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 June 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., 30375
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
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>
PART I - FINANCIAL INFORMATION
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BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(Dollars In Millions)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating Revenues:
Local service ...................... $2,712 $2,502 $ 5,366 $ 4,916
Network access ..................... 1,187 1,160 2,378 2,311
Long distance ...................... 153 177 303 352
Other .............................. 374 297 702 577
Total Operating Revenues.......... 4,426 4,136 8,749 8,156
Operating Expenses:
Operational and support expenses ... 2,380 2,121 4,649 4,092
Depreciation and amortization ...... 850 836 1,683 1,662
Total Operating Expenses ......... 3,230 2,957 6,332 5,754
Operating Income ...................... 1,196 1,179 2,417 2,402
Interest Expense ...................... 133 144 268 277
Other Income, net ..................... -- 2 1 4
Income Before Income Taxes ............ 1,063 1,037 2,150 2,129
Provision for Income Taxes ............ 401 393 805 802
Net Income ....................... $ 662 $ 644 $ 1,345 $ 1,327
Retained Earnings:
At beginning of period ..............$ 1,466 $ 1,270 $ 1,354 $ 1,140
Add: Net Income .................... 662 644 1,345 1,327
Deduct: Dividends Declared ......... (651) (662) (1,222) (1,215)
At end of period ....................$ 1,477 $ 1,252 $ 1,477 $ 1,252
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 179 $ 337
Accounts receivable, net of allowance for
uncollectibles of $70 and $75 ........... 2,887 2,952
Material and supplies ...................... 280 248
Other current assets ....................... 181 177
Total Current Assets ..................... 3,527 3,714
Investments and Advances .................... 318 310
Property, Plant and Equipment ............... 51,827 50,248
Less: accumulated depreciation .............. 32,412 31,240
Property, Plant and Equipment, net ....... 19,415 19,008
Deferred Charges and Other Assets ........... 1,318 884
Total Assets ................................ $ 24,578 $23,916
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year .............. $ 2,196 $ 1,556
Accounts payable ........................... 1,484 1,586
Other current liabilities .................. 2,348 2,090
Total Current Liabilities ................ 6,028 5,232
Long-Term Debt .............................. 6,243 6,523
Noncurrent Liabilities:
Deferred income taxes ...................... 1,427 1,274
Unamortized investment tax credits ......... 147 167
Other noncurrent liabilities .............. 1,823 1,945
Total Noncurrent Liabilities ............. 3,397 3,386
Shareholder's Equity:
Common stock, one share, no par value ...... 7,433 7,421
Retained earnings .......................... 1,477 1,354
Total Shareholder's Equity ............... 8,910 8,775
Total Liabilities and Shareholder's Equity .. $24,578 $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 Six Months Ended June 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net income .......................................................... $1,345 $1,327
Adjustments to net income:
Depreciation and amortization ................................... 1,683 1,662
Provision for uncollectibles .................................... 68 68
Deferred income taxes and unamortized investment tax credits .... 129 22
Net change in:
Accounts receivable and other current assets .................... (52) 61
Accounts payable and other current liabilities .................. 280 18
Deferred charges and other assets ............................... (257) (177)
Other liabilities and deferred credits .......................... (122) (21)
Other reconciling items, net ........................................ 60 50
Net cash provided by operating activities ....................... 3,134 3,010
Cash Flows from Investing Activities:
Capital expenditures ................................................(2,255) (1,723)
Other investing activities, net ..................................... 6 27
Net cash used for investing activities ..........................(2,249) (1,696)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt ...................... 313 (232)
Proceeds from long-term debt......................................... -- 994
Repayments of long-term debt......................................... (7) (571)
Advances from parent and affiliates ................................. 224 288
Repayments of advances from parent and affiliates ................... (215) (289)
Dividends paid to parent ............................................(1,358) (1,202)
Other financing activities, net...................................... -- 25
Net cash used for financing activities ..........................(1,043) (987)
Net (Decrease) Increase in Cash and Cash Equivalents ................. (158) 327
Cash and Cash Equivalents at Beginning of Period ..................... 337 49
Cash and Cash Equivalents at End of Period ........................... $ 179 $ 376
</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 report on Form 10-Q.
Certain amounts have been reclassified within the prior year's information 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 resulted in 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 $217
and net income of $135. 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 Six Months
Ended June 30,
1999 1998
Cash Paid For:
Income taxes .......... $ 304 $ 639
Interest .............. $ 251 $ 266
<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. The courts and state regulatory commissions in our
operating territory that have considered the matter to date, however, have ruled
that such calls invoke the reciprocal compensation obligation.
In February 1999, the Federal Communications Commission (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 further that it would
not interfere with prior state commissions' decisions regarding this matter.
Because previous state regulatory decisions were based upon a view that Internet
access calls are "local" rather than interstate in nature, we have asked those
regulators to revisit their prior interpretations. We have subsequently received
unfavorable rulings in Florida and Alabama but have appealed these decisions. We
believe that we have a good basis for our position. At June 30, 1999, our
exposure related to these disputed claims was approximately $140, including
accrued interest.
Other reciprocal compensation issues
In a related matter, we uncovered other service arrangements for which at least
one CLEC is claiming terminating compensation of approximately $115 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 hold a
hearing regarding this arrangement and to declare that we do not owe reciprocal
compensation for these minutes of use. The CLEC has filed a complaint with the
state regulatory commission asking it to order us to pay the amounts the CLEC
claims it is owed. Hearings on this matter are scheduled for August 1999. We
believe that we have a good basis for our position and, accordingly, no
provision has been recorded for this claim in these financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In Millions)
Note F - South Carolina Regulatory Matters
Beginning in 1996, we operated under a price regulation plan approved by the
South Carolina Public Service Commission (SCPSC) under existing state laws. In
April 1999, however, the South Carolina Supreme Court invalidated the SCPSC's
order approving this price regulation plan. In July 1999, we elected to be
regulated under a new state statute, adopted subsequent to the SCPSC'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
SCPSC. The election will become effective August 13, 1999.
The South Carolina Consumer Advocate has petitioned the SCPSC seeking review of
the level of our earnings during the 1996-1998 period when we operated under the
previously invalidated price regulation plan. We have filed a motion seeking to
have that petition dismissed.
During the second quarter of 1999, we settled several other challenges to our
earnings and rates in South Carolina. Under the terms of the settlement, we have
reduced access charges and other services (principally convenience features) by
an aggregate of $21 on an annual basis and will, as of January 2000, reduce
certain business and residence rates by one dollar per line, per month to remain
in effect for a minimum of five years.
<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 report 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. These charges increased our reported second quarter and year-to-date
1999 operational and support expenses by $194 and $386, respectively, and
reduced our reported net income by $119 and $237, respectively, when compared to
the same 1998 periods. 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 second quarter and year-to-date 1999 and
1998, adjusted to exclude the effect of the charges discussed above, are as
follows:
<TABLE>
<CAPTION>
----------------------- -------------- -- ------------------------- --------
Second Quarter % Year-to-Date %
----------------------- -------------------------
1999 1998 Change 1999 1998 Change
----------- ----------- ----------- -- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues. $ 4,426 $ 4,136 7.0 $ 8,749 $ 8,156 7.3
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
Expenses. $ 3,036 $ 2,957 2.7 $ 5,946 $ 5,754 3.3
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
Operating income.. $ 1,390 $ 1,179 17.9 $ 2,803 $ 2,402 16.7
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
Net income........ $ 781 $ 644 21.3 $ 1,582 $ 1,327 19.2
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
EBITDA... (a) $ 2,240 $ 2,015 11.2 $ 4,486 $ 4,064 10.4
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
EBITDA margin..... 50.6% 48.7% +190bps 51.3% 49.8% +150bps
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
Access line counts (000's):
Switched access lines 24,370 23,660 3.0
Access line equivalents(b) 16,925 12,346 37.1
Total equivalent access lines 41,295 36,006 14.7
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
Access minutes of use (millions) 27,627 26,240 5.3 54,452 51,322 6.1
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
Digital and data services revenues $ 592 $451 31.3 $ 1,127 $ 866 30.1
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
Convenience feature revenues $ 466 $390 19.5 $ 900 $ 747 20.5
- ---------------------------------------------- ----------- ----------- -- ------------- ----------- ------------
</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 six 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 $135 to net income.
- --------------------------------- ----------------------- -----------
Year-to-Date %
-----------------------
1999 1998 Change
- --------------------------------- ----------- ----------- -----------
Operating revenues:
Local service ................ $5,366 $4,916 9.2
Network access ............... 2,378 2,311 2.9
Long distance ................ 303 352 (13.9)
Other wireline................ 702 577 21.7
- --------------------------------- ----------- ----------- -----------
Total operating revenues ... $8,749 $8,156 7.3
- --------------------------------- ----------- ----------- -----------
Operating Revenues
Local service
The $450 increase in local service revenues on a year-to-date comparative basis
is attributable to growth in access lines and strong demand for digital and data
services and convenience features.
We ended the second quarter with over 41 million total equivalent access lines,
an increase of 14.7% since June 30, 1998. Residential access lines rose 3.7% to
16,782,000, driven by economic growth in our nine-state region as well as demand
for additional residence lines for home office purposes, Internet access and
children's phones. We added 363,000 second lines since June 30, 1998, extending
the total to over 2.4 million lines and increasing the penetration rate to
17.0%. Business access lines, including both switched access lines and data
circuits, grew 24.0% propelled by expanding demand for our digital and data
services.
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 $153 or 20.5% when compared to the same 1998 period. We
continued to drive growth of convenience feature usage through our Complete
Choice Package, a one-price bundled offering of over 20 features.
Increased penetration of extended local area calling plans also increased
revenues by approximately $92 compared to the first six months of 1998.
Network access
Network access revenues grew $67 for the first six months of 1999 when compared
to the same 1998 periods, due largely to higher demand. Access minutes of use
rose 6.1% to 54,452 million at June 30, 1999 from 51,322 million at June 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 has also begun to
contribute 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 $72 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 competitive local exchange carriers whose traffic completely bypasses our
network.
Volume-related growth was largely offset by rate reductions related to the
Federal Communications Commission's productivity factor adjustment and access
reform that decreased revenues by $63 compared to the first six months of 1998.
<PAGE>
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 (14.2%).
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, sales of unbundled network elements,
revenues from our Internet access offering and interconnection revenues from
wireless carriers. We ended the first six months of 1999 with over 565,000
subscribers to our BellSouth.net (sm) service, an increase of 125.1% 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 $171 or 4.2% 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 $409 (10.0%).
Increased labor costs, primarily in customer service and network support
functions, growth in reciprocal compensation expense, increased spending related
to Year 2000 remediation and other increased costs in the telephone operations
associated with higher business volumes were the primary drivers. Also
contributing to the increase 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 was relatively flat compared
to the same 1998 period, increasing $21 or 1.3%. While gross depreciable plant
increased by $2,690 or 5.5% since June 30, 1998, the overall composite
depreciation rate was slightly lower resulting in flat depreciation expense.
- -------------------------------------------------------------------
Other Nonoperating Items
- -------------------------------------------------------------------
Year-to-Date %
-----------------------
1999 1998 Change
- ------------------------------- ----------- ----------- -----------
Interest Expense .............. $268 $277 (3.2)
Other Income, net ............. 1 4 N/M
Provision for Income Taxes .... 954 802 19.0
- ------------------------------- ----------- ----------- -----------
<PAGE>
Provision for income taxes
The provision for income taxes increased $152 on a year-to-date comparative
basis due primarily to higher operating income during the first six months of
1999 compared to the same 1998 period. The effective income tax rate for the
six-month period ended June 30, 1999 was 37.4% compared to 37.7% for the
six-month period ended June 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
Reciprocal Compensation. See Note E to the consolidated financial statements.
South Carolina Regulatory Matters. See Note F to the consolidated financial
statements.
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:
o Remaining implementation and testing could reveal the need for
additional unplanned remedial efforts and
o 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.
As of July 1999, we have 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.
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:
<PAGE>
o directly affect delivery of primary services to our customers;
o directly affect our revenue recognition and collection; and
o 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. We have completed the planning, inventory and impact
analysis phases and our completion status for the remaining phases is as
follows: Network components - 99%; Information technology systems - 95%; and
Building and environmental systems - 99%.
We will continue to monitor and track the conversion, testing and implementation
for all remaining mission-critical and non-mission-critical applications. Many
of the applications scheduled to be completed after July 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.
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 business partners
and infrastructure service providers. Business impact assessments have been
substantially completed, and the completion of contingency plan testing and
sign-off is scheduled for third quarter 1999.
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 June 30, 1999, we have spent approximately $148 in external costs
towards Year 2000 compliance. We estimate the total external costs of our
compliance efforts will be approximately $225 over the life of the project.
Expected completion. We currently anticipate that the remaining applications
will be Year 2000 compliant between September and December 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.
<PAGE>
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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:
o a change in economic conditions in markets where we operate or have material
investments which would affect demand for our services;
o the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
o further delay in BellSouth Corporation's entry into the interLATA long
distance market;
o higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
o unanticipated higher capital spending from the deployment of new technologies;
o unsatisfactory results in regulatory actions including access reform,
universal service, terms of interconnection and unbundled network elements and
resale rates; and
o failure to satisfactorily identify and complete Year 2000 software and
hardware revisions by us and entities with which we do business.
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 hereby 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 June 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)
August 6, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 1999.
EXHIBIT 12
BellSouth Telecommunications Inc.
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1999
1. Earnings
<S> <C>
(a) Income from continuing operations before deductions for taxes and interest $ 2,419
(b) Portion of rental expense representative of interest factor 18
TOTAL $ 2,437
2. Fixed Charges
(a) Interest $ 280
(b) Portion of rental expense representative of interest factor 18
TOTAL $ 298
Ratio (1 divided by 2) 8.18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 179
<SECURITIES> 318
<RECEIVABLES> 2,957
<ALLOWANCES> 70
<INVENTORY> 280
<CURRENT-ASSETS> 3,527
<PP&E> 51,827
<DEPRECIATION> 32,412
<TOTAL-ASSETS> 24,578
<CURRENT-LIABILITIES> 6,028
<BONDS> 6,243
0
0
<COMMON> 7,433
<OTHER-SE> 1,477
<TOTAL-LIABILITY-AND-EQUITY> 24,578
<SALES> 48
<TOTAL-REVENUES> 8,749
<CGS> 105
<TOTAL-COSTS> 4,525
<OTHER-EXPENSES> 1,807
<LOSS-PROVISION> 68
<INTEREST-EXPENSE> 268
<INCOME-PRETAX> 2,150
<INCOME-TAX> 805
<INCOME-CONTINUING> 1,345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,345
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
