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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
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 1-8607
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BELLSOUTH CORPORATION
A GEORGIA I.R.S. EMPLOYER
CORPORATION NO. 58-1533433
1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610
Telephone number 404 249-2000
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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Common Stock New York, Boston, Chicago,
(par value $1 per share) Pacific and Philadelphia
and Stock Exchanges
Preferred Stock Purchase Rights
9 1/4% Notes due 1/15/98 of New York Stock Exchange
BellSouth Capital Funding Corporation
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None.
At March 1, 1995, 496,323,789 shares of Common Stock and Preferred Stock
Purchase Rights were outstanding.
At March 1, 1995, the aggregate market value of the voting stock held by
non-affiliates was $29,221,063,077.
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. [ ]
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
Portions of the registrant's definitive proxy statement dated March 13,
1995, issued in connection with the 1995 annual meeting of shareholders (Part
III).
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business............................................................................................ 1
General............................................................................................. 1
Modification of Final Judgment...................................................................... 1
Business Operations................................................................................. 2
Telephone Company Operations........................................................................ 2
Other Telecommunications Business Operations........................................................ 8
Competition......................................................................................... 12
Research and Development............................................................................ 16
Licenses and Franchises............................................................................. 16
Employees........................................................................................... 17
2. Properties.......................................................................................... 17
General............................................................................................. 17
Property Additions.................................................................................. 18
Environmental Matters............................................................................... 19
3. Legal Proceedings................................................................................... 19
4. Submission of Matters to a Vote of Shareholders..................................................... 19
Additional Information -- Description of BellSouth Stock....................................................... 19
Executive Officers............................................................................................. 23
PART II
5. Market and Dividend Data............................................................................ 24
6. Selected Financial and Operating Data............................................................... 25
7. Management's Discussion and Analysis of Results of Operations and Financial Condition............... 26
Results of Operations............................................................................... 26
Volumes of Business................................................................................. 27
Operating Revenues.................................................................................. 29
Operating Expenses.................................................................................. 31
Other Income Statement Items........................................................................ 33
Financial Condition................................................................................. 33
Operating Environment and Trends of the Business.................................................... 35
Other Matters....................................................................................... 37
8. Consolidated Financial Statements and Supplementary Data............................................ 40
Report of Management................................................................................ 40
Audit Committee Chairman's Letter................................................................... 41
Report of Independent Accountants................................................................... 42
Consolidated Statements of Income................................................................... 43
Consolidated Balance Sheets......................................................................... 44
Consolidated Statements of Shareholders' Equity..................................................... 45
Consolidated Statements of Cash Flows............................................................... 46
Notes to Consolidated Financial Statements.......................................................... 47
Supplementary Data -- Domestic Cellular Proportionate Operating Data................................ 65
9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure................. 66
PART III
*10. Directors and Executive Officers of the Registrant.................................................. 66
*11. Executive Compensation.............................................................................. 66
*12. Security Ownership of Certain Beneficial Owners and Management...................................... 66
*13. Certain Relationships and Related Transactions...................................................... 66
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 66
Signatures..................................................................................................... 70
Consent of Independent Accountants............................................................................. 71
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*Included in BellSouth Corporation's definitive proxy statement dated March 13,
1995 and incorporated herein by reference.
PART I
ITEM 1. BUSINESS
GENERAL
BellSouth Corporation (BellSouth) is a holding company providing
telecommunications services and communications systems and products through two
wholly-owned subsidiaries, BellSouth Telecommunications, Inc. (BellSouth
Telecommunications) and BellSouth Enterprises, Inc. (BellSouth Enterprises).
BellSouth Telecommunications, which is the surviving corporation from the
merger, effective at midnight December 31, 1991, of South Central Bell Telephone
Company (South Central Bell) and Southern Bell Telephone and Telegraph Company
(Southern Bell), 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. These areas were previously served
by South Central Bell and Southern Bell. BellSouth's other businesses (primarily
wireless and international communications services and advertising and
publishing products) are conducted through subsidiaries of BellSouth
Enterprises.
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 (the POR), American Telephone and Telegraph
Company, now AT&T Corp. (AT&T), transferred to BellSouth its 100% ownership of
South Central Bell and Southern Bell. On January 1, 1984, ownership of BellSouth
was divested from AT&T and BellSouth became a publicly traded company.
BellSouth has its principal executive offices at 1155 Peachtree Street,
N.E., Atlanta, Georgia 30309-3610 (telephone number 404-249-2000).
MODIFICATION OF FINAL JUDGMENT
Pursuant to the MFJ, AT&T divested the 22 wholly-owned operating telephone
companies including, South Central Bell and Southern Bell, that were formerly
part of the Bell System. The ownership of such 22 operating telephone companies
was transferred by AT&T to seven holding companies (the Holding Companies),
including BellSouth. All territory in the continental United States served by
the operating telephone companies was divided into geographical areas termed
"Local Access and Transport Areas" (LATAs). These LATAs are generally centered
on a city or other identifiable community of interest.
The MFJ limits the telecommunications-related scope of the post-divestiture
business activities of the operating telephone companies and their successors
(the Operating Telephone Companies), and the D. C. District Court retained
jurisdiction over construction, implementation, modification and enforcement of
the MFJ*. Under the MFJ, the Operating Telephone Companies may provide local
exchange, exchange access, information access and toll telecommunications
services within the LATAs. Although prohibited from providing service between
LATAs, the Operating Telephone Companies provide exchange access services that
link a subscriber's telephone or other equipment in one of their LATAs to the
transmission facilities of carriers (the Interexchange Carriers), which provide
toll telecommunications services between different LATAs. The Operating
Telephone Companies may market, but not manufacture, customer premises equipment
(CPE), which is defined in the MFJ as equipment used on customers' premises to
originate, route or terminate telecommunications. A
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*The provisions of the MFJ are applicable also to the Holding Companies.
1
similar restriction applies to the manufacture or provision of
"telecommunications equipment," which is defined in the MFJ as including
equipment used by carriers to provide telecommunications services.
The D.C. District Court has established procedures for obtaining generic and
specific waivers from the manufacturing and interLATA communications
restrictions of the MFJ, although the required filings with and review by the
Justice Department and the D.C. District Court usually result in lengthy and
uncertain proceedings. The foregoing restrictions present significant obstacles
to the provision of certain wireless, cable television and other communications
services and require that such business operations, even where waivers are
ultimately obtained, be conducted under burdensome arrangements or subject to
elaborate structural separation or other conditions. BellSouth is a party to
litigation and is advocating legislation intended to remove or relax the MFJ
restrictions. (See "Competition -- BellSouth Competitive Strategy.")
The MFJ requires the Operating Telephone Companies to provide, upon a bona
fide request by any Interexchange Carrier or information service provider,
exchange access, information access and exchange services for such access that
will be equal to that provided to AT&T in quality, type and price. BellSouth
Telecommunications believes it is in compliance with this requirement.
BUSINESS OPERATIONS
Approximately 72%, 73% and 74% of BellSouth's operating revenues for the
years ended December 31, 1994, 1993 and 1992, respectively, and a greater
portion of net income were from wireline telecommunications services provided by
BellSouth Telecommunications. The remainder was principally from cellular and
paging operations, directory advertising and publishing, CPE sales and
maintenance, billing and collection services and other nonregulated services.
(See "Other Telecommunications Business Operations.") Revenues from services
provided to AT&T, BellSouth's largest customer, comprised approximately 11%, 14%
and 14% of 1994, 1993 and 1992 operating revenues, respectively.
TELEPHONE COMPANY OPERATIONS
BellSouth Telecommunications provides services, which include local
exchange, exchange access and intraLATA toll services, within each of the 38
LATAs in its combined nine-state operating area. BellSouth experienced an
increase in access lines of approximately 887,400 during 1994, resulting in a
total of 20,220,000 lines at December 31, 1994. The overall increase of 4.6% was
primarily attributable to continued economic improvement in BellSouth
Telecommunications' nine-state service region and an increase in the number of
second residential lines. Second residential lines accounted for approximately
23% of the overall increase in access lines since December 31, 1993. (See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Volumes of Business.")
At December 31, 1994, approximately 76% of access lines were in 53
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 by non-affiliated telephone companies, which had
approximately 29% of the network access lines in such states on December 31,
1994. BellSouth Telecommunications does not furnish local exchange, access or
toll services in the areas served by such companies.
LOCAL AND TOLL SERVICES
Charges for local services for each of the years ended December 31, 1994,
1993 and 1992 accounted for approximately 41% of BellSouth's 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
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regular switching 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 secondary central office features.
Secondary central office features may be purchased by access line
subscribers for a charge in addition to the basic monthly fee. They include
Custom Calling service (including Call Waiting, 3-Way Calling, Call Forwarding
and Speed Dialing services) and Touchtone service. During 1994, revenues from
secondary central office features comprised approximately 17% of local service
revenues.
In addition to secondary central office features, BellSouth
Telecommunications offers certain enhanced services through its network.
Enhanced services differ from basic services and secondary central office
features in that they 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 enhanced 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). Such offerings include voice messaging and storage
services, such as MemoryCall-Registered Trademark- voice messaging service.
BellSouth Telecommunications provides intraLATA toll services within, but
not between, its 38 LATAs. Such toll services provided approximately 7%, 8% and
8% of BellSouth's operating revenues for the years ended December 31, 1994, 1993
and 1992, respectively. These services include the following: intraLATA service
beyond the local calling area; Wide Area Telecommunications Service (WATS or 800
services) for customers with highly concentrated demand; and special services,
such as transport of data, radio and video.
BellSouth Telecommunications is subject to state regulatory authorities in
each state in which it provides telecommunications services with respect to
intrastate rates, services and other issues. Traditionally, BellSouth
Telecommunications' rates were set in each state in its service areas at levels
which were anticipated to generate revenues sufficient to cover its allowed
expenses and to provide an opportunity to earn a fair return on its capital
investment. Such a regulatory structure was satisfactory in a less competitive
era; however, BellSouth Telecommunications is currently advocating changes to
the regulatory processes responsive to the increasingly competitive
telecommunications environment. Modified forms of state regulation are in effect
in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi and Tennessee.
Under one such modified form of 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 are reached, earnings are "shared" by providing refunds or rate
reductions to customers. The amounts of any such excess that may be retained
under some plans depend upon attaining mandated service standards, certain
productivity improvement provisions or both. Some sharing plans have a maximum
point above which all earnings must be returned to customers. Under some plans,
if earnings fall below a targeted minimum, additional earnings required to
return to the bottom of the allowed range can be obtained through rate
increases. Sharing plans are generally subject to renewal after two or three
years and may be subject to modification prior to renewal.
Despite the potential advantages offered by sharing plans, substantial rate
reductions have been incurred in connection with their adoption and operation.
Of the states in which these types of plans were in place, BellSouth
Telecommunications attained the earnings sharing range in Alabama, Florida,
Kentucky and Louisiana in 1994.
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Another form of regulation focuses on the prices that can be charged for
telecommunications services. While such a plan limits the amount of increase 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. For these reasons, BellSouth Telecommunications is focusing its
regulatory and legislative efforts on replacing existing plans with price
regulation. The Florida, Georgia, North Carolina and Tennessee legislatures are
considering bills that would provide for or allow price regulation and/or local
exchange competition. (See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Operating Environment and Trends of the
Business.")
ALABAMA
An incentive regulation plan has been in effect in Alabama since December
1988, which provides for a return on average total capital* in the range of
11.65% to 12.30%. If earnings exceed 12.30% or drop below 11.65%, sharing with
customers may range from 50% to 100%, depending upon whether certain service and
efficiency requirements are met.
In December 1993, in conjunction with approval of rate adjustments required
by its incentive plans, the Alabama Public Service Commission approved a
settlement of several outstanding issues. The settlement resulted in a net rate
reduction to the company of $15.7 million.
As a result of the first, second and third quarter filings under the plan in
effect, the Alabama Commission accepted rate reductions of $13.1 million in
April 1994, $16.4 million in July 1994 and $8.9 million in October 1994.
In February 1995, BellSouth Telecommunications filed a proposed price
regulation plan with the Alabama Commission. The proposal includes provisions
that basic rates for residential and business customers would not increase for
five years, intrastate switched access prices would be capped at the interstate
level for five years and the company would reduce rates by $30 million.
FLORIDA
From 1988 through 1992, the Florida incentive plan provided for a return on
equity* of 11.5% to 16%, with earnings above 14% to be shared 40% by BellSouth
Telecommunications and 60% by customers with an after-sharing cap of 16%. The
sharing level was not attained under the plan.
In 1993, BellSouth Telecommunications filed a petition to extend the
existing plan. In January 1994, after extensive proceedings and negotiations
between BellSouth Telecommunications, Public Counsel and intervenors, the
Florida Public Service Commission approved a settlement that extends incentive
regulation through 1996. Among other things, the terms of the settlement
provided for rate reductions of $55 million in February 1994, an additional $60
million in July 1994, $80 million in October 1995 and $84 million in October
1996. The settlement provided for other changes in service offerings and tariffs
including approximately $21 million in revenue reductions or increased expenses.
Basic service rates have been capped at their current levels through 1997, and
BellSouth Telecommunications has agreed not to propose any local measured
service on a statewide basis through the same time period.
The agreement established a 1994 return on equity sharing level of 12% with
an after-sharing cap of 14%, increasing in 1995 to a 12.5% sharing level with an
after-sharing cap of 14.5%. Rates of return beyond 1995 would vary based upon
changes in utility bond yields but would change no more than 75 basis points
from 1995 levels.
Financial results for 1994 include an accrual for BellSouth
Telecommunications' estimated sharing obligation of $38 million.
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*As defined in the plan for this state.
4
GEORGIA
The Georgia incentive plan adopted in 1990 provided that BellSouth
Telecommunications would retain all earnings up to a 14% return on equity*.
Subject to the attainment of service standards and productivity improvement
provisions, BellSouth Telecommunications could retain a portion of earnings
between 14% and 16%. The plan also provided for a reduction of rates if earnings
exceed a 14% return on equity, even if the service standards and productivity
improvement provisions are met. The amount of any sharing and rate adjustments
would depend upon attaining certain service standards and productivity
improvements. Effective January 1, 1994, the Georgia Public Service Commission
extended the plan for six months and modified the return on equity at which
sharing would occur from 14% to 13%. BellSouth Telecommunications has yet to
attain the sharing level under the Georgia plan. However, a proceeding is
pending regarding this issue and several parties assert that some sharing for
the six-month period ending June 30, 1994 may be required; no accrual has been
made for sharing during this period.
In August 1994, the Georgia Commission approved a staff recommendation to
implement a sharing plan on an interim basis, effective September 1994, until
pending decisions regarding ongoing regulation of the Company are finalized.
Earnings between 13.5% and 15.5% would be shared 50/50 by BellSouth
Telecommunications and its customers.
In June 1994, BellSouth Telecommunications filed with the Georgia Commission
a proposed price regulation plan. The proposal includes provisions that basic
rates for residential and single-line business customers would not increase for
five years and intrastate switched access would not increase for three years.
The rates, terms and conditions for interconnection and non-basic services would
be set by BellSouth Telecommunications based on market considerations. Hearings
have been held, and a decision is pending.
KENTUCKY
Under the Kentucky incentive regulation plan, BellSouth Telecommunications
may earn a return on average total capital* in the range of 10.99% to 11.61%.
Earnings above 11.61% or below 10.99% are subject to sharing with customers on
either a 50/50 or 25/75 basis depending upon the actual rate of return achieved.
BellSouth Telecommunications achieved the sharing level during 1993 and 1994 and
reduced rates by $4.2 million in June 1993, $2.2 million in July 1993, $2.7
million in January 1994 and $1.2 million in June 1994.
BellSouth Telecommunications filed with the Kentucky Public Service
Commission in March 1994 a proposed price regulation plan. The proposal includes
provisions that basic residential rates would not increase for three years,
residential touch-tone charges would be eliminated over a four-year period,
intrastate switched access charges would be reduced to interstate levels and
prices for non-basic services would be based on market factors. Hearings are
scheduled for April 1995.
LOUISIANA
In February 1992, in settlement of several years of regulatory and judicial
proceedings, BellSouth Telecommunications and the Louisiana Public Service
Commission agreed to a three year incentive regulation plan providing for an
immediate $55 million refund, a rate reduction of $31.4 million and an
authorized return on investment* in the range of 10.7% to 11.7%, with sharing of
earnings above 11.7% and below 12.7%. Based on 1992 results, BellSouth
Telecommunications reduced rates by $13.8 million in February and $7.8 million
in August 1993, reflecting its sharing obligation under the new plan.
Additionally, effective March 1994, BellSouth Telecommunications was ordered
to reduce rates by $47 million annually and refund approximately $14.6 million
for prior periods. This rate adjustment
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*As defined in the plan for this state.
5
and refund was associated with the November 1993 expiration of the company's
reserve deficiency amortization. Based on 1994 data, BellSouth
Telecommunications reduced rates by $11.1 million, effective February 1, 1995,
reflecting its sharing obligation under the plan.
In January 1994, BellSouth Telecommunications filed a petition with the
Louisiana Commission requesting a price regulation plan. In November 1994, the
Louisiana Commission rejected the company's price regulation plan as filed. The
company intends to continue seeking such a plan.
In its February 1995 meeting, the Louisiana Commission extended the current
incentive plan pending further regulatory action. The authorized return on
investment was changed to a range of 9.98% to 10.98% with sharing of earnings
between 10.98% and 11.98% to reflect the change in the capital structure and the
cost of debt since inception of the plan. The authorized cost of equity was not
changed. The change in the revenue requirement associated with the lower
authorized return on investment will be offset by the recovery of debt
refinancing cost and an increase of approximately $9 million in annual
intrastate depreciation expense.
MISSISSIPPI
In June 1990, the Mississippi Public Service Commission authorized
implementation of an incentive plan that includes a return on average net
investment* ranging from 10.74% to 11.74% and provides that earnings above
11.74% and shortfalls below 10.74% would be shared with customers on a 50/50
basis. Rate reductions totaling $22.8 million on an annual basis were required
prior to implementation of the plan.
Additional revenue reductions in the amount of $12.8 million related to
intrastate access and area calling plan impacts became effective in January
1993. In June 1993, the Mississippi Commission renewed, through July 1, 1995 the
incentive plan and ordered BellSouth Telecommunications to reduce rates,
effective July 1993, based on a targeted 11.24% return. Effective November 1,
1994, rates were increased by $8.9 million to provide recovery of the costs
associated with a February 1994 ice storm.
In response to an order issued by the Mississippi Commission, BellSouth
Telecommunications filed in September 1994 a model price regulation plan. The
proposal includes provisions that basic exchange and intrastate switched access
rates will not increase for three years and the rates for interconnection
services and other services (as defined in the model plan) would be set by
BellSouth Telecommunications based on market considerations, subject to certain
defined limitations. Hearings are scheduled during the second quarter of 1995.
On December 1, 1994, BellSouth Telecommunications filed for an increase in
rates of $5.1 million pursuant to the terms of the incentive plan. The increase
was suspended by the Mississippi Commission while they consider the matter.
NORTH CAROLINA
In 1989, legislation was enacted in North Carolina authorizing the North
Carolina Utilities Commission to consider alternative forms of regulation. No
specific proposal has been approved or is pending. The North Carolina Commission
reviews BellSouth Telecommunications' rates on an ongoing basis under its
traditional rate of return plan.
In November 1993, the North Carolina Commission approved one-time
depreciation reserve deficiency amortizations of $28.5 million and $25 million
for 1993 and 1994, respectively. In December 1994, the Commission approved an
additional one-time depreciation reserve deficiency amortization of $20.4
million for 1994.
SOUTH CAROLINA
In August 1991, the South Carolina Public Service Commission authorized
implementation of an incentive plan, but in August 1993, the South Carolina
Supreme Court ruled that the South Carolina
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*As defined in the plan for this state.
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Commission lacked the statutory authority to approve incentive regulation plans.
In April 1994, the South Carolina Legislature enacted a law which permits the
South Carolina Commission to adopt alternative forms of regulation.
In December 1994, the South Carolina Commission issued an order requiring
that rates be reduced prospectively by approximately $26 million. The Company
was also ordered to refund approximately $28.6 million through a one-time credit
to all residential and business customers for 1992. This order has been appealed
to the courts. Any consideration of earnings for 1993 and 1994 has been delayed
pending resolution of the appeal. In establishing rates prospectively, the South
Carolina Commission retained a 13% return on equity* as the allowed return under
traditional rate of return regulation.
TENNESSEE
In August 1993, the Tennessee Public Service Commission approved a three
year revised incentive regulation plan which lowered the sharing range as a
percentage return on average net investment* from 11.0% - 12.2% to 10.65% -
11.85%. Earnings between 11.85% - 15.85% must be shared with ratepayers in
varying degrees, depending on the quality of service. The plan also provides for
rate increases to cover up to 60% of the amount by which earnings fall below
10.65%.
In December 1994, the Tennessee Commission adopted rules that provide that
local exchange carriers (LECs), such as BellSouth Telecommunications, could
elect to operate under price regulation no earlier than January 1, 1996.
Following implementation of price regulation, local basic service rates would be
capped for four years, after which a formula would be used to change basic
rates. All other service prices will not increase for a minimum period of two
years after the effective date of price regulation. Such approval has not yet
been granted.
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In addition to the above matters, BellSouth Telecommunications is a party to
numerous proceedings pending before state regulatory bodies which involve, among
other things, terms and conditions of services provided by BellSouth
Telecommunications, rates charged for such services and relationships with
affiliates. No assurance can be given as to the outcome of any such matters.
ACCESS SERVICES
BellSouth Telecommunications provides access services by connecting the
communications networks of Interexchange Carriers with the equipment and
facilities of subscribers. 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.
Access charges, which are payable both by Interexchange Carriers and
subscribers, provided approximately 24%, 24% and 25% of BellSouth's operating
revenues for the years ended December 31, 1994, 1993 and 1992, 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. 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.
In October 1990, the FCC authorized an alternative to traditional rate of
return regulation called "price caps," effective January 1, 1991, which is
mandatory for certain LECs, including BellSouth Telecommunications. In contrast
to traditional rate of return regulation price caps limits the prices telephone
companies can charge for their services. The price cap plan limits aggregate
price changes to the rate of inflation minus a productivity offset, plus or
minus exogenous cost changes recognized by
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*As defined in the plan for this state.
7
the FCC. Price cap regulation provides LECs with enhanced incentives to increase
productivity and efficiency. Concurrent with the implementation of price caps,
the FCC reduced the allowed rate of return on interstate operations from 12.0%
to 11.25%.
LECs that operate under price caps are allowed to elect annually by April 1
a productivity offset factor of 3.3% or 4.3%. If the lower offset is chosen,
such carriers will be allowed to earn up to a 12.25% overall rate of return
without sharing. If such carriers earn between 12.25% and 16.25%, half of the
earnings in this range will be flowed through to customers in the form of a
lower price cap index in the following year. All earnings over 16.25% would be
flowed through to customers. If such carriers elect a 4.3% productivity offset,
all earnings below 13.25% may be retained, earnings up to 17.25% would be shared
and earnings over 17.25% would be flowed through to customers. BellSouth
Telecommunications elected to operate under the 3.3% productivity offset factor
for the period July 1, 1994 through June 30, 1995.
In February 1994, the FCC initiated its review of the price cap plan
described above. The FCC identified three broad sets of issues for examination
including those related to the basic goals of price cap regulation, the
operation of price caps and the transition of local exchange services to a fully
competitive market. BellSouth believes and advocates that a revised price cap
plan should be structured to provide increased pricing flexibility for services
as competition evolves in the telecommunications markets and that sharing be
eliminated from the plan. Any changes to the plan are not expected to be
effective until mid-1995.
State regulatory commissions have jurisdiction over charges related to the
provision of access to the Interexchange Carriers to complete intrastate
telecommunications. The state commissions have authorized BellSouth
Telecommunications to collect access charges from the Interexchange Carriers
and, in several states, from customers.
In addition to the above matters, BellSouth Telecommunications is a party to
numerous proceedings pending before the FCC which involve, among other things,
terms and conditions of services provided by BellSouth Telecommunications, rates
charged for such services and relationships with affiliates. No assurance can be
given as to the outcome of any such matters.
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 has been extended through
1996, 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 are expected to decrease as AT&T and other carriers assume more direct
billing for their own services. BellSouth Enterprises also provides limited
billing and collection services in foreign countries.
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 Interexchange Carriers which do not directly provide such
services for their own customers.
OTHER TELECOMMUNICATIONS BUSINESS OPERATIONS
DIRECTORY ADVERTISING AND PUBLISHING
BellSouth Enterprises owns a group of companies which publish, print and
sell advertising in, and perform related services concerning, alphabetical and
classified telephone directories. Directory advertising and publishing revenues
represented approximately 9% of BellSouth's total operating
8
revenues for each of the years ended December 31, 1994, 1993 and 1992. Two of
these companies also provide publishing and related products and services to
other directory publishers. During 1994, these companies published approximately
450 directories for BellSouth Telecommunications and contracted with more than
170 nonaffiliated companies to sell advertising space in more than 450
publications of such nonaffiliated companies.
Approximately one-half of the billed revenues from directory advertising
operations of BellSouth Advertising & Publishing Corporation, a wholly-owned
subsidiary of BellSouth, are paid as publication fees to BellSouth
Telecommunications for publishing rights and other services in its franchise
areas.
WIRELESS COMMUNICATIONS
BellSouth Enterprises provides wireless communications services which
consist mainly of cellular telephone and paging services. Revenues from wireless
communications comprised approximately 12%, 10% and 8% of BellSouth's total
operating revenues for the years ended December 31, 1994, 1993 and 1992,
respectively. In addition, BellSouth Enterprises owns minority interests in a
number of wireless businesses whose revenues are not reflected in operating
revenues because of the method of accounting required for such investments.
The predominant part of these business operations is cellular telephone
service. Cellular radio telephone systems provide customers with high-quality
and readily available two-way communications services that interconnect with the
local and long distance telephone networks. Cellular systems utilize a large
number of low power transmitters, each of which transmits within a small
geographic area, or cell, and a switching system that monitors and allocates
available frequencies to users traveling within and between cells. The number of
cells varies from market to market depending on several factors, including the
topography and demographics of the service area. As the number of subscribers
and calls increase, additional channels may be allocated to each cell, or
additional cells may be created, either by sectorizing or splitting existing
cells to create greater capacity or adding new cells.
DOMESTIC CELLULAR OPERATIONS
Domestic cellular wireless telephone business has become a significant
contributor to BellSouth's operations, primarily due to the continued expansion
of the customer base for mobile communications services and as a result of
significant acquisitions of other systems. BellSouth maintains and operates
cellular systems through wholly-owned subsidiaries and business arrangements
with other entities. Cellular service and related equipment are marketed to
consumers, directly and through authorized agents and to businesses that resell
the service.
At December 31, 1994, businesses in which BellSouth had an equity interest
provided cellular service to a total of approximately 3.0 million domestic
customers in 16 states. BellSouth's proportionate share of such total customers,
based on its percentage ownership interests of such businesses, was
approximately 2.2 million customers. (See "Consolidated Financial Statements and
Supplementary Data -- Domestic Cellular Proportionate Operating Data.") Within
its nine-state wireline service territory, BellSouth offers cellular service in
cities including Atlanta, Miami, New Orleans, Memphis, Louisville, Birmingham
and Orlando, while outside its wireline service territory it offers cellular
service in cities including Los Angeles, Houston, Milwaukee, Indianapolis,
Honolulu and Richmond, Virginia. BellSouth's proportionate interest in the
aggregate population served by its domestic cellular systems is approximately
39.2 million persons.
As described under "Other Wireless Operations," BellSouth is bidding for
several broadband licenses to provide personal communications services (PCS),
and if it is successful, it must divest operating control of cellular businesses
it owns in the same areas. In December 1994, BellSouth reached agreement with
ALLTEL Corporation (ALLTEL) to dispose of all or controlling interests in
cellular properties serving the Carolinas, contingent upon its being awarded a
PCS license for that
9
area. BellSouth would retain a minority interest in most of such properties
through participation in a limited partnership to be controlled and managed by
ALLTEL, to which ALLTEL would also contribute certain of its cellular interests.
The rates charged by cellular carriers are not regulated by the FCC or, with
certain exceptions discussed below, the states in which BellSouth's cellular
operations are located. Pursuant to a federal statute enacted into law in 1993,
state governments are generally preempted from regulating the rates charged by
cellular carriers. However, states which had any regulation concerning rates in
effect on June 1, 1993 could apply to the FCC for approval to continue
exercising authority over such rates. Three states in which BellSouth provides
cellular services -- California, Louisiana and Hawaii -- have sought such
approval. This matter is currently being litigated before the FCC. A final
decision on this matter is required by law to be issued by the FCC by August 10,
1995.
INTERNATIONAL CELLULAR OPERATIONS
Outside the United States, BellSouth owns interests in consortiums that hold
licenses for, and are building and/or operating, cellular telephone systems in
Argentina, Australia, Denmark, Germany, Israel, New Zealand, Uruguay and
Venezuela. Through a wholly-owned subsidiary, BellSouth holds a license for a
cellular telephone system in Chile. At December 31, 1994, such systems provided
cellular service to a total of approximately 1,014,000 international customers.
BellSouth's proportionate share of such customers, based on its percentage
ownership interests in such systems, was approximately 361,300 customers.
BellSouth offers cellular service under regional licenses to areas within
Argentina, Uruguay and Chile and offers cellular service under nationwide
licenses in Australia, Denmark, Germany, Israel, Venezuela and New Zealand.
Service in Australia is also currently being provided by reselling service
obtained from the government-owned carrier. (See "Other International
Operations.") During 1994, BellSouth disposed of interests in cellular telephone
businesses in France and Mexico. BellSouth's international cellular systems
operate in areas with an aggregate population of approximately 51.4 million
persons, based on its percentage ownership interests in licensees in such
countries.
PAGING OPERATIONS
BellSouth also provides domestic and international paging services. Paging
services provide the ability to contact, by means of a radio transmitted signal,
persons who carry small radio receivers. The caller uses a cellular or wireline
telephone to reach an assigned telephone or PIN number at the service provider's
facilities. The assigned number is automatically relayed to the paging terminal,
and the call triggers a signal which is relayed to the terminal's transmitter
and transmitted to the paging unit. Subscribers typically rent the paging units
on a month-to-month basis, or purchase such units, and pay a flat monthly fee
for paging services or a per message fee after a set number of free messages.
These services are subject to regulation by the FCC.
BellSouth has local and regional paging operations in many areas throughout
the United States. In addition, BellSouth offers nationwide messaging service.
BellSouth's paging and messaging services are offered under the
MobileComm-Registered Trademark- service mark. As of December 31, 1994,
BellSouth had approximately 1,614,100 pagers in service. In July 1994, BellSouth
acquired RAM Broadcasting Corporation's (RBC's) 50% interest in the paging
segment of the investment formerly jointly owned by BellSouth and RBC, thereby
giving BellSouth a 100% interest in this entity.
During second quarter 1994, BellSouth was the successful bidder, at $47.5
million, for a 10-year license for nationwide narrowband spectrum, which it
plans to use for two-way communications.
OTHER WIRELESS OPERATIONS
BellSouth and RBC have formed a business (RAM) to own and operate certain
mobile data communications networks worldwide. These networks enable mobile
applications such as computer-aided dispatch, electronic mail, transaction
processing and remote data entry and retrieval. They can also be used for such
fixed applications as credit card validation and telemetry. BellSouth has a 49
10
percent interest in the United States mobile data operations, which will
continue to be operated by RBC, and a substantial interest in all foreign mobile
data operations of the RAM venture except the United Kingdom, France and
Germany, where BellSouth has 37.5%, 11.25% and 6% ownership interests,
respectively. The RAM networks cover the top 100 metropolitan markets and 90% of
the urban United States business population. Some additional construction of
RAM's networks is planned to expand coverage. In addition, BellSouth is a
partner in mobile data businesses being developed in Australia, Belgium, France,
Germany, The Netherlands, Singapore and the United Kingdom that use the RAM
technology. BellSouth's domestic and foreign mobile data operations are in the
developmental stage and are not yet profitable.
Personal communications services (PCS) are anticipated to provide a wide
range of wireless communications services. The FCC is currently auctioning
licenses for spectrum for broadband PCS. BellSouth is bidding on licenses for
the Carolinas and eastern Tennessee major trading areas, and is considering
bidding for other selected licenses in basic trading areas. BellSouth has
conducted several trials of PCS-like services under experimental licenses from
the FCC. Substantial capital will be required to acquire licenses and to
construct and develop PCS systems.
OTHER INTERNATIONAL OPERATIONS
BellSouth is a 24.5 percent participant in Optus Communications Pty. Ltd.
(Optus), an international consortium which has been licensed by the Australian
government to build and operate Australia's second telecommunications network.
Optus offers a full spectrum of cellular telecommunications, switched network,
enhanced wireline services and satellite-based services.
Optus has completed construction of the bulk of its long distance network
and has built basic infrastructure for the local business services in Canberra,
Melbourne and Sydney. Long distance and local service switching centers have
been established in the six mainland capital cities, and over 3,000 miles of
optical fiber cable have been placed. Approximately 70% of the population
currently has access to the long distance service provided on the Optus network.
Optus also offers a limited number of local business services such as data
services via its terrestrial and satellite facilities.
Optus had over 540,000 cellular customers at December 31, 1994. In addition
to reselling analog cellular service provided by the government-owned carrier,
Optus has installed its own digital cellular service in five capital cities and
is continuing the build-out in other areas. Optus also owns AUSSAT, Australia's
national satellite communications carrier. AUSSAT satellites provide voice, data
and television broadcast communications to Australia and New Zealand, air
traffic control communications to Australia's Civil Aviation Authority and
mobile communications to Australia's rural areas.
In July 1994, Optus agreed to form a business (Optus Vision) with Australian
and U.S. companies to develop a high capacity broadband network in Australia.
The network services are expected to include cable and pay television,
interactive services and local telecommunications services. Optus and
Continental Cable will each initially own 47.5% of Optus Vision. A television
station will initially own 5% with an option to increase its ownership interest
to 20%. BellSouth expects to invest up to $200 million over the next three years
in this business.
In January 1994, BellSouth entered into an agreement with Ji Tong Company,
an operating unit within the Chinese government, to invest up to $30 million in
communications projects in China. Under the agreement, its main business will be
to provide contract work for the construction and implementation of
telecommunications and information network projects, including the provision of
network planning, design and engineering. In addition, the business will perform
software and hardware systems integration, development and production.
In October 1994, BellSouth and China Unicom signed a memorandum of
understanding to develop telephone networks in two major Chinese cities.
BellSouth will provide China Unicom with assistance and consultation in the
development of network plans for cellular, wireless, and long distance networks.
11
BellSouth has received a license to operate a competing domestic and
international long distance concession in Chile. It began service in late 1994.
BROADBAND SERVICES
In August 1992, the FCC issued an order allowing the LECs to offer video
dial tone for transmitting video services. In February 1995, the FCC approved
BellSouth Telecommunications' application to conduct a trial of video dial tone
services. BellSouth Telecommunications will construct the network in Chamblee,
Georgia, a suburb of Atlanta, that will provide for 70 analog channels and over
200 digital channels to deliver video programming and interactive services, most
of which will be offered by various programming service providers. The new
services will include broadcast entertainment, interactive video services, such
as video games, enhanced personal computer and communications services,
including electronic mail, transactional services, such as home shopping and
banking, and customer-choice video services, such as movies on demand.
In September 1994, the U.S. District Court for the Northern District of
Alabama declared unconstitutional a provision of the Cable Communications Policy
Act of 1984 that prohibits BellSouth and its affiliates from providing cable
television programming in the areas served by BellSouth Telecommunications. As a
result of the Court's decision, which was rendered in response to a suit filed
by BellSouth in 1993 and is now pending appeal by the United States, BellSouth
and its affiliates, including BellSouth Telecommunications, may seek the
appropriate governmental authorizations to provide video programming directly to
consumers throughout its service area.
SELLING AND MAINTAINING EQUIPMENT
BellSouth sells and maintains customer premises equipment (CPE), and to a
lesser extent, computers and related office equipment. The Holding Companies,
AT&T and other substantial enterprises compete in the provision of CPE and other
services and products. In April 1994, BellSouth Communications Systems, Inc., a
wholly-owned subsidiary, disposed of its customer premises equipment sales and
service operations outside the nine-state region served by BellSouth
Telecommunications.
COMPETITION
GENERAL
BellSouth 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.
A technological convergence is occurring in the telephone, cable and
broadcast television, computer, entertainment and information services
industries. The technologies utilized and being developed in these industries
will enable companies to provide multiple and integrated forms of communications
offerings.
Current policies of federal and state legislative and regulatory bodies
strongly favor lowering legal barriers to competition in the telecommunications
industry. Accordingly, the nature of competition which BellSouth will face will
depend to a large degree on regulatory actions at the state and federal levels,
decisions with respect to the MFJ and possible state and federal legislation.
Legislative or regulatory initiatives are pending or expected in a number of
BellSouth Telecommunications' jurisdictions.
NETWORK AND RELATED SERVICES
LOCAL SERVICE
Many services traditionally provided exclusively by the LECs have been
opened for competition. For example, some carriers and other customers with
concentrated, high usage characteristics are
12
utilizing shared tenant services, private branch exchange (PBX) systems (which
are owned by customers and provide internal switching functions), private line
services and other telecommunications links which bypass the switched networks
of BellSouth Telecommunications. An increasing number of private voice and data
communications networks utilizing fiber optic lines have been and are being
constructed in metropolitan areas, including Atlanta, Georgia, Charlotte, North
Carolina and Jacksonville, Miami and Orlando, Florida, which will offer certain
high volume users a competitive alternative to the public and private line
offerings of the LECs. 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 telephone and paging services, and PCS services when
operational, increasingly compete with wireline communications services.
BellSouth Telecommunications is presently vulnerable to bypass to the extent
that its access charges reflect subsidies for other services. Although BellSouth
Telecommunications believes that bypass has already occurred to a significant
degree in its nine-state area, it is difficult to quantify the lost revenues
since customers are not required to report to the telephone companies the
components of their telecommunications systems. In general, telephone company
telecommunications services in highly concentrated population and business areas
are more vulnerable to bypass.
In January 1994, MCI Communications Corporation announced long range plans
to invest more than $20 billion to create and deliver a wide array of
communications services. Included in these plans is an investment of $2 billion
to construct local networks in major United States cities, including Atlanta,
Georgia and other cities in the Southeast. MCI has stated that it would connect
directly to customers and provide alternative local voice and data
communications services. MCI has applied for local telecommunications licenses
in the eight states that have significantly deregulated local service. As states
in BellSouth Telecommunications' wireline region adopt legislation or
regulations enabling multiple local service providers, AT&T, MCI and other
carriers are expected to seek licenses to compete.
In 1994, AT&T acquired McCaw Communications, Inc., the largest domestic
cellular communications company, which serves customers in 10 cities in
BellSouth's local wireline territory and seven cities in which BellSouth
provides competing cellular communications. AT&T's capital and marketing
resources would be expected to make McCaw a more formidable cellular competitor
and could provide an integrated network for carrying communications traffic that
otherwise would have been carried over the public switched and private line
networks of BellSouth Telecommunications.
Alliances are also being formed between other Holding Companies and large
corporations that operate cable television systems in many localities throughout
the United States, E.G., U S West, Inc./ Time Warner Communications and NYNEX
Corporation/Viacom, Inc. 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 the other Holding Companies through their cable
television venture arrangements.
In July 1994, U S West and Time Warner 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 incumbent LECs.
The first of these full-service networks is being built in Orlando, Florida and
a limited trial of the services has begun. Tele-Communications, Inc. has
announced plans to offer similar services in South Florida and Louisville,
Kentucky. 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. In December 1994, U S West acquired Atlanta's
two largest cable operators.
13
ACCESS SERVICE
The FCC has adopted rules requiring local exchange carriers 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 facilities in its central office
buildings through virtual collocation arrangements. The effects of the rules are
to increase competition for access transport.
TOLL SERVICE
A number of firms compete with BellSouth Telecommunications 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 Kentucky and Florida Commissions have concluded that
competing carriers should be allowed to provide intraLATA toll presubscribed
calling with a single digit access code (1+ or 0+) and are considering how and
when such authorization should be implemented.
DIRECTORY ADVERTISING AND PUBLISHING
In BellSouth's advertising and publishing business, competition for
advertising revenues has expanded. Many different media compete for advertising
revenues, and some newspaper organizations and other companies have begun
publishing their own directories. Competition for directory sales agency
contracts for the sale of advertising in publications of nonaffiliated companies
also continues to be strong. Directory listings are now offered in electronic
data bases through telephone company and third party networks. As such offerings
expand and are enhanced through interactivity and other features, BellSouth will
experience heightened competition in its directory advertising and publishing
businesses.
WIRELESS COMMUNICATIONS
The FCC has jurisdiction over the licensing of cellular mobile radio
services in domestic markets. The FCC limits entry for providers of cellular
mobile telecommunications to two licensees for each defined metropolitan
statistical area (MSA) and each rural service area (RSA) within the country.
Each MSA and RSA in which BellSouth participates in the provision of cellular
mobile communications has a competing service provider. In many markets,
competing cellular service is provided by businesses owned or controlled by a
Holding Company, AT&T or a major telephone company. In addition, in July 1994, U
S West and AirTouch Communications announced that they plan to merge their
cellular businesses.
BellSouth's international cellular joint ventures are generally subject to
competition from at least one other cellular service provider, and sometimes
more than one other provider. For example, in Germany there are two competitors.
These competing cellular service providers are generally supported by partners
who are at least as well-capitalized as BellSouth and its partners. In some
cases the competing cellular provider is owned by the state-owned telephone
company, which may have access to the financial resources of the government.
BellSouth's paging operations experience competition from one or more
competitors in all markets in which they are conducted. Although some of
BellSouth's competitors are small privately-owned companies serving only one
market area, others are large companies such as Paging Network, Inc. Competition
for paging subscribers is based primarily on the price and quality of service
and the geographic area covered. BellSouth believes that the price and quality
of its services and its geographic coverage areas generally compare favorably
with those of its competitors.
14
BellSouth's RAM mobile data business expects competition from private
wireless data networks, Specialized Mobile Radio, analog cellular and future
Cellular Digital Packet Data technology. RAM's primary competitor today in the
wireless data market is ARDIS, a wholly-owned subsidiary of Motorola, Inc. The
ARDIS network, which was started in 1983 as a private network for IBM, currently
has the advantage of a larger installed customer base and greater network
coverage. RAM, however, expects to attract customers with its unique network
features of automatic, seamless nationwide roaming. Success of RAM will depend
significantly on early marketing efforts to enroll customers and the relative
market acceptance of RAM technology.
The FCC has approved construction of enhanced specialized mobile radio
(ESMR) systems in many cities around the country. These digital mobile
communications systems are expected to provide service very similar to cellular
telephone service. There has been a consolidation of the licenses required to
provide ESMR service, so that control of this business is concentrated in the
hands of a few potential operators, giving them the ability to offer services
like nationwide roaming once the systems are built. ESMR became available
commercially in Los Angeles during second quarter of 1994 in competition with
BellSouth's cellular telephone partnership.
The FCC's PCS licensing process will allow multiple new competitors for
BellSouth's wireless businesses. Licenses to provide PCS services are being
sought by AT&T, Holding Company consortiums and other large and well-capitalized
companies. It is also anticipated that in conjunction with cable operators,
interexchange carriers, or other alternative local service providers, PCS will
provide some competition to BellSouth's local wireline telephone business. The
exact service offerings and functionality of PCS is not yet apparent, but it is
anticipated that some competitive systems could be in place by mid-1996.
BELLSOUTH COMPETITIVE STRATEGY
REGULATORY AND LEGISLATIVE CHANGES, LITIGATION
The states in BellSouth Telecommunications' service area currently provide
for some form of regulation of earnings, a regulatory framework that BellSouth
believes is not appropriate for the increasingly competitive telecommunications
environment. Accordingly, BellSouth's primary regulatory focus continues to be
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 the current regulatory process, BellSouth believes that price
regulation, whereby prices of basic local exchange service are directly
regulated and prices for other products and services are based on market
factors, is a logical progression toward regulatory flexibility and is fair to
consumers. As such, BellSouth Telecommunications is pursuing implementation of
price regulation plans through filings with state regulatory commissions or
through legislative initiatives.
BellSouth is also seeking relief in the courts and before Congress and
regulatory agencies from current laws, regulations and judicial restrictions
(including the MFJ) for the provision of voice, data and video communications
throughout its wireline service territory and elsewhere. It is furthermore
advocating legislative and regulatory initiatives which would eliminate or
modify restrictions on its current and future business offerings. Bills are
being developed in Congress that would provide the opportunity for the Holding
Companies to engage in interLATA long distance and cable and other video
businesses, subject to various conditions and delays. The interexchange
carriers, other competitors and interest groups with substantial resources
oppose many of these initiatives. The ultimate outcome and timing of any relief
obtained cannot be predicted with certainty, but it is unlikely that meaningful
opportunities to engage in interLATA business can be obtained through
legislation without the local and intraLATA toll businesses being opened to
competition.
BellSouth, NYNEX Corporation and SBC Communications Inc. are involved in
litigation in the D.C. District Court seeking relief from the remaining
provisions of the MFJ. BellSouth believes that
15
the MFJ restrictions are contrary to the public interest in that they impair the
effectiveness of competitive markets, harm consumers economically and undermine
the efficient development of new technology. Final resolution of this motion is
not expected in the near term.
Technological changes and the effects of competition reduce the economic
useful lives of BellSouth Telecommunications' fixed assets. As competition
increases in both the exchange access and local exchange markets, the economic
lives of related properties should continue to decrease. Therefore, BellSouth
Telecommunications is examining the rates of depreciation of fixed assets
authorized by the FCC and state regulatory commissions to ensure that these
rates are adequate to recover fixed asset costs in a timely fashion. The FCC and
the state commissions represcribe depreciation rates for BellSouth
Telecommunications at three-year intervals. Such rates will be represcribed in
Florida, Georgia, North Carolina and South Carolina in 1995 and in Alabama,
Kentucky, Louisiana, Mississippi and Tennessee in 1996. (See "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Operating Environment and Trends of the Business -- Accounting Under SFAS No.
71.")
ENTRY INTO NEW MARKETS
Notwithstanding the risks associated with increased competition, BellSouth
will have the opportunity to benefit from entry into new business markets.
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 may include information
services, interactive communications and cable television and other
entertainment services. BellSouth has and will continue to enter such businesses
through acquisitions, investments, and strategic alliances with established
companies in such industries and through the development of such capabilities
internally. BellSouth intends to pursue foreign telecommunications licenses as
they are offered.
RESTRUCTURING
BellSouth Telecommunications is restructuring its telephone operations by
streamlining its fundamental processes and work activities to better respond to
an increasingly competitive business environment. This activity is expected to
improve overall responsiveness to customer needs and reduce costs. For a
discussion of the restructuring begun in 1993, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Other Matters --
Restructuring of Telephone Operations."
RESEARCH AND DEVELOPMENT
The majority of BellSouth's research and development activity is conducted
at Bell Communications Research, Inc. (Bellcore), one-seventh of which is owned
by BellSouth, through 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.
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. MCI Communications
Corporation and U S West have announced plans to pursue approval to provide
local telephone service, thereby challenging the exclusivity of BellSouth
Telecommunications' franchise for local service in certain states.
16
The domestic cellular, paging and mobile data systems in which BellSouth has
an interest are operated under licenses granted by the FCC. Prior approval of
the FCC is required for the assignment of a license or the transfer of control
of a license. The licenses are generally issued for up to 10-year periods. At
the end of the license period, a renewal application must be filed. For the
paging and mobile data licenses, BellSouth believes renewal will generally be
granted on a routine basis upon showing compliance with FCC regulations and
continuing service to the public. Licenses may be revoked and license renewal
applications may be denied for cause. With regard to cellular licenses, the FCC
has established the procedures and standards for conducting comparative renewal
proceedings, including the award of a "renewal expectancy" that effectively
eliminates the need to consider competing applicants when the incumbent meets
specified criteria.
International cellular, paging and mobile data systems also operate under
licenses granted by the governments in the countries where such systems are
located. The foreign licenses are issued for varied terms and are generally
renewable at the end of the initial license period. As is the case with
BellSouth's domestic wireless properties, the foreign licenses may be revoked
and license renewal applications may be denied for cause.
BellSouth owns or has licenses to use all patents, copyrights, licenses,
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 or its subsidiaries.
EMPLOYEES
At December 31, 1994, 1993 and 1992 BellSouth and its subsidiaries employed
approximately 92,100, 95,100 and 97,100 persons, respectively. Of these amounts
at these dates, approximately 76,700, 81,400 and 82,900 were employees of
BellSouth Telecommunications. About 63% of BellSouth's employees at December 31,
1994 were represented by the Communications Workers of America (the CWA), which
is affiliated with the AFL-CIO. BellSouth's and BellSouth Telecommunications'
collective bargaining agreements with the CWA are scheduled to terminate on
August 5, 1995. Negotiations with the CWA over the terms of the new agreements
will begin early in June 1995. The outcome of these negotiations cannot be
determined at this time.
In November 1993, BellSouth Telecommunications announced a plan to reduce
its work force by approximately 10,200 employees by the end of 1996 through
normal attrition, transitional programs, other voluntary options and involuntary
separations. For the years ended December 31, 1994 and 1993, total employee
reductions under this plan were 3,900 and 1,300, respectively. (See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Other Matters -- Restructuring of Telephone Operations.")
ITEM 2. PROPERTIES
GENERAL
BellSouth's properties do not lend themselves to description by character
and location of principal units. BellSouth's investment in property, plant and
equipment, 93% of which is held by BellSouth Telecommunications, consists of the
following at December 31:
1994 1993
---- ----
Outside Plant.................................................... 44% 44%
Central Office Equipment......................................... 35 35
Land and Buildings............................................... 7 7
Furniture and Fixtures........................................... 6 6
Operating and Other Equipment.................................... 7 6
Other............................................................ 1 2
---- ----
100% 100%
---- ----
---- ----
17
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 currently self-insures a substantial amount of its outside plant
against casualty losses. Central office equipment consists of analog switching
equipment, digital electronic switching equipment and circuit equipment. Land
and buildings are occupied principally by 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.
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 that provide a wider variety of services than their mechanical
predecessors. The BellSouth Telecommunications network is in transition from an
analog to a digital network, which provides capabilities for BellSouth
Telecommunications to furnish advanced data transmission and information
management services.
PROPERTY ADDITIONS
Property additions include 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. In the case of constructed assets,
an amount related to the cost of debt and equity used in the construction of an
asset is capitalized as part of the asset when the construction period is in
excess of one year. Property additions also include assets acquired by means of
entering into a capital lease agreement, gross additions to operating lease
equipment and reused materials.
The total investment in telephone plant has increased from approximately
$34,820 million at January 1, 1990 to approximately $44,200 million at December
31, 1994, 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 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's capital expenditures for 1990 through 1994 were as follows:
MILLIONS
---------
1994.......................... $ 3,600
1993.......................... 3,486
1992.......................... 3,189
1991.......................... 3,102
1990.......................... 3,191
BellSouth projects capital expenditures for BellSouth Telecommunications to
be approximately $3,000 million during 1995. BellSouth projects that during 1995
it will invest approximately $1,200 million in the properties of BellSouth
Enterprises' consolidated subsidiaries. A majority of such expenditures will be
for property additions to its cellular systems to complete construction of new
systems and to expand, enhance and modernize its operating systems. BellSouth
has commenced adding digital technology to certain cellular systems which are
operating at or near capacity with analog technology.
In 1994, BellSouth generated substantially all of its funds for capital
expenditures internally. In 1995, such capital expenditures are expected to be
financed primarily through internally generated funds and, to the extent
necessary, from external sources.
18
ENVIRONMENTAL MATTERS
BellSouth is subject to a number of environmental matters as a result of its
operations and the shared liability provisions in the Plan of Reorganization
(POR). As a result, BellSouth expects that it will be required to expend funds
to remedy certain facilities, including those Superfund sites for which
BellSouth 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, 1994, BellSouth's recorded liability
related primarily to remediation of these sites was $35.8 million.
BellSouth continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. BellSouth's recorded liability reflects those specific
issues where remediation activities are currently deemed to be probable and
where the cost of remediation is estimable. BellSouth continues to believe that
expenditures in connection with additional remedial actions under the current
environmental protection laws or related matters will not be material to its
financial position.
ITEM 3. LEGAL PROCEEDINGS
The MFJ and the related POR provide for the recognition and payment of
liabilities by AT&T and the Operating Telephone Companies that are attributable
to pre-divestiture events but that did not become certain until after
divestiture. These contingent liabilities relate principally to litigation and
other claims with respect to the former Bell System's environmental liabilities,
rates, taxes, contracts and torts (including business torts, such as alleged
violations of the antitrust laws). Contingent liabilities attributable to
pre-divestiture events have been shared by AT&T and the Operating Telephone
Companies in accordance with formulae prescribed by the POR, whether or not an
entity was a party to the proceeding and regardless of whether an entity was
dismissed from the proceeding by virtue of settlement or otherwise. BellSouth
Telecommunications' share of these liabilities to date has not been material to
its financial position or results of operations for any period.
The Operating Telephone Companies have agreed among themselves to disengage
from the sharing of most categories of contingent liabilities formerly subject
to the POR sharing mechanism. Sharing under the POR would continue for matters
for which notice was given as of May 23, 1994 and certain pre-divestiture
environmental claims. The sharing of liabilities for pre-divestiture claims
between AT&T and one or more Operating Telephone Companies are not affected by
this agreement.
BellSouth and its subsidiaries are subject to claims and proceedings arising
in the ordinary course of business involving allegations of personal injury,
breach of contract, anti-competitive conduct and other matters. While complete
assurance cannot be given as to the outcome of any contingent liabilities, in
the opinion of BellSouth, any financial impact to which BellSouth and its
subsidiaries are subject is not expected to be material in amount to BellSouth's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of shareholders in the fourth quarter of
the fiscal year ended December 31, 1994.
------------------------
ADDITIONAL INFORMATION
DESCRIPTION OF BELLSOUTH STOCK
GENERAL
The Articles of Incorporation of BellSouth authorize the issuance of
1,100,000,000 shares of common stock, par value $1 per share (the Common Stock),
and 100,000,000 shares of cumulative, first preferred stock, par value $1 per
share (the Preferred Stock). BellSouth's Board of Directors (the
19
Board) is authorized to provide for the issuance, from time to time, of the
Preferred Stock in series and, as to each series, to fix the number of shares in
such series and the voting, dividend, redemption, liquidation, retirement and
conversion provisions applicable to the shares of such series. No shares of
Preferred Stock are outstanding. The Board has created Series A First Preferred
Stock consisting of 30 million shares (the Series A Preferred Stock) for
possible issuance under BellSouth's Shareholder Rights Plan. (See "Preferred
Stock Purchase Rights.")
DIVIDEND RIGHTS
The holders of Common Stock are entitled to receive, from funds legally
available for the payment thereof, dividends when and as declared by resolution
of the Board. While any series of Preferred Stock is outstanding, no dividends
(other than dividends payable solely in Common Stock) may be declared or paid on
Common Stock, and no Common Stock may be purchased, redeemed or otherwise
acquired for value, (a) unless dividends on all outstanding shares of Preferred
Stock for the current and all past dividend periods have been paid or declared
and provision made for payment thereof and (b) unless all requirements with
respect to any purchase, retirement or sinking fund or funds applicable to all
outstanding series of Preferred Stock have been satisfied. Dividends on the
Preferred Stock would be cumulative.
VOTING RIGHTS
Except in connection with the "business combinations" and "fair price"
provisions discussed below, holders of shares of Common Stock are entitled to
one vote, in person or by proxy, for each share held on the applicable record
date with respect to each matter submitted to a vote at a meeting of
shareholders, but such holders do not have cumulative voting rights. The holders
of any series of Preferred Stock, when issued, may receive the right to vote as
a class on certain amendments to the Articles of Incorporation and on certain
other matters, including the election of directors in the event of certain
defaults, which may include non-payment of Preferred Stock dividends.
LIQUIDATION RIGHTS
In the event of voluntary or involuntary liquidation of BellSouth, holders
of the Common Stock will be entitled to receive, after creditors have been paid
and the holders of the Preferred Stock, if any, have received their liquidation
preferences and accumulated and unpaid dividends, all the remaining assets of
BellSouth.
PRE-EMPTIVE RIGHTS; CONVERSION RIGHTS; REDEMPTION
No shareholders of any class shall be entitled to any pre-emptive rights to
subscribe for or purchase any shares or other securities issued by BellSouth.
The Common Stock has no conversion rights and is not subject to redemption.
PREFERRED STOCK PURCHASE RIGHTS
The Board has declared a dividend of one preferred stock purchase right
(Right) for each share of Common Stock from time to time outstanding. Under
certain circumstances, each Right will entitle the holder to purchase one
one-hundredth of a share of Series A Preferred Stock, $1.00 par value (Common
Equivalent Preferred Stock), which unit is substantially equivalent in voting
and dividend rights to one whole share of the Common Stock, at a price of $175
per whole share (the Purchase Price). The Rights are not presently exercisable
and may be exercised only if a person or group acquires 10% of the outstanding
voting stock of BellSouth without the prior approval of the Board (Acquiring
Person) or announces a tender or exchange offer that would result in ownership
of 25% or more of the Common Stock.
If an Acquiring Person becomes such without prior Board approval, the Rights
are adjusted, and each holder, other than the Acquiring Person, then has the
right to receive, on payment of the Purchase Price, the number of shares of
Common Stock, units of the Common Equivalent Preferred Stock or other assets
having a market value equal to twice the Purchase Price.
The Rights currently trade with the Common Stock and expire after ten years.
20
BUSINESS COMBINATIONS
The Georgia legislature has enacted legislation which generally prohibits a
corporation which has adopted a by-law electing to be covered thereby (which
BellSouth has done) from engaging in any "business combination" (i.e., a merger,
consolidation or other specified corporate transaction) with an "interested
shareholder" (i.e., a 10% shareholder or an affiliate of the corporation which
was a 10% shareholder at any time within the preceding two years) for a period
of five years from the date such person becomes an interested shareholder,
unless the interested shareholder (i) prior to becoming an interested
shareholder, obtained the approval of the Board of Directors for either the
business combination or the transaction which resulted in the shareholder
becoming an interested shareholder, (ii) becomes the owner of at least 90% of
the outstanding voting stock of the corporation in the same transaction in which
the interested shareholder became an interested shareholder, excluding for
purposes of determining the number of shares outstanding those shares owned by
officers, directors, subsidiaries and certain employee stock plans of the
corporation or (iii) subsequent to the acquisition of 10% or more of the
outstanding voting stock of the corporation, acquires additional shares
resulting in ownership of at least 90% of the outstanding voting stock of the
corporation and obtains approval of the business combination by the holders of a
majority of the shares of voting stock of the corporation, other than those
shares held by an interested shareholder, officers, directors, subsidiaries and
certain employee stock plans of the corporation. BellSouth's "business
combinations" by-law may be repealed only by an affirmative vote of two-thirds
of the continuing directors and a majority of the votes entitled to be cast by
the shareholders, other than interested shareholders, and shall not be effective
until 18 months after such shareholder vote. The Georgia statute provides that a
domestic corporation which has thus repealed such a by-law may not thereafter
readopt the by-law as provided therein.
FAIR PRICE PROVISIONS
"Fair price" provisions contained in the Articles of Incorporation require,
generally, in connection with a merger or similar transaction between BellSouth
and an "interested shareholder" (a 10% shareholder or an affiliate of BellSouth
which was a 10% shareholder at any time within the preceding two years), the
unanimous approval of BellSouth's directors not affiliated with the interested
shareholder or the affirmative vote of two-thirds of such directors and a
majority of the outstanding shares held by disinterested shareholders, unless
(i) within the past three years the shareholder has been an interested
shareholder and has not increased its shareholdings by more than one percent in
any 12-month period or (ii) all shareholders receive at least the same
consideration for their shares as the interested shareholder previously paid.
Additionally, these provisions may be revised or rescinded only upon the
affirmative vote of at least two-thirds of the directors not affiliated with an
interested shareholder and a majority of the outstanding shares held by
disinterested shareholders.
BOARD CLASSIFICATION
Board classification provisions adopted by the shareholders and contained in
the By-laws prescribe a shareholder vote for approximately one-third of the
directors, instead of all directors, at each annual meeting of shareholders for
a three-year term. Additionally, such provisions provide that shareholders may
remove directors from office, with or without cause, amend the By-laws with
respect to the number of directors or amend the board classification provisions
only by the affirmative vote of the holders of at least 75% of the outstanding
shares entitled to vote for the election of directors.
REMOVAL OF DIRECTORS
BellSouth's Articles of Incorporation provide that the shareholders of
BellSouth may remove a director, with or without cause, by the affirmative vote
of the holders of at least 75% of the voting power of all shares of stock
entitled to vote generally in the election of directors, voting together as a
single class.
21
LIMITATION ON SHAREHOLDERS' PROCEEDINGS
BellSouth's By-laws require 60 days advance notice of shareholder
nominations for directors and of other matters to be brought before annual
shareholders' meetings. Such By-laws also provide that a special shareholders'
meeting may not be called by fewer than two-thirds of the outstanding shares
entitled to vote at the meeting.
------------------------
The provisions discussed under the six preceding sub-headings and the
ability to issue Preferred Stock, such as the Series A Preferred Stock described
above, with characteristics established by the Board and without the consent of
the holders of Common Stock and the ability to issue additional shares of Common
Stock may have the effect of discouraging takeover attempts and may also have
the effect of maintaining the position of incumbent management. In addition,
these provisions may have a significant effect on the ability of shareholders of
BellSouth to benefit from certain kinds of transactions that may be opposed by
the incumbent Board.
22
EXECUTIVE OFFICERS
The executive officers of BellSouth are listed below:
THIS
OFFICER OFFICE
NAME AGE OFFICE SINCE SINCE
- ------------------------- --- ------------------------------------------------------------ ------- ------
John L. Clendenin 60 Chairman of the Board and Chief Executive Officer 1983 1984
F. Duane Ackerman 52 Vice Chairman of the Board and Chief Operating Officer 1983 1995
Walter H. Alford 56 Executive Vice President and General Counsel 1983 1988
John F. Beasley 55 Vice President and Associate General Counsel 1985 1993
C. Sidney Boren 51 Senior Vice President -- Strategic Planning 1984 1995
Ronald M. Dykes 48 Vice President, Chief Financial Officer and Comptroller 1988 1995
Mark L. Feidler 38 Vice President -- Corporate Development 1993 1993
J. Robert Fitzgerald 55 Vice President -- Corporate Responsibility and Compliance 1983 1994
H. C. Henry, Jr. 50 Executive Vice President -- Corporate Relations 1984 1993
David J. Markey 54 Vice President -- Governmental Affairs 1986 1993
Charles C. Miller, III 42 President -- International 1990 1995
Arlen G. Yokley 57 Vice President, Secretary and Treasurer 1984 1989
The following officers of the companies indicated may be deemed to be
executive officers of BellSouth Corporation:
Jere A. Drummond 55 President and Chief Executive Officer -- BellSouth 1982 1995
Telecommunications, Inc.
Earle M. Mauldin 54 President -- BellSouth Enterprises, Inc. 1987 1995
All of the executive officers of BellSouth, other than Mr. Feidler, have for
at least the past five years held high level management or executive positions
with BellSouth or its subsidiaries. Prior to joining BellSouth in 1992, Mr.
Feidler was employed by The Robinson-Humphrey Company, Inc. (1986 - 1990) and
The Breckenridge Group (1990 - 1991), investment banking firms.
All officers serve until their successors have been elected and qualified.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market for trading in BellSouth common stock is the New York
Stock Exchange, Inc. (NYSE). BellSouth common stock is also listed on the
Boston, Chicago, Pacific and Philadelphia exchanges in the United States and the
London, Zurich, Basel, Geneva, Frankfurt and Amsterdam exchanges. The ticker
symbol for BellSouth common stock is BLS. As of January 31, 1995, there were
1,183,629 holders of record of BellSouth common stock. Market data, obtained
from the NYSE Composite Tape, which encompasses trading on the principal United
States stock exchanges as well as off-board trading, for 1992 through 1994 are
listed below. High and low prices represent the highest and lowest sales prices
for the periods indicated. Dividend data also are listed.
MARKET PRICES PER SHARE
------------------ DIVIDENDS
HIGH LOW DECLARED
------- ------- ---------
1994
First Quarter................................................................... $61 1/2 $53 $ .69
Second Quarter.................................................................. 63 1/2 55 1/2 .69
Third Quarter................................................................... 63 1/2 54 5/8 .69
Fourth Quarter.................................................................. 56 1/8 50 1/2 .69
1993
First Quarter................................................................... $57 1/2 $50 3/8 $ .69
Second Quarter.................................................................. 57 50 5/8 .69
Third Quarter................................................................... 62 7/8 54 1/8 .69
Fourth Quarter.................................................................. 63 7/8 54 1/8 .69
1992
First Quarter................................................................... $52 5/8 $43 5/8 $ .69
Second Quarter.................................................................. 50 3/8 43 3/8 .69
Third Quarter................................................................... 55 1/2 49 1/4 .69
Fourth Quarter.................................................................. 53 7/8 46 3/4 .69
STOCK TRANSFER AGENT AND REGISTRAR
Chemical Bank is BellSouth's stock transfer agent and registrar.
24
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
Operating Revenues.................................... $ 16,845 $ 15,880 $ 15,202 $ 14,445 $ 14,345
Operating Expenses (1)................................ 12,787 13,593 12,041 11,636 11,318
---------- ---------- ---------- ---------- ----------
Operating Income...................................... 4,058 2,287 3,161 2,809 3,027
Interest Expense...................................... 666 689 746 802 774
Other Income, net..................................... 11 8 178 253 157
Provision for Income Taxes............................ 1,243 572 934 753 778
Extraordinary Loss, net of tax........................ -- (87) (41) -- --
Accounting Change, net of tax......................... -- (67) -- (35) --
---------- ---------- ---------- ---------- ----------
Net Income.......................................... $ 2,160 $ 880 $ 1,618 $ 1,472 $ 1,632
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings Per Share.................................... $ 4.35 $ 1.77 $ 3.30 $ 3.04 $ 3.38
Dividends Declared Per Common Share................... $ 2.76 $ 2.76 $ 2.76 $ 2.76 $ 2.68
Book Value Per Share.................................. $ 28.95 $ 27.20 $ 27.94 $ 26.93 $ 26.28
Return to Average Common Equity....................... 15.4% 6.3% 11.9% 11.3% 12.8%
Weighted Average Common Shares Outstanding............ 496.6 496.1 490.8 484.3 482.4
Return on Average Total Capital....................... 11.5% 6.1% 9.8% 9.4% 10.4%
Total Assets.......................................... $ 34,397 $ 32,873 $ 31,463 $ 30,942 $ 30,207
Capital Expenditures.................................. $ 3,600 $ 3,486 $ 3,189 $ 3,102 $ 3,191
Long-Term Debt........................................ $ 7,435 $ 7,381 $ 7,360 $ 7,677 $ 7,781
Debt Ratio at End of Period........................... 39.3% 40.2% 39.0% 41.3% 40.7%
Ratio of Earnings to Fixed Charges (2)................ 5.34 2.98 4.00 3.47 3.68
Total Employees....................................... 92,121 95,084 97,112 96,084 101,945
Telephone Employees (3)............................... 73,764 77,958 79,453 79,743 85,967
Telephone Employees per 10,000 Access Lines........... 36.5 40.3 42.6 44.1 49.1
Business Volumes (In Millions): (4)
Network Access Lines in Service:
Residence........................................... 14.2 13.7 13.3 12.9 12.6
Business............................................ 5.8 5.4 5.1 4.8 4.6
Other............................................... .2 .2 .2 .3 .3
---------- ---------- ---------- ---------- ----------
Total............................................. 20.2 19.3 18.6 18.0 17.5
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Access Minutes of Use:
Interstate.......................................... 57,778.1 53,345.0 50,546.4 47,255.3 44,903.3
Intrastate.......................................... 16,887.8 15,260.9 13,994.2 13,237.7 12,119.5
Toll Messages......................................... 1,558.6 1,511.4 1,462.2 1,504.1 1,496.4
Cellular Customers (In Thousands): (5)
Domestic............................................ 2,155.8 1,559.1 1,118.1 774.2 498.3
International....................................... 361.3 192.2 77.6 26.0 5.1
---------- ---------- ---------- ---------- ----------
Total............................................. 2,517.1 1,751.3 1,195.7 800.2 503.4
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- --------------------------
(1) Operating Expenses for 1993 include a charge for restructuring of $1,136.4,
which reduced net income by $696.6. See Note K to the Consolidated Financial
Statements.
(2) For the purpose of this ratio: (i) earnings have been calculated by adding
income before income taxes, interest expense, such portion of rental expense
representative of the interest factor on such rentals and equity in losses
from less-than-50%-owned investments (accounted for under the equity method
of accounting) less the excess of earnings over distributions from
less-than-50%-owned investments (accounted for under the equity method of
accounting); (ii) fixed charges are comprised of total interest expense and
such portion of rental expense representative of the interest factor on such
rentals.
(3) Effective in 1994, telephone employees exclude those employees in BellSouth
Telecommunications' subsidiaries which are unrelated to telephone
operations; prior years have been restated.
(4) Prior period operating data are revised at later dates to reflect the most
current information. The above information reflects the latest data
available for the periods indicated.
(5) Equity Basis.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
BellSouth Corporation (BellSouth) is a holding company headquartered in
Atlanta, Georgia whose operating telephone company subsidiary, BellSouth
Telecommunications, Inc. (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 court-defined 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 both
inside and outside the nine-state BellSouth Telecommunications region. BellSouth
Enterprises, Inc. (BellSouth Enterprises), another wholly-owned subsidiary, owns
businesses providing wireless and international communications services and
advertising and publishing products.
Approximately 72%, 73% and 74% of BellSouth's Total Operating Revenues for
the years ended December 31, 1994, 1993 and 1992, respectively, and a greater
portion of net income were from wireline services provided by BellSouth
Telecommunications. Charges for local service, access services and toll for the
year ended December 31, 1994 accounted for approximately 57%, 33% and 10%,
respectively, of the wireline revenues discussed above. Revenues from wireless
communications services and directory advertising and publishing services
accounted for approximately 12% and 9%, respectively, of Total Operating
Revenues for the year ended December 31, 1994. The remainder of such revenues
was derived principally from other nonregulated services provided by BellSouth
Telecommunications.
RESULTS OF OPERATIONS
PERCENT CHANGE
--------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
---------- ---------- ---------- --------- ---------
Net Income........................ $ 2,159.8 $ 880.1 $ 1,617.7 145.4% (45.6%)
Earnings Per Share................ $ 4.35 $ 1.77 $ 3.30 145.8 (46.4)
Net Income and Earnings Per Share for 1994 increased $1,279.7 and $2.58,
respectively, compared to 1993. The increases were attributable in part to
revenue growth, driven by continued growth of access lines and the cellular
customer base; cost control measures at BellSouth Telecommunications, including
salary and wage savings attributable to the restructuring plan implemented in
1993; and gains of $67.5 ($.14 per share) and $40.1 ($.08 per share) related to
the sale of two international cellular investments. The increases were also due
to the effect of charges in 1993 which, in the aggregate, reduced Net Income and
Earnings Per Share by $938.2 and $1.88, respectively, for that year. The 1993
charges include $696.6 ($1.40 per share) for restructuring of BellSouth's
telephone operations (see Note K); $86.6 ($.17 per share) for the refinancing of
certain long-term debt issues at lower interest rates by BellSouth
Telecommunications (see Note E); $67.4 ($.14 per share) for the retroactive
adoption of Statement of Financial Accounting Standards (SFAS) No. 112,
"Employers' Accounting for Postemployment Benefits" (see Note N); $47 ($.09 per
share) for the initial impact of a regulatory settlement in Florida;
approximately $25 ($.05 per share) associated with severe 1993 winter weather
conditions; and $15.6 ($.03 per share) related to the federal income tax
legislation enacted in 1993.
Net Income and Earnings Per Share for 1993 decreased $737.6 and $1.53,
respectively, compared to the previous year. The decreases were due primarily to
the impact of the restructuring and other charges, as discussed above; an
additional charge of approximately $30 ($.06 per share) related to the
26
1993 federal income tax legislation; and the inclusion of gains in 1992's
results of $39.5 ($.08 per share) and $32.9 ($.07 per share), respectively, from
the settlements of a federal income tax matter and prior year regulatory issues.
The 1993 decreases were partially offset by overall growth of operating
revenues, reflecting improvement in key business volumes, and the effect of
charges in 1992 of $40.7 ($.08 per share) for the refinancing of certain
long-term debt issues at lower interest rates by BellSouth Telecommunications
(see Note E) and approximately $28 ($.06 per share) associated with Hurricane
Andrew.
VOLUMES OF BUSINESS
Network Access Lines in Service at December 31 (Thousands):
PERCENT CHANGE
----------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
---------- ---------- ---------- ---------- ----------
By Type:
Residence.................................... 14,195.2 13,691.4 13,298.3 3.7% 3.0%
Business..................................... 5,770.5 5,388.3 5,088.1 7.1 5.9
Other........................................ 254.3 252.9 263.2 0.6 (3.9)
---------- ---------- ----------
Total...................................... 20,220.0 19,332.6 18,649.6 4.6 3.7
---------- ---------- ----------
---------- ---------- ----------
By State:
Florida...................................... 5,349.7 5,096.6 4,901.0 5.0 4.0
Georgia...................................... 3,353.6 3,166.7 3,040.2 5.9 4.2
Tennessee.................................... 2,337.0 2,236.0 2,149.3 4.5 4.0
Louisiana.................................... 2,037.3 1,963.3 1,917.9 3.8 2.4
North Carolina............................... 1,993.8 1,896.2 1,821.5 5.1 4.1
Alabama...................................... 1,726.4 1,668.3 1,610.2 3.5 3.6
South Carolina............................... 1,243.5 1,199.8 1,168.2 3.6 2.7
Mississippi.................................. 1,118.4 1,076.6 1,040.8 3.9 3.4
Kentucky..................................... 1,060.3 1,029.1 1,000.5 3.0 2.9
---------- ---------- ----------
Total...................................... 20,220.0 19,332.6 18,649.6 4.6 3.7
---------- ---------- ----------
---------- ---------- ----------
The rate of growth in access lines continued to be particularly strong, 4.6%
in 1994, compared to a 3.7% rate of increase in 1993. The number of access lines
in service since December 31, 1993 increased by approximately 887,400. The
overall increase, led by growth in Georgia, North Carolina and Florida, was
primarily attributable to continued economic improvement, including expanding
employment in BellSouth Telecommunications' nine-state region and an increase in
the number of second residential lines. Second residential lines accounted for
approximately 40.2% and 22.8% of the overall increases in residence access lines
and total access lines, respectively, since December 31, 1993. The growth rates
in 1994 for total residence and business lines of 3.7% and 7.1%, respectively,
improved compared to growth rates of 3.0% and 5.9%, respectively, in 1993.
Access Minutes of Use (Millions):
PERCENT CHANGE
--------------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
---------- ---------- ---------- ------------ ------------
Interstate..................................... 57,778.1 53,345.0 50,546.4 8.3% 5.5%
Intrastate..................................... 16,887.8 15,260.9 13,994.2 10.7 9.1
---------- ---------- ----------
Total........................................ 74,665.9 68,605.9 64,540.6 8.8 6.3
---------- ---------- ----------
---------- ---------- ----------
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 1994, total access minutes of
use increased by 6,060.0 million (8.8%) compared to an increase of 6.3% in
27
1993. The 1994 increase in access minutes of use was partially 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 the
effects of bypass 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.
PERCENT CHANGE
--------------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
--------- --------- --------- ------------ ------------
Toll Messages (Millions)........................... 1,558.6 1,511.4 1,462.2 3.1% 3.4%
Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Also, effective in 1994, toll messages include
messages completed under optional calling plans (OCPs), which provide reduced
rates for toll calls within a LATA. Prior period toll message volumes have been
restated to reflect this change. The pricing of services provided under OCPs has
stimulated volume growth. Accordingly, the trend of declining toll message
volumes in prior periods has been reversed by the inclusion of messages
completed under these plans.
Toll messages increased by 47.2 million (3.1%) compared to a restated
increase of 3.4% in 1993. The 1994 increase, attributable in part to the growth
of messages completed under OCPs and stimulation resulting from access line
growth, was partially offset by the effect of optional extended area calling
plans which, based on a customer's election, provide for a wider toll-free
calling area.
In September 1994, South Carolina implemented an expanded local area calling
plan. While the South Carolina plan's impact on 1994 toll message volumes was
negligible, this plan and future implementation of other such plans in BellSouth
Telecommunications' service region, coupled with competition in the intraLATA
toll market, will adversely impact future toll message volumes. Local area and
optional extended area calling plans and the effects of competition result in
the transfer of calls from toll to local service and access categories,
respectively, but the corresponding revenues are not generally shifted at
commensurate rates.
Wireless Customers (Equity Basis):
PERCENT CHANGE
-------------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
----------- ----------- ----------- ------------ -----------
Domestic Cellular......................... 2,155,800 1,559,100 1,118,100 38.3% 39.4%
International Cellular.................... 361,300 192,200 77,600 88.0 147.7
Domestic Paging Customers................. 1,614,100 1,232,200 977,200 31.0 26.1
The wireless communications businesses have become a significant contributor
to BellSouth's operations, primarily due to the continued expansion of the
customer base for mobile communications services. Domestic cellular customers
increased by 596,700 (38.3%) since December 31, 1993. While the rate of increase
has declined since 1993, the overall penetration rate (number of customers as a
percentage of the total population in the service territory) increased from
4.01% at December 31, 1993 to 5.50% at December 31, 1994. Total minutes of use
have also continued to increase, although average minutes of use per cellular
customer declined slightly due to the trend of increased penetration into
lower-usage market segments.
The number of international cellular customers increased by 169,100 (88.0%)
since December 31, 1993. Growth in total minutes of use for international
cellular properties remained strong due to demand stimulated by competitive
programs, underdeveloped land-line service and the development of operations in
Australia and Denmark.
28
Domestic paging customers increased by 381,900 (31.0%) since December 31,
1993 due primarily to the acquisition of the remaining 50% ownership interest in
a paging business, effective August 1, 1994, and also to continued success of
the retail distribution program and aggressive pricing strategies in the
reseller market. Of the overall growth, approximately 210,000 customers were
attributable to the acquisition. Excluding the effect of the acquisition,
domestic paging customers increased by approximately 171,900 (14.0%) since
December 31, 1993.
OPERATING REVENUES
Total Operating Revenues increased $964.2 (6.1%) compared to an increase of
$678.7 (4.5%) during 1993. The increases resulted from growth in revenues from
BellSouth's wireline telephone businesses, coupled with a significant increase
in revenues from wireless communications businesses. Traditionally, local,
access and toll services offered by BellSouth Telecommunications have primarily
accounted for increases in operating revenues. BellSouth, however, continues to
experience a gradually increasing shift in the relative contributions of its
revenue sources toward wireless services.
The components of Total Operating Revenues were as follows:
PERCENT CHANGE
--------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
----------- ----------- ----------- --------- ---------
Local Service.................. $ 6,863.1 $ 6,577.3 $ 6,236.0 4.3% 5.5%
Interstate Access.............. 3,127.2 2,991.2 2,945.6 4.5 1.5
Intrastate Access.............. 908.3 881.9 871.8 3.0 1.2
Toll........................... 1,190.1 1,219.5 1,248.8 (2.4) (2.3)
Directory Advertising and
Publishing.................... 1,556.0 1,515.4 1,459.8 2.7 3.8
Wireless Communications........ 2,066.3 1,553.4 1,195.6 33.0 29.9
Other Services................. 1,133.5 1,141.6 1,244.0 (0.7) (8.2)
----------- ----------- -----------
Total Operating Revenues..... $ 16,844.5 $ 15,880.3 $ 15,201.6 6.1 4.5
----------- ----------- -----------
----------- ----------- -----------
LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network and secondary central
office feature services, such as custom calling features and custom dialing
packages. Local Service revenues for 1994 increased $285.8 (4.3%) compared to an
increase of $341.3 (5.5%) in 1993.
The increase in 1994 was due primarily to an increase of 887,400 access
lines since December 31, 1993. Also contributing to the increase was growth
attributable to optional extended area calling plans. The increase in 1994 was
partially offset by rate reductions, principally in Louisiana and also in
Florida and Alabama.
The 1993 increase was primarily attributable to an increase of 684,600
access lines since December 31, 1992, growth from optional extended area calling
plans and a $42.0 increase from secondary central office services. In addition,
the effects of a $27.9 refund in Florida during 1992 and changes in and the
expansion of local area calling plans, primarily a plan implemented in Louisiana
in 1992, contributed to the increase in 1993.
INTERSTATE ACCESS revenues result from the provision of access services to
interexchange carriers to provide telecommunications services between states.
Interstate Access revenues increased $136.0 (4.5%) in 1994 compared to an
increase of $45.6 (1.5%) in 1993.
The 1994 increase was attributable to growth in minutes of use, additional
end user charges due primarily to access line growth and the effect of billing
and other adjustments recorded in 1993, which reduced revenues for that period
by approximately $20. The increases were partially offset by the
29
effect of rate reductions effective in July 1994 and October 1994, additional
revenue deferrals under the Federal Communications Commission's (FCC) price cap
plan and decreased net settlements with the National Exchange Carriers
Association.
The increase for 1993 reflects increased rates effective in July 1993,
growth in minutes of use and increases in end user charges attributable to
growth in the number of access lines in service. The effect of these increases
was substantially offset by decreased net settlements with the National Exchange
Carriers Association, revenue deferrals under the FCC's price cap plan and
billing adjustments, which reduced revenues by approximately $20.
See "Operating Environment and Trends of the Business."
INTRASTATE ACCESS revenues result from the provision of access services to
interexchange carriers which provide telecommunications services between LATAs
within a state. In 1994, Intrastate Access revenues increased $26.4 (3.0%)
compared to an increase of $10.1 (1.2%) in 1993. For 1994, the increase was
attributable to growth in minutes of use and the reclassification in 1994 of
independent company settlements in certain states, which would have previously
reduced revenues, to operating expenses. The increase was partially offset by
the impact of rate reductions, primarily in Alabama and Florida. The increase in
1993, due primarily to growth in minutes of use, was substantially offset by
rate reductions in most states served by BellSouth Telecommunications.
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 $29.4 (2.4%)
in 1994 compared to a decrease of $29.3 (2.3%) in 1993.
The 1994 decrease was primarily attributable to several settlements with
independent companies, the reclassification of certain settlements to Intrastate
Access revenue, net rate reductions since December 31, 1993 and the impact of
optional extended area calling plans. The decrease was partially offset by
growth in toll message volumes, reflecting improvements related in part to OCPs.
The decrease in 1993 resulted from rate reductions since December 31, 1992
and the impacts of optional extended area calling plans and the expansion of
local area calling plans. The decrease was partially offset by revenue increases
attributable to independent company settlements and growth in toll message
volumes.
The overall decline in Toll revenues is expected to continue over the long
term.
DIRECTORY ADVERTISING AND PUBLISHING revenues include revenues derived from
publishing, printing and selling advertising in, and performing related services
concerning, alphabetical and classified telephone directories. Directory
Advertising and Publishing revenues increased $40.6 (2.7%) in 1994 compared to a
$55.6 (3.8%) increase in 1993. Both increases were primarily attributable to
increases in the volume and prices of advertising sold.
WIRELESS COMMUNICATIONS revenues include the revenues from consolidated
wireless communications businesses (primarily cellular and paging within
BellSouth Enterprises) as well as revenues from interconnections by unaffiliated
cellular carriers with BellSouth Telecommunications' network. (BellSouth's
interests in the net income or loss of the unconsolidated wireless businesses
within BellSouth Enterprises, which are accounted for under the equity method of
accounting, are recorded in Other Income.)
Wireless Communications revenues increased $512.9 (33.0%) in 1994, compared
to an increase of $357.8 (29.9%) in 1993. The increases for both years resulted
from continued growth of the customer base for wireless services in domestic and
international markets. Consistent with anticipated growth in the overall
cellular industry, BellSouth's wireless communications revenues are expected to
continue to increase. However, the rate of growth of such revenues could be
adversely affected by
30
competitive pressures on service pricing and market penetration, the effect of a
more diversified customer base with lower average usage and the development of
new technologies, such as personal communications service (PCS).
OTHER SERVICES revenues are principally comprised of revenues from customer
premises equipment (CPE) sales and maintenance services, billing and collection
services and other nonregulated services (primarily inside wire services)
offered by BellSouth Telecommunications. Other Services revenues decreased $8.1
(0.7%) in 1994 compared to a decrease of $102.4 (8.2%) in 1993.
The slight decrease in 1994 was primarily attributable to increased revenue
deferrals related to potential sharing under certain state regulatory plans and
the sale in April 1994 of BellSouth Telecommunications' out-of-region CPE sales
and service operations. The decrease was substantially offset by higher demand
for unregulated products and services, including CPE for residential customers,
voice messaging and inside wire services, and the effects of adjustments and
reclassifications related to services under certain state regulatory plans and
billing and collection services. Revenues derived from billing and collection
are expected to decline over the long term due to interexchange carriers'
assuming more direct billing for their own services.
The decrease in 1993 was attributable to the effect of reclassifying in 1992
a $27.9 Florida refund from Other Services to Local Service, the inclusion in
1992 of $52.7 for the settlement of prior year regulatory issues and the sale of
a subsidiary in late 1992. The decrease was partially offset by increased
revenues from nonregulated services due in part to higher demand. In addition,
billing and collection revenues increased due to the effect of nonrecurring
adjustments.
OPERATING EXPENSES
Primarily as a result of the effect of the 1993 restructuring charge, Total
Operating Expenses decreased $806.5 (5.9%) in 1994 compared to an increase of
$1,552.3 (12.9%) in 1993. The components of Total Operating Expenses were as
follows:
PERCENT CHANGE
---------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
----------- ----------- ----------- ---------- ---------
Depreciation and Amortization $ 3,258.7 $ 3,162.2 $ 3,100.0 3.1% 2.0%
----------- ----------- -----------
Other Operating Expenses:
Cost of Services and Products....... 6,043.2 5,865.1 5,681.3 3.0 3.2
Selling, General and
Administrative..................... 3,484.8 3,429.5 3,259.6 1.6 5.2
Restructuring Charge................ -- 1,136.4 -- (100.0) --
----------- ----------- -----------
9,528.0 10,431.0 8,940.9 (8.7) 16.7
----------- ----------- -----------
Total Operating Expenses............ $ 12,786.7 $ 13,593.2 $ 12,040.9 (5.9) 12.9
----------- ----------- -----------
----------- ----------- -----------
DEPRECIATION AND AMORTIZATION increased $96.5 (3.1%) in 1994 compared to a
$62.2 (2.0%) increase in 1993.
The increase in 1994 was due to higher levels of property, plant and
equipment since December 31, 1993 resulting from continued growth in the
customer base for wireless and wireline services, continued modernization of the
networks and a special reserve deficiency amortization of $20.4 in North
Carolina. The increase for the period was partially offset by the expiration of
reserve deficiency amortizations in Louisiana and, as discussed below, the
inclusion in 1993 of the $20 impact of the Florida regulatory settlement.
In 1993, the increase was partially attributable to higher levels of
property, plant and equipment since December 31, 1992 resulting from continued
growth in the customer base and approximately $20 of additional depreciation
expense related to extraordinary property retirements in conjunction with a
regulatory settlement in Florida. Higher intrastate depreciation rates for
Mississippi and
31
higher interstate depreciation rates for Alabama, Kentucky, Louisiana,
Mississippi and Tennessee, all retroactive to January 1, 1993, also contributed
to the increase. The 1993 increase was partially offset by the expiration of
inside wire and reserve deficiency amortizations and reduced depreciation
expense in Florida and Alabama resulting from represcription.
OTHER OPERATING EXPENSES are comprised of Cost of Services and Products,
Selling, General and Administrative and, in 1993, a Restructuring Charge. Cost
of Services and Products includes employee and employee-related expenses
associated with network repair and maintenance, material and supplies expense,
cost of tangible goods sold and other expenses associated with providing
services. Selling, General and Administrative includes expenses related to sales
activities such as salaries, commissions, benefits, travel, marketing and
advertising expenses and administrative expenses. Other Operating Expenses
decreased $903.0 (8.7%) in 1994 compared to an increase of $1,490.1 (16.7%) in
1993. Excluding the $1,136.4 restructuring charge in 1993, Other Operating
Expenses increased $233.4 (2.5%) in 1994 and $353.7 (4.0%) in 1993.
As adjusted, the 2.5% increase in 1994 was primarily attributable to
increased expenses related to sustained growth in the wireless communications
customer base, including additional marketing and operational costs associated
with higher levels of sales and expanded operations. Also contributing to the
increase were additional expenses for software license fees and materials,
related both to volume growth and network modernization in the wireline
business, the effect of reclassifying settlements with independent telephone
companies in certain states from Intrastate Access revenues to operating
expenses in 1994 and, to a lesser extent, volume growth in the directory
advertising and publishing businesses. Total employee-related costs also
increased, reflecting annual compensation increases for management and
represented employees, increased overtime attributable to volume growth and
network service activities and higher expenses for employee benefits, partially
offset by salary and wage savings from employee reductions attributable to the
restructuring plan begun in 1993 at BellSouth Telecommunications and a reduction
in pension expense (see Note H). The adjusted expense increase in 1994 was
partially offset by the sale in 1994 of the out-of-region CPE sales and service
operations and the inclusion in 1993 of approximately $55 and $40, respectively,
related to a regulatory settlement in Florida and severe 1993 weather
conditions.
As adjusted, the 4.0% increase in 1993 was due to increased expenses
associated with volume growth in the wireline, wireless communications and
directory businesses, approximately $40 of expenses related to severe weather
conditions during first quarter 1993, network service improvement activities,
higher levels of base salary and wage expenses resulting from annual increases
for management and represented employees and an increase in employee benefits
expense. The increase in employee benefits expense was driven by the higher
overall cost of medical services, an increase of $38 due to the adoption of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and an increase of $11 due to the adoption of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," partially offset by a $46
decrease in pension expense. The adjusted increase for 1993 was partially offset
by reduced expenses for overtime compensation, rents, software license fees, the
sale of a subsidiary in late 1992 and $45 of expenses (net of insurance recovery
and state regulatory deferrals) related to Hurricane Andrew reflected in 1992.
32
OTHER INCOME STATEMENT ITEMS
PERCENT CHANGE
---------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
---------- --------- --------- ---------- ---------
Interest Expense............................... $ 666.1 $ 689.0 $ 746.4 (3.3%) (7.7%)
Other Income, net.............................. 11.0 7.6 177.6 44.7 (95.7)
Provision for Income Taxes..................... 1,242.9 571.6 933.5 117.4 (38.8)
INTEREST EXPENSE includes interest on debt, certain other accrued
liabilities and capital leases, offset by an allowance for funds used during
construction, which is capitalized as a cost of installing equipment and
constructing plant. Interest expense decreased $22.9 (3.3%) in 1994 and $57.4
(7.7%) in 1993. The decrease for 1994 resulted primarily from interest savings
attributable to refinancings in 1993 of long-term debt at lower interest rates.
The decrease was partially offset by higher average levels of short-term
borrowings at higher average interest rates.
The decrease in 1993 was due primarily to declines in interest rates on
borrowings, both short and long term, including the impact of refinancings of
long-term debt at lower interest rates. Both decreases were partially offset by
higher average levels of short-term borrowings. (See Notes E and L.)
OTHER INCOME, NET includes earnings and losses from unconsolidated
subsidiaries, businesses and partnerships; gains and losses from the sale of
operations; interest and dividend income; and minority interests. Other Income,
net increased $3.4 (44.7%) in 1994 and decreased $170.0 (95.7%) in 1993.
The increase in 1994 reflects an aggregate gain of $107.6 from the sale of
two international cellular investments and a $21.7 increase in interest income.
The increase was partially offset by a $29.1 increase in income attributable to
minority interests. Equity in earnings (losses) of unconsolidated affiliates was
($109.8) in 1994 compared to $11.0 in 1993. The overall 1994 loss reflects
increased losses attributable to developing operations, principally the mobile
data communications businesses and, to a lesser extent, the cellular business in
Germany and the long distance telecommunications business in Chile. Such
increased losses were partially offset by an improvement in earnings from other
unconsolidated domestic and international wireless businesses. (See Note B.)
The 1993 decrease resulted in part from a decline of $80.8 in interest
income due to the inclusion in 1992 of $56.6 attributable to a tax settlement
with the Internal Revenue Service and lower interest rates. Minority interests
contributed $11.6 to the decrease and overall earnings from unconsolidated
affiliates also decreased by $65.7 due primarily to costs and expenses
associated with investments in certain developing operations, including the
mobile data communications businesses, the German cellular business and Optus
Communications Pty. Ltd. in Australia.
PROVISION FOR INCOME TAXES increased $671.3 (117.4%) in 1994 and decreased
$361.9 (38.8%) in 1993. BellSouth's effective tax rates were 36.5%, 35.6% and
36.0% in 1994, 1993 and 1992, respectively. A reconciliation of the statutory
Federal income tax rates to these effective tax rates is provided in Note M. A
discussion of the adoption of SFAS No. 109, "Accounting for Income Taxes," also
is included therein.
FINANCIAL CONDITION
BellSouth uses the net cash generated from its operations and external
financing to fund capital expenditures, pay dividends and invest in and operate
its existing operations and new businesses. BellSouth believes that funds
provided from operations and from its readily available sources of external
financing will be sufficient to meet the needs of its business for the
foreseeable future.
33
PERCENT CHANGE
--------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
---------- ---------- ---------- --------- ---------
Net Cash Provided by Operating Activities.......... $ 5,172.3 $ 4,686.5 $ 4,913.4 10.4% (4.6%)
OPERATING ACTIVITIES. Net cash provided by operating activities increased
$485.8 (10.4%) in 1994 and decreased $226.9 (4.6%) in 1993. The increase in
1994, attributable in part to a higher level of net income, was partially offset
by cash expenditures, exclusive of capital, of $390.2 related to the
restructuring plan begun in 1993.
The decrease in 1993 was due in part to a timing difference in the
collection of accounts receivable, the inclusion in 1992 of $90.9 related to a
tax settlement with the Internal Revenue Service and a slight decline in net
income, as adjusted to exclude the impact of the non-cash restructuring charge.
PERCENT CHANGE
--------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
----------- ----------- ----------- --------- ---------
Net Cash Used for Investing Activities $ (3,935.6) $ (3,434.9) $ (3,591.8) 14.6% (4.4%)
INVESTING ACTIVITIES. BellSouth's primary use of capital resources
continues to be for capital expenditures to support development of the wireline
and wireless networks. Net cash used for investing activities increased $500.7
(14.6%) in 1994 and decreased $156.9 (4.4%) in 1993. The increase in 1994 was
attributable to increases in cash investments and advances to unconsolidated
affiliates and capital expenditures. Cash used for investments and advances to
unconsolidated affiliates increased by $390.5 (122.2%) to $710.0. Of such total,
approximately 42% was for investments and advances to the mobile data
communications businesses and the German and Venezuelan cellular businesses and
26% was loaned to Prime South Diversified, Inc. which indirectly wholly owns
Community Cable TV, a Las Vegas cable operation managed by Prime Cable. The
remainder was invested in other businesses in which BellSouth has an interest.
Capital expenditures for all consolidated BellSouth companies increased by
$114.4 (3.3%) to $3,600.3 including approximately $203.6 related to
restructuring activities. Substantially all cash required for capital
expenditures in 1994 was provided internally. In 1995, such capital expenditures
are expected to be financed primarily through internally generated funds and, to
the extent necessary, from external sources. Capital expenditures are projected
to be approximately $4,200 in 1995.
The decrease in 1993 reflected declines in investments and advances to
unconsolidated affiliates and other investing activities, partially offset by an
increase of $296.6 (9.3%) in capital expenditures to support network development
activities.
PERCENT CHANGE
--------------------
1994 VS. 1993 VS.
1994 1993 1992 1993 1992
----------- ----------- ----------- --------- ---------
Net Cash Used for Financing Activities $ (1,131.7) $ (1,015.6) $ (1,383.4) 11.4% (26.6%)
FINANCING ACTIVITIES. Net cash used for financing activities increased
$116.1 (11.4%) in 1994 and decreased $367.8 (26.6%) in 1993. The increase in
1994 was attributable to increases of $61.5 in cash dividends paid to
shareholders and $3,447.1 for debt repayments, primarily short-term borrowings.
The effect of these increases was substantially offset by an increase of
$3,426.0 in proceeds from all borrowings.
The decrease in 1993 was attributable to an increase of $5,037.2 in proceeds
from all borrowings, partially offset by an increase in debt repayments of
$4,416.1 and an increase of $224.9 in cash dividends paid to shareholders. Such
higher levels of proceeds and repayments of borrowings in 1993 reflect the
refinancing of $2,760 of long-term debt at lower interest rates by BellSouth
Telecommunications. The increase in cash dividends in 1993 was due to the use of
higher levels of common shares, newly issued by BellSouth, during 1992 as
payment in lieu of cash dividends under the Shareholder Dividend Reinvestment
and Stock Purchase Plan.
BellSouth's debt to total capitalization ratio decreased from 40.2% at
December 31, 1993 to 39.3% at December 31, 1994.
34
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 and other issues. Other than in North Carolina
and South Carolina, where it is subject to traditional rate of return
regulation, BellSouth Telecommunications is operating under some form of
incentive regulation plan at the state and federal levels whereby earnings above
certain levels within a given range must be shared with customers in the form of
credits, refunds or prospective rate reductions. These plans provide incentives
to reduce costs and retain a portion of earnings above the sharing point, and in
some cases, all earnings above the top of the range must be returned to
customers. Since BellSouth Telecommunications' earnings fell close to or within
the sharing range in its incentive plans during 1994, its ability to increase
its earnings over the long run under these plans, even through productivity
enhancements, is constrained. At December 31, 1994, BellSouth
Telecommunications' estimated sharing obligation related to interstate access
services was $141.6. Furthermore, its ability to change rates to more
effectively respond to competition is limited under the current regulatory
plans, which require, in general, that rates be charged as provided in tariff
filings.
Accordingly, BellSouth's primary regulatory focus is 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 the current regulatory processes, BellSouth believes that price
regulation, whereby prices of basic local exchange services are directly
regulated, irrespective of rate of return tests, and prices for other products
and services are based on market factors, is a logical progression to
competitive fairness and provides advantages for consumers. While no such local
regulatory plan has been implemented in the nine-state service area, the
Tennessee Public Service Commission, subject to certain governmental
authorizations and the enactment of enabling legislation, adopted rules to allow
local exchange competition, including a provision whereby BellSouth
Telecommunications could elect to operate under a price regulation plan. In
addition, proposed plans filed by BellSouth Telecommunications in Kentucky,
Georgia, Mississippi and Alabama are currently under review by the respective
commissions in those states. The Florida, Georgia, North Carolina and Tennessee
legislatures are considering bills that would provide for or allow price
regulation and/or local exchange competition. A proposed plan filed with the
Louisiana Public Service Commission was rejected in November 1994. The FCC is
reviewing its regulatory plan; any changes to the plan are not expected to be
effective until mid-1995. BellSouth Telecommunications will continue to pursue
implementation of price regulation plans in Louisiana, other states and at the
federal level through filings with regulatory commissions and through
legislative initiatives.
ECONOMY. The nation's gross domestic product grew 4% in 1994, which was the
strongest annual growth of the current economic expansion. Employment in nonfarm
businesses grew 2.6% during the year as the unemployment rate dropped to 5.6% by
the fourth quarter. Growth in the nine-state region served by BellSouth
Telecommunications was even stronger. The number of jobs in nonfarm businesses
grew at a 3.0% annual rate, unemployment also dropped to 5.6% by the fourth
quarter and real income expanded by an estimated 4.4%. Net in-migration added
450,000 to the region's population during 1994, with every state except
Louisiana recording a gain. Four states, Florida, Georgia, North Carolina and
Tennessee, were among the top ten nationally in 1994 numerical population gains.
The demand for telecommunications services reflected the strength of the
economic and population growth in the region. Higher interest rates in 1995 may
dampen residential construction and durable goods manufacturing, but projected
net in-migration near 400,000 would help to keep the regional demand for
telecommunications services rising. However, the increasing competition faced by
BellSouth Telecommunications and the growing percentage of revenues from
BellSouth Enterprises make BellSouth's financial performance more susceptible to
changes in the economy than previously, as its operations reflect the more
competitive business environment and the greater elasticities for its products
and services.
35
COMPETITION. Developments in the telecommunications marketplace continue to
indicate that a technological convergence is occurring in the telephone, cable
and broadcast television, computer, entertainment and information services
industries. The technologies utilized and being developed in
these industries are able to provide multiple and integrated communications
offerings. A number of large companies, including AT&T Corp. and the other major
interexchange carriers, other Bell Holding Companies and cable and other video
and entertainment companies, have completed acquisitions and entered into
business alliances that will ultimately intensify and expand competition for
local and toll communications and other services currently provided over
BellSouth's networks. Other competitors have announced plans to build, and in
certain locations have begun construction of, local phone connections and
private networks that would permit business and residential customers to bypass
the facilities of local telephone companies, including those of BellSouth
Telecommunications in certain cities in its service territory. Legislative,
regulatory and judicial developments will further facilitate competition in
local, long distance and video markets.
Notwithstanding the risks associated with increased competition, BellSouth
will have opportunities in new business markets. 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,
which may include information services, interactive communications and cable
television and other entertainment services. As a part of this strategy,
BellSouth has been granted permission by the FCC to conduct a trial of video
dial tone services; acquired in auction one of the nationwide narrowband PCS
licenses; participated in the ongoing FCC auction for broadband PCS licenses in
the Carolinas and eastern Tennessee; and formed business alliances and
partnerships, both domestically and internationally, related to the provision of
interactive and traditional video programming services as well as wireless and
wireline communications services. As another part of its competitive strategy,
BellSouth has undertaken a plan to streamline its telephone operations and to
improve its overall cost structure (see "Other Matters -- Restructuring of
Telephone Operations"). Coincident with the existing restructuring plan,
BellSouth Telecommunications is continuing to seek additional ways to better
enhance customer service and productivity and to further improve its cost
structure. As a result of these ongoing efforts, additional changes to
fundamental business processes and work activities, as well as further employee
reductions, are expected.
BellSouth may consider acquisitions of, investments in and strategic
alliances with established companies that provide information services,
interactive communications and cable television and other entertainment services
and the development of such services and capabilities internally. Such
transactions, if accomplished, could initially reduce earnings and require
substantial capital. Financing for such business opportunities will be provided
from funds generated through internal operations and from external sources.
ACCOUNTING UNDER SFAS NO. 71. BellSouth's regulated enterprise, BellSouth
Telecommunications, continues to account for the economic effects of regulation
under SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
Where appropriate, the provisions of SFAS No. 71 give recognition to the effect
of actions of regulators, which can provide reasonable assurance of the
existence of an asset, reduce or eliminate the value of an asset or impose or
eliminate a liability of a regulated entity. As a result of such actions by
regulators, BellSouth's balance sheet at December 31, 1994 reflects net deferred
charges (regulatory assets) of $186.5 related primarily to compensated absences
and unamortized issuance costs for debt that has been refinanced, and net
deferred credits (regulatory liabilities) of $304.0 related to income tax
issues. Virtually all of the current regulatory assets and liabilities arose in
connection with the incorporation of new accounting standards into the
ratemaking process, and are transitory in nature. The magnitude of the
regulatory assets and liabilities is decreasing over time due to the ongoing
amortization prescribed as a part of the adoption in 1988 of the FCC's current
Uniform System of Accounts. Additional regulatory assets and liabilities may
arise in the future as long as BellSouth Telecommunications remains subject to
the provisions of SFAS No. 71.
36
Various forms of earnings-based regulation remain in effect at the federal
level and in all nine states served by BellSouth Telecommunications. However,
recent legislative and regulatory initiatives suggest that fully competitive
markets for telecommunications services will eventually be established. During
1994, the United States Congress considered legislation designed specifically to
open all telecommunications services to full competition. Although no such
legislation was enacted into law, Congress is again considering legislation of
this type, and similar initiatives are also emerging at the state level.
Furthermore, in the regulatory arena, BellSouth Telecommunications continues to
pursue modification of the existing regulatory framework. Price regulation
plans, whereby prices of basic local exchange service are directly regulated and
prices for other telecommunications products and services are based on market
factors, have been proposed for implementation and are under review in several
states in the service area and by the FCC.
BellSouth Telecommunications would be required to discontinue accounting
under SFAS No. 71 if the existing and anticipated levels of competition no
longer allow for service and product pricing that provides for the recovery of
costs. Additionally, SFAS No. 71 would no longer apply if BellSouth
Telecommunications is successful in altering the existing regulatory framework
and achieving price regulation since such plans do not provide for the recovery
of specific costs. While accounting under SFAS No. 71 is currently appropriate,
it is increasingly likely that BellSouth Telecommunications will discontinue
accounting under SFAS No. 71 due to the effect of one or both of these
conditions. In that event, the impact on BellSouth's financial position and
results of operations would be material. Under such circumstances, BellSouth
Telecommunications would be required to reduce the recorded value for telephone
plant and equipment in recognition of amounts that would not be recoverable or
that would be overstated due to longer regulator-prescribed asset lives.
BellSouth Telecommunications' overall depreciation reserve at December 31, 1994
was approximately 44% of its total depreciable plant. Broad industry analysis of
other telecommunications companies who have recently discontinued accounting
under SFAS No. 71 indicates that unregulated telecommunications enterprises
similar to BellSouth Telecommunications have an overall depreciation reserve
ratio that approximates 52% to 57% of total depreciable plant. If BellSouth
Telecommunications were required to discontinue SFAS No. 71 and to revalue its
telephone plant using similar assumptions and methodology, the net recorded book
value of its telephone plant would be reduced by about $4,000 to $6,000. In
addition, BellSouth Telecommunications would be required to eliminate its
regulatory assets and liabilities, adjust the level of its unamortized
investment tax credits and fully adopt issue basis accounting for its directory
publishing fees. Specific financial impacts of discontinuing SFAS No. 71 would
depend on the timing and magnitude of changes, both in the marketplace and in
the overall regulatory framework.
OTHER MATTERS
RESTRUCTURING OF TELEPHONE OPERATIONS. As previously reported, during 1993
BellSouth Telecommunications recognized a $1,136.4 restructuring charge in
connection with a plan to redesign, consolidate and streamline the fundamental
processes and work activities in its telephone operations. The restructuring is
being undertaken in response to an increasingly competitive business
environment. Upon completion, restructuring of the telephone operations is
expected to improve overall responsiveness to customer needs and reduce costs.
As a part of the restructuring, BellSouth Telecommunications is
consolidating and centralizing its existing operations. BellSouth
Telecommunications is establishing a single point of contact and accountability
for the receipt, analysis and resolution of customer installation, repair
activities and service activation. The efforts involve redesign of key work
processes and designing new processes that facilitate the consolidation of
service functions and the reduction of 10,200 employees.
37
The projected costs by year for each component of the charge were as
follows:
1993 1994 1995 1996 TOTAL
--------- --------- --------- --------- ----------
Consolidation and Elimination of Operations........ $ 14.7 $ 185.2 $ 87.0 $ 55.9 $ 342.8
Systems............................................ -- 185.5 155.5 84.4 425.4
Employee Separation................................ 38.3 142.7 105.2 82.0 368.2
--------- --------- --------- --------- ----------
Total............................................ $ 53.0 $ 513.4 $ 347.7 $ 222.3 $ 1,136.4
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Through December 31, 1994, BellSouth Telecommunications was substantially on
plan with respect to projected expenditures and employee reductions. See
"PROGRESS UNDER THE PLAN."
CONSOLIDATION AND ELIMINATION OF OPERATIONS. Approximately $342.8 of the
charge consisted of costs associated with consolidating and eliminating
operations as a result of re-engineering the way service is delivered to
customers. During the restructuring period, 288 existing operations centers are
being consolidated into 73 locations. Data management centers used to support
company operations are being reduced from 11 to 6. Comptrollers offices are
being reduced from 48 to 11. Collection process improvements are being made to
reduce operating costs and uncollectibles. Redundancies are being eliminated and
the number of steps decreased in the product planning and provisioning process.
In addition, customer service processes and systems are being designed to
provide one-number access, specific appointment times, on-line and real-time
access to customer records and immediate service activation where facilities are
already in place.
SYSTEMS. Approximately $425.4 of the charge was for systems development.
The information management systems in use prior to the restructuring effort were
inadequate to deal with increased competition and changing technology.
Accordingly, as an integral part of the restructuring plan, a major redesign of
information systems throughout BellSouth Telecommunications is being undertaken
to attain a systems framework that both facilitates the targeted employee
reductions and correlates to the increasingly competitive business environment.
This effort entails significant changes to the overall computing platform,
architecture and corporate systems structure.
EMPLOYEE SEPARATION. Approximately $368.2 of the charge was for separation
costs for employees leaving BellSouth Telecommunications through 1996 and for
relocation of certain employees. BellSouth Telecommunications' targeted employee
reduction of 10,200 employees by the end of the restructuring period will result
in future cost savings and, as a result, is expected to improve BellSouth
Telecommunications' competitive position.
The projected work force reductions by year under the plan were as follows:
1993 1994 1995 1996 TOTAL
--------- --------- --------- --------- ---------
Management............................................... 280 1,000 1,600 1,500 4,380
Represented.............................................. 1,020 2,700 1,300 800 5,820
--------- --------- --------- --------- ---------
Total.................................................. 1,300 3,700 2,900 2,300 10,200
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Employee separation costs include severance payments, health care coverage,
education benefits, and costs of relocating employees to new job locations, as
well as net curtailment expenses. The severance payments, health care coverage
and education benefits costs for management employees are paid under the
provisions of current BellSouth management separation plans. The severance
payments, health care coverage and education benefit costs for craft employees
are paid under the provisions of collective bargaining agreements. Relocation
costs are the costs to move personnel to different locations as a result of work
center consolidations. These charges are paid under BellSouth
Telecommunications' relocation guidelines and the terms of collective bargaining
agreements. Net curtailment expenses are charged in accordance with the
provisions of accounting pronouncements SFAS Nos. 88 and 106.
38
PROGRESS UNDER THE PLAN. Since inception of the restructuring plan in
fourth quarter 1993, cumulative employee reductions were 5,200 (1,300 in 1993
and 3,900 in 1994) and total amounts charged against the restructuring liability
were $521.7.
A summary of the costs incurred through December 31, 1994 under the plan is
as follows:
1993 1994 TOTAL
--------- --------- ---------
Consolidation and Elimination of Operations............................... $ 14.7 $ 164.6 $ 179.3
Systems................................................................... -- 170.3 170.3
Employee Separation....................................................... 38.3 133.8 172.1
--------- --------- ---------
Total................................................................... $ 53.0 $ 468.7 $ 521.7
--------- --------- ---------
--------- --------- ---------
For the year ended December 31, 1994, cash expenditures related to the
ongoing implementation of the restructuring plan were approximately $390.2.
Non-cash expenses were primarily comprised of pension curtailments and charges
related to elimination of certain business operations of subsidiaries. Capital
expenditures for 1994 related to restructuring were approximately $203.6; such
expenditures are not reflected in the above tables.
The remaining restructuring liability at December 31, 1994 was approximately
$614.7, all of which was classified as current. During 1995, BellSouth
Telecommunications plans to accelerate restructuring activities such that
employee reductions and expenditures as originally projected under the plan will
be substantially completed by the end of 1995. Accordingly, employee reductions
in 1995 under the plan are projected to be approximately 5,000 and capital
expenditures, which are not reflected in the above tables, are projected to be
about $300.
The cumulative reduction in employees as of December 31, 1994 resulted in an
estimated $100 reduction in 1994 operating expenses and is currently projected
to result in about a $300 to $400 reduction in 1995 operating expenses. Once the
restructuring plan is completed, annual cost savings are expected to be
approximately $600 due primarily to reduced employee-related expenses.
39
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Shareholders of BellSouth Corporation:
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 the 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. 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's 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 controls and has taken actions that it believes are
cost-effective in the circumstances to respond appropriately to these
recommendations. Management believes that as of December 31, 1994, 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's 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's real and intellectual
properties, providing equal employment opportunities and ethical relations with
customers, suppliers and governmental representatives. BellSouth maintains a
program to assess compliance with these policies and our ethical standards
through its Vice President -- Corporate Responsibility and Compliance,
designated as the ombudsman/ethics officer reporting directly to the Chairman of
the Board.
/s/ John L. Clendenin /s/ Ronald M. Dykes
CHAIRMAN OF THE BOARD VICE PRESIDENT, CHIEF FINANCIAL
AND CHIEF EXECUTIVE OFFICER OFFICER AND COMPTROLLER
February 3, 1995
40
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee of the Board of Directors consists of four members who
are neither officers nor employees of BellSouth Corporation. Information as to
these persons, as well as their duties, is provided in the Proxy Statement. The
Audit Committee met six times during 1994 and reviewed with the Chief Corporate
Auditor, Coopers & Lybrand L.L.P. and management current audit activities, plans
and the results of selected internal audits. The Audit Committee also reviewed
the objectivity of the financial reporting process and the adequacy of internal
controls. The Audit Committee recommended, subject to shareholder ratification,
the appointment of the independent accountants and considered factors relating
to their independence. In addition, the Audit Committee provided guidance in
matters regarding ethical considerations and business conduct, reviewed the
operations of political action committees and monitored compliance with laws
affecting external involvement. The Chief Corporate Auditor and Coopers &
Lybrand L.L.P. each met privately with the Audit Committee on occasion to
encourage confidential discussions as to any auditing matters.
/s/ Marshall M. Criser
CHAIRMAN, AUDIT COMMITTEE
February 3, 1995
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
BellSouth Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of BellSouth
Corporation as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are the
responsibility of BellSouth'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
Corporation as of December 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes H, M and N to the consolidated financial statements,
BellSouth changed its method of accounting for postretirement benefits other
than pensions, income taxes and postemployment benefits in 1993.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 3, 1995
42
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
Operating Revenues:
Network and related services
Local service....................................................... $ 6,863.1 $ 6,577.3 $ 6,236.0
Interstate access................................................... 3,127.2 2,991.2 2,945.6
Intrastate access................................................... 908.3 881.9 871.8
Toll................................................................ 1,190.1 1,219.5 1,248.8
Directory advertising and publishing.................................. 1,556.0 1,515.4 1,459.8
Wireless communications............................................... 2,066.3 1,553.4 1,195.6
Other services........................................................ 1,133.5 1,141.6 1,244.0
--------- --------- ---------
Total Operating Revenues.......................................... 16,844.5 15,880.3 15,201.6
--------- --------- ---------
Operating Expenses:
Cost of services and products......................................... 6,043.2 5,865.1 5,681.3
Depreciation and amortization......................................... 3,258.7 3,162.2 3,100.0
Selling, general and administrative................................... 3,484.8 3,429.5 3,259.6
Restructuring charge (Note K)......................................... -- 1,136.4 --
--------- --------- ---------
Total Operating Expenses.......................................... 12,786.7 13,593.2 12,040.9
--------- --------- ---------
Operating Income........................................................ 4,057.8 2,287.1 3,160.7
Interest Expense (Note L)............................................... 666.1 689.0 746.4
Other Income, net (Note L).............................................. 11.0 7.6 177.6
--------- --------- ---------
Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of
Change in Accounting Principle......................................... 3,402.7 1,605.7 2,591.9
Provision for Income Taxes (Note M)..................................... 1,242.9 571.6 933.5
--------- --------- ---------
Income Before Extraordinary Loss and Cumulative Effect of Change in
Accounting Principle................................................... 2,159.8 1,034.1 1,658.4
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E).................................................... -- (86.6) (40.7)
Cumulative Effect of Change in Accounting Principle, net of tax (Note
N)..................................................................... -- (67.4) --
--------- --------- ---------
Net Income........................................................ $ 2,159.8 $ 880.1 $ 1,617.7
--------- --------- ---------
--------- --------- ---------
Weighted Average Common Shares Outstanding.............................. 496.6 496.1 490.8
Dividends Declared Per Common Share..................................... $ 2.76 $ 2.76 $ 2.76
Earnings Per Share:
Income Before Extraordinary Loss and Cumulative Effect of Change in
Accounting Principle................................................. $ 4.35 $ 2.08 $ 3.38
Extraordinary Loss on Early Extinguishment of Debt,
net of tax........................................................... -- (.17) (.08)
Cumulative Effect of Change in Accounting Principle, net of tax....... -- (.14) --
--------- --------- ---------
Net Income........................................................ $ 4.35 $ 1.77 $ 3.30
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
43
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31,
------------------------
1994 1993
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents.................................................................. $ 606.5 $ 501.5
Temporary cash investments................................................................. 50.8 49.0
Accounts receivable, net of allowance for uncollectibles of $154.1 and $149.6.............. 3,126.6 2,985.2
Material and supplies...................................................................... 490.0 418.7
Other current assets....................................................................... 453.9 364.6
----------- -----------
4,727.8 4,319.0
----------- -----------
Investments and Advances (Note B)............................................................ 2,531.5 2,039.4
Property, Plant and Equipment, net (Note C).................................................. 25,162.4 24,667.8
Deferred Charges and Other Assets............................................................ 535.4 512.2
Intangible Assets, net....................................................................... 1,439.9 1,334.9
----------- -----------
Total Assets............................................................................. $ 34,397.0 $ 32,873.3
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year (Note E)..................................................... $ 2,018.7 $ 1,838.6
Accounts payable........................................................................... 1,378.3 979.0
Other current liabilities (Note D)......................................................... 3,101.1 2,943.8
----------- -----------
6,498.1 5,761.4
----------- -----------
Long-Term Debt (Note E)...................................................................... 7,435.1 7,380.7
----------- -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes.......................................................... 3,646.9 3,465.3
Unamortized investment tax credits......................................................... 443.3 515.9
Other liabilities and deferred credits (Note F)............................................ 2,006.3 2,255.8
----------- -----------
6,096.5 6,237.0
----------- -----------
Shareholders' Equity:
Common stock, $1 par value (1,100,000,000 shares authorized; 496,242,732 and 496,086,984
shares outstanding at December 31, 1994 and 1993, respectively)........................... 502.5 501.6
Paid-in capital............................................................................ 8,064.2 8,009.4
Retained earnings.......................................................................... 6,721.1 5,919.3
Shares held in trust (Note G).............................................................. (336.2) (292.6)
Guarantee of ESOP debt (Notes G and H)..................................................... (584.3) (643.5)
----------- -----------
14,367.3 13,494.2
----------- -----------
Total Liabilities and Shareholders' Equity............................................. $ 34,397.0 $ 32,873.3
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
44
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
AMOUNT
NUMBER OF ---------------------------------------------------------
SHARES SHARES
--------------- HELD GUARANTEE
COMMON TREASURY PAR PAID-IN RETAINED TREASURY IN OF ESOP
STOCK STOCK VALUE CAPITAL EARNINGS STOCK TRUST DEBT
------ ------- ------ -------- -------- ------- ------- --------
Balance at December 31, 1991....... 486.7 1.6 $488.3 $7,326.0 $6,112.8 $ (65.1) $ -- $ (757.1)
Net income......................... 1,617.7
Dividends declared................. (1,356.3)
Shares issued under Shareholder
Dividend Reinvestment and Stock
Purchase Plan..................... 6.3 (1.2) 5.1 262.3 50.2
Shares issued and activity
associated with various employee
benefit plans and other
activities........................ .8 (.4) .4 21.3 6.4 14.9
Reduction of ESOP debt and other
related activities................ 14.8 56.9
------ ------- ------ -------- -------- ------- ------- --------
Balance at December 31, 1992....... 493.8 -- 493.8 7,609.6 6,395.4 -- -- (700.2)
Net income......................... 880.1
Dividends declared................. (1,368.8)
Shares issued under Shareholder
Dividend Reinvestment and Stock
Purchase Plan..................... 1.6 1.6 81.0
Shares issued and activity
associated with various employee
benefit plans and other
activities........................ .7 .7 31.7
Shares issued to grantor trusts.... 5.5 5.5 287.1 (292.6)
Reduction of ESOP debt and other
related activities................ 12.6 56.7
------ ------- ------ -------- -------- ------- ------- --------
Balance at December 31, 1993....... 501.6 -- 501.6 8,009.4 5,919.3 -- (292.6) (643.5)
Net income......................... 2,159.8
Dividends declared................. (1,369.5)
Shares issued and activity
associated with various employee
benefit plans and other
activities........................ .1 .1 6.5
Shares issued to grantor trusts.... .8 .8 42.8 (43.6)
Reduction of ESOP debt and other
related activities................ 11.5 59.2
Foreign currency translation
adjustment........................ 5.5
------ ------- ------ -------- -------- ------- ------- --------
Balance at December 31, 1994....... 502.5 -- $502.5 $8,064.2 $6,721.1 $ -- $(336.2) $ (584.3)
------ ------- ------ -------- -------- ------- ------- --------
------ ------- ------ -------- -------- ------- ------- --------
The accompanying notes are an integral part of these financial statements.
45
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 2,159.8 $ 880.1 $ 1,617.7
Adjustments to net income:
Depreciation................................................... 3,206.1 3,103.8 3,032.2
Amortization of intangibles.................................... 52.6 58.4 67.8
Provision for losses on bad debts.............................. 175.4 197.8 195.5
Deferred income taxes and unamortized investment tax credits... (19.1) (633.2) (138.7)
Pension expense in excess of funding........................... 28.0 120.7 165.7
Noncash compensation expense related to ESOP benefits.......... 18.5 23.2 27.1
Losses (earnings) of unconsolidated affiliates................. 109.8 (11.0) (76.7)
Dividends received from unconsolidated affiliates.............. 121.5 199.9 124.6
(Gains) losses on sale of operations........................... (107.6) 10.0 --
Allowance for funds used during construction................... (19.7) (23.7) (15.3)
Restructuring charge........................................... -- 1,136.4 --
Payment of call premium........................................ -- (99.7) (33.4)
Extraordinary loss on early extinguishment of debt............. -- 145.4 70.7
Change in accounting principle, net of tax..................... -- 67.4 --
Summary tax assessment settlement.............................. -- -- 90.9
Change in accounts receivable.................................. (509.6) (501.7) (302.4)
Change in material and supplies................................ (204.3) (98.0) (156.1)
Change in accounts payable and other current liabilities....... (187.1) (13.6) 148.7
Change in deferred charges and other assets.................... (60.6) 101.5 139.3
Change in other liabilities and deferred credits............... 437.4 46.3 29.5
Other reconciling items, net................................... (28.8) (23.5) (73.7)
----------- ----------- -----------
Net cash provided by operating activities.................... 5,172.3 4,686.5 4,913.4
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................. (3,600.3) (3,485.9) (3,189.3)
Proceeds from disposals of property, plant and equipment......... 137.5 156.0 139.5
Proceeds from disposition of short-term investments.............. 106.5 147.9 188.5
Purchase of short-term investments............................... (108.2) (116.3) (167.5)
Investment acquisitions.......................................... -- -- (53.8)
Investment dispositions.......................................... 197.5 105.2 --
Investments in and advances to unconsolidated affiliates......... (710.0) (319.5) (562.5)
Proceeds from repayment of loans and advances.................... 41.4 77.2 178.5
Other investing activities, net.................................. -- .5 (125.2)
----------- ----------- -----------
Net cash used for investing activities....................... (3,935.6) (3,434.9) (3,591.8)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings.............................. 22,488.6 16,289.9 13,541.0
Repayments of short-term borrowings.............................. (22,306.2) (15,856.4) (13,770.3)
Proceeds from long-term debt..................................... 190.6 2,963.3 675.0
Repayments of long-term debt..................................... (128.6) (3,131.3) (801.3)
Payment of capital lease obligations............................. (14.7) (12.2) (15.5)
Proceeds from issuing common and treasury shares................. 7.5 38.5 70.2
Dividends paid................................................... (1,368.9) (1,307.4) (1,082.5)
----------- ----------- -----------
Net cash used for financing activities....................... (1,131.7) (1,015.6) (1,383.4)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents............. 105.0 236.0 (61.8)
Cash and Cash Equivalents at Beginning of Period................. 501.5 265.5 327.3
----------- ----------- -----------
Cash and Cash Equivalents at End of Period....................... $ 606.5 $ 501.5 $ 265.5
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
46
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
NOTE A -- ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of BellSouth Corporation (BellSouth) and subsidiaries in which it has a
controlling financial interest. BellSouth operates predominantly in the
telecommunications service industry. BellSouth Telecommunications, Inc.
(BellSouth Telecommunications), BellSouth's largest subsidiary, provides
primarily regulated telephone services. Investments in certain partnerships,
joint ventures and subsidiaries are accounted for using the equity method. All
significant intercompany transactions and accounts have been eliminated, except
as otherwise required under generally accepted accounting principles applicable
to regulated entities. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current year's
presentation.
BASIS OF ACCOUNTING. BellSouth's consolidated financial statements have
been prepared in accordance with generally accepted accounting principles,
including the provisions of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation." Where
appropriate, SFAS No. 71 gives accounting recognition to the actions of
regulators. Such actions can provide reasonable assurance of the existence of an
asset, reduce or eliminate the value of an asset or impose or eliminate a
liability of a regulated entity.
As a result of such actions by regulators, the consolidated balance sheets
at December 31, 1994 and 1993 reflect net deferred charges (regulatory assets)
of $186.5 and $235.9, respectively, related primarily to compensated absences
and unamortized issuance costs for debt that has been refinanced. Net deferred
credits (regulatory liabilities) included in the consolidated balance sheets
were $304.0 and $378.9, respectively, related to income tax issues.
Telephone plant and equipment has been depreciated using
regulator-prescribed asset lives. Other telecommunications companies have
recently discontinued accounting under SFAS No. 71 and have revalued their
telephone plant. If BellSouth Telecommunications were to revalue its telephone
plant using similar assumptions and methodology, the net recorded book value of
its telephone plant would be reduced by approximately $4,000 to $6,000.
CASH AND CASH EQUIVALENTS. BellSouth considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Investments with an original maturity of over three months to one
year are not considered cash equivalents and are included as temporary cash
investments on the consolidated balance sheets.
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.
INVESTMENTS AND ADVANCES. Investments and advances consist primarily of
investments in, and advances to, unconsolidated affiliated companies accounted
for under the equity method.
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. Depreciation expense also includes amortization of certain classes of
telephone plant and identified depreciation reserve deficiencies over periods
allowed by regulatory authorities. When depreciable telephone plant is disposed
of, the original cost, less net salvage value, is charged to accumulated
depreciation. The cost of other property, plant and equipment 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 property,
plant and equipment are recognized in the year of disposition as an element of
other non-operating income.
INTANGIBLE ASSETS. Intangible assets consist of the excess consideration
paid over net assets acquired in business combinations, acquired licenses and
customer lists. Intangible assets are being amortized using the straight-line
and accelerated methods over periods of benefit. Such periods do not exceed 40
years. The carrying value of intangible assets is periodically reviewed on the
basis of whether such intangibles are fully
47
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
recoverable from projected, discounted net cash flows of the related business
unit. Amortization of such intangibles was $52.6, $58.4 and $67.8 for the years
ended December 31, 1994, 1993 and 1992, respectively. At December 31, 1994 and
1993, accumulated amortization of intangibles was $212.1 and $169.2,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS. BellSouth manages risk arising from
fluctuations in interest rates and currency exchange rates by using derivative
financial instruments, such as foreign exchange forward contracts, currency
swaps and interest rate swaps.
Foreign exchange forward contracts are carried at fair value in the
consolidated balance sheets. Gains and losses on foreign exchange forward
contracts used as currency hedges of existing assets or liabilities are deferred
and offset the deferred losses and gains of the underlying asset or liability.
The net effect is ultimately recognized in income as the underlying transaction
matures. Gains and losses related to qualifying hedges of firm commitments also
are deferred and are recognized in income or as adjustments of carrying amounts
when the hedged transaction occurs.
Currency swap contracts entered into as hedges of existing assets and
liabilities are carried at fair value in the consolidated balance sheets. Gains
and losses on currency swaps are deferred and offset against the deferred
currency losses and gains of the underlying asset or liability. The net effect
is ultimately recognized in income as the underlying transaction matures.
Interest rate swap agreements are treated as off-balance sheet financial
instruments. Receipts or payments resulting from these instruments are
recognized as adjustments to interest expense as received or paid.
REVENUE RECOGNITION. Revenues are recognized when earned. Certain revenues
derived from local telephone and wireless access services are billed monthly in
advance and are recognized the following month when services are provided.
Directory advertising and publishing revenues and related directory costs are
recognized upon publication of directories, except where regulatory authorities
recognize different treatment. Revenues derived from other telecommunications
services, principally network access, toll and cellular airtime usage, are
recognized monthly as services are provided.
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.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Regulatory authorities allow
BellSouth Telecommunications to recognize the cost of capital (debt and equity
components) associated with the construction of certain plant as income. Such
income is not realized in cash currently but will be realized over the service
life of the related plant as the resulting higher depreciation expense and plant
investment are recovered in the form of increased revenues.
INCOME TAXES. Effective January 1, 1993, BellSouth adopted SFAS No. 109,
"Accounting for Income Taxes." In accordance with the standard, 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. Prior to 1993, BellSouth accounted for income taxes under the
provisions of Accounting Principles Board Opinion No. 11.
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.
EARNINGS PER SHARE. Earnings per common share are computed on the basis of
the weighted average number of shares of common stock and common stock
equivalents outstanding during each year.
48
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE B -- INVESTMENTS AND ADVANCES
Investments and Advances as of December 31 consist of the following:
1994 1993
---------- ----------
Investments accounted for under the equity method.......................... $ 1,715.9 $ 1,806.7
Advances to and notes receivable from affiliates........................... 729.1 146.0
Other investments.......................................................... 86.5 86.7
---------- ----------
Total Investments and Advances......................................... $ 2,531.5 $ 2,039.4
---------- ----------
---------- ----------
BellSouth's equity method investments primarily include various partnerships
in domestic cellular properties, mobile data communications, investments in
international cellular properties and other international communications
consortiums. Earnings (losses) related to investments accounted for under the
equity method were $(109.8), $11.0 and $76.7 for the three years ended December
31, 1994, 1993 and 1992, respectively, and are included as a component of Other
Income.
DOMESTIC CELLULAR. BellSouth's domestic cellular investments consist
primarily of a 60.0% non-controlling financial interest in the Los Angeles
Cellular Telephone Company and a 43.8% interest in the Houston Cellular
Telephone Company. At December 31, 1994, BellSouth's aggregate investment in
these entities exceeded the underlying book value of the investees' net assets
by $934.7. The excess of consideration paid over net assets acquired along with
other intangible assets are being amortized using either straight-line or
accelerated methods over periods of benefit which do not exceed 40 years.
MOBILE DATA COMMUNICATIONS. In January 1992, BellSouth and RAM Broadcasting
Corporation (RBC) formed an investment to own and operate certain mobile data
communications networks worldwide as well as certain cellular and paging
operations in the United States. The mobile data portion of the investment gives
BellSouth a 49% interest in the United States mobile data operations, which is
operated by RBC, and various interests in foreign mobile data operations ranging
from 5.4% to 90%. In July 1994, BellSouth acquired RBC's 50% interest in the
paging segment of the investment giving BellSouth a 100% interest in this
entity. BellSouth had a note receivable from and advances to mobile data
affiliates totaling $134.6 and $43.0 at December 31, 1994 and 1993,
respectively. These receivables bear interest at the rate of the three-month
LIBOR, plus 3 1/2%. The instruments are collateralized by assets of the
affiliates.
INTERNATIONAL COMMUNICATIONS. BellSouth has equity investments in
international cellular operations in Latin America, Europe, the Asia-Pacific
region and other international markets with ownership ranging from 21.4% to
53.3%. The largest of these investments, Telcel Cellular C.A. (TelCel), in which
BellSouth has a non-controlling 53.3% interest, provides cellular telephone
service in Venezuela. BellSouth is a 21.4% participant in the E-Plus Mobilfunk
consortium which provides cellular telephone service in Germany.
In January 1994, BellSouth disposed of its 36.4% interest in a cellular
telephone business in Mexico. In November 1994, BellSouth sold its 4% interest
in a company providing cellular service in France. As a result of these
dispositions, BellSouth recognized gains of $67.5 and $40.1, respectively, both
of which are included in Other Income.
BellSouth is a 24.5% participant in Optus, an international consortium which
provides a full spectrum of telecommunications services in Australia, including
switched network and enhanced services, wireless and satellite based services.
OTHER INVESTMENT ACTIVITY. BellSouth has non-controlling financial
interests ranging from 70% to 80% in the CSL Ventures and 1155 Peachtree
Associates real estate partnerships. BellSouth had notes receivable from and
advances to these partnerships totaling $186.1 and $208.1 (of which $135.8 was
included in current assets) at December 31, 1994 and 1993, respectively. The
notes bear interest at rates ranging from 7.88% to 9.31% while the advances bear
interest at the federal funds rate plus .30%. Principal amounts outstanding at
December 31, 1994 are due and payable to BellSouth between December 31, 1996 and
August 8, 2002. The instruments require periodic payments of interest and are
collateralized by various real estate holdings.
49
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE B -- INVESTMENTS AND ADVANCES (CONTINUED)
In December 1993, BellSouth entered into a credit agreement with Prime South
Diversified, Inc. (Prime) to provide up to $250 in financing, of which $185.0
had been borrowed by Prime as of December 31, 1994. The loan is collateralized
by the stock of Prime South Diversified, which indirectly wholly owns Community
Cable TV in Las Vegas, and its wholly-owned subsidiary Prime South Holdings,
Inc. The loan bears a variable rate of 10% to 11% and matures in 2001.
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
1994 1993
----------- -----------
Outside plant...................................................................... $ 19,291.5 $ 18,595.7
Central office equipment........................................................... 15,443.5 14,668.0
Building and building improvements................................................. 3,113.9 2,954.4
Furniture and fixtures............................................................. 2,535.3 2,362.6
Operating and other equipment...................................................... 2,346.6 2,006.8
Station equipment.................................................................. 601.0 631.4
Plant under construction........................................................... 616.3 497.2
Land............................................................................... 181.7 175.9
Other.............................................................................. 69.0 82.8
----------- -----------
44,198.8 41,974.8
Less: Accumulated depreciation................................................... 19,036.4 17,307.0
----------- -----------
Total Property, Plant and Equipment, net....................................... $ 25,162.4 $ 24,667.8
----------- -----------
----------- -----------
Depreciation of telephone plant and equipment as a percentage of average
depreciable telephone plant was 7.20%, 7.51% and 7.67% for 1994, 1993 and 1992,
respectively.
NOTE D -- OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
1994 1993
---------- ----------
Restructuring accrual (see Note K)................................................... $ 614.7 $ 513.4
Advanced billing and customer deposits............................................... 499.9 476.2
Taxes accrued........................................................................ 374.6 492.1
Dividends payable.................................................................... 346.7 346.1
Salaries and wages payable........................................................... 343.5 338.3
Compensated absences................................................................. 332.8 332.6
Interest and rents accrued........................................................... 278.1 250.2
Other................................................................................ 310.8 194.9
---------- ----------
Total Other Current Liabilities.................................................. $ 3,101.1 $ 2,943.8
---------- ----------
---------- ----------
50
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE E -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
DESCRIPTION 1994 1993
- ------------------------------------------------------------------------- -------- --------
Short-term notes payable:
Bank loans............................................................. $ 45.1 $ 88.7
Commercial paper....................................................... 1,838.5 1,536.1
-------- --------
1,883.6 1,624.8
Current maturities of long-term debt..................................... 135.1 213.8
-------- --------
Total................................................................ $ 2,018.7 $ 1,838.6
-------- --------
-------- --------
DESCRIPTION
- -------------------------------------------------------------------------
Weighted average interest rate at end of period:
Bank loans............................................................. 6.39% 3.77%
Commercial paper....................................................... 5.82% 3.30%
BellSouth has committed credit lines aggregating $1,493.4 with various
banks. Borrowings under the committed lines totaled $16.1 at December 31, 1994.
BellSouth also maintains uncommitted lines of credit of $675.0. At December 31,
1994, there were no borrowings under the uncommitted lines. There are no
significant commitment fees or requirements for compensating balances associated
with any lines of credit.
LONG-TERM: Long-term debt consists primarily of debentures and notes issued
by BellSouth Telecommunications. Interest rates and maturities of the amounts
outstanding are summarized as follows at December 31:
CONTRACTUAL
INTEREST RATES MATURITIES 1994 1993
------------------- -------------- ---------- ----------
BellSouth Telecommunications Debentures: 3 1/4% - 6 3/4% 1995 - 2033 $ 1,270.0 $ 1,270.0
7 3/8% - 8 1/4% 2010 - 2033 1,935.0 1,935.0
8 1/2% - 8 3/4% 2024 - 2029 1,400.0 1,400.0
---------- ----------
4,605.0 4,605.0
BellSouth Telecommunications Notes............. 5 1/4% - 7% 1998 - 2008 1,875.0 1,875.0
Guarantee of ESOP debt......................... 9.125% - 9.19% 2003 693.9 734.6
BellSouth Capital Funding Corporation Notes.... 3.91% - 9.50% 1994 - 1999 374.5 299.9
Other.......................................... 82.6 142.6
Unamortized discount, net of premium........... (60.8) (62.6)
---------- ----------
7,570.2 7,594.5
Current maturities............................. (135.1) (213.8)
---------- ----------
Total Long-Term Debt....................... $ 7,435.1 $ 7,380.7
---------- ----------
---------- ----------
Maturities of long-term debt outstanding (face amounts) at December 31, 1994
are summarized below:
1995 1996 1997 1998 1999 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ---------- ----------
Maturities........................ $ 135.1 $ 77.3 $ 158.7 $ 774.4 $ 249.4 $ 6,236.1 $ 7,631.0
--------- --------- --------- --------- --------- ---------- ----------
--------- --------- --------- --------- --------- ---------- ----------
As further discussed in Note H, BellSouth incorporated an Employee Stock
Ownership Plan (ESOP) feature into certain of its existing savings plans. In
1990, the ESOP trusts (the Trusts) borrowed $850.0 aggregate principal amount
through the issuance of amortizing notes. Although the obligations are owed by
the Trusts, they are guaranteed by BellSouth and thus are reflected as an
addition to Long-Term Debt and a
51
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE E -- DEBT (CONTINUED)
reduction to Shareholders' Equity. The Trusts service the debt with
contributions from BellSouth and dividends paid on the shares held by the
Trusts. As the ESOP obligations are repaid, the amount guaranteed decreases and
Long-Term Debt is reduced accordingly.
Notes issued by BellSouth Capital Funding Corporation (Capital Funding) are
used to finance the businesses of BellSouth Enterprises and the unregulated
subsidiaries of BellSouth Telecommunications. BellSouth has agreed to ensure the
timely payment of principal, premium, if any, and interest on Capital Funding's
debt securities.
During 1993 and 1992, BellSouth Telecommunications refinanced certain
long-term debt issues at more favorable interest rates. As a result of the early
extinguishment of these issues, charges of $86.6 ($.17 per share), net of taxes
of $58.8, and $40.7 ($.08 per share), net of taxes of $30.0, were recognized as
extraordinary losses in 1993 and 1992, respectively.
At December 31, 1994, shelf registration statements had been filed with the
Securities and Exchange Commission by BellSouth Telecommunications and Capital
Funding under which $725.0 and $1,027.3, respectively, of debt securities could
be offered.
NOTE F -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits is summarized as follows at December
31:
1994 1993
---------- ----------
Accrued pension cost................................................................. $ 568.2 $ 565.5
Compensation related................................................................. 341.7 318.5
Regulatory liability related to income taxes (see Note M)............................ 304.0 378.9
Minority interests................................................................... 207.8 123.6
Sharing accrual under FCC price cap plan............................................. 141.6 41.7
Postemployment benefits.............................................................. 140.6 121.4
Restructuring accrual (see Note K)................................................... -- 570.0
Other................................................................................ 302.4 136.2
---------- ----------
Total Other Liabilities and Deferred Credits..................................... $ 2,006.3 $ 2,255.8
---------- ----------
---------- ----------
NOTE G -- SHAREHOLDERS' EQUITY
PREFERRED STOCK AUTHORIZED. BellSouth's Articles of Incorporation authorize
100 million shares of cumulative First Preferred Stock having a par value of $1
per share, of which 30 million shares have been reserved and designated Series A
for possible issuance under BellSouth's Shareholder Rights Plan. As of December
31, 1994, no preferred shares had been issued.
SHAREHOLDER RIGHTS PLAN. In 1989, BellSouth adopted a Shareholder Rights
Plan by declaring a dividend of one right for each share of common stock then
outstanding and to be issued thereafter. Each right entitles shareholders to buy
one one-hundredth of a share of Series A First Preferred Stock for $175 per
share. The rights may be exercised only if a person or group acquires 10% of the
common stock of BellSouth without the prior approval of the Board of Directors
or announces a tender or exchange offer that would result in ownership of 25% or
more of the common stock. If a person or group acquires 10% of BellSouth's stock
without prior Board approval, other shareholders are then allowed to purchase
BellSouth common stock at half price. The rights currently trade with BellSouth
common stock and may be redeemed by the Board of Directors for one cent per
right until they become exercisable, and thereafter under certain circumstances.
The rights expire after ten years.
GUARANTEE OF ESOP DEBT. Financial reporting practices require that the
amount equivalent to BellSouth's guarantee of the amortizing notes issued by its
ESOP trusts be presented as a reduction to Shareholders' Equity, as well as an
increase to debt. The amount recorded as a decrease in Shareholders' Equity
represents the cost of unallocated BellSouth common stock purchased with the
proceeds of the
52
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
amortizing notes and the timing difference resulting from the shares allocated
accounting method. All ESOP shares are considered outstanding for financial
reporting purposes and, as such, are included in the computation of earnings per
share. As the ESOP notes are repaid, the amount of debt guaranteed decreases,
and Shareholders' Equity increases accordingly (see Notes E and H).
SHARES HELD IN TRUST. During 1993 and 1994, BellSouth issued shares to
grantor trusts to provide partial funding for the benefits payable under certain
non-qualified benefit plans. The trusts are irrevocable and assets contributed
to the trusts can only be used to pay such benefits with certain exceptions. At
December 31, 1994 and 1993, the assets held in the trusts consist of cash and
6,262,087 and 5,464,920 shares, respectively, of BellSouth common stock. The
total cost of the BellSouth shares as of the date of funding the trusts is
included in Common Stock and Paid-In Capital; however, because the shares held
in trust are not considered outstanding for financial reporting purposes, the
shares are reflected separately as Shares Held in Trust, a reduction to
Shareholders' Equity. Accordingly, there is no earnings per share impact.
NOTE H -- EMPLOYEE BENEFIT PLANS
PENSION PLANS. Substantially all employees of BellSouth are covered by
noncontributory defined benefit pension plans. Principal plans are discussed
below; other plans are not significant individually or in the aggregate.
The plan covering non-represented 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 non-represented 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 1994 and 1993 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
includes 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 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.
The components of net periodic pension cost are summarized below:
1994 1993 1992
----------- ----------- -----------
Service cost -- benefits earned during the year....................... $ 272.1 $ 265.8 $ 262.4
Interest cost on projected benefit obligation......................... 778.2 774.8 751.8
Actual loss (return) on plan assets................................... 135.9 (1,734.9) (686.2)
Net amortization and deferral......................................... (1,158.2) 816.0 (160.2)
----------- ----------- -----------
Net periodic pension cost......................................... $ 28.0 $ 121.7 $ 167.8
----------- ----------- -----------
----------- ----------- -----------
Effective January 1, 1994, the non-represented 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 in 1994. The decrease in 1994
pension expense is primarily the result of a reduction in assumed benefit levels
partially offset by the decrease in the discount rate assumption. The
consolidated net pension expense amounts reflected above are exclusive of
curtailment gains reflected in the restructuring activities discussed below.
53
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plans at December
31:
1994 1993
----------- -----------
Actuarial present value of:
Vested benefit obligation........................................................ $ 7,431.4 $ 7,705.3
----------- -----------
----------- -----------
Accumulated benefit obligation................................................... $ 8,404.0 $ 8,819.6
----------- -----------
----------- -----------
Projected benefit obligation..................................................... $ 10,115.1 $ 10,644.3
Plan assets at market value........................................................ 12,343.1 13,173.0
----------- -----------
Plan assets in excess of projected benefit obligation.............................. 2,228.0 2,528.7
Unrecognized net gain due to past experience different from assumptions made....... (2,263.9) (2,503.2)
Unrecognized prior service cost.................................................... (360.9) (398.5)
Unrecognized net asset at transition............................................... (171.4) (192.5)
----------- -----------
Accrued pension cost............................................................. $ (568.2) $ (565.5)
----------- -----------
----------- -----------
The significant actuarial assumptions at December 31, 1994 and 1993 were as
follows:
1994 1993
--------- ---------
Weighted average discount rate............................................................. 8.25% 7.5%
Weighted average rate of compensation increase............................................. 5.7% 5.7%
Expected long-term rate of return on plan assets........................................... 8.0% 8.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. BellSouth sponsors
postretirement health and life insurance welfare plans for most of its
non-represented and represented employees. Effective January 1, 1993, BellSouth
adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," to account for these 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 who retire 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 costs for the years ending December 31, 1994 and
1993, respectively, were composed of the following:
1994 1993
-------------------- --------------------
HEALTH LIFE HEALTH LIFE
--------- --------- --------- ---------
Service cost -- benefits earned during the year............................ $ 34.8 $ 13.3 $ 29.9 $ 8.7
Interest on accumulated postretirement benefit obligation.................. 211.0 37.4 199.4 32.4
Actual loss (return) on plan assets........................................ 14.1 (12.4) (43.5) (35.0)
Amortization of transition liability (asset)............................... 112.3 (13.1) 112.9 (13.1)
Other amortization and deferral, net....................................... (65.6) (30.6) (9.1) (9.5)
--------- --------- --------- ---------
Postretirement benefit cost (income)..................................... $ 306.6 $ (5.4) $ 289.6 $ (16.5)
--------- --------- --------- ---------
--------- --------- --------- ---------
54
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The consolidated net postretirement benefit cost amounts reflected above are
exclusive of curtailment losses reflected in the restructuring activities
discussed below. Prior to 1993, BellSouth recognized the cost of providing
postretirement benefits based on funded amounts. The cost of providing health
and life benefits for both active and retired employees was $574.6 for 1992.
The following table sets forth the plans' funded status at December 31, 1994
and 1993, respectively:
1994 1993
------------------------ ------------------------
HEALTH LIFE HEALTH LIFE
----------- ----------- ----------- -----------
Accumulated postretirement benefit obligation:
Retirees............................................... $ 1,835.4 $ 249.1 $ 1,909.8 $ 245.5
Fully eligible active plan participants................ 303.9 68.5 350.6 193.7
Other active plan participants......................... 506.8 132.3 630.9 68.2
----------- ----------- ----------- -----------
2,646.1 449.9 2,891.3 507.4
Plan assets at fair value................................ 883.1 583.0 785.3 584.5
----------- ----------- ----------- -----------
Accumulated postretirement benefit obligation in excess
of (less than) plan assets.............................. 1,763.0 (133.1) 2,106.0 (77.1)
Unrecognized net losses.................................. (219.6) (60.3) (514.0) (123.4)
Unrecognized transition (obligation) asset............... (1,425.3) 170.3 (1,572.8) 183.4
----------- ----------- ----------- -----------
Accrued (prepaid) postretirement benefit cost............ $ 118.1 $ (23.1) $ 19.2 $ (17.1)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The significant actuarial assumptions at December 31, 1994 and 1993 were as
follows:
1994 1993
--------- ---------
Weighted average discount rate.......................................................... 8.75% 7.5%
Weighted average rate of compensation increase.......................................... 5.7% 5.7%
Health care cost trend rate (1)......................................................... 11.0% 11.5%
Expected long-term rate of return on plan assets (2).................................... 8.0% 8.0%
- ------------------------
(1) Trend rate to decrease gradually to 5% in 2007
(2) Rate net of an estimated 30% tax reduction for the non-represented
employees' trust for both 1994 and 1993
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 the accumulated postretirement benefit
obligation by $108 at December 31, 1994 and the estimated aggregate service and
interest cost components of the 1994 postretirement benefit cost by $14.
Most regulatory jurisdictions have accepted BellSouth's SFAS No. 106
implementation plan. However, two states are requiring a 20-year and 30-year
amortization of the transition benefit obligation, the impact of which is not
material to BellSouth.
EFFECT OF RESTRUCTURING ON PENSIONS AND POSTRETIREMENT BENEFITS. As a part
of the restructuring charge in 1993 (see Note K), BellSouth recorded a liability
of $88 for estimated net curtailment losses expected to impact BellSouth's
pension and postretirement benefit plans. Of the amount recognized, $32 and $16
were realized and charged against the restructuring liability in 1994 and 1993,
respectively.
DEFINED CONTRIBUTION PLANS. BellSouth maintains several contributory
savings plans which cover substantially all employees. The BellSouth Savings and
Employee Stock Ownership Plan and the BellSouth Savings and Security Plan
(collectively, the ESOP Plans) are tax-qualified employee stock ownership plans
which cover the largest portion of the employees. Assets of the plans are held
by two trusts (the Trusts),
55
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
which, in turn, are part of the BellSouth Master Savings Trust. In 1990, a
leveraged ESOP feature was incorporated into the ESOP Plans. With proceeds from
the ESOP notes (see Note E), the Trusts purchased shares of BellSouth common
stock in the open market which will be used, in part, to fulfill BellSouth's
matching contribution obligation over the 13-year debt repayment period of the
leveraged ESOP program.
Employee participants contribute part of their annual compensation, via
payroll deductions, to the ESOP Plans, a portion of which is matched by
BellSouth. The matching amount, stated in percentage terms and applied to
certain eligible amounts, is determined annually by the Board of Directors. The
match consists of shares of BellSouth common stock that were purchased by the
Trusts with proceeds from the ESOP Notes, or that are purchased by the Trusts in
the market from time to time should there be insufficient shares available from
the Trust. The shares are allocated to each participant's account based on the
market price of the shares at the time of allocation. Shares are released for
allocation as each semi-annual loan payment is made. None of the shares held by
the ESOP Plans is subject to repurchase.
BellSouth makes annual contributions to the Trusts to fund the ESOP's debt
service, plus that amount required to purchase any additional shares allocated
to participant accounts, less dividends received by the Trusts. All dividends
received by the Trusts are used for debt service.
In 1993, new authoritative guidance became effective which created new
accounting requirements for certain ESOPs, and was elective for all others.
BellSouth has elected to continue the existing accounting guidance and has
adopted the new disclosure requirements applicable to all ESOPs. As a leveraged
ESOP, BellSouth recognizes expense using the shares allocated accounting method,
which combines the cost of the shares allocated for the period plus interest
incurred, reduced by the dividends used to service the ESOP debt. Dividends on
all ESOP shares are recorded as a reduction to retained earnings and all ESOP
shares are included in the computation of earnings per share.
1994 1993 1992
------------- ------------- -------------
Compensation cost................................................ $76.6 $67.9 $71.8
Interest expense................................................. $38.6 $39.9 $40.5
Actual interest on ESOP Notes.................................... $66.2 $69.5 $72.4
Cash contributions, excluding dividends paid to the Trusts....... $99.8 $84.9 $84.3
Dividends paid to the Trusts, used for debt service.............. $42.3 $43.6 $43.7
Shares allocated to participants................................. 4,810,517 3,671,657 2,555,175
Shares committed to be released.................................. -- -- --
Shares unallocated............................................... 11,078,845 12,217,705 13,334,187
BellSouth also maintains certain defined contribution plans for most other
employees not covered by the ESOP Plans. BellSouth's contributions were
approximately $15.3, $12.7 and $9.3 in 1994, 1993 and 1992, respectively.
NOTE I -- EMPLOYEE STOCK OPTION PLAN
The BellSouth Corporation Stock Option Plan provides for the grant of stock
options and related stock appreciation rights (SARs) to key employees, as
determined by the Board of Directors, to purchase shares of BellSouth common
stock within prescribed periods at either a price equal to the fair market value
on the date of grant or, as a heightened incentive, at a price in excess of the
stock price on the date of grant. SARs entitle an optionee to surrender
unexercised stock options for cash or stock equal to the excess of the fair
market value of the surrendered shares over the option price of such shares.
Options granted in 1994 become vested only at the end of the five-year vesting
period, as determined from the date of grant. Of the 5,172,962 shares covered by
outstanding options under the plan at December 31, 1994, 352,096 were
accompanied by SARs.
56
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE I -- EMPLOYEE STOCK OPTION PLAN (CONTINUED)
The following table summarizes the activity for stock options outstanding:
1994 1993 1992
---------------- ---------------- ----------------
Options outstanding at January 1................................. 3,654,142 3,436,724 3,101,490
Options granted.................................................. 1,762,861 840,302 977,978
Options exercised................................................ (130,498) (569,508) (590,953)
(113,543) (53,376) (51,791)
Options cancelled/forfeited......................................
-------- -------- --------
5,172,962 3,654,142 3,436,724
Options outstanding at December 31...............................
-------- -------- --------
-------- -------- --------
Option prices per common share:
Granted........................................................ $50.69 - $84.43 $50.69 - $62.19 $48.38 - $58.25
Exercised...................................................... $12.99 - $58.25 $22.76 - $58.25 $22.76 - $45.56
Cancelled/forfeited............................................ $32.34 - $84.43 $32.34 - $58.25 $37.38 - $58.25
Outstanding at year-end........................................ $32.34 - $84.43 $12.99 - $62.19 $12.99 - $58.25
Options exercisable at year-end.................................. 2,333,631 1,407,914 1,343,523
Shares available for grant at December 31........................ 5,025,048 5,015,519 4,937,932
NOTE J -- LEASES
BellSouth has entered into operating leases for facilities and equipment
used in operations. Rental expense under operating leases was $311.3, $300.3 and
$328.9 for 1994, 1993 and 1992, respectively. Capital leases currently in effect
are not significant.
The following table summarizes the approximate future minimum rentals under
non-cancelable operating leases in effect at December 31, 1994:
1995 1996 1997 1998 1999 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ----------
Minimum rentals..................... $ 144.7 $ 119.9 $ 101.0 $ 77.6 $ 66.6 $ 547.3 $ 1,057.1
--------- --------- --------- --------- --------- ----------- ----------
--------- --------- --------- --------- --------- ----------- ----------
NOTE K -- RESTRUCTURING CHARGE
The results of operations for the year ended December 31, 1993 include a
$1,136.4 restructuring charge which reduced net income by $696.6. The
restructuring is being undertaken to redesign and streamline the fundamental
processes and work activities in BellSouth Telecommunications' telephone
operations to better respond to an increasingly competitive business
environment. The restructuring is expected to improve overall responsiveness to
customer needs and reduce costs.
The material components of the charge related to the reduction of the
workforce by 10,200 employees. Through December 31, 1994, cumulative employee
reductions related to the restructuring plan were 5,200, consisting of 1,300 in
1993 and 3,900 in 1994. The components of the charge consisted of provisions of
$368.2 for separation payments and relocations of remaining employees, $342.8
for consolidation and elimination of certain operations facilities and $425.4
for enabling changes to information systems, primarily those used to provide
services to existing customers.
At December 31, 1994, the remaining liability associated with the
restructuring plan was $614.7, all of which was current.
57
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE L -- ADDITIONAL INCOME STATEMENT DATA
1994 1993 1992
--------- --------- ---------
Interest Expense:
Long-term debt.............................................................. $ 532.2 $ 577.3 $ 612.9
Short-term notes payable.................................................... 61.9 50.7 61.7
Other....................................................................... 72.0 61.0 71.8
--------- --------- ---------
Total..................................................................... $ 666.1 $ 689.0 $ 746.4
--------- --------- ---------
--------- --------- ---------
Other Income, net:
Interest and dividend income................................................ $ 64.5 $ 42.8 $ 123.6
Earnings (losses) of unconsolidated affiliates.............................. (109.8) 11.0 76.7
Minority interests.......................................................... (80.0) (50.9) (39.3)
Gains (losses) from operations sold, net.................................... 107.6 (10.0) --
Other, net.................................................................. 28.7 14.7 16.6
--------- --------- ---------
Total..................................................................... $ 11.0 $ 7.6 $ 177.6
--------- --------- ---------
--------- --------- ---------
Interest and dividend income for 1992 includes $56.6 relating to the
settlement of an Internal Revenue Service summary assessment for the tax years
1979 and 1980.
Revenues from services provided to AT&T Corp., BellSouth's largest customer,
were approximately 11%, 14% and 14% of consolidated operating revenues for 1994,
1993 and 1992, respectively.
NOTE M -- INCOME TAXES
Effective January 1, 1993, BellSouth adopted SFAS No. 109, "Accounting for
Income Taxes," which applies a balance sheet approach to income tax accounting.
In accordance with the new standard, 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. The
cumulative effect to January 1, 1993 of the adoption of SFAS No. 109 was
recorded as a $7.8 reduction to income tax expense.
In accordance with the provisions of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," BellSouth has, for its regulated
operations, only reflected the balance sheet impact of the adoption of SFAS No.
109. Specifically, BellSouth Telecommunications in 1993 recorded a net
regulatory liability of $538.0 to correspond to the net reduction in deferred
tax liabilities; the reduction resulted from changes in tax rates and from
temporary differences which were previously flowed through. The balance of such
net liability at December 31, 1994, included in Other Liabilities and Deferred
Credits, was $304.0. This net regulatory liability is adjusted as the related
temporary differences reverse.
58
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE M -- INCOME TAXES (CONTINUED)
The provision for income taxes is summarized as follows:
1994 1993 1992
---------- ---------- ----------
Federal:
Current................................................................ $ 1,081.9 $ 1,079.7 $ 918.3
Deferred, net.......................................................... 33.6 (532.0) (85.9)
Investment tax credits, net............................................ (72.6) (88.3) (87.9)
---------- ---------- ----------
1,042.9 459.4 744.5
---------- ---------- ----------
State:
Current................................................................ 180.1 173.9 163.6
Deferred, net.......................................................... 19.9 (61.7) 25.4
---------- ---------- ----------
200.0 112.2 189.0
---------- ---------- ----------
Total provision for income taxes..................................... $ 1,242.9 $ 571.6 $ 933.5
---------- ---------- ----------
---------- ---------- ----------
Amortization of investment tax credits................................... $ 72.6 $ 88.3 $ 88.2
---------- ---------- ----------
---------- ---------- ----------
Temporary differences and carryforwards which gave rise to deferred tax
assets and (liabilities) at December 31 were as follows:
1994 1993
----------- -----------
Pensions............................................................................ $ 274.8 $ 240.3
Restructuring charge................................................................ 238.1 419.5
Deferred compensation............................................................... 126.7 112.4
Compensated absences................................................................ 99.7 89.2
Regulatory sharing accruals......................................................... 92.3 21.3
Bad debts........................................................................... 88.6 82.5
Leveraged employee stock ownership plan............................................. 43.3 36.2
Other............................................................................... 159.1 128.1
----------- -----------
1,122.6 1,129.5
Valuation allowance................................................................. (7.3) (13.8)
----------- -----------
Deferred Tax Assets............................................................... 1,115.3 1,115.7
----------- -----------
Depreciation........................................................................ (3,731.1) (3,636.2)
Equity investments.................................................................. (367.1) (376.4)
Franchises.......................................................................... (194.3) (204.3)
Other............................................................................... (237.4) (189.7)
----------- -----------
Deferred Tax Liabilities.......................................................... (4,529.9) (4,406.6)
----------- -----------
Net Deferred Tax Liability...................................................... $ (3,414.6) $ (3,290.9)
----------- -----------
----------- -----------
The valuation allowance primarily represents federal and state net operating
losses that will not be utilized during the carryforward period. Of the Net
Deferred Tax Liability at December 31, 1994 and 1993, $232.3 and $174.4,
respectively, was current and $(3,646.9) and $(3,465.3), respectively, was
noncurrent.
Prior to 1993, deferred tax expense resulted from timing differences in the
recognition of revenue and expense items for tax and financial reporting
purposes, as follows:
1992
---------
Property, plant and equipment....................................................................... $ 5.5
Pension benefits.................................................................................... (55.6)
Other timing differences............................................................................ (10.4)
---------
Total........................................................................................... $ (60.5)
---------
---------
59
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE M -- INCOME TAXES (CONTINUED)
A reconciliation of the Federal statutory income tax rate to BellSouth's
effective tax rate follows:
1994 1993 1992
--------- --------- ---------
Federal statutory tax rate........................................................... 35.0% 35.0% 34.0%
State income taxes, net of Federal income tax benefit................................ 4.0 4.8 4.8
Amortization of investment tax credits............................................... (2.1) (5.5) (3.4)
Miscellaneous items, net............................................................. (0.4) 1.3 0.6
--------- --------- ---------
Effective tax rate............................................................... 36.5% 35.6% 36.0%
--------- --------- ---------
--------- --------- ---------
NOTE N -- CUMULATIVE EFFECT OF ACCOUNTING CHANGE
BellSouth adopted, effective January 1, 1993, SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires employers to
accrue the cost of postemployment benefits provided to former or inactive
employees after employment but before retirement, including but not limited to
worker's compensation, disability, and continuation of health care benefits.
Previously, BellSouth used the cash method to account for such costs. A one-time
charge of $67.4 ($.14 per share), net of a deferred tax benefit of $42.5,
related to adoption of this statement was recognized as a change in accounting
principle. The effect of the change on BellSouth's 1993 operating results was
not material.
NOTE O -- SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is presented in accordance with the
provisions of SFAS No. 95, "Statement of Cash Flows":
1994 1993 1992
---------- ---------- ----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common and Treasury Shares Issued in Lieu of Cash Dividends Under
Shareholder Dividend Reinvestment and Stock Purchase Plan............... $ -- $ 66.4 $ 268.9
---------- ---------- ----------
---------- ---------- ----------
Shares Issued to Grantor Trusts.......................................... $ 43.6 $ 292.6 $ --
---------- ---------- ----------
---------- ---------- ----------
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest................................................................. $ 665.4 $ 755.0 $ 738.8
---------- ---------- ----------
---------- ---------- ----------
Income Taxes............................................................. $ 1,375.3 $ 1,145.2 $ 1,053.4
---------- ---------- ----------
---------- ---------- ----------
60
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE P -- FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is presented in accordance with the provisions of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market information described
below. Since judgment is required to develop the estimates, the estimated
amounts presented herein may not be indicative of the amounts that BellSouth
could realize in a current market exchange.
1994 1993
------------------------ ----------------------
RECORDED ESTIMATED RECORDED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ---------- ----------
BALANCE SHEET FINANCIAL INSTRUMENTS
Assets (Liabilities):
Cash and cash equivalents......................... $ 606.5 $ 606.5 $ 501.5 $ 501.5
Temporary cash investments........................ 50.8 50.8 49.0 49.0
Bank loans........................................ (45.1) (45.1) (88.7) (88.7)
Commercial paper.................................. (1,838.5) (1,838.5) (1,536.1) (1,536.1)
Long-Term Debt:
BellSouth Telecommunications Debentures......... (4,605.0) (4,176.8) (4,605.0) (4,707.0)
BellSouth Telecommunications Notes.............. (1,875.0) (1,670.0) (1,875.0) (1,901.0)
Guarantee of ESOP Debt.......................... (693.9) (716.8) (734.6) (849.5)
BellSouth Capital Funding Corporation Notes..... (374.5) (362.9) (299.9) (323.6)
Foreign Exchange Forward Contracts:
Contract amount receivable...................... 67.7 67.7 24.4 24.4
Contract amount payable......................... (66.9) (66.9) (23.7) (23.7)
Currency Swap..................................... 11.8 11.8 -- --
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Interest Rate Swaps:
With unrealized gains........................... -- 1.1 -- --
With unrealized losses.......................... -- (3.4) -- (8.8)
CASH AND CASH EQUIVALENTS/TEMPORARY CASH INVESTMENTS. At December 31, 1994
and 1993, the recorded amounts for cash and cash equivalents and temporary cash
investments, respectively, approximate fair value due to the short-term nature
of these instruments.
DEBT. At December 31, 1994 and 1993, the recorded amounts for bank loans
and commercial paper approximate fair value due to the short-term nature of the
liabilities. The estimates of fair value for BellSouth Telecommunications
Debentures and Notes are estimated based on the closing market prices for each
issue at December 31, 1994 and 1993, respectively. Fair value estimates for the
Guarantee of ESOP Debt and BellSouth Capital Funding Corporation Notes are based
on quotes from dealers.
OTHER FINANCIAL INSTRUMENTS. BellSouth is party to foreign exchange forward
contracts, currency swap agreements and interest rate swap agreements in its
normal course of business for purposes other than trading. These financial
instruments are used to mitigate foreign currency and interest
61
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE P -- FINANCIAL INSTRUMENTS (CONTINUED)
rate risks, although to some extent they expose the company to market risks and
credit risks. The credit risks associated with these instruments are controlled
through the evaluation and continual monitoring of the creditworthiness of the
counterparties. In the event that a counterparty fails to meet the terms of a
contract or agreement, BellSouth's exposure is limited to the currency rate or
interest rate differential. Such contracts and agreements have been executed
with creditworthy financial institutions. As such, BellSouth considers the risk
of nonperformance to be remote.
FOREIGN EXCHANGE FORWARD CONTRACTS. Foreign exchange forward contracts are
contracts for delivery or purchase of foreign currencies at specified future
dates. The fair values of such contracts are estimated based on quotes from
brokers. BellSouth enters into foreign exchange forward contracts primarily as
hedges relating to identifiable currency exposures. These financial instruments
are designed to minimize exposure and reduce risk from exchange rate
fluctuations in the normal course of business.
Summarized below by major currency are the contractual amounts of
BellSouth's foreign exchange forward contracts in U.S. dollars. Foreign currency
amounts are translated at rates as of December 31, 1994 and 1993, respectively.
The "Buy" amounts represent the U.S. dollar equivalent of commitments to
purchase foreign currencies; the "Sell" amounts represent the U.S. dollar
equivalent of commitments to sell foreign currencies.
DECEMBER 31,
------------------------------------------
1994 1993
-------------------- --------------------
BUY SELL BUY SELL
--------- --------- --------- ---------
German Mark......................................................... $ -- $ 66.9 $ 3.0 $ --
Australian Dollar................................................... -- -- 20.3 --
Dutch Guilder....................................................... -- -- 1.1 --
--------- --------- --------- ---------
$ -- $ 66.9 $ 24.4 $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
CURRENCY SWAP. Currency swap contracts provide for the exchange of defined
cash flows between two currencies at specified times. The fair value of the
currency swap is estimated based on quotes from brokers. BellSouth entered into
a currency swap in 1994 to hedge European Currency Units (ECU) 125,000,000 debt
issued by Capital Funding. The currency swap matures in February 1999.
At December 31, 1994, the net currency swap receivable was $11.3 and the
related net interest receivable was $0.5, both of which are included in accounts
receivable in the consolidated balance sheet at December 31, 1994. The interest
rate on the ECU debt is 5.25%. The currency swap effectively converts the
interest rate on such ECU debt from 5.25% payable in ECUs to 5.247% payable in
U.S. dollars.
INTEREST RATE SWAPS. Interest rate swap agreements require counterparties
to exchange interest cash flows on a specified amount of debt for a defined
period. The fair values of interest rate swap agreements are estimated based on
quotes from dealers. In order to manage exposure to interest rate changes,
BellSouth enters into interest rate swap agreements to exchange fixed and
variable rate interest payment obligations without the exchange of the
underlying principal amounts. These agreements have been used to adjust interest
on certain fixed and variable rate obligations.
62
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE P -- FINANCIAL INSTRUMENTS (CONTINUED)
Summarized below are the types of interest rate swaps outstanding and the
related weighted-average interest rates. Such swaps mature in either 1996 or
2002.
DECEMBER 31,
-------------------
1994 1993
-------- --------
Pay Fixed Rate/Receive Variable Rate
Notional amount.......................................................... $95.4 $60.8
Average rate paid........................................................ 6.97% 5.93 %
Average rate received.................................................... 5.08% 3.52 %
Pay Variable Rate/Receive Fixed Rate
Notional amount.......................................................... $75.0 $ --
Average rate paid........................................................ 5.36% --
Average rate received.................................................... 4.86 % --
OTHER. BellSouth has also issued letters of credit and financial guarantees
which approximate $157 at December 31, 1994. Since there is no market for the
instruments, it is not practicable to estimate their fair value.
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject BellSouth to credit risk consist principally of trade accounts
receivable. Concentrations of credit risk with respect to these receivables are
limited due to the composition of the customer base, which includes a large
number of individuals and businesses. At December 31, 1994, approximately $448
of trade accounts receivable were from interexchange carriers.
63
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Millions, Except Per Share Amounts)
NOTE Q -- 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
first quarter 1993 were restated to reflect the one-time, non-cash charge for
retroactive adoption of SFAS No. 112. The results for fourth quarter 1993
include a restructuring charge of $1,136.4, which reduced net income by $696.6.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- --------- --------- ---------
1994
Operating Revenues................................ $ 4,124.3 $ 4,127.9 $ 4,197.7 $ 4,394.6
Operating Income.................................. $ 1,012.2 $ 1,001.6 $ 993.7 $ 1,050.3
Net Income........................................ $ 585.3 $ 516.5 $ 499.5 $ 558.5
Earnings Per Share................................ $ 1.18 $ 1.04 $ 1.01 $ 1.12
FIRST
QUARTER
----------
(RESTATED) SECOND THIRD FOURTH
QUARTER QUARTER QUARTER
--------- --------- ---------
1993
Operating Revenues................................ $ 3,833.7 $ 3,906.9 $ 4,014.9 $ 4,124.8
Operating Income (Loss)........................... $ 804.1 $ 856.4 $ 909.1 $ (282.5)
Income (Loss) Before Extraordinary Loss on Early
Extinguishment of Debt and Cumulative Effect of
Change in Accounting Principle................... $ 411.2 $ 433.1 $ 442.4 $ (252.6)
Extraordinary Loss on Early Extinguishment of
Debt, net of tax................................. -- (55.4) (7.8) (23.4)
Cumulative Effect of Change in Accounting
Principle, net of tax............................ (67.4) -- -- --
Net Income (Loss)................................. $ 343.8 $ 377.7 $ 434.6 $ (276.0)
---------- --------- --------- ---------
---------- --------- --------- ---------
Earnings Per Share:
Income (Loss) Before Extraordinary Loss on Early
Extinguishment of Debt and Cumulative Effect of
Change in Accounting Principle................. $ .83 $ .87 $ .89 $ (.51)
Extraordinary Loss on Early Extinguishment of
Debt, net of tax............................... -- (.11) (.01) (.05)
Cumulative Effect of Change in Accounting
Principle, net of tax.......................... (.14) -- -- --
Net Income (Loss)............................... $ .69 $ .76 $ .88 $ (.56)
---------- --------- --------- ---------
---------- --------- --------- ---------
64
SUPPLEMENTARY DATA
BELLSOUTH CORPORATION
DOMESTIC CELLULAR
PROPORTIONATE OPERATING DATA
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The following table sets forth unaudited, supplemental financial data for
BellSouth's domestic cellular operations reflecting proportionate consolidation
of entities in which BellSouth has an interest. This presentation differs from
the consolidation metholodology used to prepare BellSouth's principal financial
statements in accordance with generally accepted accounting principles. The
proportionate operating data reflect BellSouth's ownership percentage of
entities consolidated for financial reporting purposes and BellSouth's ownership
percentage in the entities which are accounted for on the equity method for
financial reporting purposes.
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993
------------- -------------
Cellular Revenue, net (1)................................................. $ 1,465,090 $ 1,150,288
Operating Expenses........................................................ 833,652 667,027
Depreciation and Amortization............................................. 234,125 201,605
------------- -------------
Total Operating Expenses.............................................. 1,067,777 868,632
------------- -------------
Operating Income.......................................................... 397,313 281,656
Other Expenses, net (including interest and taxes)........................ 164,117 137,867
------------- -------------
Net Income................................................................ $ 233,196 $ 143,789
------------- -------------
------------- -------------
Operating Margins as a Percentage of Revenue:
Including Depreciation and Amortization................................. 27.12% 24.49%
Excluding Depreciation and Amortization................................. 43.10% 42.01%
Operational Comparisons:
Proportionate Cellular Population Served................................ 39,206,000 38,845,000
Proportionate Cellular Customers........................................ 2,155,800 1,559,100
- ------------------------
(1) Includes equipment revenue, net of cost.
65
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 has occurred during the periods
included in this report.
PART III
ITEMS 10 THROUGH 13.
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure on page 23 in Part I of this report
since the registrant did not furnish such information in its definitive proxy
statement prepared in accordance with Schedule 14A.
The additional information required by these items will be included in the
registrant's definitive proxy statement dated March 13, 1995 as follows, and is
herein incorporated by reference pursuant to General Instruction G(3):
PAGE(S) IN
DEFINITIVE
ITEM DESCRIPTION PROXY STATEMENT
----- ------------------------------------------------------------------------------------------ ---------------
10. Directors and Executive Officers of the Registrant........................................ 3-7; 31-32
11. Executive Compensation.................................................................... 4; 20-24
12. Security Ownership of Certain Beneficial Owners and Management............................ 7
13. Certain Relationships and Related Transactions............................................ 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE(S) IN THIS
FORM 10-K
---------------
a. Documents filed as a part of the report:
(1) Financial Statements:
Report of Independent Accountants........................... 42
Consolidated Statements of Income........................... 43
Consolidated Balance Sheets................................. 44
Consolidated Statements of Shareholders' Equity............. 45
Consolidated Statements of Cash Flows....................... 46
Notes to Consolidated Financial Statements.................. 47-64
(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.
66
(3) Exhibits:
Exhibits identified in parentheses below, on file with the SEC, are incorporated
herein by reference as exhibits hereto. All management contracts or compensatory
plans or arrangements required to be filed as exhibits to this Form 10-K Report
pursuant to Item 14(c) are filed as Exhibits 10a through 10aa inclusive.
EXHIBIT
NUMBER
- ---------
3a Articles of Incorporation of BellSouth Corporation. (Exhibit 3a to Form 10-K for the year ended
December 31, 1990, File No. 1-8607).
3b Bylaws of BellSouth Corporation. (Exhibit 3b to Form 10-Q for the quarter ended September 30, 1994,
File No. 1-8607).
4 BellSouth Corporation Shareholder Rights Agreement. (Exhibit 4-b to Form 8-K. Date of report November
27, 1989).
4a No instrument which defines the rights of holders of long and intermediate term debt of BellSouth
Corporation is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, BellSouth Corporation hereby agrees to furnish a copy of any such instrument to the SEC
upon request.
10a BellSouth Corporation Executive Short Term Incentive Plan. (Exhibit 10d to Form 10-K for the year ended
December 31, 1991, File No. 1-8607).
10b BellSouth Corporation Executive Long Term Incentive Plan. (Exhibit 10e to Form 10-K for the year ended
December 31, 1991, File No. 1-8607).
10c BellSouth Corporation Executive Long Term Disability and Survivor Protection Plan. (Exhibit 10dd to
Form 10-K for the year ended December 31, 1985, File No. 1-8607).
10c-1 Amendment dated January 1, 1994 to the BellSouth Corporation Executive Long Term Disability and
Survivor Protection Plan. (Exhibit 10c-1 to Form 10-K for the year ended December 31, 1993, File No.
1-8607).
10d BellSouth Corporation Executive Transfer Plan. (Exhibit 10ee to Registration Statement No. 2-87846).
10e BellSouth Corporation Death Benefit Program. (Exhibit 10ff to Form 10-K for the year ended December 31,
1989, File No. 1-8607).
10f BellSouth Corporation Plan For Non-Employee Directors' Travel Accident Insurance. (Exhibit 10ii to
Registration Statement No. 2-87846).
10g BellSouth Corporation Executive Incentive Award Deferral Plan. (Exhibit 10k to Form 10-K for the year
ended December 31, 1992, File No. 1-8607).
10h BellSouth Corporation Stock Option Plan. (Exhibit 10l to Form 10-K for the year ended December 31,
1991, File No. 1-8607).
10i BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated on November 28,
1994.
10j BellSouth Corporation Supplemental Executive Retirement Plan as amended and restated on November 28,
1994.
10k BellSouth Management Savings and Employee Stock Ownership Plan as amended and restated effective as of
January 1, 1994.
10l BellSouth Corporation Directors Retirement Plan. (Exhibit 10qq to Form 10-K for the year ended December
31, 1986, File No. 1-8607).
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EXHIBIT
NUMBER
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10m BellSouth Corporation Financial Counseling Plan. (Exhibit 10r to Form 10-K for the
year ended December 31, 1992, File No. 1-8607).
10n BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors.
(Exhibit 10gg to Registration Statement No. 2-87846).
10o BellSouth Corporation Executive Life Insurance Plan. (Exhibit 10v to Form 10-K for
the year ended December 31, 1992, File No. 1-8607).
10p BellSouth Corporation Stock Option Plan for Non-Employee Directors. (Exhibit 10z
to Form 10-K for the year ended December 31, 1991, File No. 1-8607).
10q BellSouth Corporation Executive Shareholder Return Cash Plan. (Exhibit 10x to Form
10-K for the year ended December 31, 1992, File No. 1-8607).
10r Form of Executive Officer Succession and Retirement Agreement.
10s BellSouth Non-Employee Director's Charitable Contribution Program. (Exhibit 10z to
Form 10-K for the year ended December 31, 1992, File No. 1-8607).
10t BellSouth Personal Retirement Account Pension Plan. (Exhibit 10aa to Form 10-Q for
the quarter ended June 30, 1993, File No. 1-8607).
10t-1 Amendment dated August 9, 1993 to the BellSouth Personal Retirement Account
Pension Plan. (Exhibit 10aa-1 to Form 10-Q for the quarter ended September 30,
1993, File No. 1-8607).
10t-2 Amendments dated October 15, 1993 and November 12, 1993 to the BellSouth Personal
Retirement Account Pension Plan. (Exhibit 10t-2 to Form 10-K for the year ended
December 31, 1993, File No. 1-8607).
10t-3 Amendment dated April 22, 1994 to the BellSouth Personal Retirement Account
Pension Plan. (Exhibit 10t-3 to Form 10-Q for the quarter ended June 30, 1994,
File No. 1-8607).
10t-4 Amendment dated December 5, 1994 to the BellSouth Personal Retirement Account
Pension Plan.
10u BellSouth Corporation Trust Under Executive Benefit Plan(s). (Exhibit 10bb to Form
10-Q for the quarter ended June 30, 1993, File No. 1-8607).
10v BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s). (Exhibit
10cc to Form 10-Q for the quarter ended June 30, 1993, File No. 1-8607).
10w BellSouth Corporation Trust Under Board of Directors Benefit Plan(s). (Exhibit
10dd to Form 10-Q for the quarter ended September 30, 1993, File No. 1-8607).
10x BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s).
(Exhibit 10ee to Form 10-Q for the quarter ended September 30, 1993, File No.
1-8607).
10y BellSouth Enterprises, Inc. Trust Under Executive Benefit Plan(s). (Exhibit 10y to
Form 10-K for the year ended December 31, 1993, File No. 1-8607).
10z BellSouth Corporation Financial Services Plan. (Exhibit 10z to Form 10-Q for the
quarter ended March 31, 1994, File No. 1-8607).
10aa BellSouth Corporation Nonqualified Deferred Income Plan. (Exhibit 10aa to Form
10-Q for the quarter ended September 30, 1994, File No. 1-8607).
11 Computation of Earnings Per Share.
12 Computation of Ratio of Earnings to Fixed Charges.
68
EXHIBIT
NUMBER
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21 Subsidiaries of BellSouth.
24 Powers of Attorney.
27 Restated Financial Data Schedule.
99a Annual report on Form 11-K for BellSouth Management Savings and Employee Stock
Ownership Plan for the fiscal year ended December 31, 1994 (to be filed as an
amendment hereto within 180 days of the end of the period covered by this report).
99b Annual report on Form 11-K for BellSouth Savings and Security ESOP Plan for the
fiscal year ended December 31, 1994 (to be filed as an amendment hereto within 180
days of the end of the period covered by this report).
99c Annual report on Form 11-K for BellSouth Enterprises Retirement Savings Plan for
the fiscal year ended December 31, 1994 (to be filed as an amendment hereto within
180 days of the end of the period covered by this report).
b. Reports on Form 8-K:
October 20, 1994 -- BellSouth Corporation Third Quarter 1994 Earnings
Release.
January 23, 1995 -- BellSouth Corporation Fourth Quarter 1994 Earnings
Release.
69
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 CORPORATION
/s/ RONALD M. DYKES
--------------------------------------
Ronald M. Dykes
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
AND COMPTROLLER
March 6, 1995
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:
John L. Clendenin*
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
Ronald M. Dykes*
VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND COMPTROLLER
DIRECTORS:
F. Duane Ackerman* Gordon B. Davidson*
Reuben V. Anderson* Phyllis Burke Davis*
James H. Blanchard* John G. Medlin, Jr.*
Andrew F. Brimmer* Robin B. Smith*
J. Hyatt Brown* C. Dixon Spangler, Jr.*
John L. Clendenin* Ronald A. Terry*
Armando M. Codina* Thomas R. Williams*
Marshall M. Criser* J. Tylee Wilson*
*By: /s/ RONALD M. DYKES
--------------------------------------
Ronald M. Dykes
(INDIVIDUALLY AND AS ATTORNEY-IN-FACT)
March 6, 1995
70
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of BellSouth Corporation on Form S-3 (Nos. 33-29411, 33-22785, 33-48929,
33-49461 and 33-51449) and Form S-8 (Nos. 33-38265, 33-38264, 33-38263,
33-30773, 33-30772, 33-26518, 33-12165, 2-94802 and 33-49459) of our report
dated February 3, 1995, on our audits of the consolidated financial statements
of BellSouth Corporation as of December 31, 1994 and 1993, and for the years
ended December 31, 1994, 1993 and 1992, which report is included in this Annual
Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 6, 1995
71