<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1049
BELLSOUTH TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-0436120
(State of Incorporation) (I.R.S. Employer
Identification Number)
675 West Peachtree Street, N.E.,
Atlanta, Georgia 30375
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 404 927-1909
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
<PAGE>
Table of Contents
Item Page
Part I
1. Financial Statements
Consolidated Statements of Income and Retained Earnings ..... 3
Consolidated Balance Sheets ................................. 4
Consolidated Statements of Cash Flows ....................... 5
Notes to Consolidated Financial Statements .................. 6
2. Management's Discussion and Analysis of Results of Operations ... 8
Part II
6. Exhibits and Reports on Form 8-K ............................... 14
<PAGE>
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PART I - FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(Dollars In Millions)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating Revenues:
Local service ..................... $2,747 $2,542 $ 8,113 $ 7,458
Network access .................... 1,200 1,147 3,578 3,458
Long distance ..................... 158 180 461 532
Other ............................. 376 326 1,078 903
Total Operating Revenues......... 4,481 4,195 13,230 12,351
Operating Expenses:
Operational and support expenses .. 2,372 2,266 7,021 6,358
Depreciation and amortization ..... 868 847 2,551 2,509
Total Operating Expenses ........ 3,240 3,113 9,572 8,867
Operating Income ..................... 1,241 1,082 3,658 3,484
Interest Expense ..................... 142 132 410 409
Other Income (Expense), net .......... 17 (2) 18 2
Income Before Income Taxes ........... 1,116 948 3,266 3,077
Provision for Income Taxes ........... 420 322 1,225 1,124
Net Income ...................... $696 $626 $ 2,041 $ 1,953
Retained Earnings:
At beginning of period ............. $ 1,477 $ 1,252 $ 1,354 $ 1,140
Add: Net Income ................... 696 626 2,041 1,953
Deduct: Dividends Declared ........ (626) (567) (1,848) (1,782)
At end of period ................... $ 1,547 $ 1,311 $ 1,547 $ 1,311
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................... $ 135 $ 337
Accounts receivable, net of allowance
for uncollectibles of $80 and $75 ........... 3,075 2,952
Material and supplies ........................ 242 248
Other current assets ......................... 173 177
Total Current Assets ....................... 3,625 3,714
Investments and Advances ...................... 317 310
Property, Plant and Equipment ................. 52,208 50,248
Less: accumulated depreciation ................ 32,613 31,240
Property, Plant and Equipment, net ......... 19,595 19,008
Deferred Charges and Other Assets ............. 1,638 884
Total Assets ..................................$ 25,175 $23,916
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year ................ $ 2,541 $ 1,556
Accounts payable ............................. 1,516 1,586
Other current liabilities .................... 2,573 2,090
Total Current Liabilities .................. 6,630 5,232
Long-Term Debt ................................ 6,145 6,523
Noncurrent Liabilities:
Deferred income taxes ........................ 1,468 1,274
Unamortized investment tax credits ........... 137 167
Other noncurrent liabilities ................ 1,858 1,945
Total Noncurrent Liabilities ............... 3,463 3,386
Shareholder's Equity:
Common stock, one share, no par value ........ 7,390 7,421
Retained earnings ............................ 1,547 1,354
Total Shareholder's Equity ................. 8,937 8,775
Total Liabilities and Shareholder's Equity ....$ 25,175 $23,916
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ......................................................... $2,041 $1,953
Adjustments to net income:
Depreciation and amortization .................................. 2,551 2,509
Provision for uncollectibles ................................... 110 101
Deferred income taxes and unamortized investment tax credits ... 161 39
Net change in:
Accounts receivable and other current assets ................... (260) (151)
Accounts payable and other current liabilities ................. 502 416
Deferred charges and other assets .............................. (429) (228)
Other liabilities and deferred credits ......................... (167) (34)
Other reconciling items, net ....................................... 83 77
Net cash provided by operating activities ...................... 4,592 4,682
Cash Flows from Investing Activities:
Capital expenditures ...............................................(3,468) (2,593)
Other investing activities, net .................................... 39 26
Net cash used for investing activities .........................(3,429) (2,567)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt ..................... 521 (646)
Proceeds from long-term debt........................................ - 1,000
Repayments of long-term debt........................................ (8) (560)
Advances from parent and affiliates ................................ 539 462
Repayments of advances from parent and affiliates .................. (517) (465)
Dividends paid to parent ...........................................(1,921) (1,825)
Other financing activities, net..................................... 21 25
Net cash used for financing activities .........................(1,365) (2,009)
Net (Decrease) Increase in Cash and Cash Equivalents ................ (202) 106
Cash and Cash Equivalents at Beginning of Period .................... 337 49
Cash and Cash Equivalents at End of Period ..........................$ 135 $ 155
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Millions)
Note A - Preparation of Interim Financial Statements
In this report, BellSouth Telecommunications, Inc. and its subsidiaries are
referred to as "we" or "BST".
The accompanying unaudited consolidated financial statements have been prepared
based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. In our opinion, these statements include all
adjustments necessary for a fair presentation of the results of the interim
periods shown. All adjustments are of a normal recurring nature unless otherwise
disclosed. Revenues, expenses, assets and liabilities can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year. For a more
complete discussion of our significant accounting policies and other
information, you should read this report in conjunction with the consolidated
financial statements included in our latest annual report on Form 10-K and
previous quarterly reports on Form 10-Q.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
Note B - New Accounting Pronouncements
In the first quarter of 1999, we adopted a new accounting standard (SOP 98-1)
related to the capitalization of certain costs for internal-use software
development. Adoption of the new standard caused an increase in earnings as a
result of the capitalization of costs that had previously been expensed. The
1999 year-to-date impact was an increase in income before income taxes of $319
and net income of $199. The adoption also changed the classification of these
expenditures in the consolidated statements of cash flows from operating to
investing activities.
Note C - Segment Information
Our predominant products are local exchange and long distance communications
services within LATAs (referred to as intraLATA) and network access services,
all of which are provided over a single network. Operating decisions regarding
resource allocation and performance evaluation are made based on total
operations. Based on these factors, we have determined that we operate as one
operating segment as defined by Statement of Financial Accounting Standards No.
131.
Note D - Supplemental Cash Flow Information
For the Nine Months
Ended September 30,
1999 1998
Cash Paid For:
Income taxes .................................. $ 695 $ 1,002
Interest ...................................... $ 353 $ 357
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In Millions)
Note E - Contingencies
Following the enactment of the Telecommunications Act of 1996, we entered into
interconnection agreements with various competitive local exchange carriers
(CLECs). These agreements provide 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
have claimed entitlement from us for compensation associated with dial-up calls
originating on our network and connecting with Internet service providers (ISPs)
served by the CLECs' networks. It is our position that dial-up calls to ISPs are
not local calls for which terminating compensation is due under the
interconnection agreements.
In February 1999, the FCC issued a decision that such ISP traffic does not
terminate at the ISP and, therefore, is interstate in nature, rather than local.
The FCC stated, however, that it would not interfere with prior state
commissions' decisions regarding this matter. The courts and state regulatory
commissions in our operating territory that have considered the matter, however,
have generally ruled that such calls invoke the reciprocal compensation
obligation. We continue to believe that we have a good legal basis for our
position. At September 30, 1999, our exposure related to these disputed claims
was approximately $210, including accrued interest.
Other reciprocal compensation issues
In a related matter, at least one CLEC is claiming terminating compensation of
approximately $140 for service arrangements that we do not believe involves
traffic under our interconnection agreement. We have filed a complaint with the
state regulatory commission asking that agency to declare that we do not owe
reciprocal compensation for these arrangements. The CLEC has filed a complaint
with the state regulatory commission asking it to order us to pay the disputed
amounts. Hearings on this matter were held in August 1999 and a decision is
pending. We believe that we have a good legal basis for our position and,
accordingly, no provision has been recorded for this claim in these financial
statements.
Note F - South Carolina Regulatory Matters
Beginning in 1996, we operated under a price regulation plan approved by the
South Carolina Public Service Commission under existing state laws. In April
1999, however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated under a new state
statute, adopted subsequent to the Commission's approval of the earlier plan.
The new statute allows telephone companies in South Carolina to operate under
price regulation without obtaining approval from the Commission. The election
became effective during August 1999.
The South Carolina Consumer Advocate petitioned the Commission seeking review of
the level of our earnings during the 1996-1998 period when we operated under the
subsequently invalidated price regulation plan. The Commission granted our
motion to dismiss the petition on November 4, 1999.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
(Dollars in Millions)
For a more complete understanding of our industry, the drivers of our business,
and our current period results, you should read the following Management's
Discussion and Analysis of Results of Operations (MD&A) in conjunction with the
MD&A in our latest annual report on Form 10-K and previous quarterly reports on
Form 10-Q.
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Results of Operations
- ------------------------------------------------------------------------------
Our reported results include the effect of charges from an affiliated company
for use of intellectual property rights related to trademarks, service marks and
patents. When compared to the same 1998 periods, these charges increased our
reported year-to-date 1999 operational and support expenses by $520, and reduced
our reported net income by $317. To assist your understanding of the results of
operations, the following discussion excludes the effect of these charges, which
are eliminated in the consolidated financial results of our parent company,
BellSouth Corporation.
Key financial and operating data for third quarter and year-to-date 1999 and
1998, adjusted to exclude the effect of the charges discussed above, are as
follows:
<TABLE>
<CAPTION>
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $4,481 $ 4,195 6.8 $13,230 $ 12,351 7.1
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Expenses $3,043 $ 3,050 (0.2) $8,989 $ 8,804 2.1
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Operating income $1,438 $ 1,145 25.6 $4,241 $ 3,547 19.6
- ------------------------------------- ----------- ----------- ------------
Net income $ 817 $ 667 22.5 $2,399 $ 1,994 20.3
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
EBITDA (a) $2,306 $ 1,992 15.8 $6,792 $6,056 12.2
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
EBITDA margin 51.5% 47.5% +400bps 51.3% 49.0% +230bps
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Access line counts (000's):
- ------------------------------------- ----------- ----------- ------------
Switched access lines 24,440 23,869 2.4
- ------------------------------------- ----------- ----------- ------------
Access line equivalents(b) 18,349 13,470 36.2
- ------------------------------------- ----------- ----------- ------------
Total equivalent access lines 42,789 37,339 14.6
- ------------------------------------- ----------- ----------- ------------
Access minutes of use (millions) 27,858 26,438 5.4 82,310 77,760 5.9
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Digital and data services revenues $667 $519 28.5 $1,919 $1,447 32.6
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Convenience feature revenues $481 $428 12.4 $1,381 $1,175 17.5
- ------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
(a) EBITDA represents income before net interest expense, income taxes,
depreciation and amortization and other income, net. We present EBITDA
because it is a widely accepted financial indicator used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance and because we believe that EBITDA is an additional
meaningful measure of performance and liquidity. EBITDA does not represent
cash flows for the period, nor is it an alternative to operating income
(loss) as an indicator of operating performance. You should not consider it
in isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. The items
excluded from the calculation of EBITDA are significant components in
understanding and assessing our financial performance. Our computation of
EBITDA may not be comparable to the computation of similarly titled
measures of other companies. EBITDA does not represent funds available for
discretionary uses.
(b) Represents the approximate number of switched access lines that would be
functionally equal to non-switched, high-capacity digital and data circuits
in service.
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Overview
- -------------------------------------------------------------------------------
Our 1999 year-to-date results reflect strong revenue growth driven by growth in
digital and data services revenues when compared to the first nine months of
1998. Expense growth was driven by increased spending for customer service and
network support functions and expenses for development and promotion of new
business initiatives including high-speed data and Internet service offerings.
<PAGE>
In addition, on January 1, 1999, we adopted a new accounting standard on
capitalization of internal-use software. The year-to-date impact of capitalizing
software costs under the new standard was a benefit of $199 to net income.
Operating Revenues
Year-to-Date
------------------------- %
1999 1998 Change
- ----------------------------------- ------------ ------------ ----------
Operating revenues:
Local service .................. $8,113 $7,458 8.8
Network access ................. 3,578 3,458 3.5
Long distance .................. 461 532 (13.3)
Other wireline.................. 1,078 903 19.4
- ----------------------------------- ------------ ------------ ----------
Total operating revenues ..... $13,230 $12,351 7.1
- ----------------------------------- ------------ ------------ ----------
Local service
The $655 increase in local service revenues on a year-to-date comparative basis
is attributable to growth in switched access lines and strong demand for digital
and data services and convenience features.
We ended the third quarter with over 42 million total equivalent access lines,
an increase of 14.6% since September 30, 1998. Residential access lines rose
3.4% to 16,889,000, driven by economic growth in our nine-state region as well
as demand for secondary residence lines for home office purposes, Internet
access and children's phones. We added 329,000 secondary residence lines since
September 30, 1998, extending the total to almost 2.5 million lines and
increasing the penetration rate to 17.3%. Business access lines, including both
switched access lines and data circuits, grew 23.6% propelled by expanding
demand for our digital and data services. Switched business access line growth
was flat reflecting continued migration of new and existing business customers
to high-capacity data lines.
1999 year-to-date revenues from optional convenience features such as custom
calling features (e.g., Caller ID, Call Waiting, Call Return) and MemoryCall(R)
service increased $206 (17.5%) when compared to the same 1998 period. We
continued to drive growth of convenience feature usage through our Complete
Choice(R) Package, a one-price bundled offering of over 20 features.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $139 compared to the first nine months of
1998. Also contributing to the increase in revenues for the year-to-date period
were net rate impacts of $115, which were primarily attributable to sharing
accruals recorded in the prior periods. The growth in local service revenues for
the 1999 periods was partially offset by declines in revenues from our public
payphone subsidiary.
Network access
Network access revenues grew $120 for the first nine months of 1999 when
compared to the same 1998 period, due largely to higher demand. Access minutes
of use rose 5.9% to 82,310 million at September 30, 1999 from 77,760 million at
September 30, 1998. Increases in switched access lines and promotional
activities by long distance carriers continue to be the primary drivers of the
increase in minutes of use. The February 1999 introduction of 1+ dialing parity
for intraLATA long distance calls in all states in our wireline territory is
also contributing to growth in minutes.
The growth rate in total minutes of use continues to be negatively impacted by
the trend of business customers migrating from traditional switched circuits to
higher capacity dedicated circuits which are fixed-charge based rather than
per-minute-of-use based. Revenues from these dedicated circuit services grew
approximately $107 year-to-date on a comparative basis as Internet service
providers and high-capacity users increased their use of our network. The growth
rate in switched minutes of use has also been negatively impacted by competition
from CLECs whose traffic completely bypasses our network.
<PAGE>
Volume-related growth was largely offset by net rate impacts that decreased
revenues by $103 compared to the first nine months of 1998. Rate reductions
related to the FCC's productivity factor adjustment and access reforms were
partially offset by recoveries of local number portability costs.
Long distance
The decrease for the year-to-date period compared to the same 1998 period is
primarily attributable to a decrease in long distance message volumes (16.0%).
The decrease in the year-to-date period also includes the impact of a regulatory
ruling related to compensation we receive from long distance carriers for
interconnection to our public payphones. Partially offsetting these decreases
were increased revenues from the provision of digital and data services and
independent company settlements occurring in 1999.
Competition from alternative intraLATA long distance carriers and increased
penetration of extended local area calling plans continue to have an adverse
impact on our long distance message volumes. Effective February 1999, we
implemented 1+ dialing parity for all states in our region, which allows
customers to choose a competing intraLATA long distance carrier without having
to dial a special access code. We believe that competition in the intraLATA long
distance market will continue to adversely impact long distance message volumes
and revenues.
Other wireline
The increase is attributable to higher revenues in the 1999 year-to-date period
from sales of customer premises equipment, resale of paging products and
services, sales of unbundled network elements, revenues from our Internet access
offering and interconnection revenues from wireless carriers. At September 30,
1999 we had 626,000 subscribers to our BellSouth.net (sm) service, an increase
of 107% compared to the same 1998 period. The higher revenues also represent
increased business activity with other subsidiaries of our parent, BellSouth
Corporation.
Operating Expenses
Operational and support expenses
Operational and support expenses increased $143 (2.3%) for year-to-date 1999
when compared to year-to-date 1998. Adjusted for the impact of adopting the new
rules on software capitalization, expenses increased $506 (8.0%).
For the year-to-date period, the increase was driven by higher labor costs,
primarily in customer service and network support functions, increased spending
related to Year 2000 remediation, growth in reciprocal compensation expense and
other increased costs in the telephone operations associated with higher
business volumes.
Also contributing to the increase for the year-to-date period were expenses
related to new data initiatives, including Asymmetric Digital Subscriber Line
(ADSL) and integrated fiber-in-the-loop (IFITL), and promotional expenses
related to expanding our Internet customer base.
We anticipate making ADSL service available in 30 markets this year, with an
addressable market of approximately 6 million access lines. We are deploying
IFITL in nearly all newly built neighborhoods and also expect to retrofit some
200,000 existing homes in Atlanta and Miami by the end of 1999.
Depreciation and amortization
Year-to-date depreciation and amortization expense increased $42 (1.7%). The
increase is primarily attributable to amortization of capitalized internally
developed software. While gross depreciable plant increased by $2,537 (5.1%)
since September 30, 1998, the overall composite depreciation rate was slightly
lower resulting in flat depreciation expense.
<PAGE>
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Other Nonoperating Items
- -------------------------------------------------------------------------------
Year-to-Date %
-----------------------
1999 1998 Change
- ------------------------------ ----------- ----------- -----------
Interest Expense ............ $410 $409 N/M
Other Income, net ........... 18 2 N/M
Provision for Income Taxes .. 1,450 1,146 26.5
- ------------------------------ ----------- ----------- -----------
Provision for income taxes
The provision for income taxes increased $304 on a year-to-date comparative
basis due primarily to higher operating income during the first nine months of
1999 compared to the same 1998 period. The effective income tax rate for the
nine-month period ended September 30, 1999 was 37.5% compared to 36.5% for the
nine-month period ended September 30, 1998 and is in line with our expected rate
for 1999.
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Operating Environment and Trends of the Business
- ------------------------------------------------------------------------------
Regulatory Developments
FCC order on Unbundled Network Elements
In 1996, the FCC issued an order adopting rules governing interconnection and
related matters. In 1999 the U.S. Supreme Court remanded aspects of the rules to
the FCC for further consideration of the requirements in the Telecommunications
Act of 1996; those requirements specify that access to certain network elements
can be required only when necessary or when the failure to provide access would
impair the ability of the requesting carrier to provide services. On remand from
the Supreme Court, the FCC issued an order on November 5, 1999 adopting a
revised list of network elements that incumbent local exchange carriers (ILECs)
such as ourselves must make available to competitors.
The FCC's list, together with its regulations prohibiting ILECs from separating
currently combined elements, means that ILECs will be required to provide
certain combinations of network elements that competitors may substitute for
certain higher priced ILEC services. This substitution may lead to further
increases in competition for certain local exchange access services. The FCC
determined that it would not apply these new rules to allow the substitution of
certain network elements for special access services, and announced that it will
conduct a further inquiry into the use of network element combinations to
provide special access services.
The FCC's revised list does not, however, require ILECs to make network elements
used to provide advanced data services available to competitors, except in very
limited circumstances. This outcome removes a disincentive to ILEC investment in
these rapidly expanding services.
FCC Announcement on Universal Service
On October 21, 1999 the FCC announced a new universal service mechanism for
non-rural carriers serving high-cost areas to ensure that customers in those
areas receive telephone service at affordable rates. We expect to receive
support for service to residents in Alabama, Kentucky and Mississippi. Although
the FCC has not yet issued the formal order and thus the details are not known,
we do not believe the net financial effect of the new arrangement will be
material.
Reciprocal Compensation. See Note E to the consolidated financial statements.
South Carolina Regulatory Matters. See Note F to the consolidated financial
statements.
<PAGE>
Year 2000 Readiness Disclosure
You should note that the following discussion about the Year 2000 includes
certain forward-looking statements that are subject to risks and
uncertainties. Factors that could cause actual results to differ
materially from those expressed in the forward-looking statements include,
but are not limited to:
* Remaining implementation and testing could reveal the need for
additional unplanned remedial efforts and
* Third-party vendors and suppliers could fail to meet their stated
objectives, timetables or cost estimates.
Inability to reach substantial Year 2000 compliance in our systems and
integral third-party systems could result in interruption of
telecommunications services, interruption or failure of our customer
billing, operating and other information systems and failure of certain
date-sensitive equipment. These failures could result in substantial
claims by customers as well as loss of revenue due to service
interruption, delays in our ability to bill our customers accurately and
timely, and increased expenses associated with litigation, stabilization
of operations following such failures or execution of contingency plans.
During 1997, we initiated a company-wide program to identify and address issues
associated with the ability of our 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 we do business.
Our Year 2000 program is divided into six phases: planning; inventory; impact
analysis; conversion; testing; and implementation. Our progress within these
phases is based on the number of inventoried items that have been addressed and
covers those business processes that we consider "mission critical". Mission
critical applications include those that:
* directly affect delivery of primary services to our customers;
* directly affect our revenue recognition and collection; and
* would create noncompliance with any statutes or laws.
The three main areas of focus for our Year 2000 program are network components,
information technology systems and building and environmental systems. 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.
As of September 1999, we have substantially completed the majority of our Year
2000 conversions, tests and implementations. We have completed all the work on
systems that make up our key business processes, and they have been tested in
our labs in a Year 2000 environment. All of our landline central office switches
have been remediated, tested and implemented into our production environment. We
have also completed 100% of the upgrades and replacements to the equipment
necessary for E9-1-1 services within our nine-state wireline region. The
applications scheduled to be completed after September 1999 are of low or no
impact to our customers and/or internal business operations and were therefore
specifically targeted for remediation after the more critical applications.
<PAGE>
Contingency plans. We have developed numerous continuity plans for conducting
our business operations in the event of crises, including system outages and
natural disasters. We have chartered a Year 2000 Business Contingency Planning
project to ensure that contingency plans are developed and tested and support
infrastructures are in place. This effort is not limited to the risks posed by
the potential Year 2000 failures of our networks, internal information systems
or infrastructures, but also includes the potential secondary impact on us of
Year 2000 failures, including potential systems failures of third parties.
During third quarter 1999, contingency plans were completed and tested.
Costs of project. Some of the costs associated with our Year 2000 compliance
efforts were incurred in 1997 and 1998. We will incur the remainder during 1999
and 2000. At September 30, 1999, we have spent approximately $175 in external
costs towards Year 2000 compliance. We estimate the total external costs of our
compliance efforts will be approximately $210 over the life of the project.
Expected completion. We currently anticipate that the remaining applications
will be Year 2000 compliant in fourth quarter 1999. Unforeseen circumstances
such as those discussed previously could affect our current assessments. As a
result, we are unable to determine the impact that any system interruption would
have on our results of operations, financial position and cash flows.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all derivative
instruments be recognized as assets or liabilities and adjusted to fair value
each period. During June 1999, the FASB postponed the required adoption date
until January 1, 2001. We plan to adopt SFAS No. 133 on January 1, 2001 and are
currently assessing the impact that adoption will have on our results of
operations and financial position.
- -------------------------------------------------------------------------------
Cautionary Language Concerning Forward-Looking Statements
- -------------------------------------------------------------------------------
In addition to historical information, management's discussion and analysis
contains forward-looking statements regarding events and financial trends that
may affect our future operating results and financial position. These statements
are based on our assumptions and estimates and are subject to risks and
uncertainties. For these statements, we claim the protection of the safe harbor
for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995.
Factors that could affect future operating results and financial position and
could cause actual results to differ materially from those expressed in the
forward-looking statements are:
* a change in economic conditions in markets where we operate or have
material investments which would affect demand for our services;
* the intensity of competitive activity and its resulting impact on
pricing strategies and new product offerings;
* further delay in BellSouth Corporation's entry into the interLATA long
distance market;
* higher than anticipated start-up costs or significant up-front
investments associated with new business initiatives;
* unanticipated higher capital spending from the deployment of new
technologies;
* unsatisfactory results in regulatory actions including access reform,
universal service, terms of interconnection and unbundled network
elements and resale rates; and
* failure to satisfactorily identify and complete Year 2000 software and
hardware revisions by us and third parties.
<PAGE>
This list of cautionary statements is not exhaustive. These and other
developments could cause our actual results to differ materially from those
forecast or implied in the forward-looking statements. You are cautioned not to
place undue reliance on these forward-looking statements, which are current only
as of the date of this filing. We have no obligation to publicly release the
results of any revisions to these forward-looking statements to reflect events
or circumstances after the date of this filing.
<PAGE>
- -------------------------------------------------------------------------------
PART II -- OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4a No instrument which defines the rights of holders of our long-
and intermediate-term debt is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, we agree to furnish a copy of any such instrument
to the SEC upon request.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1999.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELLSOUTH TELECOMMUNICATIONS, INC.
By /s/ Isaiah Harris
ISAIAH HARRIS
Vice President,
Chief Financial Officer and Comptroller
(Principal Financial and Accounting Officer)
November 9, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1999.
EXHIBIT 12
BellSouth Telecommunications, Inc.
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Nine Months
Ended September 30,
1999
1. Earnings
(a) Income from continuing operations before
deductions for taxes and interest $ 3,677
(b) Portion of rental expense representative
of interest factor 27
TOTAL $ 3,704
2. Fixed Charges
(a) Interest $ 431
(b) Portion of rental expense representative
of interest factor 27
TOTAL $ 458
Ratio (1 divided by 2) 8.09
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0
0
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