SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1049
BELLSOUTH TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-0436120
(State of Incorporation) (I.R.S. Employer
Identification Number)
675 West Peachtree Street, N. E., Atlanta, Georgia 30375
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 404 529-8611
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION,
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___
Table of Contents
Item Page
Part I
1. Financial Statements 3
Consolidated Statements of Income and
Retained Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Selected Operating Data 8
2. Management's Discussion and Analysis of
Results of Operations 11
Results of Operations 11
Volumes of Business 12
Operating Revenues 13
Operating Expenses 14
Other Income Statement Items 15
Regulatory Developments and Competition 15
Federal Developments 15
State Developments 15
Other Matters 16
Safe Harbor Statement 19
Part II
6. Exhibits and Reports on Form 8-K 20
PART I -- FINANCIAL INFORMATION
<TABLE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(Dollars In Millions)
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Revenues:
Local service $ 2,380 $ 2,143 $ 6,987 $ 6,315
Interstate access 944 916 2,849 2,761
Intrastate access 203 197 609 601
Toll 180 189 532 549
Other 488 428 1,374 1,206
Total Operating Revenues 4,195 3,873 12,351 11,432
Operating Expenses:
Cost of services and
products 1,455 1,319 4,172 3,816
Depreciation and
amortization 847 837 2,509 2,482
Selling, general and
administrative 811 731 2,186 2,015
Total Operating Expenses 3,113 2,887 8,867 8,313
Operating Income 1,082 986 3,484 3,119
Interest Expense 132 133 409 401
Other Income (Expense), net (2) 3 2 4
Income Before Income Taxes 948 856 3,077 2,722
Provision for Income Taxes 322 320 1,124 1,022
Net Income $ 626 $ 536 $ 1,953 $ 1,700
Retained Earnings:
At beginning of period $ 1,252 $ 1,039 $ 1,140 $ 870
Add: Net Income 626 536 1,953 1,700
Deduct: Dividends Declared (567) (488) (1,782) (1,483)
At end of period $ 1,311 $ 1,087 $ 1,311 $ 1,087
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 155 $ 49
Accounts receivable, net of allowance for
uncollectibles of $115 and $108 2,924 2,951
Material and supplies 272 259
Other current assets 165 163
Total Current Assets 3,516 3,422
Investments and Advances 309 299
Property, Plant and Equipment:
Property, plant and equipment 49,671 47,868
Accumulated depreciation 30,758 29,015
Property, Plant and Equipment, net 18,913 18,853
Deferred Charges and Other Assets 873 652
Total Assets $ 23,611 $ 23,226
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year $ 1,367 $ 2,516
Accounts payable 1,330 1,116
Other current liabilities 2,483 2,217
Total Current Liabilities 5,180 5,849
Long-Term Debt 6,495 5,489
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,040 1,114
Unamortized investment tax credits 179 213
Other liabilities and deferred credits 1,999 2,033
Total Deferred Credits and Other
Liabilities 3,218 3,360
Shareholder's Equity:
Common stock, one share, no par value 7,407 7,388
Retained earnings 1,311 1,140
Total Shareholder's Equity 8,718 8,528
Total Liabilities and Shareholder's Equity $ 23,611 $ 23,226
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In Millions)
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $1,953 $1,700
Adjustments to net income:
Depreciation and amortization 2,509 2,482
Provision for uncollectibles 101 126
Deferred income taxes and unamortized
investment tax credits 39 111
Net change in:
Accounts receivable and other current assets (151) (83)
Accounts payable and other current liabilities 416 144
Deferred charges and other assets (228) (179)
Deferred credits and other liabilities (34) 70
Other reconciling items, net 77 2
Net cash provided by operating activities 4,682 4,373
Cash Flows from Investing Activities:
Capital expenditures (2,593) (2,504)
Other investing activities, net 26 6
Net cash used for investing activities (2,567) (2,498)
Cash Flows from Financing Activities:
Net repayments of short-term borrowings (646) (457)
Proceeds from long-term debt 1,000 -
Repayments of long-term debt (560) -
Advances from parent and affiliates 462 247
Repayments of advances from parent and affiliates (465) (228)
Dividends paid to parent (1,825) (1,479)
Other financing activities, net 25 (2)
Net cash used for financing activities (2,009) (1,919)
Net Increase (Decrease) in Cash and Cash Equivalents 106 (44)
Cash and Cash Equivalents at Beginning of Period 49 100
Cash and Cash Equivalents at End of Period $ 155 $ 56
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars In Millions)
Note A -- Preparation of Interim Financial Statements
The consolidated financial statements of BellSouth
Telecommunications, Inc. (BellSouth Telecommunications) have been
prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). Certain amounts have been
reclassified from previous presentations. These consolidated
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. In
the opinion of BellSouth Telecommunications, these statements
include all adjustments necessary for a fair presentation of the
results of all interim periods reported herein. All adjustments
are of a normal recurring nature unless otherwise disclosed.
Certain information and footnote disclosures prepared in accordance
with generally accepted accounting principles have been either
condensed or omitted pursuant to SEC rules and regulations.
BellSouth Telecommunications believes, however, that the
disclosures made are adequate for a fair presentation of results of
operations, financial position and cash flows. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included
in BellSouth Telecommunications' latest annual report on Form 10-K
and previous quarterly reports on Form 10-Q. BellSouth
Telecommunications is a wholly-owned subsidiary of BellSouth
Corporation (BellSouth).
Note B -- Supplemental Cash Flow Information
For the Nine Months
Ended September 30,
1998 1997
Cash Paid For:
Income taxes $1,002 $ 973
Interest $ 357 $ 366
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note C -- South Carolina Regulatory Settlement
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 to its customers in 1997. Accordingly,
in the second quarter of 1997, BellSouth Telecommunications reduced
operating revenues by $72 ($47 after tax) in connection with the
settlement.
Note D -- Issuance of Debt
In June 1998, BellSouth Telecommunications issued $500 of 6 3/8%
Debentures, due June 1, 2028, and $500 of 6% Reset Put Securities,
due June 15, 2012. The purpose of these issues was to refinance
$500 aggregate principal amount of BellSouth Telecommunications' 5
1/4% Notes that matured on June 8, 1998 and to provide funds for
general corporate purposes including the refinancing of commercial
paper.
In conjunction with the issuance of the 6% Reset Put Securities,
BellSouth Telecommunications entered into an interest rate swap
agreement. Under the agreement, BellSouth Telecommunications will
pay a variable rate that is based on LIBOR and will receive a fixed
rate of 6% in return. The LIBOR-based rate in effect at September
30, 1998 was 5.5945%. The agreement calls for periodic interim
settlements and expires June 15, 2002.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA
(Unaudited)
Percent Change
1998 vs. 1997 vs.
1998 1997 1996
Equivalent Access Lines in Service at September 30 (Thousands)(a):
By Type:
Switched Access Lines:
Residence 16,329 4.2% 4.2%
Business 7,266 3.4 5.9
Other 274 1.0 3.4
Total Switched Access Lines 23,869 3.9 4.7
Access Line Equivalents (b):
Basic Rate ISDN (c) 175 34.3 53.4
Primary Rate ISDN 458 103.9 168.6
DS0 681 5.7 (1.9)
DS1 4,090 27.6 49.0
DS3 6,646 48.1 59.5
Total Access Line Equivalents 12,050 38.6 50.1
Total Equivalent Access Lines in 35,919 13.4 14.2
Service
Switched Access Lines By State (Thousands)(a):
Florida 6,430 4.6% 5.7%
Georgia 4,131 4.8 5.5
Tennessee 2,670 2.2 3.5
North Carolina 2,425 4.7 5.7
Louisiana 2,334 3.7 3.7
Alabama 1,959 2.3 3.7
South Carolina 1,446 4.2 3.7
Mississippi 1,272 3.5 3.3
Kentucky 1,202 2.9 3.4
Total Switched Access Lines By 23,869 3.9 4.7
State
(a) Prior period operating data are often revised at later dates
to reflect updated information. The above information reflects the
latest data available for the periods indicated.
(b) Access line equivalents are based on conversion factors that
result from the estimated capacity of one switched access line.
The conversion factors used are as follows:
Basic Rate ISDN (c) 2.5/1
Primary Rate ISDN 24/1
DS0 1/1
DS1 24/1
DS3 672/1
(c) Basic Rate ISDN lines are included in BellSouth
Telecommunications' switched access line count as equaling one
line. The amounts shown as access line equivalents are the
estimated incremental equivalent access lines resulting from these
lines.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA (Continued)
(Unaudited)
Percent Change for
the Periods Ended
1998 vs. 1997 vs.
1998 1997 1996
Access Minutes of Use (Millions)(d)(e):
Interstate:
Three months ended March 31 18,997 7.2% 6.4%
Three months ended June 30 19,805 6.8 10.1
Three months ended September 30 19,728 6.5 9.2
Nine months ended September 30 58,530 6.8 8.6
Intrastate:
Three months ended March 31 6,085 9.6 8.4
Three months ended June 30 6,435 9.6 12.2
Three months ended September 30 6,710 12.5 11.5
Nine months ended September 30 19,230 10.6 10.7
Total Access Minutes of Use:
Three months ended March 31 25,082 7.8 6.9
Three months ended June 30 26,240 7.4 10.6
Three months ended September 30 26,438 8.0 9.7
Nine months ended September 30 77,760 7.7 9.1
Toll Messages (Millions)(d):
Three months ended March 31 201 (12.4)% (18.1)%
Three months ended June 30 201 (13.3) (10.5)
Three months ended September 30 199 (11.4) (10.9)
Nine months ended September 30 601 (12.4) (13.3)
(d) Prior period operating data are often revised at later dates
to reflect updated information. The above information reflects the
latest data available for the periods indicated.
(e) Minutes of Use are classified as either interstate or
intrastate based on the percentage interstate usage factor. This
factor is updated periodically.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA (Continued)
(Unaudited)
For the Nine
Months Ended
September 30,
1998
Ratio of Earnings to Fixed Charges (f) 7.82
(f) For the purpose of this ratio: (1) earnings have been
calculated by adding income before income taxes, gross interest
expense and such portion of rental expense representative of the
interest factor on such rentals; and (2) fixed charges are
comprised of gross interest expense and such portion of rental
expense representative of the interest factor on such rentals.
At At
September 30, December 31,
1998 1997
Debt Ratio (g) 47.3% 48.3%
(g) This ratio is calculated by dividing the sum of debt maturing
within one year and long-term debt, net of unamortized debt
issuance costs, by the sum of shareholder's equity, debt maturing
within one year and long-term debt, net of unamortized debt
issuance costs.
BELLSOUTH TELECOMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
(Dollars in Millions)
Management's Discussion and Analysis of Results of Operations
(MD&A) should be read in conjunction with MD&A in BellSouth
Telecommunications, Inc.'s (BellSouth Telecommunications)
latest annual report on Form 10-K and previous
quarterly reports on Form 10-Q.
BellSouth Telecommunications is a wholly-owned subsidiary of
BellSouth Corporation (BellSouth). BellSouth Telecommunications
serves, in the aggregate, approximately two-thirds of the
population and one-half of the territory within Alabama, Florida,
Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina and Tennessee. BellSouth Telecommunications primarily
provides local exchange and toll communications services within
geographic areas, called Local Access and Transport Areas (LATAs),
and provides network access services to enable interLATA and
intraLATA 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% of BellSouth Telecommunications' Total Operating
Revenues for both the nine-month periods ended September 30, 1998
and 1997 were from wireline services. Charges for local, access and
toll services for the nine-month period ended September 30, 1998
accounted for approximately 64%, 31% and 5%, respectively, of the
wireline revenues discussed above. The remainder of BellSouth
Telecommunications' Total Operating Revenues was derived
principally from other nonregulated services as well as sales and
maintenance of customer premises equipment (CPE).
RESULTS OF OPERATIONS
For the Nine
Months Ended
September 30,
1998 1997
Net Income $1,953 $1,700
For the nine-month period ended September 30, 1998, Net Income
increased by $253 (14.9%). The increase for the nine-month period
resulted primarily from continued strong growth in key business
volumes. In addition, net income for the 1997 period was reduced by
an after-tax charge of $47 related to a regulatory settlement in
South Carolina (see Note C to the Consolidated Financial Statements).
Volumes of Business
Total equivalent access lines are comprised of switched access
lines (including residence, business and other) as well as access
line equivalents. Access line equivalents are derived from non-
switched digital and data transmission lines and are based on
conversion factors that result from the estimated capacity of one
switched access line. Total equivalent access lines in service as
of September 30, 1998 increased by approximately 4,258,000 (13.4%)
since September 30, 1997 to 35,919,000, compared to an increase of
3,928,000 (14.2%) for the same 1997 period. The growth in total
equivalent access lines continues to reflect economic growth in the
Southeast, successful marketing programs and increasing demand for
high-capacity digital and data products that are included in access
line equivalents. The growth in total equivalent access lines also
includes an increase of 314,000 in resold lines to 442,000.
Switched business and residence access lines increased by 3.4% and
4.2%, respectively, compared to growth rates of 5.9% and 4.2% in
the same 1997 period. The decrease in the growth rate for switched
business lines was primarily due to the migration of business
customers from traditional business line services to digital and
data products. To a lesser degree, the growth rate for switched
business lines was also affected by the increased presence of
facilities-based competition. In addition to strong economic growth
in the region, the growth rate for switched residence access lines
reflects demand related to home office purposes, access to on-line
computer services and children's phones. The number of such
additional lines included in total switched residence lines
increased by 294,000 (15.7%) to 2,164,000 and accounted for
approximately 44.3% and 32.6% of the overall increase in switched
residence access lines and total switched access lines,
respectively, since September 30, 1997. Access line equivalents
increased by 3,357,000 (38.6%) compared to an increase of 2,904,000
(50.1%) for the same 1997 period. The increase is primarily due to
continued growth in demand for digital and data products that
provide services such as bulk data transmission, video
conferencing, ATMs, check/credit card authentication, multimedia
and interconnection with wireless networks.
Access minutes of use represent the volume of traffic carried by
interexchange carriers, both interstate and intrastate, using
BellSouth Telecommunications' local facilities. Total access
minutes of use increased by 5,575 million (7.7%) for the nine-month
period ended September 30, 1998 compared to an increase of 9.1% for
the same 1997 period. The increase in total access minutes of use
was primarily attributable to switched 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). However, the growth rate in total
minutes of use continues to be negatively impacted by competition
and the migration of interexchange carriers to categories of
service (e.g., special access) that have a fixed charge, as opposed
to a volume-driven charge, such as high-capacity digital and data
products.
Toll messages are comprised of Message Telecommunications Service
and Wide Area Telecommunications Service. For the nine-month
period ended September 30, 1998, toll messages decreased by 85
million (12.4%) compared to a decrease of 13.3% for the same 1997
period. The decrease in 1998 is primarily attributable to
continuing competition from interexchange carriers in the intraLATA
toll market as well as the increased penetration of local area
calling plans (LACPs) in existing calling plan areas.
Effects of competition and the increasing penetration of LACPs
result in the transfer of calls from toll to access and local
service categories, respectively, but the corresponding revenues
are not generally shifted at commensurate rates. Competition in the
intraLATA toll market will continue to adversely impact toll
message volumes.
Operating Revenues
Total Operating Revenues increased $919 (8.0%) for the nine-month
period ended September 30, 1998 when compared to the corresponding
1997 period. Excluding a $72 reduction of revenues related to a
regulatory settlement in South Carolina, recorded in 1997, the
increase in total operating revenues for the nine-month period
would have been 7.4%. The components of Total Operating Revenues
were as follows:
For the Nine
Months Ended
September 30,
1998 1997
Local Service $ 6,987 $ 6,315
Interstate Access 2,849 2,761
Intrastate Access 609 601
Toll 532 549
Other Services 1,374 1,206
Total Operating Revenues $12,351 $11,432
Local Service revenues increased $672 (10.6%) for the nine-month
period ended September 30, 1998 as compared to the same 1997
period. The increase for the period was due primarily to a 3.9%
growth in switched access lines in service since September 30,
1997, an increase of $181 due to higher customer demand for
optional services, such as custom calling features, and an increase
in revenues from the provision of digital and data products. Also
contributing to the overall increase in revenues were net rate
impacts of $110. Such rate impacts were due primarily to a non-
recurring revenue reduction of $64, related to the local service
portion of the regulatory settlement in South Carolina, which was
recorded during 1997, as well as revenue sharing accruals recorded
during 1997.
Interstate Access revenues increased $88 (3.2%) for the nine-month
period ended September 30, 1998 as compared to the same 1997
period. The increase was primarily due to a $114 increase in
special access revenues and an increase in end-user charges
attributable to an increase in switched access lines. Special
access charges are comprised primarily of revenues from the
provision of digital and data products. These increases were
partially offset by rate reductions that decreased revenues by $59.
Intrastate Access revenues increased $8 (1.3%) for the nine-month
period ended September 30, 1998 compared to the same 1997 period.
The increase was primarily due to growth in minutes of use of
10.6%. The increase was offset by rate reductions of $49.
Toll revenues decreased $17 (3.1%) for the nine-month period ended
September 30, 1998 when compared to the same 1997 period. The
decrease was primarily attributable to a decline in toll messages
of 12.4%. The decrease was partially offset by an increase in
charges to interexchange carriers for toll messages originating on
BellSouth Telecommunications' public telephones as well as
increased revenues from the provision of digital and data products.
Other Services revenues are principally comprised of revenues from
customer premises equipment (CPE) sales and maintenance services,
cellular interconnect services and other services (primarily inside
wire, billing and collection, and voice messaging services). Other
Services revenues increased $168 (13.9%) for the nine-month period
ended September 30, 1998 when compared to the same 1997 period.
The increase primarily reflected increased demand and prices for
nonregulated services.
Operating Expenses
Total Operating Expenses increased $554 (6.7%) for the nine-month
period ended September 30, 1998 when compared to the same 1997
period. The components of Total Operating Expenses were as follows:
For the Nine
Months Ended
September 30,
1998 1997
Depreciation and Amortization $2,509 $2,482
Other Operating Expenses:
Cost of Services and
Products 4,172 3,816
Selling, General and
Administrative 2,186 2,015
6,358 5,831
Total Operating Expenses $8,867 $8,313
Other Operating Expenses increased $527 (9.0%) for the nine-month
period ended September 30, 1998 when compared to the same 1997
period. The increase for the period was primarily attributable to
increased labor costs, increased costs associated with higher
business volumes, payments to the Universal Service Fund, increased
intercompany billings, and costs related to compliance with the
Telecommunications Act of 1996.
Other Income Statement Items
The other income statement components were as follows:
For the Nine
Months Ended
September 30,
1998 1997
Interest Expense $ 409 $ 401
Other Income, net 2 4
Provision for Income Taxes 1,124 1,022
Provision for Income Taxes increased $102 (10.0%) for the nine-
month period ended September 30, 1998 when compared to the same
1997 period. BellSouth Telecommunications' effective tax rates were
36.5% and 37.5% for the nine months ended September 30, 1998 and
1997, respectively.
REGULATORY DEVELOPMENTS AND COMPETITION
Federal Developments
Access Charge Reform. In October 1998, the Federal Communications
Commission (FCC) announced its intent to review the productivity
factor used in the calculation of interstate access charges. Any
increase in this factor will result in reductions of access charges
paid to BellSouth Telecommunications by interexchange carriers and
subscribers. The FCC also solicited comments as to whether it
should abandon its market-based approach to the pricing of access
charges and adopt, instead, a prescriptive approach. FCC
represcription of access rates could also result in a reduction of
access charge revenues. It is too early to assess the potential
outcome of these proceedings or the effects that any revisions
would have on BellSouth Telecommunications' results of operations,
financial position or cash flows.
State Developments
Reciprocal Compensation for Internet Traffic. Following the
enactment of the Telecommunications Act of 1996, the Incumbent
Local Exchange Carriers (ILECs) and Competitive Local Exchange
Carriers (CLECs) entered into interconnection agreements providing
for, among other things, the payment of reciprocal compensation for
local calls initiated by the customers of one carrier that are
completed on the network of the other carrier. Numerous CLECs
claim entitlement from ILECs, including BellSouth
Telecommunications, for reciprocal compensation to the CLECs for
dial-up calls originating on the ILECs' networks and connecting
with Internet service providers served by the CLECs' networks. The
courts and state commissions that have considered the matter have
ruled that such calls include a local call component that invokes
the reciprocal compensation obligation. However, the ILECs have
asserted that these calls are not subject to such compensation on
the basis that the FCC had previously determined that these types
of calls are entirely interstate and thus cannot be local, and
thereby subject to reciprocal compensation, under the
interconnection agreements. The FCC is considering the issues and
is expected to issue a further decision. It is too early to assess
the impact of the ultimate resolution of these issues on the
results of operations, financial position and cash flows of
BellSouth Telecommunications.
Tennessee. In 1995, BellSouth Telecommunications elected price
regulation whereby prices for basic service and Call Waiting
services are to be capped for four years, after which prices may be
changed in accordance with an inflation-based formula.
After substantial judicial and regulatory proceedings, the
Tennessee Regulatory Authority formally approved BellSouth
Telecommunications' election in October 1998. The approval is
effective as of October 1, 1995 and specifies that the existing
rates for basic service and for Call Waiting services will not be
increased until December 1, 2002. In addition, BellSouth
Telecommunications has agreed to reduce intrastate access charges
to long-distance carriers.
OTHER MATTERS
Capitalization of Internal Use Software. In March 1998, the AICPA
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use."
SOP 98-1 requires capitalization of certain direct costs and
interest costs after preliminary development efforts have been
made. SOP 98-1 requires adoption by BellSouth Telecommunications no
later than January 1, 1999. BellSouth Telecommunications intends to
adopt SOP 98-1 beginning January 1, 1999.
Adoption of SOP 98-1 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. BellSouth
Telecommunications currently believes that this increase will be
approximately $200 to $250 for 1999. 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 SOP 98-1 will result in higher
levels of capitalized software costs on the balance sheet.
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
and certain equipment to properly recognize the Year 2000 as a
result of the century change on January 1, 2000. The program is
also designed to assess the readiness of other entities with which
BellSouth does business.
Inability to reach substantial Year 2000 compliance in BellSouth
Telecommunications' systems and integral third party systems could
result in interruption of telecommunications services, interruption
or failure of BellSouth Telecommunications' customer billing,
operating and other information systems and failure of certain date-
sensitive equipment. Such failures could result in substantial
claims by customers as well as loss of revenue due to service
interruption, delays in BellSouth Telecommunications' ability to
bill its customers accurately and timely, and increased expenses
associated with litigation, stabilization of operations following
such failures or execution of contingency plans.
The Year 2000 program is being conducted by a management team that
is coordinating efforts of internal resources as well as third
party providers and vendors in identifying and making necessary
changes to BellSouth Telecommunications' systems hardware, software
and date-sensitive equipment. Some of the changes that are
necessary in BellSouth Telecommunications' operations are being
made as a part of ongoing systems upgrades.
BellSouth's Year 2000 program has been divided into six phases:
planning; inventory; impact analysis; conversion; testing; and
implementation. BellSouth Telecommunications monitors its progress
within these six phases based on the number of inventoried items
that have been addressed. Management's target date for completion
of all phases for its mission critical applications is June 30,
1999. Mission critical applications include those that (1)
directly affect delivery of primary services to BellSouth's
customers; (2) directly affect BellSouth revenue recognition and
collection; (3) would create noncompliance with any statutes or
laws; and (4) would require significant costs to address in the
event of noncompliance.
BellSouth Telecommunications has identified three main areas of
focus for its Year 2000 program. Each focus area includes the
hardware, software, embedded chips, third party vendors and
suppliers as well as third party networks that are associated with
the identified systems.
The first focus area, network components, consists of the switches,
transmission systems and associated software that comprise the core
of BellSouth Telecommunications' telephony systems. Outside
suppliers provide all hardware and most software that comprise
BellSouth Telecommunications' networks; these components are being
remediated by those third party suppliers. Testing of these
components for Year 2000 compliance is being performed by the
vendors, BellSouth Telecommunications, and industry groups such as
the Telco Year 2000 Forum. As of September 30, 1998, the planning,
inventory and impact analysis phases were complete, and the
remaining phases were each approximately 33% complete.
The second focus area, information technology systems, consists of
those systems that primarily support "customer care" operations
such as order taking and billing. The software for these systems
was developed by both BellSouth Telecommunications and vendors, and
is being remediated and tested by both. As of September 30, 1998,
the planning, inventory and impact analysis phases were each
approximately 80% to 100% complete, and the remaining phases were
each approximately 30% to 50% complete.
Building and environmental systems, the third focus area, includes
various products and systems that are not used in support of
network or customer care functions. Building and environmental
systems are primarily provided by third parties and include
building operations, copy machines, aircraft, etc. At September
30, 1998, the planning phase was approximately 97% complete, the
inventory phase was approximately 85% complete, and the impact
analysis phase was approximately 67% complete. None of the
applications in the remaining phases were complete.
Over the years, BellSouth Telecommunications has developed numerous
contingency plans for conducting its business operations in the
event of crises including system outages and natural disasters. As
a part of its Year 2000 compliance efforts, BellSouth has chartered
a Year 2000 Business Continuity project to ensure that tested
contingency plans are in place in the event that planned Year 2000
compliance activities for its mission critical applications are not
successfully accomplished. This effort is not limited to the risks
posed by the potential Year 2000 failures of internal information
systems and infrastructures, but also includes the potential
secondary impact on BellSouth Telecommunications of Year 2000
failures, including potential systems failures of business partners
and infrastructure service providers. Major milestones for the
contingency plan include completion of internal training by the end
of 1998, assessments by the end of first quarter 1999, and the
completion of testing by June 30, 1999. Additionally, BellSouth is
a member, together with other large telecommunications companies,
of several industry groups that are addressing the Year 2000 issue
and related contingency plans.
Some of the costs associated with BellSouth Telecommunications'
Year 2000 compliance efforts were incurred in 1997. The remainder
has been or will be incurred during 1998 and 1999. As of September
30, 1998, approximately $30 had been expended towards Year 2000
compliance. BellSouth Telecommunications estimates the total cost
of its compliance efforts will be between $200 and $280 over the
life of the project. BellSouth Telecommunications intends to
continually reassess the estimated costs and status of Year 2000
remediation efforts.
BellSouth Telecommunications currently anticipates that its mission
critical applications will be Year 2000 compliant by June 30, 1999.
However, no assurance can be given that unforeseen circumstances
will not arise during the performance of the testing and
implementation phases that would adversely affect the Year 2000
compliance of BellSouth Telecommunications' systems. Furthermore,
the Year 2000 compliance status of integral third party suppliers
and networks, which could adversely impact BellSouth's mission
critical applications, cannot be fully known. As a result,
BellSouth Telecommunications is unable to determine the impact that
any system interruption would have on its results of operations,
financial position and cash flows.
SAFE HARBOR STATEMENT
Statements that do not address historical performance are "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are based on a number of
assumptions, including but not limited to: (1) continued economic
growth and demand for BellSouth Telecommunications' services; (2)
the reasonable accuracy of BellSouth Telecommunications'
expectations of costs and recoveries with respect to access reform,
universal service and interconnection; (3) the reasonable accuracy
of BellSouth Corporation's estimate of regulatory authorization to
provide wireline long distance services and the impact of
competition in BellSouth Telecommunications' markets; and (4)
satisfactory identification and completion of Year 2000 software
and hardware revisions by BellSouth Telecommunications and entities
with which it does business. 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.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of BellSouth Telecommunications, Inc.
is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, BellSouth
Telecommunications, Inc. hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1998.
(b) Reports on Form 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BELLSOUTH TELECOMMUNICATIONS, INC.
By /s/ Isaiah Harris
ISAIAH HARRIS
Vice President,
Chief Financial Officer
& Comptroller
(Principal Financial and
Accounting Officer)
November 11, 1998
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1998.
EXHIBIT 12
BellSouth Telecommunications Inc.
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Nine
Months Ended
September 30,
1998
1. Earnings
(a) Income from continuing operations $ 3,486
before deductions for taxes and interest
(b) Portion of rental expense
representative of interest factor 25
TOTAL $ 3,511
2. Fixed Charges
(a) Interest $ 424
(b) Portion of rental expense
representative of interest factor 25
TOTAL $ 449
Ratio (1 divided by 2) 7.82
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