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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-1049
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BELLSOUTH TELECOMMUNICATIONS, INC.
A GEORGIA I.R.S. EMPLOYER
CORPORATION NO. 58-0436120
675 WEST PEACHTREE STREET, N. E., ATLANTA,
GEORGIA 30375
TELEPHONE NUMBER 404 529-8611
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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SEE ATTACHMENT. NEW YORK
Securities registered pursuant to Section 12(g) of the Act:
None.
At February 1, 1997 one share of Common Stock was outstanding.
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THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b) OF FORM 10-K
AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION J(2).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [NOT APPLICABLE]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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ATTACHMENT
Title of each class
DEBENTURES ISSUED BY:
South Central Bell Telephone Company
$100,000,000 Principal Amount of Forty Year 7 3/8% Debentures, due August 1, 2012
Southern Bell Telephone and Telegraph Company
$75,000,000 Principal Amount of Thirty-Seven Year 5% Debentures, due December 1, 1997
$70,000,000 Principal Amount of Thirty-Seven Year 4 3/8% Debentures, due March 1, 1998
$75,000,000 Principal Amount of Thirty-Nine Year 4 3/8% Debentures, due April 1, 2001
$70,000,000 Principal Amount of Forty Year 4 3/8% Debentures, due August 1, 2003
$100,000,000 Principal Amount of Thirty-Five Year 4 3/4% Debentures, due September 1, 2000
$100,000,000 Principal Amount of Thirty-Eight Year 6% Debentures, due October 1, 2004
$150,000,000 Principal Amount of Thirty-Eight Year 7 3/8% Debentures, due July 15, 2010
$350,000,000 Principal Amount of Forty Year 7 5/8% Debentures, due March 15, 2013
BellSouth Telecommunications, Inc.
$250,000,000 Principal Amount of Forty Year 8 1/4% Debentures, due July 1, 2032
$300,000,000 Principal Amount of Forty Year 7 7/8% Debentures, due August 1, 2032
$300,000,000 Principal Amount of Forty Year 7 1/2% Debentures, due June 15, 2033
$350,000,000 Principal Amount of Fifteen Year 5 7/8% Debentures, due January 15, 2009
$400,000,000 Principal Amount of Forty Year 6 3/4% Debentures, due October 15, 2033
$300,000,000 Principal Amount of Forty Year 7 5/8% Debentures, due May 15, 2035
$300,000,000 Principal Amount of Thirty Year 7% Debentures, due October 1, 2025
$300,000,000 Principal Amount of Fifty Year 5.85% Debentures, due November 15, 2045
$500,000,000 Principal Amount of One Hundred Year 7% Debentures, due December 1, 2095
$375,133,000 Principal Amount of Twenty Year 6.30% Amortizing Debentures, due
December 15, 2015
$500,000,000 Principal Amount of One Hundred Year 6.65% Zero-To-Full Debentures, due
December 15, 2095
NOTES
BellSouth Telecommunications, Inc.
$275,000,000 Principal Amount of Seven Year 6 1/2% Notes, Due February 1, 2000
$150,000,000 Principal Amount of Twelve Year 7% Notes, Due February 1, 2005
$450,000,000 Principal Amount of Ten Year 6 1/4% Notes, Due May 15, 2003
$200,000,000 Principal Amount of Eleven Year 6 3/8% Notes, Due June 15, 2004
$300,000,000 Principal Amount of Ten Year 6 1/2% Notes, Due June 15, 2005
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business........................................................................ 1
General......................................................................... 1
Business Operations............................................................. 1
Telephone Company Operations.................................................... 2
Other Business Operations....................................................... 8
Competition..................................................................... 9
Research and Development........................................................ 12
Licenses and Franchises......................................................... 12
Employees....................................................................... 12
2. Properties...................................................................... 13
General......................................................................... 13
Capital Expenditures............................................................ 14
Environmental Matters........................................................... 14
3. Legal Proceedings............................................................... 14
4. Submission of Matters to a Vote of Shareholders (Omitted pursuant to General
Instruction J(2))
5. Market for Registrant's Common Equity and Related Stockholder Matters
(Inapplicable)
PART II
6. Selected Financial and Operating Data........................................... 15
7. Management's Discussion and Analysis of Results of Operations (Abbreviated
pursuant to General Instruction J(2)).......................................... 16
Results of Operations........................................................... 16
Volumes of Business............................................................. 17
Operating Revenues.............................................................. 18
Operating Expenses.............................................................. 19
Other Income Statement Items.................................................... 20
Extraordinary Losses............................................................ 21
Financing Activity.............................................................. 21
Operating Environment and Trends of the Business................................ 21
Other Matters................................................................... 24
8. Consolidated Financial Statements and Supplementary Data........................ 25
Report of Management............................................................ 25
Report and Consent of Independent Accountants................................... 26
Consolidated Statements of Income and Retained Earnings......................... 27
Consolidated Balance Sheets..................................................... 28
Consolidated Statements of Cash Flows........................................... 29
Notes to Consolidated Financial Statements...................................... 30
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 43
PART III
10. Directors and Executive Officers of the Registrant (Omitted pursuant to General
Instruction J(2))
11. Executive Compensation (Omitted pursuant to General Instruction J(2))
12. Security Ownership of Certain Beneficial Owners and Management (Omitted pursuant
to General Instruction J(2))
13. Certain Relationships and Related Transactions (Omitted pursuant to General
Instruction J(2))
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 43
Signatures............................................................................. 44
PART I
ITEM 1. BUSINESS
GENERAL
BellSouth Telecommunications, Inc. (BellSouth Telecommunications) is a
corporation wholly-owned by BellSouth Corporation (BellSouth). BellSouth
Telecommunications provides predominantly tariffed wireline telecommunications
services to approximately two-thirds of the population and one-half of the
territory within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. BellSouth Telecommunications has
its principal executive offices at 675 West Peachtree Street, N.E., Atlanta,
Georgia 30375 (telephone number 404-529-8611).
BellSouth was incorporated in 1983 under the laws of the State of Georgia.
On December 31, 1983, pursuant to a consent decree approved by the United States
District Court for the District of Columbia (the D. C. District Court) entitled
"Modification of Final Judgment" (the MFJ) settling antitrust litigation brought
by the United States Department of Justice (the Justice Department) in 1974 and
the related Plan of Reorganization, American Telephone and Telegraph Company,
now AT&T Corp. (AT&T), formed seven holding companies including BellSouth (the
Holding Companies), and transferred to them one or more of the operating
telephone companies (the Operating Telephone Companies) that were formerly part
of the Bell System. As a result, AT&T transferred to BellSouth its 100%
ownership of South Central Bell Telephone Company (South Central Bell) and
Southern Bell Telephone and Telegraph Company (Southern Bell). On January 1,
1984, ownership of the Holding Companies was transferred by AT&T to its
shareholders. As a result, BellSouth became a publicly traded company. BellSouth
Telecommunications is the surviving corporation from the merger of South Central
Bell and Southern Bell, effective at midnight December 31, 1991.
Under the MFJ, the Operating Telephone Companies could provide local
exchange, exchange access, information access and toll telecommunications
services within their assigned geographical territories, termed "Local Access
and Transport Areas" (LATAs). Although prohibited from providing service between
LATAs, the Operating Telephone Companies provided exchange access services that
linked a subscriber's telephone or other equipment in one of their LATAs to the
transmission facilities of carriers (the Interexchange Carriers), which provided
toll telecommunications services between different LATAs.
In February 1996, the President signed into law the Telecommunications Act
of 1996 (the 1996 Act). This legislation provides for the development of
competitive local telecommunications markets; terminates on a prospective basis
the MFJ, enabling the provision by the Operating Telephone Companies of
interLATA telecommunications and the design and manufacture by the Operating
Telephone Companies of telecommunications and other services; and repeals the
laws prohibiting the Operating Telephone Companies and their affiliates from
providing video services within their service areas. The ability of the
Operating Telephone Companies to enter businesses previously proscribed to them
by the MFJ is, however, generally subject to numerous criteria and the
development of and compliance with newly mandated federal regulations.
BUSINESS OPERATIONS
Approximately 90%, 86% and 86% of BellSouth Telecommunications' operating
revenues for the years ended December 31, 1996, 1995 and 1994, respectively,
were derived from wireline telecommunications services and the remainder of
revenues was derived principally from, sales and maintenance of customer
premises equipment and other nonregulated services and, for 1995 and 1994,
directory publishing fees.
Certain telecommunications services and products are provided to business
customers by BellSouth Business Systems, Inc. and BellSouth Communication
Systems, Inc. subsidiaries of BellSouth
1
Telecommunications. These companies provide sales, marketing, product management
and customer service for BellSouth Telecommunications' large business customers
and sell, install and maintain communications equipment.
Revenues from services provided to AT&T, BellSouth Telecommunications'
largest customer, comprised approximately 11%, 12%, and 13% of 1996, 1995 and
1994 operating revenues, respectively.
TELEPHONE COMPANY OPERATIONS
BellSouth Telecommunications provides, predominantly, local exchange,
exchange access and intraLATA toll services within each of the 38 LATAs in its
combined nine-state wireline operating area. BellSouth Telecommunications
provided approximately 22,135,000 customer access lines at December 31, 1996 an
overall increase of 4.7% since December 31, 1995. The increase was primarily
attributable to continued economic growth in BellSouth Telecommunications'
nine-state service region. Growth in second residential lines accounted for
approximately 28% of the overall increase in total access lines since December
31, 1995. (See "Management's Discussion and Analysis of Results of Operations --
Volumes of Business.")
At December 31, 1996, approximately 74% of access lines were in 44
metropolitan areas, each having a population of 125,000 or more. Many localities
and some sizable areas in the states in which BellSouth Telecommunications
operates are served primarily by non-affiliated telephone companies, which had
approximately 29% of the network access lines in such states on December 31,
1996. BellSouth Telecommunications does not furnish, on a significant scale,
local exchange, access or toll services in the areas served by such companies.
LOCAL AND INTRALATA TOLL SERVICES
Charges for local services for each of the years ended December 31, 1996,
1995 and 1994 accounted for approximately 55%, 50%, and 49%, respectively, of
BellSouth Telecommunications' operating revenues. Local services 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 and foreign exchange services; 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 services revenue is derived from
intercept and directory assistance, public telephones and various optional
central office features, such as Caller ID Service, Call Waiting, Call Return
and 3-Way Calling. As other telecommunications companies are authorized by
regulatory agencies to compete in the provision of local service, BellSouth
Telecommunications will increasingly sell to such carriers unbundled local
service elements and discounted wholesale local service for resale.
BellSouth Telecommunications offers certain enhanced services, such as
MemoryCall-SM- voice messaging service, through its network. These services
employ computer processing applications to alter the subscriber's transmitted
information; provide the subscriber additional, different or restructured
information; or involve subscriber interaction with stored information. The
terms of many of these service offerings are not regulated under the rules of
the Federal Communications Commission (FCC), but the FCC prescribes the method
by which such services may be provided (for example, through structurally
separated subsidiaries or arrangements providing access to competitive
providers). During 1996, total revenue from enhanced and other optional services
was approximately $1 billion.
BellSouth Telecommunications provides intraLATA toll services within (but
not between) its 38 LATAs. Such toll services provided approximately 5%, 7%, and
8% of BellSouth Telecommunications' operating revenues for the years ended
December 31, 1996, 1995 and 1994, respectively. These
2
services include the following: intraLATA service beyond the local calling area;
Wide Area Telecommunications Service (WATS or 800 services) for customers with
highly concentrated demand; and special services, such as transport of data,
radio and video. In recent years, these toll revenues have decreased as local
calling areas have been expanded and as competition for toll customers has
intensified. This trend is expected to continue.
REGULATION OF LOCAL AND TOLL SERVICES
BellSouth Telecommunications is subject to regulation of its intrastate
services by state authorities in each state where it provides intrastate
telecommunications services; such regulation covers rates, services, competition
and other issues. Traditionally, BellSouth Telecommunications' rates were set in
each state in its service area at levels which 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 was satisfactory in a less competitive era; however, as discussed
below, the regulatory processes have changed in response to the increasingly
competitive telecommunications environment.
RATE REGULATION
Under one form of alternative regulation, generally known as incentive
regulation, economic incentives are 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.
Another alternative form of regulation, generally known as price regulation,
establishes maximum prices that can be charged for certain telecommunications
services. While such a plan limits the amount of increases in prices for
specified services, it enhances the company's ability to adjust prices and
service options to more effectively respond to changing market conditions and
competition and provides an opportunity to more fully benefit from productivity
enhancements. For these reasons, BellSouth Telecommunications has focused its
regulatory and legislative efforts on establishing price regulation. Such plans
have been approved or authorized by the requisite legislative or regulatory
bodies in all nine states in BellSouth Telecommunications' wireline operating
area. These plans are operational in all states except Tennessee, where judicial
appeals are pending.
The following section contains a brief description of certain regulatory
proceedings in BellSouth Telecommunications, nine-state wireline territory.
ALABAMA
From December 1988 to September 1995, an incentive regulation plan was in
effect in Alabama. In response to a law enacted in 1995 permitting the Alabama
Public Service Commission to authorize alternative methods of regulation that
are not based on rate of return for local exchange carriers, the Alabama
Commission approved a price regulation plan, effective September 1995. Under
this plan, prices for basic services, including local exchange services for
residence and business customers, are capped for five years, after which prices
may be changed in accordance with an inflation-based formula; prices for
non-basic services are capped for one year, after which aggregate price
increases are limited to 10% annually; and intrastate switched access charges
are reduced below interstate switched access rates. Additional terms of the
price regulation plan require annual price reductions aggregating $57 million
through 1999, excluding intrastate switched access reductions. Reductions
related to intrastate switched access are estimated to be $25 million through
1999.
FLORIDA
From 1988 through 1992, an incentive regulation plan was in effect in
Florida. In 1994, the Florida Public Service Commission extended the plan
through 1997, with required price reductions aggregating approximately $300
million over a three-year period.
In 1995, a law was enacted which allowed qualified service providers to
elect price regulation. Under price regulation, prices for basic services,
(which include flat-rate residential and single-line
3
business local exchange services), are capped for five years, after which prices
may be changed in accordance with an inflation-based formula. Prices for certain
non-basic services, including multi-line business service, are capped for three
years at the rates in effect in July 1995; prices for other non-basic services
may be adjusted annually subject to defined limitations. The price regulation
provisions also provide that intrastate switched access prices will decrease by
5% annually until such rates are at parity with 1994 interstate switched access
rates. In November 1995, BellSouth Telecommunications filed with the Florida
Commission an election for price regulation, which became effective in January
1996. Although BellSouth Telecommunications is currently operating under price
regulation, it must comply with the sharing provisions of the incentive plan
described above through 1997.
GEORGIA
From 1990 to August 1995, BellSouth Telecommunications operated under an
incentive regulation plan in Georgia. In April 1995, a law was enacted which,
effective in July 1995, allowed BellSouth Telecommunications to elect the price
regulation plan as described in the legislation. In July 1995, BellSouth
Telecommunications filed an election with the Georgia Public Service Commission;
such election became effective in August 1995. Basic residence and single-line
business rates are capped for five years, after which prices may be changed in
accordance with an inflation-based formula. Rates for intrastate switched access
services may be no higher than the rates charged for interstate switched access
services.
KENTUCKY
From 1988 to July 1995, an incentive regulation plan was in effect in
Kentucky. In July 1995, the Kentucky Public Service Commission approved a price
regulation plan. Under the plan, basic residential rates are capped for three
years, after which prices may be changed in accordance with an inflation-based
formula. Intrastate switched access rates are limited to rates in effect for
interstate switched access. Prices for services deemed competitive under the
plan can be set by BellSouth Telecommunications in response to market
conditions.
In September 1996, the Kentucky Commission issued an order concerning local
competition and universal service funds. The order provided that
Commission-approved negotiated agreements for interconnection shall be the
primary means for implementing local competition. The universal service fund
rules established by the Commission are preliminary and interim until the FCC
issues its order on this matter.
LOUISIANA
From February 1992 to April 1996, an incentive regulation plan was in effect
in Louisiana. Effective April 1996, the Louisiana Public Service Commission
approved a price regulation plan that will remain in effect for a six-year term,
subject to review. Under the provisions of the price regulation plan, prices for
basic services, which include the provision of local exchange services, are
capped for five years, after which prices may be changed in accordance with an
inflation-based formula. After five years, no individual basic service price can
be increased by more than 10% in any twelve-month period. Prices for
interconnection services are capped for three years, after which no individual
service can be increased more than 10% in any twelve-month period. For non-basic
services, price increases may not exceed 20% in any twelve-month period.
In connection with the approval of price regulation, the Louisiana
Commission concluded its review of BellSouth Telecommunications' earnings by
requiring an aggregate $70 million price reduction, to be apportioned over a
three-year period beginning April 1, 1996.
MISSISSIPPI
From June 1990 to January 1996, an incentive regulation plan was in effect
in Mississippi. In November 1995, the Mississippi Public Service Commission
approved a six-year price regulation plan, effective in January 1996. Reviews of
this plan will be conducted by the Mississippi Commission after three and five
years. Under the provisions of the plan, prices for basic services, which
include the provision of basic local telephone service, are capped for three
years, after which the basic service
4
category rates will be reduced annually to effect an annual reduction in
revenues of 1% or $3.75 million, whichever is greater, for the last three years
of the plan. In addition, intrastate switched access prices are capped at the
same level as interstate prices over the life of the plan.
NORTH CAROLINA
Prior to June 1996, traditional rate of return regulation was in effect in
North Carolina. In April 1995, a law was enacted that allowed price regulation,
and pursuant to approval by the North Carolina Utilities Commission, a price
regulation plan became effective in June 1996. Under the terms of the plan,
prices for residence basic local exchange services are capped for three years,
after which time any price increases are limited by an inflation-based formula.
For business basic local exchange, interconnection and certain non-basic
services, any increases in current prices are also subject to inflation-based
formulas. Prices for toll switched access services are capped at current prices,
after giving effect to specified price reductions ordered in conjunction with
approval of the price regulation plan.
SOUTH CAROLINA
Prior to 1996, BellSouth Telecommunications' rates were regulated on a
traditional rate of return basis. In December 1994, the South Carolina Public
Service Commission issued an order requiring that prices be reduced
prospectively by approximately $26 million on an annual basis and with no change
in the previously authorized return on equity of 13%. Based upon an
investigation by the South Carolina Commission of BellSouth Telecommunications'
1992 earnings, refunds of approximately $29 million, plus interest, were
ordered. The prospective rate reduction was implemented, but the refund was
stayed pending judicial review of the decision. In October 1996, the South
Carolina Court of Common Pleas entered an order affirming the South Carolina
Commission's order of the refund. BellSouth Telecommunications intends to pursue
an appeal of this decision. The South Carolina Commission has postponed review
of BellSouth Telecommunications' earnings in 1993 and 1994 until a resolution of
the 1992 period is reached. While complete assurance cannot be given as to the
outcome of these matters, BellSouth Telecommunications believes that any
financial impact would not be material to its financial position or annual
operating results or cash flows.
In January 1996, the South Carolina Commission approved a price regulation
plan which includes provisions that basic local exchange residence and business
service rates will not increase for five years, after which prices may be
changed in accordance with an inflation-based formula. Intrastate switched
access rates will be capped for three years after which prices may be changed in
accordance with an inflation-based formula. The rates for non-basic services
will be set by BellSouth Telecommunications, subject only to the limitation that
the price for any individual service may not be increased more than 20% in a
twelve-month period.
TENNESSEE
An incentive regulation plan, which had been in effect since August 1990,
ended in 1995. In June 1995, a law was enacted which allowed qualified service
providers to elect price regulation. BellSouth Telecommunications elected price
regulation under which the prices for basic services are to be capped for four
years, after which prices may be changed in accordance with an inflation-based
formula. Prices for services other than basic services are to be adjusted based
on an inflation-based formula.
In order to implement the price regulation election, the Tennessee Public
Service Commission required BellSouth Telecommunications to reduce prices by
approximately $56 million on an annual basis. BellSouth Telecommunications has
appealed to the Tennessee Court of Appeals. This Court has stayed implementation
of both the rate reduction and price regulation plan pending further
consideration of the issues.
5
LOCAL SERVICE COMPETITION
The 1996 Act requires 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)
negotiate with other carriers for interconnection, use of network elements on an
unbundled basis and resale of local services. If a negotiated agreement cannot
be reached, either party may seek arbitration with the state regulatory
authority or the FCC if the state fails to act. If rates are disputed, the
arbitrator must set rates for access to network elements on an unbundled basis,
based on cost, which may include a reasonable profit. ILECs are also required to
negotiate to provide their retail services at wholesale rates for the purposes
of resale by competing carriers. If agreement cannot be reached, the arbitrator
shall set the wholesale rates at the ILEC's retail rates less costs to be
avoided. BellSouth Telecommunications has executed over 40 interconnection or
resale agreements with such carriers and is currently involved in arbitration
proceedings with a number of other carriers, including AT&T, MCI Communications
Corporation (MCI) and Sprint Corporation (Sprint).
In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry (the Order). Among the issues
specifically addressed by the Order are the network elements that ILECs must
make available; pricing standards to be followed by states in setting rates for
interconnection, access to network elements on an unbundled basis and resold
services. BellSouth and several other ILECs joined in an appeal of the Order to
the United States Court of Appeals for the Eighth Circuit (the Court). Upon
request of several state commissions and ILECs, the Court stayed the Order in
part, pending appeal. Such stay relates to pricing prescriptions and certain
other terms. The Court heard oral arguments in January 1997, and a decision is
pending. Notwithstanding these developments, however, as discussed above,
BellSouth Telecommunications and a number of carriers have negotiated
interconnection agreements and state regulatory commissions are arbitrating or
have approved various terms of interconnection between BellSouth
Telecommunications and other carriers. These terms may be revised, depending on,
among other things, the outcome of the appeal of the Order. The arbitration
results for the wholesale discount rates vary by state from approximately 15% to
21%.
In attempting to comply with the technical requirements of interconnection,
BellSouth Telecommunications expects to incur significant costs associated with
the development or modification of systems necessary to make interconnection
possible. For example, BellSouth Telecommunications will be required to provide
for long-term number portability whereby customers switching to competing local
carriers will be able to retain their telephone numbers without interruption or
charge. It is unclear as to what degree BellSouth Telecommunications will be
able to recover these costs.
REGULATION OF ACCESS SERVICES
BellSouth Telecommunications provides access services by connecting the
equipment and facilities of its subscribers with the communications networks of
Interexchange Carriers. These connections are provided by linking these carriers
and subscribers through the public switched network of BellSouth
Telecommunications or through dedicated private lines furnished by BellSouth
Telecommunications. Rates and other aspects of interstate access services are
regulated by the FCC, and state regulatory commissions have jurisdiction over
the provision of access to the Interexchange Carriers to complete intrastate
telecommunications.
Access charges, which are payable both by Interexchange Carriers and
subscribers, provided approximately 30%, 29% and 29% of BellSouth
Telecommunications' operating revenues for the years ended December 31, 1996,
1995 and 1994, respectively. These charges are designed to recover the costs of
the common and dedicated facilities and switching equipment used to connect
networks of Interexchange Carriers with the telephone company's local network
and to subsidize the cost of providing
6
local service to rural and other high-cost areas. In addition, an interstate
subscriber line access charge of $3.50 per line per month applies to single-line
business and residential customers. The interstate subscriber access charge for
multi-line business customers varies by state but cannot exceed $6.00 per line
per month.The state commissions have authorized BellSouth Telecommunications to
collect from the Interexchange Carriers and, in several states, from customers
charges for providing intrastate access services.
The FCC regulates the level of access charges through a price cap plan. The
price cap plan limits aggregate price changes to the rate of inflation minus an
ILEC-selected productivity offset, plus or minus exogenous cost changes
recognized by the FCC. Two of the productivity options in the current plan, 4.0%
and 4.7%, provide defined earnings limitations with a sharing mechanism. A third
option in the plan, 5.3%, removes both earnings limitations and sharing
requirements. Consistent with a pricing strategy that BellSouth
Telecommunications considered compatible with an increasingly competitive
business environment, it selected a 5.3% productivity factor, which, together
with other adjustments, has decreased interstate access revenues below what
would have been produced under the other alternatives by approximately $220
million on an annual basis at 1994 access volume levels. The FCC has under
consideration the issue of whether further modification of this plan is
warranted.
The 1996 Act requires the FCC to identify the local service subsidy provided
by access charges; to provide for the removal of such subsidy from access rates
in order that access charges reflect underlying costs; to arrange for a
universal service fund to ensure the continuation of universal service; and to
develop the arrangements for payments into that fund by all carriers. The FCC is
currently engaged in this proceeding. In addition, the FCC has commenced a
proceeding to revise its access charge rules.
INTERLATA TOLL SERVICE
As a result of the 1996 Act, BellSouth Telecommunications or an affiliate
and the other Operating Telephone Companies are freed from the judicial
restrictions of the MFJ that constrained the provision of interLATA
communications throughout their wireline service territories and elsewhere; the
1996 Act establishes in its place a new restriction and a procedure for its
removal. These companies or their affiliates may apply to the FCC on a
state-by-state basis to offer in-region interLATA wireline services, and the FCC
must act on 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 services or (ii) if there is no such provider, a statement that has
been approved or permitted to take effect by state regulatory authorities, of
the terms under which it would be willing to interconnect with a competitive
local carrier; (c) will operate consistently with the separate subsidiary
requirement; and (d) has presented an application consistent with the public
interest. The FCC is required to consult with state regulatory authorities and
the Justice Department when reviewing the application.
BellSouth plans to begin offering interLATA wireline service in each of its
in-region states as soon as the FCC approves its application for each state.
BellSouth has filed documents with the Georgia Public Service Commission
requesting that the Georgia Commission approve a statement of generally
available terms and conditions as provided for in the 1996 Act and to establish
that such terms and conditions meet the competitive checklist referred to above.
BellSouth will file an application for each state as soon as it believes the
conditions described above are met. Because of the proceedings required to
obtain approval and the potential challenges of competitors and others, it is
uncertain when BellSouth will be authorized to commence interLATA service in any
of its in-region states. The 1996 Act requires that in-region interLATA service
be provided through a subsidiary separate from BellSouth Telecommunications.
------------------------
In addition to the above matters, BellSouth Telecommunications is a party or
is subject to numerous proceedings pending before federal and state regulatory
and judicial bodies. These matters
7
involve, among other things, terms and conditions of services provided by
BellSouth Telecommunications, rates charged for such services, access reform,
universal service, number portability and relationships with competitive service
providers and affiliates. No assurance can be given as to the outcome of any
such matters.
PUBLIC TELEPHONES
In September 1996, the FCC issued an order which requires ILECs to reassign
their payphone assets from regulated telephone company accounts to separate
unregulated accounts or to transfer assets to a separate subsidiary. They must
also remove any subsidy of payphone operations from their regulated rates no
later than April 15, 1997 and meet certain other requirements. In return, ILECs
that own payphone units are given the freedom to pursue new business
opportunities. BellSouth Telecommunications is currently taking action to comply
with these requirements.
Consequently, on April 1, 1997, BellSouth Telecommunications plans to
transfer its payphone assets to a separate subsidiary, BellSouth Public
Communications, Inc. (BPC). BPC has filed for certification as an independent
payphone provider in each of the nine states where BellSouth Telecommunications
provides wireline telephone service. It plans to continue to provide independent
payphone services throughout BellSouth Telecommunications' territory and will
selectively provide payphone services in areas served by independent telephone
companies.
BILLING AND COLLECTION SERVICES
BellSouth Telecommunications provides, under contract and/or tariff, billing
and collection services for certain long distance services of AT&T and several
other Interexchange Carriers. The agreement with AT&T extends through the year
2000 subject to the right of AT&T to assume billing and collection for certain
of its services prior to the expiration of the agreement. Revenues from such
services have been decreasing and this trend is expected to continue as AT&T and
other carriers assume more direct billing for their own services.
OPERATOR SERVICES
Directory assistance and local and toll operator services are provided by
BellSouth Telecommunications in its service areas. Toll operator services
include alternate billing arrangements, such as collect calls, third number
billing, person-to-person and calling card calls; dialing instructions; pre-
billed credit; and rate information. In addition, directory assistance is
provided for some other carriers which do not directly provide such services for
their own customers.
OTHER BUSINESS OPERATIONS
DIRECTORY PUBLISHING FEES
Prior to 1996, BellSouth Telecommunications had a contractual agreement with
BellSouth Advertising & Publishing Corporation (BAPCO), an affiliated company,
wherein BAPCO published certain telephone directories and in return paid
publication fees to BellSouth Telecommunications for publishing rights and other
services. For the years ended December 31, 1995 and 1994, these fees, included
in Other Operating Revenue, were $721, and $638, respectively.
BellSouth Telecommunications and BAPCO established a new contract, based on
fees for services rendered between the companies, which was effective beginning
in the first quarter of 1996. For additional information, see "Management's
Discussion and Analysis of Results of Operations -- Other Matters -- Affiliated
Transactions."
SELLING AND MAINTAINING EQUIPMENT
Through subsidiaries, BellSouth Telecommunications sells and maintains
telecommunications equipment in the nine states where it provides wireline
telephone service. The Holding Companies, AT&T and other substantial enterprises
compete in the provision of these services and products. In May 1996, BellSouth
Telecommunications sold its interest in DataServ Computer Maintenance Inc., a
wholly-owned subsidiary that performed computer maintenance.
8
COMPETITION
GENERAL
BellSouth Telecommunications is subject to increasing competition in all
areas of its business. Regulatory, legislative and judicial actions and
technological developments have expanded the types of available services and
products and the number of companies that may offer them. Increasingly, this
competition is from large companies which have substantial capital,
technological and marketing resources.
NETWORK AND RELATED SERVICES
LOCAL SERVICE
Over the past several years, a number of states in BellSouth
Telecommunications' wireline territory have passed legislation providing for
local service competition. Even if a state has not passed legislation, the 1996
Act requires elimination of barriers to local service competition. The state
public service commissions have granted or are in the process of considering,
applications filed by a number of carriers for authority to compete with
BellSouth Telecommunications. Many of these commissions have also determined the
bases, including prices, on which the ILECs must furnish interconnection and
other services to competing carriers. BellSouth Telecommunications expects that
it will experience greater competition for its business customers, which provide
a higher concentration of higher margin revenues than do its residential
customers.
An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by telecommunications
providers in metropolitan areas, including Atlanta, Georgia, Charlotte, North
Carolina and Jacksonville, Miami and Orlando, Florida, and these networks offer
certain high volume users a competitive alternative to the public and private
line offerings of the ILECs. In addition, the networks of some cable television
systems will be capable of carrying two-way interactive data messages and will
be configured to provide voice communications. Furthermore, wireless services,
such as cellular, personal communications service (PCS) and paging services,
increasingly compete with wireline communications services.
AT&T's domestic cellular communications business serves customers in 10
cities in BellSouth Telecommunications' local wireline territory. This allows
AT&T to carry telecommunications traffic that otherwise could have been carried
over the public switched and private line networks of BellSouth
Telecommunications.
As technological and regulatory developments make it more feasible for cable
television to carry data and voice communications, it is increasingly probable
that BellSouth Telecommunications will face competition within its region from
cable television ventures. Alliances are being formed between other Holding
Companies and large corporations that operate cable television systems in many
localities throughout the United States -- for example, U S West, Inc. (U S
West)/Time Warner Communications and NYNEX Corporation (NYNEX)/Viacom, Inc. U S
West and Time Warner have announced plans to upgrade certain of their cable TV
systems to full-service networks which would support new interactive and
telephone services that would compete with the ILECs. Time Warner and U S West
have made major cable system acquisitions that are expected to provide voice and
video competition in BellSouth Telecommunications' service areas. U S West has
acquired Atlanta's two largest cable operators and, in November 1996, acquired
Continental Cablevision, Inc., a provider with a major presence in Florida. In
addition, the 1996 acquisition by Time Warner of Turner Broadcasting Corporation
will increase concentration in the cable and programming industries.
Joint ventures and mergers between major telecommunications companies will
result in large, well-capitalized carriers that will provide formidable
competition to BellSouth across a number of markets, including local and long
distance telephone service. Such transactions include the proposed mergers of
SBC Communications Inc. and Pacific Telesis Group and NYNEX and Bell Atlantic
Corporation and the proposed acquisition by British Telecommunications plc of
MCI.
9
Competition for local service revenues could adversely affect BellSouth
Telecommunications' results of operations. However, the existence of competitive
local service, among other things, can allow BellSouth to qualify to offer
in-region interLATA service, as contemplated in the 1996 Act. (See "BellSouth
Telecommunications' Competitive Strategy.")
ACCESS SERVICE
The FCC has adopted rules requiring ILECs to offer expanded interconnection
for interstate special and switched transport. As a result, BellSouth
Telecommunications is required to 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 access transport.
TOLL SERVICE
A number of firms compete with BellSouth Telecommunications in its
nine-state region for intraLATA toll business by reselling toll services
obtained at bulk rates from BellSouth Telecommunications or, subject to the
approval of the applicable state public utility commission, providing toll
services over their own facilities. Commissions in the states in BellSouth
Telecommunications' operating territory have allowed the latter type of
intraLATA toll calling, whereby the Interexchange Carriers are assigned a
multiple digit access code (10XXX) which customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislature or
commissions in three states have authorized competing carriers to provide
intraLATA toll presubscribed calling with a single digit access code (1+),
giving them dialing parity with the ILEC in that area. Commissions in several
other states are considering how and when such authorization should be
implemented. However, the 1996 Act prohibits states from ordering the
implementation of new toll dialing parity until the earlier of (a) three years
from the enactment of the 1996 Act or (b) such time as the Operating Telephone
Company has qualified to provide in-region interLATA services.
The 1996 Act permits the other Holding Companies to offer BellSouth
Telecommunications' local service customers interLATA toll service. BellSouth
Telecommunications expects Holding Companies and other carriers to compete for
such interLATA toll service. For example, Bell Atlantic has begun offering
interLATA toll service to BellSouth Telecommunications' local service customers
and other Holding Companies may do likewise. AT&T, MCI, Sprint and a number of
other carriers currently provide toll service to BellSouth Telecommunications'
local service customers.
PERSONAL COMMUNICATIONS SERVICE (PCS)
In 1995, the FCC began auctioning radio spectrum for providing a type of
mobile communications service commonly referred to as PCS. As opposed to
cellular service, PCS service is digital, which provides greater security and
clarity.
BELLSOUTH TELECOMMUNICATIONS' COMPETITIVE STRATEGY
MARKETING
BellSouth Telecommunications has developed several strategies that govern
its business decisions in the increasingly competitive telecommunications
industry. Among them, BellSouth Telecommunications will (a) enhance and build
its brand strength and distribution channels; (b) seek approval to provide wired
long distance service and video service directly or through affiliates; (c)
control costs and (d) develop and enhance joint marketing efforts with
BellSouth's domestic wireless businesses.
A substantial portion of the growth in BellSouth Telecommunications'
revenues from local services is derived from the sale of second residential
lines and optional calling services. These offerings are marketed in a variety
of packages with varying pricing features that are designed to appeal to a wide
variety of the Company's customer base. A substantial number of these sales are
made by customer service representatives who are on call 24 hours a day, seven
days a week, as they are contacted by subscribers on other matters.
10
Many of BellSouth's other services and products, such as cellular and PCS
service, and including the long distance component of these wireless services,
Internet service and video services, are sold by BellSouth Telecommunications'
service representatives. The marketing of many of these services is enhanced by
alliances with other service providers and suppliers. For instance, Netscape
Communications Corporation provides BellSouth Telecommunications' Internet users
with its Web browser, and persons who visit the Netscape Web site are offered a
convenient way to sign up for BellSouth Telecommunications' Internet service.
Additional arrangements with Yahoo! Inc and Wired Ventures Limited further
enhance BellSouth Telecommunications' Internet service marketing strategy.
BellSouth Telecommunications' business services are marketed by customer
service representatives through varied pricing and service options. BellSouth
Telecommunications' products and services, such as video conferencing, ISDN
service and telecommunications equipment and systems, are also demonstrated and
sold through marketing arrangements with other retailers of office products,
such as Office Depot. BellSouth Telecommunications markets its services and
products to large and complex business customers through highly specialized
applications and, where appropriate, through pricing enhancements varying
according to business volumes and length of service. In addition to telephone
lines, product and service offerings to these customers include Internet access,
special networks, high-speed data transmission, business teleconferencing and
industry-specific communications configurations.
While BellSouth Telecommunications continues to use the names South Central
Bell and Southern Bell for various purposes, its services were unified under the
BellSouth brand name in October 1995 to give BellSouth Telecommunications a
clear, consistent identity in the marketplace. BellSouth Telecommunications
believes that the BellSouth 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,
thereby facilitating the joint marketing efforts described above. Accordingly,
significant increases in marketing and advertising costs have been and will be
incurred. BellSouth advertises in the various media in its territory and in
connection with major events, such as the Olympics, the Super Bowl and its
sponsored PGA golf tournaments, which also offer BellSouth Telecommunications a
broader platform to showcase its products and services.
REGULATORY AND LEGISLATIVE CHANGES
BellSouth Telecommunications' primary regulatory focus has been directed
toward modifying the regulatory process to one that is more closely aligned with
changing market conditions and overall public policy objectives. As an
alternative to regulation of intrastate earnings, BellSouth Telecommunications
has sought price regulation, whereby prices of basic service are regulated and
the pricing of other products and services are based on market factors. While
price regulation plans do not provide for the direct recovery through basic
service rates of cost increases or extraordinary expenses, they generally
provide more flexibility to meet competitive pricing levels. BellSouth
Telecommunications has price regulation plans approved or authorized in all
states in its wireline territory, although the implementation of the Tennessee
plan has been stayed by a court pending resolution of a number of issues.
NEW SERVICES
Notwithstanding the inevitable loss of local service customers and other
risks associated with increased competition, BellSouth Telecommunications will
have the opportunity to benefit from entry into new business markets. For
example, the presence of competition, among other things, can allow BellSouth to
qualify to offer interLATA service under provisions contained in the 1996 Act.
BellSouth believes that in order to remain competitive in the future, it must
aggressively pursue a corporate strategy of expanding its offerings beyond its
traditional businesses and markets. These offerings include interLATA services,
information services and video and electronic commerce services.
The 1996 Act requires elimination of previous prohibitions on telephone
companies providing cable television services in their service territories,
although many federal courts had already held
11
such prohibitions unconstitutional. Although ILECs may not acquire or joint
venture with established cable television providers in their wireline
territories, they may provide cable television service over their own
facilities. BellSouth Telecommunications has acquired several cable TV rights
and is conducting a trial of cable TV service to assess the extent to which it
wishes to enter this business.
In 1996, BellSouth Telecommunications began providing Internet access, a
customized version of Netscape Navigator-TM-, electronic mail, an optional
site-blocking feature, and a gateway to local and national information and
electronic Yellow Pages.
WORK FORCE REDUCTION
In 1995, BellSouth Telecommunications completed the restructuring of its
telephone operations that was announced in 1993. Also, BellSouth
Telecommunications announced in 1995 a plan to reduce its work force by
approximately 11,300 additional employees by the end of 1997. For a discussion
of the work force reduction see "MD&A -- Results of Operations -- Operating
Expenses -- Work Force Reduction Charge."
RESEARCH AND DEVELOPMENT
The majority of BellSouth Telecommunications' research and development
activity is conducted at Bell Communications Research, Inc. (Bellcore),
one-seventh of which is owned by BellSouth Telecommunications, with the
remainder owned by the other Holding Companies. Bellcore provides research and
development and other services for its owners and is the central point of
contact for coordinating the Federal government's telecommunications
requirements relating to national security and emergency preparedness.
In November 1996, Science Applications International Corporation agreed to
purchase Bellcore. BellSouth has contracted with Bellcore for ongoing support of
engineering and systems. In addition, the Holding companies formed the National
Telecommunications Alliance to support their commitment to national security and
emergency preparedness.
LICENSES AND FRANCHISES
BellSouth Telecommunications' local exchange business is typically provided
under certificates of public convenience and necessity granted pursuant to state
statutes and public interest findings of the various public utility commissions
of the states in which BellSouth Telecommunications does business. These
certificates provide for a franchise of indefinite duration, subject to the
maintenance of satisfactory service at reasonable rates.
BellSouth Telecommunications believes that it owns or has licenses to use
all patents, copyrights, trademarks and other intellectual property necessary
for it to conduct its present business operations. It is not anticipated that
any of such property will be subject to expiration or non-renewal of rights
which would materially and adversely affect BellSouth Telecommunications or its
subsidiaries.
EMPLOYEES
At December 31, 1996, 1995 and 1994 BellSouth Telecommunications employed
approximately 63,800, 71,400, and 76,700 persons, respectively. Of these amounts
at these dates, approximately 62,400, 68,600, and 73,800 persons were telephone
employees. About 74% of these employees at December 31, 1996 were represented by
the Communications Workers of America (the CWA), which is affiliated with the
AFL-CIO. In October 1995, members of the CWA ratified new three-year contracts
with BellSouth Telecommunications. These contracts were effective in August
1995. The contracts include basic wage increases of 10.9% (compounded) over
three years. In addition, the agreement provided a cash payment of $1,100 to
each eligible employee upon ratification and further provides payments of $1,100
per eligible employee in cash or $1,210 in BellSouth stock, at the option of the
12
employee, on the 1996 and 1997 contract anniversary dates. Other terms of the
agreement include discontinuance of annual wage adjustments based on cost of
living increases and discontinuance of annual incentive payments.
During 1995, BellSouth Telecommunications completed the 1993 plan to reduce
its work force by approximately 10,200 employees. Also during 1995, BellSouth
Telecommunications announced a plan to reduce its work force by approximately
11,300 employees by the end of 1997. Including a reduction of approximately 800
employees which occured in December 1995, BellSouth Telecommunications has
reduced its work force by approximately 7,000 employees under the 1995 plan
through December 1996. (See "MD&A -- Results of Operations -- Operating Expenses
- -- Work Force Reduction Charge.")
ITEM 2. PROPERTIES
GENERAL
BellSouth Telecommunications' properties do not lend themselves to
description by character and location of principal units. BellSouth
Telecommunications' investment in property, plant and equipment consisted of the
following at December 31:
1996 1995
----------- -----------
Outside plant........................... 45% 46%
Central office equipment................ 38 37
Land and buildings...................... 7 7
Furniture and fixtures.................. 6 5
Operating and other equipment........... 3 4
Plant under construction................ 1 1
--- ---
100% 100%
--- ---
--- ---
Outside plant consists of connecting lines (aerial, underground and buried
cable) not on customers' premises, the majority of which are on or under public
roads, highways or streets, while the remainder is on or under private property.
BellSouth Telecommunications currently self-insures all of its outside plant
against casualty losses. Central office equipment substantially consists of
digital electronic switching equipment and circuit equipment. Land and buildings
consist principally of central offices. Operating and other equipment consists
of embedded intrasystem wiring (substantially all of which is on the premises of
customers), motor vehicles and equipment. Central office equipment, buildings,
furniture and fixtures and certain operating and other equipment are insured
under a blanket property insurance program. This program provides substantial
limits of coverage against "all risks" of loss including, fire, windstorm,
flood, earthquake and other perils not specifically excluded by the terms of the
policies.
Substantially all of the installations of central office equipment and
administrative offices are located in buildings and on land owned by BellSouth
Telecommunications. Many garages, business offices and telephone service centers
are in leased quarters.
BellSouth Telecommunications' customers are now served by electronic
switching systems. The BellSouth Telecommunications network has been
transitioned from an analog to a digital network, which provides capabilities
for BellSouth Telecommunications to furnish advanced data transmission and
information management services.
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.
13
The total investment in property, plant and equipment has increased from
$37,155 million at January 1, 1992 to $45,762 million at December 31, 1996, 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 further modernize and improve such services
to meet competitive demands. Population and economic expansion is projected by
BellSouth Telecommunications in certain growth centers within its nine-state
area during the next five to ten years. Expansion of the network will be needed
to accommodate such projected growth.
BellSouth Telecommunications' capital expenditures for 1992 through 1996
were as follows:
MILLIONS
---------
1996............................................................ $ 3,206
1995............................................................ 3,123
1994............................................................ 2,971
1993............................................................ 2,995
1992............................................................ 2,846
BellSouth Telecommunications currently projects capital expenditures to be
approximately $3.4 billion for 1997. In 1996 BellSouth Telecommunications
generated substantially all of its funds for capital expenditures internally. In
1997, such capital expenditures are expected to be financed primarily through
internally generated funds and, to the extent necessary, from external sources.
ENVIRONMENTAL MATTERS
BellSouth Telecommunications is subject to a number of environmental matters
as a result of its operations and the shared liability provisions related to the
divestiture from AT&T. As a result, BellSouth Telecommunications expects that it
will be required to expend funds to remedy certain facilities, including those
Superfund sites for which BellSouth Telecommunications has been named as a
potentially responsible party, for the remediation of sites with underground
fuel storage tanks and other expenses associated with environmental compliance.
At December 31, 1996, BellSouth Telecommunications' recorded liability related
primarily to remediation of these sites was approximately $35 million.
BellSouth Telecommunications monitors its operations with respect to
potential environmental issues, including changes in legally mandated standards
and remediation technologies. BellSouth Telecommunications' recorded liability
reflects those specific issues where remediation activities are currently deemed
to be probable and where the cost of remediation is estimable. BellSouth
Telecommunications continues to believe that expenditures in connection with
additional remedial actions under the current environmental protection laws or
related matters would not be material to its financial position or annual
operating results or cash flows.
ITEM 3. LEGAL PROCEEDINGS
BellSouth Telecommunications and its subsidiaries are subject to claims
arising in the ordinary course of business involving allegations of personal
injury, breach of contract, anti-competitive conduct, employment law issues,
regulatory matters and other actions. While complete assurance cannot be given
as to the outcome of any legal claims, BellSouth Telecommunications believes
that any financial impact would not be material to its financial position or
annual operating results or cash flows. See Note O to the Consolidated Financial
Statements.
14
PART II
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Operating Revenues...................... $14,776 $14,540 $14,040 $13,580 $13,182
Operating Expenses (1).................. 11,069 11,759 10,452 11,591 10,258
-------- -------- -------- -------- --------
Operating Income........................ 3,707 2,781 3,588 1,989 2,924
Interest Expense........................ 552 573 549 562 583
Other Income, net....................... 20 27 18 21 75
-------- -------- -------- -------- --------
Income Before Income Taxes and
Extraordinary Losses................... 3,175 2,235 3,057 1,448 2,416
Provision for Income Taxes.............. 1,170 818 1,105 461 801
-------- -------- -------- -------- --------
Income Before Extraordinary Losses...... 2,005 1,417 1,952 987 1,615
Extraordinary Losses, net of tax (2).... -- (2,796) -- (87) (41)
Accounting Change, net of tax........... -- -- -- (65) --
-------- -------- -------- -------- --------
Net Income (Loss)..................... $ 2,005 $(1,379) $ 1,952 $ 835 $ 1,574
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Assets............................ $23,038 $23,933 $27,372 $27,095 $26,442
Capital Expenditures.................... $ 3,206 $ 3,123 $ 2,971 $ 2,995 $ 2,846
Long-Term Debt.......................... $ 6,671 $ 6,853 $ 6,512 $ 6,547 $ 6,336
Ratio of Earnings to Fixed Charges...... 6.02 4.38 5.68 3.17 4.53
Return to Average Common Equity......... 24.6% (14.4%) 18.0% 7.3% 13.8%
Debt Ratio at End of Period (3)......... 49.4% 51.9% 41.0% 41.3% 38.5%
Telephone Employees (4)................. 62,425 68,585 73,764 77,958 79,453
Other Operations Employees.............. 1,372 2,797 2,944 3,457 3,413
-------- -------- -------- -------- --------
Total Employees....................... 63,797 71,382 76,708 81,415 82,866
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Telephone Employees per 10,000 Access
Lines.................................. 28.2 32.5 36.5 40.3 42.6
Business Volumes: (5)
Network Access Lines in Service
(thousands).......................... 22,135 21,133 20,220 19,333 18,650
Access Minutes of Use (millions):
Interstate.......................... 67,690 62,411 57,778 53,345 50,546
Intrastate.......................... 21,171 19,197 16,888 15,261 13,994
Toll Messages (millions).............. 1,023 1,374 1,559 1,511 1,462
- ------------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
which reduced net income by $663. See Note J to the Consolidated Financial
Statements. Operating Expenses for 1993 include a charge for restructuring
of $1,136, which reduced net income by $697.
(2) For 1995, reflects charges of $2,718 for the discontinuance of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation," and $78 related to the refinancing of
long-term debt issues. See Notes L and E to the Consolidated Financial
Statements.
(3) The debt ratio at December 31, 1995 has been adjusted to exclude $485 of
debentures redeemed in January 1996.
(4) Telephone employees exclude those employees in BellSouth Telecommunications'
subsidiaries which are unrelated to telephone operations.
(5) Prior period operating data are revised at later dates to reflect the most
current information. The above information reflects the latest data
available for the periods indicated.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
BellSouth Telecommunications, Inc. (BellSouth Telecommunications) is a
wholly-owned subsidiary of BellSouth Corporation (BellSouth). BellSouth
Telecommunications serves, in the aggregate, approximately two-thirds of the
population and one-half of the territory within Alabama, Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.
BellSouth Telecommunications primarily provides local exchange service and toll
communications services within geographic areas, called Local Access and
Transport Areas (LATAs), and provides network access services to enable
interLATA communications using the long-distance facilities of interexchange
carriers. Through subsidiaries, other telecommunications services and products
are provided primarily within the nine-state BellSouth Telecommunications
region.
Approximately 90% and 86% of BellSouth Telecommunications' Total Operating
Revenues for the years ended December 31, 1996 and 1995, respectively, were from
wireline services. Charges for local, access and toll services for the year
ended December 31, 1996 accounted for approximately 61%, 33% and 6%,
respectively, of the wireline 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 and, for 1995 and 1994, directory publishing fees.
RESULTS OF OPERATIONS
1996 1995 % CHANGE
--------- --------- -----------
Income Before Extraordinary Losses........................... $ 2,005 $ 1,417 41.5%
Extraordinary Loss for Discontinuance of SFAS No. 71, net of
tax......................................................... -- (2,718) --
Extraordinary Loss on Early Extinguishment of Debt, net of
tax......................................................... -- (78) --
--------- ---------
Net Income (Loss)............................................ $ 2,005 $ (1,379) --
--------- ---------
--------- ---------
For a discussion of the extraordinary losses in 1995, see "Extraordinary
Losses" below.
Income Before Extraordinary Losses increased $588 (41.5%) compared to 1995.
The increase was primarily due to the after-tax work force reduction charge in
1995 of $663. For a discussion of such charge, see "Operating Expenses -- Work
Force Reduction Charge" below. Also contributing to the increase were growth in
key business volumes, driven by continued growth of access lines, and cost
control measures, including salary and wage savings attributable to the work
force reduction and restructuring plans initiated in 1995 and 1993,
respectively.
See "Other Matters -- Affiliated Transactions."
16
VOLUMES OF BUSINESS
Network Access Lines in Service at December 31 (thousands):
1996 1995 % CHANGE
--------- --------- ------------
By Type:
Residence......................................... 15,136 14,653 3.3%
Business.......................................... 6,732 6,225 8.1
Other............................................. 267 255 4.7
--------- ---------
Total Access Lines............................ 22,135 21,133 4.7
--------- ---------
--------- ---------
By State:
Florida........................................... 5,899 5,597 5.4
Georgia........................................... 3,772 3,550 6.3
Tennessee......................................... 2,544 2,435 4.5
North Carolina.................................... 2,213 2,101 5.3
Louisiana......................................... 2,178 2,108 3.3
Alabama........................................... 1,857 1,792 3.6
South Carolina.................................... 1,344 1,292 4.0
Mississippi....................................... 1,193 1,158 3.0
Kentucky.......................................... 1,135 1,100 3.2
--------- ---------
Total Access Lines............................ 22,135 21,133 4.7
--------- ---------
--------- ---------
The total number of access lines in service increased by approximately
1,002,000 (4.7%) to 22,135,000 since December 31, 1995, compared to a 4.5% rate
of increase in 1995. Business and residence access lines increased by 8.1% and
3.3%, respectively, compared to growth rates of 7.9% and 3.2% in 1995. The
number of second residence lines, included in total residence lines, increased
by 285,000 (22.4%) to 1,556,000 and accounted for 59.0% and 28.4% of the overall
increase in residence access lines and total access lines, respectively, since
December 31, 1995. Such second residence lines are generally used for home
office purposes, access to on-line computer services and children's phones. The
growth in all categories of access lines was primarily attributable to continued
economic improvement in the Southeast and successful marketing programs.
Access Minutes of Use (millions):
1996 1995 % CHANGE
--------- --------- ------------
Interstate.......................................... 67,690 62,411 8.5%
Intrastate.......................................... 21,171 19,197 10.3
--------- ---------
Total Access Minutes of Use....................... 88,861 81,608 8.9
--------- ---------
--------- ---------
Access minutes of use represent the volume of traffic carried by
interexchange carriers between LATAs, both interstate and intrastate, using
BellSouth Telecommunications' local facilities. In 1996, total access minutes of
use increased by 7,253 million (8.9%) compared to an increase of 9.3% in 1995.
The 1996 increase in access minutes of use was primarily attributable to access
line growth, promotions by the interexchange carriers and intraLATA toll
competition, which has the effect of increasing access minutes of use while
reducing toll messages carried over BellSouth Telecommunications' network. The
growth rate in total minutes of use continues to be negatively impacted by
competition and the migration of interexchange carriers to categories of service
(e.g., special access) that have a fixed charge as opposed to a volume-driven
charge and to high capacity services, which causes a decrease in minutes of use.
17
1996 1995 % CHANGE
--------- --------- -------------
Toll Messages (millions).............................. 1,023 1,374 (25.5%)
Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 351 million (25.5%)
in 1996 compared to a decrease of 11.9% in 1995. The decrease in 1996 was
primarily attributable to the expansion of local area calling plans (LACPs) in
Florida, Georgia and North Carolina and, to a lesser extent, increased
competition from interexchange carriers in the intraLATA toll market. While the
respective impacts of such factors cannot be precisely quantified, BellSouth
Telecommunications estimates that about 70% of the decline in toll messages was
attributable to expanded LACPs and about 30% was due to increased competition.
These plans and future implementation of other such plans in BellSouth
Telecommunications' service region, coupled with competition from the
interexchange carriers in the intraLATA toll market, will adversely impact
future toll message volumes. The expansion of LACPs and some effects of
competition result in the transfer of calls from toll to the local service and
access categories, respectively, but the corresponding revenues are not
generally shifted at commensurate rates.
OPERATING REVENUES
For a discussion of the impact of impending local service competition on
revenues and volumes of business, see "Operating Environment and Trends of the
Business."
Total Operating Revenues increased $236 (1.6%) in 1996. The components of
Total Operating Revenues were as follows:
1996 1995 % CHANGE
--------- --------- -----------
Local Service.................................... $ 8,082 $ 7,294 10.8%
Interstate Access................................ 3,553 3,275 8.5
Intrastate Access................................ 812 884 (8.1)
Toll............................................. 794 1,009 (21.3)
Other............................................ 1,535 2,078 (26.1)
--------- ---------
Total Operating Revenues....................... $ 14,776 $ 14,540 1.6
--------- ---------
--------- ---------
LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network and optional
services, such as custom calling features and custom dialing packages. (Revenues
from cellular interconnection and other mobile services are included in Other
operating revenues for both periods presented.) Local Service revenues increased
$788 (10.8%) in 1996.
The increase in 1996 was due primarily to an increase of 1,002,000 access
lines since December 31, 1995. Also contributing were an increase of $248 due to
higher customer demand for optional services and net rate increases of $88 which
include benefits related to the effects of expanded LACPs.
INTERSTATE ACCESS revenues result from the provision of access services to
interexchange carriers to provide telecommunications services between states and
from end-user charges collected from residential and business customers.
Interstate Access revenues increased $278 (8.5%) in 1996.
The 1996 increase was due primarily to growth in minutes of use of 8.5%, an
increase of $69 due to higher demand for special access services and an increase
in end-user charges of $58 attributable to growth in the number of access lines
in service. Such increases were offset by net rate reductions since December 31,
1995 of $25.
INTRASTATE ACCESS revenues result from the provision of access services to
interexchange carriers which provide telecommunications services between LATAs
within a state. In 1996, Intrastate Access revenues decreased $72 (8.1%). Such
decrease was due primarily to net rate reductions of $160, partially offset by
10.3% growth in minutes of use.
18
TOLL revenues are received from the provision of long-distance services
within (but not between) LATAs. These services include intraLATA service beyond
the local calling area; Wide Area Telecommunications Service (WATS or 800
services) for customers with highly concentrated demand; and special services,
such as transport of voice, data and video. Toll revenues decreased $215 (21.3%)
in 1996.
The decrease for 1996 was primarily attributable to the expansion of LACPs
and increased competition from interexchange carriers, the effect of which
reduced toll messages by 25.5%. The decrease was partially offset by a
retroactive independent company settlement in 1995 which reduced revenues by $31
in that period. The overall decline in intraLATA toll revenues is expected to
continue over the long term.
OTHER revenues are principally comprised of revenues from customer premises
equipment (CPE) sales and maintenance services, cellular interconnect services,
publishing fees (1995 only) and other nonregulated services (primarily inside
wire, billing and collection and voice messaging services). Other revenues
decreased $543 (26.1%) in 1996.
The decrease is primarily due to the elimination of directory publishing
fees, which were $721 in 1995 (see "Other Matters -- Affiliated Transactions"
below) and the sale of a subsidiary which performed computer maintenance. The
decreases were partially offset by higher prices and demand for nonregulated
services, product sales and fees as well as incremental rate impacts related to
potential sharing under certain state reguatory plans.
See "Other Matters -- Affiliated Transactions."
OPERATING EXPENSES
Total Operating Expenses decreased $690 (5.9%) in 1996. The decrease was
primarily attributable to the effects of the 1995 work force reduction charge of
$1,082. Excluding the effect of the work force reduction charge in 1995, total
operating expenses increased $392 (3.7%) in 1996. The components of Total
Operating Expenses were as follows:
1996 1995 % CHANGE
--------- --------- -----------
Depreciation and Amortization.................... $ 3,255 $ 3,065 6.2%
--------- ---------
Other Operating Expenses:
Cost of Services and Products.................. 5,133 5,268 (2.6)
Selling, General and Administrative............ 2,681 2,344 14.4
--------- ---------
7,814 7,612 2.7
--------- ---------
Subtotal....................................... 11,069 10,677 3.7
Work Force Reduction Charge.................... -- 1,082 --
--------- ---------
Total Operating Expenses..................... $ 11,069 $ 11,759 (5.9)
--------- ---------
--------- ---------
DEPRECIATION AND AMORTIZATION increased $190 (6.2%) in 1996. The increase
was due primarily to higher levels of property, plant and equipment and shorter
depreciable lives subsequent to the discontinuance of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." The higher levels of property, plant and equipment resulted from
continued growth in the customer base and modernization of the network.
OTHER OPERATING EXPENSES are comprised of Cost of Services and Products and
Selling, General and Administrative. Cost of Services and Products includes
employee and employee-related expenses associated with network repair and
maintenance, material and supplies expense, cost of tangible goods sold and
other expenses associated with providing services. Selling, General and
Administrative includes expenses related to sales activities such as salaries,
commissions, benefits, travel, marketing and advertising expenses and
administrative expenses.
19
Other Operating Expenses increased $202 (2.7%) in 1996. The increase for the
period was due primarily to higher business volumes, new service offerings and
intensified marketing and advertising. The increase was partially offset by a
decrease of approximately $162 for employee-related costs in the wireline
telephone operations, and the sale in 1996 of a subsidiary which performed
computer maintenance. The decrease in employee-related costs reflects employee
reductions attributable to the restructuring and work force reduction plans,
partially offset by annual compensation increases for management and represented
employees.
WORK FORCE REDUCTION CHARGE. In the fourth quarter of 1995, BellSouth
Telecommunications recognized a pretax charge of $1,082 ($663 after tax),
comprised of $942 ($577 after tax) related to planned work force reductions by
the end of 1997, $85 ($52 after tax) for expected severance benefit payments
after 1997 and $55 ($34 after tax) for additional net curtailment losses related
to employee reductions under a restructuring plan initiated in 1993 and
completed in 1995.
1995 WORK FORCE REDUCTION. The $942 pretax charge was comprised of
approximately $561 under the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," related to employees expected to receive severance
benefits under preexisting separation plans, and approximately $381 for
curtailment losses under the provisions of SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Substantially all of the
curtailment losses relate to postretirement benefits other than pensions.
Under this plan, BellSouth Telecommunications expects to reduce the work
force of the wireline telephone operations by approximately 11,300 employees by
the end of 1997. The work force reduction will be accomplished through the
separation of approximately 13,200 employees, partially offset by the planned
hiring of new employees primarily to replace those not expected to relocate in
connection with the consolidation of work locations. Including a reduction of
approximately 800 employees which occurred in December 1995, BellSouth
Telecommunications has reduced its work force by approximately 7,000 employees
under the 1995 plan through December 31, 1996.
Once the plan to reduce 11,300 employees is completed, annual net employee
cost savings are estimated to be approximately $500 after considering increased
costs for outsourced services.
POSTEMPLOYMENT BENEFITS AND OTHER CHARGES. The pretax charge of $85
represents estimated future postemployment severance benefits to be paid after
1997, also in accordance with the provisions of SFAS No. 112. This component was
based on BellSouth Telecommunications' belief that work force reductions will
continue under existing separation plans, although at reduced separation benefit
levels.
A pretax charge of $55 was also recorded related to additional net
curtailment losses in connection with a restructuring plan initiated in 1993 and
completed in 1995. This charge resulted primarily from a greater number of
retirement-eligible employees separating under the plan than was originally
expected.
OTHER INCOME STATEMENT ITEMS
1996 1995 % CHANGE
--------- --------- ------------
Interest Expense................................................ $ 552 $ 573 (3.7)%
Other Income, net............................................... 20 27 (25.9)
Provision for Income Taxes...................................... 1,170 818 43.0
INTEREST EXPENSE includes interest on debt, certain other accrued
liabilities and capital leases, partially offset by interest capitalized as a
cost of installing equipment and constructing plant. Interest expense decreased
$21 (3.7%) in 1996. The decrease was primarily attributable to lower average
interest rates on borrowings due in part to refinancings during 1995, partially
offset by higher average debt balances in 1996.
20
PROVISION FOR INCOME TAXES increased $352 (43.0%) in 1996. BellSouth
Telecommunications' effective tax rates were 36.9% and 36.6% in 1996 and 1995,
respectively. A reconciliation of the statutory Federal income tax rates to
these effective tax rates is provided in Note K to the Consolidated Financial
Statements.
EXTRAORDINARY LOSSES
DISCONTINUANCE OF SFAS NO. 71. In 1995, as a result of its continuing
regulatory and marketplace assessments, BellSouth Telecommunications concluded
that it was required to discontinue SFAS No. 71 for financial reporting
purposes. Accordingly, BellSouth Telecommunications recorded a noncash
extraordinary charge of $2,718 (net of a deferred tax benefit of $1,731). The
extraordinary charge reflects $3,002 (after tax) to reduce the recorded value of
long-lived telephone plant and equipment, all of which was within the regulatory
framework, to the level appropriate for nonregulated enterprises. The overall
charge was partially offset by $194 related to the method by which BellSouth
Telecommunications reported its directory publishing revenues, $71 related to
the elimination of regulatory assets and liabilities and $19 for the partial
acceleration of unamortized investment tax credits associated with the
reductions in asset carrying values and in asset lives.
See Note L to the Consolidated Financial Statements.
EARLY EXTINGUISHMENT OF DEBT. During 1995, BellSouth Telecommunications
recognized extraordinary losses of $78 (net of a current tax benefit of $49)
related to the early extinguishment of outstanding debt issues. See Note E to
the Consolidated Financial Statements.
FINANCING ACTIVITY
During 1995, BellSouth Telecommunications issued $300 of long-term debt and,
with the net proceeds, refinanced outstanding short-term debt. Also during 1995,
BellSouth Telecommunications issued approximately $1,900 of long-term debt to
refinance $1,885 of outstanding long-term debentures, including $485 of
debentures redeemed in January 1996. The funds to redeem the $485 of debentures
in January 1996 are included in Cash and Cash Equivalents in the Consolidated
Balance Sheet at December 31, 1995. In addition, Cash and Cash Equivalents at
December 31, 1995 includes $500 which was used to reduce commercial paper on
January 2, 1996.
BellSouth Telecommunications has committed credit lines aggregating $1,396
with various banks. BellSouth Telecommunications also maintains uncommitted
credit lines of $75. There were no borrowings under the lines of credit at
December 31, 1996. As of February 14, 1997, shelf registration statements were
on file with the Securities and Exchange Commission under which $1,200 of debt
securities could be publicly offered.
BellSouth Telecommunications' debt to total capitalization ratio, adjusted
in 1995 to exclude $485 of debentures redeemed in January 1996, decreased to
49.4% at December 31, 1996 from 51.9% at December 31, 1995. The decrease was
primarily caused by a reduction in short-term borrowings and an increase in
shareholder's equity due to earnings during 1996.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
REGULATORY ENVIRONMENT. In providing telecommunications services, BellSouth
Telecommunications is subject to regulation by both state and federal regulators
with respect to rates, services, competition and other issues. BellSouth
Telecommunications' primary regulatory focus has been directed toward modifying
the regulatory process to one that is more closely aligned with changing market
conditions and overall public policy objectives. As an alternative to regulation
of intrastate earnings, BellSouth Telecommunications has sought price
regulation, whereby prices of basic service are regulated and the pricing of
other products and services are based on market factors. While price regulation
plans do not provide for the direct recovery through basic service rates of cost
increases or extraordinary expenses, they generally provide more flexibility to
meet competitive pricing levels. BellSouth Telecommunications has price
regulation plans approved or authorized in all states in its wireline territory,
although the implementation of the Tennessee plan has been stayed by a court
21
pending resolution of a number of issues. At the federal level, BellSouth
Telecommunications is operating under a price regulation plan established by the
Federal Communications Commission (FCC) in 1995.This plan provided a
productivity option, which BellSouth Telecommunications selected, that
eliminated both earnings limitations and sharing requirements.
ECONOMY. The nation's output of goods and services, which grew 2.0% in
1995, grew at a moderate rate of 2.3% in 1996. Employment in nonfarm business
establishments grew 2.2% during the year and the unemployment rate averaged
5.4%. The economy of the nine-state region served by BellSouth
Telecommunications' wireline telephone business grew slightly faster than the
national economy. The number of jobs in nonfarm businesses grew 2.3% as the
unemployment rate averaged 5.0% for the year. Real income expanded at an
estimated 3.7%. Net migration added approximately 400,000 persons, accounting
for half of the region's population growth. The demand for telecommunications
services in the region reflected the strength of its economic and population
growth. Moderate economic expansion is expected during 1997, as tight labor
markets, slow labor force growth, and modest productivity growth act to
constrain the pace of growth. The region's cost advantages and strong net
migration should bring an economic growth rate comparatively better than the
nation's and further increase the demand for telecommunications services.
However, increasing competition makes BellSouth Telecommunications' financial
performance more susceptible to changes in the economy than previously, as its
operations reflect the more competitive business environment and the greater
demand elasticities for its products and services.
COMPETITION. 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 which have substantial
capital, technological and marketing resources.
THE 1996 ACT. 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 BellSouth Telecommunications negotiate with
other carriers for interconnection, use of network elements on an unbundled
basis and resale of local services. If a negotiated agreement cannot be reached,
either party may seek arbitration with the state regulatory authority or the FCC
if the state fails to act. If rates are disputed, the arbitrator must set rates
for access to network elements on an unbundled basis, based on cost, which may
include a reasonable profit. BellSouth Telecommunications is also required to
negotiate to provide retail services at wholesale rates for the purposes of
resale by competing carriers. If agreement cannot be reached, the arbitrator
shall set the wholesale rates at BellSouth Telecommunications' retail rates less
costs to be avoided. BellSouth Telecommunications has executed over 40
interconnection or resale agreements with such carriers and is currently
involved in arbitration proceedings with a number of other carriers, including
AT&T, MCI and Sprint. The arbitration results for the wholesale discount rates
vary by state from approximately 15% to 21%.
In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry (the Order). Among the issues
specifically addressed by the Order are the network elements that BellSouth
Telecommunications must make available; pricing standards to be followed by
states in setting rates for interconnection; access to network elements on an
unbundled basis and resold services. BellSouth Telecommunications and several
other incumbent local exchange carriers (ILECs) joined in an appeal of the Order
to the United States Court of Appeals for the Eighth Circuit (the Court). Upon
request of several state commissions and ILECs, the Court stayed the Order in
part, pending appeal. Such stay relates to pricing prescriptions and certain
other terms. The Court heard oral arguments in January 1997, and a decision is
pending. Notwithstanding these developments, however, as discussed above,
BellSouth Telecommunications and a number of carriers have negotiated
22
interconnection agreements and state regulatory commissions are arbitrating or
have approved various terms of interconnection between BellSouth
Telecommunications and other carriers. These terms may be revised, depending on,
among other things, the outcome of the appeal of the Order.
The 1996 Act also requires the FCC to identify the local service subsidy
provided by access charges; to provide for the removal of such subsidy from
access rates in order that access charges reflect underlying costs; to arrange
for a universal service fund to ensure the continuation of universal service;
and to develop the arrangements for payments into that fund by all carriers. The
FCC is currently engaged in this proceeding. In addition, the FCC has commenced
a proceeding to revise its access charge rules. Until final orders are issued by
the FCC and any judicial appeals have been concluded, it will not be possible to
determine the impact on access charge revenues; however, an interim access
charge plan provides for lower access charges paid by carriers that purchase
unbundled network elements from ILECs or that connect wireless communications
with the wireline networks of the ILECs.
In attempting to comply with the technical requirements of interconnection,
BellSouth Telecommunications expects to incur significant costs associated with
the development or modification of systems necessary to make interconnection
possible. For example, BellSouth Telecommunications will be required to provide
for long-term number portability whereby customers switching to competing local
carriers will be able to retain their telephone numbers without interruption. It
is unclear as to what degree BellSouth Telecommunications will be able to
recover these costs.
Until the FCC issues final orders on matters such as access reform,
universal service and number portability, as well as other matters, and any
judicial appeals have been concluded, it will not be possible to determine the
impact the 1996 Act will have on BellSouth Telecommunications' financial
position or annual operating results or cash flows.
BELLSOUTH TELECOMMUNICATIONS COMPETITIVE STRATEGY. BellSouth
Telecommunications has developed several strategies that govern its business
decisions in the increasingly competitive telecommunications industry. Among
them, BellSouth Telecommunications will (a) enhance and build its brand strength
and distribution channels; (b) seek approval to provide wired long distance
service and video service directly or through affiliates; (c) control costs and
(d) develop and enhance joint marketing efforts with BellSouth's domestic
wireless businesses.
NEW SERVICES. Notwithstanding the inevitable loss of local service
customers and other risks associated with increased competition, BellSouth
Telecommunications will have the opportunity to benefit from entry into new
business markets. For example, the presence of competition, among other things,
can allow BellSouth to qualify to offer interLATA service under provisions
contained in the 1996 Act. BellSouth believes that in order to remain
competitive in the future, it must aggressively pursue a corporate strategy of
expanding its offerings beyond its traditional businesses and markets. These
offerings include interLATA services, information services and video and
electronic commerce services.
The 1996 Act requires elimination of previous prohibitions on telephone
companies providing cable television services in their service territories,
although many federal courts had already held such prohibitions
unconstitutional. Although ILECs may not acquire or joint venture with
established cable television providers in their wireline territories, they may
provide cable television service over their own facilities. BellSouth
Telecommunications has acquired several cable TV rights and is conducting a
trial of cable TV service to assess the extent to which it wishes to enter this
business.
JOINT MARKETING. The 1996 Act allows BellSouth Telecommunications to market
wireless and other services jointly with its wireline local exchange services;
previously, separate marketing was required. This change has enabled BellSouth
Telecommunications to more efficiently offer and provide integrated
telecommunications. In March 1996, BellSouth Telecommunications began joint
23
marketing of wireless and wireline services in selected markets. In addition, as
permitted by the 1996 Act, BellSouth Telecommunications intends to jointly
market other services such as video, internet access and, eventually, interLATA
service with its wireline services.
1995 WORK FORCE REDUCTION. As another part of its competitive strategy,
BellSouth Telecommunications announced in 1995 a plan to reduce its work force
by approximately 11,300 employees by the end of 1997. Also, in 1995, BellSouth
Telecommunications completed the restructuring of its telephone operations that
had been announced in 1993.
OTHER MATTERS
AFFILIATED TRANSACTIONS. Prior to 1996, BellSouth Telecommunications had a
contractual agreement with BellSouth Advertising & Publishing Corporation
(BAPCO), an affiliated company, wherein BAPCO published certain telephone
directories and in return paid publication fees to BellSouth Telecommunications
for publishing rights and other services. For the years ended December 31, 1995
and 1994, these fees, included in Other Operating Revenue, were $721 and $638,
respectively.
BellSouth Telecommunications and BAPCO established a new contract, based on
fees for services rendered between the companies, which was effective beginning
in the first quarter of 1996. Under the new contract, BellSouth
Telecommunications generated fees of approximately $78 in 1996. As a result,
BellSouth Telecommunications' 1996 revenues related to directory publishing
activities of BAPCO decreased $643 compared to 1995.
Because BellSouth Telecommunications and BAPCO are wholly-owned
subsidiaries, BellSouth's consolidated financial results are not affected by
this change.
24
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
These financial statements have been prepared in conformity with generally
accepted accounting principles and have been audited by Coopers & Lybrand
L.L.P., independent accountants, whose report is contained herein.
The integrity and objectivity of the data in these financial statements,
including estimates and judgments relating to matters not concluded by the end
of the year, are the responsibility of the management of BellSouth
Telecommunications. Management has also prepared all other information included
therein unless indicated otherwise.
Management maintains a system of internal accounting controls which is
continuously reviewed and evaluated. However, there are inherent limitations
that should be recognized in considering the assurances provided by any system
of internal accounting controls. The concept of reasonable assurance recognizes
that the cost of a system of internal accounting controls should not exceed, in
management's judgment, the benefits to be derived. Management believes that
BellSouth Telecommunications' system does provide reasonable assurance that the
transactions are executed in accordance with management's general or specific
authorizations and are recorded properly to maintain accountability for assets
and to permit the preparation of financial statements in conformity with
generally accepted accounting principles. Management also believes that this
system provides reasonable assurance that access to assets is permitted only in
accordance with management's authorizations, that the recorded accountability
for assets is compared with the existing assets at reasonable intervals and that
appropriate action is taken with respect to any differences. Management also
seeks to assure the objectivity and integrity of its financial data by the
careful selection of its managers, by organizational arrangements that provide
an appropriate division of responsibility and by communications programs aimed
at assuring that its policies, standards and managerial authorities are
understood throughout the organization. Management is also aware that changes in
operating strategy and organizational structure can give rise to disruptions in
internal controls. Special attention is given to controls while the changes are
being implemented.
Management maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. In addition, as part of its audit of these financial
statements, Coopers & Lybrand L.L.P. completed a review of the accounting
controls to establish a basis for reliance thereon in determining the nature,
timing and extent of audit tests to be applied. Management has considered the
internal auditor's and Coopers & Lybrand L.L.P.'s recommendations concerning the
system of internal control 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, 1996, 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/ Jere A. Drummond /s/ Patrick H. Casey
PRESIDENT AND CHIEF EXECUTIVE OFFICER VICE PRESIDENT AND COMPTROLLER
February 3, 1997
25
REPORT OF INDEPENDENT ACCOUNTANTS
BellSouth Telecommunications, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of BellSouth
Telecommunications, Inc. and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income and retained earnings and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BellSouth
Telecommunications, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note L to the consolidated financial statements, BellSouth
Telecommunications discontinued accounting for its operations in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation," effective June 30, 1995.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 3, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of BellSouth Telecommunications, Inc. on Form S-3 (File Nos. 33-63661 and
333-00649) of our report, dated February 3, 1997, which includes an explanatory
paragraph stating that the Company discontinued accounting for its operations in
accordance with Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation," effective June 30, 1995, on our
audits of the consolidated financial statements of BellSouth Telecommunications,
Inc. as of December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996, which report is included in this annual report
on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 25, 1997
26
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
Operating Revenues:
Local service................................................................ $ 8,082 $ 7,294 $ 6,863
Interstate access............................................................ 3,553 3,275 3,127
Intrastate access............................................................ 812 884 908
Toll......................................................................... 794 1,009 1,190
Other........................................................................ 1,535 2,078 1,952
--------- --------- ---------
Total Operating Revenues................................................... 14,776 14,540 14,040
--------- --------- ---------
Operating Expenses:
Cost of services and products................................................ 5,133 5,268 5,235
Depreciation and amortization................................................ 3,255 3,065 2,954
Selling, general and administrative.......................................... 2,681 2,344 2,263
Work force reduction charge (Note J)......................................... -- 1,082 --
--------- --------- ---------
Total Operating Expenses................................................... 11,069 11,759 10,452
--------- --------- ---------
Operating Income............................................................... 3,707 2,781 3,588
Interest Expense............................................................... 552 573 549
Other Income, net.............................................................. 20 27 18
--------- --------- ---------
Income Before Income Taxes and Extraordinary Losses............................ 3,175 2,235 3,057
Provision for Income Taxes (Note K)............................................ 1,170 818 1,105
--------- --------- ---------
Income Before Extraordinary Losses............................................. 2,005 1,417 1,952
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note L)........................................................... -- (2,718) --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E)........................................................... -- (78) --
--------- --------- ---------
Net Income (Loss).......................................................... $ 2,005 $ (1,379) $ 1,952
--------- --------- ---------
--------- --------- ---------
Retained Earnings:
At beginning of year......................................................... $ 555 $ 3,522 $ 3,180
Net income (loss)............................................................ 2,005 (1,379) 1,952
Dividends declared........................................................... (1,690) (1,588) (1,610)
--------- --------- ---------
At end of year............................................................... $ 870 $ 555 $ 3,522
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
27
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents................................................................ $ 100 $ 1,084
Accounts receivable, net of allowance for uncollectibles of $67 and $94.................. 2,807 2,941
Material and supplies.................................................................... 327 347
Other current assets..................................................................... 355 281
--------- ---------
Total Current Assets................................................................... 3,589 4,653
--------- ---------
Investments and Advances (Note B).......................................................... 297 279
Property, Plant and Equipment, net (Note C)................................................ 18,739 18,744
Deferred Charges and Other Assets.......................................................... 413 257
--------- ---------
Total Assets........................................................................... $ 23,038 $ 23,933
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year (Note E)................................................... $ 1,435 $ 2,265
Accounts payable......................................................................... 1,126 1,332
Other current liabilities (Note D)....................................................... 2,194 1,934
--------- ---------
Total Current Liabilities.............................................................. 4,755 5,531
--------- ---------
Long-Term Debt (Note E).................................................................... 6,671 6,853
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes........................................................ 1,079 1,000
Unamortized investment tax credits....................................................... 278 355
Other liabilities and deferred credits (Note F).......................................... 2,004 2,227
--------- ---------
Total Deferred Credits and Other Liabilities........................................... 3,361 3,582
--------- ---------
Shareholder's Equity:
Common stock, one share, no par value.................................................... 7,381 7,412
Retained earnings........................................................................ 870 555
--------- ---------
Total Shareholder's Equity............................................................. 8,251 7,967
--------- ---------
Total Liabilities and Shareholder's Equity........................................... $ 23,038 $ 23,933
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
28
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 2,005 $ (1,379) $ 1,952
Adjustments to net income (loss):
Depreciation and amortization............................................. 3,255 3,065 2,950
Provision for uncollectibles.............................................. 137 124 111
Deferred income taxes and unamortized investment tax credits.............. (56) (1,973) (35)
Extraordinary loss for discontinuance of SFAS No. 71...................... -- 4,449 --
Extraordinary loss on early extinguishment of debt........................ -- 127 --
Payment of call premium................................................... -- (74) --
Work force reduction charge............................................... -- 1,082 --
Net change in:
Accounts receivable and other current assets............................ (57) (454) (483)
Accounts payable and other current liabilities.......................... (608) (632) (400)
Deferred charges and other assets....................................... (155) (33) 78
Other liabilities and deferred credits.................................. 413 62 299
Other reconciling items, net.............................................. (66) 3 (14)
---------- ---------- ----------
Net cash provided by operating activities............................... 4,868 4,367 4,458
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (3,206) (3,123) (2,971)
Other investing activities, net............................................. 15 1 123
---------- ---------- ----------
Net cash used for investing activities.................................. (3,191) (3,122) (2,848)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings......................................... 15,125 14,410 13,100
Repayments of short-term borrowings......................................... (15,626) (13,817) (13,003)
Proceeds from long-term debt................................................ -- 2,202 --
Repayments of long-term debt................................................ (485) (1,430) --
Advances from parent and affiliates......................................... 473 613 435
Repayments of advances from parent and affiliates........................... (486) (610) (437)
Dividends paid to parent.................................................... (1,649) (1,594) (1,621)
Equity investment of parent................................................. -- 9 (59)
Other financing activities, net............................................. (13) (38) (15)
---------- ---------- ----------
Net cash used for financing activities.................................. (2,661) (255) (1,600)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.......................... (984) 990 10
Cash and Cash Equivalents at Beginning of Period.............................. 1,084 94 84
---------- ---------- ----------
Cash and Cash Equivalents at End of Period.................................... $ 100 $ 1,084 $ 94
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
29
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
NOTE A -- ACCOUNTING POLICIES
ORGANIZATION. BellSouth Telecommunications, Inc. (BellSouth
Telecommunications) is a wholly-owned subsidiary of BellSouth Corporation
(BellSouth). BellSouth Telecommunications serves, in the aggregate,
approximately two-thirds of the population and one-half of the territory within
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina and Tennessee. BellSouth Telecommunications primarily provides
local exchange service and toll communications services within geographic areas,
called Local Access and Transport Areas (LATAs), and provides network access
services to enable interLATA communications using the long-distance facilities
of interexchange carriers. Through subsidiaries, other telecommunications
services and products are provided primarily within the nine-state BellSouth
Telecommunications region.
BellSouth Telecommunications' Operating Revenues were primarily from
wireline services. Charges for local, access and toll services for the year
ended December 31, 1996 accounted for approximately 61%, 33% and 6%,
respectively, of those wireline revenues. The remainder of BellSouth
Telecommunications' Operating Revenues was derived principally from directory
publishing fees (1995 and 1994 only), sales and maintenance of customer premises
equipment and other nonregulated services.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of BellSouth Telecommunications and subsidiaries in which it has a
controlling financial interest. All significant intercompany transactions and
accounts have been eliminated. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current year's
presentation.
BASIS OF ACCOUNTING. BellSouth Telecommunications consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles. Such financial statements include estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the amounts of revenues and expenses. Actual results
could differ from those estimates.
Effective June 30, 1995, BellSouth Telecommunications discontinued
application of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." See Note L for
further discussion of the impacts of discontinuance of SFAS No. 71.
CASH AND CASH EQUIVALENTS. BellSouth Telecommunications considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
MATERIAL AND SUPPLIES. New and reusable material is carried in inventory,
principally at average original cost, except that specific costs are used in the
case of large individual items. Nonreusable material is carried at estimated
salvage value.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is stated at original cost. For plant dedicated to providing regulated
telecommunications services, depreciation is based on the remaining life method
of depreciation and straight-line composite rates determined on the basis of
equal life groups of certain categories of telephone plant acquired in a given
year. When depreciable telephone plant is disposed of, the original cost less
net salvage value is charged to accumulated depreciation. Other depreciable
plant is depreciated using either straight-line or accelerated methods over the
estimated useful lives of the assets. Gains or losses on disposal of other
depreciable plant are recognized in the year of disposition as an element of
other nonoperating income.
30
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
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 toll, are
recognized monthly as services are provided. Prior to 1996, directory publishing
fees were recognized upon publication of the related directories by an
affiliated company. Beginning in 1996, BellSouth Telecommunications no longer
receives fees for publication rights related to the directory publishing
activities of affiliated companies. Allowances for uncollectible billed services
are adjusted monthly. The provision for such uncollectible accounts was $137,
$124 and $111 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Revenues from services provided to AT&T Corp., BellSouth Telecommunications'
largest customer, were approximately 11%, 12% and 13% of consolidated operating
revenues for 1996, 1995 and 1994, respectively.
MAINTENANCE AND REPAIRS. The cost of maintenance and repairs of plant,
including the cost of replacing minor items not effecting substantial
betterments, is charged to operating expenses.
INCOME TAXES. The balance sheet reflects deferred tax balances associated
with the anticipated tax impact of future income or deductions implicit in the
balance sheet in the form of temporary differences. Temporary differences
primarily result from the use of accelerated methods and shorter lives in
computing depreciation for tax purposes.
For financial reporting purposes, BellSouth Telecommunications is amortizing
deferred investment tax credits earned prior to the 1986 repeal of the
investment tax credit and also some transitional credits earned after the
repeal. The credits are being amortized as a reduction to the provision for
income taxes over the estimated useful lives of the assets to which the credits
relate.
NOTE B -- INVESTMENTS AND ADVANCES
At December 31, 1996 and 1995, Investments and Advances consists primarily
of the cost of 8,922,014 and 8,132,474 shares of BellSouth common stock,
respectively. These shares are held in grantor trusts established by BellSouth
Telecommunications to provide partial funding for the benefits payable under
certain nonqualified benefit plans. Dividend income earned from the BellSouth
shares, included as a component of Other Income, net, was $12, $11 and $10 for
1996, 1995 and 1994, respectively.
31
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:
1996 1995
--------- ---------
Outside plant.......................................................... $ 20,866 $ 20,092
Central office equipment............................................... 17,442 16,132
Building and building improvements..................................... 2,979 2,879
Furniture and fixtures................................................. 2,533 2,408
Operating and other equipment.......................................... 890 912
Station equipment...................................................... 638 626
Plant under construction............................................... 249 304
Land................................................................... 165 168
--------- ---------
45,762 43,521
Less: Accumulated depreciation......................................... 27,023 24,777
--------- ---------
Total Property, Plant and Equipment, net............................. $ 18,739 $ 18,744
--------- ---------
--------- ---------
See Note L for a discussion of the discontinuance of SFAS No. 71 and its
effect on Property, Plant and Equipment.
NOTE D -- OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
1996 1995
--------- ---------
Advanced billing and customer deposits................................... $ 414 $ 400
Taxes accrued............................................................ 385 203
Postemployment benefits (see Note J)..................................... 303 273
Salaries and wages payable............................................... 282 281
Interest and rents accrued............................................... 234 232
Compensated absences..................................................... 215 288
Dividends payable to parent.............................................. 154 113
Other.................................................................... 207 144
--------- ---------
Total Other Current Liabilities...................................... $ 2,194 $ 1,934
--------- ---------
--------- ---------
NOTE E -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
1996 1995
--------- ---------
Debentures Redeemed in January 1996..................................... $ -- $ 485
--------- ---------
Commercial paper........................................................ 1,342 1,775
Current maturities of long-term debt.................................... 93 5
--------- ---------
Total Other Debt Maturing Within One Year............................... 1,435 1,780
--------- ---------
Total Debt Maturing Within One Year................................. $ 1,435 $ 2,265
--------- ---------
--------- ---------
Weighted average interest rate at end of period:
Commercial paper...................................................... 5.52% 5.83%
32
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE E -- DEBT (CONTINUED)
BellSouth Telecommunications has committed credit lines aggregating $1,396
with various banks. BellSouth Telecommunications also maintains uncommitted
lines of credit of $75. There were no borrowings under the lines of credit at
December 31, 1996. 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, 1996.
CONTRACTUAL
INTEREST RATES MATURITIES 1996 1995
-------------- -------------- --------- ---------
4 3/8% -
Debentures: 6 3/4% 1997 - 2045 $ 1,905 $ 1,915
6.65% - 7% 2095 635 626
7% - 8 1/4% 2010 - 2035 2,050 2,535
--------- ---------
4,590 5,076
Notes.................................... 5 1/4% - 7% 1998 - 2008 2,175 2,175
Other.................................... 31 124
Unamortized discount, net of premium..... (32) (32)
--------- ---------
6,764 7,343
Current maturities....................... (93) (490)
--------- ---------
Total Long-Term Debt................. $ 6,671 $ 6,853
--------- ---------
--------- ---------
Maturities of long-term debt outstanding (principal amounts) at December 31,
1996 are summarized below. Maturities after the year 2001 include $500 principal
amount 6.65% debentures due in 2095. At December 31, 1996, such debentures had
an accreted book value of $135.
1997 1998 1999 2000 2001 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- ------
Maturities................. $ 93 $581 $ 12 $388 $ 88 $5,999 $7,161
---- ---- ---- ---- ---- ---------- ------
---- ---- ---- ---- ---- ---------- ------
During 1995, BellSouth Telecommunications refinanced certain long-term debt
issues at more favorable interest rates. The approximate $1,900 gross proceeds
of debentures issued during the year to accomplish these refinancings are
included in Long-Term Debt. Of the total $1,885 aggregate principal amount of
debentures called for redemption during 1995, $1,400 had actually been redeemed
as of December 31, 1995. The remaining $485 of debentures, redeemed in January
1996, are included in the Consolidated Balance Sheet at December 31, 1995 in
Debt Maturing Within One Year. As a result of the early extinguishment of these
issues, including the issues redeemed in January 1996, an extraordinary loss of
$78, net of a current tax benefit of $49, was recognized in 1995.
At December 31, 1996, a shelf registration statement was on file with the
Securities and Exchange Commission under which $1,200 of debt securities could
be publicly offered.
33
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:
1996 1995
--------- ---------
Postretirement benefits other than pensions
(see Notes H and J)..................................................... $ 732 $ 656
Accrued pension cost (see Notes H and J)................................. 556 465
Compensation related..................................................... 462 354
Postemployment benefits (see Note J)..................................... 136 485
Sharing accrual under FCC price cap plan................................. 39 186
Other.................................................................... 79 81
--------- ---------
Total Other Liabilities and Deferred Credits......................... $ 2,004 $ 2,227
--------- ---------
--------- ---------
NOTE G -- TRANSACTIONS WITH AFFILIATES
Prior to 1996, BellSouth Telecommunications had a contractual agreement with
BellSouth Advertising & Publishing Corporation (BAPCO), an affiliated company,
wherein BAPCO published certain telephone directories and in return paid
publication fees to BellSouth Telecommunications for publishing rights and other
services. For the years ended December 31, 1995 and 1994, these fees, included
in Other Operating Revenue, were $721 and $638, respectively.
In response to changes in the telecommunications environment, BellSouth
Telecommunications and BAPCO established a new contract, based on fees for
services rendered between the companies, which was effective beginning in the
first quarter of 1996. Under the new contract, BellSouth Telecommunications
generated fees of approximately $78 in 1996. As a result, BellSouth
Telecommunications' 1996 revenues related to directory publishing activities of
BAPCO decreased approximately $643 compared to 1995.
At December 31, 1996 and 1995, amounts receivable from affiliated companies
were $29 and $8, respectively. Amounts payable to affiliated companies at
December 31, 1996 and 1995, both short- and long-term, were $191 and $397,
respectively.
NOTE H -- EMPLOYEE BENEFITS
PENSION PLANS. Substantially all employees of BellSouth Telecommunications
are covered by noncontributory defined benefit pension plans sponsored by
BellSouth. Principal plans are discussed below; other plans are not significant
individually or in the aggregate.
The plan covering nonrepresented employees is a cash balance plan which
provides pension benefits determined by a combination of compensation-based
service and additional credits and individual account-based interest credits.
The cash balance plan is subject to a minimum benefit determined under a plan in
existence for nonrepresented employees prior to July 1, 1993 which provided
benefits based upon credited service and employees' average compensation for a
specified period. The minimum benefit under the prior plan is applicable to
employees retiring through 2005. Both the 1996 and 1995 projected benefit
obligations assume interest and additional credits greater than the minimum
levels specified in the written plan. Pension benefits provided for represented
employees are based on specified benefit amounts and years of service and
include the projected effect of future bargained-for improvements.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all pension benefits for
which BellSouth is liable. Contributions are
34
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFITS (CONTINUED)
actuarially determined using the aggregate cost method, subject to ERISA and
Internal Revenue Service limitations. Pension plan assets consist primarily of
equity securities and fixed income investments.
Effective January 1, 1994, the nonrepresented cash balance plan was divided
from one into four cash balance plans which allowed for costs to be accounted
for more precisely based upon specific company demographic information. The plan
division had no material impact on BellSouth Telecommunications' 1994 costs.
The components of net pension income for the nonrepresented plan are
summarized below:
1996 1995 1994
--------- --------- ---------
Service cost -- benefits earned during the year............. $ 77 $ 68 $ 81
Interest cost on projected benefit obligation............... 297 328 325
Actual (return) loss on plan assets......................... (788) (1,255) 58
Net amortization and deferral............................... 316 788 (506)
--------- --------- ---------
Net pension income...................................... $ (98) $ (71) $ (42)
--------- --------- ---------
--------- --------- ---------
The following table sets forth the funded status of the plan at December 31:
1996 1995
--------- ---------
Actuarial present value of:
Vested benefit obligation............................................. $ 3,606 $ 3,927
--------- ---------
--------- ---------
Accumulated benefit obligation........................................ $ 3,719 $ 4,194
--------- ---------
--------- ---------
Projected benefit obligation.......................................... $ 4,050 $ 4,622
Plan assets at fair value............................................... 6,205 6,042
--------- ---------
Plan assets in excess of projected benefit obligation................... $ 2,155 $ 1,420
Unrecognized net gain due to past experience different from assumptions
made................................................................... (1,587) (1,067)
Unrecognized prior service cost......................................... (328) (249)
Unrecognized net asset at transition.................................... (38) (43)
--------- ---------
Prepaid pension cost.................................................. $ 202 $ 61
--------- ---------
--------- ---------
Prior to 1994, BellSouth Telecommunications was allocated a portion of the
expenses for both the nonrepresented and represented plans' pension expense.
Pension cost allocated to BellSouth Telecommunications in 1996, 1995 and 1994
for the represented plan was $68, $14 and $64, respectively. Net pension
(income) cost is affected by changes in the discount rate and other actuarial
assumptions. The consolidated net pension income amounts reflected above are
exclusive of curtailment effects reflected in the work force reduction and
restructuring activities (see Note J) and do not reflect curtailment gains in
the amount of $43 in 1996.
SFAS No. 87, "Employers' Accounting for Pensions," requires certain
disclosures to be made with respect to the components of net pension cost for
the period and a reconciliation of the funded status of the plan with amounts
reported in the balance sheets. Such disclosures are not presented in 1996, 1995
and 1994 for the represented plan because the structure of the BellSouth plans
does not permit disaggregation of relevant plan information on an individual
company basis.
35
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFITS (CONTINUED)
The significant actuarial assumptions at December 31, 1996 and 1995 were as
follows:
1996 1995
--------- -----------
Weighted average discount rate.............................................. 7.5% 7.0%
Weighted average rate of compensation increase.............................. 5.5% 5.5%
Expected long-term rate of return on plan assets............................ 8.25% 8.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. Substantially all
nonrepresented and represented employees of BellSouth Telecommunications
participate in BellSouth's postretirement health and life insurance welfare
plans. BellSouth's transition benefit obligation is being amortized over 15
years, the average remaining service period of active plan participants at
adoption. The accounting for the health care plan does not anticipate future
adjustments to the cost-sharing arrangements provided for in the written plan
for employees retiring after December 31, 1991.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all health and life benefits
for which BellSouth is liable. Contributions are actuarially determined using
the aggregate cost method, subject to ERISA and Internal Revenue Service
limitations. Assets in the health and life plans consist primarily of equity
securities and fixed income investments.
Postretirement benefit cost allocated to BellSouth Telecommunications was
$294, $264 and $289 for 1996, 1995 and 1994, respectively. The consolidated net
postretirement benefit cost amounts reflected above are exclusive of curtailment
effects reflected in the work force reduction and restructuring activities
discussed below. SFAS No. 106, "Employees' Accounting for Retirement Benefits
Other than Pensions," requires certain disclosures to be made with respect to
the components of net periodic postretirement benefit cost for the period and a
reconciliation of the funded status of the plan with amounts reported in the
balance sheets. Such disclosures are not presented because the structure of the
BellSouth plans does not permit disaggregation of relevant plan information on
an individual company basis.
The significant actuarial assumptions at December 31, 1996 and 1995 were as
follows:
1996 1995
--------- -----------
Weighted average discount rate.............................................. 7.5% 7.0%
Weighted average rate of compensation increase.............................. 5.8% 5.7%
Health care cost trend rate (1)............................................. 8.5% 9.0%
Expected long-term rate of return on plan assets (2)........................ 8.25% 8.0%
- ------------------------
(1) Trend rate used to value the accumulated postretirement benefit obligation
in 1996 and 1995 is assumed to decrease gradually to 5% in 2003.
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
trust for 1996 and 1995.
The health care cost trend rate assumption affects the amounts reported. A
one-percentage-point increase in the assumed health care cost trend rates for
each future year would increase BellSouth Telecommunications' accumulated
postretirement benefit obligation by $190 at December 31, 1996 and the estimated
aggregate service and interest cost components of the 1996 postretirement
benefit cost by $17.
DEFINED CONTRIBUTION PLANS. BellSouth maintains contributory savings plans
which cover substantially all employees of BellSouth Telecommunications.
Employees' eligible contributions are
36
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE H -- EMPLOYEE BENEFITS (CONTINUED)
matched with BellSouth common stock based on defined percentages determined
annually by the Board of Directors. BellSouth Telecommunications recognized
compensation expense of $79, $110 and $113 in 1996, 1995 and 1994, respectively,
related to these plans.
NOTE I -- STOCK COMPENSATION PLANS
Certain employees of BellSouth Telecommunications participate in stock-based
compensation plans sponsored by BellSouth Corporation. 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 five years and have a term of 10 years.
BellSouth Telecommunications applies APB Opinion 25 and related
Interpretations in accounting for stock-based compensation plans. Accordingly,
no compensation cost has been recognized by BellSouth Telecommunications for
stock options granted to its employees. Had compensation cost for BellSouth's
stock-based compensation plans been determined in accordance with the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," BellSouth
Telecommunications' net income would have been reduced to the pro forma amounts
indicated below:
1996 1995
--------- ---------
Net income (loss) -- as reported........................................................... $ 2,005 $ (1,379)
Net income (loss) -- pro forma............................................................. $ 2,000 $ (1,380)
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 1996 and 1995 do not vest for several years and additional awards are made
each year.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1996 1995
--------- ---------
Expected life (years)........................................................................... 7 7
Dividend yield.................................................................................. 3.39% 4.36%
Expected volatility............................................................................. 15.4% 15.8%
Risk-free interest rate......................................................................... 5.52% 7.26%
The weighted-average fair values of options granted at fair market value
during 1996 and 1995 were $7.61 and $5.45, respectively. The weighted-average
fair value of options granted at above fair market value during 1995 was $2.48.
NOTE J -- WORK FORCE REDUCTION CHARGE
In the fourth quarter of 1995, BellSouth Telecommunications recognized a
pretax charge of $1,082 related to work force reductions. The primary component
of the charge, $942 for planned work force reductions in the core wireline
business by the end of 1997, consists of $561 under the provisions of SFAS No.
112, "Employers' Accounting for Postemployment Benefits," related to those
employees who are expected to receive severance benefits under preexisting
separation plans, and $381 for curtailment losses under the provisions of SFAS
No. 88, "Employers' Accounting for Settlements and
37
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE J -- WORK FORCE REDUCTION CHARGE (CONTINUED)
Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Substantially all of the curtailment losses relate to postretirement
benefits other than pensions. The remaining components of the charge are $85 for
expected severance benefit payments after 1997, also under SFAS No. 112, and $55
for additional net curtailment losses related to employee reductions under a
restructuring plan initiated in 1993 and completed in 1995.
Under the 1995 work force reduction plan, BellSouth Telecommunications
expects to reduce the work force of the wireline telephone operations by
approximately 11,300 employees by the end of 1997. The work force reduction will
be accomplished through the separation of approximately 13,200 employees,
partially offset by the planned hiring of new employees primarily to replace
those not expected to relocate in connection with the consolidation of work
locations. Including a reduction of approximately 800 employees which occurred
in December 1995, BellSouth Telecommunications has reduced its work force by
approximately 7,000 employees under the 1995 plan through December 31, 1996.
NOTE K -- INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," the balance
sheet reflects the anticipated tax impact of future taxable income or deductions
implicit in the balance sheet in the form of temporary differences. These
temporary differences reflect the difference between the basis in assets and
liabilities as measured in the financial statements and as measured by tax laws
using enacted tax rates.
BellSouth Telecommunications is included in the consolidated Federal income
tax return filed by BellSouth. Consolidated tax expense is allocated among the
separate members of the group in accordance with the applicable sections of the
Internal Revenue Code.
Generally, under this method each company calculates its current tax expense
as if it filed a separate return. The sum of the separate company liabilities is
compared to the consolidated return liability. The resulting difference, the
benefit of consolidation, is allocated to companies contributing benefits
(operating losses, excess credits and capital losses) in proportion to the
amounts contributed. Deferred taxes are not allocated among the members of the
group.
The provision for income taxes is summarized as follows:
1996 1995 1994
--------- --------- ---------
Federal:
Current...................................................... $ 1,056 $ 904 $ 983
Deferred, net................................................ 24 (145) 20
Investment tax credits, net.................................. (77) (69) (72)
--------- --------- ---------
1,003 690 931
--------- --------- ---------
State:
Current...................................................... 170 156 157
Deferred, net................................................ (3) (28) 17
--------- --------- ---------
167 128 174
--------- --------- ---------
Total provision for income taxes........................... $ 1,170 $ 818 $ 1,105
--------- --------- ---------
--------- --------- ---------
Extraordinary losses in 1995 are presented in the Consolidated Statement of
Income net of tax benefits totaling $1,780, of which $49 is current and $1,731
is deferred.
38
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE K -- INCOME TAXES (CONTINUED)
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
1996 1995
--------- ---------
Compensation related.................................................... $ 619 $ 550
Work force reduction charge............................................. 210 370
Allowance for uncollectibles............................................ 70 72
Regulatory sharing accruals............................................. 32 114
Other................................................................... 103 97
--------- ---------
Deferred Tax Assets................................................... 1,034 1,203
--------- ---------
Depreciation............................................................ (1,929) (1,949)
Issue basis accounting.................................................. -- (143)
Other................................................................... (1) (3)
--------- ---------
Deferred Tax Liabilities.............................................. (1,930) (2,095)
--------- ---------
Net Deferred Tax Liability.......................................... $ (896) $ (892)
--------- ---------
--------- ---------
Of the Net Deferred Tax Liability at December 31, 1996 and 1995, $183 and
$108, respectively, was current and $(1,079) and $(1,000), respectively, was
noncurrent.
A reconciliation of the Federal statutory income tax rate to BellSouth
Telecommunications' effective tax rate follows:
1996 1995 1994
----- ----- -----
Federal statutory tax rate....................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit............ 3.4 3.7 3.8
Amortization of investment tax credits........................... (2.4) (3.1) (2.4)
Miscellaneous items, net......................................... .9 1.0 (0.2)
--- --- ---
Effective tax rate............................................. 36.9% 36.6% 36.2%
--- --- ---
--- --- ---
NOTE L -- DISCONTINUANCE OF SFAS NO. 71
In 1995, as a result of its continuing regulatory and marketplace
assessments, BellSouth Telecommunications concluded that it was required to
discontinue SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," for financial reporting purposes. Accordingly, BellSouth
Telecommunications recorded a noncash extraordinary charge of $2,718 (net of a
deferred tax benefit of $1,731). The components of the charge are as follows:
PRETAX AFTER TAX
--------- ---------
Reduction in recorded value of long lived telephone plant............... $ (4,896) $ (3,002)
Full adoption of issue basis accounting................................. 317 194
Elimination of regulatory assets and liabilities........................ 111 71
Partial adjustment to unamortized investment tax credits................ 19 19
--------- ---------
Total................................................................. $ (4,449) $ (2,718)
--------- ---------
--------- ---------
39
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE L -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
The reduction of telephone plant, $4,896 (pretax), was recorded as an
increase to the related accumulated depreciation accounts, the categories and
amounts of which are as follows:
Central Office Equipment:
Digital switching................................................ $ 1,305
Circuit-other.................................................... 1,291
---------
Total Central Office Equipment................................. 2,596
---------
Outside Plant:
Buried metallic cable............................................ 1,345
Aerial metallic cable............................................ 630
Underground metallic cable....................................... 325
---------
Total Outside Plant............................................ 2,300
---------
Total............................................................ $ 4,896
---------
---------
Such reduction of plant was determined by an impairment analysis that
identified estimated amounts not recoverable from future discounted cash flows.
The analysis considered projected effects of future competition as well as
changes in technology and capital requirements. The plant-related charge, all of
which related to assets within the regulatory framework, was further supported
by depreciation studies that identified inadequate levels of accumulated
depreciation for certain asset categories. These studies give recognition to the
historical underdepreciation of assets resulting primarily from
regulator-prescribed asset lives that exceeded the estimated economic asset
lives.
For financial reporting purposes, the average depreciable lives of affected
categories of long lived telephone plant have been reduced to more closely
reflect the economic and technological lives. Differences between
regulator-approved asset lives and the current estimated economic asset lives
are as follows:
COMPOSITE OF ESTIMATED
REGULATOR-APPROVED ECONOMIC
CATEGORY ASSET LIVES ASSET LIVES
- -------------------------------------------------- ----------------------- -----------------------
(IN YEARS)
Digital switching................................. 17.0 10.0
Circuit-other..................................... 10.5 9.1
Buried metallic cable............................. 20.0 14.0
Aerial metallic cable............................. 20.0 14.0
Underground metallic cable........................ 25.0 12.0
The remaining components of the extraordinary charge, which partially offset
the plant-related portion of the overall charge, include $194 (after tax)
related to the adoption by BellSouth Telecommunications of issue basis
accounting for its directory publishing revenues. BellSouth's unregulated
subsidiaries already recognized directory publishing revenues and production
expenses using issue basis accounting.
The overall extraordinary charge was also reduced by $71 (after tax) to
reflect the removal of regulatory assets and liabilities that were recorded as a
result of previous actions by regulators. Virtually all of these regulatory
assets and liabilities arose in connection with the incorporation of new
accounting standards into the ratemaking process and were transitory in nature.
In addition, the overall extraordinary charge was reduced by $19 (after tax) for
the partial acceleration of unamortized investment tax credits associated with
the reductions in asset carrying values and in asset lives.
40
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE M -- SUPPLEMENTAL CASH FLOW INFORMATION
1996 1995 1994
--------- --------- ---------
Cash Paid For:
Income taxes................................................. $ 1,111 $ 1,064 $ 1,259
--------- --------- ---------
--------- --------- ---------
Interest..................................................... $ 585 $ 627 $ 554
--------- --------- ---------
--------- --------- ---------
NOTE N -- FINANCIAL INSTRUMENTS
The recorded amounts for cash and cash equivalents and commercial paper
approximate fair value due to the short-term nature of these instruments. The
fair value of marketable securities (representing BellSouth Common Stock),
included as a component of Investments and Advances, as well as Debentures and
Notes are based on the respective closing market prices for each security at
December 31, 1996 and 1995, respectively. Since judgment is required to develop
the estimates, the estimated amounts presented herein may not be indicative of
the amounts that BellSouth Telecommunications could realize in a current market
exchange.
Following is a summary of financial instruments where the fair values differ
from the recorded amounts as of December 31, 1996 and 1995:
1996 1995
---------------------- ----------------------
RECORDED ESTIMATED RECORDED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ----------- --------- -----------
Assets (Liabilities):
Marketable securities........................... $ 250 $ 361 $ 219 $ 354
Long-Term Debt:
Debentures.................................... (4,590) (4,422) (5,076) (5,079)
Notes......................................... (2,175) (2,141) (2,175) (2,216)
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject BellSouth Telecommunications to credit risk consist principally of trade
accounts receivable. Concentrations of credit risk with respect to these
receivables, other than those from interexchange carriers, are limited due to
the composition of the customer base, which includes a large number of
individuals and businesses. At December 31, 1996 and 1995, approximately $492
and $520, respectively, of trade accounts receivable were from interexchange
carriers.
NOTE O -- COMMITMENTS AND CONTINGENCIES
LEASES. BellSouth Telecommunications has entered into operating leases for
facilities and equipment used in operations. Rental expense under operating
leases was $177, $187 and $240 for 1996, 1995 and 1994, 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, 1996:
1997 1998 1999 2000 2001 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Minimum rentals............ $103 $ 73 $ 58 $ 48 $ 47 $432 $ 761
---- ---- ---- ---- ---- ----- -----
---- ---- ---- ---- ---- ----- -----
OUTSIDE PLANT. BellSouth Telecommunications currently self insures all of
its outside plant against casualty losses. The net book value of outside plant
was $7,621 and $8,080 at December 31, 1996 and 1995, 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.
41
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS)
NOTE O -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL CLAIMS. BellSouth Telecommunications is subject to claims arising in
the ordinary course of business involving allegations of personal injury, breach
of contract, anti-competitive conduct, employment law issues, regulatory matters
and other actions. BellSouth Telecommunications is also subject to claims
attributable to pre-divestiture events involving environmental liabilities,
rates, taxes, contracts and torts. Certain contingent liabilities for
pre-divestiture events are shared with AT&T Corp.
With respect to regulatory matters, the South Carolina Public Service
Commission has ordered BellSouth Telecommunications to refund approximately $29,
plus interest, based on an investigation of its 1992 earnings. The refund was
stayed pending judicial review of the decision. In 1996, the South Carolina
Court of Common Pleas entered an order affirming the Commission's order of the
refund. BellSouth Telecommunications intends to pursue an appeal of this
decision. The Commission has postponed review of BellSouth Telecommunications'
earnings in 1993 and 1994 until a resolution of the 1992 period is reached.
While complete assurance cannot be given as to the outcome of any legal
claims, BellSouth Telecommunications believes that any financial impact would
not be material to its financial position or annual operating results or cash
flows.
NOTE P -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the following summary of quarterly financial information, all adjustments
necessary for a fair presentation of each period were included. The results for
fourth quarter 1995 include a work force reduction charge of $1,082, which
reduced net income by $663.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1996
Operating Revenues...................................................... $ 3,655 $ 3,645 $ 3,760 $ 3,716
Operating Income........................................................ $ 993 $ 934 $ 931 $ 849
Net Income.............................................................. $ 539 $ 510 $ 497 $ 459
1995
Operating Revenues...................................................... $ 3,561 $ 3,595 $ 3,605 $ 3,779
Operating Income (Loss)................................................. $ 991 $ 980 $ 917 $ (107)
Income (Loss) Before Extraordinary Losses............................... $ 533 $ 519 $ 487 $ (122)
Extraordinary Loss for Discontinuance of SFAS No.71,
net of tax............................................................. -- (2,718) -- --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax............................................................. -- (16) -- (62)
--------- --------- --------- ---------
Net Income (Loss)....................................................... $ 533 $ (2,215) $ 487 $ (184)
--------- --------- --------- ---------
--------- --------- --------- ---------
42
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:
PAGE(S)
-------
(1) Financial Statements:
Report of Independent Accountants/Consent of Independent
Accountants.................................................... 26
Consolidated Statements of Income and Retained Earnings......... 27
Consolidated Balance Sheets..................................... 28
Consolidated Statements of Cash Flows........................... 29
Notes to Consolidated Financial Statements...................... 30 - 42
(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.
EXHIBIT
NUMBER
- ---------
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 July 31, 1996.
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.
b. Reports on Form 8-K:
None.
43
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/ PATRICK H. CASEY
--------------------------------------
Patrick H. Casey
VICE PRESIDENT AND COMPTROLLER
February 25, 1997
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:
Jere A. Drummond*
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
Patrick H. Casey*
Vice President and Comptroller
DIRECTORS:
C. Sidney Boren*
Charles B. Coe*
Jere A. Drummond*
Roger M. Flynt, Jr.*
Elton R. King*
*By: /s/ PATRICK H. CASEY
----------------------------------
Patrick H. Casey
(INDIVIDUALLY AND AS
ATTORNEY-IN-FACT)
February 25, 1997
44