.................................................... $ 550 $ 477
Work force reduction/restructuring charges.............................. 370 238
Regulatory sharing accruals............................................. 114 92
Bad debts............................................................... 72 70
Other................................................................... 97 44
--------- ---------
Deferred Tax Assets................................................... 1,203 921
--------- ---------
Depreciation............................................................ (1,949) (3,647)
Issue basis accounting.................................................. (143) --
Other................................................................... (3) (6)
--------- ---------
Deferred Tax Liabilities.............................................. (2,095) (3,653)
--------- ---------
Net Deferred Tax Liability.......................................... $ (892) $ (2,732)
--------- ---------
--------- ---------
</TABLE>
The decrease in the net deferred tax liability is primarily due to the
discontinuance of SFAS No. 71. Of the Net Deferred Tax Liability at December 31,
1995 and 1994, $108 and $260, respectively, was current and $(1,000) and
$(2,992), respectively, was noncurrent.
43
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE K -- INCOME TAXES (CONTINUED)
A reconciliation of the Federal statutory income tax rate to BellSouth
Telecommunications' effective tax rate follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate.............. 35.0% 35.0% 35.0%
State income taxes, net of Federal
income tax benefit..................... 3.7 3.8 4.4
Amortization of investment tax
credits................................ (3.1) (2.4) (6.1)
Miscellaneous items, net................ 1.0 (0.2) (1.4)
--- ----- -----
Effective tax rate.................... 36.6% 36.2% 31.9%
--- ----- -----
--- ----- -----
</TABLE>
NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash Paid For:
Income taxes................................................. $ 1,064 $ 1,259 $ 792
--------- --------- ---------
--------- --------- ---------
Interest..................................................... $ 627 $ 554 $ 616
--------- --------- ---------
--------- --------- ---------
Net assets transferred to BellSouth Telecommunications......... $ -- $ -- $ 26
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE M -- FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is presented in accordance with the provisions of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market information described
below. Since judgment is required to develop the estimates, the estimated
amounts presented herein may not be indicative of the amounts that BellSouth
Telecommunications could realize in a current market exchange.
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
RECORDED ESTIMATED RECORDED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Assets (Liabilities):
Cash and cash equivalents....................... $ 1,084 $ 1,084 $ 94 $ 94
Marketable securities........................... 219 354 200 204
Commercial paper................................ (1,775) (1,775) (1,181) (1,181)
Long-Term Debt:
Debentures.................................... (5,076) (5,079) (4,605) (4,177)
Notes......................................... (2,175) (2,216) (1,875) (1,670)
</TABLE>
CASH AND CASH EQUIVALENTS. At December 31, 1995 and 1994, the recorded
amount for Cash and cash equivalents approximates fair value due to the
short-term nature of these instruments.
MARKETABLE SECURITIES. The fair value of Marketable securities
(representing BellSouth Common Stock), included as a component of Investments in
and Advances to Affiliates, is based on the quoted market prices at December 31,
1995 and 1994, respectively (see Note C).
DEBT. At December 31, 1995 and 1994, the recorded amount for Commercial
paper approximates the fair value due to the short-term nature of the liability.
The estimates of fair value for Debentures and Notes are based on the closing
market prices for each issue at December 31, 1995 and 1994, respectively.
44
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE M -- FINANCIAL INSTRUMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject BellSouth Telecommunications to credit risk consist principally of trade
accounts receivable. Concentrations of credit risk with respect to these
receivables, other than those from interexchange carriers, are limited due to
the composition of the customer base, which includes a large number of
individuals and businesses. At December 31, 1995 and 1994, approximately $520
and $448, respectively, of trade accounts receivable were from interexchange
carriers.
NOTE N -- COMMITMENTS AND CONTINGENCIES
LEASES. BellSouth Telecommunications has entered into operating leases for
facilities and equipment used in operations. Rental expense under operating
leases was $187, $240 and $229 for 1995, 1994 and 1993, respectively. Capital
leases currently in effect are not significant.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 1995:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rentals............ $103 $ 88 $ 64 $ 53 $ 46 $474 $ 828
---- ---- ---- ---- ---- ----- -----
---- ---- ---- ---- ---- ----- -----
</TABLE>
OUTSIDE PLANT. BellSouth Telecommunications currently self insures all of
its outside plant against casualty losses. The net book value of outside plant
was $8,080 and $10,459 at December 31, 1995 and 1994. Such outside plant,
located in the nine Southeastern states served by BellSouth Telecommunications,
is susceptible to damage from severe weather conditions and other perils,
including hurricanes.
LEGAL ACTIONS. BellSouth Telecommunications is subject to claims and
proceedings arising in the ordinary course of business involving allegations of
personal injury, breach of contract, anti-competitive conduct, employment law
issues and other matters. BellSouth Telecommunications is also subject to claims
and proceedings attributable to pre-divestiture events involving environmental
liabilities, rates, taxes, contracts and torts. Certain contingent liabilities
for pre-divestiture events are shared by AT&T Corp. and the operating telephone
companies. While complete assurance cannot be given as to the outcome of any
pending or threatened legal actions, BellSouth Telecommunications believes that
any financial impact is not expected to be material to its financial position,
annual operating results or cash flows.
45
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE O -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the following summary of quarterly financial information, all adjustments
necessary for a fair presentation of each period were included. The results for
fourth quarter 1995 include a work force reduction charge of $1,082, which
reduced net income by $663.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1995
Operating Revenues...................................................... $ 3,561 $ 3,595 $ 3,605 $ 3,779
Operating Income (Loss)................................................. $ 991 $ 980 $ 917 $ (107)
Income (Loss) Before Extraordinary Losses............................... $ 533 $ 519 $ 487 $ (122)
Extraordinary Loss for Discontinuance of SFAS No.71,
net of tax............................................................. -- (2,718) -- --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax............................................................. -- (16) -- (62)
--------- --------- --------- ---------
Net Income (Loss)....................................................... $ 533 $ (2,215) $ 487 $ (184)
--------- --------- --------- ---------
--------- --------- --------- ---------
1994
Operating Revenues...................................................... $ 3,526 $ 3,442 $ 3,510 $ 3,562
Operating Income........................................................ $ 919 $ 880 $ 852 $ 937
Net Income.............................................................. $ 496 $ 475 $ 461 $ 520
</TABLE>
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change in accountants or disagreements on the adoption of appropriate
accounting standards or financial disclosure have occurred during the periods
included in this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Documents filed as a part of the report:
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C> <C>
(1) Financial Statements:
Report of Independent Accountants/Consent of Independent
Accountants.................................................... 29
Consolidated Statements of Income and Retained Earnings......... 30
Consolidated Balance Sheets..................................... 31
Consolidated Statements of Cash Flows........................... 32
Notes to Consolidated Financial Statements...................... 33
</TABLE>
(2) Financial statement schedules have been omitted because the required
information is contained in the financial statements and notes
thereto or because such schedules are not required or applicable.
(3) Exhibits: Exhibits identified in parentheses below, on file with the
SEC, are incorporated herein by reference as exhibits hereto.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C>
3a Restated Articles of Incorporation of BellSouth Telecommunications, Inc. (Exhibit 3a to Form 10-K for
the year ended December 31, 1991, File No. 1-1049).
3b Bylaws of BellSouth Telecommunications, Inc. as amended, effective November 22, 1993. (Exhibit 3b to
Form 10-K for the year ended December 31, 1993, File No. 1-1049).
4 No instrument which defines the rights of holders of long and intermediate term debt of BellSouth
Telecommunications 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.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
b. Reports on Form 8-K:
None.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section13 or 15(d) 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.
/s/ PATRICK H. CASEY
--------------------------------------
Patrick H. Casey
VICE PRESIDENT AND COMPTROLLER
February 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
Jere A. Drummond*
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
Patrick H. Casey*
Vice President and Comptroller
DIRECTORS:
Irving W. Bailey II*
Robert H. Boh*
Edward E. Crutchfield*
Frank R. Day*
Jere A. Drummond*
Lloyd C. Elam*
John W. Harris*
Mark C. Hollis*
Harry M. Lightsey, Jr.*
Thomas H. Meeker*
Joe M. Rodgers*
*By: /s/ PATRICK H. CASEY
----------------------------------
Patrick H. Casey
(INDIVIDUALLY AND AS
ATTORNEY-IN-FACT)
February 27, 1996
48
<PAGE>
EXHIBIT 12
BELLSOUTH TELECOMMUNICATIONS
COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1. Earnings
(a) Income from continuing operations before
deductions for taxes and interest $2,808 $3,606 $2,034 $3,014 $2,722
(b) Portion of rental expense representative of
interest factor 62 80 80 87 75
------ ------ ------ ------ ------
TOTAL $2,870 $3,686 $2,114 $3,101 $2,797
------ ------ ------ ------ ------
------ ------ ------ ------ ------
2. Fixed Charges
(a) Interest $594 $569 $586 $598 $650
(b) Portion of rental expense representative of
interest factor 62 80 80 87 75
------ ------ ------ ------ ------
TOTAL $656 $649 $666 $685 $725
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio (1 divided by 2) 4.38 5.68 3.17 4.53 3.86
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, each of the undersigned is an officer or both an officer and
a director of the Company as indicated below under his name;
NOW THEREFORE, the undersigned, and each of them, hereby
constitutes and appoints JERE A. DRUMMOND, PATRICK H. CASEY and JERRY W.
ROBINSON, and each of them, as attorneys for him and in his name, place and
stead, and in each of his respective capacities with the Company, to execute
and file such annual report, and thereafter to execute and file any amendment
or amendments thereto, hereby giving and granting to said attorneys full
power and authority to do and perform all and every act and thing whatsoever
requisite and necessary to be done in and about the premises as fully, to all
intents and purposes, as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand this
26th day of February, 1996.
/s/Jere A. Drummond /s/Patrick H. Casey
- ------------------- -------------------
Jere A. Drummond Patrick H. Casey
President and Chief Executive Vice President and Comptroller
Officer; Director
<PAGE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Irving W. Bailey, II
-----------------------
Irving W. Bailey II
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Robert H. Boh
----------------
Robert H. Boh
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Edward E. Crutchfield
------------------------
Edward E. Crutchfield
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/ Frank R. Day
----------------
Frank R. Day
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Lloyd C. Elam
----------------
Lloyd C. Elam
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/ John W. Harris
------------------
John W. Harris
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Mark C. Hollis
-----------------
Mark C. Hollis
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Harry M. Lightsey, Jr.
-------------------------
Harry M. Lightsey, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Thomas H. Meeker
-------------------
Thomas H. Meeker
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia corporation
(hereinafter referred to as the "Company"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints JERE A.
DRUMMOND, PATRICK H. CASEY, and JERRY W. ROBINSON, and each of them, as
attorneys for him and in his name, place and stead as a director of the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day
of February, 1996.
/s/Joe M. Rodgers
-----------------
Joe M. Rodgers
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,084
<SECURITIES> 219
<RECEIVABLES> 3,035
<ALLOWANCES> 94
<INVENTORY> 347
<CURRENT-ASSETS> 4,654
<PP&E> 43,520
<DEPRECIATION> 24,777
<TOTAL-ASSETS> 23,933
<CURRENT-LIABILITIES> 5,531
<BONDS> 6,853
0,345
0
<COMMON> 7,345
<OTHER-SE> 622
<TOTAL-LIABILITY-AND-EQUITY> 23,933
<SALES> 198
<TOTAL-REVENUES> 14,540
<CGS> 256
<TOTAL-COSTS> 8,333
<OTHER-EXPENSES> 3,426
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 573
<INCOME-PRETAX> 2,235
<INCOME-TAX> 818
<INCOME-CONTINUING> 1,417
<DISCONTINUED> 0
<EXTRAORDINARY> (2,796)
<CHANGES> 0
<NET-INCOME> (1,379)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
