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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, 1995
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 February 1, 1996, 993,902,959 shares of Common Stock and Preferred Stock
Purchase Rights were outstanding.
At February 1, 1996, the aggregate market value of the voting stock held by
non-affiliates was $42,613,589,367.
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 11,
1996, issued in connection with the 1996 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 and Telecommunications Act of 1996................................... 1
Business Operations................................................................................. 2
Telephone Company Operations........................................................................ 2
Other Telecommunications Business Operations........................................................ 8
Competition......................................................................................... 11
Research and Development............................................................................ 15
Licenses and Franchises............................................................................. 16
Employees........................................................................................... 16
2. Properties.......................................................................................... 17
General............................................................................................. 17
Capital Expenditures................................................................................ 17
Environmental Matters............................................................................... 18
3. Legal Proceedings................................................................................... 18
4. Submission of Matters to a Vote of Shareholders..................................................... 19
Additional Information -- Description of BellSouth Stock....................................................... 19
Executive Officers............................................................................................. 22
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............................... 23
6. Selected Financial and Operating Data............................................................... 24
7. Management's Discussion and Analysis of Results of Operations and Financial Condition............... 25
Results of Operations............................................................................... 25
Volumes of Business................................................................................. 27
Operating Revenues.................................................................................. 28
Operating Expenses.................................................................................. 31
Other Income Statement Items........................................................................ 34
Extraordinary Losses................................................................................ 34
Financial Condition................................................................................. 35
Operating Environment and Trends of the Business.................................................... 37
Other Matters....................................................................................... 39
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................................ 68
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 69
PART III
*10. Directors and Executive Officers of the Registrant.................................................. 69
*11. Executive Compensation.............................................................................. 69
*12. Security Ownership of Certain Beneficial Owners and Management...................................... 69
*13. Certain Relationships and Related Transactions...................................................... 69
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 69
Signatures..................................................................................................... 73
Consent of Independent Accountants............................................................................. 74
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*Included in BellSouth Corporation's definitive proxy statement dated March 11,
1996 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 provides predominantly tariffed wireline
telecommunications services to approximately two-thirds of the population and
one-half of the territory within Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina and Tennessee. BellSouth'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, American Telephone and Telegraph Company,
now AT&T Corp. (AT&T), transferred to BellSouth its 100% ownership of South
Central Bell Telephone Company (South Central Bell) and Southern Bell Telephone
and Telegraph Company (Southern Bell). On January 1, 1984, ownership of
BellSouth was divested from AT&T and BellSouth became a publicly traded company.
BellSouth Telecommunications is the surviving corporation from the merger of
South Central Bell and Southern Bell, effective at midnight on December 31,
1991. While BellSouth Telecommunications continues to use the names South
Central Bell and Southern Bell for various purposes, its services were unified
under the BellSouth brand name in October 1995 to give BellSouth
Telecommunications a clear, consistent identity in the marketplace.
BellSouth has its principal executive offices at 1155 Peachtree Street,
N.E., Atlanta, Georgia 30309-3610 (telephone number 404-249-2000).
MODIFICATION OF FINAL JUDGMENT AND TELECOMMUNICATIONS ACT OF 1996
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 limited 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 could 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 provided exchange access services that
linked a subscriber's telephone or other equipment in one of their LATAs to the
transmission facilities of carriers (the Interexchange Carriers), which provided
toll telecommunications services between different LATAs. The Operating
Telephone Companies could market, but not design or manufacture,
telecommunications equipment used by customers to originate or receive, or by
carriers to provide, telecommunications services. The MFJ required
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*The provisions of the MFJ were also applicable to the Holding Companies.
1
that the Operating Telephone Companies provide, upon a bona fide request by any
Interexchange Carrier or information service provider, exchange access,
information access and exchange services for such access equal to that provided
to AT&T in quality, type and price.
On February 8, 1996, the President signed into law the Telecommunications
Act of 1996 (the 1996 Act). This legislation provides for the development of
competitive local telecommunications markets; terminates on a prospective basis
the MFJ, enabling the provision by the Operating Telephone Companies of
interLATA telecommunications and the design and manufacture by the Operating
Telephone Companies of telecommunications equipment; and repeals the laws
prohibiting the Operating Telephone Companies and their affiliates from
providing video services within their service areas. The ability of the
Operating Telephone Companies to enter businesses previously proscribed to them
by the MFJ is, however, generally subject to numerous criteria and the
development of and compliance with newly mandated federal regulations.
BUSINESS OPERATIONS
Approximately 70%, 72% and 73% of BellSouth's operating revenues for the
years ended December 31, 1995, 1994 and 1993, respectively, were from wireline
telecommunications services provided by BellSouth Telecommunications. The
remainder was principally derived from wireless operations, directory
advertising and publishing, billing and collection and other nonregulated
services. (See "Other Telecommunications Business Operations.") Revenues from
services provided to AT&T, BellSouth's largest customer, comprised approximately
10%, 11% and 14% of 1995, 1994 and 1993 operating revenues, respectively.
TELEPHONE COMPANY OPERATIONS
BellSouth Telecommunications provides, predominantly, local exchange,
exchange access and intraLATA toll services within each of the 38 LATAs in its
combined nine-state wireline operating area. BellSouth Telecommunications
provided approximately 21,133,000 customer access lines at December 31, 1995, an
overall increase of 4.5% since December 31, 1994. The increase was primarily
attributable to continued economic growth in BellSouth Telecommunications'
nine-state service region, including an increase in the number of second
residential lines. Growth in second residential lines accounted for
approximately 48.0% and 24.1% of the overall increase in residence access lines
and total access lines, respectively, since December 31, 1994. (See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Volumes of Business.")
At December 31, 1995, approximately 75% of access lines were in 47
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,
1995. 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, 1995,
1994 and 1993 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
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.
2
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 1995, 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 6%, 7% and
8% of BellSouth's operating revenues for the years ended December 31, 1995, 1994
and 1993, 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.
REGULATION OF LOCAL AND TOLL SERVICES
BellSouth Telecommunications is subject to state regulatory authorities in
each state in which it provides intrastate telecommunications services with
respect to 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 rate of return on its
capital investment. Such a regulatory structure was satisfactory in a less
competitive era; however, the regulatory processes have changed in response to
the increasingly competitive telecommunications environment.
Under one form of alternative 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.
Another alternative form of regulation, generally known as price regulation,
establishes maximum prices that can be charged for certain telecommunications
services. While such a plan limits the amount of increases in prices for
specified services, it enhances the company's ability to adjust prices and
service options to more effectively respond to changing market conditions and
competition and enables it to more fully benefit from productivity enhancements.
For these reasons, BellSouth Telecommunications is focusing its regulatory and
legislative efforts on establishing price regulation. Such plans have been
approved or authorized by the requisite legislative or regulatory bodies in
Alabama, Florida (although a sharing requirement exists at least through 1996),
Georgia, Kentucky, Mississippi, South Carolina and Tennessee, and approval of a
plan is pending in North Carolina. BellSouth Telecommunications has filed a
proposed price regulation plan in Louisiana.
Despite the potential advantages offered to BellSouth Telecommunications by
sharing and price regulation plans over traditional rate of return regulation,
in some cases rate reductions have been required in connection with their
adoption and operation.
3
ALABAMA
An incentive regulation plan in effect in Alabama from December 1988 to
September 1995 provided for a return on average total capital* in the range of
11.65% to 12.30%.
In response to a law enacted in 1995 permitting the Alabama Public Service
Commission to authorize alternative methods of regulation that are not based on
rate of return for local exchange carriers, the Alabama Commission approved a
price regulation plan, effective September 1995. Under this plan, prices for
basic services, including local exchange services for residence and business
customers, are capped for five years, after which an inflation-based formula
will be used to change prices; prices for non-basic services are capped for one
year, after which aggregate price increases are limited to 10% annually; and
intrastate switched access charges are reduced below interstate switched access
rates. Additional terms of the price regulation plan require annual price
reductions aggregating $57 million through 1999 excluding intrastate switched
access reductions. Reductions related to intrastate switched access are
estimated to be $25 million.
FLORIDA
From 1988 through 1992, the Florida incentive regulation plan provided for a
return on equity* of 11.5% to 16%, with earnings above 14% to be shared with
customers through rate reductions. In 1994, the Florida Public Service
Commission extended the plan through 1997, with required rate reductions
aggregating approximately $300 million over a three-year period. Basic service
rates will be capped at their current levels through 1997.
The plan provides for a return on equity sharing level of 12% with an
after-sharing cap of 14% for 1994, increasing in 1995 to a 12.5% sharing level
with an after-sharing cap of 14.5%. Rates of return beyond 1995 will vary based
upon changes in utility bond yields but would change no more than 75 basis
points from 1995 levels.
In 1995, a law was enacted which allows qualified service providers to elect
price regulation. Under price regulation, prices for basic services, which
include flat-rate residential and single-line business local exchange services,
will be capped for five years, after which an inflation-based formula will be
used to change basic rates. Prices for certain non-basic services, including
multi-line business service, will be capped for three years at the rates in
effect in July 1995; prices for other non-basic services may be adjusted
annually subject to defined limitations. The price regulation provisions also
provide that intrastate switched access rates will decrease by 5% annually until
such rates are at parity with interstate switched access rates effective in
1994. In November 1995, BellSouth Telecommunications filed with the Florida
Commission an election for price regulation, which became effective in January
1996.
Although BellSouth Telecommunications is currently operating under price
regulation, it must comply with the sharing provisions of the incentive plan
described above through 1997. However, BellSouth Telecommunications can request
the plan be modified to eliminate the sharing requirement, effective January
1997, if there are material changes in the industry.
GEORGIA
A Georgia incentive regulation plan was adopted in 1990, providing 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%. Effective in January 1994, the Georgia Public
Service Commission extended the plan for six months and modified the return on
equity level at which sharing would occur from 14% to 13%. In August 1994, the
Georgia Commission changed the sharing range to 13.5%-15.5%. In June 1995, the
Georgia Commission ordered refunds of $9 million and rate reductions aggregating
$33 million on an annual basis.
In April 1995, a law was enacted which, effective in July 1995, allows
BellSouth Telecommunications to elect the price regulation plan as described in
the legislation. In July 1995, BellSouth Telecommunications filed an election
for alternative regulation with the Georgia Commission; such election became
effective in August 1995. Following implementation of alternative regulation,
basic
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*As defined in the plan for this state.
4
residence and single-line business rates are capped for five years, after which
an inflation-based formula will be used to change rates. Rates for intrastate
switched access services will be no higher than the rates charged for interstate
switched access services.
The Georgia Commission approved an approximate $10 million rate reduction in
intrastate switched access to be effective in July 1996. BellSouth
Telecommunications plans to offset this reduction by increasing rates for other
services.
KENTUCKY
Effective in May 1991, under the Kentucky incentive regulation plan,
BellSouth Telecommunications was authorized to earn a return on average total
capital* in the range of 10.99% to 11.61% with sharing of earnings exceeding
that range. BellSouth Telecommunications achieved the sharing level during 1993
and 1994.
In July 1995, the Kentucky Public Service Commission approved a price
regulation plan. In connection with approval of the plan, the Kentucky
Commission ordered reductions in rates aggregating $29 million on an annual
basis.
Under the plan, after giving effect to the rate reductions discussed above,
basic residential rates are capped for three years, after which an
inflation-based formula will be used to change rates, intrastate switched access
rates are limited to rates in effect for interstate switched access and prices
for services deemed competitive under the plan will be market based.
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 a $55
million refund and a rate reduction of $31 million on an annual basis and an
authorized return on investment* in the range of 10.7% to 11.7%, with sharing of
earnings above 11.7%. Through 1995, BellSouth Telecommunications has reduced
rates by an aggregate of $38 million, reflecting its sharing obligation under
the plan.
Effective February 1995, the Louisiana Commission extended the incentive
regulation plan, reducing the authorized return on investment* to a range of
9.98% to 10.98% with sharing of earnings between 10.98% and 11.98%.
In April 1995, BellSouth Telecommunications filed a proposed price
regulation plan with the Louisiana Commission. The plan proposes a three-year
cap on residence and business basic local exchange services after which rate
changes would be based on an inflation-based formula. Intrastate switched access
would also be capped for three years. Non-basic service prices would be set
based on market factors. The Louisiana Commission staff has issued a proposed
rule on price regulation. In addition to an inflation-based formula, the
Commission's proposal includes an earnings-based sharing formula.
MISSISSIPPI
In June 1990, the Mississippi Public Service Commission authorized
implementation of an incentive regulation plan with sharing of earnings falling
outside a return on average net investment* range of 10.74% to 11.74%. Rate
reductions totaling $23 million on an annual basis were required prior to
implementation of the plan.
Additional rate reductions of approximately $12 million on an annual basis
related to intrastate access and area calling plan impacts became effective in
January 1993. In June 1993, the Mississippi Commission renewed the incentive
plan for two years and ordered BellSouth Telecommunications to reduce rates,
based on a targeted 11.24% return.
In November 1995, the Mississippi Commission approved a five-year price
regulation plan, effective in January 1996. Reviews of this plan will be
conducted by the Mississippi Commission after three years. Under the provisions
of the plan, rates for basic services, which include the provision of local
telephone service, are capped for three years after which such basic service
revenues will be
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*As defined in the plan for this state.
5
reduced annually by 1% for the duration of the plan. In addition, intrastate
switched access rates are capped at the same level as interstate rates over the
life of the plan. The terms of the plan provide for rate reductions over the
life of the plan which total approximately $34 million on an annual basis.
NORTH CAROLINA
In April 1995, a law was enacted that allows BellSouth Telecommunications to
elect to operate under a price regulation plan, which must be approved by the
North Carolina Utilities Commission. In October 1995, BellSouth
Telecommunications filed with the North Carolina Commission a proposed price
regulation plan. A modified plan has been negotiated and stipulated between
BellSouth Telecommunications and the Public Staff of the North Carolina
Commission. The North Carolina Commission has held hearings on the stipulated
plan and a decision is expected by the Spring of 1996.
SOUTH CAROLINA
Prior to 1996, BellSouth Telecommunications' rates were regulated on a
traditional rate of return basis. In December 1994, the South Carolina Public
Service Commission issued an order requiring that rates be reduced prospectively
by approximately $26 million on an annual basis and with no change in the
previously authorized return on equity of 13%. Based upon an investigation by
the South Carolina Commission of BellSouth Telecommunications' 1992 earnings,
refunds of approximately $29 million were ordered. BellSouth Telecommunications
has appealed this order. As a result of the South Carolina Commission's
investigation of BellSouth Telecommunications' 1994 earnings, rate reductions of
approximately $42 million on an annual basis were ordered and the authorized
return on equity was set at 12.75%.
In January 1996, the South Carolina Commission approved a price regulation
plan which includes provisions that basic local exchange residence and business
service rates will not increase for five years after which an inflation-based
formula will be used to change rates. Intrastate switched
access rates will be capped for three years after which an inflation-based
formula will be used to change rates. The rates for non-basic services would be
set by BellSouth Telecommunications based on market considerations, with defined
limitations on price increases.
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%.
In June 1995, a law was enacted which allows qualified service providers to
elect price regulation. BellSouth Telecommunications elected price regulation
under which the rates for basic services are to be capped for four years, after
which an inflation-based formula is to be used to change the basic rates. Rates
for services other than basic services are to be adjusted based on an
inflation-based formula.
In order to implement the price regulation election, the Tennessee
Commission has required BellSouth Telecommunications to reduce rates by
approximately $56 million on an annual basis. Price regulation is to be
effective concurrent with rate reductions in March 1996, subject to compliance
with a number of other preconditions. BellSouth Telecommunications has appealed
the rate reduction.
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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
competitive service providers and affiliates. No assurance can be given as to
the outcome of any such matters.
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* As defined in the plan for this state.
6
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. Rates and other aspects of interstate access services are
regulated by the FCC, and state regulatory commissions have jurisdiction over
the provision of access to the Interexchange Carriers to complete intrastate
telecommunications.
Access charges, which are payable both by Interexchange Carriers and
subscribers, provided approximately 23%, 24% and 24% of BellSouth's operating
revenues for the years ended December 31, 1995, 1994 and 1993, 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. The state commissions have authorized BellSouth Telecommunications to
collect from the Interexchange Carriers and, in several states, from customers
charges for providing intrastate access services.
In October 1990, the FCC authorized an alternative to traditional rate of
return regulation called "price caps," which became mandatory for certain local
exchange carriers (LECs), including BellSouth Telecommunications. In contrast to
traditional rate of return regulation, a price cap plan limits the prices
telephone companies can charge for their services. The price cap plan limits
aggregate price changes to the rate of inflation minus an LEC-selected
productivity offset, plus or minus exogenous cost changes recognized by the FCC.
Price cap regulation provides LECs with enhanced incentives to increase
productivity and efficiency. To the extent an LEC's actual rate of return
exceeds the allowed rate of return, a portion of such excess must be shared with
customers through prospective rate reductions.
In February 1994, the FCC initiated its review of the price cap plan. 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. In
connection with this review, in March 1995, the FCC adopted an interim plan,
which became effective in August 1995. This plan established three productivity
factor options, which are offsets to the inflation-based increase in rates that
LECs are permitted to make each year. Similar to the above plan, two of the
productivity options in the interim plan, 4.0% and 4.7%, provide defined
earnings limitations with a sharing mechanism. A third option in the interim
plan, 5.3%, removes both earnings limitations and sharing requirements.
Consistent with a pricing strategy that BellSouth Telecommunications
considered compatible with an increasingly competitive business environment, it
selected a 5.3% productivity factor, which, together with other adjustments,
would decrease interstate access revenues by approximately $220 million on an
annual basis at 1994 access volume levels. BellSouth continues to believe 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.
The FCC is expected to consider further the interim rules as well as other
issues related to competition, streamlined regulation and other matters
contained in the 1996 Act. A final order is expected to be issued in 1996.
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.
7
BILLING AND COLLECTION SERVICES
BellSouth Telecommunications provides, under contract and/or tariff, billing
and collection services for certain long distance services of AT&T and several
other Interexchange Carriers. The agreement with AT&T extends through the year
2000, subject to the right of AT&T to assume billing and collection for certain
of its services prior to the expiration of the agreement. Revenues from such
services have been decreasing and this trend is expected to continue as AT&T and
other carriers assume more direct billing for their own services. 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 revenues for each of
the last three years. Two of BellSouth's directory companies also provide
publishing and related products and services to other directory publishers.
During 1995, such BellSouth companies published approximately 470 directories
for BellSouth Telecommunications and contracted with approximately 160
nonaffiliated companies to sell advertising space in approximately 450 of their
publications.
WIRELESS COMMUNICATIONS
BellSouth Enterprises provides wireless communications services, which have
consisted mainly of cellular telephone and paging services. Revenues from
wireless communications comprised approximately 14%, 12% and 10% of BellSouth's
total operating revenues for the years ended December 31, 1995, 1994 and 1993,
respectively. In addition, BellSouth Enterprises has a noncontrolling financial
interest in a number of wireless businesses whose revenues are not reflected in
operating revenues because of the method of accounting required for such
investments.
DOMESTIC CELLULAR OPERATIONS
The predominant part of the wireless communications 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. Under the MFJ,
BellSouth and the other Holding Companies generally were prohibited from
providing interLATA wireless communications. The 1996 Act lifts this
prohibition, and BellSouth has begun providing such interLATA wireless
communications in conjunction with its cellular offerings. In areas where it
does not have long distance telephone facilities, BellSouth links its cellular
communications through the networks of the Interexchange Carriers.
The domestic cellular 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. The 1996 Act allows BellSouth and the other Holding Companies to
market their wireless services jointly with their wireline local exchange
services; before, separate marketing was required for cellular services. This
change should enable the Holding Companies to more efficiently offer and provide
integrated telecommunications.
In August 1995, BellSouth and MCI Telecommunications Corporation (MCI)
signed an agreement to allow MCI to resell cellular service provided by
BellSouth in all BellSouth controlled markets.
8
According to the agreement, MCI will be responsible for all billing, customer
service, marketing and advertising involved in selling such resold service,
while BellSouth will provide the network infrastructure for carrying the
cellular traffic.
At December 31, 1995, businesses in which BellSouth had an equity interest
provided cellular service to a total of approximately 3,770,000 domestic
customers in 16 states. BellSouth's proportionate share of such total customers,
based on its percentage ownership interests of such businesses, was
approximately 2,847,000 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 was approximately
39,937,000 persons at December 31, 1995.
As described below, BellSouth was the successful bidder for two broadband
personal communications services (PCS) licenses in several areas where it
provides cellular service. Therefore, during 1995, as required by the FCC,
BellSouth disposed of its controlling interests in cellular properties serving
these areas.
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.
INTERNATIONAL CELLULAR OPERATIONS
Outside the United States, BellSouth owns interests in consortia that hold
licenses for, and are building and/or operating, cellular telephone systems in
Argentina, Australia, Denmark, Germany, India, 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, 1995, such systems provided
cellular service to a total of approximately 1,950,000 international customers.
BellSouth's proportionate share of such customers, based on its percentage
ownership interests in such systems, was approximately 655,000 customers.
BellSouth offers cellular service under regional licenses to areas within
Argentina, India, 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 proportionate interest in the
aggregate population served by its international cellular systems was
approximately 52,255,000 persons at December 31, 1995.
In January 1996, BSC de Panama, a consortium headed by BellSouth
International, a subsidiary of BellSouth, won a 20-year license to build and
operate Panama's first cellular telephone network. Construction of the network
will begin immediately with service to begin by mid-1996.
PERSONAL COMMUNICATIONS SERVICES
Personal communications services (PCS) are anticipated to provide a wide
range of wireless communications services. In March 1995, BellSouth was the
successful bidder for two broadband PCS licenses for certain Major Trading Areas
(MTAs) in the nine-state region served by BellSouth Telecommunications. A
consortium in which BellSouth owns a majority interest bid $71 million for the
license that covers most of North and South Carolina. BellSouth alone bid $11
million for the adjacent MTA that includes primarily eastern Tennessee. The
systems are currently being constructed, and the initiation of service is
anticipated in the second half of 1996 with initial build out completed by the
end of 1998.
9
PAGING OPERATIONS
Through Mobile Communications Corporation of America (MCCA), BellSouth
provided local and regional paging operations in many areas throughout the
United States and offered nationwide messaging service. 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.
As of December 31, 1995, BellSouth had approximately 1,777,000 pagers in
service. In January 1996, BellSouth sold to MobileMedia Communications, Inc.,
for $930 million, its interest in MCCA and its two-way nationwide narrowband PCS
license in order to redeploy its assets in, and focus its wireless
communications offerings primarily on, cellular and PCS. However, pursuant to a
reseller agreement, BellSouth may resell MobileMedia's paging services under
BellSouth's name.
MOBILE DATA
BellSouth, through its subsidiary BellSouth Mobile Data (BSMD), is an equity
investor in six wireless data communications networks worldwide utilizing L.M.
Ericsson's Mobitex technology. The countries consist of the United States, the
United Kingdom, The Netherlands, Belgium, Germany and Singapore. These networks
enable wireless data applications such as computer-aided dispatch, electronic
mail, transaction processing and remote data entry and retrieval. They are also
well-suited for fixed applications such as credit card validation and telemetry.
BSMD has a 49% interest in the United States wireless data operation, RAM
Mobile Data L.P. (RAM US). RAM Broadcasting Corporation is the operating partner
and owns 51% of RAM US.
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 local and long-distance telecommunications,
including cellular, 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 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. More than 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 902,000 cellular customers at December 31, 1995. 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 construction of its own network 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 each own 46.5% of Optus Vision. Two television stations now
hold 2% and 5%, respectively, and have the option to increase their respective
ownership interests to 15% and 20%.
10
BellSouth holds a license to operate a competing domestic and international
long distance concession in Chile. It began service in late 1994.
DOMESTIC BROADBAND SERVICES
In August 1992, the FCC issued an order allowing 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 is constructing a network in the
Chamblee, Georgia area that is planned to begin service during the second
quarter of 1996 and will provide 70 analog channels, 160 digital broadcast
channels and 480 digital switched channels to deliver video programming and
interactive services, which will be provided by both affiliated and non-
affiliated 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.
During 1995, BellSouth secured cable franchises covering Vestavia Hills, a
community of approximately 8,500 homes near Birmingham, Alabama, Daniel Island
(South Carolina) and World Golf Village (Florida). Daniel Island is a planned
community development located on a 4,500-acre island in Charleston harbor that
will include retail, commercial and residential development for 7,000 homes.
World Golf Village, located near Jacksonville, Florida, is a 6,300 acre
development which will include extensive commercial and residential development.
Cable service for Daniel Island and World Golf Village is expected to begin
sometime in 1996.
The 1996 Act eliminates the previous prohibition on telephone companies
providing cable television services in their service territories, although many
federal courts had already held such prohibition unconstitutional. In general,
however, local exchange carriers may not acquire or joint venture with
established cable television providers in their wireline territories.
SELLING AND MAINTAINING EQUIPMENT
To a limited extent, BellSouth sells and maintains telecommunications
equipment, computers and related office equipment in the nine Southeastern
states where BellSouth Telecommunications provides wireline telephone service.
The Holding Companies, AT&T and other substantial enterprises compete in the
provision of these services and products. In April 1994, BellSouth
Communications Systems, Inc., a wholly-owned subsidiary, disposed of its
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.
NETWORK AND RELATED SERVICES
LOCAL SERVICE
Over the past several years, a number of states in BellSouth
Telecommunications' wireline territory have passed legislation providing for
competition in areas where previously it had an exclusive operating franchise.
The state public service commissions in such jurisdictions have granted, or are
in the process of considering, applications for authority to compete with
BellSouth
11
Telecommunications. Such competitors include AT&T, MCI Telecommunications
Corporation (MCI), U S West, Inc. (U S West) and other substantial companies.
The 1996 Act further preempts all existing state legislative and regulatory
barriers to competition for local telephone service, subject only to
competitively neutral requirements to assure quality service consistent with
public safety, convenience and consumer welfare. BellSouth expects multiple
companies to apply to public service commissions in BellSouth
Telecommunications' territory for the authority to provide competitive local
telecommunications services. Because of the expense of constructing facilities
to provide these services, many of such carriers may resell the services of
BellSouth Telecommunications or jointly construct a competing network.
An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by competitive access
providers and other carriers in metropolitan areas, including Atlanta, Georgia,
Charlotte, North Carolina and Jacksonville, Miami and Orlando, Florida, which
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.
In 1994, AT&T acquired McCaw Communications, Inc. (McCaw), 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 cellular communications. AT&T will likely be a formidable cellular
competitor as a result of this acquisition, which provides 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, for example, 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.
One of these full-service networks is being built in Orlando, Florida, and a
limited trial of 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
and, in February 1996, announced a definitive agreement to acquire Continental
Cablevision, Inc., a provider with a major presence in Florida. The pending
acquisition by Time Warner of Turner Broadcasting Corporation will increase
concentration in the cable and programming industries.
Competition for local service revenues could adversely affect BellSouth's
net income. However, the existence of facilities-based competitive local service
will allow the Operating Telephone Companies to qualify to offer in-region
interLATA service, as contemplated in the 1996 Act. (See "BellSouth Competitive
Strategy.")
ACCESS SERVICE
The FCC has adopted rules requiring LECs to offer expanded interconnection
for interstate special and switched transport. As a result, BellSouth
Telecommunications is required to permit
12
competitive carriers and customers to terminate their transmission facilities in
its central office buildings through collocation arrangements. The effects of
the rules are to increase competition for access transport.
TOLL SERVICE
A number of firms compete with BellSouth Telecommunications in its
nine-state region for intraLATA toll business by reselling toll services
obtained at bulk rates from BellSouth Telecommunications or, subject to the
approval of the applicable state public utility commission, providing toll
services over their own facilities. Commissions in the states in BellSouth
Telecommunications' operating territory have allowed the latter type of
intraLATA toll calling, whereby the Interexchange Carriers are assigned a
multiple digit access code (10XXX) which customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislature or
commissions in three states have authorized competing carriers to provide
intraLATA toll presubscribed calling with a single digit access code (1+),
giving them dialing parity with the LEC in that area. Commissions in several
other states are considering how and when such authorization should be
implemented. However, the 1996 Act prohibits states from ordering the
implementation of new toll dialing parity until the earlier of (a) three years
from the enactment of the 1996 Act or (b) such time as the Operating Telephone
Company has qualified to provide in-region interLATA services. Other Holding
Companies will be permitted to offer BellSouth's local customers interLATA toll
service before BellSouth is eligible under the 1996 Act to offer such service to
its customers. BellSouth expects Holding Companies and interexchange carriers,
including AT&T and MCI, to compete for interLATA toll service.
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 various media
besides paper books, including CD ROM, the Internet and other 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. BellSouth has responded to the increased competition and its
changing market environment with new directory products, product enhancements,
multi-media delivery options, pricing changes, competitive advertising, local
promotions, directory redeliveries and extended distributions.
WIRELESS COMMUNICATIONS
The FCC's PCS licensing process will allow multiple new competitors for
BellSouth's wireless businesses. Licenses to provide PCS services have been won
in auction by AT&T, Holding Company consortia and other large and
well-capitalized entities. It is also anticipated that in conjunction with cable
operators, interexchange carriers or other alternative local service providers,
PCS will provide competition to BellSouth's local wireline and cellular
telephone businesses. The exact service offerings and functionality of PCS are
not yet apparent, but it is anticipated that some competitive systems could be
in place by mid-1996.
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, Bell Atlantic
Corporation and NYNEX Corporation have combined their cellular businesses, and U
S West and AirTouch Communications have announced that they plan to merge their
cellular businesses. Those four Holding Companies have also formed a joint
venture to provide PCS in many domestic markets.
13
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 wireless data businesses experience competition from private and
public wireless data networks, specialized mobile radio networks and cellular
networks. The degree and type of competition vary from country to country.
BellSouth's wireless data companies all utilize the Mobitex technology which is
flexible for targeting both specialized and general market segments.
RAM US's primary competitor is ARDIS, a wholly-owned subsidiary of Motorola,
Inc. The ARDIS network, which was started in 1983 as a private network for IBM,
has historically had greater coverage, an advantage which BellSouth considers
has been neutralized. Future competition could come from companies offering
Cellular Digital Packet Data (CDPD), a cellular-based system specifically
designed for packet data applications. There is a host of network and product
development issues that CDPD operators must still address before they can offer
a fully competitive service to that of RAM US.
Another competitive threat to each of BellSouth's overseas wireless data
holdings are Global System Mobile (GSM) operators, which may offer an integrated
packet data standard around the turn of the century. In Germany and Singapore,
BellSouth's wireless data properties compete against operators of technologies
related to Motorola's ARDIS 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.
BELLSOUTH COMPETITIVE STRATEGY
REGULATORY AND LEGISLATIVE CHANGES
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 regulation of earnings, BellSouth is seeking price regulation
where it does not exist, whereby prices of basic local exchange service would be
regulated and prices for other products and services would be based on market
factors. As such, BellSouth Telecommunications has price regulation plans
approved or authorized in seven states, and approvals are pending in two states.
As a result of the 1996 Act, BellSouth and the other Holding Companies are
freed from many of the laws, regulations and judicial restrictions (including
the MFJ) that constrained the provision of voice, data and video communications
throughout their wireline service territories and elsewhere. The FCC has
commenced rulemaking proceedings relating to the provision of interLATA service
by the Holding Companies. After necessary federal and state proceedings, these
companies may apply to the FCC to offer in-region interLATA wireline services,
and the FCC must act on such application within 90 days. The FCC must grant such
application if it determines that the applicant (a) has met a competitive
checklist; (b) has shown (i) the presence of facilities-based competition for
residential and business local service or (ii) in the absence thereof, a
statement of the terms under which it would be willing to interconnect with a
competitive local carrier; (c) will operate consistently with the separate
subsidiary requirement; and (d) will meet the 1996 Act's public interest
requirement in so offering the services on the foregoing conditions.
14
The Holding Companies are not required to obtain such FCC approval prior to
offering out-of-region interLATA wireline or nationwide interLATA wireless
services. BellSouth has begun to offer interLATA wireless service. BellSouth
plans to begin offering interLATA wireline service within its nine-state
territory as soon as possible after completion of FCC and state regulatory
proceedings, expected to be concluded in late 1996 or early 1997; however, no
assurance can be provided with respect to when BellSouth will be authorized to
initiate such interLATA wireline service. BellSouth has no plans to offer
out-of-region interLATA wireline services on a significant scale.
After some modifications to its network and operating systems, both wireline
and wireless interLATA services can be offered by BellSouth. However, many of
the telecommunications services that BellSouth and the other Holding Companies
may provide may be subject to extensive regulations to be adopted by the FCC and
state regulatory commissions.
The 1996 Act allows, without additional approval, BellSouth to market its
wireless services jointly with its wireline local exchange services; before,
separate marketing was required for cellular services. In addition, such joint
marketing will include interLATA wireline services in the nine-state territory
when authorized. BellSouth expects to begin a joint marketing trial for wireline
local exchange and cellular services later in 1996.
Technological changes and the effects of competition reduce the economic
useful lives of BellSouth Telecommunications' fixed assets. In connection with
BellSouth's discontinuance in 1995 of Statement of Financial Accounting
Standards No. 71 (SFAS No. 71), BellSouth Telecommunications reduced the
regulator-approved asset lives for certain categories of fixed assets to reflect
their estimated economic asset lives. (See "Management's Discussion and Analysis
of Results of Operations and Financial Condition (MD&A) -- Results of Operations
- -- Extraordinary Losses -- Discontinuance of 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 interLATA
services, information services and video and electronic commerce services.
BellSouth may enter such businesses through investments in, strategic alliances
with and acquisitions of established companies in such industries and through
the development of such services and capabilities internally. BellSouth intends
to pursue certain foreign telecommunications licenses as they are offered.
WORK FORCE REDUCTION/RESTRUCTURING
In 1995, BellSouth Telecommunications completed the restructuring of its
telephone operations that was announced in 1993. Also, BellSouth
Telecommunications announced in 1995 a plan to reduce its work force by
approximately 11,300 additional employees by the end of 1997. For a discussion
of the work force reduction/restructuring, see "MD&A -- Results of Operations --
Operating Expenses -- Work Force Reduction/Restructuring Charges."
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.
In April 1995, the Holding Companies announced their intention to dispose of
their respective interests in Bellcore. Neither the method of disposition nor
the timing thereof has been determined. A final decision regarding the
disposition of Bellcore and the structure of such a transaction is subject to
15
obtaining satisfactory financial and other terms and all necessary approvals.
There can be no assurance that a disposition will occur. In anticipation of such
disposition, however, BellSouth has negotiated an agreement for Bellcore to
provide continuing research and development services for a number of years.
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.
The domestic cellular, PCS 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. 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 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 believes that it owns or has licenses to use all patents,
copyrights, trademarks and other intellectual property necessary for it to
conduct its present business operations. It is not anticipated that any of such
property will be subject to expiration or non-renewal of rights which would
materially and adversely affect BellSouth or its subsidiaries.
EMPLOYEES
At December 31, 1995, 1994 and 1993 BellSouth and its subsidiaries employed
approximately 87,600, 92,100 and 95,100 persons, respectively. Of these amounts
at these dates, approximately 68,600, 73,800 and 78,000 persons were telephone
employees of BellSouth Telecommunications. About 62% of BellSouth's employees at
December 31, 1995 were represented by the Communications Workers of America (the
CWA), which is affiliated with the AFL-CIO. In October 1995, members of the CWA
ratified new three-year contracts with BellSouth. These contracts were effective
in August 1995. The contracts include basic wage increases of 10.9% (compounded)
over three years. In addition, the agreement provided a cash payment of one
thousand one hundred dollars to each eligible employee upon ratification and
further provides payments of one thousand one hundred dollars per eligible
employee in either cash or BellSouth stock, at the option of the employee, on
the 1996 and 1997 contract anniversary dates. Other terms of the agreement
include discontinuance of annual wage adjustments based on cost of living
increases and discontinuance of annual incentive payments.
During 1995, BellSouth Telecommunications completed the 1993 plan to reduce
its work force by approximately 10,200 employees. For the years ended December
31, 1995, 1994 and 1993, total employee reductions under this plan were 5,000,
3,900 and 1,300, respectively. Also during 1995, BellSouth Telecommunications
announced a plan to reduce its work force by approximately 11,300 employees by
the end of 1997. (See "MD&A -- Results of Operations -- Operating Expenses --
Work Force Reduction/Restructuring Charges.")
16
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, consisted of
the following at December 31:
1995 1994
---- ----
Outside plant.................................................... 43% 44%
Central office equipment......................................... 34 35
Land and buildings............................................... 7 7
Furniture and fixtures........................................... 6 6
Operating and other equipment.................................... 8 7
Plant under construction......................................... 2 1
---- ----
100% 100%
---- ----
---- ----
Outside plant consists of connecting lines (aerial, underground and buried
cable) not on customers' premises, the majority of which are on or under public
roads, highways or streets, while the remainder is on or under private property.
BellSouth currently self-insures all 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. Central office equipment, buildings,
furniture and fixtures and certain operating and other equipment are insured
under a blanket property insurance program. This program provides substantial
limits of coverage against "all risks" of loss including fire, windstorm, flood,
earthquake and other perils not specifically excluded.
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 has been transitioned
from an analog to a digital network, which provides capabilities for BellSouth
Telecommunications to furnish advanced data transmission and information
management services. BellSouth has substantially completed adding digital
technology to certain cellular systems which were operating with analog
technology at or near capacity.
CAPITAL EXPENDITURES
Capital expenditures consist of gross additions to property, plant and
equipment having an estimated service life of one year or more, plus the
incidental costs of preparing the asset for its intended use.
The total investment in property, plant and equipment has increased from
$36,812 million at January 1, 1991 to $46,869 million at December 31, 1995, 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.
17
BellSouth's capital expenditures for 1991 through 1995 were as follows:
MILLIONS
---------
1995.......................... $ 4,203
1994.......................... 3,600
1993.......................... 3,486
1992.......................... 3,189
1991.......................... 3,102
BellSouth projects capital expenditures of approximately $4.0 billion to
$4.3 billion for 1996, consisting of $3.0 billion for BellSouth
Telecommunications' and $1.0 billion to $1.3 billion for BellSouth Enterprises'
businesses. A majority of such expenditures for BellSouth Enterprises'
businesses will be for property additions to its cellular systems to complete
construction of new systems and to expand, enhance and modernize its current
operating systems.
In 1995, BellSouth generated substantially all of its funds for capital
expenditures internally. In 1996, such capital expenditures are expected to be
financed primarily through internally generated funds and, to the extent
necessary, from external sources.
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, 1995, BellSouth's recorded liability
related primarily to remediation of these sites was approximately $32 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 would not be material to its
financial position, annual operating results or cash flows.
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, annual operating results or cash flows.
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,
18
employment law issues and other matters. While complete assurance cannot be
given as to the outcome of any pending or threatened legal actions, BellSouth
believes that any financial impact would not be material to its financial
position, annual operating results or cash flows.
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, 1995.
------------------------
ADDITIONAL INFORMATION
DESCRIPTION OF BELLSOUTH STOCK
GENERAL
The Articles of Incorporation of BellSouth authorize the issuance of
2,200,000,000 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 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" and "Market for Registrants Common Equity and Related
Stockholder Matters.")
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.
19
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 in 1999.
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 (a) 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, (b) 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
(c) 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
(a) 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 (b) 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.
20
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.
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.
21
EXECUTIVE OFFICERS
The executive officers of BellSouth are listed below:
THIS
OFFICER OFFICE
NAME AGE OFFICE SINCE SINCE
- ------------------------- --- ------------------------------------------------------------ ------- ------
John L. Clendenin* 61 Chairman of the Board, President and Chief Executive Officer 1983 1984
F. Duane Ackerman* 53 Vice Chairman of the Board and Chief Operating Officer 1983 1995
Walter H. Alford 57 Executive Vice President and General Counsel 1983 1988
John F. Beasley 56 Vice President and Associate General Counsel 1985 1993
C. Sidney Boren 52 Senior Vice President -- Strategic Planning 1984 1995
Ronald M. Dykes 49 Executive Vice President, Chief Financial Officer and 1988 1995
Comptroller
Mark L. Feidler 39 Vice President -- Corporate Development 1993 1993
J. Robert Fitzgerald 56 Vice President -- Corporate Responsibility and Compliance 1983 1994
H. C. Henry, Jr. 51 Executive Vice President -- Corporate Relations 1984 1993
David J. Markey 55 Vice President -- Governmental Affairs 1986 1993
Charles C. Miller, III 43 President -- International 1990 1995
Arlen G. Yokley 58 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 56 President and Chief Executive Officer -- BellSouth 1982 1995
Telecommunications, Inc.
Earle Mauldin 55 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.
- ------------------------
* BellSouth has announced that Mr. Clendenin will retire as President and Chief
Executive Officer at the end of 1996, to be succeeded by Mr. Ackerman. Mr.
Clendenin will remain Chairman of the Board of Directors through 1997.
22
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. At February 1, 1996, there were
1,136,035 holders of record of BellSouth common stock. The market price and
dividend information listed below has been adjusted for the two-for-one stock
split effective in November 1995. Market price data were obtained from the NYSE
Composite Tape, which encompasses trading on the principal United States stock
exchanges as well as off-board trading. High and low prices represent the
highest and lowest sales prices for the periods indicated.
MARKET PRICES PER SHARE
------------------ DIVIDENDS
HIGH LOW DECLARED
------- ------- ----------
1995
First Quarter................................................................... $30 3/8 $26 7/8 $ .345
Second Quarter.................................................................. 32 1/4 29 1/8 .345
Third Quarter................................................................... 36 7/8 31 .36
Fourth Quarter.................................................................. 43 7/8 36 3/8 .36
1994
First Quarter................................................................... $30 3/4 $26 1/2 $ .345
Second Quarter.................................................................. 31 3/4 27 3/4 .345
Third Quarter................................................................... 31 3/4 27 3/8 .345
Fourth Quarter.................................................................. 28 1/8 25 1/4 .345
1993
First Quarter................................................................... $28 3/4 $25 1/4 $ .345
Second Quarter.................................................................. 28 1/2 25 3/8 .345
Third Quarter................................................................... 31 1/2 27 1/8 .345
Fourth Quarter.................................................................. 32 27 1/8 .345
STOCK TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services LLC is BellSouth's stock transfer agent
and registrar.
23
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 1992 1991
--------- -------- -------- -------- --------
Operating Revenues................................ $17,886 $16,845 $15,880 $15,202 $14,445
Operating Expenses (1)............................ 14,594 12,787 13,593 12,041 11,636
--------- -------- -------- -------- --------
Operating Income.................................. 3,292 4,058 2,287 3,161 2,809
Interest Expense.................................. 724 666 689 746 802
Other Income, net................................. 20 11 8 178 253
--------- -------- -------- -------- --------
Income Before Income Taxes, Extraordinary Losses
and Accounting Change............................ 2,588 3,403 1,606 2,593 2,260
Provision for Income Taxes........................ 1,024 1,243 572 934 753
--------- -------- -------- -------- --------
Income Before Extraordinary Losses and Accounting
Change........................................... 1,564 2,160 1,034 1,659 1,507
Extraordinary Losses, net of tax (2).............. (2,796) -- (87) (41) --
Accounting Change, net of tax..................... -- -- (67) -- (35)
--------- -------- -------- -------- --------
Net Income (Loss)............................... $(1,232) $ 2,160 $ 880 $ 1,618 $ 1,472
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Earnings (Loss) Per Share: (3)
Income Before Extraordinary Losses and
Accounting Change.............................. $ 1.57 $ 2.18 $ 1.04 $ 1.69 $ 1.56
Extraordinary Losses, net of tax (2)............ (2.81) -- (.09) (.04) --
Accounting Change, net of tax................... -- -- (.06) -- (.04)
--------- -------- -------- -------- --------
Net Income (Loss)............................. $(1.24) $ 2.18 $ .89 $ 1.65 $ 1.52
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Dividends Declared Per Common Share (3)........... $ 1.41 $ 1.38 $ 1.38 $ 1.38 $ 1.38
Book Value Per Share (3).......................... $ 11.90 $ 14.48 $ 13.60 $ 13.97 $ 13.47
Return to Average Common Equity................... (9.2%) 15.4% 6.3% 11.9% 11.3%
Weighted Average Common Shares Outstanding (3).... 993 992 991 981 968
Return on Average Total Capital................... (2.7%) 11.5% 6.1% 9.8% 9.4%
Total Assets...................................... $31,880 $34,397 $32,873 $31,463 $30,942
Capital Expenditures.............................. $ 4,203 $ 3,600 $ 3,486 $ 3,189 $ 3,102
Long-Term Debt.................................... $ 7,924 $ 7,435 $ 7,381 $ 7,360 $ 7,677
Debt Ratio at End of Period (4)................... 46.7% 39.3% 40.2% 39.0% 41.3%
Ratio of Earnings to Fixed Charges................ 4.24 5.34 2.98 4.00 3.47
Total Employees................................... 87,571 92,121 95,084 97,112 96,084
Telephone Employees (5)........................... 68,585 73,764 77,958 79,453 79,743
Telephone Employees per 10,000 Access Lines....... 32.5 36.5 40.3 42.6 44.1
Business Volumes: (6)
Network Access Lines in Service (thousands)....... 21,133 20,220 19,333 18,650 18,035
Access Minutes of Use (millions):
Interstate...................................... 62,411 57,778 53,345 50,546 47,255
Intrastate...................................... 19,197 16,888 15,261 13,994 13,238
Toll Messages (millions).......................... 1,374 1,559 1,511 1,462 1,504
Cellular Customers (thousands): (7)
Domestic........................................ 2,847 2,156 1,559 1,118 774
International................................... 655 361 192 78 26
--------- -------- -------- -------- --------
Total......................................... 3,502 2,517 1,751 1,196 800
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- ------------------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
which reduced net income by $663. Operating Expenses for 1993 include a
charge for restructuring of $1,136, which reduced net income by $697. See
Note K to the Consolidated Financial Statements.
(2) For 1995, reflects charges of $2,718 ($2.73 per share) for the
discontinuance of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" and $78 ($.08
per share) related to the refinancing of long-term debt issues. See Notes B
and F to the Consolidated Financial Statements.
(3) Amounts for 1991 - 1994 have been restated to reflect a two-for-one stock
split effective in November 1995.
(4) The debt ratio at December 31, 1995 has been adjusted to exclude $485 of
debentures to be redeemed in January 1996.
(5) Telephone employees exclude those employees in BellSouth Telecommunications'
subsidiaries which are unrelated to telephone operations.
(6) 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.
(7) Equity Basis.
24
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 geographic areas, called Local Access and Transport Areas (LATAs), and
provides network access services to enable interLATA communications using the
long-distance facilities of interexchange carriers. Through subsidiaries, other
telecommunications services and products are provided primarily within the
nine-state BellSouth Telecommunications region. BellSouth Enterprises, Inc.
(BellSouth Enterprises), another wholly-owned subsidiary, owns businesses
providing wireless and international communications services and advertising and
publishing products.
Approximately 70%, 72% and 73% of BellSouth's Total Operating Revenues for
the years ended December 31, 1995, 1994 and 1993, respectively, were from
wireline services provided by BellSouth Telecommunications. Charges for local,
access and toll services for the year ended December 31, 1995 accounted for
approximately 59%, 33% and 8%, respectively, of the wireline revenues discussed
above. Revenues from wireless communications services and directory advertising
and publishing services accounted for approximately 14% and 9%, respectively, of
Total Operating Revenues for the year ended December 31, 1995. The remainder of
such revenues was derived principally from other nonregulated services provided
by BellSouth Telecommunications.
RESULTS OF OPERATIONS
All per share amounts herein reflect a two-for-one stock split effective in
November 1995. See Note H to the Consolidated Financial Statements.
PERCENT CHANGE
----------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ---------- ----------
Income Before Extraordinary Losses
and Cumulative Effect of Change in
Accounting Principle............... $ 1,564 $ 2,160 $ 1,034 (27.6%) 108.9%
Extraordinary Loss for
Discontinuance of SFAS No. 71, net
of tax............................. (2,718) -- -- -- --
Extraordinary Loss on Early
Extinguishment of Debt, net of
tax................................ (78) -- (87) -- (100.0)
Cumulative Effect of Change in
Accounting Principle, net of tax... -- -- (67) -- (100.0)
--------- --------- ---------
Net Income (Loss)................... $ (1,232) $ 2,160 $ 880 -- 145.5
--------- --------- ---------
--------- --------- ---------
25
Earnings (Loss) Per Share:
PERCENT CHANGE
----------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ---------- ----------
Income Before Extraordinary Losses
and Cumulative Effect of Change in
Accounting Principle............... $ 1.57 $2.18 $1.04 (28.0%) 109.6%
Extraordinary Loss for
Discontinuance of SFAS No. 71, net
of tax............................. (2.73) -- -- -- --
Extraordinary Loss on Early
Extinguishment of Debt, net
of tax............................. (.08) -- (.09) -- (100.0)
Cumulative Effect of Change in
Accounting Principle, net of tax... -- -- (.06) -- (100.0)
--------- --------- ---------
Earnings (Loss) Per Share........... $(1.24) $2.18 $ .89 -- 144.9
--------- --------- ---------
--------- --------- ---------
For a discussion of the extraordinary losses in 1995 and 1993, see
"Extraordinary Losses" below; the change in accounting principle in 1993
resulted from the retroactive adoption of Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
which is discussed in Note M to the Consolidated Financial Statements.
Income Before Extraordinary Losses and Cumulative Effect of Change in
Accounting Principle for 1995 decreased $596 (27.6%) and $.61 per share (28.0%),
respectively, compared to 1994. The decreases were primarily due to a work force
reduction charge in 1995 of $663 ($.67 per share). For a discussion of such
charge, see "Operating Expenses -- Work Force Reduction/Restructuring Charges"
below. Also contributing to the decreases were the effects of gains in 1994
aggregating $108 ($.11 per share) related to the sale of two international
cellular investments. The decreases were partially offset by revenue growth,
driven by continued growth of access lines and the cellular customer base, and
cost control measures at BellSouth Telecommunications, including salary and wage
savings attributable to the restructuring plan initiated in 1993.
Income Before Extraordinary Losses and Cumulative Effect of Change in
Accounting Principle for 1994 increased $1,126 (108.9%) and $1.14 per share
(109.6%), respectively, compared to the previous year. The increases were
attributable in part to growth in key business volumes, expense savings
attributable to BellSouth Telecommunications' restructuring plan initiated in
1993 and, as discussed above, the gains on sale of two international cellular
investments. The increases were also due to the effect of charges in 1993 which
totaled $785 ($.79 per share). Such 1993 charges are comprised of $697 ($.71 per
share) for restructuring of BellSouth's telephone operations (see "Operating
Expenses -- Work Force Reduction/Restructuring Charges" below); $47 ($.05 per
share) for the initial impact of a regulatory settlement in Florida;
approximately $25 ($.02 per share) associated with severe 1993 winter weather
conditions; and $16 ($.01 per share) related to the federal income tax
legislation enacted in 1993.
26
VOLUMES OF BUSINESS
Network Access Lines in Service at December 31 (thousands):
PERCENT CHANGE
----------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ---------- ----------
By Type:
Residence................................ 14,653 14,195 13,692 3.2% 3.7%
Business................................. 6,225 5,771 5,388 7.9 7.1
Other.................................... 255 254 253 0.4 0.4
--------- --------- ---------
Total.................................. 21,133 20,220 19,333 4.5 4.6
--------- --------- ---------
--------- --------- ---------
By State:
Florida.................................. 5,597 5,350 5,097 4.6 5.0
Georgia.................................. 3,550 3,354 3,167 5.8 5.9
Tennessee................................ 2,435 2,337 2,236 4.2 4.5
Louisiana................................ 2,108 2,037 1,963 3.5 3.8
North Carolina........................... 2,101 1,994 1,896 5.4 5.2
Alabama.................................. 1,792 1,726 1,668 3.8 3.5
South Carolina........................... 1,292 1,244 1,200 3.9 3.7
Mississippi.............................. 1,158 1,118 1,077 3.6 3.8
Kentucky................................. 1,100 1,060 1,029 3.8 3.0
--------- --------- ---------
Total.................................. 21,133 20,220 19,333 4.5 4.6
--------- --------- ---------
--------- --------- ---------
The total number of access lines in service since December 31, 1994
increased by approximately 913,000 (4.5%) to 21,133,000, compared to a 4.6% rate
of increase in 1994. Business and residence access lines increased by 7.9% and
3.2%, respectively, compared to growth rates of 7.1% and 3.7% in 1994. The
number of second residence lines, included in total residence lines, increased
by 220,000 (20.9%) to 1,271,000 and accounted for approximately 48.0% and 24.1%
of the overall increase in residence access lines and total access lines,
respectively, since December 31, 1994. Such second residence lines are generally
used for home office purposes, access to on-line computer services and
children's phones. The growth in all categories of access lines was primarily
attributable to continued economic improvement in the Southeast and successful
marketing programs.
Access Minutes of Use (millions):
PERCENT CHANGE
--------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ------------ ------------
Interstate................................. 62,411 57,778 53,345 8.0% 8.3%
Intrastate................................. 19,197 16,888 15,261 13.7 10.7
--------- --------- ---------
Total.................................... 81,608 74,666 68,606 9.3 8.8
--------- --------- ---------
--------- --------- ---------
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 1995, total access minutes of
use increased by 6,942 million (9.3%) compared to an increase of 8.8% in 1994.
The 1995 increase in access minutes of use was primarily attributable to access
line growth, promotions by the interexchange carriers and intraLATA toll
competition, which has the effect of increasing access minutes of use while
reducing toll messages carried over BellSouth Telecommunications' network. The
growth rate in total minutes of use continues to be negatively impacted by
competition
27
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
-------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ----------- ------------
Toll Messages (millions)................................ 1,374 1,559 1,511 (11.9%) 3.2%
Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 185 million (11.9%)
in 1995 compared to an increase of 3.2% in 1994. The decrease in 1995 was
primarily attributable to the expansion of local area calling plans in Florida,
Georgia, South Carolina, North Carolina and Mississippi. These plans and future
implementation of other such plans in BellSouth Telecommunications' service
region, coupled with competition from the interexchange carriers in the
intraLATA toll market, will adversely impact future toll message volumes. Local
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.
Cellular and Paging Customers -- Equity Basis (thousands):
PERCENT CHANGE
--------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ------------ ------------
Domestic Cellular........................................ 2,847 2,156 1,559 32.1% 38.3%
International Cellular................................... 655 361 192 81.4 88.0
Paging Customers (all domestic).......................... 1,777 1,614 1,232 10.1 31.0
The wireless communications businesses are a significant contributor to
BellSouth's operations, primarily due to the continued expansion of the customer
base for cellular communications services. Domestic cellular customers increased
by 691,000 (32.1%) since December 31, 1994. While the rate of increase has
declined since 1994, the overall penetration rate (number of customers as a
percentage of the total population in the service territory) increased from 5.5%
at December 31, 1994 to 7.1% at December 31, 1995. Total minutes of use have
also continued to increase, although average minutes of use per cellular
customer declined due to the trend of increased penetration into lower-usage
market segments.
Since December 31, 1994, the number of international cellular customers
increased by 294,000 (81.4%) to 655,000. Growth in total minutes of use for
international cellular properties remained strong due to demand stimulated by
competitive programs, enhanced services and underdeveloped land-line service.
Paging customers increased by 163,000 (10.1%) since December 31, 1994 due
primarily to the continued success of the retail distribution program. In
January 1996, BellSouth sold its paging subsidiary; see Note C to the
Consolidated Financial Statements.
OPERATING REVENUES
Total Operating Revenues increased $1,041 (6.2%) in 1995 compared to an
increase of $965 (6.1%) during 1994. The increases resulted from growth in
revenues from BellSouth's wireline telephone businesses, coupled with a
significant increase in revenues from cellular 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.
28
The components of Total Operating Revenues were as follows:
PERCENT CHANGE
------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ----------- -----------
Local Service.................................. $ 7,294 $ 6,863 $ 6,577 6.3% 4.3%
Interstate Access.............................. 3,275 3,127 2,991 4.7 4.5
Intrastate Access.............................. 884 908 882 (2.6) 2.9
Toll........................................... 1,009 1,190 1,220 (15.2) (2.5)
Wireless Communications........................ 2,592 2,067 1,553 25.4 33.1
Directory Advertising and Publishing........... 1,677 1,556 1,515 7.8 2.7
Other Services................................. 1,155 1,134 1,142 1.9 (0.7)
--------- --------- ---------
Total Operating Revenues..................... $ 17,886 $ 16,845 $ 15,880 6.2 6.1
--------- --------- ---------
--------- --------- ---------
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 1995 increased $431 (6.3%) compared to an
increase of $286 (4.3%) in 1994.
The 1995 increase was due primarily to an increase of 913,000 access lines
since December 31, 1994, an increase of $107 due to higher customer demand for
TouchStar-Registered Trademark- and Custom Calling services, and the effect of
expanded local area calling plans. The increase in 1995 was partially offset by
net rate reductions since December 31, 1994 of approximately $46.
The increase in 1994 was due primarily to an increase of 887,000 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.
INTERSTATE ACCESS revenues result from the provision of access services to
interexchange carriers to provide telecommunications services between states.
Interstate Access revenues increased $148 (4.7%) in 1995 compared to an increase
of $136 (4.5%) in 1994.
The increase for 1995 was due primarily to growth in minutes of use of 8.0%,
an increase in end-user charges of $52 attributable to growth in the number of
access lines in service and an increase of $42 due to higher demand for special
access services. The 1995 increase was partially offset by net rate reductions
since December 31, 1994 of approximately $58.
The 1994 increase was primarily attributable to growth in minutes of use,
additional end user charges due 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 increase was partially offset by the effect of net
rate reductions since December 31, 1993 and decreased net settlements with the
National Exchange Carriers Association.
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 1995, Intrastate Access revenues decreased $24 (2.6%)
compared to an increase of $26 (2.9%) in 1994.
The 1995 decrease was due primarily to net rate reductions of $100,
partially offset by 13.7% growth in minutes of use.
For 1994, the increase was attributable to growth in minutes of use and the
reclassification beginning in 1994 of independent telephone 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.
29
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 $181 (15.2%)
in 1995 compared to a decrease of $30 (2.5%) in 1994.
In 1995, the decrease was due primarily to a decline in toll messages of
11.9%. The decline in toll messages reflects the expansion of local area calling
plans and increased competition from interexchange carriers.
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
optional calling plans.
The overall decline in toll revenues is expected to continue over the long
term.
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 $525 (25.4%) in 1995 compared to
an increase of $514 (33.1%) in 1994. The increases for both years resulted
primarily from continued growth of the customer base for wireless services in
domestic and international markets.
As discussed in Note C to the Consolidated Financial Statements, BellSouth
sold its domestic paging subsidiary in January 1996. Revenues from such paging
services, included as a component of Wireless Communications revenues, were
$349, $276 and $207 in 1995, 1994 and 1993, respectively.
Consistent with anticipated growth in the overall cellular industry,
BellSouth's revenues from cellular services are expected to continue to
increase. However, the rate of growth of such revenues could be adversely
affected by competitive pressures on service pricing and market penetration, the
continuing effect of an increasingly diversified customer base with lower
average usage and the development of new technologies, such as personal
communications service (PCS).
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 $121 (7.8%) in 1995 compared to a
$41 (2.7%) increase in 1994.
The 1995 increase was due primarily to increases in the volume of
advertising sold and the impact of BellSouth Telecommunications' adoption of
issue basis accounting for directory revenues in connection with the
discontinuance of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," which is discussed
in Note B to the Consolidated Financial Statements.
In 1994 the increase was primarily attributable to increases in the volume
and prices of advertising sold.
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 increased $21
(1.9%) in 1995 compared to a decrease of $8 (0.7%) in 1994.
The increase in 1995 was due primarily to reduced levels of revenue
reduction accruals related to potential sharing under certain state regulatory
plans coupled with the reclassification of certain such
30
accruals to Local Service revenues, the combined effect of which increased Other
Services revenues by approximately $76. The increase was also due to
approximately $41 resulting from higher demand for voice messaging and inside
wire services. The increase was partially offset by a reduction of $37 in
revenues from billing and collection services and by approximately $33 related
to the sale in April 1994 of BellSouth Telecommunications' out-of-region CPE
sales and service operations.
The slight decrease in 1994 was primarily attributable to increased revenue
reduction accruals 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.
OPERATING EXPENSES
Primarily as a result of the work force reduction charge in 1995 and the
restructuring charge in 1993, Total Operating Expenses increased $1,807 (14.1%)
in 1995 compared to a decrease of $806 (5.9%) in 1994. The components of Total
Operating Expenses were as follows:
PERCENT CHANGE
-------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ------------ -----------
Depreciation and Amortization.................. $ 3,455 $ 3,259 $ 3,162 6.0% 3.1%
--------- --------- ---------
Other Operating Expenses:
Cost of Services and Products................ 6,184 6,043 5,865 2.3 3.0
Selling, General and Administrative.......... 3,873 3,485 3,430 11.1 1.6
--------- --------- ---------
10,057 9,528 9,295 5.6 2.5
--------- --------- ---------
Subtotal................................... 13,512 12,787 12,457 5.7 2.6
Work Force Reduction/Restructuring Charges..... 1,082 -- 1,136 -- (100.0)
--------- --------- ---------
Total Operating Expenses................... $ 14,594 $ 12,787 $ 13,593 14.1 (5.9)
--------- --------- ---------
--------- --------- ---------
DEPRECIATION AND AMORTIZATION increased $196 (6.0%) in 1995 compared to a
$97 (3.1%) increase in 1994.
The 1995 increase was due primarily to higher levels of property, plant and
equipment since December 31, 1994 resulting from sustained growth in the
customer base for wireless and wireline services and continued modernization of
the networks. For a discussion of the impact of discontinuance of SFAS No. 71 on
depreciation expense in 1995 and 1996, see "Extraordinary Losses --
Discontinuance of SFAS No. 71" below.
The increase in 1994 was due primarily 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 and continued modernization of
the networks. The increase for the period was partially offset by the expiration
of reserve deficiency amortizations in Louisiana and the inclusion in 1993 of
$20 related to extraordinary property retirements in conjunction with a
regulatory settlement in Florida.
OTHER OPERATING EXPENSES are comprised of Cost of Services and Products and
Selling, General and Administrative. Cost of Services and Products includes
employee and employee-related expenses associated with network repair and
maintenance, material and supplies expense, cost of tangible goods sold and
other expenses associated with providing services. Selling, General and
Administrative includes expenses related to sales activities such as salaries,
commissions, benefits, travel, marketing and advertising expenses and
administrative expenses. Other Operating Expenses increased $529 (5.6%) in 1995
compared to an increase of $233 (2.5%) in 1994.
31
The 1995 increase was due primarily to increased expenses of approximately
$310 related to sustained growth in the wireless communications customer base,
reflecting additional marketing and operational costs associated with higher
levels of sales and expanded operations. At BellSouth Telecommunications, Other
Operating Expenses increased $114, which reflected volume growth that was
partially offset by a decrease of approximately $130 for labor costs, including
expenses for employee benefits. The decrease in such labor costs reflects
employee reductions attributable to the restructuring plan begun in 1993,
partially offset by annual compensation increases for management and represented
employees. The 1995 increase in Other Operating Expenses was also attributable
to approximately $55 related to growth in the volume of directory advertising
sold.
The increase in 1994 was primarily attributable to increased expenses
related to growth in the wireless communications customer base. Also
contributing to the increase were expenses related both to volume growth and
network modernization in the core wireline business 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 $94 reduction in pension expense (see Note I). The
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.
WORK FORCE REDUCTION/RESTRUCTURING CHARGES. In the fourth quarter of 1995,
BellSouth recognized a pretax charge of $1,082 ($663 after tax), comprised of
$942 ($577 after tax) related to planned work force reductions by the end of
1997, $85 ($52 after tax) for expected severance benefit payments after 1997 and
$55 ($34 after tax) for additional net curtailment losses related to employee
reductions under the restructuring plan initiated in 1993.
Each component of the overall 1995 work force reduction charge, as well as
the 1993 restructuring charge, is discussed below.
1995 WORK FORCE REDUCTION CHARGE. In connection with a previously-disclosed
plan to significantly reduce its work force by the end of 1997, BellSouth
recorded a pretax charge of $942 in the fourth quarter of 1995. Under this plan,
BellSouth expects to reduce the work force of the core wireline business by
approximately 11,300 employees by the end of 1997, including a reduction of 800
employees which occurred in December 1995.
The work force reduction will be accomplished through the separation of
approximately 13,200 employees, partially offset by the planned hiring of new
employees primarily to replace those not expected to relocate in connection with
the consolidation of work locations.
The $942 pretax charge is comprised of approximately $561 under the
provisions of SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
related to those employees who are expected to receive severance benefits under
preexisting separation plans, and approximately $381 for curtailment losses
under the provisions of SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Substantially all of the curtailment losses relate to postretirement
benefits other than pensions.
Once the plan to reduce 11,300 employees is completed, annual employee cost
savings are estimated to be approximately $560. Such annual savings will be
partially offset by increased costs of approximately $60 for outsourced
services.
POSTEMPLOYMENT BENEFITS CHARGE. The pretax charge of $85 represents
estimated future postemployment severance benefits to be paid after 1997, also
in accordance with the provisions of SFAS No. 112. This component is based on
BellSouth's belief that work force reductions will continue under existing
separation plans, although at reduced separation benefit levels.
32
1993 RESTRUCTURING OF TELEPHONE OPERATIONS. During 1993, BellSouth
Telecommunications recognized a $1,136 restructuring charge in connection with a
plan to redesign, consolidate and streamline the fundamental processes and work
activities in its telephone operations. Consistent with previously-disclosed
expectations, the restructuring was completed in 1995, about one year earlier
than initially planned.
As a part of the restructuring, BellSouth Telecommunications consolidated
and centralized its existing operations. These efforts involved redesign of key
work processes and the design of new processes that facilitated the
consolidation of service functions and the reduction of 10,200 employees.
Since inception of the restructuring plan, total employee reductions were
approximately 10,200, including 5,000 since December 31, 1994. As a result of
employee reductions in 1994 and 1995, employee-related expenses, included as a
component of operating expenses, for the year 1995 were reduced by approximately
$180 compared to the 1994 level. The cumulative reduction of 10,200 employees
since inception of the plan reduced 1995 employee-related expenses by
approximately $375. For the year 1996, the cumulative employee reductions under
the plan are projected to reduce employee-related expenses by approximately
$600.
A summary of employee reductions and expenditures through December 31, 1995
under the 1993 restructuring plan is as follows:
1993 1994 1995 TOTAL
------ ------ ------ ------
Employee Reductions..................... 1,300 3,900 5,000 10,200
------ ------ ------ ------
------ ------ ------ ------
Expenditures By Component:
Consolidation and Elimination of
Operations........................... $ 15 $ 165 $ 231 $ 411
Systems............................... -- 170 244 414
Employee Separation................... 38 134 251 423
------ ------ ------ ------
Total............................... $ 53 $ 469 $ 726 $1,248
------ ------ ------ ------
------ ------ ------ ------
Expenditures By Type:
Cash.................................. $ 53 $ 390 $ 648 $1,091
Noncash............................... -- 79 78 157
------ ------ ------ ------
Total............................... $ 53 $ 469 $ 726 $1,248
------ ------ ------ ------
------ ------ ------ ------
Capital Expenditures (not included in
above expenditures).................... $-- $ 204 $ 250 $ 454
------ ------ ------ ------
------ ------ ------ ------
Total expenditures of $1,248 include $55 of additional net curtailment
losses resulting from a greater number of retirement-eligible employees
separating under the plan than originally expected. These additional net
curtailment losses were included in the 1995 work force reduction charge
discussed above.
At inception of the restructuring plan in 1993, the projected employee
reductions and expenditures for each component of the charge by year were as
follows:
1993 1994 1995 1996 TOTAL
--------- --------- --------- --------- ---------
Employee Reductions...................................... 1,300 3,700 2,900 2,300 10,200
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Consolidation and Elimination of Operations.............. $ 15 $ 185 $ 87 $ 56 $ 343
Systems.................................................. -- 185 156 84 425
Employee Separation...................................... 38 143 105 82 368
--------- --------- --------- --------- ---------
Total.................................................. $ 53 $ 513 $ 348 $ 222 $ 1,136
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
33
OTHER INCOME STATEMENT ITEMS
PERCENT CHANGE
----------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ---------- ----------
Interest Expense................................ $ 724 $ 666 $ 689 8.7% (3.3%)
Other Income, net............................... 20 11 8 81.8 37.5
Provision for Income Taxes...................... 1,024 1,243 572 (17.6) 117.3
INTEREST EXPENSE includes interest on debt, certain other accrued
liabilities and capital leases, partially offset by interest capitalized as a
cost of installing equipment and constructing plant. Interest expense increased
$58 (8.7%) in 1995 compared to a decrease of $23 (3.3%) in 1994.
The 1995 increase was primarily attributable to higher average interest
rates on short-term borrowings and higher average debt levels for long-term
borrowings. The average interest rate on long-term borrowings was slightly lower
in 1995 compared to 1994, reflecting the initial impact of 1995 debt
refinancings at more favorable interest rates.
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.
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 $9 (81.8%) in 1995 compared to an increase of $3 (37.5%) in 1994.
The increase in 1995 included a $43 increase in interest income and $18 in
lower net minority interest deductions. Equity in losses of unconsolidated
affiliates was $(86) in 1995 compared to $(110) in 1994. The lower 1995 losses
reflect a reduction in losses in the mobile data communications businesses and
higher income from domestic cellular operations, partially offset by increased
losses from certain developing international businesses, principally operations
in Germany and Israel. The increase in Other Income was also attributable to a
$34 increase in miscellaneous income related to nonstrategic business
activities. The increases in Other Income were partially offset by a gain of
$108 in 1994, as discussed below.
The increase in 1994 reflected an aggregate gain of $108 from the sale of
two international cellular investments and a $22 increase in interest income.
The increases were partially offset by a $29 increase in net minority interest
deductions. Equity in earnings (losses) of unconsolidated affiliates was $(110)
in 1994 compared to $11 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.
PROVISION FOR INCOME TAXES decreased $219 (17.6%) in 1995 compared to an
increase of $671 (117.3%) in 1994. BellSouth's effective tax rates were 39.6%,
36.5% and 35.6% in 1995, 1994 and 1993, respectively. A reconciliation of the
statutory Federal income tax rates to these effective tax rates is provided in
Note L. A discussion of the 1993 adoption of SFAS No. 109, "Accounting for
Income Taxes," also is included therein.
EXTRAORDINARY LOSSES
DISCONTINUANCE OF SFAS NO. 71. As a result of its continuing regulatory and
marketplace assessments, BellSouth Telecommunications concluded that it is no
longer appropriate to prepare its external financial results using the
accounting method required for regulated enterprises. BellSouth
Telecommunications believes that based on recent changes in the regulatory
framework and the increasing level of competition, it was required to
discontinue SFAS No. 71 for financial reporting purposes. Discontinuance was
required because most of BellSouth Telecommunications' revenues
will not be generated under cost-based regulation and because it is doubtful
that regulated rates sufficient to recover the net book value of telephone plant
could be charged to and collected from
34
customers due to the expected levels of future competition. Accordingly, in the
second quarter of 1995, BellSouth Telecommunications discontinued application of
SFAS No. 71 and recorded a noncash extraordinary charge of $2,718 (net of a
deferred tax benefit of $1,731). The extraordinary charge reflects $3,002 (after
tax) to reduce the recorded value of long lived telephone plant and equipment,
all of which was within the regulatory framework, to the level appropriate for
nonregulated enterprises. The overall charge was partially offset by $194
related to the method by which BellSouth Telecommunications reports its
directory publishing revenues, $71 related to the elimination of regulatory
assets and liabilities and $19 for the partial acceleration of unamortized
investment tax credits associated with the reductions in asset carrying values
and in asset lives.
Recent changes in its regulatory framework and the simultaneous elimination
of legal and regulatory barriers for its competitors both support discontinuance
of SFAS No. 71. In the regulatory arena, implementation of price regulation has
been and continues to be a cornerstone in BellSouth Telecommunications'
corporate strategy. Due in part to this strategy, changes in the regulatory
framework are now being implemented (see "Operating Environment and Trends of
the Business"). As a result of such changes, a significant portion of BellSouth
Telecommunications' revenue will no longer be regulated based on the recovery of
specific costs. Furthermore, BellSouth Telecommunications expects that
competition in its local exchange markets will accelerate. The removal of legal
and regulatory barriers is expected to encourage potential competitors to
accelerate deployment of competing networks to either compete directly for local
service or to bypass the BellSouth Telecommunications network for long distance
access. Potential competitors have continued to make investments in wireless
licenses, cable properties and enhanced interexchange networks, which serves as
further evidence of increased competition.
In connection with the discontinuance of SFAS No. 71, the average
depreciable lives of significant categories of long lived telephone plant were
reduced to more closely reflect the economic and technological lives. The
application of such shorter lives does not result in a material increase in
depreciation expense.
See Note B to the Consolidated Financial Statements.
EARLY EXTINGUISHMENT OF DEBT. During 1995 and 1993, BellSouth
Telecommunications recognized extraordinary losses of $78 (net of a current tax
benefit of $49) and $87 (net of a current tax benefit of $59), respectively,
related to the early extinguishment of outstanding debt issues. See Note F to
the Consolidated Financial Statements.
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. While current liabilities exceeded
current assets at both December 31, 1995 and 1994, BellSouth's sources of funds
- -- primarily from operations and, to the extent necessary, from readily
available external financing arrangements -- are sufficient to meet all current
obligations on a timely basis. BellSouth believes that such sources of funds
will be sufficient to meet the needs of its business for the foreseeable future.
PERCENT CHANGE
--------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
---------- ---------- ---------- ------------ ------------
Net Cash Provided by Operating Activities...... $ 5,443 $ 5,172 $ 4,687 5.2% 10.3%
OPERATING ACTIVITIES. Net cash provided by operating activities increased
$271 (5.2%) in 1995 compared to an increase of $485 (10.3%) in 1994. The
increase in 1995 was primarily attributable to a $512 increase in operating
income excluding depreciation, amortization and the work force reduction
charges. Such increase in 1995 operating income was partially offset by higher
cash expenditures of $258 related to the restructuring plan begun in 1993.
35
The increase in 1994, primarily attributable to a higher level of net
income, was partially offset by cash expenditures of $390 related to the
restructuring plan begun in 1993.
PERCENT CHANGE
--------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ------------ ------------
Net Cash Used for Investing Activities............ $ (4,384) $ (3,935) $ (3,435) 11.4% 14.6%
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 $449 (11.4%)
in 1995 compared to an increase of $500 (14.6%) in 1994. The increase in 1995
was primarily due to higher capital expenditures of $603 related substantially
to wireline and wireless network development, partially offset by higher cash
proceeds of $188 from investment dispositions and repayment of advances.
Capital expenditures were $4,203 in 1995 and are projected to be
approximately $4,000 to $4,300 in 1996. Such capital expenditures for 1995 were
financed internally and, for 1996, are expected to be financed primarily through
internally generated funds and, to the extent necessary, from external sources.
The increase in 1994 was primarily 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
$321 (106.3%) to $623. Of such total, approximately 48% was for investments and
advances to the mobile data communications businesses and the German and
Venezuelan cellular businesses and 30% 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 (3.3%) to $3,600. Substantially all cash
required for capital expenditures in 1994 was provided internally.
PERCENT CHANGE
-------------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
--------- --------- --------- ----------- ------------
Net Cash Provided by (Used for) Financing
Activities.................................... $ 46 $ (1,132) $ (1,016) -- 11.4%
FINANCING ACTIVITIES. During 1995, financing activities provided cash of $46
while in 1994 financing activities used cash of $(1,132). The change from 1994
to 1995 of $1,178 primarily reflects higher levels of net proceeds from all
borrowing activities in 1995 compared to 1994.
In September 1995, BellSouth's Board of Directors raised the quarterly
dividend by $.015 per share to a total of $.36 per share and declared the same
$.36 per share dividend again in November 1995.
The increase in 1994 was primarily attributable to increases of $62 in cash
dividends paid to shareholders and $3,447 for debt repayments, primarily
short-term borrowings. The effect of these increases was substantially offset by
an increase of $3,427 in proceeds from all borrowings.
DEBT ACTIVITIES. During 1995, BellSouth issued $500 of long-term debt and,
with net proceeds, refinanced outstanding short-term debt. Also during 1995,
BellSouth issued approximately $1,900 of long-term debt to refinance $1,885 of
outstanding long-term debentures, including $485 of debentures redeemed in
January 1996. The funds to redeem the $485 of debentures in January 1996 are
included in Cash and Cash Equivalents in the Consolidated Balance Sheet at
December 31, 1995. In addition, Cash and Cash Equivalents includes $500 which
was used to redeem commercial paper on January 2, 1996.
BellSouth has committed credit lines aggregating $1,539 with various banks.
Borrowings under the committed credit lines totaled $21 at December 31, 1995.
BellSouth also maintains uncommitted lines of credit of $650. At December 31,
1995, there were no borrowings under the uncommitted lines. As of February 15,
1996, shelf registration statements were on file with the Securities and
Exchange Commission under which $2,227 of debt securities could be publicly
offered.
36
BellSouth's debt to total capitalization ratio, adjusted to exclude the $485
of debentures redeemed in January 1996, increased to 46.7% at December 31, 1995
from 39.3% at December 31, 1994. The increase was mostly caused by the reduction
in equity due to the extraordinary loss from the discontinuance of SFAS No. 71.
DERIVATIVE ACTIVITIES. BellSouth is party to foreign exchange forward
contracts, currency swap agreements and interest rate swap agreements in its
normal course of business for hedging purposes. These financial instruments are
used to mitigate foreign currency and interest rate risks, although to some
extent they expose the company to market 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, not the full notional amount. Such contracts and agreements have
been executed with creditworthy financial institutions whose credit ratings are
generally AA/Aa or higher. As such, BellSouth considers the risk of
nonperformance to be remote. See Note O to the Consolidated Financial Statements
for additional information.
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. 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. BellSouth believes that price regulation, whereby prices of
basic local exchange services are regulated based on factors other than rate of
return 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 price regulation plans limit the amount of increases in prices
for specified services, such plans enhance the company's ability to adjust
prices and service options to more effectively respond to changing market
conditions and competition and enable it to more fully benefit from productivity
enhancements. Price regulation plans have been approved or authorized by the
requisite legislative or regulatory bodies in Alabama, Florida (although a
sharing requirement exists at least through 1996), Georgia, Kentucky,
Mississippi, South Carolina and Tennessee, and approval of a plan is pending in
North Carolina. In addition, BellSouth Telecommunications has filed a proposed
price regulation plan in Louisiana. At the federal level, BellSouth
Telecommunications is operating under an interim price regulation plan
established by the Federal Communications Commission (FCC) in 1995. This plan
provided a productivity option, which BellSouth Telecommunications selected,
that eliminated both earnings limitations and sharing requirements. The FCC is
expected to consider further the interim rules as well as other issues related
to competition, streamlined regulation and other matters contained in the
Telecommunications Act of 1996 (the 1996 Act). A final order is expected to be
issued in 1996.
ECONOMY. The nation's output of goods and services, which grew 4% in 1994,
expanded 3.2% in 1995. Employment in nonfarm business establishments grew 2.3%
during the year and the unemployment rate averaged 5.6%. The nine-state region
served by BellSouth Telecommunications wireline telephone business outperformed
the nation again in 1995. The number of jobs in nonfarm businesses grew 2.8% as
the unemployment rate averaged 5.1% for the year. Real income expanded at an
estimated 4.5% rate. Net in-migration added approximately 375,000 persons,
accounting for half of the region's population growth. The demand for
telecommunications services in the region reflected the strength of its economic
and population growth. While the economic expansion is expected to continue
through 1996, boosted in Georgia in particular by the Olympic games to be held
in July and August, tight labor markets, slow labor force growth and modest
productivity growth will likely result in slower output growth. Its cost
advantages and strong net in-migration promise to keep the region's economic
performance comparatively better than the nation's and to bring increased demand
for telecommunications services. 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 demand elasticities for its products and
services.
37
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. (AT&T) 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.
In conjunction with the approval of state price regulation plans,
competition for local service has been authorized by legislative or regulatory
action in Alabama, Florida, Georgia, North Carolina and Tennessee, and
proceedings to consider local service competition are pending in Kentucky,
Louisiana and Mississippi. In addition, the 1996 Act preempts state legislative
and regulatory barriers to competition for local telephone service, subject only
to competitively neutral requirements to assure quality service consistent with
public safety, convenience and consumer welfare. AT&T, MCI Telecommunications
Corporation (MCI), U S West, Inc. (U S West) and a number of other carriers have
filed applications and have announced their intent to provide local service in
many of the areas in which BellSouth Telecommunications provides service. The
new legislation allows for the Bell Holding Companies, including BellSouth, to
compete for interLATA toll business in states outside their local service
territories prior to the time that such companies can offer interLATA toll
services in states within their local service territories. BellSouth expects
Bell Holding Companies and interexchange carriers, including AT&T and MCI, to
compete for interLATA toll service and local service business. Those competitors
that choose to provide local service predominantly over their own facilities may
bundle local and toll service offerings. Such services could be provided before
BellSouth becomes eligible to provide interLATA service within the states in its
region.
Notwithstanding the risks associated with increased competition, BellSouth
will have opportunities to benefit from entry into new business markets. For
example, the presence of competition will allow the entry by BellSouth into
interLATA wireline businesses under provisions contained in the new federal
telecommunications legislation. 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 interLATA services, information services and video and
electronic commerce services. As a part of this strategy, BellSouth is
conducting a trial of video dial tone services; acquiring broadband PCS licenses
in certain areas of its wireline territories; and forming 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 a result of the 1996 Act, BellSouth is freed from many of the laws,
regulations and judicial restrictions (including the Modification of Final
Judgment) that constrained the provision of voice, data and video communications
throughout its wireline service territory and elsewhere. The FCC has commenced
rulemaking proceedings relating to the provision of interLATA service by the
Bell Holding Companies. After necessary federal and state proceedings, BellSouth
may apply to the FCC to offer interLATA wireline services within its nine-state
region, and the FCC must act on such application within 90 days. The FCC must
grant such application if it determines that BellSouth (a) has met a competitive
checklist; (b) has shown (i) the presence of facilities-based competition for
residential and business local service or (ii) in the absence thereof, a
statement of the terms under which it would be willing to interconnect with a
competitive local carrier; (c) will operate consistently with the separate
subsidiary requirement; and (d) will meet the 1996 Act's public interest
requirement in so offering the services on the foregoing conditions.
BellSouth is not required to obtain such FCC approval prior to offering
out-of-region interLATA wireline or nationwide interLATA wireless services.
BellSouth has begun to offer interLATA wireless service. BellSouth plans to
begin offering interLATA wireline service within its nine-state territory as
soon as possible after completion of FCC and state regulatory proceedings,
expected to be concluded in
38
late 1996 or early 1997; however, no assurance can be provided with respect to
when BellSouth will be authorized to initiate such interLATA wireline service.
BellSouth has no plans to offer out-of-region interLATA wireline services on a
significant scale.
After some modifications to its network and operating systems, both wireline
and wireless interLATA services can be offered by BellSouth. However, many of
the telecommunications services that BellSouth and the other Bell Holding
Companies may provide may be subject to extensive regulations to be adopted by
the FCC and state regulatory commissions.
The 1996 Act allows, without additional approval, BellSouth to market its
wireless services jointly with its wireline local exchange services; before
separate marketing was required for cellular services. In addition, such joint
marketing will include interLATA wireline services in the nine-state territory
when authorized. BellSouth expects to begin a joint marketing trial for wireline
local exchange and cellular services later in 1996.
As another part of its competitive strategy, BellSouth has completed a 1993
restructuring plan to streamline its telephone operations and to improve its
overall cost structure and has undertaken a plan to further reduce its work
force by the end of 1997. 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 are
expected.
BellSouth may consider (a) investments in, strategic alliances with and
acquisitions of established companies that provide interLATA services,
information services and video and electronic commerce services and (b) 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 would be provided from funds generated
through internal operations and from external sources.
OTHER MATTERS
CWA CONTRACTS. In October 1995, members of the Communications Workers of
America (CWA) ratified new three-year contracts with BellSouth. These contracts
were effective in August 1995. The contracts include basic wage increases of
10.9% (compounded) over three years. In addition, the agreement provided a cash
payment of one thousand one hundred dollars to each eligible employee upon
ratification and provides payments of one thousand one hundred dollars per
eligible employee in either cash or BellSouth stock, at the option of the
employee, on the 1996 and 1997 contract anniversary dates. Other terms of the
agreement include discontinuance of annual wage adjustments based on cost of
living increases and discontinuance of annual incentive payments.
ACCOUNTING PRONOUNCEMENTS. In March 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which BellSouth is required
to adopt effective January 1, 1996. SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. The adoption of SFAS No. 121 is not expected to have a
material impact on BellSouth's financial position, annual operating results or
cash flows.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which BellSouth is required to adopt effective January 1, 1996.
SFAS No. 123 establishes optional alternative accounting methods for stock-based
compensation as well as new required disclosures. BellSouth has elected to
account for stock-based compensation under previously-existing accounting
guidance. As such, SFAS No. 123 will be adopted in 1996 for disclosure purposes
only and will not impact BellSouth's financial position, annual operating
results or cash flows.
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, 1995, 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 who reports directly to the Chairman
of the Board on these matters.
/s/ John L. Clendenin /s/ Ronald M. Dykes
CHAIRMAN OF THE BOARD, PRESIDENT EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
AND CHIEF EXECUTIVE OFFICER OFFICER AND COMPTROLLER
February 5, 1996
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 seven times during 1995 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 and regulations. 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 5, 1996
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, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note B to the consolidated financial statements, BellSouth
discontinued accounting for the operations of BellSouth Telecommunications, Inc.
in accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," effective June 30,
1995. Also, as discussed in Notes I, L and M 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 5, 1996
42
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
Operating Revenues:
Network and related services:
Local service....................................................... $ 7,294 $ 6,863 $ 6,577
Interstate access................................................... 3,275 3,127 2,991
Intrastate access................................................... 884 908 882
Toll................................................................ 1,009 1,190 1,220
Wireless communications............................................... 2,592 2,067 1,553
Directory advertising and publishing.................................. 1,677 1,556 1,515
Other services........................................................ 1,155 1,134 1,142
--------- --------- ---------
Total Operating Revenues............................................ 17,886 16,845 15,880
--------- --------- ---------
Operating Expenses:
Cost of services and products......................................... 6,184 6,043 5,865
Depreciation and amortization......................................... 3,455 3,259 3,162
Selling, general and administrative................................... 3,873 3,485 3,430
Work force reduction/restructuring charges (Note K)................... 1,082 -- 1,136
--------- --------- ---------
Total Operating Expenses............................................ 14,594 12,787 13,593
--------- --------- ---------
Operating Income........................................................ 3,292 4,058 2,287
Interest Expense........................................................ 724 666 689
Other Income, net....................................................... 20 11 8
--------- --------- ---------
Income Before Income Taxes, Extraordinary Losses and Cumulative Effect
of Change in Accounting Principle...................................... 2,588 3,403 1,606
Provision for Income Taxes (Note L)..................................... 1,024 1,243 572
--------- --------- ---------
Income Before Extraordinary Losses and Cumulative
Effect of Change in Accounting Principle............................... 1,564 2,160 1,034
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note B).................................................... (2,718) -- --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note F).................................................... (78) -- (87)
Cumulative Effect of Change in Accounting Principle,
net of tax (Note M).................................................... -- -- (67)
--------- --------- ---------
Net Income (Loss)................................................... $ (1,232) $ 2,160 $ 880
--------- --------- ---------
--------- --------- ---------
Weighted Average Common Shares Outstanding (Note H)..................... 993 992 991
Dividends Declared Per Common Share (Note H)............................ $ 1.41 $ 1.38 $ 1.38
Earnings Per Share: (Note H)
Income Before Extraordinary Losses and Cumulative
Effect of Change in Accounting Principle............................. $ 1.57 $ 2.18 $ 1.04
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note B).................................................. (2.73) -- --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note F).................................................. (.08) -- (.09)
Cumulative Effect of Change in Accounting Principle,
net of tax (Note M).................................................. -- -- (.06)
--------- --------- ---------
Net Income (Loss)................................................... $ (1.24) $ 2.18 $ .89
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
43
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
1995 1994
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 1,711 $ 606
Temporary cash investments..................................................................... 71 51
Accounts receivable, net of allowance for uncollectibles of $171 and $154...................... 3,772 3,127
Material and supplies.......................................................................... 430 490
Other current assets........................................................................... 521 454
--------- ---------
6,505 4,728
--------- ---------
Investments and Advances (Note C)................................................................ 2,418 2,532
Property, Plant and Equipment, net (Note D)...................................................... 21,092 25,162
Deferred Charges and Other Assets................................................................ 338 535
Intangible Assets, net........................................................................... 1,527 1,440
--------- ---------
Total Assets................................................................................. $ 31,880 $ 34,397
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year: (Note F)
Debentures to be redeemed in January 1996.................................................... $ 485 $ --
Other........................................................................................ 2,466 2,019
Accounts payable............................................................................... 1,724 1,378
Other current liabilities (Note E)............................................................. 2,715 3,101
--------- ---------
7,390 6,498
--------- ---------
Long-Term Debt (Note F).......................................................................... 7,924 7,435
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes.............................................................. 1,650 3,647
Unamortized investment tax credits............................................................. 355 443
Other liabilities and deferred credits (Note G)................................................ 2,736 2,006
--------- ---------
4,741 6,096
--------- ---------
Shareholders' Equity:
Common stock, $1 par value (2,200 and 1,100 shares authorized; 994 and 496 shares
outstanding).................................................................................. 1,007 503
Paid-in capital................................................................................ 7,619 8,064
Retained earnings.............................................................................. 4,099 6,721
Shares held in trust (Note H).................................................................. (374) (336)
Guarantee of ESOP debt (Notes H and I)......................................................... (526) (584)
--------- ---------
11,825 14,368
--------- ---------
Total Liabilities and Shareholders' Equity................................................... $ 31,880 $ 34,397
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
44
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NUMBER OF SHARES AMOUNT
--------------------- -------------------------------------------------------------
SHARES SHARES
COMMON HELD PAR PAID-IN RETAINED HELD GUARANTEE OF
STOCK IN TRUST VALUE CAPITAL EARNINGS IN TRUST ESOP DEBT
--------- --------- ------- ------- -------- ------------- ------------
Balance at December 31, 1992....... 494 -- $ 494 $ 7,610 $ 6,395 $ -- $ (700)
Net income......................... 880
Dividends declared................. (1,369)
Shares issued for:
Shareholder Dividend Reinvestment
and Stock Purchase Plan......... 1 1 81
Employee benefit plans........... 1 1 32
Grantor trusts................... 6 (6) 6 287 (293)
ESOP activities and related tax
benefit........................... 13 57
--------- --- ------- ------- -------- ------ ------
Balance at December 31, 1993....... 502 (6) 502 8,010 5,919 (293) (643)
Net income......................... 2,160
Dividends declared................. (1,370)
Shares issued for:
Employee benefit plans........... 6
Grantor trusts................... 1 (1) 1 42 (43)
ESOP activities and related tax
benefit........................... 12 59
Foreign currency translation
adjustment........................ 6
--------- --- ------- ------- -------- ------ ------
Balance at December 31, 1994....... 503 (7) 503 8,064 6,721 (336) (584)
Two-for-one stock split (Note H)... 503 (6) 503 (503)
Net loss........................... (1,232)
Dividends declared................. (1,400)
Shares issued for:
Employee benefit plans........... 1 1 30
Grantor trusts................... 38 (38)
ESOP activities and related tax
benefit........................... 10 58
Foreign currency translation
adjustment........................ (10)
--------- --- ------- ------- -------- ------ ------
Balance at December 31, 1995....... 1,007 (13) $ 1,007 $ 7,619 $ 4,099 $ (374) $ (526)
--------- --- ------- ------- -------- ------ ------
--------- --- ------- ------- -------- ------ ------
The accompanying notes are an integral part of these financial statements.
45
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1995 1994 1993
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ (1,232) $ 2,160 $ 880
Adjustments to net income (loss):
Extraordinary loss for discontinuance of SFAS No. 71......... 4,449 -- --
Extraordinary loss on early extinguishment of debt........... 127 -- 146
Payment of call premium...................................... (74) -- (100)
Change in accounting principle............................... -- -- 110
Work force reduction/restructuring charges................... 1,082 -- 1,136
Depreciation and amortization................................ 3,455 3,259 3,162
Provision for losses on bad debts............................ 213 175 198
Deferred income taxes and unamortized investment tax
credits..................................................... (1,971) (19) (676)
Pension expense in excess of funding/(pension income)........ (53) 28 121
Dividends from unconsolidated affiliates..................... 149 122 200
Losses (earnings) from unconsolidated affiliates............. 86 110 (11)
Change in accounts receivable and other current assets....... (770) (741) (752)
Change in accounts payable and other current liabilities..... (283) (187) (13)
Change in deferred charges and other assets.................. (28) (34) 254
Change in other liabilities and deferred credits............. 315 437 46
Other reconciling items, net................................. (22) (138) (14)
-------- -------- --------
Net cash provided by operating activities.................. 5,443 5,172 4,687
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................... (4,203) (3,600) (3,486)
Proceeds from disposals of property, plant and equipment....... 104 138 156
Proceeds from disposition of short-term investments............ 187 107 148
Purchases of short-term investments............................ (207) (108) (116)
Proceeds from investment dispositions and repayments of
advances...................................................... 426 238 182
Investments in and advances to unconsolidated affiliates....... (521) (623) (302)
Other investing activities, net................................ (170) (87) (17)
-------- -------- --------
Net cash used for investing activities..................... (4,384) (3,935) (3,435)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings............................ 21,075 22,489 16,290
Repayments of short-term borrowings............................ (20,565) (22,306) (15,857)
Proceeds from long-term debt................................... 2,488 191 2,963
Repayments of long-term debt................................... (1,555) (129) (3,131)
Dividends paid................................................. (1,385) (1,369) (1,307)
Other financing activities, net................................ (12) (8) 26
-------- -------- --------
Net cash provided by (used for) financing activities....... 46 (1,132) (1,016)
-------- -------- --------
Net Increase in Cash and Cash Equivalents........................ 1,105 105 236
Cash and Cash Equivalents at Beginning of Period................. 606 501 265
-------- -------- --------
Cash and Cash Equivalents at End of Period....................... $ 1,711 $ 606 $ 501
-------- -------- --------
-------- -------- --------
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
ORGANIZATION. 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 geographic areas, called Local Access and Transport Areas (LATAs), and
provides network access services to enable interLATA communications using the
long-distance facilities of interexchange carriers. Through subsidiaries, other
telecommunications services and products are provided primarily within the
nine-state BellSouth Telecommunications region. BellSouth Enterprises, Inc.
(BellSouth Enterprises), another wholly-owned subsidiary, owns businesses
providing wireless and international communications services and advertising and
publishing products.
Substantially all of BellSouth's operating revenues are derived from
domestic operations. For the year ended December 31, 1995, approximately 70% of
BellSouth's operating revenues were from wireline and network services, 14% were
from wireless communications services and 9% were from directory advertising and
publishing services. The remainder of such operating revenues was derived
principally from other nonregulated services provided by BellSouth
Telecommunications.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of BellSouth and subsidiaries in which it has a controlling financial
interest. Investments in certain partnerships, joint ventures and subsidiaries
are accounted for using the equity method. All significant intercompany
transactions and accounts have been eliminated. Certain amounts in the prior
period consolidated financial statements have been reclassified to conform to
the current year's presentation.
BASIS OF ACCOUNTING. BellSouth's consolidated financial statements have
been prepared in accordance with generally accepted accounting principles. Such
financial statements include estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the amounts of revenues and expenses. Actual results could
differ from those estimates.
Effective June 30, 1995, BellSouth discontinued application of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." See Note B for further discussion of the impacts
of discontinuance of SFAS No. 71.
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. Interest income on cash
equivalents, temporary cash investments and other interest-bearing instruments
was $108, $65 and $43 for the years ended December 31, 1995, 1994 and 1993,
respectively.
MATERIAL AND SUPPLIES. New and reusable material is carried in inventory,
principally at average original cost, except that specific costs are used in the
case of large individual items. Nonreusable material is carried at estimated
salvage value.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is stated at original cost. For plant dedicated to providing regulated
telecommunications services, depreciation is based on the remaining life method
of depreciation and straight-line composite rates determined on the basis of
equal life groups of certain categories of telephone plant acquired in a given
year. When depreciable telephone plant is disposed of, the original cost, less
net salvage value, is charged to accumulated depreciation. The
47
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
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 recoverable from projected,
discounted net cash flows of the related business unit. Amortization of such
intangibles was $50, $53 and $58 for the years ended December 31, 1995, 1994 and
1993, respectively. At December 31, 1995 and 1994, accumulated amortization of
intangibles was $228 and $212, respectively.
FOREIGN CURRENCY. Assets and liabilities of foreign subsidiaries and equity
investees with a functional currency other than U.S. dollars are translated into
U.S. dollars at exchange rates in effect at the end of the reporting period.
Foreign entity revenues and expenses are translated into U.S. dollars at the
average rates that prevailed during the period. The resulting net translation
gains and losses are reported as foreign currency translation adjustments in
Shareholders' Equity as a component of Paid-In Capital.
Exchange gains and losses on transactions of the company and its equity
investees denominated in a currency other than their functional currency are
generally included in results of operations as incurred unless the transactions
are hedged (see "Derivative Financial Instruments" below). The exchange gains
and losses for the years ended December 31, 1995, 1994 and 1993 were not
material.
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 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. Revenues derived from other telecommunications
services, principally network access, toll and cellular airtime usage, are
recognized monthly as services are provided. Allowances for uncollectible billed
services are adjusted monthly. The provision for such uncollectible accounts was
$213, $175 and $198 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Revenues from services provided to AT&T Corp., BellSouth's largest customer,
were approximately 10%, 11% and 14% of consolidated operating revenues for 1995,
1994 and 1993, respectively.
48
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
MAINTENANCE AND REPAIRS. The cost of maintenance and repairs of plant,
including the cost of replacing minor items not effecting substantial
betterments, is charged to operating expenses.
INCOME TAXES. The balance sheet reflects deferred tax balances associated
with the anticipated tax impact of future income or deductions implicit in the
balance sheet in the form of temporary differences. Temporary differences
primarily result from the use of accelerated methods and shorter lives in
computing depreciation for tax purposes.
For financial reporting purposes, BellSouth 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 outstanding during each
year. Earnings per share have been restated to reflect a two-for-one stock split
approved by BellSouth's Board of Directors in September 1995. See Note H for
additional information.
NOTE B -- DISCONTINUANCE OF SFAS NO. 71
As a result of its continuing regulatory and marketplace assessments,
BellSouth Telecommunications concluded during the second quarter 1995 that it is
no longer appropriate to prepare its external financial results using the
accounting method required for regulated enterprises. BellSouth
Telecommunications believes that, based on recent changes in the regulatory
framework and the increasing level of competition, it was required to
discontinue SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," for financial reporting purposes. Discontinuance was required
because most of BellSouth Telecommunications' revenues will not be generated
under cost-based regulation and because it is doubtful that regulated rates
sufficient to recover the net book value of telephone plant could be charged to
and collected from customers due to the expected levels of future competition.
Accordingly, in the second quarter, BellSouth Telecommunications discontinued
application of SFAS No. 71 and recorded a noncash extraordinary charge of $2,718
(net of a deferred tax benefit of $1,731). The components of the charge are as
follows:
PRETAX AFTER TAX
--------- ---------
Reduction in recorded value of long lived telephone plant............................... $ (4,896) $ (3,002)
Full adoption of issue basis accounting................................................. 317 194
Elimination of regulatory assets and liabilities........................................ 111 71
Partial adjustment to unamortized investment tax credits................................ 19 19
--------- ---------
Total................................................................................. $ (4,449) $ (2,718)
--------- ---------
--------- ---------
49
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE B -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
The reduction of telephone plant, $4,896 (pretax), was recorded as an
increase to the related accumulated depreciation accounts, the categories and
amounts of which are as follows:
Central Office Equipment:
Digital switching............................................................. $ 1,305
Circuit-other................................................................. 1,291
---------
Total Central Office Equipment.............................................. 2,596
---------
Outside Plant:
Buried metallic cable......................................................... 1,345
Aerial metallic cable......................................................... 630
Underground metallic cable.................................................... 325
---------
Total Outside Plant......................................................... 2,300
---------
Total......................................................................... $ 4,896
---------
---------
Such reduction of plant was determined by an impairment analysis that
identified estimated amounts not recoverable from future discounted cash flows.
The analysis considered projected effects of future competition as well as
changes in technology and capital requirements. The plant-related charge, all of
which related to assets within the regulatory framework, was further supported
by depreciation studies that identified inadequate levels of accumulated
depreciation for certain asset categories. These studies give recognition to the
historical underdepreciation of assets resulting primarily from
regulator-prescribed asset lives that exceeded the estimated economic asset
lives.
For financial reporting purposes, the average depreciable lives of affected
categories of long lived telephone plant have been reduced to more closely
reflect the economic and technological lives. Differences between
regulator-approved asset lives and the current estimated economic asset lives
are as follows:
COMPOSITE OF ESTIMATED
REGULATOR-APPROVED ECONOMIC ASSET
CATEGORY ASSET LIVES (IN YEARS) LIVES (IN YEARS)
- ------------------------------------------------------------------------ ----------------------- -----------------
Digital switching....................................................... 17.0 10.0
Circuit-other........................................................... 10.5 9.1
Buried metallic cable................................................... 20.0 14.0
Aerial metallic cable................................................... 20.0 14.0
Underground metallic cable.............................................. 25.0 12.0
The remaining components of the extraordinary charge, which partially offset
the plant-related portion of the overall charge, include $194 (after tax)
related to the method by which BellSouth Telecommunications reports its
directory publishing revenues. BellSouth's unregulated subsidiaries recognize
directory publishing revenues and production expenses using issue basis
accounting. Under issue basis accounting, revenues and product expenses are
recognized when directories are published rather than over the lives of the
directories (generally one year) as under the prescribed regulatory accounting
framework. BellSouth Telecommunications is now reporting using issue basis
accounting consistent with BellSouth's unregulated subsidiaries and with
publishing companies in general.
The overall extraordinary charge was also reduced by $71 (after tax) to
reflect the removal of regulatory assets and liabilities that were recorded as a
result of previous actions by regulators. Virtually all of these regulatory
assets and liabilities arose in connection with the incorporation of new
accounting standards into the ratemaking process and were transitory in nature.
The magnitude of the regulatory assets and liabilities has been decreasing over
time due to the ongoing amortization prescribed as a part of the adoption in
1988 of the Federal Communications Commission's current Uniform System of
Accounts. In addition, the overall extraordinary charge was reduced by $19
(after tax) for the partial acceleration of unamortized investment tax credits
associated with the reductions in asset carrying values and in asset lives.
50
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE C -- INVESTMENTS, ADVANCES AND SALES OF OPERATIONS
Investments and advances as of December 31 consist of the following:
1995 1994
--------- ---------
Investments accounted for under the equity method........................................ $ 1,619 $ 1,716
Advances to and notes receivable from affiliates......................................... 703 729
Other investments........................................................................ 96 87
--------- ---------
Total Investments and Advances......................................................... $ 2,418 $ 2,532
--------- ---------
--------- ---------
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 $(86), $(110) and $11 for the three years ended December 31,
1995, 1994 and 1993, 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, 1995, BellSouth's aggregate investment in
these entities exceeded the underlying book value of the investees' net assets
by $907. 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 6% to 72.5%. In July 1994, BellSouth acquired RBC's 50% interest in the
paging segment of the investment giving BellSouth a 100% interest in this
entity; after such acquisition, this investment was consolidated. BellSouth had
a note receivable from and advances to mobile data affiliates totaling $220 and
$135 at December 31, 1995 and 1994, 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%. Telcel Cellular C.A. (TelCel), in which BellSouth has a noncontrolling
53.3% interest, provides cellular telephone service in Venezuela. 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. BellSouth is a
21.4% participant in the E-Plus Mobilfunk consortium (E-Plus), which provides
cellular telephone service in Germany. BellSouth has agreed to guarantee E-Plus
borrowings up to 400 million German Marks (U.S. Dollar equivalent of $280 at
December 31, 1995). The U.S. dollar equivalent of the outstanding balance of
such guaranteed debt as of December 31, 1995 was $110. Subsequent to December
31, 1995, BellSouth purchased an additional interest in E-Plus, which raised its
percentage ownership to 22.5%.
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 aggregating $108 which are included in
Other Income.
OTHER INVESTMENT ACTIVITY. BellSouth has noncontrolling 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 $188 and $186 at December 31, 1995 and 1994,
51
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE C -- INVESTMENTS, ADVANCES AND SALES OF OPERATIONS (CONTINUED)
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, 1995 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.
BellSouth has a credit agreement with Prime South Diversified, Inc. (Prime)
to provide up to $250 in financing, of which $185 had been borrowed by Prime as
of December 31, 1995 and 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
interest at a variable rate of 10% to 11% and matures in 2001.
Minority interests of consolidated subsidiaries, included as a component of
Other Income, were $(62), $(80), and $(51) for the years ended December 31,
1995, 1994 and 1993, respectively.
SUBSEQUENT EVENT. In January 1996, BellSouth sold to MobileMedia
Communications, Inc. its paging subsidiary, Mobile Communications Corporation of
America (MCCA), and its two-way nationwide narrowband personal communications
services license for a total of approximately $930. The pretax gain on such sale
was approximately $442.
MCCA's operating revenues and operating expenses were $349 and $300,
respectively, for the year ended December 31, 1995 and total assets at December
31, 1995 were $355.
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
1995 1994
--------- ---------
Outside plant.......................................................................... $ 20,092 $ 19,292
Central office equipment............................................................... 16,132 15,443
Building and building improvements..................................................... 3,303 3,114
Operating and other equipment.......................................................... 2,952 2,416
Furniture and fixtures................................................................. 2,791 2,535
Plant under construction............................................................... 782 616
Station equipment...................................................................... 626 601
Land................................................................................... 191 182
--------- ---------
46,869 44,199
Less: Accumulated depreciation....................................................... 25,777 19,037
--------- ---------
Total Property, Plant and Equipment, net........................................... $ 21,092 $ 25,162
--------- ---------
--------- ---------
See Note B for a discussion of the discontinuance of SFAS No. 71 and its
effect on Property, Plant and Equipment.
52
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE E -- OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
1995 1994
--------- ---------
Advanced billing and customer deposits................................................... $ 493 $ 500
Taxes accrued............................................................................ 382 374
Dividends payable........................................................................ 363 347
Salaries and wages payable............................................................... 325 343
Compensated absences..................................................................... 317 333
Interest and rents accrued............................................................... 282 278
Postemployment benefits (see Note K)..................................................... 273 --
1993 restructuring accrual (see Note K).................................................. -- 615
Other.................................................................................... 280 311
--------- ---------
Total Other Current Liabilities........................................................ $ 2,715 $ 3,101
--------- ---------
--------- ---------
NOTE F -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
1995 1994
--------- ---------
Debentures to be Redeemed in January 1996................................................ $ 485 $ --
--------- ---------
Short-term notes payable:
Bank loans............................................................................. 85 45
Commercial paper....................................................................... 2,302 1,839
Current maturities of long-term debt..................................................... 79 135
--------- ---------
Total Other Debt Maturing Within One Year................................................ 2,466 2,019
--------- ---------
Total Debt Maturing Within One Year.................................................... $ 2,951 $ 2,019
--------- ---------
--------- ---------
Weighted average interest rate at end of period:
Bank loans............................................................................. 7.50% 6.39%
Commercial paper....................................................................... 5.81% 5.82%
BellSouth has committed credit lines aggregating $1,539 with various banks.
Borrowings under the committed lines totaled $21 and $16, respectively, at
December 31, 1995 and 1994. BellSouth also maintains uncommitted lines of credit
of $650. At December 31, 1995, 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.
53
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE F -- DEBT (CONTINUED)
LONG-TERM: Long-term debt, summarized below, consists primarily of
debentures and notes issued by BellSouth Telecommunications. Interest rates and
maturities in the table below are for the amounts outstanding at December 31,
1995.
CONTRACTUAL
INTEREST RATES MATURITIES 1995 1994
------------------- -------------- --------- ---------
BellSouth Telecommunications Debentures: 4 3/8% - 6 3/4% 1997 - 2045 $ 1,915 $ 1,270
6.65% - 7% 2095 626 --
7% - 8 1/4% 1996 - 2035 2,535 1,935
8 1/2% - 8 3/4% -- -- 1,400
--------- ---------
5,076 4,605
BellSouth Telecommunications Notes................. 5 1/4% - 7% 1998 - 2008 2,175 1,875
Guarantee of ESOP debt............................. 9.125% - 9.19% 2003 647 694
BellSouth Capital Funding Corporation Notes........ 4.50% - 9.25% 1996 - 2002 544 374
Other.............................................. 79 83
Unamortized discount, net of premium............... (33) (61)
--------- ---------
8,488 7,570
Current maturities................................. (564) (135)
--------- ---------
Total Long-Term Debt............................. $ 7,924 $ 7,435
--------- ---------
--------- ---------
Maturities of long-term debt outstanding (principal amounts) at December 31,
1995 are summarized below. Maturities after the year 2000 include $500 principal
amount 6.65% debentures due in 2095. At December 31, 1995, such debentures had
an accreted book value of $126.
1996 1997 1998 1999 2000 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
Maturities.................................... $ 564 $ 198 $ 771 $ 259 $ 460 $ 6,643 $ 8,895
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
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 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 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 1995, BellSouth Telecommunications refinanced certain long-term debt
issues at more favorable interest rates. The approximate $1,900 gross proceeds
of debentures issued during the year to accomplish these refinancings are
included in Long-Term Debt. Of the total $1,885 aggregate principal amount of
debentures called for redemption during 1995, $1,400 had actually been redeemed
as of December 31, 1995. The remaining $485 of debentures, redeemed in January
1996, are included in the Consolidated Balance Sheet at December 31, 1995 as a
separate component of Debt Maturing Within One Year.
54
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE F -- DEBT (CONTINUED)
As a result of the early extinguishment of these issues, including the
issues redeemed in January 1996, an extraordinary loss of $78 ($.08 per share),
net of a current tax benefit of $49, was recognized in 1995. Also, during 1993,
an extraordinary loss of $87 ($.09 per share), net of a current tax benefit of
$59, was recognized due to early extinguishments of debt during that year.
At December 31, 1995, shelf registration statements were on file with the
Securities and Exchange Commission under which $1,127 of debt securities could
be offered.
NOTE G -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits are summarized as follows at December
31:
1995 1994
--------- ---------
Postretirement benefits other than pensions (see Notes I and K).......................... $ 675 $ 118
Postemployment benefits (see Note K)..................................................... 494 141
Accrued pension cost (see Notes I and K)................................................. 469 568
Compensation related..................................................................... 421 342
Minority interests....................................................................... 347 208
Sharing accrual under FCC price cap plan................................................. 186 141
Regulatory liability related to income taxes (see Note L)................................ -- 304
Other.................................................................................... 144 184
--------- ---------
Total Other Liabilities and Deferred Credits........................................... $ 2,736 $ 2,006
--------- ---------
--------- ---------
NOTE H -- SHAREHOLDERS' EQUITY
STOCK SPLIT. In September 1995, BellSouth's Board of Directors approved a
two-for-one stock split effected in the form of a stock dividend, whereby each
shareholder of record as of October 11, 1995 received on November 8, 1995 one
additional share of common stock for each share owned as of the record date. As
a result of the split, 503,555,084 shares were issued and $503 was transferred
from Paid-In Capital to Common Stock. Also in September 1995, BellSouth's Board
of Directors approved an increase in the number of authorized shares of common
stock to 2,200,000,000 from 1,100,000,000. Weighted average common shares
outstanding and per share amounts for all periods presented have been restated
to reflect the stock split.
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, 1995, 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 in 1999.
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
55
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- SHAREHOLDERS' EQUITY (CONTINUED)
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 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 F and I).
SHARES HELD IN TRUST. During 1993, 1994 and 1995, 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, 1995 and 1994, the assets held in the trusts consist
of cash and 13,753,204 and 12,524,174 shares, respectively, of BellSouth common
stock (restated to reflect the two-for-one stock split). 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 I -- 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 nonrepresented employees is a cash balance plan which
provides pension benefits determined by a combination of compensation-based
service and additional credits and individual account-based interest credits.
The cash balance plan is subject to a minimum benefit determined under a plan in
existence for nonrepresented employees prior to July 1, 1993 which provided
benefits based upon credited service and employees' average compensation for a
specified period. The minimum benefit under the prior plan is applicable to
employees retiring through 2005. Both the 1995 and 1994 projected benefit
obligations assume interest and additional credits greater than the minimum
levels specified in the written plan. Pension benefits provided for represented
employees are based on specified benefit amounts and years of service and
include the projected effect of future bargained-for improvements.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all pension benefits for
which BellSouth is liable. Contributions are 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 pension cost (income) are summarized below:
1995 1994 1993
--------- --------- ---------
Service cost -- benefits earned during the year............................. $ 239 $ 272 $ 266
Interest cost on projected benefit obligation............................... 812 778 775
Actual loss (return) on plan assets......................................... (3,041) 136 (1,735)
Net amortization and deferral............................................... 1,937 (1,158) 816
--------- --------- ---------
Net pension cost (income)............................................... $ (53) $ 28 $ 122
--------- --------- ---------
--------- --------- ---------
Effective January 1, 1994, the nonrepresented cash balance plan was divided
from one into four cash balance plans which allowed for costs to be accounted
for more precisely based upon specific company demographic information. The plan
division had no material impact on BellSouth in 1994. Net pension cost
56
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- EMPLOYEE BENEFIT PLANS (CONTINUED)
(income) is affected by changes in the discount rate and other actuarial
assumptions. The consolidated net pension cost (income) amounts reflected above
are exclusive of curtailment effects reflected in the work force reduction and
restructuring activities discussed below.
The following table sets forth the funded status of the plans at December
31:
1995 1994
--------- ---------
Actuarial present value of:
Vested benefit obligation............................................................ $ 8,853 $ 7,431
--------- ---------
--------- ---------
Accumulated benefit obligation....................................................... $ 9,961 $ 8,404
--------- ---------
--------- ---------
Projected benefit obligation......................................................... $ 11,994 $ 10,115
Plan assets at fair value.............................................................. 14,613 12,343
--------- ---------
Plan assets in excess of projected benefit obligation.................................. 2,619 2,228
Unrecognized net gain due to past experience different from assumptions made........... (2,738) (2,264)
Unrecognized prior service cost........................................................ (199) (361)
Unrecognized net asset at transition................................................... (151) (171)
--------- ---------
Accrued pension cost................................................................. $ (469) $ (568)
--------- ---------
--------- ---------
The significant actuarial assumptions at December 31, 1995 and 1994 were as
follows:
1995 1994
---- -----
Weighted average discount rate.......... 7.0% 8.25%
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
nonrepresented 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 of $1,486 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. As a result of the adoption of SFAS No. 106, net income for
1993 was reduced by approximately $23 ($.02 per share).
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.
57
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Net postretirement benefit cost (income) for the years ended December 31,
1995, 1994 and 1993, respectively, is composed of the following:
1995 1994 1993
--------------- --------------- ---------------
HEALTH LIFE HEALTH LIFE HEALTH LIFE
------ ------ ------ ------ ------ ------
Service cost -- benefits earned during
the year............................... $ 27 $ 10 $ 35 $ 13 $ 30 $ 9
Interest on accumulated postretirement
benefit obligation..................... 223 38 211 37 199 32
Actual loss (return) on plan assets..... (185) (125) 14 (12) (43) (35)
Amortization of transition liability
(asset)................................ 110 (13) 112 (13) 113 (13)
Other amortization and deferral, net.... 115 77 (65) (30) (9) (10)
------ ------ ------ ------ ------ ------
Net postretirement benefit cost
(income)............................... $290 $ (13) $307 $ (5) $290 $ (17)
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
The consolidated net postretirement benefit cost (income) amounts reflected
above are exclusive of curtailment effects reflected in the work force reduction
and restructuring activities discussed below.
The following table sets forth the plans' funded status at December 31, 1995
and 1994, respectively:
1995 1994
-------------------- --------------------
HEALTH LIFE HEALTH LIFE
--------- --------- --------- ---------
Accumulated postretirement benefit obligation:
Retirees.................................................................. $ 1,909 $ 305 $ 1,835 $ 249
Fully eligible active plan participants................................... 712 178 304 69
Other active plan participants............................................ 687 137 507 132
--------- --------- --------- ---------
3,308 620 2,646 450
Plan assets at fair value................................................... 1,159 692 883 583
--------- --------- --------- ---------
Accumulated postretirement benefit obligation
less than (in excess of) plan assets....................................... (2,149) 72 (1,763) 133
Unrecognized prior service cost............................................. 103 5 -- --
Unrecognized net losses..................................................... 218 117 220 60
Unrecognized transition obligation (asset).................................. 1,153 (157) 1,425 (170)
--------- --------- --------- ---------
Prepaid (accrued) postretirement benefit cost............................... $ (675) $ 37 $ (118) $ 23
--------- --------- --------- ---------
--------- --------- --------- ---------
The significant actuarial assumptions at December 31, 1995 and 1994 were as
follows:
1995 1994
------- -------
Weighted average discount rate.................... 7.0% 8.75%
Weighted average rate of compensation increase.... 5.7% 5.7%
Health care cost trend rate (1)................... 9.0% 11.0%
Expected long-term rate of return on plan assets
(2).............................................. 8.0% 8.0%
- ------------------------
(1) Trend rate used to value the accumulated postretirement obligation in 1995
is assumed to decrease gradually to 5% in 2003; trend rate used in 1994 was
assumed to decrease gradually to 5% in 2007.
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
trust for both 1995 and 1994.
58
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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 $204 at December 31, 1995 and the estimated aggregate service and
interest cost components of the 1995 postretirement benefit cost by $9.
EFFECT OF 1995 WORK FORCE REDUCTION AND 1993 RESTRUCTURING ON PENSIONS AND
OTHER POSTRETIREMENT BENEFITS. As a part of the work force reduction charge in
1995 (see Note K), BellSouth recorded an estimated liability of $381 for
curtailment losses expected to impact BellSouth's pension and postretirement
health plans from January 1, 1996 through December 31, 1997. Substantially all
of such losses relate to postretirement health plans. The expected benefits from
curtailment gains will be recognized as they occur in 1996 and 1997.
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 health plans; subsequently, the
estimate has been revised for actual results and additional charges based upon
revised projections. Having recognized through 1995 the total net curtailments
originally projected for the restructuring, BellSouth has reevaluated the
original estimate and charged an additional $55 for net curtailment losses
reflected in the income statement on a line item combined with the 1995 work
force reduction charge. The additional net curtailment charge is a result of a
greater number of employees terminating in a retirement eligible status than
originally expected, thus generating additional losses in retiree health
benefits and reduced gains in pensions.
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), 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 F), 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 on shares purchased with the proceeds from the ESOP notes
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
59
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
1995 1994 1993
------------- ------------- -------------
Compensation cost................................................ $83 $77 $68
Interest expense................................................. $29 $39 $40
Actual interest on ESOP Notes.................................... $62 $66 $70
Cash contributions, excluding dividends paid
to the Trusts................................................... $101 $100 $85
Dividends paid to the Trusts, used for debt service.............. $44 $42 $44
Shares allocated to participants................................. 11,942,278 9,621,034 7,343,314
Shares committed to be released.................................. -- -- --
Shares unallocated............................................... 19,836,446 22,157,690 24,435,410
BellSouth also maintains certain defined contribution plans for most other
employees not covered by the ESOP Plans. BellSouth's contributions were
approximately $12, $15 and $13 in 1995, 1994 and 1993, respectively.
NOTE J -- STOCK OPTION PLANS
In April 1995, BellSouth shareholders approved the adoption of the BellSouth
Corporation Stock Plan (the Stock Plan). The Stock Plan provides for various
types of grants to key employees, including stock options, stock appreciation
rights (SARs), restricted shares, and performance-based awards. One share of
BellSouth common stock is the underlying security for any award. The aggregate
number of shares of BellSouth common stock which may be granted in any calendar
year shall not exceed one percent of the shares outstanding at the time of
grant. Prior to adoption of the Stock Plan, awards were granted under the
BellSouth Corporation Stock Option Plan (the Stock Option Plan). Stock options
granted under these plans entitle an optionee 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 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 under
these plans generally become exercisable at the end of five years and have a
term of 10 years.
In April 1995, BellSouth shareholders also approved the adoption of the
BellSouth Corporation Non-Employee Director Stock Plan (the Director Stock
Plan). The Director Stock Plan provides for grants of stock options and SARs to
non-employee directors up to an aggregate of 300,000 shares of BellSouth common
stock. Under the plan, each non-employee director will be granted on the date of
each annual shareholders' meeting an option to purchase 1,000 shares. Each
option granted will include the grant of a tandem SAR. The option price per
share is equal to the fair market value on the date of grant. Options granted
under the Director Stock Plan become exercisable at the end of one year and have
a term of 10 years.
Of the total 14,287,748 shares covered by outstanding options under all
plans at December 31, 1995, 488,938 were accompanied by SARs.
60
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE J -- STOCK OPTION PLANS (CONTINUED)
The following table summarizes the activity for stock options outstanding
(1):
1995 1994 1993
---------------- ---------------- ----------------
Options outstanding at January 1................................. 10,345,924 7,308,284 6,873,448
Options granted.................................................. 5,269,040 3,525,722 1,680,604
Options exercised................................................ (1,112,220) (260,996) (1,139,016)
Options cancelled/forfeited...................................... (214,996) (227,086) (106,752)
--------- --------- --------
Options outstanding at December 31............................... 14,287,748 10,345,924 7,308,284
--------- --------- --------
--------- --------- --------
Option prices per common share:
Granted........................................................ $29.53 - $43.56 $25.34 - $42.21 $25.34 - $31.09
Exercised...................................................... $16.17 - $30.84 $ 6.49 - $29.12 $11.38 - $29.12
Cancelled/forfeited............................................ $16.17 - $31.87 $16.17 - $42.21 $16.17 - $29.12
Outstanding at year-end........................................ $16.17 - $43.56 $16.17 - $42.21 $ 6.49 - $31.09
Options exercisable at year-end.................................. 5,242,258 4,667,262 2,815,828
Shares available for grant at
December 31..................................................... 10,074,447 10,050,096 10,031,038
- ------------------------
(1) Reflects the two-for-one stock split as if it occurred as of the beginning
of the earliest period presented.
NOTE K -- WORK FORCE REDUCTION/RESTRUCTURING CHARGES
1995 WORK FORCE REDUCTION CHARGE. In the fourth quarter of 1995, BellSouth
recognized a pretax charge of $1,082 related to work force reductions. The
primary component of the charge, $942 for planned work force reductions in the
core wireline business by the end of 1997, consists of $561 under the provisions
of SFAS No. 112, "Employers' Accounting for Postemployment Benefits," related to
those employees who are expected to receive severance benefits under preexisting
separation plans, and $381 for curtailment losses under the provisions of SFAS
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the curtailment losses relate to postretirement benefits
other than pensions. The remaining components of the charge are $85 for expected
severance benefit payments after 1997, also under SFAS No. 112, and $55 for
additional net curtailment losses related to employee reductions under the 1993
restructuring plan.
1993 RESTRUCTURING CHARGE. The results of operations for the year ended
December 31, 1993 include a $1,136 restructuring charge. The restructuring,
which was completed in 1995, was 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 material components of the charge related to the reduction of the
workforce by 10,200 employees. Through December 31, 1995, employee reductions
related to the restructuring plan were 1,300 in 1993, 3,900 in 1994 and 5,000 in
1995. The components of the charge consisted of provisions of $368 for
separation payments and relocations of remaining employees, $343 for
consolidation and elimination of certain operations facilities and $425 for
enabling changes to information systems, primarily those used to provide
services to existing customers.
61
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE L -- 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 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 $8 reduction to 1993 income tax expense.
Upon adoption in 1993, BellSouth, for its regulated operations, reflected
only the balance sheet impact of SFAS No. 109, in accordance with the provisions
of SFAS No. 71. Specifically, BellSouth Telecommunications recorded a net
regulatory liability of $538 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. In 1995, this net regulatory liability was eliminated in
conjunction with the discontinuance of SFAS No. 71.
The provision for income taxes is summarized as follows:
1995 1994 1993
--------- --------- ---------
Federal:
Current...................................................................... $ 1,061 $ 1,082 $ 1,080
Deferred, net................................................................ (148) 34 (532)
Investment tax credits, net.................................................. (69) (73) (88)
--------- --------- ---------
844 1,043 460
--------- --------- ---------
State:
Current...................................................................... 203 180 174
Deferred, net................................................................ (23) 20 (62)
--------- --------- ---------
180 200 112
--------- --------- ---------
Total provision for income taxes........................................... $ 1,024 $ 1,243 $ 572
--------- --------- ---------
--------- --------- ---------
Extraordinary losses in 1995 are presented in the Consolidated Statement of
Income net of tax benefits totaling $1,780, of which $49 is current and $1,731
is deferred. In 1993, the extraordinary loss and accounting change were net of
tax benefits totaling $102, of which $59 was current and $43 was deferred.
62
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE L -- INCOME TAXES (CONTINUED)
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
1995 1994
--------- ---------
Compensation related.................................................................... $ 627 $ 545
Work force reduction/restructuring charges.............................................. 370 238
Regulatory sharing accruals............................................................. 114 92
Bad debts............................................................................... 89 88
Other................................................................................... 172 159
--------- ---------
1,372 1,122
Valuation allowance..................................................................... (8) (7)
--------- ---------
Deferred Tax Assets................................................................... 1,364 1,115
--------- ---------
Depreciation............................................................................ (2,042) (3,731)
Equity investments...................................................................... (361) (367)
Licenses................................................................................ (190) (194)
Issue basis accounting.................................................................. (207) (58)
Other................................................................................... (129) (180)
--------- ---------
Deferred Tax Liabilities.............................................................. (2,929) (4,530)
--------- ---------
Net Deferred Tax Liability.......................................................... $ (1,565) $ (3,415)
--------- ---------
--------- ---------
The decrease in the net deferred tax liability is primarily due to the
discontinuance of SFAS No. 71. The valuation allowance primarily relates to
state net operating losses that will not be utilized during the carryforward
period. Of the Net Deferred Tax Liability at December 31, 1995 and 1994, $85 and
$232, respectively, was current and $(1,650) and $(3,647), respectively, was
noncurrent.
A reconciliation of the Federal statutory income tax rate to BellSouth's
effective tax rate follows:
1995 1994 1993
--------- --------- ---------
Federal statutory tax rate....................................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit............................ 4.5 4.0 4.8
Amortization of investment tax credits........................................... (2.7) (2.1) (5.5)
Equity of unconsolidated subsidiaries............................................ 2.0 0.6 --
Benefit of capital loss carryforward............................................. (0.4) (1.1) --
Miscellaneous items, net......................................................... 1.2 .1 1.3
--- --- ---
Effective tax rate............................................................. 39.6% 36.5% 35.6%
--- --- ---
--- --- ---
NOTE M -- 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 $67 ($.06 per share), net of a deferred tax benefit of $43, 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.
63
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE N -- SUPPLEMENTAL CASH FLOW INFORMATION
1995 1994 1993
--------- --------- ---------
CASH PAID FOR:
Income Taxes............................................................. $ 1,231 $ 1,375 $ 1,145
--------- --------- ---------
--------- --------- ---------
Interest................................................................. $ 760 $ 665 $ 755
--------- --------- ---------
--------- --------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Shares Issued to Grantor Trusts.......................................... $ 38 $ 43 $ 293
--------- --------- ---------
--------- --------- ---------
Common and Treasury Shares Issued in Lieu of Cash Dividends Under
Shareholder Dividend Reinvestment and Stock Purchase Plan............... $ -- $ -- $ 66
--------- --------- ---------
--------- --------- ---------
NOTE O -- 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.
1995 1994
-------------------- ---------------------
RECORDED ESTIMATED RECORDED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
BALANCE SHEET FINANCIAL INSTRUMENTS
Assets (Liabilities):
Cash and cash equivalents................... $ 1,711 $ 1,711 $ 606 $ 606
Temporary cash investments.................. 71 71 51 51
Bank loans.................................. (85) (85) (45) (45)
Commercial paper............................ (2,302) (2,302) (1,839) (1,839)
Long-Term Debt:
BellSouth Telecommunications Debentures... (5,076) (5,079) (4,605) (4,177)
BellSouth Telecommunications Notes........ (2,175) (2,216) (1,875) (1,670)
Guarantee of ESOP Debt.................... (647) (803) (694) (717)
BellSouth Capital Funding Corporation
Notes.................................... (544) (587) (374) (363)
Foreign Exchange Forward Contracts:
Contract amount receivable................ 27 27 68 68
Contract amount payable................... (27) (27) (67) (67)
Currency Swap............................... 20 20 12 12
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Interest Rate Swaps:
With unrealized gains....................... -- -- -- 1
With unrealized losses...................... -- (10) -- (3)
CASH AND CASH EQUIVALENTS/TEMPORARY CASH INVESTMENTS. At December 31, 1995
and 1994, 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, 1995 and 1994, 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
64
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE O -- FINANCIAL INSTRUMENTS (CONTINUED)
prices for each issue at December 31, 1995 and 1994, 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 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.
As of December 31, 1995, BellSouth had foreign exchange forward contracts to
buy $27 worth of German Marks. At December 31, 1994, BellSouth had foreign
exchange forward contracts to sell $67 worth of German Marks.
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 and related debt mature in February
1999.
At December 31, 1995, the net currency swap receivable was $20 and the
related net interest receivable was $8, both of which are included in accounts
receivable in the consolidated balance sheet at December 31, 1995. 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.
65
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE O -- 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,
------------------
1995 1994
------- -------
Pay Fixed Rate/Receive Variable Rate
Notional amount.......................................................... $ 96 $ 95
Average rate paid........................................................ 7.38% 6.97%
Average rate received.................................................... 6.05% 5.08%
Pay Variable Rate/Receive Fixed Rate
Notional amount.......................................................... $ 75 $ 75
Average rate paid........................................................ 5.96% 5.36%
Average rate received.................................................... 4.86% 4.86%
OTHER. BellSouth has also issued letters of credit and financial guarantees
which approximate $340 at December 31, 1995. 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,
other than those from interexchange carriers, are limited due to the composition
of the customer base, which includes a large number of individuals and
businesses. At December 31, 1995 and 1994, approximately $520 and $448,
respectively, of trade accounts receivable were from interexchange carriers.
NOTE P -- COMMITMENTS AND CONTINGENCIES
LEASES. BellSouth has entered into operating leases for facilities and
equipment used in operations. Rental expense under operating leases was $252,
$311 and $300 for 1995, 1994 and 1993, respectively. Capital leases currently in
effect are not significant.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 1995:
1996 1997 1998 1999 2000 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- ------
Minimum rentals......................... $166 $140 $ 99 $ 81 $ 64 $508 $1,058
---- ---- ---- ---- ---- ----- ------
---- ---- ---- ---- ---- ----- ------
OUTSIDE PLANT. BellSouth currently self-insures all of its outside plant
against casualty losses. The net book value of outside plant was $8,080 and
$10,459 at December 31, 1995 and 1994, respectively. Such outside plant,
located in the nine Southeastern states served by BellSouth Telecommunications,
is susceptible to damage from severe weather conditions and other perils,
including hurricanes.
LEGAL ACTIONS. 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, employment law
issues and other matters. BellSouth Telecommunications is also subject to claims
and proceedings attributable to pre-divestiture events involving environmental
liabilities, rates, taxes, contracts and torts. Certain contingent liabilities
for pre-divestiture events are shared by AT&T Corp. and the operating telephone
companies. While complete assurance cannot be given as to the outcome of any
pending or threatened legal actions, BellSouth believes that any financial
impact would not be material to its financial position, annual operating results
or cash flows.
66
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
fourth quarter 1995 include a work force reduction charge of $1,082, which
reduced net income by $663.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- --------
1995
Operating Revenues................................ $ 4,299 $ 4,390 $ 4,432 $ 4,765
Operating Income (Loss)........................... $ 1,095 $ 1,096 $ 1,058 $ 43
Income (Loss) Before Extraordinary Losses......... $ 547 $ 557 $ 559 $ (99)
Extraordinary Loss for Discontinuance of
SFAS No. 71, net of tax.......................... -- (2,718) -- --
Extraordinary Loss on Early Extinguishment of
Debt, net of tax................................. -- (16) -- (62)
--------- -------- -------- --------
Net Income (Loss)................................. $ 547 $ (2,177) $ 559 $ (161)
--------- -------- -------- --------
--------- -------- -------- --------
Earnings Per Share:
Income (Loss) Before Extraordinary Losses....... $ .55 $ .56 $ .56 $ (.10)
Extraordinary Loss for Discontinuance of
SFAS No. 71, net of tax.......................... -- (2.73) -- --
Extraordinary Loss on Early Extinguishment of
Debt, net of tax................................. -- (.02) -- (.06)
--------- -------- -------- --------
Net Income (Loss)............................... $ .55 $ (2.19) $ .56 $ (.16)
--------- -------- -------- --------
--------- -------- -------- --------
1994
Operating Revenues................................ $ 4,124 $ 4,128 $ 4,198 $ 4,395
Operating Income.................................. $ 1,012 $ 1,002 $ 994 $ 1,050
Net Income........................................ $ 585 $ 517 $ 500 $ 558
Earnings Per Share................................ $ .59 $ .52 $ .50 $ .56
67
SUPPLEMENTARY DATA
BELLSOUTH CORPORATION
DOMESTIC CELLULAR
PROPORTIONATE OPERATING DATA
(DOLLARS IN MILLIONS)
(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 methodology 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. The data exclude gains (losses) from the
disposition of property interests and include equipment revenue, net of cost.
YEAR ENDED DECEMBER
31,
--------------------
1995 1994
--------- ---------
Cellular Revenue, net............................................................ $ 1,888 $ 1,465
--------- ---------
Operating Expenses............................................................... 1,065 834
Depreciation and Amortization.................................................... 298 234
--------- ---------
Total Operating Expenses..................................................... 1,363 1,068
--------- ---------
Operating Income................................................................. 525 397
Other Expenses, net (including interest and taxes)............................... 233 164
--------- ---------
Net Income................................................................... $ 292 $ 233
--------- ---------
--------- ---------
Operating Margins as a Percentage of Revenue:
Including Depreciation and Amortization........................................ 27.8% 27.1%
Excluding Depreciation and Amortization........................................ 43.6% 43.1%
Operational Comparisons (thousands):
Proportionate Cellular Population Served....................................... 39,937 39,206
Proportionate Cellular Customers............................................... 2,847 2,155
68
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 22 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 11, 1996 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
11. Executive Compensation................................................................... 12-17; 19-22
12. Security Ownership of Certain Beneficial Owners and Management........................... 7
13. Certain Relationships and Related Transactions........................................... 18*
- ------------------------
* Incorporation by reference excludes Five Year Performance Comparison.
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
(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.
69
(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 10w 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).
3a-1 Articles of Amendment to Articles of Incorporation of BellSouth Corporation. (Exhibit 3a-1 to Form 10-Q
for the quarter ended September 30, 1995, 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 Nonqualified Deferred Compensation Plan as amended and restated on November 28,
1994. (Exhibit 10i to Form 10-K for the year ended December 31, 1994, File No. 1-8607).
10i BellSouth Corporation Supplemental Executive Retirement Plan as amended on May 18, 1995. (Exhibit 10j-1
to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10j BellSouth Management Savings and Employee Stock Ownership Plan as amended and restated effective as of
January 1, 1994. (Exhibit 10k to Form 10-K for the year ended December 31, 1994, File No. 1-8607).
10j-1 Amendment dated December 15, 1995 to the BellSouth Management Savings and Employee Stock Ownership
Plan.
70
EXHIBIT
NUMBER
- ---------
10k BellSouth Corporation Directors Retirement Plan. (Exhibit 10qq to Form 10-K for the year ended December
31, 1986, File No. 1-8607).
10l BellSouth Corporation Financial Counseling Plan. (Exhibit 10r to Form 10-K for the year ended December
31, 1992, File No. 1-8607).
10l-1 Amendment dated November 3, 1995 to the BellSouth Corporation Executive Financial Counseling Plan.
10m BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors. (Exhibit 10gg to
Registration Statement No. 2-87846).
10n BellSouth Corporation Executive Life Insurance Plan. (Exhibit 10v to Form 10-K for the year ended
December 31, 1992, File No. 1-8607).
10o 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).
10p Form of Executive Officer Succession and Retirement Agreement. (Exhibit 10r to Form 10-K for the year
ended December 31, 1995, File No. 1-8607).
10q BellSouth Non-Employee Directors Charitable Contribution Program. (Exhibit 10z to Form 10-K for the
year ended December 31, 1992, File No. 1-8607).
10r BellSouth Personal Retirement Account Pension Plan. (Exhibit 10aa to Form 10-Q for the quarter ended
June 30, 1993, File No. 1-8607).
10r-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).
10r-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).
10r-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).
10r-4 Amendment dated March 3, 1995 to the BellSouth Personal Retirement Account Pension Plan. (Exhibit 10t-5
to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10r-5 Amendment dated September 21, 1995 to the BellSouth Personal Retirement Account Pension Plan.
10r-6 Amendment dated October 12, 1995 to the BellSouth Personal Retirement Account Pension Plan. (Exhibit
10t-6 to Form 10-Q for the quarter ended September 30, 1995, File No.1-8607).
10r-7 Amendment dated November 9, 1995 to the BellSouth Personal Retirement Account Pension Plan. (Exhibit
10t-7 to Form 10-Q for the quarter ended September 30, 1995, File No.8607).
10s BellSouth Corporation Trust Under Executive Benefit Plan(s) as amended April 28, 1995. (Exhibit 10u-1
to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10t BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) as amended April 28, 1995.
(Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10u BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) as amended April 28, 1995.
(Exhibit 10w-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
71
EXHIBIT
NUMBER
- ---------
10v BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) as amended April 28,
1995. (Exhibit 10x-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10w BellSouth Corporation Stock Plan. (Exhibit 10bb to Form 10-Q for the quarter ended June 30, 1995, File
No. 1-8607).
11 Computation of Earnings Per Share.
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of BellSouth.
24 Powers of Attorney.
27 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, 1995 (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, 1995 (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, 1995 (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:
DATE OF EVENT SUBJECT
- ---------------------- --------------------------------------------------
January 22, 1996 Fourth Quarter 1995 Earnings Release
72
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
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER
AND COMPTROLLER
February 27, 1996
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, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
Ronald M. Dykes*
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND COMPTROLLER
DIRECTORS:
F. Duane Ackerman* Phyllis Burke Davis*
Reuben V. Anderson* John G. Medlin, Jr.*
James H. Blanchard* 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)
February 27, 1996
73
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, 33-51449 and 33-63173) 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 5, 1996, which includes an explanatory paragraph stating
that the Company discontinued accounting for the operations of BellSouth
Telecommunications, Inc. in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
effective June 30, 1995, and changed its method of accounting for postretirement
benefits other than pensions, income taxes and postemployment benefits in 1993,
on our audits of the consolidated financial statements of BellSouth Corporation
as of December 31, 1995 and 1994, and for each of the three years in the period
ended December 31, 1995, which report is included in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 27, 1996
74