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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1997
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
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BELLSOUTH TELECOMMUNICATIONS, INC.
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<S> <C>
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
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Securities registered pursuant to Section 12(g) of the Act:
None.
At February 2, 1998 one share of Common Stock was outstanding.
------------------------
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION I(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
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<C> <S>
Title of each class
DEBENTURES ISSUED BY:
Southern Bell Telephone and Telegraph Company
$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
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>
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
Safe Harbor Statement........................................................... 1
1. Business........................................................................ 1
General......................................................................... 1
Business Operations............................................................. 2
Telephone Company Operations.................................................... 2
Competition..................................................................... 10
Research and Development........................................................ 13
Licenses and Franchises......................................................... 13
Employees....................................................................... 13
2. Properties...................................................................... 14
General......................................................................... 14
Capital Expenditures............................................................ 15
Environmental Matters........................................................... 15
3. Legal Proceedings............................................................... 15
4. Submission of Matters to a Vote of Shareholders (Omitted pursuant to General
Instruction I(2))
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters
(Inapplicable)
6. Selected Financial and Operating Data........................................... 16
7. Management's Discussion and Analysis of Results of Operations (Abbreviated
pursuant to General Instruction I(2))........................................... 17
Results of Operations........................................................... 17
Volumes of Business............................................................. 18
Operating Revenues.............................................................. 19
Operating Expenses.............................................................. 20
Other Income Statement Items.................................................... 21
Extraordinary Losses............................................................ 21
Financing Activity.............................................................. 22
Operating Environment and Trends of the Business................................ 22
Year 2000 Compliance............................................................ 26
New Accounting Pronouncements................................................... 26
Other Matters................................................................... 26
Safe Harbor Statement........................................................... 27
8. Consolidated Financial Statements and Supplementary Data........................ 28
Report of Management............................................................ 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 I(2))
11. Executive Compensation (Omitted pursuant to General Instruction I(2))
12. Security Ownership of Certain Beneficial Owners and Management (Omitted pursuant
to General Instruction I(2))
13. Certain Relationships and Related Transactions (Omitted pursuant to General
Instruction I(2))
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 47
Signatures............................................................................. 48
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PART I
SAFE HARBOR STATEMENT
CERTAIN OF THE INFORMATION CONTAINED IN THIS AND OTHER REPORTS ADDRESSES
KNOWN TRENDS AND UNCERTAINTIES AFFECTING BELLSOUTH TELECOMMUNICATIONS, INC.'S
BUSINESS AND PROSPECTS AND MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. BELLSOUTH
TELECOMMUNICATIONS, INC.'S EXPECTATIONS CONTAINED IN OR UNDERLYING SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON A NUMBER OF ASSUMPTIONS, INCLUDING BUT
NOT LIMITED TO: (1) ECONOMIC GROWTH AND DEMAND FOR WIRELINE COMMUNICATIONS
SERVICES CONTINUES IN BELLSOUTH TELECOMMUNICATIONS, INC.'S SERVICE TERRITORY;
(2) THE FINAL RESOLUTION OF THE ACCESS REFORM AND UNIVERSAL SERVICE ORDERS OF
THE FCC (AND THE RESULTANT CUSTOMER IMPACTS) IS REASONABLY EARNINGS-NEUTRAL; (3)
LOCAL WIRELINE SERVICE COMPETITION DOES NOT HAVE SIGNIFICANTLY INCREASING
ADVERSE IMPACTS ON EARNINGS; (4) THE CONTINUING COSTS TO IMPLEMENT NETWORK
CHANGES AND OPERATING SYSTEMS NECESSARY TO SATISFY REGULATORY CONDITIONS FOR
BELLSOUTH CORPORATION'S PROVISION OF INTERLATA SERVICE ARE NOT MATERIALLY
GREATER THAN CURRENTLY PROJECTED; AND (5) BELLSOUTH TELECOMMUNICATIONS, INC.'S
EXPECTATIONS AS TO THE COST AND SUCCESS OF ITS EFFORTS FOR YEAR 2000 COMPLIANCE,
INCLUDING THE SUCCESS OF ITS KEY SUPPLIERS AND CUSTOMERS, ARE REASONABLY
ACCURATE. ANY DEVELOPMENTS SIGNIFICANTLY DEVIATING FROM THESE ASSUMPTIONS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE FORECAST OR IMPLIED IN THE
AFOREMENTIONED FORWARD-LOOKING STATEMENTS.
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. BellSouth Telecommunications has
its principal executive offices at 675 West Peachtree Street, N.E., Atlanta,
Georgia 30375 (telephone number 404-529-8611).
BellSouth was incorporated in 1983 under the laws of the State of Georgia.
On December 31, 1983, pursuant to a consent decree approved by the United States
District Court for the District of Columbia 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),
formed several holding companies including BellSouth (the Holding Companies),
and transferred to them one or more of the operating telephone companies (the
Operating Telephone Companies) that were formerly part of the Bell System. As a
result, 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 January 1, 1984, ownership of the Holding Companies
was transferred by AT&T to its shareholders. As a result, 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, December 31, 1991.
Under the MFJ, the Operating Telephone Companies could provide local
exchange, exchange access, information access and toll telecommunications
services within their assigned geographical territories, termed "Local Access
and Transport Areas" (LATAs). Although prohibited from providing wireline
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), that provided toll telecommunications services between different
LATAs.
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The Telecommunications Act of 1996 (the 1996 Act) supersedes the MFJ,
providing for the development of competition in local telecommunications
markets; the conditions under which the Operating Telephone Companies can
provide interLATA wireline telecommunications and other services; and the
provision by the Operating Telephone Companies of 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 and rigorous criteria and the development of and compliance
with newly mandated regulations of the Federal Communications Commission (FCC).
To date, the FCC has rejected all applications to provide interLATA wireline
service. (See "Telephone Company Operations -- InterLATA Toll Service.")
BUSINESS OPERATIONS
Approximately 89%, 90% and 86% of BellSouth Telecommunications' total
operating revenues for the years ended December 31, 1997, 1996 and 1995,
respectively, were from wireline telecommunications services and the remainder
was derived principally from sales and maintenance of customer premises
equipment and other nonregulated services and, for 1995, directory publishing
fees.
Certain telecommunications services and products are provided to business
customers by BellSouth Business Systems, Inc. and BellSouth Communication
Systems, Inc., wholly-owned subsidiaries of BellSouth Telecommunications. These
companies provide sales, marketing, product management and customer service for
BellSouth Telecommunications' large business customers and sell, install and
maintain communications equipment.
Revenues from services (predominantly exchange access services) provided to
AT&T, BellSouth Telecommunications' largest customer, comprised approximately
10%, 11% and 12% of 1997, 1996 and 1995 total 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
nine-state wireline service territory. BellSouth Telecommunications provided
approximately 23,201,000 customer access lines at December 31, 1997, an overall
increase of 4.8% since December 31, 1996. The increase was primarily
attributable to continued economic growth in BellSouth Telecommunications'
nine-state service region. Growth in additional residential lines ordered by
existing customers accounted for approximately 30.8% of the overall increase in
total access lines since December 31, 1996 (See "MD&A -- Results of Operations
- -- Volumes of Business.")
At December 31, 1997, approximately 81% of BellSouth Telecommunications'
access lines were in 44 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 primarily by non-affiliated telephone
companies. BellSouth Telecommunications does not furnish, on a significant
scale, local exchange, exchange access or toll services in the areas served by
such companies. BellSouth Telecommunications is increasingly facing competition
for local and intraLATA customers within its wireline service territory. (See
"Competition -- Network and Related Services.")
LOCAL AND INTRALATA TOLL SERVICES
Charges for local service for each of the years ended December 31, 1997,
1996 and 1995 accounted for approximately 55%, 55% and 50%, respectively, of
BellSouth Telecommunications' total operating revenues. Local service 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 switched network;
dedicated private line facilities for voice and special services, such as
transport of data, radio and video; switching services for
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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 service revenue is derived from
intercept and directory assistance, public telephones and various optional
central office features, such as Caller ID, Call Waiting, Call Return and 3-Way
Calling services. As other authorized telecommunications carriers compete in the
provision of local service, BellSouth Telecommunications will increasingly sell
to such carriers unbundled network elements and discounted local service for
resale.
BellSouth Telecommunications offers certain enhanced services, such as
MemoryCall-SM- voice messaging service, through its network. These services
differ from basic services 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 many of these service
offerings are not regulated under the rules of the 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). Total revenue from enhanced and other optional services
was approximately $1.31 billion, $1.06 billion and $794 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
BellSouth Telecommunications provides intraLATA toll services within (but
not between) its 38 LATAs. Such toll services provided approximately 5%, 5% and
7% of BellSouth Telecommunications' total operating revenues for the years ended
December 31, 1997, 1996 and 1995, 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. In recent years, these toll revenues have decreased as competition for
toll customers has intensified and as local area calling plans have been
expanded. Toll revenues are expected to continue to be negatively impacted by
competition.
REGULATION OF LOCAL AND TOLL SERVICES
BellSouth Telecommunications is subject to regulation of its intrastate
services by a state authority in each state where it provides intrastate
telecommunications services; such regulation covers rates, services, competition
and other issues.
RATE REGULATION
Traditionally, BellSouth Telecommunications' rates were set in each state in
its wireline service territory at levels that 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, generally known as rate of return regulation, was acceptable in a
less competitive era; however, as discussed below, the regulatory processes have
changed in response to the increasingly competitive telecommunications
environment.
Under the first generation of alternative regulation, generally known as
incentive regulation, economic incentives were 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
were reached, earnings were "shared" by providing refunds or price reductions to
customers.
Under the next generation of alternative regulation, generally known as
price regulation, the state authorities establish maximum prices that can be
charged for certain telecommunications services. While such plans limit the
amount of increases in prices for specified services, they enhance BellSouth
Telecommunications' ability to adjust prices and service options to respond more
effectively to changing market conditions and competition and provide an
opportunity to benefit more fully from productivity enhancements. For these
reasons, BellSouth Telecommunications has focused its regulatory and legislative
efforts on establishing price regulation, and such plans are now operational
throughout BellSouth Telecommunications' wireline service territory, except in
Tennessee where a court order to implement
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price regulation has been appealed. While some state price regulation plans are
not subject to either review or renewal, other state plans contain specified
termination dates and/or review periods. No assurance can be given that plans
subject to review or renewal will retain prices or other terms currently
applicable.
The following section contains a brief description of certain regulatory
proceedings in BellSouth Telecommunications' nine-state wireline service
territory.
ALABAMA
BellSouth Telecommunications' rates were subject to an incentive regulation
plan from 1988 to September 1995 and to a price regulation plan thereafter.
Under the price regulation plan, prices for basic services, including local
exchange services for residence and business customers, are capped until 2000,
after which prices may be changed in accordance with an inflation-based formula.
Aggregate price increases for non-basic services are limited to 10% annually.
Intrastate switched access rates must be reduced below interstate switched
access rates. Reductions related to intrastate switched access are estimated to
be $25 million through 1999. Additional terms of the price regulation plan
require annual price reductions aggregating $57 million through 1999, excluding
intrastate switched access reductions.
FLORIDA
From 1988 through 1992, an incentive regulation plan was in effect in
Florida. In 1994, the Florida Public Service Commission extended the plan
retroactively from 1993 to 1997, with required price reductions aggregating
approximately $300 million over a three-year period. Effective January 1996,
BellSouth Telecommunications elected to be regulated under price regulation;
however, it was still required to comply with the sharing provisions of the
previous incentive plan through 1997.
Under the price regulation plan, prices for basic services, which include
flat-rate residential and single-line business local exchange services, are
capped until 2001, after which prices may be changed in accordance with an
inflation-based formula. Prices for certain non-basic services, including
multi-line business service, are capped until 1999 at the rates in effect in
July 1995. Prices for other non-basic services may be adjusted annually subject
to defined limitations.
GEORGIA
From 1990 to August 1995, BellSouth Telecommunications operated under an
incentive regulation plan in Georgia. Thereafter, it has operated under a price
regulation plan. Under the price regulation plan, basic residence and
single-line business rates are capped until 2000, after which prices may be
changed in accordance with an inflation-based formula. Rates for intrastate
switched access services may be no higher than the rates charged for interstate
switched access services.
KENTUCKY
From 1988 to July 1995, an incentive regulation plan was in effect in
Kentucky. BellSouth Telecommunications' rates are now regulated under a price
regulation plan. Under the price regulation plan, basic residential rates are
capped until 1998, after which prices may be changed in accordance with an
inflation-based formula. Intrastate switched access rates are limited to rates
in effect for interstate switched access. Prices for services deemed competitive
under the plan can be set by BellSouth Telecommunications in response to market
conditions.
LOUISIANA
From February 1992 to April 1996, an incentive regulation plan was in effect
in Louisiana. Effective April 1996, the Louisiana Public Service Commission
approved a price regulation plan that will remain in effect for a six-year term.
Under the provisions of the price regulation plan, prices for basic services,
which include the provision of local exchange service, are capped until 2001,
after which prices may be changed in accordance with an inflation-based formula.
After 2001, no individual basic service price can
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be increased by more than 10% in any twelve-month period. Prices for
interconnection services are capped until 1999, after which no individual
service can be increased more than 10% in any twelve-month period. For non-basic
services, price increases may not exceed 20% in any twelve-month period.
Concurrently with the approval of price regulation, the Louisiana Commission
concluded its review of BellSouth Telecommunications' earnings by requiring an
aggregate $70 million price reduction, to be apportioned over a three-year
period beginning April 1, 1996.
MISSISSIPPI
From June 1990 through December 1995, an incentive regulation plan was in
effect in Mississippi. Effective January 1996, the Mississippi Public Service
Commission approved a six-year price regulation plan. Under the provisions of
the plan, prices for basic services, which include the provision of basic local
telephone service, are capped until 1999, after which the basic service category
rates will be revised annually to effect an annual reduction in revenues of 1%
or $3.75 million, whichever is greater, for the last three years of the plan. In
addition, intrastate switched access rates are capped at the same level as
interstate switched access rates over the life of the plan.
NORTH CAROLINA
Prior to June 1996, traditional rate of return regulation was in effect in
North Carolina. Since then, BellSouth Telecommunications has been subject to a
price regulation plan under which prices for residence basic local exchange
service are capped until 1999, after which time any price increases are limited
by an inflation-based formula. For business basic local exchange,
interconnection and certain non-basic services, any increases in current prices
are also subject to inflation-based formulas. Prices for toll switched access
services were capped at the June 1996 prices, after giving effect to specified
price reductions ordered in conjunction with approval of the price regulation
plan.
SOUTH CAROLINA
Prior to 1996, BellSouth Telecommunications' rates were regulated on a
traditional rate of return basis. In January 1996, the South Carolina Public
Service Commission approved a price regulation plan which includes provisions
that basic local exchange residence and business service flat rates will not
increase until 2001, after which prices may be changed in accordance with an
inflation-based formula. Intrastate switched access rates will be capped until
1999, after which prices may be changed in accordance with an inflation-based
formula. The rates for non-basic services will be set by BellSouth
Telecommunications, subject only to the limitation that the price for any
individual service may not be increased more than 20% in a twelve-month period.
In April 1997, BellSouth Telecommunications, the South Carolina Public
Service Commission and other parties agreed on a settlement to claims of alleged
overearnings for the years 1992 through 1994. Under the terms of the settlement,
BellSouth Telecommunications paid $72 million to its customers in 1997.
TENNESSEE
An incentive regulation plan, which had been in effect since August 1990,
ended in 1995. In June 1995, a law was enacted in Tennessee that allowed
qualified service providers to elect price regulation. BellSouth
Telecommunications elected price regulation under which the prices for basic
services and Call Waiting services are to be capped for four years, after which
prices may be changed in accordance with an inflation-based formula. Prices for
services other than basic services are to be adjusted based on an
inflation-based formula.
In order to implement the price regulation election, the Tennessee Public
Service Commission required BellSouth Telecommunications to reduce prices by
approximately $56 million on an annual basis. BellSouth Telecommunications
appealed to the Tennessee Court of Appeals. The court stayed implementation of
both the rate reduction and price regulation plan pending further consideration
of the issues. In October 1997, the court vacated the order requiring the rate
reduction and remanded the case to the Tennessee Regulatory Authority (successor
to the Tennessee Public Service Commission) with instructions to approve the
price regulation plan. In January 1998, the Tennessee Regulatory Authority and
the Consumer Advocate filed an application for permission to appeal to the
Tennessee Supreme Court.
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A bill has been introduced in the Tennessee legislature that would impose
significant new restrictions on companies electing price regulation.
Specifically, the bill would require BellSouth Telecommunications to agree to
make substantial refunds to customers and to have its initial rates for price
regulation purposes established by means of a traditional rate of return
earnings investigation. It is too early to assess the degree of support that
this proposal might receive in the legislature.
REGULATION OF LOCAL SERVICE COMPETITION
The 1996 Act requires the elimination of state legislative and regulatory
barriers to competition for local telephone service, subject only to
competitively neutral requirements to preserve and advance universal service,
protect the public safety and welfare, maintain the quality of
telecommunications services and safeguard the rights of customers. The 1996 Act
also includes requirements that incumbent local exchange carriers (ILECs), such
as BellSouth Telecommunications, negotiate with other carriers for
interconnection, use of network elements on an unbundled basis and resale of
local services. If a negotiated agreement cannot be reached, either party may
seek arbitration with the state regulatory authority, or the FCC if the state
fails to act. If rates are disputed, the arbitrator must set rates for access to
network elements on an unbundled basis, based on cost, which may include a
reasonable profit. ILECs are also required to negotiate to provide their retail
services at wholesale rates for the purpose of resale by competing carriers. If
agreement cannot be reached, the arbitrator shall set the wholesale rates at the
ILEC's retail rates less costs to be avoided. BellSouth Telecommunications has
executed over 300 interconnection or resale agreements with such carriers.
In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry. Among the issues specifically addressed
by the order were the network elements that ILECs must make available; pricing
standards to be followed by states in setting rates for interconnection; access
to network elements on an unbundled basis; and resold services. BellSouth
Telecommunications, several other ILECs and several state regulatory bodies
appealed the Order to the United States Court of Appeals for the Eighth Circuit,
and in July 1997, the court ruled that state commissions, not the FCC, have
exclusive jurisdiction to set prices for local service interconnection,
unbundled network elements and local service resale. In addition, the court
vacated other aspects of the order including the FCC's "pick and choose" rule,
which allowed competing local carriers to select terms from different
interconnection agreements in negotiating their own interconnection agreements.
The court also rejected the FCC's requirement that ILECs submit pre-1996
interconnection agreements to the state commissions for approval and the
presumption that any network element that can be technically unbundled must be
unbundled. Finally, the court rejected the FCC's requirement that ILECs
physically recombine unbundled network elements for competing local carriers and
only required that such elements be made available for rebundling.
Certain aspects of the order were upheld by the court, including the ability
of the competing local carriers to recombine network elements to produce
complete telecommunications services without providing any of their own
facilities. The court also affirmed the FCC's classification of operations
support systems, operator services, directory assistance and vertical switching
features as unbundled network elements. In addition, the court also upheld the
FCC's definition of "technically feasible" interconnection to exclude all
economic considerations. Finally, the court declined to rule on whether or not
the Total Element Long Run Incremental Cost (TELRIC) pricing methodology was
inconsistent with the 1996 Act, leaving the state commissions to make that
decision. On reconsideration, the court further clarified that the 1996 Act does
not require ILECs to provide recombined unbundled network elements. The United
States Supreme Court has agreed to review the court's decision, and a ruling is
expected by mid-1999. In a subsequent order, the Eighth Circuit held that the
FCC may not impose its pricing standards as a condition to granting permission
for the Operating Telephone Companies to provide interLATA communications.
Notwithstanding these developments, however, BellSouth Telecommunications
and a number of carriers have negotiated interconnection agreements, and state
regulatory commissions have arbitrated and approved various terms of
interconnection between BellSouth Telecommunications and other carriers. Some
changes may be made to these agreements when the judicial appeals are concluded.
The arbitration results for the wholesale discount rates vary by state from
approximately 14.8% to 21.8% for both business and residential service.
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In attempting to comply with the technical requirements of interconnection,
BellSouth Telecommunications is incurring, and expects to continue to incur,
significant costs associated with the facilitation of interconnection. BellSouth
Telecommunications incurred approximately $400 million of costs associated with
these efforts in the year ended December 31, 1997. Of this amount, approximately
$230 million was expensed as incurred, and the remainder was capitalized. It
remains unclear to what degree, if any, BellSouth Telecommunications will be
compensated for these costs.
REGULATION OF ACCESS SERVICES
BellSouth Telecommunications provides access services by connecting the
equipment and facilities of its subscribers with the communications networks of
Interexchange Carriers. 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. The FCC regulates rates and other aspects of interstate
access services. State regulatory commissions have jurisdiction over the
provision of access to the Interexchange Carriers to complete intrastate
telecommunications.
Interstate and intrastate access charges, which are payable both by
Interexchange Carriers and subscribers, provided approximately 29%, 30% and 29%
of BellSouth Telecommunications' total operating revenues for the years ended
December 31, 1997, 1996 and 1995, 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 and to subsidize the cost of providing local service to rural and
other high-cost areas. The FCC regulates interstate access charges through its
price cap and access charge rules. The state commissions have authorized
BellSouth Telecommunications to collect from the Interexchange Carriers and, in
several states, from customers, fees for providing intrastate access services.
In connection with the approval of price regulation plans, many states have
required BellSouth Telecommunications to reduce intrastate access rates to bring
them to parity with interstate access rates.
Historically, access charges have been set at levels that subsidize the cost
of providing local residential service. The 1996 Act requires that the FCC
identify the local service subsidy implicitly provided by access charges; to
provide for the removal of such subsidy from access rates in order that access
charges reflect underlying costs; to arrange for a universal service fund to
ensure the continuation of universal service; and to develop the arrangements
for payments into that fund by all carriers.
The FCC's price cap plan limits aggregate price changes to the rate of
inflation minus a productivity offset, plus or minus exogenous cost changes
recognized by the FCC. BellSouth Telecommunications had been pricing its
services based on a 5.3% productivity factor, which meant that price increases
would only occur to the extent that the Gross Domestic Product Price Index of
the United States (the Index) increased by greater than 5.3% over an annual
period. If the Index increased by less than 5.3%, price reductions would occur.
In May 1997, the FCC adopted orders regarding revisions to the price cap plan,
access charge reform and the establishment of a universal service fund. The
orders on the price cap plan and access charge reform resulted in access rate
reductions related to per-minute-of-use charges and increases to per-line
charges. The net access charge reductions resulted primarily from an
FCC-mandated increase in the price cap productivity factor from 5.3% to 6.5%.
The new rates went into effect beginning July 1, 1997 and were computed as if
the 6.5% productivity factor had been in effect since July 1, 1996.
In addition, the access charge reform order resulted in several changes to
the existing interstate access rate structure designed to move access charges,
over time, to more economically efficient levels and to create more efficient
rate structures. Non-traffic-sensitive costs, that were previously recovered on
a per-minute-of-use basis, were changed to be recovered on a flat-rate, per-line
basis. As part of this plan, subscriber line charges (SLCs) were increased and a
new presubscribed interexchange carrier charge (PICC) was established. As SLC
and PICC charges are increased over time, usage charges are reduced. SLCs for
primary residential and single-line business access lines remained unchanged at
$3.50 per line, per month. SLCs for non-primary (or "additional") residential
access lines increased from $3.50 to $5.00 per line, per month, and SLCs for
multi-line business customers increased from $6.97 to $8.17 per line, per month
beginning in January 1998. PICCs were established on January 1, 1998 and are
charged to Interexchange Carriers for recovery of non-traffic-sensitive costs
not recovered through
7
<PAGE>
SLCs. These charges were established for primary residential and single-line
business access lines, non-primary residential access lines and multi-line
business access lines and were initially set at $.53, $1.50 and $2.75,
respectively, per line, per month, beginning January 1998. BellSouth
Telecommunications believes that the net effect of these changes will be
substantially revenue-neutral.
The universal service order established new funding mechanisms for
high-cost, low-income service areas. BellSouth Telecommunications began
contributing to the new funds on January 1, 1998 and is allowed recovery of its
contributions through increased interstate access charges. Major changes to the
support mechanism to subsidize the provision of services to high-cost areas will
occur January 1, 1999. The new support mechanism, when implemented in 1999, will
be based on forward-looking economic costs; however, a cost model has yet to be
adopted. A new proceeding was initiated in June 1997 to select a cost model with
final FCC action expected in 1998.
The order also established significant discounts to be provided to eligible
schools and libraries for all telecommunications services, internal connections
and Internet access. It also established support for rural health care providers
so that they may pay rates comparable to those that urban health care providers
pay for similar services. Industry-wide annual costs of the program are to be
capped at approximately $2.7 billion and are to be funded out of the universal
service fund. Local and Interexchange Carriers' contributions to the education
and health care funds would be assessed by the fund administrator on the basis
of their interstate and intrastate end-user revenues.
All of the foregoing orders have been appealed to United States Courts of
Appeal in several different Circuits.
INTERLATA TOLL SERVICE
As a result of the 1996 Act, BellSouth Telecommunications or an affiliate
and the other Operating Telephone Companies are freed from the judicial
restrictions of the MFJ that generally prohibited the provision of interLATA
communications throughout their wireline service territories and elsewhere. The
1996 Act establishes in its place a new restriction and a procedure for its
removal. These companies or their affiliates may apply to the FCC on a
state-by-state basis to offer in-region interLATA wireline services, and the FCC
must act on each 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 a facilities-based provider
offering both residential and business local services (Track A) or (ii) if there
is no such provider, a statement that has been approved or permitted to take
effect by state regulatory authorities of the terms under which it would be
willing to interconnect with a competitive local carrier (Track B); (c) will
operate in accordance with the separate subsidiary requirement; and (d) has
presented an application consistent with the public interest. The FCC is
required to consult with state regulatory authorities and the Justice Department
when reviewing the application.
BellSouth plans to begin offering interLATA wireline service in each of its
in-region states as soon as the FCC approves its application for each state.
BellSouth has received favorable determinations from the regulatory commissions
in several states in its wireline service territory, but the FCC has rejected
all applications to provide in-region interLATA service on which it has ruled.
The applicants have appealed such denials to the United States Court of Appeals
for the District of Columbia Circuit. In addition, the United States District
Court for the Northern District of Texas has ruled that the provisions of the
1996 Act prohibiting the Operating Telephone Companies from providing interLATA
services are, in effect, an unconstitutional bill of attainder and are
unenforceable. The ruling has been stayed pending appeal. BellSouth will
continue to seek approvals from the FCC and other state commissions and judicial
review of adverse decisions which it believes to be erroneous. However, because
of the scrutiny of such applications by the FCC and the Justice Department, the
time required to obtain judicial review of adverse decisions and the possible
challenges by Interexchange Carriers of any approved applications, it is
uncertain when BellSouth will be authorized to commence interLATA service in any
of its in-region states.
------------------------
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<PAGE>
In addition to the above matters, BellSouth and BellSouth Telecommunications
are parties to or subject to numerous other proceedings pending before federal
and state regulatory and judicial bodies. These matters involve, among other
things, terms and conditions of services provided by BellSouth
Telecommunications and its affiliates, rates charged for such services, access
reform, universal service, number portability and relationships with competitive
service providers and their affiliates. No assurance can be given as to the
outcome of any such proceedings.
PUBLIC TELEPHONES
In April 1997, BellSouth Telecommunications transferred its payphone
business assets to a separate subsidiary, BellSouth Public Communications, Inc.
(BPC), in order to satisfy an FCC order which required ILECs to reassign their
payphone business assets from regulated telephone company accounts to separate
unregulated accounts or to transfer assets to a separate subsidiary. BPC has
received certification as an independent payphone provider in each of the nine
states where BellSouth Telecommunications provides wireline telephone service.
BPC plans to continue to provide independent payphone services throughout
BellSouth Telecommunications' territory and will selectively provide payphone
services in areas served by unaffiliated telephone companies. Also beginning in
April, BPC is authorized to begin receiving per-call compensation from
Interexchange Carriers for calls originating on its payphone equipment.
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.
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 other carriers which do not directly provide such services for
their own customers.
DIRECTORY PUBLISHING FEES
Prior to 1996, BellSouth Telecommunications had a contractual agreement with
BellSouth Advertising & Publishing Corporation (BAPCO), an affiliated company,
wherein BAPCO published certain telephone directories and in return paid
publication fees to BellSouth Telecommunications for publishing rights and other
services. For the year ended December 31, 1995, these fees, included in Other
Operating Revenue, were $721 million.
BellSouth Telecommunications and BAPCO established a new contract, based on
fees for services rendered between the companies, which was effective beginning
in the first quarter of 1996. For additional information, see "MD&A -- Other
Matters -- Affiliated Transactions."
INTERNET ACCESS
In 1996, BellSouth Telecommunications began providing Internet access, a
customized version of Netscape Navigator-TM-, electronic mail and a gateway to
local and national information. Internet access is provided as BellSouth.net-SM-
service to over 182,000 customers at December 31, 1997.
SELLING AND MAINTAINING EQUIPMENT
To a limited extent, BellSouth Telecommunications, through subsidiaries,
sells and maintains telecommunications equipment in the nine states where it
provides wireline telephone service. The Holding Companies, Lucent Technologies,
Inc. and other substantial enterprises compete in the provision of these
services and products.
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<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 that have substantial capital, technological
and marketing resources.
NETWORK AND RELATED SERVICES
LOCAL SERVICE
Federal and state law provide for local service competition throughout
BellSouth Telecommunications' wireline service territory, and the state public
service commissions have granted numerous carrier applications for authority to
offer local telephone service. As a result, substantial competition has
developed for BellSouth Telecommunications' business customers which provide a
greater concentration of higher margin revenues than do its residential
customers. Competitors include the Interexchange Carriers, such as AT&T and MCI,
and smaller competitive local exchange carriers (CLECs), which resell local
services of BellSouth Telecommunications and other ILECs or provide service over
their own facilities. Because of the fact that significant residential local
service competition would improve BellSouth's prospects for obtaining regulatory
authority to offer interLATA long distance service, BellSouth believes that the
Interexchange Carriers have been slow to enter the local residential market and,
therefore, the development of competition for residential local service
customers will continue to be much slower than for business local service
customers.
An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by telecommunications
providers in all major metropolitan areas throughout BellSouth
Telecommunications' wireline service territory. These networks offer certain
high-volume users a competitive alternative to the public and private line
offerings of BellSouth Telecommunications. Furthermore, wireless services, such
as cellular, personal communications service (PCS) and paging services, and
Internet services increasingly compete with wireline communications services.
PCS service is digital, which provides greater security and clarity than analog
cellular service. Such services are provided by, among others, a number of
well-capitalized entities, including AT&T and other Holding Companies, in most
of BellSouth Telecommunications' markets.
As technological and regulatory developments make it more feasible for cable
television to carry data and voice communications, BellSouth Telecommunications
will face increased competition within its region from cable television
ventures. For example, MediaOne, an affiliate of USWest Media Group, has begun
offering local wireline service in Atlanta in 1998 over its enhanced cable
television network.
Joint ventures and mergers between major telecommunications companies (e.g.,
the proposed mergers of MCI/WorldCom, Inc. and AT&T/Teleport Communications
Group) will result in large, well-capitalized carriers that will provide
formidable competition to BellSouth across a number of markets, including local
and long distance telephone and Internet services.
Competition for local service revenues could adversely affect BellSouth
Telecommunications' results of operations. However, the opening of local markets
to competition, among other things, can allow BellSouth to qualify to offer
in-region interLATA service as contemplated in the 1996 Act. (See "BellSouth
Telecommunications Competitive Strategy.")
ACCESS SERVICE
FCC rules require BellSouth Telecommunications to offer expanded
interconnection for interstate special and switched access transport. As a
result, BellSouth Telecommunications must permit competitive carriers and
customers to terminate their transmission lines on BellSouth Telecommunications'
facilities in its central office buildings through collocation arrangements. The
effects of the rules are to
10
<PAGE>
increase competition for access transport. Furthermore, Interexchange Carriers
are increasingly connecting their lines directly to their customers' facilities,
bypassing the networks of BellSouth Telecommunications and thereby avoiding
access charges entirely. In addition, commercial applications of Internet
telephony are being developed. This medium could attract substantial interLATA
traffic because of its lower cost structure, because FCC rules do not currently
impose access charges on Internet communications.
TOLL SERVICE
A number of companies 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' wireline service territory have allowed the latter type of
intraLATA toll calling, whereby the Interexchange Carriers are assigned a
multiple digit access code (10XXX) that customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislatures
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 ILEC 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.
The 1996 Act permits the Holding Companies to offer interLATA toll service
outside of the states containing their local wireline service territories.
Holding Companies and other carriers have announced plans to compete for such
interLATA toll service in BellSouth Telecommunications' territory. AT&T, MCI,
Sprint and a number of other carriers, including other Holding Companies,
currently provide toll service to BellSouth Telecommunications' local service
customers.
BELLSOUTH TELECOMMUNICATIONS COMPETITIVE STRATEGY
MARKETING
BellSouth Telecommunications has developed several strategies that govern
its business decisions in the increasingly competitive telecommunications
industry. Among them, BellSouth Telecommunications will strengthen its
leadership position throughout its nine-state wireline service territory by (a)
enhancing and building its brand strength and distribution channels; (b) seeking
approval to provide wireline long distance and video services directly or
through affiliates; (c) controlling costs; and (d) developing and enhancing
joint marketing efforts with BellSouth's domestic wireless business.
BellSouth Telecommunications markets all its services and products under the
BellSouth brand name to give them a clear, consistent identity in the
marketplace. BellSouth believes that its brand name is widely recognized and
held in high esteem by its customers. A primary marketing strategy is to enhance
the recognition and reputation of this mark throughout its service territory by
jointly marketing all BellSouth services and products with special attention to
each customer base. BellSouth's goal is for its brand name to become synonymous
with quality service and state-of-the-art technology. Accordingly, significant
increases in marketing and advertising costs have been and will be incurred.
BellSouth advertises in the various media in its territory, in connection with
major events, such as the Olympics, the Super Bowl, PGA golf tournaments and
NASCAR events, and through its affiliation with several professional and
collegiate sports organizations, which offer BellSouth a broader platform to
showcase its products and services.
BellSouth Telecommunications has organized its marketing efforts to parallel
its four major customer bases: consumer, small business, complex business and
interconnection services (predominantly exchange access services.)
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<PAGE>
A substantial portion of the growth in BellSouth Telecommunications'
revenues from local service is derived from the sale of additional residential
lines and optional calling services to its residential customers. These
offerings are marketed in a variety of packages with varying pricing features
that are designed to appeal to a wide range of BellSouth Telecommunications'
residential customers. A substantial number of these sales are made by customer
service representatives who are on call 24 hours a day, seven days a week, as
they are contacted by subscribers on other matters.
BellSouth Telecommunications' small business services are marketed by
customer service representatives through varied pricing and service options.
BellSouth Telecommunications' products and services, such as video conferencing,
ISDN service and telecommunications equipment and systems, are also demonstrated
and sold through marketing arrangements with retailers and other independent
sales representatives.
BellSouth Telecommunications markets highly specialized services and
products to large and complex business customers. In addition to telephone
lines, product and service offerings to these customers include Internet access,
special networks, high-speed data transmission, business teleconferencing and
industry-specific communications configurations.
FCC rules require BellSouth Telecommunications to offer interconnection
capabilities to CLECs. BellSouth Telecommunications already has many
interconnection agreements in place and continues to negotiate more. To
strengthen bonds with these customers, each customer has been assigned an
account manager, and service centers have been established to handle unbundled
network element and resale orders. Interconnection helps BellSouth
Telecommunications open its markets to competition, which, among other things,
can facilitate BellSouth's qualification to offer interLATA wireline service
under provisions contained in the 1996 Act.
BellSouth is considering offering bundled telecommunications services inside
and outside the local wireline service territory of BellSouth Telecommunications
through its own CLEC. Subject to regulatory approval in the states in which it
intends to provide service, the BellSouth CLEC would have the same flexibility
as other non-affiliated carriers to resell services provided by ILECs, including
BellSouth Telecommunications and other telecommunications service providers.
Many of BellSouth's other services and products, such as cellular and PCS
services, including the long distance component of these wireless services,
Internet services and video services, are sold by BellSouth Telecommunications'
service representatives. The marketing of many of BellSouth Telecommunications'
nontraditional wireline services is enhanced by alliances with other service
providers and suppliers. For instance, Netscape Communications Corporation
provides BellSouth's Internet users with its Web browser, and persons who visit
the Netscape Web site are offered a convenient way to sign up for BellSouth's
Internet services. Additional arrangements with Yahoo! Inc. and Wired Ventures
Limited further enhance BellSouth's Internet services marketing strategy.
REGULATORY AND LEGISLATIVE CHANGES
BellSouth Telecommunications' primary regulatory focus has been directed
toward seeking the modification of 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 intrastate earnings, BellSouth
Telecommunications has successfully sought price regulation, whereby prices of
basic services are regulated and the pricing of other products and services are
based on market factors. While price regulation plans do not provide for the
direct recovery through basic service rates of cost increases or extraordinary
expenses, they generally provide more flexibility to meet competitive pricing
levels. BellSouth Telecommunications has price regulation plans implemented in
all states in its wireline service territory except in Tennessee. The FCC also
regulates BellSouth Telecommunications' interstate services using price
regulation.
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NEW SERVICES
The opening of BellSouth Telecommunications' local service markets to
competition can allow BellSouth to qualify for entry into new business markets.
While loss of local service customers and other risks associated with increased
competition are inevitable, BellSouth will have the opportunity to offer
interLATA wireline service under provisions contained in the 1996 Act. BellSouth
believes that in order to remain competitive, it must aggressively pursue a
corporate strategy of expanding its offerings beyond its traditional businesses
and markets. These offerings include interLATA services, information services,
video and Internet services.
The 1996 Act eliminated prohibitions on telephone companies from providing
cable television services in their service territories, although many federal
courts had already held such prohibitions unconstitutional. Although ILECs may
not acquire or joint venture with established cable television providers in
their wireline territories, they may provide cable television service over their
own facilities. BellSouth Telecommunications has acquired several cable TV and
wireless video rights and has begun providing both cable TV and wireless video
services on a limited basis in certain metropolitan areas.
In 1996, BellSouth Telecommunications began providing Internet access, a
customized version of Netscape Navigator-TM-, electronic mail and a gateway to
local and national information and electronic Yellow Pages.
RESEARCH AND DEVELOPMENT
BellSouth Telecommunications conducts its research and development
activities internally and through external vendors, primarily Bell
Communications Research, Inc. (Bellcore). Bellcore provides research and
development and other services to BellSouth and the other Holding Companies. In
November 1997, BellSouth Telecommunications completed the sale of its 14.3%
interest in Bellcore to Science Applications International Corporation.
BellSouth has contracted with Bellcore for ongoing support of engineering and
systems. In addition, BellSouth Telecommunications is a member of the National
Telecommunications Alliance, an organization which supports its commitment to
national security and emergency preparedness.
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 franchises 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 that
would materially and adversely affect BellSouth Telecommunications or its
subsidiaries.
EMPLOYEES
At December 31, 1997, 1996 and 1995, BellSouth Telecommunications employed
approximately 59,100, 63,800 and 71,400 persons, respectively. Of those totals,
approximately 57,600, 62,400 and 68,600, respectively, were telephone employees.
About 74% of these employees at December 31, 1997 were represented by the
Communications Workers of America (the CWA), which is affiliated with the
AFL-CIO. BellSouth's and BellSouth Telecommunications' collective bargaining
agreements with the CWA are scheduled to terminate on August 6,1998.
Negotiations with the CWA over the terms of new agreements will begin in early
June 1998. The outcome of these negotiations cannot be determined at this time.
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During 1995, BellSouth Telecommunications completed a 1993 plan to reduce
its work force by approximately 10,200 employees. Also during 1995, BellSouth
Telecommunications announced a plan to further reduce its work force by
approximately 11,300 employees by the end of 1997. BellSouth Telecommunications
substantially completed the 1995 plan in 1997. (See "MD&A -- Results of
Operations -- Operating Expenses -- Work Force Reduction Charge.")
In 1997, BellSouth Telecommunications announced plans to outsource certain
engineering functions, as well as its information technology operations and
application development. Approximately 2,200 employees have left or will leave
BellSouth Telecommunications in connection with these outsourcing efforts which
are expected to be complete by the end of 1998. BellSouth Telecommunications has
contracted with various entities to perform these outsourced functions. These
contracts expire at various dates through 2008, are generally renewable, and are
cancelable upon the payment of additional fees or for nonperformance. Future
minimum payments for these contracts range from $465 million to $625 million
annually over the next ten years and replace costs previously incurred for
BellSouth Telecommunications' employees, facilities, equipment and other costs.
BellSouth Telecommunications outsourced these functions to improve capabilities
and cost effectiveness.
ITEM 2. PROPERTIES
GENERAL
BellSouth Telecommunications' properties do not lend themselves to
description by character or location of principal units. BellSouth
Telecommunications' investment in property, plant and equipment consisted of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Outside plant........................... 45% 45%
Central office equipment................ 39 38
Land and buildings...................... 7 7
Furniture and fixtures.................. 5 6
Operating and other equipment........... 3 3
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 substantially consists of
digital electronic switching equipment and circuit equipment. Land and buildings
consist principally of 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 by the terms of the
policies.
Substantially all of the installations of central office equipment are
located in buildings and on land owned by BellSouth Telecommunications. Many
garages, administrative and business offices and telephone service centers are
in leased quarters.
BellSouth Telecommunications' customers are now served by electronic
switching systems and a digital network, which provides capabilities for
BellSouth Telecommunications to furnish advanced data transmission and
information management services.
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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
$38.3 billion at January 1, 1993 to $47.9 billion at December 31, 1997, 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 continually 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.
BellSouth Telecommunications' capital expenditures for 1993 through 1997
were as follows:
<TABLE>
<CAPTION>
MILLIONS
---------
<S> <C>
1997............................................................ $ 3,440
1996............................................................ 3,206
1995............................................................ 3,123
1994............................................................ 2,971
1993............................................................ 2,995
</TABLE>
BellSouth Telecommunications currently projects capital expenditures to be
approximately $3.4 billion for 1998. In 1997, BellSouth Telecommunications
generated substantially all of its funds for capital expenditures internally. In
1998, projected 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 related to the
divestiture from AT&T. 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, 1997, BellSouth Telecommunications' recorded liability, related
primarily to remediation of these sites, was approximately $31 million.
BellSouth Telecommunications 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 or annual
operating results or cash flows.
ITEM 3. LEGAL PROCEEDINGS
BellSouth Telecommunications and its subsidiaries are subject to claims
arising in the ordinary course of business involving allegations of personal
injury, breach of contract, anti-competitive conduct, employment law issues,
regulatory matters and other actions. While complete assurance cannot be given
as to the outcome of any legal claims, BellSouth Telecommunications believes
that any financial impact would not be material to its financial position or
annual operating results or cash flows. See Note O to the Consolidated Financial
Statements.
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PART II
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues...................... $15,346 $14,776 $14,540 $14,040 $13,580
Operating Expenses (1).................. 11,158 11,069 11,759 10,452 11,591
-------- -------- -------- -------- --------
Operating Income........................ 4,188 3,707 2,781 3,588 1,989
Interest Expense........................ 534 552 573 549 562
Other Income, net....................... 41 20 27 18 21
-------- -------- -------- -------- --------
Income Before Income Taxes,
Extraordinary Losses and Accounting
Change................................. 3,695 3,175 2,235 3,057 1,448
Provision for Income Taxes.............. 1,372 1,170 818 1,105 461
-------- -------- -------- -------- --------
Income Before Extraordinary Losses and
Accounting Change...................... 2,323 2,005 1,417 1,952 987
Extraordinary Losses, net of tax (2).... (9) -- (2,796) -- (87)
Accounting Change, net of tax........... -- -- -- -- (65)
-------- -------- -------- -------- --------
Net Income (Loss)..................... $ 2,314 $ 2,005 $(1,379) $ 1,952 $ 835
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Return to Average Common Equity......... 27.5% 24.6% (14.4%) 18.0% 7.3%
Total Assets............................ $23,226 $23,038 $23,933 $27,372 $27,095
Capital Expenditures.................... $ 3,440 $ 3,206 $ 3,123 $ 2,971 $ 2,995
Long-Term Debt.......................... $ 5,489 $ 6,671 $ 6,853 $ 6,512 $ 6,547
Debt Ratio at End of Period (3)......... 48.3% 49.4% 51.9% 41.0% 41.3%
Ratio of Earnings to Fixed Charges...... 7.18 6.02 4.38 5.68 3.17
Telephone Employees (4)................. 57,619 62,425 68,585 73,764 77,958
Other Operations Employees.............. 1,461 1,372 2,797 2,944 3,457
-------- -------- -------- -------- --------
Total Employees....................... 59,080 63,797 71,382 76,708 81,415
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Telephone Employees per 10,000 Access
Lines.................................. 24.8 28.2 32.5 36.5 40.3
Business Volumes: (5)
Network Access Lines in Service
(thousands).......................... 23,201 22,135 21,133 20,220 19,333
Access Minutes of Use (millions):
Interstate.......................... 73,634 67,690 62,411 57,778 53,345
Intrastate.......................... 23,472 21,171 19,197 16,888 15,261
Toll Messages (millions).............. 894 1,023 1,374 1,559 1,511
</TABLE>
- ------------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
which reduced net income by $663. See Note L to the Consolidated Financial
Statements. Operating Expenses for 1993 include a charge for restructuring
of $1,136, which reduced net income by $697.
(2) For 1997, reflects charges related to the extinguishment of long-term debt
issues. 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 E and M to the Consolidated Financial
Statements.
(3) The debt ratio at December 31, 1995 has been adjusted to exclude $485 of
debentures 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.
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 (i) local exchange service and
toll communications services within geographic areas, called Local Access and
Transport Areas (LATAs), and (ii) exchange 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 89% and 90% of BellSouth Telecommunications' Total Operating
Revenues for the years ended December 31, 1997 and 1996, respectively, were from
network and related services. Charges for local, access and toll services for
the year ended December 31, 1997 accounted for approximately 62%, 33% and 5%,
respectively, of the network and related revenues discussed above. The remainder
of BellSouth Telecommunications' Total Operating Revenues was derived
principally from sales and maintenance of customer premises equipment and other
nonregulated services.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Income Before Extraordinary Loss............................. $ 2,323 $ 2,005 15.9%
Extraordinary Loss on Early Extinguishment of Debt, net of
tax........................................................ (9) -- --
--------- ---------
Net Income................................................... $ 2,314 $ 2,005 15.4
--------- ---------
--------- ---------
</TABLE>
For a discussion of the extraordinary loss in 1997, see "Extraordinary
Losses" below.
Income Before Extraordinary Loss increased $318 (15.9%) compared to 1996.
The increase was primarily due to continued strong growth in key business
volumes and expense savings due to employee reductions under a work force
reduction plan initiated in 1995. The increase was partially offset by an
after-tax charge of $47 related to a regulatory settlement in South Carolina in
1997.
17
<PAGE>
VOLUMES OF BUSINESS
Network Access Lines in Service at December 31 (thousands):
<TABLE>
<CAPTION>
1997 1996 % CHANGE
--------- --------- -------------
<S> <C> <C> <C>
By Type:
Residence........................................ 15,841 15,140 4.6%
Business......................................... 7,088 6,732 5.3
Other............................................ 272 263 3.4
--------- ---------
Total Access Lines........................... 23,201 22,135 4.8
--------- ---------
--------- ---------
By State:
Florida.......................................... 6,237 5,899 5.7
Georgia.......................................... 3,990 3,772 5.8
Tennessee........................................ 2,623 2,544 3.1
North Carolina................................... 2,337 2,213 5.6
Louisiana........................................ 2,267 2,178 4.1
Alabama.......................................... 1,928 1,857 3.8
South Carolina................................... 1,404 1,344 4.5
Mississippi...................................... 1,238 1,193 3.8
Kentucky......................................... 1,177 1,135 3.7
--------- ---------
Total Access Lines........................... 23,201 22,135 4.8
--------- ---------
--------- ---------
</TABLE>
The total number of access lines in service increased by approximately
1,066,000 (4.8%) to 23,201,000 since December 31, 1996, compared to a 4.7% rate
of increase in 1996. Business and residence access lines increased by 5.3% and
4.6%, respectively, compared to growth rates of 8.1% and 3.3% in 1996. The
decrease in the growth rate for business lines was primarily due to the
migration of business customers from traditional business line services to
high-capacity service arrangements which are not included in business access
line counts. To a lesser degree, the growth rate for business lines was also
affected by the increased presence of facilities-based competition. Many
residential customers order additional access lines for home office purposes,
access to on-line computer services and children's phones. The number of such
additional residence lines, included in total residence lines, increased by
328,000 (21.1%) to 1,884,000 and accounted for 46.8% and 30.8% of the overall
increase in residence access lines and total access lines, respectively, since
December 31, 1996. The growth in all categories of access lines continues to
reflect economic improvement in the southeast and successful marketing programs.
Access Minutes of Use (millions):
<TABLE>
<CAPTION>
1997 1996 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Interstate......................................... 73,634 67,690 8.8%
Intrastate......................................... 23,472 21,171 10.9
--------- ---------
Total Access Minutes of Use...................... 97,106 88,861 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 1997, total access minutes of
use increased by 8,245 million (9.3%) compared to an increase of 8.9% in 1996.
The 1997 increase in access minutes of use was primarily attributable to access
line growth, promotions by the Interexchange Carriers and intraLATA toll
competition (which has the effect of increasing access minutes of use while
reducing toll messages carried over BellSouth Telecommunications' facilities).
The
18
<PAGE>
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.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Toll Messages (millions)............................. 894 1,023 (12.6%)
</TABLE>
Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 129 million (12.6%)
in 1997 compared to a decrease of 25.5% in 1996. The decrease in 1997 was
primarily attributable to continued competition from Interexchange Carriers in
the intraLATA toll market as well as the continuing expansion of local area
calling plans (LACPs). Some effects of competition and the expansion of LACPs
result in the transfer of calls from toll to the access and local service
categories, respectively, but the corresponding revenues are not generally
shifted at commensurate rates. Competition from the Interexchange Carriers in
the intraLATA toll market will adversely impact future toll message volumes.
OPERATING REVENUES
For a discussion of the impact of local service competition on revenues and
volumes of business, see "Operating Environment and Trends of the Business."
Total Operating Revenues increased $570 (3.9%) in 1997. Excluding a $72
reduction of revenues related to a regulatory settlement in South Carolina, the
increase in operating revenues would have been 4.3%. The components of Total
Operating Revenues were as follows:
<TABLE>
<CAPTION>
1997 1996 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Local service................................... $ 8,499 $ 8,082 5.2%
Interstate access............................... 3,673 3,553 3.4
Intrastate access............................... 810 812 (0.2)
Toll............................................ 734 794 (7.6)
Other........................................... 1,630 1,535 6.2
--------- ---------
Total Operating Revenues...................... $ 15,346 $ 14,776 3.9
--------- ---------
--------- ---------
</TABLE>
LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network and optional
services, such as custom calling features. (Revenues from cellular
interconnection and other mobile services are included in Other revenues for
both periods presented.) Local Service revenues increased $417 (5.2%) in 1997.
The increase in 1997 was due primarily to a 4.8% growth in access lines
since December 31, 1996. Also contributing was an increase of $241 due to higher
customer demand for optional services. Such increases were partially offset by
rate impacts which reduced revenues by $252 primarily due to revenue sharing
accruals recorded in 1997 and a non-recurring revenue reduction of $64 related
to the local service portion of the regulatory settlement in South Carolina.
INTERSTATE ACCESS revenues result from the provision of access services to
Interexchange Carriers to provide telecommunications services between states and
from end-user charges collected from residential and business customers.
Interstate Access revenues increased $120 (3.4%) in 1997.
The 1997 increase was attributable primarily to growth in minutes of use of
8.8 %, an increase of $97 due to higher demand for special access services and
an increase in end-user charges of $99 attributable to growth in the number of
access lines. Such increases were partially offset by rate reductions which
decreased revenues by $161 since December 31, 1996.
19
<PAGE>
INTRASTATE ACCESS revenues result from the provision of access services to
Interexchange Carriers which provide telecommunications services between LATAs
within a state. In 1997, Intrastate Access revenues decreased $2 (0.2%). Such
decrease was due primarily to rate reductions of $82. The decrease was partially
offset by 10.9% 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 $60 (7.6%)
in 1997.
The decrease for 1997 was primarily attributable to continuing competition
from Interexchange Carriers in the intraLATA toll market as well as the
continuing expansion of LACPs, the effect of which reduced toll messages by
12.6%. The decrease was partially offset by $62 related to revenues from
Interexchange Carriers beginning in the second quarter of 1997 for toll messages
originating on BellSouth Telecommunications' public telephones. The overall
decline in intraLATA toll revenues is expected to continue over the long term.
OTHER revenues are principally comprised of revenues from customer premises
equipment (CPE) sales and maintenance services, cellular interconnection
services, and other nonregulated services (primarily inside wire, billing and
collection and voice messaging services). Other revenues increased $95 (6.2%) in
1997.
The increase primarily reflected increased demand and prices for
nonregulated services and higher billing-related fees totaling $138. The
increase was partially offset by the effects in 1996 of positive rate impacts,
as well as the sale of a subsidiary which performed computer maintenance.
OPERATING EXPENSES
Total Operating Expenses increased $89 (0.8%) in 1997. The components of
Total Operating Expenses were as follows:
<TABLE>
<CAPTION>
1997 1996 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Depreciation and amortization................... $ 3,332 $ 3,255 2.4%
--------- ---------
Other operating expenses:
Cost of services and products................. 5,119 5,133 (0.3)
Selling, general and administrative........... 2,707 2,681 1.0
--------- ---------
7,826 7,814 0.2
--------- ---------
Total Operating Expenses.................... $ 11,158 $ 11,069 0.8
--------- ---------
--------- ---------
</TABLE>
DEPRECIATION AND AMORTIZATION increased $77 (2.4%) in 1997. The increase was
due primarily to higher levels of property, plant and equipment resulting from
continued growth in the customer base and continued modernization of the
network.
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 $12 (0.2%) in 1997. The increase was
primarily attributable to costs associated with 1996 Act compliance of $230, as
well as increased costs due to higher business volumes, new service offerings
and intensified marketing and advertising efforts. The increase was partially
offset by an estimated reduction of $232 in employee-related costs in the core
wireline business,
20
<PAGE>
including expenses for employee benefits. The decrease in employee-related costs
reflected net employee reductions in BellSouth Telecommunications' telephone
operations of approximately 4,800 since December 31, 1996, partially offset by
annual compensation increases for management and represented employees. The
employee reductions were primarily attributable to a previously disclosed work
force reduction plan. The increase in Other Operating Expenses was further
offset by the April 1996 sale of a subsidiary which performed computer
maintenance.
WORK FORCE REDUCTION CHARGE. 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 a restructuring plan initiated in 1993 and
completed in 1995. The 1995 plan was substantially completed in 1997 and
resulted in the reduction of the wireline telephone operations work force by
approximately 11,600 employees over the term of the plan. See Note L to the
Consolidated Financial Statements.
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
1997 1996 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Interest Expense............................................. $ 534 $ 552 (3.3%)
Other Income, net............................................ 41 20 --
Provision for Income Taxes................................... 1,372 1,170 17.3
</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 decreased
$18 (3.3%) in 1997. The decrease was primarily attributable to lower average
interest rates partially offset by higher average debt balances in 1996.
PROVISION FOR INCOME TAXES increased $202 (17.3%) in 1997. BellSouth
Telecommunications' effective tax rates were 37.1% and 36.9% in 1997 and 1996,
respectively. A reconciliation of the statutory Federal income tax rates to
these effective tax rates is provided in Note J to the Consolidated Financial
Statements.
EXTRAORDINARY LOSSES
EARLY EXTINGUISHMENT OF DEBT. During 1997, BellSouth Telecommunications
recognized an extraordinary loss of $9 (net of a current tax benefit of $6)
related to the early extinguishment of outstanding debt issues. See Note E to
the Consolidated Financial Statements.
DISCONTINUANCE OF SFAS NO. 71. In 1995, as a result of its continuing
regulatory and marketplace assessments, BellSouth Telecommunications concluded
that is was required to discontinue application of SFAS No. 71. Accordingly,
BellSouth Telecommunications recorded a non-cash extraordinary charge of $2,718
(net of a deferred tax benefit of $1,731). The extraordinary charge reflected
$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
reported 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.
See Note M to the Consolidated Financial Statements.
21
<PAGE>
FINANCING ACTIVITY
BellSouth Telecommunications has committed credit lines aggregating $1,090
with various banks. BellSouth Telecommunications also maintains uncommitted
credit lines of $20. There were no borrowings under the lines of credit at
December 31, 1997. As of February 3, 1998, shelf registration statements were on
file with the Securities and Exchange Commission under which $1,200 of debt
securities could be publicly offered.
BellSouth Telecommunications' debt to total capitalization ratio decreased
to 48.3% at December 31, 1997 from 49.4% at December 31, 1996. The decrease was
primarily caused by a reduction in short-term borrowings and an increase in
shareholder's equity due to earnings during 1997.
MARKET RATE RISK SENSITIVITY BellSouth Telecommunications is subject to
market rate risks due to fluctuations in interest rates. The majority of
BellSouth Telecommunications' debt is in the form of long-term fixed rate notes
and debentures with original maturities ranging from ten to one hundred years.
Accordingly, fluctuations in interest rates can lead to significant fluctuations
in the fair value of such debt instruments. BellSouth Telecommunications does
not engage in hedging activity with regard to any of its interest rate risks.
The following table provides information, by maturity date, about BellSouth
Telecommunications' interest rate sensitive financial instruments which consist
primarily of fixed rate debt obligations. Fair values for the majority of
BellSouth Telecommunications' long-term debt obligations are based on quotes
from dealers.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate Debt............... $ 2,516 $ 12 $ 388 $ 88 $ 14 $ 4,987 $ 8,005 $ 8,054
Average Interest Rate......... 5.71% 6.30% 6.02% 4.74% 6.30% 6.74% -- --
</TABLE>
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
ECONOMY. The nation's output of goods and services, which grew 2.8% in
1996, grew at the more rapid rate of 3.8% in 1997. Employment in nonfarm
business establishments grew 2.3% during the year and the unemployment rate
averaged 5.0%. Slower economic growth is expected during 1998, as increased
foreign imports, tight labor markets, slow labor force growth and modest
productivity growth act to constrain the pace of growth. The economy of the
nine-state region served by BellSouth Telecommunications' wireline telephone
business grew at about the same pace as the national economy. The number of jobs
in nonfarm businesses grew 2.2% as the unemployment rate averaged 4.7% for the
year. Real income expanded at an estimated 4.0%. Net migration added
approximately 400,000 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. The region's cost advantages and
strong net migration should bring an economic growth rate comparatively better
than the nation's and further increase the demand for telecommunication
services. The increased competition faced by BellSouth Telecommunications make
its 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.
REGULATORY AND COMPETITIVE ENVIRONMENT. In providing telecommunications
services, BellSouth Telecommunications is subject to regulation by both state
and federal regulators with respect to rates, services, competition and other
issues. BellSouth Telecommunications' primary regulatory focus has been directed
toward seeking modification of 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 intrastate earnings, BellSouth
Telecommunications has successfully sought price regulation, whereby prices of
basic services are regulated and the pricing of other products and services are
based on
22
<PAGE>
market factors. While price regulation plans do not provide for the direct
recovery through basic service rates of cost increases or extraordinary
expenses, they generally provide more flexibility to meet competitive pricing
levels.
At the state level, BellSouth Telecommunications is subject to price
regulation plans in all states in its wireline territory, except Tennessee where
a court order to implement price regulation has been appealed. At the federal
level, BellSouth Telecommunications is operating under a price regulation plan
established by the Federal Communications Commission (FCC) in 1995. The FCC's
price cap plan limits aggregate price changes to the rate of inflation minus a
productivity offset, plus or minus exogenous cost changes recognized by the FCC.
The FCC has mandated an increase in the price cap productivity factor from 5.3%
to 6.5%, reducing access charges. The new rates went into effect beginning July
1, 1997 and were computed as if the 6.5% productivity factor had been in effect
since July 1, 1996. If the Gross Domestic Product Price Index increases by less
than 6.5% over an annual period, further price reductions will occur.
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 that have substantial capital, technological
and marketing resources.
LOCAL SERVICE COMPETITION. The Telecommunications Act of 1996 (the 1996
Act) requires the elimination of state legislative and regulatory barriers to
competition for local telephone service, subject only to competitively neutral
requirements to preserve and advance universal service, protect the public
safety and welfare, maintain the quality of telecommunications services and
safeguard the rights of customers. The 1996 Act also includes requirements that
incumbent local exchange carriers (ILECs), such as BellSouth Telecommunications,
negotiate with other carriers for interconnection, use of network elements on an
unbundled basis and resale of local services. If a negotiated agreement cannot
be reached, either party may seek arbitration with the state regulatory
authority, or the FCC if the state fails to act. If rates are disputed, the
arbitrator must set rates for access to network elements on an unbundled basis,
based on cost, which may include a reasonable profit. ILECs are also required to
negotiate to provide retail services at wholesale rates for the purpose of
resale by competing carriers. If agreement cannot be reached, the arbitrator is
to set the wholesale rates at BellSouth Telecommunications' retail rates less
costs to be avoided. BellSouth Telecommunications has executed over 300
interconnection or resale agreements with such carriers. The arbitration results
for the wholesale discount rates vary by state from approximately 14.8% to 21.8%
for both business and residential service.
In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry. Among the issues specifically addressed
by the order were the network elements that BellSouth Telecommunications must
make available; pricing standards to be followed by states in setting rates for
interconnection; access to network elements on an unbundled basis; and resold
services. BellSouth Telecommunications, several other ILECs and several state
regulatory bodies appealed the order to the United States Court of Appeals for
the Eighth Circuit, and in July 1997, the court ruled that state commissions,
not the FCC, have exclusive jurisdiction to set prices for local service
interconnection, unbundled network elements and local service resale. In
addition, the court vacated other aspects of the order including the FCC's "pick
and choose" rule, which allowed competing local carriers to select terms from
different interconnection agreements in negotiating their own interconnection
agreements. The court also rejected the FCC's requirement that ILECs submit
pre-1996 interconnection agreements to the state commissions for approval and
the presumption that any network element that can be technically unbundled must
be unbundled. Finally, the court rejected the FCC's requirement that ILECs
physically recombine any unbundled network elements for competing local carriers
and only required that such elements be made available for rebundling.
23
<PAGE>
Certain aspects of the order were upheld by the court including the ability
of the competing local carriers to recombine network elements to produce
complete telecommunications services without providing any of their own
facilities. The court also affirmed the FCC's classification of operations
support systems, operator services, directory assistance and vertical switching
features as unbundled network elements. In addition, the court upheld the FCC's
definition of "technically feasible" interconnection to exclude all economic
considerations. Finally, the court declined to rule on whether or not the Total
Element Long Run Incremental Cost (TELRIC) pricing methodology was inconsistent
with the 1996 Act, leaving the state commissions to make that decision. On
reconsideration, the court further clarified that the 1996 Act does not require
ILECs to provide recombined unbundled network elements. The United States
Supreme Court has agreed to review the court's decision, and a ruling is
expected by mid-1999. In a subsequent order, the Eighth Circuit held that the
FCC may not impose its pricing standards as a condition to granting permission
for the Operating Telephone Companies to provide interLATA communications.
Notwithstanding these developments, however, BellSouth Telecommunications
and a number of carriers have negotiated interconnection agreements and state
regulatory commissions have arbitrated and approved various terms of
interconnection between BellSouth Telecommunications and other carriers. Some
changes may be made to these agreements when the judicial appeals are concluded.
In attempting to comply with the technical requirements of interconnection,
BellSouth Telecommunications is incurring, and expects to continue to incur,
significant costs associated with the facilitation of interconnection. BellSouth
Telecommunications incurred approximately $400 of costs associated with these
efforts in the year ended December 31, 1997. Of this amount, approximately $230
was expensed as incurred, and the remainder was capitalized. It remains unclear
to what degree, if any, BellSouth Telecommunications will be compensated for
these costs.
As a result of the changes in regulation discussed above, substantial
competition has developed for BellSouth Telecommunications' business customers
which provide a greater concentration of higher margin revenues than do its
residential customers. Competitors include the Interexchange Carriers, such as
AT&T and MCI, and smaller competitive local exchange carriers (CLECs), which
resell local services of BellSouth Telecommunications and other ILECs or provide
service over their own facilities. Because of the fact that significant
residential local service competition would improve BellSouth's prospects for
obtaining regulatory authority to offer interLATA long distance service,
BellSouth Telecommunications believes that the Interexchange Carriers have been
slow to enter the local residential market and, therefore, the development of
competition for local residential service customers will continue to be much
slower than for business local service customers.
ACCESS SERVICE. Historically, access charges have been set at levels that
subsidize the cost of providing local residential service. The 1996 Act also
requires that the FCC identify the local service subsidy implicitly provided by
access charges; to provide for the removal of such subsidy from access rates in
order that access charges reflect underlying costs; to arrange for a universal
service fund to ensure the continuation of universal service; and to develop the
arrangements for payments into that fund by all carriers. In May 1997, the FCC
adopted orders regarding revisions to the price cap plan, access charge reform
and the establishment of a universal service fund. The orders on the price cap
plan and access charge reform resulted in access rate reductions related to
per-minute-of-use charges and increases to per-line charges.
In addition, the access charge reform order resulted in several changes to
the existing interstate access rate structure designed to move access charges,
over time, to more economically efficient levels and to create more efficient
rate structures. Non-traffic-sensitive costs, that were previously recovered on
a per-minute-of-use basis, were changed to be recovered on a flat-rate, per-line
basis. As part of this
24
<PAGE>
plan, subscriber line charges (SLCs) were increased and a new presubscribed
interexchange carrier charge (PICC) was established. As SLC and PICC charges are
increased over time, usage charges are reduced.
The universal service order established new funding mechanisms for
high-cost, low-income service areas. BellSouth Telecommunications began
contributing to the new funds on January 1, 1998 and is allowed recovery of its
contributions through increased interstate access charges. Major changes to the
support mechanism to subsidize the provision of services to high-cost areas will
occur January 1, 1999. The new support mechanism, when implemented in 1999, will
be based on forward-looking economic costs; however, a cost model has yet to be
adopted. A new proceeding was initiated in June 1997 to select a cost model with
final FCC action expected in 1998.
All of the foregoing orders have been appealed to United States Courts of
Appeal in several different Circuits.
As a result of the legal requirement to offer expanded interconnection for
interstate special and switched access transport, BellSouth Telecommunications
must permit competitive carriers and customers to terminate their transmission
lines on BellSouth Telecommunications' facilities through collocation
arrangements. The effects of the rules are to increase competition for access
transport. Furthermore, Interexchange Carriers are increasingly connecting their
lines directly to their customers' facilities, bypassing the networks of
BellSouth Telecommunications and thereby avoiding access charges entirely. In
addition, commercial applications of Internet telephony are being developed.
This medium could attract substantial long distance traffic because of its lower
cost structure, because FCC rules do not currently impose access charges on
Internet communications.
BELLSOUTH TELECOMMUNICATIONS COMPETITIVE STRATEGY. BellSouth
Telecommunications has developed several strategies that govern its business
decisions in the increasingly competitive telecommunications industry. Among
them, BellSouth Telecommunications will strengthen its leadership position
throughout its nine-state wireline service territory by (a) enhancing and
building its brand strength and distribution channels; (b) seeking approval to
provide wireline long distance and video services directly or through
affiliates; (c) controlling costs; and (d) developing and enhancing joint
marketing efforts with BellSouth's domestic wireless business.
NEW SERVICES. The opening of BellSouth Telecommunications' local service
markets to competition can allow BellSouth to qualify for entry into new
business markets. While loss of local service customers and other risks
associated with increased competition are inevitable, BellSouth will have the
opportunity to offer interLATA wireline service under provisions contained in
the 1996 Act. BellSouth believes that in order to remain competitive, it must
aggressively pursue a corporate strategy of expanding its offerings beyond its
traditional businesses and markets. These offerings include interLATA services,
information services, video services and Internet services.
BellSouth plans to begin offering interLATA wireline service in each of its
in-region states as soon as the FCC approves its application for each state.
BellSouth has received favorable determinations from the regulatory commissions
in several states in its wireline service territory, but the FCC has rejected
all applications to provide in-region interLATA service on which it has ruled.
The applicants have appealed such denials to the United States Court of Appeals
for the District of Columbia Circuit. In addition, the United States District
Court for the Northern District of Texas has ruled that the provisions of the
1996 Act prohibiting the Holding Companies from providing interLATA service are,
in effect, an unconstitutional bill of attainder and are unenforceable. The
ruling has been stayed pending appeal. BellSouth will continue to seek approvals
from the FCC and other state commissions and judicial review of adverse
decisions which it believes to be erroneous. However, because of the scrutiny of
such applications by the FCC and the Justice Department, the time required to
obtain judicial review of adverse decisions and the possible challenges by the
Interexchange Carriers of any approved applications, it is uncertain when
BellSouth will be authorized to commence interLATA service in any of its
in-region states.
25
<PAGE>
YEAR 2000 COMPLIANCE
BellSouth has initiated a company-wide program to identify and address
issues associated with the ability of its date-sensitive information, telephony
and business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. This
program is being conducted by a management team which is coordinating the
efforts of internal resources as well as third party vendors in making all
necessary changes to BellSouth Telecommunications' systems. Some of these
changes are being made as a part of larger systems upgrades. BellSouth plans to
have all conversion and initial testing completed by the end of 1998 and to
complete testing and deployment by mid-1999. Some of the costs associated with
these efforts were incurred in 1997, and the remainder will be incurred over the
next two years. BellSouth Telecommunications estimates the cost of these efforts
will be between $75 to $150 over the life of the project. BellSouth
Telecommunications expects to avoid disruption of its information, telephony and
business systems as a result of these efforts.
NEW ACCOUNTING PRONOUNCEMENTS
SEGMENT REPORTING. In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," superseding SFAS No.
14, "Financial Reporting of Segments of a Business Enterprise." SFAS No. 131
establishes new standards for reporting operating segment information in annual
and interim financial statements. The new standard requires reporting of
operating segment information based on the way that financial information for
the entity is organized for senior management for evaluating performance and
allocating resources. The standard is effective for year-end 1998 and need not
be applied to interim financial statements in that year. Comparative information
for earlier years on the same basis of segmentation must also be reported.
At present, BellSouth Telecommunications presents its operations as one
business segment in its financial statements. No assessment of the requirements
of the new standard has yet been made. Thus, it is not clear whether BellSouth
Telecommunications will be required to report operating segment information for
multiple reportable segments.
CAPITALIZATION OF INTERNAL USE SOFTWARE. In 1996, the AICPA issued a
Statement of Position (SOP) exposure draft dealing with the costs of internal
use software. The treatment accorded such costs in the past has been very
diverse in practice. The proposed SOP will require capitalization of such costs
after certain preliminary development efforts have been made. Costs to be
capitalized are direct costs and interest costs related to development efforts.
The proposed SOP is expected to be issued in early 1998 and will require
adoption by BellSouth Telecommunications no later than January 1, 1999. Earlier
adoption will be permitted for years for which financial statements have not
been issued.
Adoption of the proposed SOP will result in a temporary increase in earnings
in the year of adoption as a result of the capitalization of costs which had
previously been expensed. If expenditures remain at a consistent level, the
earnings impact will decline in each year following the change. The decline will
continue until the amortization expense related to the capitalized software
costs equals the level of software costs treated as expense prior to the change.
In addition, adoption of the proposed SOP will result in higher levels of
capitalized software costs on the balance sheet.
OTHER MATTERS
AFFILIATED TRANSACTIONS. Prior to 1996, BellSouth Telecommunications had a
contractual agreement with BellSouth Advertising & Publishing Corporation
(BAPCO), an affiliated company, wherein BAPCO published certain telephone
directories and in return paid publication fees to BellSouth Telecommunications
for publishing rights and other services.
26
<PAGE>
BellSouth Telecommunications and BAPCO established a new contract, based on
fees for services rendered between the companies, which was effective beginning
in the first quarter of 1996. Under the new contract, BellSouth
Telecommunications generated fees of approximately $95 and $78, respectively, in
1997 and 1996.
Because BellSouth Telecommunications and BAPCO are wholly-owned
subsidiaries, BellSouth's consolidated financial results are not affected by
this change.
SAFE HARBOR STATEMENT
CERTAIN OF THE INFORMATION CONTAINED IN THIS AND OTHER REPORTS ADDRESSES
KNOWN TRENDS AND UNCERTAINTIES AFFECTING BELLSOUTH TELECOMMUNICATIONS' BUSINESS
AND PROSPECTS AND MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. BELLSOUTH
TELECOMMUNICATIONS' EXPECTATIONS CONTAINED IN OR UNDERLYING SUCH FORWARD-LOOKING
STATEMENTS ARE BASED ON A NUMBER OF ASSUMPTIONS, INCLUDING BUT NOT LIMITED TO:
(1) ECONOMIC GROWTH AND DEMAND FOR WIRELINE COMMUNICATIONS SERVICES CONTINUES IN
BELLSOUTH TELECOMMUNICATIONS' SERVICE TERRITORY; (2) THE FINAL RESOLUTION OF THE
ACCESS REFORM AND UNIVERSAL SERVICE ORDERS OF THE FCC (AND THE RESULTANT
CUSTOMER IMPACTS) IS REASONABLY EARNINGS-NEUTRAL; (3) LOCAL WIRELINE SERVICE
COMPETITION DOES NOT HAVE SIGNIFICANTLY INCREASING ADVERSE IMPACTS ON EARNINGS;
(4) THE CONTINUING COSTS TO IMPLEMENT NETWORK CHANGES AND OPERATING SYSTEMS
NECESSARY TO SATISFY REGULATORY CONDITIONS FOR BELLSOUTH'S PROVISION OF
INTERLATA SERVICE ARE NOT MATERIALLY GREATER THAN CURRENTLY PROJECTED; AND (5)
BELLSOUTH TELECOMMUNICATIONS' EXPECTATIONS AS TO THE COST AND SUCCESS OF ITS
EFFORTS FOR YEAR 2000 COMPLIANCE, INCLUDING THE SUCCESS OF ITS KEY SUPPLIERS AND
CUSTOMERS, ARE REASONABLY ACCURATE. ANY DEVELOPMENTS SIGNIFICANTLY DEVIATING
FROM THESE ASSUMPTIONS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE FORECAST OR IMPLIED IN THE AFOREMENTIONED FORWARD-LOOKING STATEMENTS.
27
<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
therein 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 controls and has taken actions that it believes are
cost-effective in the circumstances to respond appropriately to these
recommendations. Management believes that as of December 31, 1997, 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/ Charles B. Coe /s/ Isaiah Harris
PRESIDENT VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND COMPTROLLER
February 3, 1998
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note M 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.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 3, 1998
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
333-00649) of our report, dated February 3, 1998, which includes an explanatory
paragraph stating that the Company 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, on our
audits of the consolidated financial statements of BellSouth Telecommunications,
Inc. as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, which report is included in this annual report
on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 25, 1998
29
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Revenues:
Local service................................................................ $ 8,499 $ 8,082 $ 7,294
Interstate access............................................................ 3,673 3,553 3,275
Intrastate access............................................................ 810 812 884
Toll......................................................................... 734 794 1,009
Other........................................................................ 1,630 1,535 2,078
--------- --------- ---------
Total Operating Revenues................................................... 15,346 14,776 14,540
--------- --------- ---------
Operating Expenses:
Cost of services and products................................................ 5,119 5,133 5,268
Depreciation and amortization................................................ 3,332 3,255 3,065
Selling, general and administrative.......................................... 2,707 2,681 2,344
Work force reduction charge (Note L)......................................... -- -- 1,082
--------- --------- ---------
Total Operating Expenses................................................... 11,158 11,069 11,759
--------- --------- ---------
Operating Income............................................................... 4,188 3,707 2,781
Interest Expense............................................................... 534 552 573
Other Income, net.............................................................. 41 20 27
--------- --------- ---------
Income Before Income Taxes and Extraordinary Losses............................ 3,695 3,175 2,235
Provision for Income Taxes (Note J)............................................ 1,372 1,170 818
--------- --------- ---------
Income Before Extraordinary Losses............................................. 2,323 2,005 1,417
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note M)........................................................... -- -- (2,718)
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E)........................................................... (9) -- (78)
--------- --------- ---------
Net Income (Loss).......................................................... $ 2,314 $ 2,005 $ (1,379)
--------- --------- ---------
--------- --------- ---------
Retained Earnings:
At beginning of year......................................................... $ 870 $ 555 $ 3,522
Net income (loss)............................................................ 2,314 2,005 (1,379)
Dividends declared........................................................... (2,044) (1,690) (1,588)
--------- --------- ---------
At end of year............................................................... $ 1,140 $ 870 $ 555
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................ $ 49 $ 100
Accounts receivable, net of allowance for uncollectibles of $108 and $67................. 2,951 2,807
Material and supplies.................................................................... 259 327
Other current assets..................................................................... 163 355
--------- ---------
Total Current Assets................................................................... 3,422 3,589
Investments and Advances (Note B).......................................................... 299 297
Property, Plant and Equipment, net (Note C)................................................ 18,853 18,739
Deferred Charges and Other Assets.......................................................... 652 413
--------- ---------
Total Assets........................................................................... $ 23,226 $ 23,038
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year (Note E)................................................... $ 2,516 $ 1,435
Accounts payable......................................................................... 1,116 1,126
Other current liabilities (Note D)....................................................... 2,217 2,194
--------- ---------
Total Current Liabilities.............................................................. 5,849 4,755
--------- ---------
Long-Term Debt (Note E).................................................................... 5,489 6,671
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes........................................................ 1,114 1,079
Unamortized investment tax credits....................................................... 213 278
Other liabilities and deferred credits (Note F).......................................... 2,033 2,004
--------- ---------
Total Deferred Credits and Other Liabilities........................................... 3,360 3,361
--------- ---------
Shareholder's Equity:
Common stock, one share, no par value.................................................... 7,388 7,381
Retained earnings........................................................................ 1,140 870
--------- ---------
Total Shareholder's Equity............................................................. 8,528 8,251
--------- ---------
Total Liabilities and Shareholder's Equity........................................... $ 23,226 $ 23,038
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 2,314 $ 2,005 $ (1,379)
Adjustments to net income (loss):
Depreciation and amortization............................................. 3,332 3,255 3,065
Provision for uncollectibles.............................................. 169 137 124
Deferred income taxes and unamortized investment tax credits.............. 118 (56) (1,973)
Extraordinary loss for discontinuance of SFAS No. 71...................... -- -- 4,449
Extraordinary loss on early extinguishment of debt........................ 15 -- 127
Work force reduction charge............................................... -- -- 1,082
Net change in:
Accounts receivable and other current assets............................ (250) (57) (454)
Accounts payable and other current liabilities.......................... (92) (608) (632)
Deferred charges and other assets....................................... (241) (155) (33)
Deferred credits and other liabilities.................................. 29 413 62
Other reconciling items, net.............................................. (4) (66) (71)
---------- ---------- ----------
Net cash provided by operating activities............................... 5,390 4,868 4,367
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (3,440) (3,206) (3,123)
Other investing activities, net............................................. 118 15 1
---------- ---------- ----------
Net cash used for investing activities.................................. (3,322) (3,191) (3,122)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) short-term borrowings...................... 515 (501) 593
Proceeds from long-term debt................................................ -- -- 2,202
Repayment of long-term debt................................................. (677) (485) (1,430)
Advances from parent and affiliates......................................... 341 473 613
Repayments of advances from parent and affiliates........................... (326) (486) (610)
Dividends paid to parent.................................................... (1,972) (1,649) (1,594)
Other financing activities, net............................................. -- (13) (29)
---------- ---------- ----------
Net cash used for financing activities.................................. (2,119) (2,661) (255)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.......................... (51) (984) 990
Cash and Cash Equivalents at Beginning of Period.............................. 100 1,084 94
---------- ---------- ----------
Cash and Cash Equivalents at End of Period.................................... $ 49 $ 100 $ 1,084
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated 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
(i) local exchange service and toll communications services within geographic
areas, called Local Access and Transport Areas (LATAs), and (ii) 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' Total Operating Revenues were primarily from
network and related services. Charges for local, access and toll services for
the year ended December 31, 1997 accounted for approximately 62%, 33% and 5%,
respectively, of those network and related revenues. The remainder of BellSouth
Telecommunications' Total Operating Revenues was derived principally from sales
and maintenance of customer premises equipment and other nonregulated services.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of BellSouth Telecommunications and subsidiaries in which it has a
controlling financial interest. All significant intercompany transactions and
accounts have been eliminated. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current year's
presentation.
BASIS OF ACCOUNTING. BellSouth Telecommunications' consolidated financial
statements have been prepared 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.
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 M 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 depreciable telephone 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 or losses on disposal of other
depreciable plant are recognized in the year of disposition as an element of
Other Income, net.
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
33
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
services are provided. Revenues derived from other telecommunications services,
principally network access and toll, are recognized monthly as services are
provided. Prior to 1996, directory publishing fees were recognized upon
publication of the related directories by an affiliated company. Beginning in
1996, BellSouth Telecommunications no longer receives fees for publication
rights related to the directory publishing activities of affiliated companies.
Allowances for uncollectible billed services are adjusted monthly. The provision
for such uncollectible accounts was $169, $137 and $124 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Revenues from services provided to AT&T Corp., BellSouth Telecommunications'
largest customer, were approximately 10%, 11% and 12% of Total Operating
Revenues for 1997, 1996 and 1995, 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 -- INVESTMENTS AND ADVANCES
At December 31, 1997 and 1996, Investments and Advances consists primarily
of the cost of 9,573,179 and 8,922,014 shares of BellSouth Common Stock,
respectively. These shares are held in grantor trusts established by BellSouth
Telecommunications 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 $14, $12 and $11 for
1997, 1996 and 1995, respectively.
In November 1997, BellSouth Telecommunications sold to Science Applications
International Corporation its 14.3% interest in Bell Communications Research,
Inc. (Bellcore) for total proceeds of $65. The pretax gain on such sale,
included as a component of Other Income, net, was $38.
34
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Outside plant.......................................................... $ 21,642 $ 20,866
Central office equipment............................................... 18,716 17,442
Building and building improvements..................................... 2,984 2,979
Furniture and fixtures................................................. 2,579 2,533
Operating and other equipment.......................................... 935 890
Station equipment...................................................... 523 638
Plant under construction............................................... 327 249
Land................................................................... 162 165
--------- ---------
47,868 45,762
Less: Accumulated depreciation......................................... 29,015 27,023
--------- ---------
Total Property, Plant and Equipment, net............................. $ 18,853 $ 18,739
--------- ---------
--------- ---------
</TABLE>
NOTE D -- OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Advanced billing and customer deposits................................... $ 525 $ 414
Taxes accrued............................................................ 395 385
Salaries and wages payable............................................... 266 282
Interest and rents accrued............................................... 226 234
Dividends payable to parent.............................................. 223 154
Compensated absences..................................................... 215 215
Postemployment benefits (see Note L)..................................... 57 303
Other.................................................................... 310 207
--------- ---------
Total Other Current Liabilities...................................... $ 2,217 $ 2,194
--------- ---------
--------- ---------
</TABLE>
NOTE E -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Commercial paper........................................................ $ 1,912 $ 1,342
Current maturities of long-term debt.................................... 604 93
--------- ---------
Total Debt Maturing Within One Year..................................... $ 2,516 $ 1,435
--------- ---------
--------- ---------
Weighted average interest rate at end of period:
Commercial paper...................................................... 5.94% 5.52%
</TABLE>
BellSouth Telecommunications has committed credit lines aggregating $1,090
with various banks. BellSouth Telecommunications also maintains uncommitted
lines of credit of $20. There were no borrowings under the lines of credit at
December 31, 1997. There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
35
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE E -- DEBT (CONTINUED)
LONG-TERM: The table below summarizes debt outstanding as of December 31.
Interest rates and maturities are for amounts outstanding at December 31, 1997.
<TABLE>
<CAPTION>
CONTRACTUAL
INTEREST RATES MATURITIES 1997 1996
------------------ -------------- --------- ---------
<S> <C> <C> <C> <C>
Debentures: 4.375% - 6.75% 1998 - 2045 $ 1,820 $ 1,905
6.65% - 7% 2095 644 635
7% - 8.25% 2010 - 2035 1,450 2,050
--------- ---------
3,914 4,590
Notes............................... 5.25% - 7% 1998 - 2008 2,175 2,175
Other............................... 33 31
Unamortized discount, net of
premium............................ (29) (32)
--------- ---------
6,093 6,764
Current maturities.................. (604) (93)
--------- ---------
Total Long-Term Debt............ $ 5,489 $ 6,671
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt outstanding (principal amounts) at December 31,
1997 are summarized below. Maturities after the year 2002 include $500 principal
amount of 6.65% debentures due in 2095. At December 31, 1997, such debentures
had an accreted book value of $144.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturities................. $604 $ 12 $388 $ 88 $ 14 $5,372 $6,478
---- ---- ---- ---- ---- ---------- ------
---- ---- ---- ---- ---- ---------- ------
</TABLE>
During 1997 and 1995, BellSouth Telecommunications retired certain long-term
debt issues totaling $600 and $1,885, respectively. As a result of the early
extinguishment of these issues, extraordinary losses of $9 and $78, net of
current tax benefits of $6 and $49, respectively, were recognized in 1997 and
1995.
At December 31, 1997, a shelf registration statement was on file with the
Securities and Exchange Commission under which $1,200 of debt securities could
be publicly offered.
36
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN MILLIONS)
NOTE F -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits are summarized as follows at December
31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Postretirement benefits other than pensions
(see Notes H and L)..................................................... $ 782 $ 732
Accrued pension cost (see Notes H and L)................................. 525 556
Compensation related..................................................... 398 462
Postemployment benefits (see Note L)..................................... 232 136
Other.................................................................... 96 118
--------- ---------
Total Other Liabilities and Deferred Credits......................... $ 2,033 $ 2,004
--------- ---------
--------- ---------
</TABLE>
NOTE G -- TRANSACTIONS WITH AFFILIATES
Prior to 1996, BellSouth Telecommunications had a contractual agreement with
BellSouth Advertising & Publishing Corporation (BAPCO), an affiliated company,
wherein BAPCO published certain telephone directories and in return paid
publication fees to BellSouth Telecommunications for publishing rights and other
services. For the year ended December 31, 1995, these fees, included in Other
Operating Revenue, were $721.
In response to changes in the telecommunications environment, BellSouth
Telecommunications and BAPCO established a new contract, based on fees for
services rendered between the companies, which was effective beginning in the
first quarter of 1996. Under the new contract, BellSouth Telecommunications
generated fees of approximately $95 and $78 in 1997 and 1996, respectively. As a
result, BellSouth Telecommunications' 1997 and 1996 revenues related to
directory publishing activities of BAPCO decreased significantly compared to
1995.
At both December 31, 1997 and 1996, amounts receivable from affiliated
companies were $29. Amounts payable to affiliated companies at December 31, 1997
and 1996, both short- and long-term, were $318 and $191, respectively.
NOTE H -- EMPLOYEE BENEFIT PLANS
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 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 1997 and 1996 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.
37
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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 December 31, 1997, the nonrepresented cash balance plan was
recombined with other BellSouth cash balance plans into one nonrepresented plan.
Although only one nonrepresented cash balance plan exists, separate demographic
pools are maintained to generate pension income based upon specific company
demographic information; therefore, the impact of the recombination to BellSouth
Telecommunications will not be material in 1998.
The components of net pension income for the nonrepresented plan are
summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 68 $ 77 $ 68
Interest cost on projected benefit obligation............... 290 297 328
Actual return on plan assets................................ (1,022) (788) (1,255)
Net amortization and deferral............................... 520 316 788
--------- --------- ---------
Net pension income...................................... $ (144) $ (98) $ (71)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the funded status of the plan at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation............................................. $ 3,812 $ 3,606
--------- ---------
--------- ---------
Accumulated benefit obligation........................................ $ 3,929 $ 3,719
--------- ---------
--------- ---------
Projected benefit obligation.......................................... $ 4,244 $ 4,050
Plan assets at fair value............................................... 6,717 6,205
--------- ---------
Plan assets in excess of projected benefit obligation................... $ 2,473 $ 2,155
Unrecognized net gain due to past experience different from assumptions
made................................................................... (1,773) (1,587)
Unrecognized prior service cost......................................... (284) (328)
Unrecognized net asset at transition.................................... (33) (38)
--------- ---------
Prepaid pension cost.................................................. $ 383 $ 202
--------- ---------
--------- ---------
</TABLE>
BellSouth Telecommunications was allocated a portion of the total
represented plan's pension (income) expense. Pension (income) cost allocated to
BellSouth Telecommunications in 1997, 1996 and 1995 for the represented plan was
$(34), $68 and $14, respectively. The change in net pension (income) cost is
affected by several variables, including changes in actuarial assumptions such
as discount rate, return on plan assets and plan amendments. The consolidated
net pension income amounts reflected above are exclusive of curtailment effects
reflected in the work force reduction and restructuring activities (see Note L)
and do not reflect curtailment gains in the amount of $36 and $43, respectively,
in 1997 and 1996.
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
38
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
the plan with amounts reported in the balance sheets. Such disclosures are not
presented in 1997, 1996 and 1995 for the represented plan because the structure
of the BellSouth plans does not permit disaggregation of relevant plan
information on an individual company basis.
The (accrued) prepaid pension benefit costs are included in Other
Liabilities and Deferred Credits and Deferred Charges and Other Assets,
respectively. The significant actuarial assumptions at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Weighted-average discount rate................................................. 7.0% 7.5%
Weighted-average rate of compensation increase................................. 5.9% 5.5%
Expected long-term rate of return on plan assets............................... 8.25% 8.25%
</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. BellSouth's transition benefit obligation 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.
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
$257, $294 and $264 for 1997, 1996 and 1995, 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 in Note L. SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," 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 plans does not permit disaggregation of relevant plan
information on an individual company basis.
The (accrued) prepaid postretirement benefit costs are included in Other
Liabilities and Deferred Credits and Deferred Charges and Other Assets,
respectively. The significant actuarial assumptions at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Weighted-average discount rate................................................. 7.0% 7.5%
Weighted-average rate of compensation increase................................. 5.9% 5.8%
Health care cost trend rate (1)................................................ 9.0% 8.5%
Expected long-term rate of return on plan assets (2)........................... 8.25% 8.25%
</TABLE>
- ------------------------
(1) Trend rate used to value the accumulated postretirement benefit obligation
in 1997 and 1996 is assumed to decrease to 5% by 2003.
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
trust for 1997 and 1996.
39
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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 $258 at December 31, 1997 and the estimated
aggregate service and interest cost components of the 1997 postretirement
benefit cost by $18.
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 expense of $91, $79 and $110 in 1997, 1996 and
1995, respectively, related to these plans.
NOTE I -- STOCK COMPENSATION PLANS
Certain employees of BellSouth Telecommunications participate in stock-based
compensation plans sponsored by BellSouth. The BellSouth Corporation Stock Plan
(the Stock Plan) provides for grants to key employees of stock options and
various other stock-based awards. One share of BellSouth Common Stock is the
underlying security for any award. The aggregate number of shares of BellSouth
Common Stock which may be granted in any calendar year cannot exceed one percent
of the shares outstanding at the time of grant. Prior to adoption of the Stock
Plan, stock options were granted under the BellSouth Corporation Stock Option
Plan. Stock options granted under both plans entitle an optionee to purchase
shares of BellSouth Common Stock within prescribed periods at a price either
equal to, or in excess of, the fair market value on the date of grant. Options
granted under these plans generally become exercisable at the end of three to
five years and have a term of 10 years.
BellSouth Telecommunications applies APB Opinion 25 and related
Interpretations in accounting for stock-based compensation plans. Accordingly,
no compensation cost has been recognized by BellSouth Telecommunications for
stock options granted to its employees. Had compensation cost for BellSouth's
stock-based compensation plans been determined in accordance with the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," BellSouth
Telecommunications' net income (loss) would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) -- as reported............................................... $ 2,314 $ 2,005 $ (1,379)
Net income (loss) -- pro forma................................................. $ 2,305 $ 2,000 $ (1,380)
</TABLE>
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options granted
in 1997, 1996 and 1995 do not vest for several years and additional awards are
made each year.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected life (years)................................................................. 5 7 7
Dividend yield........................................................................ 3.24% 3.39% 4.36%
Expected volatility................................................................... 19.0% 15.4% 15.8%
Risk-free interest rate............................................................... 6.21% 5.52% 7.26%
</TABLE>
40
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
The weighted-average fair values of options granted at fair market value
during 1997, 1996 and 1995 were $8.73, $7.61 and $5.45, respectively. The
weighted-average fair value of options granted at above fair market value during
1995 was $2.48.
NOTE J -- INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," 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.
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.
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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.................................................... $ 1,087 $ 1,056 $ 904
Deferred, net.............................................. 143 24 (145)
Investment tax credits, net................................ (65) (77) (69)
--------- --------- ---------
1,165 1,003 690
--------- --------- ---------
State:
Current.................................................... 167 170 156
Deferred, net.............................................. 40 (3) (28)
--------- --------- ---------
207 167 128
--------- --------- ---------
Total provision for income taxes......................... $ 1,372 $ 1,170 $ 818
--------- --------- ---------
--------- --------- ---------
</TABLE>
Extraordinary losses in 1997 and 1995 are presented in the Consolidated
Statements of Income, net of tax benefits totaling $6 and $1,780, respectively.
All of the 1997 benefit was current. Of the 1995 benefit, $49 was current and
$1,731 was deferred.
41
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE J -- INCOME TAXES (CONTINUED)
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Compensation related.................................................... $ 638 $ 619
Work force reduction charge............................................. 66 210
Allowance for uncollectibles............................................ 76 70
Regulatory sharing accruals............................................. 58 32
Other................................................................... 95 103
--------- ---------
Deferred Tax Assets................................................... 933 1,034
--------- ---------
Depreciation............................................................ (2,001) (1,929)
Other................................................................... (1) (1)
--------- ---------
Deferred Tax Liabilities.............................................. (2,002) (1,930)
--------- ---------
Net Deferred Tax Liability.......................................... $ (1,069) $ (896)
--------- ---------
--------- ---------
</TABLE>
Of the Net Deferred Tax Liability at December 31, 1997 and 1996, $45 and
$183, respectively, were current and $(1,114) and $(1,079), respectively, were
noncurrent.
A reconciliation of the Federal statutory income tax rate to BellSouth
Telecommunications' effective tax rate follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Federal statutory tax rate............................................. 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit.................. 3.7 3.4 3.7
Amortization of investment tax credits................................. (1.8) (2.4) (3.1)
Miscellaneous items, net............................................... .2 .9 1.0
--- --- ---
Effective tax rate................................................... 37.1% 36.9% 36.6%
--- --- ---
--- --- ---
</TABLE>
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Paid For:
Income taxes................................................. $ 1,259 $ 1,111 $ 1,064
--------- --------- ---------
--------- --------- ---------
Interest..................................................... $ 552 $ 585 $ 627
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE L -- 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, consisted of $561 under the provisions of SFAS No.
112, "Employers' Accounting for Postemployment Benefits," related to those
employees who would 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 were $85 for
42
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE L -- WORK FORCE REDUCTION CHARGE (CONTINUED)
expected severance benefit payments after 1997, also under SFAS No. 112, and $55
for additional net curtailment losses related to employee reductions under a
restructuring plan initiated in 1993 and completed in 1995.
The plan was substantially completed in 1997 and resulted in the reduction
of the wireline telephone operations work force by approximately 11,600
employees over the term of the plan.
NOTE M -- DISCONTINUANCE OF SFAS NO. 71
In 1995, as a result of its continuing regulatory and marketplace
assessments, BellSouth Telecommunications concluded that it was required to
discontinue application of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," for financial reporting purposes. Accordingly, BellSouth
Telecommunications 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>
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.
43
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE M -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
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
CATEGORY ASSET LIVES ASSET LIVES
- ----------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
(IN YEARS)
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 adoption by BellSouth Telecommunications of issue basis
accounting for its directory publishing revenues. BellSouth's unregulated
subsidiaries already recognized directory publishing revenues and production
expenses using issue basis accounting.
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.
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 N -- FINANCIAL INSTRUMENTS
The recorded amounts for cash and cash equivalents and commercial paper
approximate fair value due to the short-term nature of these instruments. The
fair value of marketable securities (representing BellSouth Common Stock),
included as a component of Investments and Advances, as well as Debentures and
Notes are based on the closing market prices for each security at December 31,
1997 and 1996, respectively. 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.
Following is a summary of financial instruments where the fair values differ
from the recorded amounts as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
RECORDED ESTIMATED RECORDED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets (Liabilities):
Marketable securities...................... $ 290 $ 549 $ 250 $ 361
Long-Term Debt:
Debentures............................... (3,914) (3,949) (4,590) (4,422)
Notes.................................... (2,175) (2,193) (2,175) (2,141)
</TABLE>
44
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE N -- 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, 1997 and 1996, approximately $485
and $492, respectively, of trade accounts receivable were from Interexchange
Carriers.
NOTE O -- COMMITMENTS AND CONTINGENCIES
LEASES. BellSouth Telecommunications has entered into operating leases for
facilities and equipment used in operations. Rental expense under operating
leases was $136, $177 and $187 for 1997, 1996 and 1995, 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, 1997:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rentals............ $62 $63 $54 $50 $47 $394 $ 670
---- ---- ---- ---- ---- ----- -----
---- ---- ---- ---- ---- ----- -----
</TABLE>
OUTSIDE PLANT. BellSouth Telecommunications currently self insures all of
its outside plant against casualty losses. The net book value of outside plant
was $7,408 and $7,621 at December 31, 1997 and 1996, respectively. 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.
OUTSOURCING CONTRACTS. Beginning in 1997, BellSouth Telecommunications
contracted with various entities to outsource the performance of certain
engineering functions, as well as its information technology operations and
application development. These contracts expire at various dates through 2008,
are generally renewable, and are cancelable upon the payment of additional fees
or for nonperformance. Future minimum payments for these contracts range from
$465 to $625 annually over the next ten years and replace costs previously
incurred for BellSouth Telecommunications' employees, facilities, equipment and
other costs.
LEGAL CLAIMS. BellSouth Telecommunications is subject to claims arising in
the ordinary course of business involving allegations of personal injury, breach
of contract, anti-competitive conduct, employment law issues, regulatory matters
and other actions. BellSouth Telecommunications is also subject to claims
attributable to pre-divestiture events involving environmental liabilities,
rates, taxes, contracts and torts. Certain contingent liabilities for
pre-divestiture events are shared with AT&T Corp.
While complete assurance cannot be given as to the outcome of any legal
claims, BellSouth Telecommunications believes that any financial impact would
not be material to its financial position or annual operating results or cash
flows.
45
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE P -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the following summary of quarterly financial information, all adjustments
necessary for a fair presentation of each period were included.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997
Operating Revenues..................................................... $ 3,805 $ 3,754 $ 3,873 $ 3,914
Operating Income....................................................... $ 1,151 $ 982 $ 986 $ 1,069
Income Before Extraordinary Loss....................................... $ 633 $ 531 $ 536 $ 623
Extraordinary Loss on Early Extinguishment of Debt,
net of tax............................................................ -- -- -- (9)
--------- --------- --------- ---------
Net Income............................................................. $ 633 $ 531 $ 536 $ 614
--------- --------- --------- ---------
--------- --------- --------- ---------
1996
Operating Revenues..................................................... $ 3,655 $ 3,645 $ 3,760 $ 3,716
Operating Income....................................................... $ 993 $ 934 $ 931 $ 849
Net Income............................................................. $ 539 $ 510 $ 497 $ 459
</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 January 1, 1998.
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 Section 13 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/ ISAIAH HARRIS
--------------------------------------
Isaiah Harris
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
AND COMPTROLLER
February 25, 1998
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:
Charles B. Coe*
President
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
Isaiah Harris*
Vice President, Chief Financial Officer and Comptroller
DIRECTORS:
C. Sidney Boren*
Charles B. Coe*
Odie C. Donald*
Jere A. Drummond*
Roger M. Flynt, Jr.*
Isaiah Harris*
Elton R. King*
*By: /s/ ISAIAH HARRIS
----------------------------------
Isaiah Harris
(INDIVIDUALLY AND AS
ATTORNEY-IN-FACT)
February 25, 1998
48
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
BYLAWS
AS AMENDED
EFFECTIVE JANUARY 1, 1998
ARTICLE I
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the shareholders for the
election of Directors and for the transaction of such other business as may
properly come before the meeting shall be held at such place, either within or
without the State of Georgia, on such date and at such time as the Chairman or
President may determine, or if the Chairman or President fails to so determine,
then such meeting shall be held at the principal office of the Corporation at
10:00 a.m. on the fourth Monday in March of each year, or, if such date is a
legal holiday, on the next succeeding business day. The Chairman or President
may specify prior to any special meeting of shareholders held within the year
that such meeting shall be in lieu of the annual meeting, provided that notice
of all purposes of the meeting are described in the meeting notice.
Section 2. Special Meeting. A special meeting of the shareholders may be
called at any time by the Board of Directors, the Chairman, the President or
upon written request to the Secretary of the Corporation, by the holders of at
least twenty-five percent of the outstanding shares entitled to vote on any
issue to be considered at such meeting. Such written request shall specify the
date, time and purpose of the proposed meeting. Such meetings shall be held at
such place, either within or without the State of Georgia, as is stated in the
call and notice thereof.
Section 3. Notice of Meetings of Shareholders. Written notice of each
meeting of shareholders, stating the place, date and time of the meeting, shall
be mailed to each shareholder entitled to vote at or to notice of such meeting
at his address shown on the books of the Corporation not less than ten (10) nor
more than sixty (60) days prior to such meeting unless such shareholder waives
notice of the meeting. If such notice is for a special meeting, the notice
shall also include the purpose or purposes for which the special meeting is
being called and shall indicate that the notice is being issued by or at the
direction of the person or persons calling the meeting. Any shareholder may
execute a waiver of notice, in person or by proxy, either before or after any
meeting. A shareholder shall be deemed to have waived notice if he is present at
such meeting in person or by proxy and does not object at the beginning of the
meeting to the holding of such meeting or the transacting of business at the
meeting. Neither the business transacted at, nor the purpose of, any meeting
need be stated in the waiver of notice of such meeting, except that, with
respect to a waiver of notice of a meeting at which an amendment to the Articles
of Incorporation, a plan of merger or share exchange, a sale of assets, or any
other action which would entitle the shareholder to dissent and obtain payment
for his shares is considered, information as required by the Georgia Business
Corporation Code must be delivered to the shareholder prior to his execution of
the waiver of notice or the waiver itself must expressly waive the right to such
information. Failure to receive notice of any meeting of shareholders shall not
<PAGE>
invalidate the meeting. Notice of any meeting may be given by the Chairman, the
President, the Secretary or by the person or persons calling such meeting. No
notice need be given of the time, date and place of reconvening of any adjourned
meeting, if the time, date and place to which the meeting is adjourned are
announced at the adjourned meeting and if there is no change in the record date.
Section 4. Quorum; Required Shareholder Vote. A quorum for the transaction
of business at any annual or special meeting of shareholders shall exist when
the holders of a majority of the outstanding shares entitled to vote are
represented either in person or by proxy at such meeting. A shareholder who is
present solely to object to the holding of the meeting or transacting business
at the meeting shall not be deemed present for quorum purposes. If a quorum is
present, the affirmative vote of the majority of the shares represented at the
meeting and entitled to vote on the subject matter shall be the act of the
shareholders, unless a greater vote is required by law, by the Articles of
Incorporation or by these Bylaws. When a quorum is once present to organize a
meeting, the shareholders present may continue to do business at the meeting or
at any adjournment thereof (provided no new record date is set), notwithstanding
the withdrawal of enough shareholders to leave less than a quorum. The holders
of a majority of the voting shares represented at a meeting, whether or not a
quorum is present, may adjourn such meeting from time to time.
Section 5. Proxies. A shareholder may vote either in person or by a proxy
which he has duly executed in writing. No proxy shall be valid after eleven
(11) months from the date of its execution unless a longer period is expressly
provided in the proxy.
Section 6. Action of Shareholders Without Meeting. Any action required
to be, or which may be, taken at a meeting of the shareholders, may be taken
without a meeting if written consent(s), describing the action taken, shall
be signed by all of the shareholders entitled to vote with respect to the
subject matter thereof, except that, the consenting shareholder must have
been furnished the same information that would have been required by the
Georgia Business Corporation Code to be sent to shareholders in a notice of a
meeting at which the proposed action would have been submitted to the
shareholders for action or the consent must expressly waive the right to such
information. Such consent shall have the same force and effect as a
unanimous affirmative vote of the shareholders at a meeting of the
shareholders and may be described as such in any document. The written
consent shall be delivered to the Corporation for inclusion in the minutes of
the proceedings of the shareholders or filing with the corporate records.
ARTICLE II
DIRECTORS
Section 1. Power of Directors. The Board of Directors shall direct the
management of the business and affairs of the Corporation and may exercise all
the powers of the Corporation, subject to any restrictions imposed by law, by
the Articles of Incorporation or by these Bylaws.
Section 2. Composition, Election and Term of the Board of Directors. The
Board of Directors of the Corporation shall consist of at least one and not more
than thirty (30)
2
<PAGE>
natural persons, with the exact number to be determined by the number of persons
elected to the Board of Directors and serving. Directors shall be elected at
each annual shareholders, meeting. A Director's term shall expire at the next
annual shareholders, meeting. Despite expiration of a Director's term, however,
the Director shall continue to serve until his successor is elected and
qualifies or until there is a decrease in the number of Directors.
Section 3. Election of Chairman. The Board of Directors may elect from
their number a Chairman of the Board. The Chairman shall preside at all
meetings of the shareholders, of the Board of Directors, and of the Executive
Committee, and shall have such other powers and duties as may be conferred or
assigned by the Board of Directors. If there be no Chairman, or in the absence
or disability of the Chairman, the President shall act as Chairman and preside
at such meetings.
Section 4. Meetings of the Board Notice of Directors; Notice of
Meetings; Waiver of Notice. The annual meeting of the Board of Directors for
the purpose of electing officers and transacting such other business as may
be brought before the meeting shall be held each year following the annual
meeting of shareholders. The Board of Directors may by resolution provide
for the date, time and place of other regular meetings and no notice of such
regular meetings need be given. Special meetings of the Board of Directors
may be called by the Chairman, the President or any member of the Executive
Committee, and shall be called by the Chairman or the President upon request
in writing signed by two or more Directors and specifying the purpose or
purposes of the meeting. Notice of the date, time and place of such special
meetings shall be given to each Director, at his residence or usual place of
business, in person or by first class mail, express courier, facsimile
machine, telegraph, cablegram or telephone, or by any other means customary
for expedited business communications, at least two (2) days before the
meeting. Any Director may execute a waiver of notice, either before or after
any meeting, and deliver the waiver to the Corporation for filing with the
corporate records. A Director's attendance at or participation in a meeting
waives any required notice to him of the meeting, unless the Director, at the
beginning of the meeting, objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to action
taken at the meeting. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board of Directors need be stated in the
notice or waiver of notice of such meeting. Any meeting may be held at any
place within or without the State of Georgia.
Section 5. Quorum and Voting. One-third of the Directors in office
immediately before the meeting begins shall constitute a quorum for the
transaction of business at any meeting. If a quorum is present when the vote is
taken, the vote of a majority of the Directors present shall be the act of the
Board of Directors unless a greater vote is required by law, by the Articles of
Incorporation or by these Bylaws. A majority of the Directors present, whether
or not a quorum is present, may adjourn a meeting to any specified time, date
and place.
Section 6. Action of Board of Directors Without Meeting. Any action
required or permitted to be taken at a meeting of the Board of Directors or any
committee thereof may be taken without a meeting if written consent(s),
describing the action taken, is signed by all the Directors or committee members
and delivered to the Corporation for inclusion with the minutes of the
proceedings of the Board of Directors or committee or filing with the corporate
records. Such consent shall have the same force and effect as a unanimous
affirmative vote of the
3
<PAGE>
Board of Directors or committee, as the case may be, and may be described as
such in any document.
Section 7. Committees. The Board of Directors, by resolution adopted by
a majority of all of the Directors, may designate from among its members an
Executive Committee and such other committees as it deems necessary or
desirable and may fix the quorum thereof, each committee composed of one (1)
or more Directors, except that the Executive Committee shall have two (2) or
more Directors. Any committee so designated shall serve at the pleasure of
the Board of Directors and may exercise such authority as is delegated by the
Board of Directors, provided that no committee shall (1) approve or propose
to shareholders action that the Georgia Business Corporation Code requires to
be approved by shareholders; (2) fill vacancies on the Board of Directors or
on any of its committees; (3) amend Articles of Incorporation; (4) adopt,
amend, or repeal Bylaws; or (5) approve a plan of merger not requiring
shareholder approval.
Section 8. Executive Committee. The Chairman, if there be one, and the
President, shall be members of the Executive Committee. The Executive Committee
shall have, except as otherwise provided herein, by law or by resolution of the
Board of Directors, all the authority of the Board of Directors during the
intervals between the meetings of the Board of Directors. Minutes of all
meetings of the Executive Committee shall be kept and recorded by the Secretary
or by a director or officer designated by the Chairman or the President to
perform such duties during all or any portion of a meeting, and shall be from
time to time reported to the Board of Directors. The Board of Directors may
designate from time to time one or more Directors as alternate members of the
Executive Committee or of any other committee, who may replace any absent member
or members at any meeting of the committee.
Section 9. Vacancies. A vacancy occurring in the Board of Directors
including a vacancy or vacancies created by an increase in the number of
Directors, may be filled by the shareholders or by the affirmative vote of a
majority of the remaining Directors regardless of whether a quorum of Directors
remain. A vacancy that will occur at a specified later date may be filled
before the vacancy occurs but the new Director may not take office until the
vacancy occurs. A Director elected to fill a vacancy shall serve for the
unexpired term of his predecessor in office.
Section 10. Telephone Conference Meetings. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or committee by means of
telephone conference or by any means of communication by which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this Section 10 shall constitute presence in person at such meeting.
ARTICLE III
OFFICERS
Section 1. Executive Structure of the Corporation. The officers of the
Corporation shall be elected by the Board of Directors and may consist of a
Chairman, a President, such number of Group Presidents, Executive Vice
Presidents, Senior Vice Presidents, State Presidents, Presidents (of a
business or functional unit or division), and Vice Presidents as the Board of
Directors shall from time to time determine, a Secretary, a Treasurer, a
Comptroller and
4
<PAGE>
such other officers as may be elected by the Board of Directors. Each officer
shall hold office for the term for which he has been elected or appointed and
until his successor has been elected or appointed and has qualified, or until
his earlier resignation, removal from office or death. Any two or more offices
may be held by the same person, except that neither the Chairman nor the
President shall serve as Secretary or Assistant Secretary. The Chairman or the
President may change the title and responsibilities, but not the salary band, of
any individual holding one of the following offices to another title within this
group of offices: Group President, Executive Vice President, Senior Vice
President, State President, President (of a business or functional unit or
division), and Vice President.
Section 2. Appointed Officers. The Board of Directors may appoint one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers and agents as the Board of Directors may consider necessary, who shall
have such authority and perform such duties as may be provided in these Bylaws
or as may be assigned to them by the Board of Directors, the President or other
appropriate officer.
Section 3. President. The President shall have the following powers
and duties in addition to those described elsewhere in these Bylaws. He
shall give general supervision and direction to the affairs of the
Corporation, subject to the direction of the Board of Directors. He shall
have the power to make and execute contracts, deeds, leases, evidences of
indebtedness and other instruments on behalf of the Corporation and to
delegate such powers to others. He shall have such additional powers and
duties as may be conferred or assigned by the Board of Directors or as
usually appertain to the chief executive officer in like business
corporations. He also shall be empowered at any time and from time to time
to issue and promulgate rules, regulations and directives relating to the
conduct of the business and affairs of the Corporation and to delegate such
authority to others. The Secretary of the Corporation shall maintain a
record of such rules, regulations and directives as are issued and
promulgated by the President. Rules, regulations and directives so issued
shall be available at any time to the Board of Directors and, subject to the
authority of the Board of Directors or Executive Committee at any time to
amend, suspend or repeal any or all of such rules, regulations or directives,
shall evidence the authority of the officers and employees named therein to
act on behalf of the Corporation with respect to the matters therein set
forth. If the President is absent or disabled, the duties of the President
shall be performed by such Group President, Executive Vice President, Senior
Vice President, Vice President or other officer of the Corporation as the
Board of Directors or the President may have designated.
Section 4. Group Presidents, Executive Vice Presidents, Senior Vice
Presidents, State Presidents, Presidents (of a business or a functional unit or
division), and Vice Presidents. Each Group President, Executive Vice President,
Senior Vice President, State President, President (of a business or a functional
unit or division), and Vice President shall have such authority and perform such
duties as may be assigned to him by the Board of Directors, the Chairman or the
President.
Section 5. Secretary. The Secretary shall send all requisite notices of
meetings of the shareholders, the Board of Directors and the Executive
Committee. The Secretary shall attend all meetings of the shareholders, the
Board of Directors, and the Executive Committee, and shall keep a true and
faithful record of the proceedings unless the Chairman or President has
designated another director or officer to perform such duties during all or any
portion of a meeting.
5
<PAGE>
The Secretary shall have custody of the seal of the Corporation, the securities
of the Corporation's subsidiary corporations, the stock records of the
corporation, and all other records, books, documents, and papers of the
Corporation, except those required to be in the custody of the Treasurer or the
Comptroller, and except such records as may be kept in departmental offices.
The Secretary shall sign and execute all documents which require his signature
and execution, shall affix the seal of the Corporation thereto and attest the
same when necessary, and shall authenticate corporate records, when required.
Assistant Secretaries appointed by the Board of Directors shall perform such
duties as the Secretary finds appropriate to delegate in the ordinary course of
business. Any Assistant Secretary, in the case of the absence or disability of
the Secretary, may exercise the authority and perform the duties of the
Secretary.
Section 6. Treasurer. The Treasurer shall receive and have charge of
all funds of the Corporation and shall have custody of all securities held by
the Corporation, except those securities in the custody of the Secretary. He
shall deposit the funds to the credit of the Corporation in such depositories
as shall be approved from time to time by the Board of Directors, the
Chairman, the President, the Treasurer, or an Assistant Treasurer. The funds
shall be disbursed only on the approval of the Comptroller or his duly
authorized representative, and under such rules and regulations as the Board
of Directors may adopt. The Treasurer shall keep full and regular books
showing all his receipts and disbursements, which books shall be open at all
times to the inspection of the Chairman, the President or of any other member
of the Board of Directors; and he shall make such reports as the Board of
Directors, the Chairman, or the President may require. Assistant Treasurers
appointed by the Board of Directors shall perform such duties as the
Treasurer finds appropriate to delegate in the ordinary course of business.
With the approval of the Chairman, or the President, the Treasurer shall
designate which Assistant Treasurer shall perform the duties of the Treasurer
in case of the absence or disability of the Treasurer. The Treasurer and
each Assistant Treasurer shall give such security for the faithful
performance of his duties as the Board of Directors may require.
Section 7. Comptroller. The Comptroller shall be the principal accounting
officer of the Corporation and shall have custody and charge of all books of
account, except those required by the Treasurer in keeping record of the work of
his office, and shall have supervision over such accounting records as may be
kept in departmental offices. The Comptroller shall have access to all books of
account, including the records of the Secretary and the Treasurer, for purposes
of audit and for obtaining information necessary to verify or complete the
records of his office. The Comptroller or his duly authorized representative
shall certify, authorize or approve payments and vouchers; and no payments from
the general cash shall be made by the Treasurer except as certified, authorized
or approved by the Comptroller or his authorized representative. With the
approval of the Chairman or the President, the Comptroller may designate some
other person or persons to perform such of his duties as he finds necessary to
delegate in the ordinary conduct of the business, and shall with such approval
designate some person to perform the duties of Comptroller in case of his
absence or disability.
Section 8. Other Duties and Authority. Each officer, employee and agent of
the Corporation shall have such other duties and authority as may be conferred
upon him by the Board of Directors or delegated to him by the Chairman or the
President.
Section 9. Removal of Officers. Any officer may be removed at any time by
the Board of Directors with or without cause, and such vacancy may be filled by
the Board of
6
<PAGE>
Directors. This provision shall not prevent the making of a contract of
employment for a definite term with any officer and shall have no effect upon
any cause of action which any officer may have as a result of removal in breach
of a contract of employment.
ARTICLE IV
STOCK
Section 1. Stock Certificates. The shares of stock of the Corporation
shall be represented by certificates in such form as may be approved by the
Board of Directors, which certificates shall bear the name of the issuing
corporation and that it is organized under the laws of Georgia, the name of the
shareholder, the number, class, and series, if any, of shares represented, and
the date of issue; and which shall be signed by the Chairman or President and
the Secretary or Treasurer or an Assistant Secretary or Assistant Treasurer of
the Corporation; and which shall be sealed with the seal of the Corporation. No
share certificate shall be issued until adequate consideration for the shares as
determined by the Board of Directors has been received by the Corporation. A
facsimile of the seal of the Corporation may be used in connection with the
share certificates of the Corporation. Facsimile signatures of the officers
named in this Section may be used in connection with said certificates if the
certificate is countersigned by a transfer agent or registered by a registrar
other than the Corporation itself or an employee of the Corporation. In the
event any officer whose facsimile signature has been placed upon a certificate
shall cease to be such officer before the certificate is issued, the certificate
may be validly issued.
Section 2. Transfer of Stock. Shares of stock of the Corporation shall be
transferred only on the books of the Corporation upon surrender to the
Corporation of the certificate or certificates representing the shares to be
transferred accompanied by an assignment in writing of such shares properly
executed by the shareholder of record or his duly authorized attorney-in-fact
and with all taxes on the transfer having been paid. The Corporation may refuse
any requested transfer until furnished evidence satisfactory to it that such
transfer is proper. Upon the surrender of a certificate for transfer of stock,
such certificate shall at once be conspicuously marked on its face "Canceled"
and filed with the permanent stock records of the Corporation. The Board of
Directors may make such additional rules concerning the issuance, transfer and
registration of stock and requirements regarding the establishment of lost,
destroyed or wrongfully taken stock certificates (including any requirement of
an indemnity bond prior to issuance of any replacement certificate) as it deems
appropriate.
Section 3. Registered Shareholders. The Corporation may deem and treat the
holder of record of any stock as the absolute owner for all purposes and shall
not be required to take any notice of any right or claim of right of any other
person.
Section 4. Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, for
determining shareholders entitled to receive payment of any dividend, or for
determining shareholders for any other purpose, the Board of Directors of the
Corporation may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than
seventy (70) days prior to the date on which the particular action, requiring
such determination of shareholders, is to be taken. A determination of
shareholders entitled to notice of or to vote at a shareholders, meeting is
effective for any adjournment of the meeting unless the Board of Directors
fixes a new record date
7
<PAGE>
which it must do if the meeting is adjourned to a date more than 120 days after
the date fixed for the original meeting.
ARTICLE V
SEAL
The common seal of the Corporation shall bear within concentric circles the
words "BellSouth Telecommunications, Inc." with the word "Seal" in the center.
The seal and its attestation may be facsimiles or may be otherwise printed on
any document and shall have, to the extent permitted by law, the same force and
effect as if it had been affixed and attested manually.
ARTICLE VI
INDEMNITY
Section 1. Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including any action
by or in the right of the Corporation), by reason of the fact that he is or was
a Director or officer of the Corporation, or is or was serving at the request of
the Corporation as a Director or officer of another corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified by the
Corporation against expenses (including reasonable attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interest
of the Corporation (and with respect to any criminal action or proceeding, if he
had no reasonable cause to believe his conduct was unlawful), to the maximum
extent permitted by, and in the manner provided by, the Georgia Business
Corporation Code.
Section 2. The Board of Directors is expressly authorized on behalf of
the Corporation to enter into indemnity agreements between the Corporation
and any Director or officer of the Corporation, or any person serving at the
request of the Corporation as a Director, officer, trustee, agent or
fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or enterprise, in form and content acceptable to the
Board of Directors and substantially in the form of agreement submitted to
and approved by the shareholders of the Corporation. Such agreements may
provide that the Corporation shall indemnify such persons and provide for
procedural rights intended to assure that appropriate indemnification is
available against expenses (including reasonable attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
persons in connection with such action, suit or proceeding. No
indemnification may be made for liability (i) for any appropriation, in
violation of a Director's duties, of any business opportunity of the
Corporation, (ii) for acts or omissions not in good faith or constituting
intentional misconduct or a knowing violation of law, (iii) for the types of
liability set forth in Section 14-2-154 of the Georgia Business Corporation
Code, or (iv) for any transaction from which the person derived an improper
personal benefit.
8
<PAGE>
ARTICLE VII
AMENDMENT OF BYLAWS
Unless prohibited by the Georgia Business Corporation Code, the Board of
Directors shall have the power to alter, amend or repeal the Bylaws or adopt new
Bylaws, but any Bylaws adopted by the Board of Directors may be altered, amended
or repealed and new Bylaws adopted by the shareholders. The shareholders may
prescribe that any Bylaw or Bylaws adopted by them shall not be altered, amended
or repealed by the Board of Directors. If the Bylaws are to be amended at a
special meeting of Directors, notice of such intention shall be included in the
notice of the meeting. Action by the shareholders with respect to the Bylaws
shall be taken by an affirmative vote of a majority of all shares outstanding
and entitled to vote.
9
<PAGE>
EXHIBIT 12
BellSouth Telecommunications
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1. Earnings
(a) Income from continuing operations before deductions for taxes
and interest................................................... $ 4,229 $ 3,727 $ 2,808 $ 3,606 $ 2,034
--------- --------- --------- --------- ---------
(b) Portion of rental expense representative of interest
factor......................................................... 45 60 62 80 80
--------- --------- --------- --------- ---------
TOTAL............................................................ $ 4,274 $ 3,787 $ 2,870 $ 3,686 $ 2,114
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
2. Fixed Charges
(a) Interest..................................................... $ 550 $ 569 $ 594 $ 569 $ 586
(b) Portion of rental expense representative of interest
factor......................................................... 45 60 62 80 80
--------- --------- --------- --------- ---------
TOTAL............................................................ $ 595 $ 629 $ 656 $ 649 $ 666
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio (1 divided by 2)........................................... 7.18 6.02 4.38 5.68 3.17
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Charles B.
Coe, Isaiah Harris 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 do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 28th day
of January, 1998.
<TABLE>
<S> <C> <C>
/s/ JERE A. DRUMMOND
-----------------------------------------
Jere A. Drummond
Director
</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, the undersigned is an officer and a director of the Company as
indicated under his name;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Charles B.
Coe, Isaiah Harris 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 do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 28th day
of January, 1998.
<TABLE>
<S> <C>
/s/ ODIE C. DONALD
------------------------------------------
Odie C. Donald
Group President--Customer
Operations
Director
</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, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Charles B.
Coe, Isaiah Harris 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 do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 2nd day of
February, 1998.
<TABLE>
<S> <C> <C>
/s/ C. SIDNEY BOREN
-----------------------------------------
C. Sidney Boren
Director
</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, the undersigned is an officer and a director of the Company as
indicated under his name;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Charles B.
Coe, Isaiah Harris 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 do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 28th day
of January, 1998.
<TABLE>
<S> <C> <C>
/s/ ELTON R. KING
-----------------------------------------
Elton R. King
Group President--Network and
Carrier Services
Director
</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, the undersigned is an officer and a director of the Company as
indicated under his name;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Charles B.
Coe, Isaiah Harris 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 do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 28th day
of January, 1998.
<TABLE>
<S> <C> <C>
/s/ ROGER M. FLYNT, JR.
-----------------------------------------
Roger M. Flynt, Jr.
Group President--Regulatory and
External Affairs
Director
</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, the undersigned is an officer and a director of the Company as
indicated under his name;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Charles B.
Coe, Isaiah Harris 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 do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 28th day
of January, 1998.
<TABLE>
<S> <C> <C>
/s/ CHARLES B. COE
-----------------------------------------
Charles B. Coe
President
Director
</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, the undersigned is an officer and a director of the Company as
indicated under his name;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Charles B.
Coe, Isaiah Harris 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 do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 28th day
of January, 1998.
<TABLE>
<S> <C> <C>
/s/ ISAIAH HARRIS
-----------------------------------------
Isaiah Harris
Vice President
Chief Financial Officer
Comptroller
Director
</TABLE>
<TABLE> <S> <C>
<PAGE>
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0
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