<PAGE>
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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, 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.
<TABLE>
<S> <C>
A GEORGIA I.R.S. EMPLOYER
CORPORATION NO. 58-0436120
675 WEST PEACHTREE STREET, N. E., ROOM 20M77,
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
- ------------------------ ---------------------
NEW YORK STOCK
SEE ATTACHMENT. EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE.
AT FEBRUARY 1, 1999 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 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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<PAGE>
ATTACHMENT
<TABLE>
<C> <S>
Title of each class
ISSUED BY:
Southern Bell Telephone and Telegraph Company
$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
$500,000,000 Principal Amount of Thirty Year 6 3/8% Debentures, due June 1, 2028
$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
$500,000,000 Principal Amount of 6% Reset Put Securities, due June 15, 2012
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ITEM PAGE
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PART I
Safe Harbor Statement.................................................................. 1
1. Business........................................................................ 1
General......................................................................... 1
Telephone Company Operations.................................................... 2
Business Operations............................................................. 2
Regulation...................................................................... 4
Competition..................................................................... 7
Franchises and Licenses......................................................... 9
Research and Development........................................................ 9
Employees....................................................................... 10
2. Properties...................................................................... 10
General......................................................................... 10
Capital Expenditures............................................................ 10
Environmental Matters........................................................... 11
3. Legal Proceedings............................................................... 12
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........................................... 13
7. Management's Discussion and Analysis of Results of Operations (Abbreviated
pursuant to General Instruction I(2))........................................... 14
Results of Operations........................................................... 14
Volumes of Business............................................................. 15
Operating Revenues.............................................................. 16
Operating Expenses.............................................................. 17
Other Income Statement Items.................................................... 18
Financing Activity.............................................................. 18
Operating Environment and Trends of the Business................................ 19
Safe Harbor Statement........................................................... 22
8. Consolidated Financial Statements............................................... 23
Report of Management............................................................ 23
Report and Consent of Independent Accountants................................... 24
Consolidated Statements of Income and Retained Earnings......................... 25
Consolidated Balance Sheets..................................................... 26
Consolidated Statements of Cash Flows........................................... 27
Notes to Consolidated Financial Statements...................................... 28
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 41
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................. 41
Signatures............................................................................. 42
</TABLE>
<PAGE>
PART I
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 the results of regulatory actions as well as 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.
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 substantial portions of the population 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 U.S. District
Court for the District of Columbia entitled "Modification of Final Judgment"
(the MFJ) settling antitrust litigation brought by the U.S. 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, network access, information access and long distance
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 network access services that linked a subscriber's telephone or other
equipment in one of their LATAs to the transmission facilities of long distance
carriers, which provided telecommunications services between different LATAs.
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 Holding Companies can provide interLATA
wireline telecommunications and other services; and the provision by the Holding
Companies of video services within their service areas. The ability of the
Holding 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
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provide interLATA wireline service. (See "Telephone Company
Operations--InterLATA Long Distance Service.")
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.
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 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 BellSouth Telecommunications' services and products with
special attention to each customer base. BellSouth's goal is for its brand name
to be synonymous with quality service and state-of-the-art technology. BellSouth
advertises in the various media in its territory, in connection with major
events, such as the Olympics, the Super Bowl, PGA tournaments and NASCAR events,
and through its affiliation with several professional and collegiate sports
organizations, which offer BellSouth a broad platform to showcase its services
and products.
Revenues from services (predominantly network access services) provided to
AT&T, BellSouth Telecommunications' largest customer, comprised approximately
9%, 10% and 11% of 1998, 1997 and 1996 total operating revenues, respectively.
TELEPHONE COMPANY OPERATIONS
BUSINESS OPERATIONS
GENERAL
BellSouth Telecommunications provides wireline communications services,
including local exchange, network access and intraLATA long distance services.
For 1998, 1997 and 1996, these operations generated 89%, 89% and 90%,
respectively, of BellSouth Telecommunications' total operating revenues.
BellSouth Telecommunications is the predominant telephone service provider in
the nine-state region comprising the Southeastern U.S. Total equivalent access
lines, which include traditional switched access lines as well as digital and
data transmission lines, increased 14.7% over the prior year to 37,187,000 at
December 31, 1998. This growth is attributable to increasing demand for
high-capacity digital and data services, continued economic expansion in the
region and additional access lines ordered by existing customers.
While BellSouth Telecommunications provides telephone service to the
majority of the metropolitan areas in its region, there are many localities and
some sizable geographic areas within the region that are served by nonaffiliated
telephone providers. In addition, BellSouth Telecommunications is increasingly
facing competition for local and intraLATA business customers, and to a lesser
extent, residential customers, within its territory.
BellSouth Telecommunications has organized its marketing efforts to parallel
its four major customer bases: consumer, small business, complex business and
network and carrier services.
2
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A substantial portion of the growth in BellSouth Telecommunications'
revenues from local service is derived from the sale of optional calling
services and additional residence lines to its residential customers. These
offerings are marketed in a variety of packages with varying pricing options
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 as they are contacted by subscribers on other matters.
BellSouth Telecommunications' small business services, which have varied
pricing and service options, are marketed by customer service representatives.
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 special
networks, high-speed data transmission, business teleconferencing and
industry-specific communications configurations.
In response to the 1996 Act, BellSouth Telecommunications has developed a
unit to market to competitors interconnection to its network and related
services. The unit markets to both affiliated and nonaffiliated customers in six
carrier markets: wireless service providers, competitive local exchange carriers
(CLECs), competitive switched and special access providers, long distance
carriers, information service providers and public payphone service providers.
Through BellSouth Telecommunications' infrastructure, services are provided to
these carriers for voice, data and video transmission, as well as advanced
products, transport, interconnection and vertical services.
LOCAL SERVICE
Local service revenues for the years ended December 31, 1998, 1997 and 1996
accounted for approximately 57%, 55% and 55%, 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 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 information and directory
assistance and public payphone services.
BellSouth Telecommunications offers various convenience features, such as
Caller ID, Call Waiting Deluxe, Call Return and 3-Way Calling, on a monthly
subscription or per-use basis. Total revenues from such optional features were
approximately $1.5 billion, $1.2 billion and $1.0 billion for the years ended
December 31, 1998, 1997 and 1996, respectively.
NETWORK ACCESS
BellSouth Telecommunications provides network access and interconnection
services by connecting the equipment and facilities of its subscribers with the
communications networks of long distance carriers, CLECs and wireless providers.
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.
Network access charges, which are payable by long distance carriers, CLECs,
wireless providers and end-user subscribers, provided approximately 28%, 29% and
30% of BellSouth Telecommunications' total operating revenues for the years
ended December 31, 1998, 1997 and 1996, respectively.
3
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These charges are designed to recover the costs of the common and dedicated
facilities and equipment used to connect networks of long distance carriers with
the telephone company's local network and to subsidize the cost of providing
local service to rural and other high-cost areas.
LONG DISTANCE
Long distance services provided approximately 4%, 5% and 5% of BellSouth
Telecommunications' total operating revenues for the years ended December 31,
1998, 1997 and 1996, 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 revenues have decreased as competition for such customers has
intensified and as more customers have subscribed to local area calling plans.
Long distance revenues from intraLATA calls are expected to continue to decline.
DIGITAL AND DATA
A key driver in BellSouth Telecommunications' growth in local service and
network access revenues is the provision of digital and data services. Revenues
from these services were $1.9 billion, $1.3 billion and $1.1 billion for 1998,
1997 and 1996, respectively. These services and products are provided primarily
over non-switched access lines that typically have significantly greater
capacity per line than a traditional switched access line. These lines are well
suited for high-capacity applications that previously could not be provided over
traditional switched access lines. Uses of these lines include bulk data
transmission, video conferencing, ATMs, check/credit card authentication,
multimedia and interconnection with wireless networks.
BellSouth Telecommunications believes that the data telecommunications
business will eventually become substantially larger than the traditional voice
telephony market, and that it must significantly expand its operations in the
data communications market. Data communications, however, are subject to the
same laws and regulations as voice communications. BellSouth Telecommunications
believes that it must be allowed the freedom to offer interLATA data
communications to fully compete in the data communications marketplace.
OTHER
Other revenues accounted for approximately 11%, 11% and 10%, respectively,
of BellSouth Telecommunications' total operating revenues for the years ended
December 31, 1998, 1997 and 1996. Other revenues are primarily comprised of
charges for inside wire maintenance contracts, billing and collection services
for long distance carriers and CLECs, customer premises equipment sales and
maintenance services, voice messaging (MemoryCall(SM)) service, Internet access
and interconnection charges to wireless carriers.
REGULATION
LOCAL SERVICE
BellSouth Telecommunications is subject to regulation of its local service
by a state authority in each state where it provides intrastate
telecommunications services. Such regulation covers prices, services,
competition and other issues.
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, the regulatory processes have changed in response
to the increasingly competitive telecommunications environment.
4
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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 established maximum prices that could 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. The majority
of these plans, during the early years, have price cap provisions on basic local
exchange services with provisions for inflation-based price increases in later
years. These plans are now operational throughout BellSouth Telecommunications'
wireline service territory although appeals relating to plans in South Carolina
and Tennessee are pending. While some plans are not subject to either review or
renewal, other plans contain specified termination dates and/or review periods.
Some plans are expected to be reviewed in 1999. No assurance can be given that
plans subject to review or renewal will retain prices or other terms currently
applicable.
NETWORK ACCESS
The FCC regulates rates and other aspects of interstate network access
services through its price cap and access charge rules. State regulatory
commissions have jurisdiction over the provision of network access to the long
distance carriers to complete intrastate telecommunications.
Historically, network access charges paid by long distance carriers 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 such network access charges; provide for the removal of
such subsidy from network access rates in order that network access charges
reflect underlying costs; arrange for a fund (the Universal Service Fund) to
ensure the continuation of universal service to high-cost, low-income service
areas; and 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. In May 1997, the FCC adopted orders regarding revisions
to the price cap plan, access charge reform and the establishment of the
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. BellSouth Telecommunications has been pricing
its services based on a 6.5% productivity factor, which means that price
increases could only occur to the extent that the Gross Domestic Product Price
Index of the U.S. (the Index) increased by greater than 6.5% over an annual
period. If the Index increases by less than 6.5%, price reductions would occur.
In October 1998, the FCC announced its intent to review the productivity
factor used in the calcula-
tion of interstate network access charges. Any increase in this factor would
result in reductions of network access charges paid to BellSouth
Telecommunications by long distance carriers, subscribers or both. The FCC also
solicited comments as to whether it should abandon its market-based approach to
the pricing of network access charges and adopt, instead, a prescriptive
approach. FCC represcription of network access rates could also result in a
reduction of network access charge revenues.
The FCC's 1997 network access charge reform order, which has been upheld by
the U.S. Court of Appeals for the Eighth Circuit, resulted in several changes to
the existing interstate network access rate structure designed to move network
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 long distance carrier
5
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charge (PICC) was established. As SLC and PICC levels are increased over time,
usage charges are reduced. At January 1, 1999, SLCs for primary residence and
single-line business access lines remained unchanged at $3.50 per line, per
month. Beginning in January 1999, SLCs for non-primary (or "additional")
residence access lines increased from $5.00 to $6.07 per line, per month, and
SLCs for multi-line business customers increased from $8.17 to $8.25 per line,
per month. PICCs were established on January 1, 1998 and are charged to long
distance carriers for recovery of non-traffic-sensitive costs not recovered
through SLCs. These charges were established for primary residence and
single-line business access lines, non-primary residence 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 has been
substantially revenue-neutral.
The universal service order, which has been appealed to the U.S. Court of
Appeals for the Fifth Circuit, 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 network access charges. Major changes to the
support mechanism to subsidize the provision of services to high-cost areas will
occur July 1, 1999. The new support mechanism, when implemented in 1999, will be
based on forward-looking economic costs.
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, estimated
at approximately $1.9 billion, through June 1999, are to be funded out of the
Universal Service Fund. Local and long distance 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.
INTERLATA LONG DISTANCE SERVICE
As a result of the 1996 Act, BellSouth Telecommunications and affiliates 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 service, 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
CLEC (Track B); (c) will operate in accordance with the separate affiliate
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 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 voice,
information and data communications. BellSouth plans to begin offering interLATA
wireline service in each of its in-region states as soon as the FCC approves its
application for such states. 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. BellSouth and other Holding Companies
have unsuccessfully challenged portions of the 1996 Act as unconstitutional
bills of attainder but have petitioned the U.S. Supreme Court (the Supreme
Court) to consider the issue. The Supreme Court has denied the other Holding
Companies' requests, but BellSouth's request remains pending.
6
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BellSouth has a three-pronged approach to gaining authorization to provide
in-region interLATA service: (a) continuing to modify its facilities and
operating support systems to facilitate competition and agressively seeking
approvals from the FCC and state commissions; (b) seeking judicial review of
adverse decisions which it believes to be erroneous; and (c) participating in
actions by Congress to urge the FCC to implement the 1996 Act in a timely
fashion. Because of the scrutiny of interLATA applications by the FCC and the
Justice Department; the time required to obtain judicial review of adverse
decisions; and the possible challenges by the existing long distance carriers of
any approved applications or proposed or enacted legislation, it is uncertain
when BellSouth will be authorized to commence interLATA service in any of its
in-region states.
COMPETITION
LOCAL SERVICE
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, access fees for
local calls terminating on the network of a carrier other than the originating
carrier and resale of telecommunications 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 that are
avoided. BellSouth Telecommunications has executed numerous interconnection or
resale agreements with such carriers. Many of these agreements expire during
1999 and must be renegotiated. The arbitration results for the wholesale
discount rates vary by state from 14.8% to 21.8%. At December 31, 1998,
BellSouth Telecommunications had provisioned approximately 520,000 equivalent
access lines to such carriers for resale, an increase of 299,000 since December
31,1997.
In connection with the requirements of the 1996 Act, in August 1996 the FCC
released an order adopting rules governing interconnection and related matters,
and in July 1997 the U.S. Court of Appeals for the Eighth Circuit vacated
substantial aspects of the order. In January 1999, the Supreme Court reinstated
significant portions of the vacated order. The Supreme Court held that with
regard to setting the pricing of interconnection between ILECs and other
carriers, the FCC has jurisdiction to set pricing standards to be implemented by
the state commissions. The FCC has prescribed a forward-looking economic cost
approach for pricing interconnection and unbundled network elements. That
methodology is still under review by the U.S. Court of Appeals for the Eighth
Circuit.
Under the 1996 Act, access to certain network elements can be given only
when "necessary" or when the failure to provide access would "impair" the
ability of the requesting carrier to provide service. The Supreme Court held
that the FCC did not adequately consider the "necessary" and "impair" standards
when adopting rules giving access to such network elements on an unbundled
basis. Until the FCC reconsiders this issue, it is uncertain which of BellSouth
Telecommunications' network elements it will be required to offer on an
unbundled basis, and at what prices.
The Supreme Court upheld the FCC's "all elements" rule which allows
competing carriers to provide local telephone service relying solely on the
elements in an ILEC's network, approving the FCC's refusal to impose a
requirement of facility ownership on carriers who seek to lease network
elements. The Supreme Court also upheld the FCC's rule forbidding ILECs from
separating already combined network elements before leasing them to a CLEC.
Finally, the Supreme Court upheld the FCC's "pick
7
<PAGE>
and choose" rule. This rule requires that ILECs make available to requesting
CLECs contractual provisions, including related rates and terms, contained in
any other agreements that have been previously approved by the state commission
for that same state. Exceptions are allowed when the ILEC can prove to the state
commission that providing the particular item requested is either more costly
than providing it to the original carrier or is technically infeasible. These
rulings may make it easier for a CLEC to compete with BellSouth.
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 $367 million of costs associated with
these efforts in the year ended December 31, 1998. Of this amount, approximately
$232 million was expensed as incurred, and the remainder was capitalized. Total
costs incurred through December 31, 1998 were approximately $700 million.
In May 1998, the FCC adopted an order that will allow telecommunications
carriers, such as BellSouth Telecommunications, to recover, over five years,
their carrier-specific costs of implementing long-term number portability, which
allows customers to retain their local telephone numbers in the event they
change local carriers. The order allows for such cost recovery to begin no
earlier than February 1, 1999 in the form of a surcharge from customers to whom
number portability is available. It remains unclear to what degree, if any,
BellSouth Telecommunications will be compensated for the noncarrier-specific
costs of interconnection.
The state public service commissions to which BellSouth Telecommunications
is subject 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 long distance carriers and CLECs, which resell the local
services of BellSouth Telecommunications or provide services over their own
facilities. BellSouth Telecommunications believes that certain long distance
carriers have been slow to enter the local residential market due to lower
margins compared to the business market and to deter competition by the Holding
Companies in the long distance market. However, MCI Worldcom recently announced
its intent to offer residential local service in certain areas of the country
using the unbundled network elements of ILECs.
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.
Such wireless services are provided by a number of well-capitalized entities in
most of BellSouth Telecommunications' markets.
As technological and regulatory developments make it more feasible for cable
television networks to carry data and voice communications, BellSouth
Telecommunications will face increased competition within its region from cable
television ventures. For example, MediaOne began offering local wireline service
in Atlanta in 1998 over its enhanced cable television network, and AT&T has
stated that, after its acquisition of TCI, it intends to upgrade and use TCI's
cable facilities to offer telephony over coaxial cable and fiber optic lines.
AT&T has also announced that it intends to form joint ventures with other cable
television companies to expand such offerings nationwide.
Federal and state policies strongly favor further changes to Operating
Telephone Company networks and business operations to encourage local service
competition, and regulators have stated that such changes must be made before
they will allow Holding Companies to provide interLATA long distance services
within their local service territories. Therefore, BellSouth Telecommunications
expects that local service competition will steadily increase. While competition
for local service revenues could
8
<PAGE>
adversely affect BellSouth Telecommunications' results of operations, BellSouth
Telecommunications is working to support the opening of local markets to
competition by facilitating interconnection of its facilities and systems with
those of CLECs. These actions, among other things, can allow BellSouth to
qualify to offer in-region interLATA service as contemplated in the 1996 Act.
(See "Telephone Company Operations--Regulation--InterLATA Long Distance
Service").
NETWORK ACCESS
FCC rules require BellSouth Telecommunications to offer expanded
interconnection for interstate special and switched network 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 increase competition for network access transport.
Furthermore, long distance carriers are increasingly connecting their lines
directly to their customers' facilities, bypassing the networks of BellSouth
Telecommunications and thereby avoiding network 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, due to the fact that FCC rules do not currently impose access
charges on most Internet communications.
LONG DISTANCE
A number of companies compete with BellSouth Telecommunications in its
nine-state region for its intraLATA long distance business by reselling long
distance services obtained at bulk rates or providing long distance services
over their own facilities. As of February 8, 1999, BellSouth Telecommunications
has implemented intraLATA long distance subscription (single digit access code
1+ dialing) in all nine states in its region.
The 1996 Act permits the Holding Companies to offer interLATA long distance
service outside of the states containing their local wireline service
territories. Holding Companies and other carriers have announced plans to
compete for such interLATA long distance service in BellSouth
Telecommunications' territory. AT&T, MCI WorldCom, Sprint and a number of other
carriers, including other Holding Companies, currently provide long distance
service to BellSouth Telecommunications' local service customers.
FRANCHISES AND LICENSES
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.
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.
BellSouth Telecommunications 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.
9
<PAGE>
EMPLOYEES
At December 31, 1998, 1997 and 1996, BellSouth Telecommunications employed
approximately 62,500, 59,100 and 63,800 persons, respectively. Of those totals,
approximately 60,600, 57,600 and 62,400, respectively, were employees engaged in
the telephone operations of BellSouth Telecommunications. About 74% of total
employees at December 31, 1998 were represented by the Communications Workers of
America (the CWA), which is affiliated with the AFL-CIO. In September 1998,
members of the CWA ratified new three-year contracts with BellSouth
Telecommunications, effective August 9, 1998. The contracts include basic wage
increases totaling 12.39% over the three years covered by the contracts. In
addition, the agreement provides for a standard award of between 2% and 2.5% of
base salary and overtime compensation which is subject to adjustment based on
company performance measures for plan years 1999 and 2000. Other terms of the
agreement include pension band increases and pension plan cash balance
improvements for active employees.
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>
1998 1997
----------- -----------
<S> <C> <C>
Outside plant........................... 45% 45%
Central office equipment................ 40 39
Land and buildings...................... 6 7
Furniture and fixtures.................. 5 5
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 is 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.
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
$40.1 billion at January 1, 1994 to $50.2 billion at December 31, 1998, 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
10
<PAGE>
demands. Continued 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 1994 through 1998
were as follows:
<TABLE>
<CAPTION>
MILLIONS
---------
<S> <C>
1998............................................................ $ 3,512
1997............................................................ 3,440
1996............................................................ 3,206
1995............................................................ 3,123
1994............................................................ 2,971
</TABLE>
BellSouth Telecommunications currently projects capital expenditures to be
approximately $3.5 billion for 1999. In 1998, BellSouth Telecommunications
generated substantially all of its funds for capital expenditures internally. In
1999, projected capital expenditures are expected to be financed primarily
through internal 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, 1998, BellSouth Telecommunications' recorded liability, related
primarily to remediation of these sites, was approximately $30 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 results of operations, financial
position or cash flows.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Following the enactment of the 1996 Act, BellSouth Telecommunications and
various 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 BellSouth Telecommunications for
compensation associated with dial-up calls originating on BellSouth
Telecommunications' network and connecting with Internet service providers
(ISPs) served by the CLECs' networks. BellSouth Telecommunications has
maintained that, because the FCC has previously determined that Internet calls
over dedicated lines are jurisdictionally interstate, dial-up calls to ISPs are
not local calls for which terminating compensation is due under the
interconnection agreements. The courts and state commissions that have
considered the matter have ruled that such calls invoke the reciprocal
compensation obligation. The FCC has indicated that it would release an order in
which it would address the jurisdictional nature of switched ISP traffic.
BellSouth Telecommunications believes that it has a good basis for its claims
that such reciprocal compensation is not owed to the CLECs. However, at December
31, 1998, BellSouth Telecommunications' exposure related to unrecorded amounts
withheld from CLECs was approximately $135 million, including accrued interest.
In addition, 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 results of
operations, financial position or cash flows. (See Note M to the Consolidated
Financial Statements.)
12
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues...................... $16,622 $15,346 $14,776 $14,540 $14,040
Operating Expenses (1).................. 12,000 11,158 11,069 11,759 10,452
-------- -------- -------- -------- --------
Operating Income........................ 4,622 4,188 3,707 2,781 3,588
Interest Expense........................ 551 534 552 573 549
Other Income, net....................... 3 41 20 27 18
-------- -------- -------- -------- --------
Income Before Income Taxes and
Extraordinary Losses................... 4,074 3,695 3,175 2,235 3,057
Provision for Income Taxes.............. 1,486 1,372 1,170 818 1,105
-------- -------- -------- -------- --------
Income Before Extraordinary Losses...... 2,588 2,323 2,005 1,417 1,952
Extraordinary Losses, net of tax (2).... -- (9) -- (2,796) --
-------- -------- -------- -------- --------
Net Income (Loss)..................... $ 2,588 $ 2,314 $ 2,005 $(1,379) $ 1,952
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Return to Average Common Equity......... 29.8% 27.5% 24.6% (14.4%) 18.0%
Total Assets............................ $23,916 $23,226 $23,038 $23,933 $27,372
Capital Expenditures.................... $ 3,512 $ 3,440 $ 3,206 $ 3,123 $ 2,971
Long-Term Debt.......................... $ 6,523 $ 5,489 $ 6,671 $ 6,853 $ 6,512
Debt Ratio at End of Period............. 47.8% 48.3% 49.4% 51.9% 41.0%
Ratio of Earnings to Fixed Charges...... 7.70 7.18 6.02 4.38 5.68
Telephone Employees (3)................. 60,561 57,619 62,425 68,585 73,764
Other Operations Employees.............. 1,942 1,461 1,372 2,797 2,944
-------- -------- -------- -------- --------
Total Employees....................... 62,503 59,080 63,797 71,382 76,708
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Telephone Employees per 10,000 Switched
Access Lines........................... 25.2 24.8 28.2 32.5 36.5
Business Volumes (4):
Network Equivalent Access Lines in
Service (thousands):
Switched Access Lines............... 24,025 23,201 22,135 21,133 20,220
Access Line Equivalents............. 13,162 9,218 6,158 4,723 3,716
-------- -------- -------- -------- --------
Total Equivalent Access Lines....... 37,187 32,419 28,293 25,856 23,936
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Access Minutes of Use (millions)...... 104,373 97,106 88,861 81,608 74,666
Long Distance Messages (millions)..... 784 894 1,023 1,374 1,559
</TABLE>
- ------------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
which reduced net income by $663.
(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.
(3) Telephone employees exclude those employees in BellSouth Telecommunications'
subsidiaries which are unrelated to telephone operations.
(4) 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.
13
<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 substantial portions of the population within Alabama,
Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina and Tennessee. BellSouth Telecommunications primarily provides (i)
local exchange and long distance services within but not between geographic
areas, called Local Access and Transport Areas (LATAs) and (ii) network access
services to enable interLATA communications using the facilities of long
distance 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 the years ended December 31, 1998 and 1997, respectively, were from network
and related services. Charges for local, network access and long distance
services for the year ended December 31, 1998 accounted for approximately 64%,
31% 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>
1998 1997 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Net Income (a)............................................... $ 2,588 $ 2,314 11.8%
</TABLE>
- ------------------------------
(a) Net Income for 1997 includes an Extraordinary Loss on Early Extinguishment
of Debt of $9.
Net Income increased $274 (11.8%) compared to 1997. The increase was
primarily due to an 8.3% increase in operating revenues which was driven by
continued strong growth in key business volumes. The increase was partially
offset by increased operating expenses of 7.5% due to increases in affiliate
billings, increased labor costs in the telephone operations, increased expenses
at unregulated subsidiaries due to higher business volumes, and payments to the
Universal Service Fund.
14
<PAGE>
VOLUMES OF BUSINESS
Equivalent Access Lines in Service at December 31 (thousands) (a):
<TABLE>
<CAPTION>
1998 1997 % CHANGE
--------- --------- -------------
<S> <C> <C> <C>
By Type:
Switched Access Lines:
Residence............................................................ 16,457 15,841 3.9%
Business............................................................. 7,294 7,088 2.9
Other................................................................ 274 272 0.7
--------- ---------
Total Switched Access Lines...................................... 24,025 23,201 3.6
--------- ---------
Access Line Equivalents (b)(c):
Basic Rate ISDN.................................................. 178 143 24.5
Primary Rate ISDN................................................ 526 288 82.6
DS0.............................................................. 697 644 8.2
DS1.............................................................. 4,343 3,400 27.7
DS3.............................................................. 7,418 4,743 56.4
--------- ---------
Total Access Line Equivalents.................................... 13,162 9,218 42.8
--------- ---------
Total Equivalent Access Lines in Service..................... 37,187 32,419 14.7
--------- ---------
--------- ---------
Switched Access Lines by State (thousands) (a):
Florida.............................................................. 6,496 6,237 4.2
Georgia.............................................................. 4,159 3,990 4.2
Tennessee............................................................ 2,677 2,623 2.1
North Carolina....................................................... 2,444 2,337 4.6
Louisiana............................................................ 2,344 2,267 3.4
Alabama.............................................................. 1,960 1,928 1.7
South Carolina....................................................... 1,456 1,404 3.7
Mississippi.......................................................... 1,280 1,238 3.4
Kentucky............................................................. 1,209 1,177 2.7
--------- ---------
Total Switched Access Lines...................................... 24,025 23,201 3.6
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(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, 2.5/1; Primary Rate ISDN, 24/1; DS0, 1/1;
DS1, 24/1; and DS3, 672/1. 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.
(c) Revenues associated with digital and data services are derived from the sale
of specific high-bandwidth products provisioned over transmission lines with
DS0 or greater capacity. While access line equivalent counts have a
directional relationship with digital and data revenues, growth rates cannot
be compared on an equivalent basis.
Switched residence lines increased by 3.9% in the period ended December 31,
1998, compared to a growth rate of 4.6% in 1997. In addition to continued
economic growth in the region, the growth rate reflects demand for additional
lines related to home office purposes, access to on-line computer services and
children's phones. The number of such additional lines increased by 375,000
(19.9%) to 2,259,000 and accounted for approximately 61% of the overall increase
in switched residence access lines since December 31, 1997. The slower growth
rate in 1998 primarily reflects the higher penetration rates in the residential
market.
15
<PAGE>
Switched business lines increased by 2.9% in the period ended December 31,
1998, compared to a growth rate of 5.3% in 1997. The decrease in the growth rate
was primarily due to the migration of business customers from traditional
business line services to digital and data services and, to a lesser degree, by
the increased presence of facilities-based competition.
Access line equivalents increased by 42.8% in 1998 compared to an increase
of 49.7% in 1997. The increase is attributable to continued growth in demand for
digital and data lines that provide services such as bulk data transmission,
video conferencing, ATMs, check/credit card authentication, multimedia and
interconnection with wireless networks.
Total equivalent access lines at December 31, 1998 include 520,000 resold
lines, an increase of 299,000 over the prior year.
<TABLE>
<CAPTION>
1998 1997 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Access Minutes of Use (millions)................. 104,373 97,106 7.5%
</TABLE>
Access minutes of use represent the volume of traffic carried by long
distance carriers between LATAs, both interstate and intrastate, using BellSouth
Telecommunications' local facilities. In 1998, access minutes of use increased
by 7,267 million (7.5%) compared to an increase of 9.3% in 1997. The 1998
increase in access minutes of use was primarily attributable to access line
growth, promotions by the long distance carriers and intraLATA long distance
competition, which has the effect of increasing access minutes of use while
reducing long distance messages carried over BellSouth Telecommunications'
facilities. The growth rate in access minutes of use continues to be negatively
impacted by competition and the migration of long distance 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>
1998 1997 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Long Distance Messages (millions).................... 784 894 (12.3%)
</TABLE>
Long distance messages are comprised of Message Telecommunications Service
and Wide Area Telecommunications Service within LATAs. Long distance messages
decreased by 110 million (12.3%) in 1998 compared to a decrease of 12.6% in
1997. The decrease in 1998 was primarily attributable to continued competition
from long distance carriers in the intraLATA long distance 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 in existing
LACPs result in the transfer of calls from long distance to the access and local
service categories, respectively, but the corresponding revenues are not
generally shifted at commensurate rates. Competition in the intraLATA long
distance market will continue to adversely impact long distance message volumes.
OPERATING REVENUES
For a discussion of the impact of local service competition on revenues and
volumes of business, see "MD&A--Operating Environment and Trends of the
Business."
Total Operating Revenues increased $1,276 (8.3%) in 1998. The components of
Total Operating Revenues were as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Local service................................... $ 9,399 $ 8,499 10.6%
Network access.................................. 4,632 4,483 3.3
Long distance................................... 713 734 (2.9)
Other........................................... 1,878 1,630 15.2
--------- ---------
Total Operating Revenues...................... $ 16,622 $ 15,346 8.3
--------- ---------
--------- ---------
</TABLE>
16
<PAGE>
LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network, optional services
such as custom calling features and certain digital and data services. Local
service revenues increased $900 (10.6%) in 1998.
The increase for 1998 was due primarily to a 3.6% increase in switched
access lines since December 31, 1997, an increase of $246 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 services. Also contributing were
net rate impacts of $161. These impacts were due primarily to revenue sharing
accruals recorded during 1997 as well as a nonrecurring revenue reduction of $64
in 1997, related to the local service portion of the regulatory settlement in
South Carolina.
NETWORK ACCESS revenues result from the provision of network access services
to long distance carriers to provide telecommunications services between LATAs,
both interstate and intrastate, and from end-user charges collected from
residential and business customers. Network access revenues also include special
access charges for the provision of certain digital and data services. Network
access revenues increased $149 (3.3%) in 1998.
The increase for 1998 was attributable primarily to an increase of $148 due
to higher demand for special access services and increases in end-user charges
attributable to increases in switched access lines. Special access revenues are
comprised primarily of revenues from the provision of digital and data services.
Such increases were partially offset by rate reductions which decreased revenues
by $122 since December 31, 1997.
LONG DISTANCE revenues are received from the provision of long distance
services within 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. Long distance revenues decreased $21 (2.9%)
in 1998.
The decrease for 1998 was primarily attributable to continuing competition
from long distance carriers in the intraLATA long distance market as well as the
increased penetration of LACPs in existing calling plan areas. The decreases
were partially offset by increases in charges to long distance carriers for
messages originating on BellSouth Telecommunications' public payphones as well
as increased revenues from the provision of digital and data services.
The overall decline in intraLATA long distance revenues is expected to
continue over the long term.
OTHER revenues are principally comprised of revenues from customer premises
equipment sales, maintenance services and other services (primarily inside wire,
billing and collection and voice messaging services). Other revenues also
include billings for interconnections by wireless carriers with BellSouth
Telecommunications' network. Other revenues increased $248 (15.2%) in 1998. The
increase primarily reflected increased demand and prices for nonregulated
services totaling $162.
OPERATING EXPENSES
Total Operating Expenses increased $842 (7.5%) in 1998. The components of
Total Operating Expenses were as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
--------- --------- ------------
<S> <C> <C> <C>
Depreciation and amortization................... $ 3,363 $ 3,332 0.9%
--------- ---------
Other operating expenses:
Cost of services and products................. 5,510 5,119 7.6
Selling, general and administrative........... 3,127 2,707 15.5
--------- ---------
8,637 7,826 10.4
--------- ---------
Total Operating Expenses.................... $ 12,000 $ 11,158 7.5
--------- ---------
--------- ---------
</TABLE>
17
<PAGE>
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 $811 (10.4%) compared to 1997. The
increase was primarily due to increases in affiliate billings of $297, increased
labor costs of $263 in the telephone operations associated primarily with
increased customer service staffing levels, increased expenses of $164 at
unregulated subsidiaries associated with higher business volumes, and payments
to the fund (the Universal Service Fund) provided for by the 1996 Act.
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
1998 1997 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Interest Expense............................................. $ 551 $ 534 3.2%
Other Income, net............................................ 3 41 --
Provision for Income Taxes................................... 1,486 1,372 8.3
</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 increased
$17 (3.2%) in 1998. The increase was primarily attributable to higher average
debt balances, partially offset by lower average interest rates.
PROVISION FOR INCOME TAXES increased $114 (8.3%) in 1998. BellSouth
Telecommunications' effective tax rates were 36.5% and 37.1% in 1998 and 1997,
respectively. The lower effective tax rate in 1998 resulted primarily from a
decrease in tax expense related to nonrecurring transactions as well as
adjustments in the current year related to prior year income tax returns. The
decreases were partially offset by a reduction in the benefit from investment
tax credits. A reconciliation of the statutory federal income tax rates to these
effective tax rates is provided in Note J to the Consolidated Financial
Statements.
FINANCING ACTIVITY
BellSouth Telecommunications has committed credit lines aggregating $1,261
with various banks. BellSouth Telecommunications also maintains uncommitted
credit lines of $20. There were no borrowings under the lines of credit at
December 31, 1998. As of February 3, 1999, a shelf registration statement was on
file with the Securities and Exchange Commission under which $200 of debt
securities could be publicly offered.
BellSouth Telecommunications' long-term debt remained relatively flat in
1998 compared to 1997. Repayments of current maturities of long-term debt and
reductions in commercial paper were offset by the issuance of $1,000 in new
long-term debt.
BellSouth Telecommunications' debt to total capitalization ratio was 47.8%
at December 31, 1998 compared to 48.3% at December 31, 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 engages
in limited hedging activity with regard to its interest rate risks.
18
<PAGE>
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>
TOTAL
RECORDED
1999 2000 2001 2002 2003 THEREAFTER AMOUNT FAIR VALUE
--------- --------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate Debt............. $ 1,556 $ 388 $88 $14 $535 $ 5,519 $ 8,100 $ 8,279
Average Interest Rate....... 5.37% 6.04% 4.67% 6.21% 6.00% 6.65 % -- --
</TABLE>
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
REGULATION
BellSouth Telecommunications' future operations and financial results will
be substantially influenced by developments in a number of federal and state
regulatory proceedings. Adverse results in these proceedings could materially
affect BellSouth Telecommunications' revenues and expenses and its ability to
compete effectively against other telecommunications carriers.
Federal policies being implemented by the Federal Communications Commission
(FCC) strongly favor access reform, whereby the historical subsidy for local
service that is contained in network access charges paid by long distance
carriers is eliminated. Unless compensatory changes are adopted, such as
Universal Service Fund contribution mandates, BellSouth Telecommunications'
revenues from this source, which constituted 28% of its revenues during 1998,
are at risk. In addition, other aspects of access charge regulation and
Universal Service Fund contribution requirements that are applicable to local
service carriers such as BellSouth Telecommunications are also under
consideration and could result in greater expense levels or reduced revenues.
As a result of litigation challenging a number of the FCC's rulings under
the 1996 Act, the U.S. Supreme Court has ruled that the FCC has considerable
authority to establish many pricing, interconnection and other policies that
have been considered within the exclusive jurisdiction of the state public
service commissions. BellSouth Telecommunications expects the FCC to accelerate
the growth of local service competition by aggressively utilizing such power to
require interconnection with competing carriers and the sale of network elements
to competitors who wish to provide communications services to customers in
BellSouth Telecommunications' region.
BellSouth has petitioned the FCC for permission under the 1996 Act to offer
full long distance services. The FCC has denied all of BellSouth's petitions.
BellSouth expects that the FCC will require further changes in BellSouth
Telecommunications' network interconnection elements and operating systems
before it will approve such petitions. Such changes will result in significant
additional expenses and promote local service competition.
BellSouth Telecommunications' intrastate prices are regulated under price
regulation plans provided by statute or approved by state public service
commissions. Appeals of approvals of plans in South Carolina and Tennessee are
pending. Some plans are subject to periodic review and require renewal, with
several plans scheduled for renewal during 1999. These commissions generally
required price reductions and other concessions from BellSouth
Telecommunications as a condition to approving these plans, and there is no
assurance that the commissions will not require further modifications when they
consider their renewal.
BellSouth Telecommunications is involved in numerous legal proceedings
associated with state and federal regulatory matters, the disposition of which
could materially impact its operating results and prospects. (See Note M to the
Consolidated Financial Statements.)
19
<PAGE>
COMPETITION
There are many competitive forces that impact BellSouth Telecommunications.
The 1996 Act removed the regulatory barriers to local service competition and
required BellSouth Telecommunications to open its network to other carriers.
BellSouth Telecommunications expects local service competition to steadily
increase, particularly with respect to its business customers. While competition
for local service revenues could adversely affect BellSouth Telecommunications'
results of operations, opening of local markets can lead to qualification to
offer in-region interLATA long distance service.
BellSouth Telecommunications plans to compete through aggressive marketing,
competitive pricing and technical innovation. It will offer consumers a full
range of services--local, long distance, Internet access and more--while
remaining committed to its high level of customer service and value.
TECHNOLOGY
BellSouth Telecommunications is continually upgrading its network with
digital and optical technologies, making it capable of delivering a full
complement of voice and data services. This modernization of the network is
critical to BellSouth Telecommunications' success in providing the data
connectivity demanded by its customers and to compete with fiber networks being
constructed or currently utilized by start-ups and cable companies. This effort
will require investment of significant amounts of capital in the future.
YEAR 2000 READINESS DISCLOSURE
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 most of its mission critical applications is
June 30, 1999. Mission critical applications include those that (1) directly
affect delivery of primary services to BellSouth Telecommunications' customers;
(2) directly affect BellSouth Telecommunications' 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.
20
<PAGE>
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
December 31, 1998, the planning, inventory and impact analysis phases were
complete, and the remaining phases were each approximately 65% 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 December 31, 1998, the planning, inventory and impact analysis phases were
each approximately 95% complete, and the remaining phases were each
approximately 70% 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, office equipment, utilities, etc. At
December 31, 1998, the planning, inventory and impact analysis phases were
almost 100% complete. The remaining phases were each approximately 15% complete.
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. A master Year 2000 Contingency Planning Guide
and associated workbook have been developed and internal training has been
completed. Other major milestones for the contingency plans include completion
of assessments by the end of first quarter 1999, and the completion of testing
and signoff of contingency plans during third quarter 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 and 1998. The remainder has been or
will be incurred during 1999 and 2000. Costs are not incurred equally over all
phases of the project, but increase over time. BellSouth Telecommunications
anticipates that the conversion and testing phases will require an increase in
spending over the earlier phases of the project. As of December 31, 1998,
approximately $69 of external costs had been expended towards Year 2000
compliance. BellSouth Telecommunications estimates the total external 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 most of 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 Telecommunications' 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.
21
<PAGE>
OTHER MATTERS
CWA CONTRACTS. In September 1998, members of the Communications Workers of
America (CWA) ratified new three-year contracts with BellSouth
Telecommunications, effective August 9, 1998. The contracts include basic wage
increases totaling 12.39% over the three years covered by the contracts. In
addition, the agreement provides for a standard award of between 2% and 2.5% of
base salary and overtime compensation which is subject to adjustment based on
company performance measures for plan years 1999 and 2000. Other terms of the
agreement include pension band increases and pension plan cash balance
improvements for active employees.
AFFILIATED TRANSACTIONS. BellSouth Telecommunications records both revenues
and expenses which result from transactions with other subsidiaries of
BellSouth. Revenues are generated primarily from services provided to BellSouth
Advertising and Publishing Corporation, interconnection services provided to
BellSouth Cellular Corporation and sales commissions charged to BellSouth
Cellular Corporation for joint marketing efforts. Expenses are incurred
primarily from charges for use of intellectual property, allocations of
corporate overhead expenses, and allocations of expenses from other subsidiaries
of BellSouth. During 1998 and 1997, BellSouth Telecommunications recorded a
total of $221 and $168, respectively, in revenues and $529 and $232,
respectively, in expenses related to these affiliate transactions.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The standard requires that all derivative instruments (1)
be recognized as assets or liabilities and (2) be adjusted to fair value each
period. BellSouth Telecommunications will adopt SFAS No. 133 on January 1, 2000
and is currently assessing the impact that adoption will have on its results of
operations and financial condition.
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. BellSouth Telecommunications adopted SOP
98-1 on January 1, 1999.
Adoption of SOP 98-1 will result in a temporary increase in earnings in the
year of adoption, compared to the prior period, as a result of the
capitalization of costs which had previously been expensed. BellSouth
Telecommunications currently believes that this increase will be approximately
$325 to $425 ($200 to $250 after tax) for 1999. If expenditures remain at a
consistent level, the comparative 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 Consolidated
Balance Sheets.
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 the results of regulatory actions as well as 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.
22
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF MANAGEMENT
These financial statements have been prepared in conformity with generally
accepted accounting principles and have been audited by PricewaterhouseCoopers
LLP, 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, PricewaterhouseCoopers LLP 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 PricewaterhouseCoopers LLP'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, 1998, 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, 1999
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
BellSouth Telecommunications, Inc.
Atlanta, Georgia
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of BellSouth
Telecommunications, Inc. and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 3, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of BellSouth Telecommunications, Inc. on Form S-3 (File No. 333-00649) and Form
S-8 (File No. 333-64041) of our report, dated February 3, 1999, on our audits of
the consolidated financial statements of BellSouth Telecommunications, Inc. as
of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, which report is included in this annual report on Form
10-K.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 24, 1999
24
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Revenues:
Local service................................................................ $ 9,399 $ 8,499 $ 8,082
Network access............................................................... 4,632 4,483 4,365
Long distance................................................................ 713 734 794
Other........................................................................ 1,878 1,630 1,535
--------- --------- ---------
Total Operating Revenues................................................... 16,622 15,346 14,776
--------- --------- ---------
Operating Expenses:
Cost of services and products................................................ 5,510 5,119 5,133
Depreciation and amortization................................................ 3,363 3,332 3,255
Selling, general and administrative.......................................... 3,127 2,707 2,681
--------- --------- ---------
Total Operating Expenses................................................... 12,000 11,158 11,069
--------- --------- ---------
Operating Income............................................................... 4,622 4,188 3,707
Interest Expense............................................................... 551 534 552
Other Income, net.............................................................. 3 41 20
--------- --------- ---------
Income Before Income Taxes and Extraordinary Losses............................ 4,074 3,695 3,175
Provision for Income Taxes (Note J)............................................ 1,486 1,372 1,170
--------- --------- ---------
Income Before Extraordinary Losses............................................. 2,588 2,323 2,005
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E)........................................................... -- (9) --
--------- --------- ---------
Net Income................................................................. $ 2,588 $ 2,314 $ 2,005
--------- --------- ---------
--------- --------- ---------
Retained Earnings:
At beginning of year......................................................... $ 1,140 $ 870 $ 555
Net income................................................................... 2,588 2,314 2,005
Dividends declared........................................................... (2,374) (2,044) (1,690)
--------- --------- ---------
At end of year............................................................... $ 1,354 $ 1,140 $ 870
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................ $ 337 $ 49
Accounts receivable, net of allowance for uncollectibles of $75 and $108................. 2,952 2,951
Material and supplies.................................................................... 248 259
Other current assets..................................................................... 177 163
--------- ---------
Total Current Assets................................................................... 3,714 3,422
Investments and Advances (Note B).......................................................... 310 299
Property, Plant and Equipment, net (Note C)................................................ 19,008 18,853
Deferred Charges and Other Assets.......................................................... 884 652
--------- ---------
Total Assets........................................................................... $ 23,916 $ 23,226
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year (Note E)................................................... $ 1,556 $ 2,516
Accounts payable......................................................................... 1,586 1,116
Other current liabilities (Note D)....................................................... 2,090 2,217
--------- ---------
Total Current Liabilities.............................................................. 5,232 5,849
--------- ---------
Long-Term Debt (Note E).................................................................... 6,523 5,489
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes........................................................ 1,274 1,114
Unamortized investment tax credits....................................................... 167 213
Other liabilities and deferred credits (Note F).......................................... 1,945 2,033
--------- ---------
Total Deferred Credits and Other Liabilities........................................... 3,386 3,360
--------- ---------
Shareholder's Equity:
Common stock, one share, no par value.................................................... 7,421 7,388
Retained earnings........................................................................ 1,354 1,140
--------- ---------
Total Shareholder's Equity............................................................. 8,775 8,528
--------- ---------
Total Liabilities and Shareholder's Equity........................................... $ 23,916 $ 23,226
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 2,588 $ 2,314 $ 2,005
Adjustments to net income:
Depreciation and amortization............................................. 3,363 3,332 3,255
Provision for uncollectibles.............................................. 134 169 137
Deferred income taxes and unamortized investment tax credits.............. 134 118 (56)
Extraordinary loss on early extinguishment of debt........................ -- 15 --
Net change in:
Accounts receivable and other current assets............................ (179) (250) (57)
Accounts payable and other current liabilities.......................... 294 (92) (608)
Deferred charges and other assets....................................... (225) (241) (155)
Deferred credits and other liabilities.................................. (88) 29 413
Other reconciling items, net.............................................. 108 (4) (66)
---------- ---------- ----------
Net cash provided by operating activities............................... 6,129 5,390 4,868
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (3,512) (3,440) (3,206)
Other investing activities, net............................................. 29 118 15
---------- ---------- ----------
Net cash used for investing activities.................................. (3,483) (3,322) (3,191)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) proceeds from short-term borrowings...................... (489) 515 (501)
Proceeds from long-term debt................................................ 1,000 -- --
Repayment of long-term debt................................................. (560) (677) (485)
Advances from parent and affiliates......................................... 652 341 473
Repayments of advances from parent and affiliates........................... (641) (326) (486)
Dividends paid to parent.................................................... (2,330) (1,972) (1,649)
Other financing activities, net............................................. 10 -- (13)
---------- ---------- ----------
Net cash used for financing activities.................................. (2,358) (2,119) (2,661)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.......................... 288 (51) (984)
Cash and Cash Equivalents at Beginning of Period.............................. 49 100 1,084
---------- ---------- ----------
Cash and Cash Equivalents at End of Period.................................... $ 337 $ 49 $ 100
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<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 substantial portions of the
population within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. BellSouth Telecommunications
primarily provides (i) local exchange service and long distance services within
but not between geographic areas, called Local Access and Transport Areas
(LATAs) and (ii) network access services to enable interLATA and intraLATA
communications using the facilities of long distance carriers. Through
subsidiaries, other telecommunications services and products are provided
primarily within the nine-state BellSouth Telecommunications region.
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.
USE OF ESTIMATES. 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.
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.
DERIVATIVE FINANCIAL INSTRUMENTS. BellSouth Telecommunications' use of
derivative instruments is generally limited to interest rate swap agreements.
These agreements are treated as off-balance-sheet financial instruments.
Receipts or payments resulting from these instruments are recognized as
adjustments to Interest Expense as received or paid.
REVENUE RECOGNITION. Revenues are recognized when earned. Certain revenues
derived from local telephone services are billed monthly in advance and are
recognized the following month when services are provided. Revenues derived from
other telecommunications services, principally network access and long distance,
are recognized monthly as services are provided. Allowances for uncollectible
billed services are adjusted monthly. The provision for such uncollectible
accounts was $134, $169, and $137 for the years ended December 31, 1998, 1997
and 1996, respectively.
28
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
MAINTENANCE AND REPAIRS. The cost of maintenance and repairs of plant,
including the cost of replacing minor items not resulting in substantial
betterments, is charged to Operating Expenses.
INCOME TAXES. The Consolidated Balance Sheets reflect deferred tax balances
associated with the anticipated tax impact of future income or deductions
implicit in the Consolidated Balance Sheets 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.
SEGMENT REPORTING. Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
requires that BellSouth Telecommunications report financial and descriptive
information about its reportable segments, and how its reportable segments were
determined. BellSouth Telecommunications' predominant products are local
exchange and long distance communications services within LATAs and network
access services, all of which are provided over a single network. Additionally,
BellSouth Telecommunications' chief operating decision maker makes final
decisions regarding resource allocation and performance evaluation based on
total operations. Based on these factors, BellSouth Telecommunications has
determined that it operates as one operating segment as defined by SFAS 131.
NEW ACCOUNTING PRONOUNCEMENTS. 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. BellSouth Telecommunications adopted SOP 98-1 on January 1,
1999. Adoption of SOP 98-1 will result in a temporary increase in earnings in
the year of adoption, compared to the prior period, as a result of the
capitalization of costs which had previously been expensed.
NOTE B -- INVESTMENTS AND ADVANCES
Investments and Advances consists primarily of the cost of 19,814,758 and
19,146,358 shares of BellSouth Common Stock, at December 31, 1998 and 1997,
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.
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.
29
<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>
ESTIMATED
DEPRECIABLE
LIVES
(IN YEARS) 1998 1997
------------- --------- ---------
<S> <C> <C> <C>
Outside plant........................................... 12-20 $ 22,496 $ 21,642
Central office equipment................................ 8-10 20,056 18,716
Building and building improvements...................... 45 3,059 2,984
Furniture and fixtures.................................. 15 2,561 2,579
Operating and other equipment........................... 5-15 979 935
Station equipment....................................... 6 563 523
Land.................................................... -- 162 162
Plant under construction................................ -- 372 327
--------- ---------
50,248 47,868
Less: Accumulated depreciation.......................... 31,240 29,015
--------- ---------
Total Property, Plant and Equipment, net.............. $ 19,008 $ 18,853
--------- ---------
--------- ---------
</TABLE>
NOTE D -- OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Advanced billing and customer deposits................................... $ 641 $ 525
Taxes accrued............................................................ 274 395
Dividends payable to parent.............................................. 267 223
Salaries and wages payable............................................... 264 266
Interest and rents accrued............................................... 231 226
Compensated absences..................................................... 216 215
Other.................................................................... 197 367
--------- ---------
Total Other Current Liabilities...................................... $ 2,090 $ 2,217
--------- ---------
--------- ---------
</TABLE>
NOTE E -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Commercial paper........................................................ $ 1,509 $ 1,912
Current maturities of long-term debt.................................... 47 604
--------- ---------
Total Debt Maturing Within One Year..................................... $ 1,556 $ 2,516
--------- ---------
--------- ---------
Weighted-average interest rate at end of period:
Commercial paper...................................................... 5.36% 5.94%
</TABLE>
30
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE E -- DEBT (CONTINUED)
BellSouth Telecommunications has committed credit lines aggregating $1,261
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, 1998. There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
LONG-TERM: The table below summarizes debt outstanding as of December 31.
Interest rates and maturities are for amounts outstanding at December 31, 1998.
<TABLE>
<CAPTION>
CONTRACTUAL WEIGHTED-AVERAGE
INTEREST RATES INTEREST RATES MATURITIES 1998 1997
------------------ ------------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
4.375% - 6% 5.70% 2000 - 2045 $ 1,495 $ 1,565
6.125% - 7% 6.48% 2000 - 2033 3,219 2,730
7.5% - 8.25% 7.79% 2032 - 2035 1,150 1,150
6.65% - 7% 6.92% 2095 654 644
--------- ---------
6,518 6,089
Other........................................................................
73 33
Unamortized discount, net of premium.........................................
(21) (29)
--------- ---------
6,570 6,093
Current maturities...........................................................
(47) (604)
--------- ---------
Total Long-Term Debt.....................................................
$ 6,523 $ 5,489
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt outstanding (principal amounts) at December 31,
1998 are summarized below. Maturities after the year 2003 include $500 principal
amount of 6.65% debentures due in 2095. At December 31, 1998, such debentures
had an accreted book value of $154.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturities..................... $ 47 $388 $ 88 $ 14 $535 $5,865 $6,937
---- ---- ---- ---- ---- ---------- ------
---- ---- ---- ---- ---- ---------- ------
</TABLE>
In June 1998, BellSouth Telecommunications issued $500 of 6 3/8% Debentures,
due June 1, 2028. In addition, during June 1998, BellSouth Telecommunications
issued $500 of 6% Reset Put Securities due June 15, 2012 (REPS). REPS are a debt
instrument with embedded put and call option features. The REPS are subject to
mandatory redemption from the existing holders on June 15, 2002 through either
(i) the exercise by the callholder of its right to purchase the REPS or (ii) the
repurchase of the REPS by BellSouth Telecommunications. If the call option is
exercised, the callholder will, based on BellSouth Telecommunications' then
current credit spreads, determine the interest to be paid on the REPS.
During 1997, BellSouth Telecommunications retired certain long-term debt
issues totaling $600. As a result of the early extinguishment of these issues,
extraordinary losses of $9, net of current tax benefits of $6, were recognized
in 1997.
At December 31, 1998, a shelf registration statement was on file with the
Securities and Exchange Commission under which $200 of debt securities could be
publicly offered.
31
<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>
1998 1997
--------- ---------
<S> <C> <C>
Postretirement benefits other than pensions (Note H)............................... $ 772 $ 782
Compensation related............................................................... 420 398
Accrued pension cost (Note H)...................................................... 412 525
Postemployment benefits............................................................ 234 232
Other.............................................................................. 107 96
--------- ---------
Total Other Liabilities and Deferred Credits................................... $ 1,945 $ 2,033
--------- ---------
--------- ---------
</TABLE>
NOTE G -- TRANSACTIONS WITH AFFILIATES
BellSouth Telecommunications records both revenues and expenses which result
from transactions with other subsidiaries of BellSouth Corporation. Revenues are
generated primarily from services provided to BellSouth Advertising and
Publishing Corporation, interconnection services provided to BellSouth Cellular
Corporation and sales commissions charged to BellSouth Cellular Corporation for
joint marketing efforts. Expenses are incurred primarily from charges for use of
intellectual property, allocations of corporate overhead expenses, and
allocations of expenses from other subsidiaries of BellSouth. During 1998, 1997
and 1996, BellSouth Telecommunications recorded a total of $221, $168 and $152,
respectively, in revenues and $529, $232 and $166, respectively, in expenses
related to these affiliated transactions.
At December 31, 1998 and 1997, amounts receivable from affiliated companies
were $50 and $29, respectively. Amounts payable to affiliated companies at
December 31, 1998 and 1997, both short- and long-term, were $447 and $318,
respectively.
NOTE H -- EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS. Substantially all
nonrepresented and represented employees of BellSouth Telecommunications are
covered by noncontributory defined benefit pension plans, as well as
postretirement health and life insurance welfare 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 1998 and 1997 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 through
1998. During 1998, BellSouth established a cash balance plan for represented
employees based upon an initial cash balance amount, negotiated pension band
increases and interest credits effective January 1, 1999. The 1998 and 1997
represented pension obligations include the projected effect of future
bargained-for improvements. 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 who retire after December 31, 1991.
32
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits" requires certain disclosures to be made with respect to the components
of pension and postretirement (income) expense for the period and a
reconciliation of the funded status of the plan with amounts reported in the
Consolidated Balance Sheets. With the exception of the BellSouth
Telecommunications pension plan for nonrepresented employees prior to its
combination into the BellSouth nonrepresented plan on December 31, 1997, 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.
Pension and postretirement benefit (income) expense allocated to BellSouth
Telecommunications from BellSouth, and pension income recognized on the separate
BellSouth Telecommunications pension plan for nonrepresented employees in 1997
and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Pension (income) expense:
Represented pension plan................................................... $ (134) $ (34) $ 68
Nonrepresented pension plan................................................ $ (149) $ (144) $ (98)
Net postretirement benefit expense........................................... $ 233 $ 257 $ 294
</TABLE>
The consolidated net pension and postretirement (income) expense amounts
reflected above are exclusive of curtailment effects reflected in the work force
reduction activity and do not reflect pension curtailment gains in the amount of
$9, $36 and $43 in 1998, 1997 and 1996, respectively.
Amounts recognized in the Consolidated Balance Sheets consist of:
<TABLE>
<CAPTION>
PENSION BENEFITS RETIREE HEALTH AND
LIFE
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Prepaid benefit cost............................................... $ 527 $ 347 $ 76 $ 60
Accrued benefit liability.......................................... (412) (525) (772) (782)
</TABLE>
33
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Prior to December 31, 1997, BellSouth Telecommunications maintained a
separate cash balance plan for its nonrepresented employees. The following
information required by SFAS 132 is presented for the periods BellSouth
Telecommunications maintained this separate plan.
<TABLE>
<CAPTION>
PENSION
BENEFITS
---------
1997
---------
<S> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of the year........................................................ $ 4,050
Service cost........................................................................................... 68
Interest cost.......................................................................................... 290
Actuarial losses....................................................................................... 363
Benefits paid.......................................................................................... (510)
Curtailments........................................................................................... (17)
---------
Benefit obligation at the end of the year.............................................................. $ 4,244
---------
---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year......................................................... $ 6,205
Actual return on plan assets........................................................................... 1,022
Benefits paid.......................................................................................... (510)
---------
Fair value of plan assets at end of year............................................................... $ 6,717
---------
---------
FUNDED STATUS:
As of December 31...................................................................................... $ 2,473
Unrecognized prior service cost........................................................................ (284)
Unrecognized net gain.................................................................................. (1,773)
Unrecognized transition asset.......................................................................... (33)
---------
Prepaid benefit cost................................................................................... $ 383
---------
---------
</TABLE>
34
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The components of the separate nonrepresented pension income for 1997 and
1996 and the underlying assumptions, respectively, are as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS
--------------------
1997 1996
--------- ---------
<S> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT EXPENSE (INCOME):
Service cost.......................................................................... $ 68 $ 77
Interest cost......................................................................... 290 297
Expected return on plan assets........................................................ (440) (431)
Amortization of prior service cost.................................................... (25) (23)
Amortization of gain.................................................................. (32) (13)
Amortization of transition asset...................................................... (5) (5)
--------- ---------
Net periodic benefit (income)......................................................... $ (144) $ (98)
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<S> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate..................................................... 7.00% 7.50%
Expected return on plan assets.................................... 8.25% 8.25%
Rate of compensation increase..................................... 5.00% 5.00%
</TABLE>
During 1998, BellSouth modified the presentation of the salary rate
assumption to reflect a more comparable weighted-average compensation increase.
The revised presentation has been included for all years and has no impact on
BellSouth's expenses or obligations.
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 $58, $91 and $79 in 1998, 1997 and
1996, 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
35
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
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 would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income -- as reported...................................................... $ 2,588 $ 2,314 $ 2,005
Net income -- pro forma........................................................ $ 2,571 $ 2,305 $ 2,000
</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 1998, 1997 and 1996 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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected life (years)................................................................. 5 5 7
Dividend yield........................................................................ 2.44% 3.24% 3.39%
Expected volatility................................................................... 21.0% 19.0% 15.4%
Risk-free interest rate............................................................... 5.46% 6.21% 5.52%
</TABLE>
The weighted-average fair values of options granted at fair market value
during 1998, 1997 and 1996 were $6.88, $4.37 and $3.81, respectively. Prior year
fair values have been restated to reflect a two-for-one split of BellSouth's
Common Stock which occurred in December 1998.
NOTE J -- INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
Consolidated Balance Sheets reflect the anticipated tax impact of future taxable
income or deductions implicit in the Consolidated Balance Sheets in the form of
temporary differences. These temporary differences reflect the difference
between the basis in assets and liabilities as measured in the Consolidated
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
subsidiaries of BellSouth in accordance with the applicable sections of the
Internal Revenue Code.
Generally, under this method each company calculates its current year 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.
36
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE J -- INCOME TAXES (CONTINUED)
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.................................................... $ 1,177 $ 1,087 $ 1,056
Deferred, net.............................................. 139 143 24
Investment tax credits, net................................ (45) (65) (77)
--------- --------- ---------
1,271 1,165 1,003
--------- --------- ---------
State:
Current.................................................... 175 167 170
Deferred, net.............................................. 40 40 (3)
--------- --------- ---------
215 207 167
--------- --------- ---------
Total provision for income taxes......................... $ 1,486 $ 1,372 $ 1,170
--------- --------- ---------
--------- --------- ---------
</TABLE>
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Compensation related.................................................... $ 522 $ 638
Allowance for uncollectibles............................................ 88 76
Work force reduction charge............................................. 54 66
Regulatory sharing accruals............................................. 47 58
Other................................................................... 64 95
--------- ---------
Deferred Tax Assets................................................... 775 933
--------- ---------
Depreciation............................................................ (2,030) (2,002)
--------- ---------
Deferred Tax Liabilities.............................................. (2,030) (2,002)
--------- ---------
Net Deferred Tax Liability.......................................... $ (1,255) $ (1,069)
--------- ---------
--------- ---------
</TABLE>
Of the Net Deferred Tax Liability at December 31, 1998 and 1997, $19 and
$45, respectively, were current and $(1,274) and $(1,114), respectively, were
noncurrent.
A reconciliation of the federal statutory income tax rate to BellSouth
Telecommunications' effective tax rate follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Federal statutory tax rate.......................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit............... 3.4 3.7 3.4
Amortization of investment tax credits.............................. (.7) (1.8) (2.4)
Miscellaneous items, net............................................ (1.2) .2 .9
--- --- ---
Effective tax rate................................................ 36.5% 37.1% 36.9%
--- --- ---
--- --- ---
</TABLE>
37
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Paid For:
Income taxes................................................. $ 1,455 $ 1,259 $ 1,111
--------- --------- ---------
--------- --------- ---------
Interest..................................................... $ 568 $ 552 $ 585
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE L -- 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,
1998 and 1997, respectively. Fair value estimates for interest rate swaps are
based on quotes from dealers. 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
RECORDED ESTIMATED RECORDED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS
Assets (Liabilities):
Marketable securities.......................................... $ 301 $ 988 $ 290 $ 549
Long-Term Debt................................................. (6,518) (6,771) (6,089) (6,142)
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Interest Rate Swaps............................................ -- (1) -- --
</TABLE>
INTEREST RATE SWAPS. BellSouth Telecommunications enters into interest rate
swap agreements to exchange fixed and variable rate interest payment obligations
without the exchange of the underlying principal amounts. As of December 31,
1998, BellSouth Telecommunications was a party to an interest rate swap with a
notional amount of $500. Under this swap, BellSouth Telecommunications paid a
variable rate averaging 5.69% and received a fixed rate of 6% at December 31,
1998. The swap matures in 2002. There were no interest rate swap agreements
outstanding at December 31, 1997.
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 long distance carriers, are limited due to
the composition of the customer base, which includes a large number of
individuals and businesses. At December 31, 1998 and 1997, approximately $472
and $485, respectively, of trade accounts receivable were from long distance
carriers.
Revenues from services provided to AT&T Corp., BellSouth Telecommunications'
largest customer, were approximately 9%, 10% and 11% of Total Operating Revenues
for 1998, 1997 and 1996, respectively.
38
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE M -- COMMITMENTS AND CONTINGENCIES
LEASES. BellSouth Telecommunications has entered into operating leases for
facilities and equipment used in operations. Rental expense under operating
leases was $101, $136 and $177 for 1998, 1997 and 1996, 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, 1998:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
----- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rentals.............. $ 63 $56 $56 $56 $55 $389 $ 675
--- ---- ---- ---- ---- ----- -----
--- ---- ---- ---- ---- ----- -----
</TABLE>
OUTSIDE PLANT. BellSouth Telecommunications currently self-insures all of
its outside plant against casualty losses. The net book value of outside plant
was $7,234 and $7,408 at December 31, 1998 and 1997, 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
$400 to $625 annually over the next nine years.
RECIPROCAL COMPENSATION. Following the enactment of the Telecommunications
Act of 1996, BellSouth Telecommunications and various 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 BellSouth Telecommunications for
compensation associated with dial-up calls originating on BellSouth
Telecommunications' network and connecting with Internet service providers
(ISPs) served by the CLECs' networks. BellSouth Telecommunications has
maintained that, because the Federal Communications Commission (FCC) has
previously determined that Internet calls over dedicated lines are
jurisdictionally interstate, dial-up calls to ISPs are not local calls for which
terminating compensation is due under the interconnection agreements. The courts
and state commissions that have considered the matter have ruled that such calls
invoke the reciprocal compensation obligation. The FCC has indicated that it
would release an order in which it would address the jurisdictional nature of
switched ISP traffic. BellSouth Telecommunications believes that it has a good
basis for its claims that such reciprocal compensation is not owed to the CLECs.
However, at December 31, 1998, BellSouth Telecommunications' exposure related to
unrecorded amounts withheld from CLECs was approximately $135, including accrued
interest.
OTHER 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.
39
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE M -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 results of operations, financial position or cash flows.
NOTE N -- 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>
1998
Operating Revenues..................................................... $ 4,020 $ 4,136 $ 4,195 $ 4,271
Operating Income....................................................... $ 1,223 $ 1,179 $ 1,082 $ 1,138
Net Income............................................................. $ 683 $ 644 $ 626 $ 635
1997
Operating Revenues..................................................... $ 3,805 $ 3,754 $ 3,873 $ 3,914
Operating Income....................................................... $ 1,151 $ 982 $ 986 $ 1,069
Net Income............................................................. $ 633 $ 531 $ 536 $ 614
</TABLE>
40
<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.................................................... 24
Consolidated Statements of Income and Retained Earnings......... 25
Consolidated Balance Sheets..................................... 26
Consolidated Statements of Cash Flows........................... 27
Notes to Consolidated Financial Statements...................... 28
</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. (Exhibit 3b to Form
10-K for the year ended December 31, 1997, File No. 1-1049.)
4 No instrument which defines the rights of holders of long and intermediate term debt of BellSouth
Telecommunications is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to
this regulation, BellSouth Telecommunications, Inc. hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
12 Computation of Ratio of Earnings to Fixed Charges.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
b. Reports on Form 8-K:
None.
41
<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 24, 1999
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*
Margaret H. Greene*
Isaiah Harris*
Elton R. King*
*By: /s/ ISAIAH HARRIS
----------------------------------
Isaiah Harris
(INDIVIDUALLY AND AS
ATTORNEY-IN-FACT)
February 24, 1999
42
<PAGE>
EXHIBIT 12
BELLSOUTH TELECOMMUNICATIONS
COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
1. Earnings
(a) Income from continuing operations before deductions for
taxes and interest........................................ $ 4,625 $ 4,229 $ 3,727 $ 2,808 $ 3,606
(b) Portion of rental expense representative of interest
factor.................................................... 34 45 60 62 80
--------- --------- --------- --------- ---------
TOTAL..................................................... $ 4,659 $ 4,274 $ 3,787 $ 2,870 $ 3,686
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
2. Fixed Charges
(a) Interest.................................................. $ 571 $ 550 $ 569 $ 594 $ 569
(b) Portion of rental expense representative of interest
factor.................................................... 34 45 60 62 80
--------- --------- --------- --------- ---------
TOTAL..................................................... $ 605 $ 595 $ 629 $ 656 $ 649
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio (1 divided by 2)........................................ 7.70 7.18 6.02 4.38 5.68
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS 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 GARY BUTLER, 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 27TH
DAY OF JANUARY, 1999.
/s/ C. Sidney Boren
----------------------------
C. SIDNEY BOREN
DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS 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 GARY BUTLER, 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 27TH
DAY OF JANUARY, 1999.
/s/ Charles B. Coe
----------------------------
CHARLES B. COE
PRESIDENT
DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS 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 GARY BUTLER, 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 27TH
DAY OF JANUARY, 1999.
/s/ Odie C. Donald
----------------------------
ODIE C. DONALD
GROUP PRESIDENT - CUSTOMER
OPERATIONS
DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS 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 GARY BUTLER, 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 27TH
DAY OF JANUARY, 1999.
/s/ Jere A. Drummond
----------------------------
JERE A. DRUMMOND
DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS 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 HER NAME;
NOW, THEREFORE, THE UNDERSIGNED HEREBY CONSTITUTES AND APPOINTS
CHARLES B. COE, ISAIAH HARRIS AND GARY BUTLER, AND EACH OF THEM, AS ATTORNEYS
FOR HER AND IN HER NAME, PLACE AND STEAD, AND IN EACH OF HER 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 SHE 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 HER HAND THE 27TH
DAY OF JANUARY, 1999.
/s/ Margaret H. Greene
----------------------------
MARGARET H. GREENE
GROUP PRESIDENT - REGULATORY AND
EXTERNAL AFFAIRS
DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS 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 GARY BUTLER, 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 27TH
DAY OF JANUARY, 1999.
/s/ Isaiah Harris
----------------------------
ISAIAH HARRIS
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
COMPTROLLER
DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS 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 GARY BUTLER, 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 27TH
DAY OF JANUARY, 1999.
/s/ Elton R. King
----------------------------
ELTON R. KING
GROUP PRESIDENT - NETWORK AND
CARRIER SERVICES
DIRECTOR
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 337
<SECURITIES> 310
<RECEIVABLES> 3,027
<ALLOWANCES> 75
<INVENTORY> 248
<CURRENT-ASSETS> 3,714
<PP&E> 50,248
<DEPRECIATION> 31,240
<TOTAL-ASSETS> 23,916
<CURRENT-LIABILITIES> 5,232
<BONDS> 6,523
0
0
<COMMON> 7,421
<OTHER-SE> 1,354
<TOTAL-LIABILITY-AND-EQUITY> 23,916
<SALES> 192
<TOTAL-REVENUES> 16,622
<CGS> 237
<TOTAL-COSTS> 8,873
<OTHER-EXPENSES> 3,127
<LOSS-PROVISION> 134
<INTEREST-EXPENSE> 551
<INCOME-PRETAX> 4,074
<INCOME-TAX> 1,486
<INCOME-CONTINUING> 2,588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,588
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
