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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
COMMISSION FILE NUMBER 1-8607
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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, 1997, 991,205,642 shares of Common Stock and Preferred Stock
Purchase Rights were outstanding.
At February 1, 1997, the aggregate market value of the voting stock held by
non-affiliates was $43,984,750,364.
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,
1997, issued in connection with the 1997 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
Business Operations................................................................................ 1
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....................................................................... 33
Extraordinary Losses............................................................................... 33
Financial Condition................................................................................ 34
Operating Environment and Trends of the Business................................................... 36
8. Consolidated Financial Statements and Supplementary Data........................................... 39
Report of Management............................................................................... 39
Audit Committee Chairman's Letter.................................................................. 40
Report of Independent Accountants.................................................................. 40
Consolidated Statements of Income.................................................................. 41
Consolidated Balance Sheets........................................................................ 42
Consolidated Statements of Shareholders' Equity.................................................... 43
Consolidated Statements of Cash Flows.............................................................. 44
Notes to Consolidated Financial Statements......................................................... 45
Supplementary Data -- Domestic Cellular Proportionate Operating Data............................... 64
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 65
ITEM PAGE
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PART III
*10. Directors and Executive Officers of the Registrant................................................. 65
*11. Executive Compensation............................................................................. 65
*12. Security Ownership of Certain Beneficial Owners and Management..................................... 65
*13. Certain Relationships and Related Transactions..................................................... 65
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 65
Signatures.................................................................................................... 68
Consent of Independent Accountants............................................................................ 69
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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, systems and products primarily 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 (predominantly wireless and international communications services and
advertising and publishing products) are conducted primarily through
subsidiaries of BellSouth Enterprises. BellSouth has its principal executive
offices at 1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610 (telephone
number 404-249-2000).
BellSouth was incorporated in 1983 under the laws of the State of Georgia.
On December 31, 1983, pursuant to a consent decree approved by the United States
District Court for the District of Columbia (the D. C. District Court) entitled
"Modification of Final Judgment" (the MFJ) settling antitrust litigation brought
by the United States Department of Justice (the Justice Department) in 1974 and
the related Plan of Reorganization, American Telephone and Telegraph Company,
now AT&T Corp. (AT&T), formed seven holding companies including BellSouth (the
Holding Companies), and transferred to them one or more of the operating
telephone companies (the Operating Telephone Companies) that were formerly part
of the Bell System. As a result, AT&T transferred to BellSouth its 100%
ownership of South Central Bell Telephone Company (South Central Bell) and
Southern Bell Telephone and Telegraph Company (Southern Bell). On January 1,
1984, ownership of the Holding Companies was transferred by AT&T to its
shareholders. As a result, BellSouth became a publicly traded company. BellSouth
Telecommunications is the surviving corporation from the merger of South Central
Bell and Southern Bell, effective at midnight December 31, 1991.
Under the MFJ, the Operating Telephone Companies could provide local
exchange, exchange access, information access and toll telecommunications
services within their assigned geographical territories, termed "Local Access
and Transport Areas" (LATAs). Although prohibited from providing service between
LATAs, the Operating Telephone Companies provided exchange access services that
linked a subscriber's telephone or other equipment in one of their LATAs to the
transmission facilities of carriers (the Interexchange Carriers), which provided
toll telecommunications services between different LATAs.
In February 1996, the President signed into law the Telecommunications Act
of 1996 (the 1996 Act). This legislation provides for the development of
competitive local telecommunications markets; terminates on a prospective basis
the MFJ, enabling the provision by the Operating Telephone Companies of
interLATA telecommunications and other services; and repeals the laws
prohibiting the Operating Telephone Companies and their affiliates from
providing video services within their service areas. The ability of the
Operating Telephone Companies to enter businesses previously proscribed to them
by the MFJ is, however, generally subject to numerous criteria and the
development of and compliance with newly mandated federal regulations.
BUSINESS OPERATIONS
Approximately 70%, 70% and 72% of BellSouth's operating revenues for the
years ended December 31, 1996, 1995 and 1994, 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. Revenues from services provided to AT&T, BellSouth's largest customer,
comprised approximately 9%, 10% and 11% of 1996, 1995 and 1994 operating
revenues, respectively.
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TELEPHONE COMPANY OPERATIONS
BellSouth Telecommunications provides, predominantly, local exchange,
exchange access and intraLATA toll services within each of the 38 LATAs in its
combined nine-state wireline operating area. BellSouth Telecommunications
provided approximately 22,135,000 customer access lines at December 31, 1996, an
overall increase of 4.7% since December 31, 1995. The increase was primarily
attributable to continued economic growth in BellSouth Telecommunications'
nine-state service region. Growth in second residential lines accounted for
approximately 28% of the overall increase in total access lines since December
31, 1995. (See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Volumes of Business.")
At December 31, 1996, approximately 74% of access lines were in 44
metropolitan areas, each having a population of 125,000 or more. Many localities
and some sizable areas in the states in which BellSouth Telecommunications
operates are served primarily by non-affiliated telephone companies, which had
approximately 29% of the network access lines in such states on December 31,
1996. BellSouth Telecommunications does not furnish, on a significant scale,
local exchange, access or toll services in the areas served by such companies.
LOCAL AND INTRALATA TOLL SERVICES
Charges for local services for each of the years ended December 31, 1996,
1995 and 1994 accounted for approximately 42%, 41% and 41% of BellSouth's
operating revenues, respectively. Local services operations provide lines from
telephone exchange offices to subscribers' premises for the origination and
termination of telecommunications, including the following: basic local
telephone service provided through the regular switched network; dedicated
private line facilities for voice and special services, such as transport of
data, radio and video, and foreign exchange services; switching services for
customers' internal communications through facilities owned by BellSouth
Telecommunications; services for data transport that include managing and
configuring special service networks; and dedicated low or high capacity public
or private digital networks. Other local services revenue is derived from
intercept and directory assistance, public telephones and various optional
central office features, such as Caller ID service, Call Waiting, Call Return
and 3-Way Calling. As other telecommunications companies are authorized by
regulatory agencies to compete in the provision of local service, BellSouth
Telecommunications will increasingly sell to such carriers unbundled local
service elements and discounted wholesale local service for resale.
BellSouth Telecommunications offers certain enhanced services, such as
MemoryCallSM voice messaging service, through its network. These services differ
from basic services 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 many of these service
offerings are not regulated under the rules of the Federal Communications
Commission (FCC), but the FCC prescribes the method by which such services may
be provided (for example, through structurally separated subsidiaries or
arrangements providing access to competitive providers). During 1996, total
revenue from enhanced and other optional services was approximately $1 billion.
BellSouth Telecommunications provides intraLATA toll services within (but
not between) its 38 LATAs. Such toll services provided approximately 4%, 6% and
7% of BellSouth's operating revenues for the years ended December 31, 1996, 1995
and 1994, 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. In recent years, these toll revenues
have decreased as local calling areas have been expanded and as competition for
toll customers has intensified. This trend is expected to continue.
REGULATION OF LOCAL AND TOLL SERVICES
BellSouth Telecommunications is subject to regulation of its intrastate
services by state authorities in each state where it provides intrastate
telecommunications services; such regulation covers rates,
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services, competition and other issues. Traditionally, BellSouth
Telecommunications' rates were set in each state in its service area at levels
which were anticipated to generate revenues sufficient to cover its allowed
expenses and to provide an opportunity to earn a fair rate of return on its
capital investment. Such a regulatory structure was satisfactory in a less
competitive era; however, as discussed below, the regulatory processes have
changed in response to the increasingly competitive telecommunications
environment.
RATE REGULATION
Under one form of alternative regulation, generally known as incentive
regulation, economic incentives are provided to lower costs and increase
productivity through the potential availability of "shared" earnings over a
benchmark rate of return. Generally, when levels above targeted returns were
reached, earnings were "shared" by providing refunds or price reductions to
customers.
Another alternative form of regulation, generally known as price regulation,
establishes maximum prices that can be charged for certain telecommunications
services. While such a plan limits the amount of increases in prices for
specified services, it enhances the company's ability to adjust prices and
service options to more effectively respond to changing market conditions and
competition and provides an opportunity to more fully benefit from productivity
enhancements. For these reasons, BellSouth Telecommunications has focused its
regulatory and legislative efforts on establishing price regulation. Such plans
have been approved or authorized by the requisite legislative or regulatory
bodies in all nine states in BellSouth Telecommunications' wireline operating
area. These plans are operational in all states except Tennessee, where judicial
appeals are pending.
The following section contains a brief description of certain regulatory
proceedings in BellSouth Telecommunications' nine-state wireline territory.
ALABAMA
From December 1988 to September 1995, an incentive regulation plan was in
effect in Alabama. In response to a law enacted in 1995 permitting the Alabama
Public Service Commission to authorize alternative methods of regulation that
are not based on rate of return for local exchange carriers, the Alabama
Commission approved a price regulation plan, effective September 1995. Under
this plan, prices for basic services, including local exchange services for
residence and business customers, are capped for five years, after which prices
may be changed in accordance with an inflation-based formula; prices for
non-basic services are capped for one year, after which aggregate price
increases are limited to 10% annually; and intrastate switched access charges
are reduced below interstate switched access rates. Additional terms of the
price regulation plan require annual price reductions aggregating $57 million
through 1999, excluding intrastate switched access reductions. Reductions
related to intrastate switched access are estimated to be $25 million through
1999.
FLORIDA
From 1988 through 1992, an incentive regulation plan was in effect in
Florida. In 1994, the Florida Public Service Commission extended the plan
through 1997, with required price reductions aggregating approximately $300
million over a three-year period.
In 1995, a law was enacted which allowed qualified service providers to
elect price regulation. Under price regulation, prices for basic services (which
include flat-rate residential and single-line business local exchange services)
are capped for five years, after which prices may be changed in accordance with
an inflation-based formula. Prices for certain non-basic services, including
multi-line business service, are capped for three years at the rates in effect
in July 1995; prices for other non-basic services may be adjusted annually
subject to defined limitations. The price regulation provisions also provide
that intrastate switched access prices will decrease by 5% annually until such
rates are at parity with 1994 interstate switched access rates. In November
1995, BellSouth Telecommunications filed with the Florida Commission an election
for price regulation, which became effective in January 1996. Although BellSouth
Telecommunications is currently operating under price regulation, it must comply
with the sharing provisions of the incentive plan described above through 1997.
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GEORGIA
From 1990 to August 1995, BellSouth Telecommunications operated under an
incentive regulation plan in Georgia. In April 1995, a law was enacted which,
effective in July 1995, allowed BellSouth Telecommunications to elect the price
regulation plan as described in the legislation. In July 1995, BellSouth
Telecommunications filed an election with the Georgia Public Service Commission;
such election became effective in August 1995. Basic residence and single-line
business rates are capped for five years, after which prices may be changed in
accordance with an inflation-based formula. Rates for intrastate switched access
services may be no higher than the rates charged for interstate switched access
services.
KENTUCKY
From 1988 to July 1995, an incentive regulation plan was in effect in
Kentucky. In July 1995, the Kentucky Public Service Commission approved a price
regulation plan. Under the plan, basic residential rates are capped for three
years, after which prices may be changed in accordance with an inflation-based
formula. Intrastate switched access rates are limited to rates in effect for
interstate switched access. Prices for services deemed competitive under the
plan can be set by BellSouth Telecommunications in response to market
conditions.
In September 1996, the Kentucky Commission issued an order concerning local
competition and universal service funds. The order provided that
Commission-approved negotiated agreements for interconnection shall be the
primary means for implementing local competition. The universal service fund
rules established by the Commission are preliminary and interim until the FCC
issues its order on this matter.
LOUISIANA
From February 1992 to April 1996, an incentive regulation plan was in effect
in Louisiana. Effective April 1996, the Louisiana Public Service Commission
approved a price regulation plan that will remain in effect for a six-year term,
subject to review. Under the provisions of the price regulation plan, prices for
basic services, which include the provision of local exchange services, are
capped for five years, after which prices may be changed in accordance with an
inflation-based formula. After five years, no individual basic service price can
be increased by more than 10% in any twelve-month period. Prices for
interconnection services are capped for three years, after which no individual
service can be increased more than 10% in any twelve-month period. For non-basic
services, price increases may not exceed 20% in any twelve-month period.
In connection with the approval of price regulation, the Louisiana
Commission concluded its review of BellSouth Telecommunications' earnings by
requiring an aggregate $70 million price reduction, to be apportioned over a
three-year period beginning April 1, 1996.
MISSISSIPPI
From June 1990 to January 1996, an incentive regulation plan was in effect
in Mississippi. In November 1995, the Mississippi Public Service Commission
approved a six-year price regulation plan, effective in January 1996. Reviews of
this plan will be conducted by the Mississippi Commission after three and five
years. Under the provisions of the plan, prices for basic services, which
include the provision of basic local telephone service, are capped for three
years, after which the basic service category rates will be reduced annually to
effect an annual reduction in revenues of 1% or $3.75 million, whichever is
greater, for the last three years of the plan. In addition, intrastate switched
access prices are capped at the same level as interstate prices over the life of
the plan.
NORTH CAROLINA
Prior to June 1996, traditional rate of return regulation was in effect in
North Carolina. In April 1995, a law was enacted that allowed price regulation,
and pursuant to approval by the North Carolina Utilities Commission, a price
regulation plan became effective in June 1996. Under the terms of the plan,
prices for residence basic local exchange services are capped for three years,
after which time any price increases are limited by an inflation-based formula.
For business basic local exchange, interconnection
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and certain non-basic services, any increases in current prices are also subject
to inflation-based formulae. Prices for toll switched access services are capped
at current prices, after giving effect to specified price reductions ordered in
conjunction with approval of the price regulation plan.
SOUTH CAROLINA
Prior to 1996, BellSouth Telecommunications' rates were regulated on a
traditional rate of return basis. In December 1994, the South Carolina Public
Service Commission issued an order requiring that prices be reduced
prospectively by approximately $26 million on an annual basis and with no change
in the previously authorized return on equity of 13%. Based upon an
investigation by the South Carolina Commission of BellSouth Telecommunications'
1992 earnings, refunds of approximately $29 million, plus interest, were
ordered. The prospective rate reduction was implemented, but the refund was
stayed pending judicial review of the decision. In October 1996, the South
Carolina Court of Common Pleas entered an order affirming the South Carolina
Commission's order of the refund. BellSouth Telecommunications intends to pursue
an appeal of this decision. The South Carolina Commission has postponed review
of BellSouth Telecommunications' earnings in 1993 and 1994 until a resolution of
the 1992 period is reached. While complete assurance cannot be given as to the
outcome of these matters, BellSouth believes that any financial impact would not
be material to its financial position or annual operating results or cash flows.
In January 1996, the South Carolina Commission approved a price regulation
plan which includes provisions that basic local exchange residence and business
service rates will not increase for five years, after which prices may be
changed in accordance with an inflation-based formula. Intrastate switched
access rates will be capped for three years after which prices may be changed in
accordance with an inflation-based formula. The rates for non-basic services
will be set by BellSouth Telecommunications, subject only to the limitation that
the price for any individual service may not be increased more than 20% in a
twelve-month period.
TENNESSEE
An incentive regulation plan, which had been in effect since August 1990,
ended in 1995. In June 1995, a law was enacted which allowed qualified service
providers to elect price regulation. BellSouth Telecommunications elected price
regulation under which the prices for basic services are to be capped for four
years, after which prices may be changed in accordance with an inflation-based
formula. Prices for services other than basic services are to be adjusted based
on an inflation-based formula.
In order to implement the price regulation election, the Tennessee Public
Service Commission required BellSouth Telecommunications to reduce prices by
approximately $56 million on an annual basis. BellSouth Telecommunications has
appealed to the Tennessee Court of Appeals. This Court has stayed implementation
of both the rate reduction and price regulation plan pending further
consideration of the issues.
LOCAL SERVICE COMPETITION
The 1996 Act requires the elimination of state legislative and regulatory
barriers to competition for local telephone service, subject only to
competitively neutral requirements to preserve and advance universal service,
protect the public safety and welfare, maintain the quality of
telecommunications services and safeguard the rights of customers. The 1996 Act
also includes requirements that incumbent local exchange carriers (ILECs)
negotiate with other carriers for interconnection, use of network elements on an
unbundled basis and resale of local services. If a negotiated agreement cannot
be reached, either party may seek arbitration with the state regulatory
authority or the FCC if the state fails to act. If rates are disputed, the
arbitrator must set rates for access to network elements on an unbundled basis,
based on cost, which may include a reasonable profit. ILECs are also required to
negotiate to provide their retail services at wholesale rates for the purposes
of resale by competing carriers. If agreement cannot be reached, the arbitrator
shall set the wholesale rates at the ILEC's retail rates less costs to be
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avoided. BellSouth Telecommunications has executed over 40 interconnection or
resale agreements with such carriers and is currently involved in arbitration
proceedings with a number of other carriers, including AT&T, MCI Communications
Corporation (MCI) and Sprint Corporation (Sprint).
In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry (the Order). Among the issues
specifically addressed by the Order are the network elements that ILECs must
make available; pricing standards to be followed by states in setting rates for
interconnection, access to network elements on an unbundled basis and resold
services. BellSouth and several other ILECs joined in an appeal of the Order to
the United States Court of Appeals for the Eighth Circuit (the Court). Upon
request of several state commissions and ILECs, the Court stayed the Order in
part, pending appeal. Such stay relates to pricing prescriptions and certain
other terms. The Court heard oral arguments in January 1997, and a decision is
pending. Notwithstanding these developments, however, as discussed above,
BellSouth Telecommunications and a number of carriers have negotiated
interconnection agreements and state regulatory commissions are arbitrating or
have approved various terms of interconnection between BellSouth and other
carriers. These terms may be revised, depending on, among other things, the
outcome of the appeal of the Order. The arbitration results for the wholesale
discount rates vary by state from approximately 15% to 21%.
In attempting to comply with the technical requirements of interconnection,
BellSouth expects to incur significant costs associated with the development or
modification of systems necessary to make interconnection possible. For example,
BellSouth Telecommunications will be required to provide for long-term number
portability whereby customers switching to competing local carriers will be able
to retain their telephone numbers without interruption or charge. It is unclear
as to what degree BellSouth will be able to recover these costs.
REGULATION OF ACCESS SERVICES
BellSouth Telecommunications provides access services by connecting the
equipment and facilities of its subscribers with the communications networks of
Interexchange Carriers. These connections are provided by linking these carriers
and subscribers through the public switched network of BellSouth
Telecommunications or through dedicated private lines furnished by BellSouth
Telecommunications. Rates and other aspects of interstate access services are
regulated by the FCC, and state regulatory commissions have jurisdiction over
the provision of access to the Interexchange Carriers to complete intrastate
telecommunications.
Access charges, which are payable both by Interexchange Carriers and
subscribers, provided approximately 23%, 23% and 24% of BellSouth's operating
revenues for the years ended December 31, 1996, 1995 and 1994, respectively.
These charges are designed to recover the costs of the common and dedicated
facilities and switching equipment used to connect networks of Interexchange
Carriers with the telephone company's local network and to subsidize the cost of
providing local service to rural and other high-cost areas. In addition, an
interstate subscriber line access charge of $3.50 per line per month applies to
single-line business and residential customers. The interstate subscriber access
charge for multi-line business customers varies by state but cannot exceed $6.00
per line per month. The state commissions have authorized BellSouth
Telecommunications to collect from the Interexchange Carriers and, in several
states, from customers charges for providing intrastate access services.
The FCC regulates the level of access charges through a price cap plan. The
price cap plan limits aggregate price changes to the rate of inflation minus an
ILEC-selected productivity offset, plus or minus exogenous cost changes
recognized by the FCC. Two of the productivity options in the current plan, 4.0%
and 4.7%, provide defined earnings limitations with a sharing mechanism. A third
option in the plan, 5.3%, removes both earnings limitations and sharing
requirements. Consistent with a pricing strategy that BellSouth
Telecommunications considered compatible with an increasingly competitive
business environment, it selected a 5.3% productivity factor, which, together
with other adjustments, has
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decreased interstate access revenues below what would have been produced under
the other alternatives by approximately $220 million on an annual basis at 1994
access volume levels. The FCC has under consideration the issue of whether
further modification of this plan is warranted.
The 1996 Act requires the FCC to identify the local service subsidy provided
by access charges; to provide for the removal of such subsidy from access rates
in order that access charges reflect underlying costs; to arrange for a
universal service fund to ensure the continuation of universal service; and to
develop the arrangements for payments into that fund by all carriers. The FCC is
currently engaged in this proceeding. In addition, the FCC has commenced a
proceeding to revise its access charge rules.
INTERLATA TOLL SERVICE
As a result of the 1996 Act, BellSouth and the other Holding Companies are
freed from the judicial restrictions of the MFJ that constrained the provision
of interLATA communications throughout their wireline service territories and
elsewhere; the 1996 Act establishes in its place a new restriction and a
procedure for its removal. These companies or their affiliates may apply to the
FCC on a state-by-state basis to offer in-region interLATA wireline services,
and the FCC must act on such application within 90 days. The FCC must grant such
application if it determines that the applicant (a) has met a competitive
checklist; (b) has shown (i) the presence of a facilities-based provider
offering both residential and business services or (ii) if there is no such
provider, a statement that has been approved or permitted to take effect by
state regulatory authorities, of the terms under which it would be willing to
interconnect with a competitive local carrier; (c) will operate consistently
with the separate subsidiary requirement; and (d) has presented an application
consistent with the public interest. The FCC is required to consult with state
regulatory authorities and the Justice Department when reviewing the
application.
BellSouth plans to begin offering interLATA wireline service in each of its
in-region states as soon as the FCC approves its application for each state.
BellSouth has filed documents with the Georgia Public Service Commission
requesting that the Georgia Commission approve a statement of generally
available terms and conditions as provided for in the 1996 Act and to establish
that such terms and conditions meet the competitive checklist referred to above.
BellSouth will file an application for each state as soon as it believes the
conditions described above are met. Because of the proceedings required to
obtain approval and the potential challenges of competitors and others, it is
uncertain when BellSouth will be authorized to commence interLATA service in any
of its in-region states. The 1996 Act requires that in-region interLATA service
be provided through a subsidiary separate from BellSouth Telecommunications.
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In addition to the above matters, BellSouth Telecommunications is a party or
is subject to numerous proceedings pending before federal and state regulatory
and judicial bodies. These matters involve, among other things, terms and
conditions of services provided by BellSouth Telecommunications, rates charged
for such services, access reform, universal service, number portability and
relationships with competitive service providers and affiliates. No assurance
can be given as to the outcome of any such matters.
PUBLIC TELEPHONES
In September 1996, the FCC issued an order which requires ILECs to reassign
their payphone assets from regulated telephone company accounts to separate
unregulated accounts or to transfer assets to a separate subsidiary. They must
also remove any subsidy of payphone operations from their regulated rates no
later than April 15, 1997 and meet certain other requirements. In return, ILECs
that own payphone units are given the freedom to pursue new business
opportunities. BellSouth Telecommunications is currently taking action to comply
with these requirements.
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Consequently, on April 1, 1997, BellSouth Telecommunications plans to
transfer its payphone assets to a separate subsidiary, BellSouth Public
Communications, Inc. (BPC). BPC has filed for certification as an independent
payphone provider in each of the nine states where BellSouth Telecommunications
provides wireline telephone service. It plans to continue to provide independent
payphone services throughout BellSouth Telecommunications' territory and will
selectively provide payphone services in areas served by independent telephone
companies.
BILLING AND COLLECTION SERVICES
BellSouth Telecommunications provides, under contract and/or tariff, billing
and collection services for certain long distance services of AT&T and several
other Interexchange Carriers. The agreement with AT&T extends through the year
2000, subject to the right of AT&T to assume billing and collection for certain
of its services prior to the expiration of the agreement. Revenues from such
services have been decreasing and this trend is expected to continue as AT&T and
other carriers assume more direct billing for their own services. 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 other 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 1996, such BellSouth companies published approximately 500 directories
for BellSouth Telecommunications and contracted with approximately 170
nonaffiliated companies to sell advertising space in approximately 490 of their
publications.
WIRELESS COMMUNICATIONS
BellSouth Enterprises provides wireless communications services, which have
consisted mainly of cellular telephone and, through 1995, paging services. In
January 1996, BellSouth sold its interest in its paging subsidiary. Revenues
from wireless communications comprised approximately 15%, 14% and 12% of
BellSouth's total operating revenues for the years ended December 31, 1996, 1995
and 1994, 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.
Under the MFJ, the Holding Companies generally were prohibited from
providing interLATA wireless communications. The 1996 Act lifts this
prohibition, and in February 1996, BellSouth began offering the interLATA
component of its wireless communications in conjunction with its wireless
offerings. Approximately 1.5 million customers subscribe to such interLATA
service. In areas where it does not have long distance telephone facilities,
BellSouth connects with the networks of the Interexchange Carriers.
The 1996 Act allows BellSouth to market wireless services jointly with
wireline local exchange services; previously, separate marketing was required.
This change has enabled BellSouth to more efficiently offer and provide
integrated telecommunications. In March 1996, BellSouth began joint marketing of
wireless and wireline services in selected markets.
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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 wireline and other cellular telephone networks.
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. 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 rates charged by cellular carriers are not regulated by the FCC nor 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.
At December 31, 1996, businesses in which BellSouth had an equity interest
provided cellular service to a total of approximately 4,880,000 domestic
customers in 17 states. BellSouth's proportionate share of such total customers,
based on its percentage ownership interests of such businesses, was
approximately 3,612,000 customers. (See "Consolidated Financial Statements and
Supplementary Data -- Domestic Cellular Proportionate Operating Data.")
BellSouth's proportionate interest in the aggregate population (POPs) served by
its domestic cellular systems was approximately 40,696,000 persons at December
31, 1996, and its penetration rate was approximately 9%. Within its nine-state
wireline service territory, BellSouth and its partners offer 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, Indianapolis, Honolulu and
Richmond, Virginia.
In February 1997, BellSouth signed a definitive agreement with United States
Cellular Corporation to exchange cellular properties. BellSouth would trade its
ownership interests in cellular properties in Wisconsin and Illinois for new or
increased equity ownership of cellular properties located in or adjacent to
BellSouth's nine-state wireline service territory. The exchange is subject to
regulatory approval.
PERSONAL COMMUNICATIONS SERVICE
In 1995, the FCC began auctioning available radio spectrum for providing
digital mobile communications service, commonly referred to as personal
communications service, or PCS. Because PCS service is digital, it provides
greater security and clarity than existing analog cellular systems. BellSouth's
PCS system has been constructed utilizing a technology standard known as GSM
(Global Systems for Mobile communications). GSM is widely used by international
systems. Some domestic PCS systems utilize different, non-compatible
technologies. As a result, cellular services currently offer greater seamless
roaming characteristics across systems than PCS. However, as more PCS networks
are deployed across the United States utilizing GSM technology, and as analog
cellular systems are augmented with digital capability, PCS systems will be able
to offer roaming capabilities comparable to existing cellular services.
BellSouth owns interests in two PCS licenses, one that covers most of North
Carolina and South Carolina and another that covers eastern Tennessee. A
BellSouth consortium is building and operating the network in the Carolinas
while BellSouth alone is building and operating the network in eastern
Tennessee. BellSouth's proportionate POPs covered by these licensed territories
is 7,600,000. The systems became operational in the summer of 1996.
In January 1997, BellSouth won an additional 39 licenses in 37 markets in
the FCC's D- and E-block auctions. These markets cover 11,800,000 POPs in
smaller areas within or adjacent to BellSouth's wireline service territory.
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INTERNATIONAL WIRELESS OPERATIONS
Outside the United States, BellSouth owns interests in consortia that hold
licenses for, and are building and/or operating, wireless telephone systems in
Argentina, Australia, Denmark, Germany, India, Israel, New Zealand, Panama,
Peru, Uruguay and Venezuela. Through a wholly-owned subsidiary, BellSouth holds
a license for a wireless telephone system in Chile. At December 31, 1996, these
systems provided cellular or PCS service to a total of approximately 3,603,000
international customers. BellSouth's proportionate share of such customers,
based on its percentage ownership interests in such systems, was approximately
1,244,000 customers. BellSouth's proportionate interest in the aggregate POPs
covered by its international wireless systems was approximately 57,641,000
persons at December 31, 1996, and its penetration rate was approximately 2%.
BellSouth offers wireless service under regional licenses to areas within
Argentina, India, Peru, Uruguay and Chile and offers wireless service under
nationwide licenses in Australia, Denmark, Germany, Israel, New Zealand, Panama
and Venezuela. Service in Australia is also currently being provided by
reselling service obtained from the government-owned carrier. (See "Other
International Operations.")
MOBILE DATA
BellSouth, through its subsidiary BellSouth Mobile Data (BSMD), is an equity
investor in five wireless data communications networks worldwide utilizing L.M.
Ericsson's Mobitex technology. The countries in which BSMD currently provides
service consist of the United States, the United Kingdom, The Netherlands,
Belgium 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.
OTHER INTERNATIONAL OPERATIONS
BellSouth holds a 24.5% interest in Optus Communications Pty. Ltd. (Optus),
which is building and operating Australia's second telecommunications network.
In addition to its wireline and wireless networks, Optus operates four
satellites which were purchased from AUSSAT, Australia's national satellite
communications carrier. Optus offers a range of telecommunications services,
including national and international long-distance, digital and analog cellular,
switched network, enhanced wireline and satellite-based services.
In July 1994, Optus formed a business (Optus Vision) with Australian and
United States companies to develop a high capacity broadband network in
Australia. Optus and U S West, Inc. (U S West) 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%. Local telephone
service, which is marketed under the Optus brand name, was only recently
launched.
BellSouth holds a concession to operate a competing domestic and
international long distance business in Chile. In addition, in January 1997,
BellSouth purchased an interest in a company that offers wired and wireless
cable television and paging services in Peru.
DOMESTIC BROADBAND SERVICES
The 1996 Act eliminates previous prohibitions on telephone companies'
providing cable television services in their service territories, although many
federal courts had already held such prohibitions unconstitutional. Although
ILECs may not acquire or joint venture with established cable television
providers in their wireline territories, they may provide cable television
service over their own facilities.
BellSouth has constructed several networks, and provided cable television
service to a limited degree, in several areas within its wireline
telecommunications service areas to assess the extent to which it wishes to
enter this business. It has obtained and is negotiating to acquire franchises
and licenses in several metropolitan areas, including New Orleans, Atlanta and
Miami, that would enable it to provide video services over wired and wireless
networks.
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INTERNET ACCESS
In 1996, BellSouth Telecommunications began providing Internet access, a
customized version of Netscape Navigator-TM-, electronic mail, an optional
site-blocking feature, and a gateway to local and national information and
electronic Yellow Pages.
SELLING AND MAINTAINING EQUIPMENT
To a limited extent, BellSouth sells and maintains telecommunications
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 May 1996, BellSouth Telecommunications sold its interest in DataServ Computer
Maintenance Inc., a wholly-owned subsidiary that performed computer maintenance.
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.
NETWORK AND RELATED SERVICES
LOCAL SERVICE
Over the past several years, a number of states in BellSouth
Telecommunications' wireline territory have passed legislation providing for
local service competition. Even if a state has not passed legislation, the 1996
Act requires elimination of barriers to local service competition. The state
public service commissions have granted or are in the process of considering,
applications filed by a number of carriers for authority to compete with
BellSouth Telecommunications. Many of these commissions have also determined the
bases, including prices, on which the ILECs must furnish interconnection,
wholesale local service and unbundled local service elements to competing
carriers. BellSouth expects that it will experience greater competition for its
business customers, which provide a higher concentration of higher margin
revenues than do its residential customers.
An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by telecommunications
providers in metropolitan areas, including Atlanta, Georgia, Charlotte, North
Carolina and Jacksonville, Miami and Orlando, Florida, and these networks offer
certain high volume users a competitive alternative to the public and private
line offerings of the ILECs. In addition, the networks of some cable television
systems will be capable of carrying two-way interactive data messages and will
be configured to provide voice communications. Furthermore, wireless services,
such as cellular, PCS and paging services, increasingly compete with wireline
communications services.
AT&T's domestic cellular communications business serves customers in 10
cities in BellSouth's local wireline territory and seven cities in which
BellSouth provides cellular communications. This allows AT&T to carry
telecommunications traffic that otherwise could have been carried over the
public switched and private line networks of BellSouth Telecommunications.
As technological and regulatory developments make it more feasible for cable
television to carry data and voice communications, it is increasingly probable
that BellSouth Telecommunications will face competition within its region from
cable television ventures. Alliances are being formed between other Holding
Companies and large corporations that operate cable television systems in many
localities throughout the United States -- for example, U S West/Time Warner
Communications and NYNEX Corporation (NYNEX)/Viacom, Inc. U S West and Time
Warner have announced plans to upgrade certain of their cable TV systems to
full-service networks which would support new interactive and telephone services
that would compete with the ILECs. Time Warner and U S West have made major
cable system
11
acquisitions that are expected to provide voice and video competition in
BellSouth Telecommunications' service areas. U S West has acquired Atlanta's two
largest cable operators and, in November 1996, acquired Continental Cablevision,
Inc., a provider with a major presence in Florida. In addition, the 1996
acquisition by Time Warner of Turner Broadcasting Corporation will increase
concentration in the cable and programming industries.
Joint ventures and mergers between major telecommunications companies will
result in large, well-capitalized carriers that will provide formidable
competition to BellSouth across a number of markets, including local and long
distance telephone service. Such transactions include the proposed mergers of
SBC Communications Inc. and Pacific Telesis Group and NYNEX and Bell Atlantic
Corporation (Bell Atlantic) and the proposed acquisition by British
Telecommunications plc of MCI.
Competition for local service revenues could adversely affect BellSouth's
results of operations. However, the existence of competitive local service,
among other things, can allow BellSouth to qualify to offer in-region interLATA
service, as contemplated in the 1996 Act. (See "BellSouth Competitive
Strategy.")
ACCESS SERVICE
The FCC has adopted rules requiring ILECs to offer expanded interconnection
for interstate special and switched transport. As a result, BellSouth
Telecommunications is required to permit competitive carriers and customers to
terminate their transmission lines on BellSouth's facilities through collocation
arrangements. The effects of the rules are to increase competition for access
transport.
TOLL SERVICE
A number of firms compete with BellSouth Telecommunications in its
nine-state region for intraLATA toll business by reselling toll services
obtained at bulk rates from BellSouth Telecommunications or, subject to the
approval of the applicable state public utility commission, providing toll
services over their own facilities. Commissions in the states in BellSouth
Telecommunications' operating territory have allowed the latter type of
intraLATA toll calling, whereby the Interexchange Carriers are assigned a
multiple digit access code (10XXX) which customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislature or
commissions in three states have authorized competing carriers to provide
intraLATA toll presubscribed calling with a single digit access code (1+),
giving them dialing parity with the ILEC in that area. Commissions in several
other states are considering how and when such authorization should be
implemented. However, the 1996 Act prohibits states from ordering the
implementation of new toll dialing parity until the earlier of (a) three years
from the enactment of the 1996 Act or (b) such time as the Operating Telephone
Company has qualified to provide in-region interLATA services.
The 1996 Act permits the other Holding Companies to offer BellSouth's local
service customers interLATA toll service. BellSouth expects Holding Companies
and other carriers to compete for such interLATA toll service. For example, Bell
Atlantic has begun offering interLATA toll service to BellSouth's local service
customers and other Holding Companies may do likewise. AT&T, MCI, Sprint and a
number of other carriers currently provide toll services to BellSouth's local
service customers.
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
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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 allows multiple new competitors for
BellSouth's businesses. Licenses to provide PCS services have been won in
auction by AT&T, Holding Company consortia and other large and well-capitalized
entities. PCS will provide competition to BellSouth's local wireline and
wireless telephone businesses. Several competitive PCS systems are now
operational.
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
and NYNEX have combined their cellular businesses, and U S West and AirTouch
Communications have announced that they plan to merge their cellular businesses.
Those four companies have also formed a joint venture to provide PCS in many
domestic markets.
BellSouth's international wireless joint ventures are generally subject to
competition from at least one other wireless service provider, and sometimes
more than one other provider. For example, in Germany there are two competitors.
These competing service providers are generally supported by partners who are at
least as well-capitalized as BellSouth and its partners. In some cases the
competing 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.
BellSouth's primary mobile data 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 and PCS-based
services. There are many network and product development issues that CDPD
operators must still address before they can offer a fully competitive service.
Other competitive threats to each of BellSouth's overseas wireless data
holdings are GSM operators, which may offer an integrated packet data standard
around the turn of the century. In Singapore, BellSouth's wireless data property
competes 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
BellSouth has developed three main strategies that govern its business
decisions in the increasingly competitive telecommunications industry. First,
BellSouth will strengthen its leadership position
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throughout its nine-state wireline territory by (a) enhancing and building its
brand strength and distribution channels; (b) providing full-service offerings
including wireline and wireless, local and long-distance, and video and
electronic commerce services; and (c) controlling costs. Second, BellSouth will
continue to grow profitably its domestic wireless business by (a) deploying
value-added products and services and competitive technology; (b) strengthening
and expanding distribution channels including joint marketing with BellSouth
Telecommunications; and (c) expanding in-region wireless coverage through
successfully bidding for PCS licenses and other acquisitions. Third, BellSouth
will continue to grow and develop its Latin American and other international
operations.
MARKETING
A substantial portion of the growth in BellSouth Telecommunications'
revenues from local services is derived from the sale of second residential
lines and optional calling services. These offerings are marketed in a variety
of packages with varying pricing features that are designed to appeal to a wide
variety of the Company's customer base. A substantial number of these sales are
made by customer service representatives who are on call 24 hours a day, seven
days a week, as they are contacted by subscribers on other matters.
Many of BellSouth's other services and products, such as cellular and PCS
services and including the long distance component of these wireless services,
Internet service and video services, are sold by BellSouth Telecommunications'
service representatives. The marketing of many of these services is enhanced by
alliances with other service providers and suppliers. For instance, Netscape
Communications Corporation provides BellSouth's Internet users with its Web
browser, and persons who visit the Netscape Web site are offered a convenient
way to sign up for BellSouth's Internet service. Additional arrangements with
Yahoo! Inc and Wired Ventures Limited further enhance BellSouth's Internet
service marketing strategy.
In addition to utilizing BellSouth Telecommunications' distribution
channels, BellSouth's wireless offerings are sold through approximately 275
company-owned stores, 300 kiosks located in retail stores and shopping centers,
and non-affiliated retail outlets such as Radio Shack and Circuit City stores.
In addition, BellSouth's services are made available through BellSouth's home
page on the worldwide web, through a telemarketing organization which contacts
over 1 million potential customers each month and through a direct sales force
of nearly 4,000 persons. BellSouth's PCS service in the Carolinas is also
marketed through BellSouth's partners in that system, including Duke Power
Company, when its service representatives receive inquiries and other calls for
electric service. BellSouth was the first operational PCS provider in this
market, giving it a marketing advantage over other rivals who purchased PCS
licenses covering the same territory. BellSouth's PCS service offers a number of
packages of optional features with pricing enhancements intended to attract
cellular customers from the incumbent wireless carriers in that territory.
BellSouth Telecommunications' business services are marketed by customer
service representatives through varied pricing and service options. BellSouth's
products and services, such as video conferencing, ISDN service and
telecommunications equipment and systems, are also demonstrated and sold through
marketing arrangements with other retailers of office products, such as Office
Depot. BellSouth Telecommunications markets its services and products to large
and complex business customers through highly specialized applications and,
where appropriate, through pricing enhancements varying according to business
volumes and length of service. In addition to telephone lines, product and
service offerings to these customers include Internet access, special networks,
high-speed data transmission, business teleconferencing and industry-specific
communications configurations.
Advertising and publishing products are marketed to organizations and
companies with unique directory needs. Export directories, a home improvement
guide, a health and medical guide, consumer tips and a restaurant and
entertainment guide are examples of such directories. Directories are also
marketed to non-affiliated telephone companies.
14
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 believes that its brand
name is widely recognized and held in high esteem by its customers. A primary
marketing strategy is to enhance the recognition and reputation of this mark
throughout its service territory, thereby facilitating the joint marketing
efforts described above. Accordingly, significant increases in marketing and
advertising costs have been and will be incurred. BellSouth advertises in the
various media in its territory and in connection with major events, such as the
Olympics, the Super Bowl and its sponsored PGA golf tournaments, which offer
BellSouth a broader platform to showcase its products and services.
With a few exceptions, BellSouth's international services are not marketed
under its brand name, in part because the name recognition is less than in
domestic markets. Nevertheless, the appeal of the wireless offerings is
significant because the wireline service in many international markets,
especially in Latin America, is less reliable or available.
REGULATORY AND LEGISLATIVE CHANGES
BellSouth's primary regulatory focus has been directed toward modifying the
regulatory process to one that is more closely aligned with changing market
conditions and overall public policy objectives. As an alternative to regulation
of intrastate earnings, BellSouth has sought price regulation, whereby prices of
basic service are regulated and the pricing of other products and services are
based on market factors. While price regulation plans do not provide for the
direct recovery through basic service rates of cost increases or extraordinary
expenses, they generally provide more flexibility to meet competitive pricing
levels. BellSouth Telecommunications has price regulation plans approved or
authorized in all states in its wireline territory, although the implementation
of the Tennessee plan has been stayed by a court pending resolution of a number
of issues.
NEW SERVICES
Notwithstanding the inevitable loss of local service customers and other
risks associated with increased competition, BellSouth will have the opportunity
to benefit from entry into new business markets. For example, the presence of
competition, among other things, can allow BellSouth to qualify to offer
interLATA wireline service under provisions contained in the 1996 Act. BellSouth
believes that in order to remain competitive in the future, it must aggressively
pursue a corporate strategy of expanding its offerings beyond its traditional
businesses and markets. These offerings include interLATA services, information
services and video and electronic commerce services. BellSouth has entered some
of these businesses through investments in, strategic alliances with and
acquisitions of established companies in such industries and through the
development of some of these services and capabilities internally. For example,
among other initiatives, BellSouth has acquired several cable TV rights, is
conducting a trial of cable TV service and is providing Internet access.
BellSouth also intends to continue to pursue certain foreign telecommunications
licenses as they are offered.
WORK FORCE REDUCTION
In 1995, BellSouth Telecommunications completed the restructuring of its
telephone operations that was announced in 1993. Also, BellSouth
Telecommunications announced in 1995 a plan to reduce its work force by
approximately 11,300 additional employees by the end of 1997. For a discussion
of the work force reduction, see "MD&A -- Results of Operations -- Operating
Expenses -- Work Force Reduction Charge."
RESEARCH AND DEVELOPMENT
The majority of BellSouth'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.
15
In November 1996, Science Applications International Corporation agreed to
purchase Bellcore. BellSouth has contracted with Bellcore for ongoing support of
engineering and systems. In addition, the Holding Companies formed the National
Telecommunications Alliance to support their commitment to national security and
emergency preparedness.
LICENSES AND FRANCHISES
BellSouth Telecommunications' local exchange business is typically provided
under certificates of public convenience and necessity granted pursuant to state
statutes and public interest findings of the various public utility commissions
of the states in which BellSouth Telecommunications does business. These
certificates provide for a franchise of indefinite duration, subject to the
maintenance of satisfactory service at reasonable rates.
The domestic cellular, PCS, wireless cable and mobile data systems in which
BellSouth has an interest are operated under licenses granted by the FCC. A
carrier holding a license to provide cellular service in a territory is not
eligible for a PCS license covering the same territory. 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.
The wired cable systems over which BellSouth provides domestic cable
services are operated under cable franchises granted by the city or
unincorporated county government with local franchising authority for the
geographic service area in question. These cable franchises are generally issued
for 10 to 15 year periods. They typically require the payment of cable franchise
fees to the local franchising authority, capped by federal law at 5% of gross
cable related revenues, and various forms of financial and facilities support
for a limited number of government, education and public access channels.
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, 1996, 1995 and 1994 BellSouth and its subsidiaries employed
approximately 81,200, 87,600 and 92,100 persons, respectively. Of these amounts
at these dates, approximately 62,400, 68,600, and 73,800 persons were telephone
employees of BellSouth Telecommunications. About 63% of BellSouth's employees at
December 31, 1996 were represented by the Communications Workers of America (the
CWA), which is affiliated with the AFL-CIO. In October 1995, members of the CWA
ratified new three-year contracts with BellSouth. These contracts were effective
in August 1995. The contracts include basic wage increases of 10.9% (compounded)
over three years. In addition, the agreement provided a cash payment of $1,100
to each eligible employee upon ratification and further provides payments of
$1,100 per eligible employee in cash or $1,210 in BellSouth stock, at the option
of the 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.
16
During 1995, BellSouth Telecommunications completed the 1993 plan to reduce
its work force by approximately 10,200 employees. Also during 1995, BellSouth
Telecommunications announced a plan to further reduce its work force by
approximately 11,300 employees by the end of 1997. Including a reduction of
approximately 800 employees which occured in December 1995, BellSouth
Telecommunications has reduced its work force by approximately 7,000 employees
under the 1995 plan through December 31, 1996. (See "MD&A -- Results of
Operations -- Operating Expenses -- Work Force Reduction Charge.")
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, 91% of which is held by BellSouth Telecommunications, consisted of
the following at December 31:
1996 1995
---- ----
Outside plant.................................................... 42% 43%
Central office equipment......................................... 35 34
Operating and other equipment.................................... 8 8
Land and buildings............................................... 8 7
Furniture and fixtures........................................... 6 6
Plant under construction......................................... 1 2
---- ----
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 substantially consists of digital electronic
switching equipment and circuit equipment. Land and buildings consist
principally of central offices. Operating and other equipment consists of
wireless network equipment, embedded intrasystem wiring (substantially all of
which is on the premises of customers), motor vehicles and other equipment.
Central office equipment, buildings, furniture and fixtures and certain
operating and other equipment are insured under a blanket property insurance
program. This program provides substantial limits of coverage against "all
risks" of loss including fire, windstorm, flood, earthquake and other perils not
specifically excluded by the terms of the policies.
Substantially all of the installations of central office equipment and
administrative offices are located in buildings and on land owned by BellSouth
Telecommunications. Many garages, business offices and telephone service centers
are in leased quarters.
BellSouth Telecommunications' customers are now served by electronic
switching systems. The BellSouth Telecommunications network has been
transitioned from an analog to a digital network, which provides capabilities
for BellSouth Telecommunications to furnish advanced data transmission and
information management services. 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
$37,155 million at January 1, 1992 to $50,059 million at December 31, 1996, not
including deductions of accumulated depreciation. Significant additions to
property, plant and equipment will be required to meet the demand
17
for telecommunications services and to further modernize and improve such
services to meet competitive demands. Population and economic expansion is
projected by BellSouth in certain growth centers within its nine-state area
during the next five to ten years. Expansion of the network will be needed to
accommodate such projected growth.
BellSouth's capital expenditures for 1992 through 1996 were as follows:
MILLIONS
--------
1996........................................................ $ 4,455
1995........................................................ 4,203
1994........................................................ 3,600
1993........................................................ 3,486
1992........................................................ 3,189
BellSouth projects capital expenditures of approximately $4.7 billion to
$5.2 billion for 1997, consisting of $3.4 billion for BellSouth
Telecommunications' and $1.3 billion to $1.8 billion primarily for BellSouth's
wireless and international businesses. A majority of the expenditures will be to
expand, enhance and modernize its current wireline and domestic cellular
operating systems, to develop international wireless and other businesses and
for property additions to complete construction of PCS systems in the United
States.
In 1996, BellSouth generated substantially all of its funds for capital
expenditures internally. In 1997, such capital expenditures are expected to be
financed primarily through internally generated funds and, to the extent
necessary, from external sources.
ENVIRONMENTAL MATTERS
BellSouth is subject to a number of environmental matters as a result of its
operations and the shared liability provisions related to the divestiture from
AT&T. As a result, BellSouth 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, 1996, BellSouth's recorded liability
related primarily to remediation of these sites was approximately $35 million.
BellSouth 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 or annual operating results or cash flows.
ITEM 3. LEGAL PROCEEDINGS
BellSouth and its subsidiaries are subject to claims arising in the ordinary
course of business involving allegations of personal injury, breach of contract,
anti-competitive conduct, employment law issues, regulatory matters and other
actions. While complete assurance cannot be given as to the outcome of any legal
claims, BellSouth believes that any financial impact would not be material to
its financial position or annual operating results or cash flows. See Note O to
the Consolidated Financial Statements.
18
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, 1996.
------------------------
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 Registrant's 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.
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
19
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 $87.50 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.
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
20
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 Corporation are listed below:
THIS
OFFICER OFFICE
NAME AGE OFFICE SINCE SINCE
- ------------------------- --- ------------------------------------------------------------ ------- ------
F. Duane Ackerman* 54 President and Chief Executive Officer 1983 1996
Walter H. Alford 58 Executive Vice President and General Counsel 1983 1988
C. Sidney Boren 53 Senior Vice President -- Corporate Planning and Development 1984 1996
Keith O. Cowan 40 Vice President -- Corporate Development 1996 1996
Mark E. Droege 43 Vice President -- Financial Management and Treasurer 1996 1996
Ronald M. Dykes 50 Executive Vice President and Chief Financial Officer 1988 1995
H. C. Henry, Jr. 53 Executive Vice President -- Corporate Relations 1984 1993
David J. Markey 56 Vice President -- Governmental Affairs 1986 1993
Charles C. Miller, III 44 President -- International 1990 1995
W. Patrick Shannon 34 Vice President and Controller 1997 1997
Arlen G. Yokley 59 Senior Vice President, Executive Staff Officer and Corporate 1984 1996
Secretary
The following officers of the companies indicated may be deemed to be
executive officers of BellSouth Corporation:
Jere A. Drummond 57 President and Chief Executive Officer -- BellSouth 1982 1995
Telecommunications, Inc.
Earle Mauldin 56 President and Chief Executive Officer -- BellSouth 1987 1995
Enterprises, Inc.
All of the executive officers of BellSouth, other than Mr. Shannon and Mr.
Cowan, 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 1997, Mr. Shannon was employed by U S West, Inc. as Chief Financial
Officer of MediaOne, a company that provides cable TV services. Mr. Cowan was a
partner at the law firm of Alston & Bird before joining BellSouth in 1996.
All officers serve until their successors have been elected and qualified.
- ------------------------
* John L. Clendenin retired as President and Chief Executive Officer at the end
of 1996, and was succeeded by Mr. Ackerman. Mr. Clendenin will remain Chairman
of the Board of Directors through 1997 but, since his retirement, he is no
longer deemed to be an officer of BellSouth.
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, Frankfurt. Amsterdam and Swiss exchanges. The ticker symbol for
BellSouth common stock is BLS. At February 1, 1997, there were 1,084,146 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
------- ------- ----------
1996
First Quarter................................................................... $45 7/8 $36 $ .36
Second Quarter.................................................................. 42 3/8 35 1/4 .36
Third Quarter................................................................... 43 3/8 35 1/4 .36
Fourth Quarter.................................................................. 44 36 1/4 .36
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
STOCK TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is BellSouth's stock transfer agent
and registrar.
23
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
Operating Revenues................................ $19,040 $17,886 $16,845 $15,880 $15,202
Operating Expenses (1)............................ 14,261 14,594 12,787 13,593 12,041
--------- -------- -------- -------- --------
Operating Income.................................. 4,779 3,292 4,058 2,287 3,161
Interest Expense.................................. 721 724 666 689 746
Gain on Sale of Paging Business (2)............... 442 -- -- -- --
Other Income, net................................. 108 20 11 8 178
--------- -------- -------- -------- --------
Income Before Income Taxes, Extraordinary Losses
and Accounting Change............................ 4,608 2,588 3,403 1,606 2,593
Provision for Income Taxes........................ 1,745 1,024 1,243 572 934
--------- -------- -------- -------- --------
Income Before Extraordinary Losses and Accounting
Change........................................... 2,863 1,564 2,160 1,034 1,659
Extraordinary Losses, net of tax (3).............. -- (2,796) -- (87) (41)
Accounting Change, net of tax..................... -- -- -- (67) --
--------- -------- -------- -------- --------
Net Income (Loss)............................... $ 2,863 $(1,232) $ 2,160 $ 880 $ 1,618
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Earnings (Loss) Per Share:
Income Before Extraordinary Losses and
Accounting Change.............................. $ 2.88 $ 1.57 $ 2.18 $ 1.04 $ 1.69
Extraordinary Losses, net of tax (3)............ -- (2.81) -- (.09) (.04)
Accounting Change, net of tax................... -- -- -- (.06) --
--------- -------- -------- -------- --------
Net Income (Loss)............................... $ 2.88 $ (1.24) $ 2.18 $ .89 $ 1.65
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Dividends Declared Per Common Share............... $ 1.44 $ 1.41 $ 1.38 $ 1.38 $ 1.38
Book Value Per Share.............................. $ 13.37 $ 11.90 $ 14.48 $ 13.60 $ 13.97
Return to Average Common Equity................... 22.4% (9.2%) 15.4% 6.3% 11.9%
Weighted Average Common Shares Outstanding........ 994 993 992 991 981
Return on Average Total Capital................... 15.0% (2.7%) 11.5% 6.1% 9.8%
Total Assets...................................... $32,568 $31,880 $34,397 $32,873 $31,463
Capital Expenditures.............................. $ 4,455 $ 4,203 $ 3,600 $ 3,486 $ 3,189
Long-Term Debt.................................... $ 8,116 $ 7,924 $ 7,435 $ 7,381 $ 7,360
Debt Ratio at End of Period (4)................... 43.5% 46.7% 39.3% 40.2% 39.0%
Ratio of Earnings to Fixed Charges................ 6.55 4.24 5.34 2.98 4.00
Total Employees................................... 81,241 87,571 92,121 95,084 97,112
Telephone Employees (5)........................... 62,425 68,585 73,764 77,958 79,453
Telephone Employees per 10,000 Access Lines....... 28.2 32.5 36.5 40.3 42.6
Business Volumes: (6)
Network Access Lines in Service (thousands)..... 22,135 21,133 20,220 19,333 18,650
Access Minutes of Use (millions):
Interstate.................................... 67,690 62,411 57,778 53,345 50,546
Intrastate.................................... 21,171 19,197 16,888 15,261 13,994
Toll Messages (millions)........................ 1,023 1,374 1,559 1,511 1,462
Cellular Customers (thousands): (7)
Domestic...................................... 3,612 2,847 2,156 1,559 1,118
International................................. 1,244 655 361 192 78
--------- -------- -------- -------- --------
Total Cellular Customers.................... 4,856 3,502 2,517 1,751 1,196
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- ------------------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
which reduced net income by $663. See Note J to the Consolidated Financial
Statements. Operating Expenses for 1993 include a charge for restructuring
of $1,136, which reduced net income by $697.
(2) Represents the pre-tax gain on the sale of BellSouth's paging business in
January 1996, which increased net income by $344. See Note B to the
Consolidated Financial Statements.
(3) 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 E
and L to the Consolidated Financial Statements.
(4) The debt ratio at December 31, 1995 has been adjusted to exclude $485 of
debentures 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) Calculated on the equity basis, which includes customers served based on
BellSouth's ownership percentage in all markets served.
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%, 70% and 72% of BellSouth's Total Operating Revenues for
the years ended December 31, 1996, 1995 and 1994, respectively, were from
wireline services provided by BellSouth Telecommunications. Charges for local,
access and toll services for the year ended December 31, 1996 accounted for
approximately 61%, 33% and 6%, respectively, of the wireline revenues discussed
above. Revenues from consolidated wireless communications services and from
directory advertising and publishing services accounted for approximately 15%
and 9%, respectively, of Total Operating Revenues for the year ended December
31, 1996. The remainder of such revenues was derived principally from sales and
maintenance of customer premises equipment and 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 G to the Consolidated Financial Statements.
PERCENT CHANGE
----------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ---------- ----------
Income Before Extraordinary
Losses........................... $ 2,863 $ 1,564 $ 2,160 83.1% (27.6%)
Extraordinary Loss for
Discontinuance of SFAS No. 71,
net of tax....................... -- (2,718) -- -- --
Extraordinary Loss on Early
Extinguishment of Debt, net of
tax.............................. -- (78) -- -- --
--------- --------- ---------
Net Income (Loss)................. $ 2,863 $ (1,232) $ 2,160 -- --
--------- --------- ---------
--------- --------- ---------
25
Earnings (Loss) Per Share:
PERCENT CHANGE
----------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ---------- ----------
Income Before Extraordinary
Losses........................... $ 2.88 $ 1.57 $ 2.18 83.4% (28.0%)
Extraordinary Loss for
Discontinuance of SFAS No. 71,
net of tax....................... -- (2.73) -- -- --
Extraordinary Loss on Early
Extinguishment of Debt, net of
tax.............................. -- (.08) -- -- --
--------- --------- ---------
Earnings (Loss) Per Share......... $ 2.88 $ (1.24) $ 2.18 -- --
--------- --------- ---------
--------- --------- ---------
For a discussion of the extraordinary losses in 1995, see "Extraordinary
Losses" below.
Income Before Extraordinary Losses for 1996 increased $1,299 (83.1%) and
$1.31 per share (83.4%), respectively, compared to 1995. The increases were
primarily attributable to the effect of an after-tax work force reduction charge
in 1995 of $663 ($.67 per share). For a discussion of such charge, see
"Operating Expenses -- Work Force Reduction Charge" below. Also contributing to
the increases were the $344 ($.35 per share) after-tax gain on sale of
BellSouth's paging business (see Note B to the Consolidated Financial
Statements) as well as growth in key business volumes, 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 work force reduction and restructuring plans initiated in 1995 and 1993,
respectively.
Income Before Extraordinary Losses for 1995 decreased $596 (27.6%) and $.61
per share (28.0%), respectively, compared to 1994. The decreases were primarily
due to the after-tax work force reduction charge of $663 ($.67 per share). 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 a restructuring plan initiated in 1993 and completed in 1995.
26
VOLUMES OF BUSINESS
Network Access Lines in Service at December 31 (thousands):
PERCENT CHANGE
----------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ---------- ----------
By Type:
Residence.............................. 15,136 14,653 14,195 3.3% 3.2%
Business............................... 6,732 6,225 5,771 8.1 7.9
Other.................................. 267 255 254 4.7 0.4
--------- --------- ---------
Total Access Lines................... 22,135 21,133 20,220 4.7 4.5
--------- --------- ---------
--------- --------- ---------
By State:
Florida................................ 5,899 5,597 5,350 5.4 4.6
Georgia................................ 3,772 3,550 3,354 6.3 5.8
Tennessee.............................. 2,544 2,435 2,337 4.5 4.2
North Carolina......................... 2,213 2,101 1,994 5.3 5.4
Louisiana.............................. 2,178 2,108 2,037 3.3 3.5
Alabama................................ 1,857 1,792 1,726 3.6 3.8
South Carolina......................... 1,344 1,292 1,244 4.0 3.9
Mississippi............................ 1,193 1,158 1,118 3.0 3.6
Kentucky............................... 1,135 1,100 1,060 3.2 3.8
--------- --------- ---------
Total Access Lines................... 22,135 21,133 20,220 4.7 4.5
--------- --------- ---------
--------- --------- ---------
The total number of access lines in service increased by approximately
1,002,000 (4.7%) to 22,135,000 since December 31, 1995, compared to a 4.5% rate
of increase in 1995. Business and residence access lines increased by 8.1% and
3.3%, respectively, compared to growth rates of 7.9% and 3.2% in 1995. The
number of second residence lines, included in total residence lines, increased
by 285,000 (22.4%) to 1,556,000 and accounted for 59.0% and 28.4% of the overall
increase in residence access lines and total access lines, respectively, since
December 31, 1995. Such second residence lines are generally used for home
office purposes, access to on-line computer services and children's phones. The
growth in all categories of access lines was primarily attributable to continued
economic improvement in the Southeast and successful marketing programs.
Access Minutes of Use (millions):
PERCENT CHANGE
--------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ------------ ------------
Interstate............................... 67,690 62,411 57,778 8.5% 8.0%
Intrastate............................... 21,171 19,197 16,888 10.3 13.7
--------- --------- ---------
Total Access Minutes of Use............ 88,861 81,608 74,666 8.9 9.3
--------- --------- ---------
--------- --------- ---------
Access minutes of use represent the volume of traffic carried by
interexchange carriers between LATAs, both interstate and intrastate, using
BellSouth Telecommunications' local facilities. In 1996, total access minutes of
use increased by 7,253 million (8.9%) compared to an increase of 9.3% in 1995.
The increases in access minutes of use were primarily attributable to access
line growth, promotions by the interexchange carriers and intraLATA toll
competition, which has the effect of increasing access minutes of use while
reducing toll messages carried over BellSouth Telecommunications' network. The
growth rate in total minutes of use continues to be negatively impacted by
competition and the migration of
27
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
--------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ------------ ------------
Toll Messages (millions)............................... 1,023 1,374 1,559 (25.5%) (11.9%)
Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 351 million (25.5%)
in 1996 compared to a decrease of 11.9% in 1995. The decrease in 1996 was
primarily attributable to the expansion of local area calling plans (LACPs) in
Florida, Georgia and North Carolina and, to a lesser extent, increased
competition from interexchange carriers in the intraLATA toll market. While the
respective impacts of such factors cannot be precisely quantified, BellSouth
estimates that about 70% of the decline in toll messages was attributable to
expanded LACPs and about 30% was due to increased competition. The decrease in
1995 was also attributable to LACPs in Florida, Georgia and North Carolina as
well as South 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. The expansion of LACPs and some
effects of competition result in the transfer of calls from toll to the local
service and access categories, respectively, but the corresponding revenues are
not generally shifted at commensurate rates.
Cellular and Paging Customers -- Equity Basis (thousands):
PERCENT CHANGE
--------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ------------ ------------
Domestic Cellular...................................... 3,612 2,847 2,156 26.9% 32.1%
International Cellular................................. 1,244 655 361 89.9 81.4
Paging Customers (all domestic)........................ -- 1,777 1,614 -- 10.1
Domestic cellular customers increased by 765,000 (26.9%) since December 31,
1995. While the rate of increase has declined since 1995, the overall
penetration rate (number of customers as a percentage of the total population in
the service territory) increased from 7.1% at December 31, 1995 to 8.9% at
December 31, 1996. Total minutes of use have also continued to increase,
although average minutes of use per cellular customer have remained relatively
flat in 1996.
Since December 31, 1995, the number of international cellular customers
increased by 589,000 (89.9%) to 1,244,000. 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.
In January 1996, BellSouth sold its paging business to Mobile Media
Communications Inc. See Note B to the Consolidated Financial Statements.
OPERATING REVENUES
For a discussion of the impact of impending local service competition on
revenues and volumes of business, see "Operating Environment and Trends of the
Business."
Total Operating Revenues increased $1,154 (6.5%) in 1996 compared to an
increase of $1,041 (6.2%) during 1995. The increases resulted from growth in
revenues from BellSouth's wireline telephone business, coupled with significant
increases in revenues from the cellular communications business. The increase in
1996 was partially offset by the effect of the January 1996 sale of BellSouth's
paging business. Excluding paging revenues in 1995, Total Operating Revenues
increased $1,503 (8.6%) in 1996.
28
The components of Total Operating Revenues were as follows:
PERCENT CHANGE
----------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ---------- ----------
Local Service.................................. $ 8,082 $ 7,294 $ 6,863 10.8% 6.3%
Interstate Access.............................. 3,553 3,275 3,127 8.5 4.7
Intrastate Access.............................. 812 884 908 (8.1) (2.6)
Toll........................................... 794 1,009 1,190 (21.3) (15.2)
Wireless Communications........................ 2,799 2,592 2,067 8.0 25.4
Directory Advertising and Publishing........... 1,742 1,677 1,556 3.9 7.8
Other Services................................. 1,258 1,155 1,134 8.9 1.9
--------- --------- ---------
Total Operating Revenues..................... $ 19,040 $ 17,886 $ 16,845 6.5 6.2
--------- --------- ---------
--------- --------- ---------
LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network and optional
services, such as custom calling features and custom dialing packages. Local
Service revenues for 1996 increased $788 (10.8%) compared to an increase of $431
(6.3%) in 1995.
The increase in 1996 was due primarily to an increase of 1,002,000 access
lines since December 31, 1995. Also contributing were an increase of $248 due to
higher customer demand for optional services and net rate increases of $88 which
include benefits related to the effects of expanded LACPs.
The 1995 increase was due primarily to an increase of 913,000 access lines
since December 31, 1994 and an increase of $107 due to higher customer demand
for optional services. The increase in 1995 was partially offset by net rate
reductions since December 31, 1994 of approximately $46 which are net of
benefits related to the effects of expanded LACPs.
INTERSTATE ACCESS revenues result from the provision of access services to
interexchange carriers to provide telecommunications services between states and
from end-user charges collected from residential and business customers.
Interstate Access revenues increased $278 (8.5%) in 1996 compared to an increase
of $148 (4.7%) in 1995.
The 1996 increase was due primarily to growth in minutes of use of 8.5%, an
increase of $69 due to higher demand for special access services and an increase
in end-user charges of $58 attributable to growth in the number of access lines
in service. Such increases were offset by net rate reductions since December 31,
1995 of $25.
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.
INTRASTATE ACCESS revenues result from the provision of access services to
interexchange carriers which provide telecommunications services between LATAs
within a state. In 1996, Intrastate Access revenues decreased $72 (8.1%)
compared to a decrease of $24 (2.6%) in 1995.
The decreases for 1996 and 1995 were due primarily to net rate reductions of
$160 and $100, respectively, partially offset by growth in minutes of use of
10.3% and 13.7%, respectively.
TOLL revenues are received from the provision of long-distance services
within (but not between) LATAs. These services include intraLATA service beyond
the local calling area; Wide Area Telecommunications Service (WATS or 800
services) for customers with highly concentrated demand; and special services,
such as transport of voice, data and video. Toll revenues decreased $215 (21.3%)
in 1996 compared to a decrease of $181 (15.2%) in 1995.
29
The decrease for 1996 was primarily attributable to the expansion of LACPs
and increased competition from interexchange carriers, the effects of which
reduced toll messages by 25.5%. The decrease was partially offset by a
retroactive independent company settlement in 1995 which reduced revenues by $31
in that period.
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 LACPs and
increased competition from interexchange carriers. The decrease also includes
the effect of the retroactive independent company settlement.
The overall decline in intraLATA toll revenues is expected to continue over
the long term.
WIRELESS COMMUNICATIONS revenues include revenues from consolidated wireless
communications businesses (primarily domestic cellular and, prior to 1996,
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, net.)
Wireless Communications revenues increased $207 (8.0%) in 1996 compared to
an increase of $525 (25.4%) in 1995. The increases for both years resulted
primarily from continued growth of the customer base for wireless services in
domestic and international markets. The 1996 increase was partially offset by
the effect of the January 1996 sale of BellSouth's paging business. Revenues
from such paging services were $349 and $276, respectively, in 1995 and 1994.
Excluding such paging revenues in 1995, Wireless Communications revenues
increased 24.8% in 1996.
Consistent with anticipated growth in the overall wireless industry,
BellSouth's revenues from wireless services are expected to continue to
increase. However, the rate of growth of revenues from BellSouth's existing
cellular businesses could be adversely affected by competitive pressures on
service pricing, the continuing effect of an increasingly diversified customer
base with lower average usage and the emergence of new wireless service
providers offering 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 $65 (3.9%) in 1996 compared to a
$121 (7.8%) increase in 1995.
The increase for 1996 was primarily due to increases in the volume and
prices of advertising sold. The increase was partially offset by the effect of
BellSouth Telecommunications' adoption of issue basis accounting for directory
revenues, which increased revenues in 1995 by $41, in connection with the
discontinuance of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." See Note L to the
Consolidated Financial Statements.
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.
OTHER SERVICES revenues are principally comprised of revenues from customer
premises equipment (CPE) sales and maintenance services and other nonregulated
services (primarily inside wire, billing and collection and voice messaging
services) offered by BellSouth Telecommunications. Other Services revenues
increased $103 (8.9%) in 1996 compared to an increase of $21 (1.9%) in 1995.
The 1996 increase was primarily attributable to higher demand and prices for
nonregulated services, product sales and fees totalling $132. In addition, the
increase was also due to incremental rate impacts related to potential sharing
under certain state regulatory plans. The increase was partially offset by the
sale in 1996 of a subsidiary which performed computer maintenance.
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 accruals to Local
Service revenues, the combined effect of which increased Other Services revenues
by
30
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.
OPERATING EXPENSES
Total Operating Expenses decreased $333 (2.3%) in 1996 compared to an
increase of $1,807 (14.1%) in 1995. The 1996 decrease was primarily attributable
to the effects of the 1995 work force reduction charge of $1,082 and the sale of
BellSouth's paging business in January 1996. Excluding these effects, Total
Operating Expenses increased $1,049 (7.9%) in 1996. The components of Total
Operating Expenses were as follows:
PERCENT CHANGE
------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ----------- -----------
Depreciation and Amortization.................. $ 3,719 $ 3,455 $ 3,259 7.6% 6.0%
--------- --------- ---------
Other Operating Expenses:
Cost of Services and Products................ 6,072 6,184 6,043 (1.8) 2.3
Selling, General and Administrative.......... 4,470 3,873 3,485 15.4 11.1
--------- --------- ---------
10,542 10,057 9,528 4.8 5.6
--------- --------- ---------
Subtotal................................... 14,261 13,512 12,787 5.5 5.7
Work Force Reduction Charge.................... -- 1,082 -- -- --
--------- --------- ---------
Total Operating Expenses................... $ 14,261 $ 14,594 $ 12,787 (2.3) 14.1
--------- --------- ---------
--------- --------- ---------
DEPRECIATION AND AMORTIZATION increased $264 (7.6%) in 1996 compared to a
$196 (6.0%) increase in 1995.
The increase for 1996 was due primarily to higher levels of property, plant
and equipment and shorter depreciable lives subsequent to the discontinuance of
SFAS No. 71. The higher levels of property, plant and equipment resulted from
continued growth in the customer base for wireless and wireline services and
modernization of the networks. The increase was partially offset by the sale of
BellSouth's paging business in January 1996 which had depreciation and
amortization of $44 in 1995.
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.
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 $485 (4.8%) in 1996 compared to an
increase of $529 (5.6%) in 1995. The increase for 1996 was primarily related to
growth in the wireless and wireline businesses, partially offset by the effect
of the January 1996 sale of BellSouth's paging business. Excluding such
paging-related expenses in 1995, Other Operating Expenses increased $741 (7.6%)
in 1996.
For 1996, expenses related to the cellular and PCS businesses increased $342
and $69, respectively, as a result of sustained growth in the cellular customer
base and the initiation of PCS services. At BellSouth Telecommunications, Other
Operating Expenses increased $202 due principally to higher business volumes,
new service offerings and intensified marketing and advertising. The increase
was partially offset by a decrease of approximately $162 for employee-related
costs in the wireline telephone operations, and the sale in 1996 of a subsidiary
which performed computer maintenance. The decrease
31
in employee-related costs reflects employee reductions attributable to the
restructuring and work force reduction plans, partially offset by annual
compensation increases for management and represented employees. The 1996
increase in Other Operating expenses also included an increase of approximately
$50 in expenses related to the directory advertising and publishing business.
The 1995 increase was due primarily to increased expenses of approximately
$310 related to sustained growth in the cellular 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 employee-related costs. Such decrease
was 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.
WORK FORCE REDUCTION CHARGE. 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
a restructuring plan initiated in 1993 and completed in 1995.
1995 WORK FORCE REDUCTION. The $942 pretax charge was comprised of
approximately $561 under the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," related to employees expected to receive severance
benefits under preexisting separation plans, and approximately $381 for
curtailment losses under the provisions of SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Substantially all of the
curtailment losses relate to postretirement benefits other than pensions.
Under this plan, BellSouth Telecommunications expects to reduce the work
force of the wireline telephone operations by approximately 11,300 employees by
the end of 1997. The work force reduction will be accomplished through the
separation of approximately 13,200 employees, partially offset by the planned
hiring of new employees primarily to replace those not expected to relocate in
connection with the consolidation of work locations. Including a reduction of
approximately 800 employees which occurred in December 1995, BellSouth
Telecommunications has reduced its work force by approximately 7,000 employees
under the 1995 plan through December 31, 1996.
Once the plan to reduce 11,300 employees is completed, annual net employee
cost savings are estimated to be approximately $500 after considering increased
costs for outsourced services.
POSTEMPLOYMENT BENEFITS AND OTHER CHARGES. The pretax charge of $85
represented estimated future postemployment severance benefits to be paid after
1997, also in accordance with the provisions of SFAS No. 112. This component was
based on BellSouth's belief that work force reductions will continue under
existing separation plans, although at reduced separation benefit levels.
A pretax charge of $55 was also recorded related to additional net
curtailment losses in connection with a restructuring plan initiated in 1993 and
completed in 1995. This charge resulted primarily from a greater number of
retirement-eligible employees separating under the plan than was originally
expected.
32
OTHER INCOME STATEMENT ITEMS
PERCENT CHANGE
------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ----------- -----------
Interest Expense................................. $ 721 $ 724 $ 666 (0.4)% 8.7%
Gain on Sale of Paging Business.................. 442 -- -- -- --
Other Income, net................................ 108 20 11 440.0 81.8
Provision for Income Taxes....................... 1,745 1,024 1,243 70.4 (17.6)
INTEREST EXPENSE includes interest on debt, certain other accrued
liabilities and capital leases, partially offset by interest capitalized as a
cost of installing equipment and constructing plant. Interest expense decreased
$3 (0.4%) in 1996 compared to an increase of $58 (8.7%) in 1995.
The decrease for 1996 was primarily attributable to lower average interest
rates on borrowings due in part to refinancings during 1995, partially offset by
higher average debt balances in 1996.
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.
GAIN ON SALE OF PAGING BUSINESS represents the pre-tax gain on the sale of
BellSouth's paging business in January 1996.
OTHER INCOME, NET includes earnings and losses from unconsolidated
subsidiaries, businesses and partnerships; income and losses from the sale of
operations; interest and dividend income; minority interests; and other
nonoperating items. Other Income, net increased $88 in 1996 compared to an
increase of $9 in 1995.
The 1996 increase resulted primarily from a $55 increase in interest income
and lower net minority interest deductions of $35. Equity in losses was ($76) in
1996, an improvement of $10 since 1995. The lower 1996 losses were primarily
attributable to improved operating results at unconsolidated domestic cellular
operations and certain international businesses, principally operations in
Israel and Venezuela. Such improvements were partially offset by increased
losses attributable to the continuing development of German cellular operations.
The increase in Other Income, net in 1995 included a $43 increase in
interest income, an improvement of $24 in equity in losses and $18 in lower net
minority interest deductions. The increase in Other Income, net was also
attributable to a $34 increase in miscellaneous income related to nonstrategic
business activities. The increases in Other Income were partially offset by the
effect of a gain of $108 in 1994 from the sale of two international cellular
investments.
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 unconsolidated
domestic cellular operations, partially offset by increased losses from certain
developing international businesses, principally operations in Germany and
Israel.
PROVISION FOR INCOME TAXES increased $721 (70.4%) in 1996 compared to a
decrease of $219 (17.6%) in 1995. BellSouth's effective tax rates were 37.9%,
39.6% and 36.5% in 1996, 1995 and 1994, respectively. The lower effective tax
rate for 1996 compared to 1995 was due primarily to a higher tax than book basis
for the paging business, which resulted in a lower gain on sale for computing
tax expense. A reconciliation of the statutory Federal income tax rates to these
effective tax rates is provided in Note K to the Consolidated Financial
Statements.
EXTRAORDINARY LOSSES
DISCONTINUANCE OF SFAS NO. 71. In 1995, as a result of its continuing
regulatory and marketplace assessments, BellSouth Telecommunications concluded
that it was required to discontinue SFAS No. 71
33
for financial reporting purposes. Accordingly, BellSouth Telecommunications
recorded a noncash extraordinary charge of $2,718 (net of a deferred tax benefit
of $1,731). The extraordinary charge reflects $3,002 (after tax) to reduce the
recorded value of long-lived telephone plant and equipment, all of which was
within the regulatory framework, to the level appropriate for nonregulated
enterprises. The overall charge was partially offset by $194 related to the
method by which BellSouth Telecommunications reported its directory publishing
revenues, $71 related to the elimination of regulatory assets and liabilities
and $19 for the partial acceleration of unamortized investment tax credits
associated with the reductions in asset carrying values and in asset lives.
See Note L to the Consolidated Financial Statements.
EARLY EXTINGUISHMENT OF DEBT. During 1995, BellSouth Telecommunications
recognized extraordinary losses of $78 (net of a current tax benefit of $49)
related to the early extinguishment of outstanding debt issues. See Note E to
the Consolidated Financial Statements.
FINANCIAL CONDITION
BellSouth uses the net cash generated from its operations and external
financing to invest in and operate its existing and new businesses and to pay
dividends. While current liabilities exceeded current assets at both December
31, 1996 and 1995, 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
------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ----------- -----------
Net Cash Provided by Operating Activities.......... $ 5,863 $ 5,443 $ 5,172 7.7% 5.2%
OPERATING ACTIVITIES. Net cash provided by operating activities increased
$420 (7.7%) in 1996 compared to an increase of $271 (5.2%) in 1995. The increase
in 1996 was primarily attributable to a $669 increase in operating income
excluding depreciation, amortization and the work force reduction charge. The
1996 increase was partially offset by higher cash expenditures for reductions of
accounts payable.
The increase in 1995 was primarily attributable to a $512 increase in
operating income excluding depreciation, amortization and the work force
reduction charge. The 1995 increase was partially offset by higher cash
expenditures of $258 related to a restructuring plan begun in 1993.
PERCENT CHANGE
------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- ----------- -----------
Net Cash Used for Investing Activities.......... $ (4,199) $ (4,384) $ (3,935) (4.2%) 11.4%
INVESTING ACTIVITIES. BellSouth's primary use of capital resources
continues to be for capital expenditures to support development of the wireline
and wireless networks. Net cash used for investing activities decreased $185
(4.2%) in 1996 compared to an increase of $449 (11.4%) in 1995. The decrease in
1996 was primarily due to $930 in cash received from the sale of the paging
business. The decrease was partially offset by higher capital expenditures of
$252 related substantially to wireline and wireless network development and a
decrease of $324 in proceeds from other investment dispositions and repayment of
advances.
Capital expenditures were $4,455 in 1996 and are projected to be
approximately $4,700 to $5,200 in 1997. Such capital expenditures for 1996 were
financed internally and, for 1997, are expected to be financed primarily through
internally generated funds and, to the extent necessary, from external sources.
34
The increase in 1995 was primarily attributable 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. Substantially all cash required for
capital expenditures in 1995 was provided internally.
PERCENT CHANGE
----------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- ----- --------- ---------- ----------
Net Cash Provided by (Used for) Financing
Activities......................................... $ (2,197) $ 46 $ (1,132) -- --
FINANCING ACTIVITIES. During 1996, financing activities used cash of
$(2,197) while in 1995 financing activities provided cash of $46. The increased
use of cash from 1995 to 1996 of $2,243 primarily reflects higher levels of net
proceeds from all borrowing activities in 1995 compared to 1996.
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 and for each quarter in 1996.
The change in cash used for financing activities from 1994 to 1995 was
primarily attributable to higher levels of net proceeds from all borrowing
activities in 1995 compared to 1994.
DEBT ACTIVITIES. During 1996, BellSouth issued $300 of long term debt and,
with net proceeds as well as cash on hand, redeemed outstanding short-term debt
and long-term debentures of $417 and $485, respectively.
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 at December 31, 1995 includes $500 which was
used to reduce commercial paper on January 2, 1996.
BellSouth has committed credit lines aggregating $1,951 with various banks.
Borrowings under the committed credit lines totaled $92 at December 31, 1996.
BellSouth also maintains uncommitted lines of credit of $650. At December 31,
1996, there were no borrowings under the uncommitted lines. As of February 14,
1997, shelf registration statements were on file with the Securities and
Exchange Commission under which $1,927 of debt securities could be publicly
offered.
BellSouth's debt to total capitalization ratio, adjusted in 1995 to exclude
the $485 of debentures redeemed in January 1996, decreased to 43.5% at December
31, 1996 from 46.7% at December 31, 1995. The decrease was primarily caused by a
reduction in short-term borrowings and an increase in shareholders' equity due
to earnings during 1996.
DERIVATIVE ACTIVITIES. BellSouth enters into 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 a limited
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 then current value of 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 N to the Consolidated Financial
Statements for additional information.
35
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
REGULATORY ENVIRONMENT. In providing telecommunications services, BellSouth
is subject to regulation by both state and federal regulators with respect to
rates, services, competition and other issues. BellSouth's primary regulatory
focus has been directed toward modifying the regulatory process to one that is
more closely aligned with changing market conditions and overall public policy
objectives. As an alternative to regulation of intrastate earnings, BellSouth
has sought price regulation, whereby prices of basic service are regulated and
the pricing of other products and services are based on market factors. While
price regulation plans do not provide for the direct recovery through basic
service rates of cost increases or extraordinary expenses, they generally
provide more flexibility to meet competitive pricing levels. BellSouth
Telecommunications has price regulation plans approved or authorized in all
states in its wireline territory, although the implementation of the Tennessee
plan has been stayed by a court pending resolution of a number of issues. At the
federal level, BellSouth Telecommunications is operating under a price
regulation plan established by the Federal Communications Commission (FCC) in
1995.This plan provided a productivity option, which BellSouth
Telecommunications selected, that eliminated both earnings limitations and
sharing requirements.
ECONOMY. The nation's output of goods and services, which grew 2.0% in
1995, grew at a moderate rate of 2.3% in 1996. Employment in nonfarm business
establishments grew 2.2% during the year and the unemployment rate averaged
5.4%. The economy of the nine-state region served by BellSouth
Telecommunications' wireline telephone business grew slightly faster than the
national economy. The number of jobs in nonfarm businesses grew 2.3% as the
unemployment rate averaged 5.0% for the year. Real income expanded at an
estimated 3.7%. Net migration added approximately 400,000 persons, accounting
for half of the region's population growth. The demand for telecommunications
services in the region reflected the strength of its economic and population
growth. Moderate economic expansion is expected during 1997, as tight labor
markets, slow labor force growth and modest productivity growth act to constrain
the pace of growth. The region's cost advantages and strong net migration should
bring an economic growth rate comparatively better than the nation's and further
increase the demand for telecommunications services. The increased competition
faced by BellSouth Telecommunications and the growing percentage of revenues
from unregulated businesses 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.
COMPETITION. 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.
THE 1996 ACT. The 1996 Act requires the elimination of state legislative
and regulatory barriers to competition for local telephone service, subject only
to competitively neutral requirements to preserve and advance universal service,
protect the public safety and welfare, maintain the quality of
telecommunications services and safeguard the rights of customers. The 1996 Act
also includes requirements that BellSouth negotiate with other carriers for
interconnection, use of network elements on an unbundled basis and resale of
local services. If a negotiated agreement cannot be reached, either party may
seek arbitration with the state regulatory authority or the FCC if the state
fails to act. If rates are disputed, the arbitrator must set rates for access to
network elements on an unbundled basis, based on cost, which may include a
reasonable profit. BellSouth is also required to negotiate to provide retail
services at wholesale rates for the purposes of resale by competing carriers. If
agreement cannot be reached, the arbitrator shall set the wholesale rates at
BellSouth's retail rates less costs to be avoided. BellSouth Telecommunications
has executed over 40 interconnection or resale agreements with such carriers and
is currently involved in arbitration proceedings with a number of other
carriers, including AT&T, MCI and Sprint. The arbitration results for the
wholesale discount rates vary by state from approximately 15% to 21%.
36
In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry (the Order). Among the issues
specifically addressed by the Order are the network elements that BellSouth must
make available; pricing standards to be followed by states in setting rates for
interconnection; access to network elements on an unbundled basis and resold
services. BellSouth and several other incumbent local exchange carriers (ILECs)
joined in an appeal of the Order to the United States Court of Appeals for the
Eighth Circuit (the Court). Upon request of several state commissions and ILECs,
the Court stayed the Order in part, pending appeal. Such stay relates to pricing
prescriptions and certain other terms. The Court heard oral arguments in January
1997, and a decision is pending. Notwithstanding these developments, however, as
discussed above, BellSouth Telecommunications and a number of carriers have
negotiated interconnection agreements and state regulatory commissions are
arbitrating or have approved various terms of interconnection between BellSouth
Telecommunications and other carriers. These terms may be revised, depending on,
among other things, the outcome of the appeal of the Order.
The 1996 Act also requires the FCC to identify the local service subsidy
provided by access charges; to provide for the removal of such subsidy from
access rates in order that access charges reflect underlying costs; to arrange
for a universal service fund to ensure the continuation of universal service;
and to develop the arrangements for payments into that fund by all carriers. The
FCC is currently engaged in this proceeding. In addition, the FCC has commenced
a proceeding to revise its access charge rules. Until final orders are issued by
the FCC and any judicial appeals have been concluded, it will not be possible to
determine the impact on access charge revenues; however, an interim access
charge plan provides for lower access charges paid by carriers that purchase
unbundled network elements from ILECs or that connect wireless communications
with the wireline networks of the ILECs.
In attempting to comply with the technical requirements of interconnection,
BellSouth expects to incur significant costs associated with the development or
modification of systems necessary to make interconnection possible. For example,
BellSouth Telecommunications will be required to provide for long-term number
portability whereby customers switching to competing local carriers will be able
to retain their telephone numbers without interruption. It is unclear as to what
degree BellSouth will be able to recover these costs.
Until the FCC issues final orders on matters such as access reform,
universal service and number portability, as well as other matters, and any
judicial appeals have been concluded, it will not be possible to determine the
impact the 1996 Act will have on BellSouth's financial position or annual
operations results or cash flows.
WIRELESS SERVICES. The FCC's PCS licensing process allows multiple new
competitors for BellSouth's businesses. Licenses to provide PCS services have
been won in auction by AT&T, Bell Holding Company consortia and other large and
well-capitalized entities. PCS will provide competition to BellSouth's local
wireline and wireless telephone businesses. Several competitive PCS systems are
now operational.
In many markets, competing cellular service is provided by businesses owned
or controlled by a Bell 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, Inc. and AirTouch Communications have
announced that they plan to merge their cellular businesses. Those four
companies have also formed a joint venture to provide PCS in many domestic
markets.
BELLSOUTH COMPETITIVE STRATEGY. BellSouth has developed three main
strategies that govern its business decisions in the increasingly competitive
telecommunications industry. First, BellSouth will strengthen its leadership
position throughout its nine-state wireline territory by (a) enhancing and
building its brand strength and distribution channels; (b) providing
full-service offerings including wireline and wireless, local and long-distance,
and video and electronic commerce services; and (c) controlling costs. Second,
BellSouth will continue to grow profitably its domestic wireless business by (a)
deploying value-added products and services and competitive technology; (b)
strengthening and
37
expanding distribution channels including joint marketing with BellSouth
Telecommunications; and (c) expanding in-region wireless coverage through
successful bidding for PCS licenses and other acquisitions. Third, BellSouth
will continue to grow and develop its Latin American and other international
operations.
NEW SERVICES. Notwithstanding the inevitable loss of local service
customers and other risks associated with increased competition, BellSouth will
have the opportunity to benefit from entry into new business markets. For
example, the presence of competition, among other things, can allow BellSouth to
qualify to offer interLATA wireline service under provisions contained in the
1996 Act. BellSouth believes that in order to remain competitive in the future,
it must aggressively pursue a corporate strategy of expanding its offerings
beyond its traditional businesses and markets. These offerings include interLATA
services, information services and video and electronic commerce services.
BellSouth has entered some of these businesses through investments in, strategic
alliances with and acquisitions of established companies in such industries and
through the development of some of these services and capabilities internally.
For example, among other initiatives, BellSouth has acquired several cable TV
rights, is conducting a trial of cable TV service and is providing Internet
access. BellSouth also intends to continue to pursue certain foreign
telecommunications licenses as they are offered.
BellSouth plans to begin offering interLATA wireline service in each of its
in-region states as soon as the FCC approves its application for each state.
BellSouth has filed documents with the Georgia Public Service Commission
requesting that the Georgia Commission approve a statement of generally
available terms and conditions as provided for in the 1996 Act and to establish
that such terms and conditions meet the competitive checklist. BellSouth will
file an application for each state as soon as it believes the conditions are
met. Because of the proceedings required to obtain approval and the potential
challenges of competitors and others, it is uncertain when BellSouth will be
authorized to commence interLATA service in any of its in-region states. The
1996 Act requires that in-region interLATA service be provided through a
subsidiary separate from BellSouth Telecommunications.
JOINT MARKETING. The 1996 Act allows BellSouth to market wireless and other
services jointly with its wireline local exchange services; previously, separate
marketing was required. This change has enabled BellSouth to more efficiently
offer and provide integrated telecommunications. In March 1996, BellSouth began
joint marketing of wireless and wireline services in selected markets. In
addition, as permitted by the 1996 Act, BellSouth intends to jointly market
other services such as video, internet access and, eventually, interLATA service
with its wireline and wireless services.
1995 WORK FORCE REDUCTION. As another part of its competitive strategy,
BellSouth Telecommunications announced in 1995 a plan to reduce its work force
by approximately 11,300 employees by the end of 1997. Also, in 1995, BellSouth
Telecommunications completed the restructuring of its telephone operations that
had been announced in 1993.
38
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 these financial statements
including estimates and judgments relating to matters not concluded by the end
of the year, are the responsibility of the management of BellSouth. 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, 1996, the system of
internal controls was adequate to accomplish the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical
climate so that BellSouth'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 Senior Vice President, Executive Staff Officer and Corporate
Secretary.
/s/ F. Duane Ackerman /s/ Ronald M. Dykes
F. Duane Ackerman Ronald M. Dykes
PRESIDENT AND CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
February 3, 1997
39
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee of the Board of Directors consists of four members who
are neither officers nor employees of BellSouth Corporation. Information as to
these persons, as well as their duties, is provided in the Proxy Statement. The
Audit Committee met six times during 1996 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
Marshall M. Criser
CHAIRMAN, AUDIT COMMITTEE
February 3, 1997
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, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note L to the consolidated financial statements, BellSouth
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.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 3, 1997
40
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Operating Revenues:
Network and related services:
Local service....................................................... $ 8,082 $ 7,294 $ 6,863
Interstate access................................................... 3,553 3,275 3,127
Intrastate access................................................... 812 884 908
Toll................................................................ 794 1,009 1,190
Wireless communications............................................... 2,799 2,592 2,067
Directory advertising and publishing.................................. 1,742 1,677 1,556
Other services........................................................ 1,258 1,155 1,134
--------- --------- ---------
Total Operating Revenues............................................ 19,040 17,886 16,845
--------- --------- ---------
Operating Expenses:
Cost of services and products......................................... 6,072 6,184 6,043
Depreciation and amortization......................................... 3,719 3,455 3,259
Selling, general and administrative................................... 4,470 3,873 3,485
Work force reduction charge (Note J).................................. -- 1,082 --
--------- --------- ---------
Total Operating Expenses............................................ 14,261 14,594 12,787
--------- --------- ---------
Operating Income........................................................ 4,779 3,292 4,058
Interest Expense........................................................ 721 724 666
Gain on Sale of Paging Business (Note B)................................ 442 -- --
Other Income, net....................................................... 108 20 11
--------- --------- ---------
Income Before Income Taxes and Extraordinary Losses..................... 4,608 2,588 3,403
Provision for Income Taxes (Note K)..................................... 1,745 1,024 1,243
--------- --------- ---------
Income Before Extraordinary Losses...................................... 2,863 1,564 2,160
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note L).................................................... -- (2,718) --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E).................................................... -- (78) --
--------- --------- ---------
Net Income (Loss)................................................. $ 2,863 $ (1,232) $ 2,160
--------- --------- ---------
--------- --------- ---------
Weighted Average Common Shares Outstanding (Note G)..................... 994 993 992
Dividends Declared Per Common Share (Note G)............................ $ 1.44 $ 1.41 $ 1.38
Earnings (Loss) Per Share: (Note G)
Income Before Extraordinary Losses.................................... $ 2.88 $ 1.57 $ 2.18
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note L).................................................. -- (2.73) --
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E).................................................. -- (.08) --
--------- --------- ---------
Net Income (Loss)................................................. $ 2.88 $ (1.24) $ 2.18
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
41
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 1,178 $ 1,711
Temporary cash investments..................................................................... 51 71
Accounts receivable, net of allowance for uncollectibles of $180 and $171...................... 4,087 3,772
Material and supplies.......................................................................... 451 430
Other current assets........................................................................... 531 521
--------- ---------
Total Current Assets......................................................................... 6,298 6,505
--------- ---------
Investments and Advances (Note B)................................................................ 2,430 2,418
Property, Plant and Equipment, net (Note C)...................................................... 21,825 21,092
Deferred Charges and Other Assets................................................................ 610 338
Intangible Assets, net........................................................................... 1,405 1,527
--------- ---------
Total Assets................................................................................. $ 32,568 $ 31,880
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year (Note E)......................................................... $ 2,124 $ 2,951
Accounts payable............................................................................... 1,446 1,724
Other current liabilities (Note D)............................................................. 2,871 2,715
--------- ---------
Total Current Liabilities.................................................................... 6,441 7,390
--------- ---------
Long-Term Debt (Note E).......................................................................... 8,116 7,924
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes.............................................................. 1,899 1,650
Unamortized investment tax credits............................................................. 278 355
Other liabilities and deferred credits (Note F)................................................ 2,585 2,736
--------- ---------
Total Deferred Credits and Other Liabilities................................................. 4,762 4,741
--------- ---------
Shareholders' Equity:
Common stock, $1 par value (2,200 shares authorized; 991 and 994 shares outstanding)........... 1,009 1,007
Paid-in capital................................................................................ 7,697 7,619
Retained earnings.............................................................................. 5,541 4,099
Shares held in trust and treasury (Note G)..................................................... (532) (374)
Guarantee of ESOP debt (Note H)................................................................ (466) (526)
--------- ---------
Total Shareholders' Equity................................................................... 13,249 11,825
--------- ---------
Total Liabilities and Shareholders' Equity................................................... $ 32,568 $ 31,880
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
42
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
NUMBER OF SHARES AMOUNT
---------------------- ------------------------------------------------------
SHARES SHARES GUARANTEE
COMMON HELD IN TRUST PAR PAID-IN RETAINED HELD IN TRUST OF ESOP
STOCK AND TREASURY VALUE CAPITAL EARNINGS AND TREASURY DEBT
------ ------------- ------ ------- -------- ------------- ---------
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 G)......... 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)
Net income............................... 2,863
Dividends declared....................... (1,430)
Shares issued for:.......................
Employee benefit plans................. 1 1 14 11
Grantor trusts......................... 1 (1) 1 34 (35)
Shares purchased for:
Treasury............................... (3) (85)
Grantor trusts......................... (1) (49)
ESOP activities and related tax
benefit................................. 9 60
Foreign currency translation
adjustment.............................. 30
------ --- ------ ------- -------- ------ ---------
Balance at December 31, 1996............. 1,009 (18) $1,009 $ 7,697 $ 5,541 $(532) $(466)
------ --- ------ ------- -------- ------ ---------
------ --- ------ ------- -------- ------ ---------
TOTAL
-------
Balance at December 31, 1993............. $13,495
Net income............................... 2,160
Dividends declared....................... (1,370)
Shares issued for:
Employee benefit plans................. 6
Grantor trusts......................... --
ESOP activities and related tax
benefit................................. 71
Foreign currency translation
adjustment.............................. 6
-------
Balance at December 31, 1994............. 14,368
Two-for-one stock split (Note G)......... --
Net loss................................. (1,232)
Dividends declared....................... (1,400)
Shares issued for:
Employee benefit plans................. 31
Grantor trusts......................... --
ESOP activities and related tax
benefit................................. 68
Foreign currency translation
adjustment.............................. (10)
-------
Balance at December 31, 1995............. 11,825
Net income............................... 2,863
Dividends declared....................... (1,430)
Shares issued for:.......................
Employee benefit plans................. 26
Grantor trusts......................... --
Shares purchased for:
Treasury............................... (85)
Grantor trusts......................... (49)
ESOP activities and related tax
benefit................................. 69
Foreign currency translation
adjustment.............................. 30
-------
Balance at December 31, 1996............. $13,249
-------
-------
The accompanying notes are an integral part of these consolidated financial
statements.
43
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ 2,863 $ (1,232) $ 2,160
Adjustments to net income (loss):
Gain on sale of paging business....................................................... (442) -- --
Depreciation and amortization......................................................... 3,719 3,455 3,259
Provision for uncollectibles.......................................................... 254 213 175
Deferred income taxes and unamortized investment tax credits.......................... 120 (1,971) (19)
Pension expense in excess of funding/(pension income)................................. (14) (53) 28
Dividends from unconsolidated affiliates.............................................. 130 149 122
Losses from unconsolidated affiliates, net............................................ 76 86 110
Extraordinary loss for discontinuance of SFAS No. 71.................................. -- 4,449 --
Extraordinary loss on early extinguishment of debt.................................... -- 127 --
Payment of call premium............................................................... -- (74) --
Work force reduction charge........................................................... -- 1,082 --
Net change in:
Accounts receivable and other current assets........................................ (645) (770) (741)
Accounts payable and other current liabilities...................................... (708) (283) (187)
Deferred charges and other assets................................................... (126) (28) (34)
Other liabilities and deferred credits.............................................. 581 315 437
Other reconciling items, net.......................................................... 55 (22) (138)
--------- ---------- ----------
Net cash provided by operating activities............................................. 5,863 5,443 5,172
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................... (4,455) (4,203) (3,600)
Proceeds from sale of paging business................................................... 930 -- --
Proceeds from disposition of short-term investments..................................... 355 187 107
Purchases of short-term investments..................................................... (336) (207) (108)
Proceeds from investment dispositions and repayments of advances........................ 102 426 238
Investments in and advances to unconsolidated affiliates................................ (620) (521) (623)
Other investing activities, net......................................................... (175) (66) 51
--------- ---------- ----------
Net cash used for investing activities................................................ (4,199) (4,384) (3,935)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings..................................................... 23,942 21,075 22,489
Repayments of short-term borrowings..................................................... (24,439) (20,565) (22,306)
Proceeds from long-term debt............................................................ 392 2,488 191
Repayments of long-term debt............................................................ (544) (1,555) (129)
Dividends paid.......................................................................... (1,430) (1,385) (1,369)
Other financing activities, net......................................................... (118) (12) (8)
--------- ---------- ----------
Net cash provided by (used for) financing activities.................................. (2,197) 46 (1,132)
--------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents...................................... (533) 1,105 105
Cash and Cash Equivalents at Beginning of Period.......................................... 1,711 606 501
--------- ---------- ----------
Cash and Cash Equivalents at End of Period................................................ $ 1,178 $ 1,711 $ 606
--------- ---------- ----------
--------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
44
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, 1996, approximately 70% of
BellSouth's operating revenues were from wireline and network services, 15% 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 L 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 $163, $108 and $65 for the years ended December 31, 1996, 1995 and 1994,
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 cost of other
property, plant and equipment is depreciated using either
45
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
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 the fair value of 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 $49, $50 and $53 for the years ended
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
accumulated amortization of intangibles was $220 and $228, 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, 1996, 1995 and 1994 were not
material.
DERIVATIVE FINANCIAL INSTRUMENTS. 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
$254, $213 and $175 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Revenues from services provided to AT&T Corp., BellSouth's largest customer,
were approximately 9%, 10% and 11% of consolidated operating revenues for 1996,
1995 and 1994, respectively.
46
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.
NOTE B -- INVESTMENTS, ADVANCES AND SALES OF OPERATIONS
Investments and advances as of December 31 consist of the following:
1996 1995
--------- ---------
Investments accounted for under the equity method.................................. $ 1,676 $ 1,845
Advances to and notes receivable from affiliates................................... 675 477
Other investments.................................................................. 79 96
--------- ---------
Total Investments and Advances................................................... $ 2,430 $ 2,418
--------- ---------
--------- ---------
BellSouth's equity method investments primarily include various partnerships
in domestic and international wireless properties and other international
communications consortiums. Losses related to investments accounted for under
the equity method were $(76), $(86) and $(110) for the three years ended
December 31, 1996, 1995 and 1994, respectively, and are included as a component
of Other Income, net.
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, 1996, BellSouth's aggregate investment in
these entities exceeded the underlying book value of the investees' net assets
by $880. The excess of consideration paid over net assets acquired along with
other intangible assets is being amortized using either straight-line or
accelerated methods over periods of benefit, which do not exceed 40 years.
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 22.5% 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
22.5% participant in the E-Plus Mobilfunk consortium (E-Plus), which provides
cellular telephone service in Germany.
OTHER INVESTMENTS. 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 $193 and $188 at December 31, 1996 and 1995, respectively.
The notes bear interest at rates ranging from 6.31% to 9.31% while the advances
bear
47
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE B -- INVESTMENTS, ADVANCES AND SALES OF OPERATIONS (CONTINUED)
interest at the federal funds rate plus .30%. Principal amounts outstanding at
December 31, 1996 are due and payable to BellSouth between January 15, 1998 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 $250 and $185 had been borrowed by
Prime as of December 31, 1996 and 1995, respectively. The loan is collateralized
by the stock of Prime, 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.
BellSouth and RAM Communications Group, Inc. are partners in an entity that
owns and operates certain mobile data communications networks. Through its
investment, BellSouth holds a 49% interest in the United States mobile data
operations and various interests in foreign mobile data operations ranging from
6% to 72.5%.
In 1996, BellSouth initiated a tender offer for a controlling interest in an
entity that provides cellular telephone service in Peru. BellSouth deposited
$148 in escrow arrangements pending the outcome of the tender offer. Such amount
is included in Deferred Charges and Other Assets in the accompanying
consolidated balance sheet. In January 1997, BellSouth successfully completed
the tender offer, acquiring a 58.7% interest in the entity.
Minority interests of consolidated subsidiaries, included as a component of
Other Income, net, were $(27), $(62) and $(80) for the years ended December 31,
1996, 1995 and 1994, respectively.
SALES OF OPERATIONS. In January 1996, BellSouth sold to Mobile Media
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 $442. MCCA's operating revenues were $349 and $276, respectively, for the
years ended December 31, 1995 and 1994. Total operating expenses were $300 and
$245, respectively, for the years ended December 31, 1995 and 1994. Total assets
at December 31, 1995 were $355.
In 1994, BellSouth disposed of its interests in cellular telephone
businesses in Mexico and France. BellSouth recognized gains from these
dispositions aggregating $108, which are included in Other Income, net.
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
1996 1995
--------- ---------
Outside plant.................................................................... $ 20,866 $ 20,092
Central office equipment......................................................... 17,442 16,132
Building and building improvements............................................... 3,595 3,303
Operating and other equipment.................................................... 3,595 2,952
Furniture and fixtures........................................................... 3,017 2,791
Plant under construction......................................................... 716 782
Station equipment................................................................ 638 626
Land............................................................................. 190 191
--------- ---------
50,059 46,869
Less: Accumulated depreciation................................................. 28,234 25,777
--------- ---------
Total Property, Plant and Equipment, net..................................... $ 21,825 $ 21,092
--------- ---------
--------- ---------
See Note L for a discussion of the discontinuance of SFAS No. 71 and its
effect on Property, Plant and Equipment.
48
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE D -- OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
1996 1995
--------- ---------
Advanced billing and customer deposits............................................. $ 539 $ 493
Taxes accrued...................................................................... 517 382
Dividends payable.................................................................. 363 363
Salaries and wages payable......................................................... 335 325
Postemployment benefits (see Note J)............................................... 303 273
Interest and rents accrued......................................................... 293 282
Compensated absences............................................................... 244 317
Other.............................................................................. 277 280
--------- ---------
Total Other Current Liabilities.................................................. $ 2,871 $ 2,715
--------- ---------
--------- ---------
NOTE E -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
1996 1995
--------- ---------
Debentures Redeemed in January 1996................................................ $ -- $ 485
Short-term notes payable:
Bank loans....................................................................... 73 85
Commercial paper................................................................. 1,885 2,302
Current maturities of long-term debt............................................... 166 79
--------- ---------
Total Debt Maturing Within One Year.............................................. $ 2,124 $ 2,951
--------- ---------
--------- ---------
Weighted average interest rate at end of period:
Bank loans....................................................................... 7.40% 7.50%
Commercial paper................................................................. 5.50% 5.81%
BellSouth has committed credit lines aggregating $1,951 with various banks.
Borrowings under the committed lines totaled $92 and $66, respectively, at
December 31, 1996 and 1995. BellSouth also maintains uncommitted lines of credit
aggregating $650. At December 31, 1996, 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.
49
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE E -- 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,
1996.
CONTRACTUAL
INTEREST RATES MATURITIES 1996 1995
------------------ -------------- --------- ---------
BellSouth Telecommunications Debentures: 4 3/8% - 6 3/4% 1997 - 2045 $ 1,905 $ 1,915
6.65% - 7% 2095 635 626
7% - 8 1/4% 2010 - 2035 2,050 2,535
--------- ---------
4,590 5,076
BellSouth Telecommunications Notes............ 5 1/4% - 7% 1998 - 2008 2,175 2,175
BellSouth Capital Funding Corporation Notes... 4.89% - 9.25% 1997 - 2026 820 544
Guarantee of ESOP debt........................ 9.125% - 9.19% 2003 594 647
Other......................................... 136 79
Unamortized discount, net of premium.......... (33) (33)
--------- ---------
8,282 8,488
Current maturities............................ (166) (564)
--------- ---------
Total Long-Term Debt........................ $ 8,116 $ 7,924
--------- ---------
--------- ---------
Maturities of long-term debt outstanding (principal amounts) at December 31,
1996 are summarized below. Maturities after the year 2001 include $500 principal
amount 6.65% debentures due in 2095. At December 31, 1996, such debentures had
an accreted book value of $135.
1997 1998 1999 2000 2001 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
Maturities.................. $ 166 $ 798 $ 265 $ 473 $ 182 $ 6,796 $ 8,680
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
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 in
Debt Maturing Within One Year. As a result of the early extinguishment of these
issues, including the issues redeemed in January 1996, an extraordinary loss of
$78 ($.08 per share), net of a current tax benefit of $49, was recognized in
1995.
At December 31, 1996, shelf registration statements were on file with the
Securities and Exchange Commission under which $1,927 of debt securities could
be offered.
50
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE F -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits are summarized as follows at December
31:
1996 1995
--------- ---------
Postretirement benefits other than pensions (see Notes H and J).................... $ 744 $ 675
Accrued pension cost (see Notes H and J)........................................... 581 469
Compensation related............................................................... 522 421
Minority interests................................................................. 439 347
Postemployment benefits (see Note J)............................................... 144 494
Sharing accrual under FCC price cap plan........................................... 39 186
Other.............................................................................. 116 144
--------- ---------
Total Other Liabilities and Deferred Credits..................................... $ 2,585 $ 2,736
--------- ---------
--------- ---------
NOTE G -- 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 1994 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, 1996, 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 $87.50 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.
SHARES HELD IN TRUST AND TREASURY. During 1994, 1995 and 1996, BellSouth
issued shares to grantor trusts to provide partial funding for the benefits
payable under certain nonqualified 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, 1996 and 1995, the assets held in the trusts
consist of cash and 15,796,782 and 13,753,204 shares, respectively, of BellSouth
common stock. Of the total shares of BellSouth common stock held by the trusts,
14,586,782 were issued by BellSouth directly to the trusts, out of previously
unissued shares and 1,210,000 shares were acquired in open market transactions
through use of the trusts' funds.
The total cost of the shares issued by BellSouth as of the date of funding
the trusts is included in Common Stock and Paid-In Capital; however, because
these shares are not considered outstanding for financial reporting purposes,
the shares are included within Shares Held in Trust and Treasury, a
51
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
reduction to Shareholders' Equity. In addition, there is no earnings per share
impact of these shares. The cost of shares acquired in open market purchases by
the trust are also included in Shares Held in Trust and Treasury.
In addition to shares held by the grantor trusts, Shares Held in Trust and
Treasury includes treasury shares purchased in connection with BellSouth's
announced plans to repurchase shares of its common stock. In 1996, BellSouth
purchased 2,207,152 treasury shares for an aggregate of $85. A total of 276,168
shares were reissued under various employee benefit plans.
Shares Held in Trust and Treasury as of December 31, 1996 and 1995 are
comprised of the following:
1996 1995
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ----------- ------------- -----------
Shares held by Grantor Trusts........................ 15,796,782 $ 458 13,753,204 $ 374
Shares held in Treasury.............................. 1,930,984 74 -- --
------------- ----- ------------- -----
Total Shares Held in Trust and Treasury.......... 17,727,766 $ 532 13,753,204 $ 374
------------- ----- ------------- -----
------------- ----- ------------- -----
GUARANTEE OF ESOP DEBT. Financial reporting practices require that the
amount equivalent to BellSouth's guarantee of the amortizing notes issued by its
ESOP trusts be presented as a reduction to Shareholders' Equity. 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. See Note H.
NOTE H -- EMPLOYEE BENEFIT PLANS
PENSION PLANS. Substantially all employees of BellSouth are covered by
noncontributory defined benefit pension plans. Principal plans are discussed
below; other plans are not significant individually or in the aggregate.
The plan covering nonrepresented employees is a cash balance plan which
provides pension benefits determined by a combination of compensation-based
service and additional credits and individual account-based interest credits.
The cash balance plan is subject to a minimum benefit determined under a plan in
existence for nonrepresented employees prior to July 1, 1993 which provided
benefits based upon credited service and employees' average compensation for a
specified period. The minimum benefit under the prior plan is applicable to
employees retiring through 2005. Both the 1996 and 1995 projected benefit
obligations assume interest and additional credits greater than the minimum
levels specified in the written plan. Pension benefits provided for represented
employees are based on specified benefit amounts and years of service and
include the projected effect of future bargained-for improvements.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all pension benefits for
which BellSouth is liable. Contributions are 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.
52
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The components of net pension (income) cost are summarized below:
1996 1995 1994
--------- --------- ---------
Service cost -- benefits earned during the year....................... $ 288 $ 239 $ 272
Interest cost on projected benefit obligation......................... 799 812 778
Actual (return) loss on plan assets................................... (1,957) (3,041) 136
Net amortization and deferral......................................... 856 1,937 (1,158)
--------- --------- ---------
Net pension (income) cost........................................... $ (14) $ (53) $ 28
--------- --------- ---------
--------- --------- ---------
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 (income) cost
is affected by changes in the discount rate and other actuarial assumptions. The
consolidated net pension (income) cost amounts reflected above are exclusive of
curtailment effects reflected in the work force reduction and restructuring
activities (see Note J) and do not reflect curtailment gains in the amount of
$43 in 1996.
The following table sets forth the funded status of the plans at December
31:
1996 1995
--------- ---------
Actuarial present value of:
Vested benefit obligation...................................................... $ 9,321 $ 8,853
--------- ---------
--------- ---------
Accumulated benefit obligation................................................. $ 9,824 $ 9,961
--------- ---------
--------- ---------
Projected benefit obligation................................................... $ 11,303 $ 11,994
Plan assets at fair value........................................................ 15,614 14,613
--------- ---------
Plan assets in excess of projected benefit obligation............................ 4,311 2,619
Unrecognized net gain due to past experience different from assumptions made..... (4,286) (2,738)
Unrecognized prior service cost.................................................. (304) (199)
Unrecognized net asset at transition............................................. (130) (151)
--------- ---------
Accrued pension cost........................................................... $ (409) $ (469)
--------- ---------
--------- ---------
The significant actuarial assumptions at December 31, 1996 and 1995 were as
follows:
1996 1995
----------- -----------
Weighted average discount rate........................................................ 7.5 % 7.0%
Weighted average rate of compensation increase........................................ 5.8 % 5.7%
Expected long-term rate of return on plan assets...................................... 8.25% 8.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. BellSouth sponsors
postretirement health and life insurance welfare plans for most of its
nonrepresented and represented employees. BellSouth's transition benefit
obligation is being amortized over 15 years, the average remaining service
period of active plan participants at adoption. The accounting for the health
care plan does not anticipate future adjustments to the cost-sharing
arrangements provided for in the written plan for employees who retire after
December 31, 1991.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all health and life benefits
for which BellSouth is liable. Contributions are
53
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
Net postretirement benefit cost (income) for the years ended December 31,
1996, 1995 and 1994, respectively, is composed of the following:
1996 1995 1994
-------------------- -------------------- ---------
HEALTH LIFE HEALTH LIFE HEALTH
--------- --------- --------- --------- ---------
Service cost -- benefits earned during the year..................... $ 35 $ 12 $ 27 $ 10 $ 35
Interest on accumulated postretirement benefit obligation........... 225 43 223 38 211
Actual (return) loss on plan assets................................. (163) (103) (185) (125) 14
Amortization of transition liability (asset)........................ 96 (13) 110 (13) 112
Other amortization and deferral, net................................ 115 58 115 77 (65)
--------- --------- --------- --------- ---------
Net postretirement benefit cost (income)............................ $ 308 $ (3) $ 290 $ (13) $ 307
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
LIFE
---------
Service cost -- benefits earned during the year..................... $ 13
Interest on accumulated postretirement benefit obligation........... 37
Actual (return) loss on plan assets................................. (12)
Amortization of transition liability (asset)........................ (13)
Other amortization and deferral, net................................ (30)
---------
Net postretirement benefit cost (income)............................ $ (5)
---------
---------
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 in Note J.
The following table sets forth the plans' funded status at December 31, 1996
and 1995, respectively:
1996 1995
-------------------- --------------------
HEALTH LIFE HEALTH LIFE
--------- --------- --------- ---------
Accumulated postretirement benefit obligation:
Retirees................................................. $ 1,994 $ 318 $ 1,909 $ 305
Fully eligible active plan participants.................. 437 135 712 178
Other active plan participants........................... 541 164 687 137
--------- --------- --------- ---------
2,972 617 3,308 620
Plan assets at fair value.................................. 1,379 778 1,159 692
--------- --------- --------- ---------
Accumulated postretirement benefit obligation less than (in
excess of) plan assets.................................... (1,593) 161 (2,149) 72
Unrecognized prior service cost............................ 71 17 103 5
Unrecognized net (gains) losses............................ (279) 7 218 117
Unrecognized transition obligation (asset)................. 1,057 (144) 1,153 (157)
--------- --------- --------- ---------
(Accrued) prepaid postretirement benefit cost.............. $ (744) $ 41 $ (675) $ 37
--------- --------- --------- ---------
--------- --------- --------- ---------
The significant actuarial assumptions at December 31, 1996 and 1995 were as
follows:
1996 1995
----------- -----------
Weighted average discount rate........................................................ 7.5 % 7.0%
Weighted average rate of compensation increase........................................ 5.8 % 5.7%
Health care cost trend rate (1)....................................................... 8.5 % 9.0%
Expected long-term rate of return on plan assets (2).................................. 8.25% 8.0%
- ------------------------
(1) Trend rate used to value the accumulated postretirement obligation in 1996
and 1995 is assumed to decrease gradually to 5% in 2003.
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
trust for 1996 and 1995.
54
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- 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 $190 at December 31, 1996 and the estimated aggregate service and
interest cost components of the 1996 postretirement benefit cost by $17.
DEFINED CONTRIBUTION PLANS. BellSouth maintains several contributory
savings plans which cover substantially all employees. In April 1996, the
BellSouth Management Savings and Employee Stock Ownership Plan and the BellSouth
Enterprises Retirement Savings Plan merged to form the BellSouth Retirement
Savings Plan. The BellSouth Retirement Savings Plan and the BellSouth Savings
and Security Plan (collectively, the Savings Plans) are tax-qualified defined
contribution plans. 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 Employee Stock Ownership Plan (ESOP) was incorporated
into the Savings Plans. The Trusts borrowed $850 by issuing amortizing notes
which are guaranteed by BellSouth (see Note E). The Trusts used the loan
proceeds to purchase shares of BellSouth common stock in the open market. These
shares are held in suspense accounts in the Trusts; a scheduled number of shares
is released for allocation to participants as each semi-annual loan payment is
made. The Trusts service the debt with contributions from BellSouth and with
dividends paid on the shares held by the Trusts. None of the shares held by the
Trusts is subject to repurchase.
A portion of employees' eligible contributions to the Savings Plans is
matched by BellSouth at rates determined annually by the Board of Directors.
BellSouth's matching obligation is fulfilled with shares released from the
suspense accounts semi-annually for allocation to participants. The number of
shares allocated to each participant's account is based on the market price of
the shares at the time of allocation. If shares released for allocation do not
fulfill BellSouth's matching obligation, BellSouth makes further contributions
to the Trusts to fund the purchase of additional shares in the open market to
fulfill the remaining obligation.
BellSouth recognizes expense using the shares allocated accounting method,
which combines the cost of the shares allocated for the period plus interest
incurred, reduced by the dividends used to service the ESOP debt. Dividends on
all ESOP shares are recorded as a reduction to retained earnings and all ESOP
shares are included in the computation of earnings per share.
1996 1995 1994
-------------- -------------- --------------
Compensation cost..................................... $58 $75 $77
Interest expense...................................... $33 $37 $39
Actual interest on ESOP Notes......................... $56 $62 $66
Cash contributions, excluding dividends paid to the
Trusts............................................... $91 $101 $100
Dividends paid to the Trusts, used for debt service... $44 $44 $42
Shares allocated to participants...................... 14,305,917 11,942,278 9,621,034
Shares committed to be released....................... -- -- --
Shares unallocated.................................... 17,472,807 19,836,446 22,157,690
55
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- STOCK COMPENSATION PLANS
At December 31, 1996, BellSouth has stock options outstanding under several
stock-based compensation plans. The BellSouth Corporation Stock Plan (the Stock
Plan) provides for grants to key employees of stock options and various other
stock-based awards. One share of BellSouth common stock is the underlying
security for any award. The aggregate number of shares of BellSouth common stock
which may be granted in any calendar year cannot exceed one percent of the
shares outstanding at the time of grant. Prior to adoption of the Stock Plan,
stock options were granted under the BellSouth Corporation Stock Option Plan.
Stock options granted under both plans entitle an optionee to purchase shares of
BellSouth common stock within prescribed periods at a price either equal to, or
in excess of, the fair market value on the date of grant. Options granted under
these plans generally become exercisable at the end of five years and have a
term of 10 years.
BellSouth applies APB Opinion 25 and related Interpretations in accounting
for its stock plans. Accordingly, no compensation cost has been recognized for
grants of stock options. Had compensation cost for BellSouth's stock-based
compensation plans been determined in accordance with the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," BellSouth's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1996 1995
--------- ---------
Net income (loss) -- as reported................................................... $ 2,863 $ (1,232)
Net income (loss) -- pro forma..................................................... $ 2,852 $ (1,235)
Earnings (loss) per share -- as reported........................................... $ 2.88 $ (1.24)
Earnings (loss) per share -- pro forma............................................. $ 2.87 $ (1.24)
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options granted
in 1996 and 1995 do not vest for several years and additional awards are made
each year.
The following table summarizes the activity for stock options outstanding:
1996 1995 1994
-------------- -------------- --------------
Options outstanding at January 1...................... 14,287,748 10,345,924 7,308,284
Options granted....................................... 5,376,513 5,269,040 3,525,722
Options exercised..................................... (692,545) (1,226,040) (374,278)
Options forfeited..................................... (400,324) (101,176) (113,804)
Options outstanding at December 31.................... 18,571,392 14,287,748 10,345,924
Weighted-average option prices per common share:
Outstanding at January 1............................ $30.56 $28.65 $26.14
Granted at fair market value........................ $42.50 $30.85 $30.20
Granted at above fair market value.................. N/A $41.34 $41.79
Exercised........................................... $26.24 $24.46 $23.58
Forfeited........................................... $33.71 $30.10 $29.08
Outstanding at December 31.......................... $34.11 $30.56 $28.65
Weighted-average fair value of options granted at fair
market value during the year......................... $7.66 $5.60 $7.50
Weighted-average fair value of options granted at
above fair market value during the year.............. N/A $2.48 $1.70
Options exercisable at December 31.................... 6,523,291 5,242,258 4,667,262
Shares available for grant at December 31............. 9,910,692 10,074,447 10,050,096
56
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1996 1995 1994
----------- ----------- -----------
Expected life (years)................................................ 7 7 7
Dividend yield....................................................... 3.39% 4.55% 4.59%
Expected volatility.................................................. 15.4% 15.8% 16.4%
Risk-free interest rate.............................................. 5.56% 7.21% 5.75%
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- ------------------ ------------- -------------------- --------------- ------------ ---------------
$18.50 - $25.99 1,466,990 4.66 years $ 24.65 1,466,990 $ 24.65
$26.00 - $27.99 2,819,677 5.24 years $ 27.23 1,839,895 $ 27.27
$28.00 - $29.99 3,668,220 7.05 years $ 29.44 1,229,828 $ 29.28
$30.00 - $38.99 3,259,373 7.56 years $ 30.98 819,337 $ 31.41
$39.00 - $44.50 7,357,132 8.77 years $ 42.34 1,167,241 $ 42.08
$18.50 - $44.50 18,571,392 7.36 years $ 34.11 6,523,291 $ 30.23
NOTE J -- 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 a restructuring plan
initiated in 1993 and completed in 1995.
Under the 1995 work force reduction plan, BellSouth Telecommunications
expects to reduce the work force of the wireline telephone operations by
approximately 11,300 employees by the end of 1997. The work force reduction will
be accomplished through the separation of approximately 13,200 employees,
partially offset by the planned hiring of new employees primarily to replace
those not expected to relocate in connection with the consolidation of work
locations. Including a reduction of approximately 800 employees which occurred
in December 1995, BellSouth Telecommunications has reduced its work force by
approximately 7,000 employees under the 1995 plan through December 31, 1996.
NOTE K -- INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," the balance
sheet reflects the anticipated tax impact of future taxable income or deductions
implicit in the balance sheet in the form of temporary differences. These
temporary differences reflect the difference between the basis in assets and
liabilities as measured in the financial statements and as measured by tax laws
using enacted tax rates.
57
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
NOTE K -- INCOME TAXES (CONTINUED)
The provision for income taxes is summarized as follows:
1996 1995 1994
--------- --------- ---------
Federal:
Current................................................................ $ 1,390 $ 1,061 $ 1,082
Deferred, net.......................................................... 170 (148) 34
Investment tax credits, net............................................ (77) (69) (73)
--------- --------- ---------
1,483 844 1,043
--------- --------- ---------
State:
Current................................................................ 235 203 180
Deferred, net.......................................................... 27 (23) 20
--------- --------- ---------
262 180 200
--------- --------- ---------
Total provision for income taxes..................................... $ 1,745 $ 1,024 $ 1,243
--------- --------- ---------
--------- --------- ---------
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.
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
1996 1995
--------- ---------
Compensation related............................................................ $ 707 $ 627
Work force reduction charge..................................................... 210 370
Allowance for uncollectibles.................................................... 87 89
Regulatory sharing accruals..................................................... 32 114
Other........................................................................... 244 219
--------- ---------
1,280 1,419
Valuation allowance............................................................. (64) (55)
--------- ---------
Deferred Tax Assets............................................................. 1,216 1,364
--------- ---------
Depreciation.................................................................... (2,110) (2,042)
Equity investments.............................................................. (354) (361)
Issue basis accounting.......................................................... (197) (207)
Licenses........................................................................ (187) (190)
Other........................................................................... (133) (129)
--------- ---------
Deferred Tax Liabilities...................................................... (2,981) (2,929)
--------- ---------
Net Deferred Tax Liability.................................................. $ (1,765) $ (1,565)
--------- ---------
--------- ---------
The valuation allowance, which increased by $9 in 1996, 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, 1996 and 1995, $134
and $85, respectively, was current and $(1,899) and $(1,650), respectively, was
noncurrent.
58
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE K -- INCOME TAXES (CONTINUED)
A reconciliation of the Federal statutory income tax rate to BellSouth's
effective tax rate follows:
1996 1995 1994
--------- --------- ---------
Federal statutory tax rate................................................. 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit...................... 3.7 4.5 4.0
Amortization of investment tax credits..................................... (1.7) (2.7) (2.1)
Equity of unconsolidated subsidiaries...................................... 1.6 2.0 0.6
Benefit of capital loss carryforward....................................... -- (0.4) (1.1)
Basis difference in disposed subsidiary.................................... (1.5) -- --
Miscellaneous items, net................................................... 0.8 1.2 .1
--------- --------- ---------
Effective tax rate....................................................... 37.9% 39.6% 36.5%
--------- --------- ---------
--------- --------- ---------
NOTE L -- DISCONTINUANCE OF SFAS NO. 71
In 1995, as a result of its continuing regulatory and marketplace
assessments, BellSouth Telecommunications concluded that it was required to
discontinue SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," for financial reporting purposes. Accordingly, BellSouth
Telecommunications recorded a noncash extraordinary charge of $2,718 (net of a
deferred tax benefit of $1,731). The components of the charge are as follows:
PRETAX AFTER TAX
--------- ---------
Reduction in recorded value of long lived telephone plant......................... $ (4,896) $ (3,002)
Full adoption of issue basis accounting........................................... 317 194
Elimination of regulatory assets and liabilities.................................. 111 71
Partial adjustment to unamortized investment tax credits.......................... 19 19
--------- ---------
Total........................................................................... $ (4,449) $ (2,718)
--------- ---------
--------- ---------
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.
59
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE L -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
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 LIVES
- ---------------------------------------------------------------- ----------------------- -------------------
(IN YEARS)
Digital switching............................................... 17.0 10.0
Circuit-other................................................... 10.5 9.1
Buried metallic cable........................................... 20.0 14.0
Aerial metallic cable........................................... 20.0 14.0
Underground metallic cable...................................... 25.0 12.0
The remaining components of the extraordinary charge, which partially offset
the plant-related portion of the overall charge, include $194 (after tax)
related to the adoption by BellSouth Telecommunications of issue basis
accounting for its directory publishing revenues. BellSouth's unregulated
subsidiaries already recognized directory publishing revenues and production
expenses using issue basis accounting.
The overall extraordinary charge was also reduced by $71 (after tax) to
reflect the removal of regulatory assets and liabilities that were recorded as a
result of previous actions by regulators. Virtually all of these regulatory
assets and liabilities arose in connection with the incorporation of new
accounting standards into the ratemaking process and were transitory in nature.
In addition, the overall extraordinary charge was reduced by $19 (after tax) for
the partial acceleration of unamortized investment tax credits associated with
the reductions in asset carrying values and in asset lives.
NOTE M -- SUPPLEMENTAL CASH FLOW INFORMATION
1996 1995 1994
--------- --------- ---------
CASH PAID FOR:
Income Taxes............................................................. $ 1,427 $ 1,231 $ 1,375
--------- --------- ---------
--------- --------- ---------
Interest................................................................. $ 740 $ 760 $ 665
--------- --------- ---------
--------- --------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Shares Issued to Grantor Trusts.......................................... $ 35 $ 38 $ 43
--------- --------- ---------
--------- --------- ---------
NOTE N -- FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, temporary cash
investments, bank loans and commercial paper approximate fair value due to the
short-term nature of these instruments. The fair value for BellSouth
Telecommunications Debentures and Notes are estimated based on the closing
market prices for each issue at December 31, 1996 and 1995. Fair value estimates
for the Guarantee of ESOP Debt, BellSouth Capital Funding Corporation Notes,
foreign exchange contracts, foreign currency swaps and interest rate swaps are
based on quotes from dealers. 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.
60
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE N -- FINANCIAL INSTRUMENTS (CONTINUED)
Following is a summary of financial instruments where the fair values differ
from the recorded amounts as of December 31, 1996 and 1995:
1996 1995
------------------------ ------------------------
ESTIMATED ESTIMATED
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
BALANCE SHEET FINANCIAL INSTRUMENTS
Long-Term Debt:
BellSouth Telecommunications Debentures................... $ 4,590 $ 4,422 $ 5,076 $ 5,079
BellSouth Telecommunications Notes........................ 2,175 2,141 2,175 2,216
BellSouth Capital Funding Corporation Notes............... 820 856 544 587
Guarantee of ESOP Debt.................................... 594 675 647 803
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Interest Rate Swaps......................................... -- (5) -- (10)
DERIVATIVE FINANCIAL INSTRUMENTS. BellSouth is, from time to time, party to
currency swap agreements, interest rate swap agreements and foreign exchange
forward contracts 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 then current value of the currency rate or interest rate differential, not
the full notional amount. Such contracts and agreements have been executed with
creditworthy financial institutions. As such, BellSouth considers the risk of
nonperformance to be remote.
CURRENCY SWAP. 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, 1996,
the net currency swap receivable, which equals the fair value of the swap, was
$23 and the related net interest receivable was $7, both of which are included
in accounts receivable in the consolidated balance sheet at December 31, 1996.
INTEREST RATE SWAPS. BellSouth enters into interest rate swap agreements to
exchange fixed and variable rate interest payment obligations without the
exchange of the underlying principal amounts. As of December 31, 1996, BellSouth
was a party to various interest rate swaps with an aggregate notional amount of
$120. Under these swaps, BellSouth paid fixed rates averaging 7.13% and received
variable rates averaging 5.52%. These swaps mature at dates ranging from 2001 to
2002.
At December 31, 1995, BellSouth was a party to two types of interest rate
swaps with aggregate notional amounts of $96 and $75, respectively. Under the
$96 swaps, BellSouth paid fixed rates averaging 7.38% and received variable
rates averaging 6.05%. Under the $75 swaps, BellSouth paid variable rates
averaging 5.96% and received fixed rates averaging 4.86%.
OTHER. BellSouth has also issued letters of credit and financial guarantees
which approximate $322 at December 31, 1996. Of this total, $169 represents the
U.S. Dollar equivalent of the outstanding balance of E-Plus debt guaranteed by
BellSouth. BellSouth has agreed to guarantee E-Plus borrowings up to a U.S.
Dollar equivalent of $341 (530 million German Marks) at December 31, 1996.
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
61
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE N -- FINANCIAL INSTRUMENTS (CONTINUED)
these receivables, other than those from interexchange carriers, are limited due
to the composition of the customer base, which includes a large number of
individuals and businesses. At December 31, 1996 and 1995, approximately $492
and $520, respectively, of trade accounts receivable were from interexchange
carriers.
NOTE O -- COMMITMENTS AND CONTINGENCIES
LEASES. BellSouth has entered into operating leases for facilities and
equipment used in operations. Rental expense under operating leases was $269,
$252 and $311 for 1996, 1995 and 1994, respectively. Capital leases currently in
effect are not significant.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 1996:
1997 1998 1999 2000 2001 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
Minimum rentals............. $ 181 $ 143 $ 121 $ 101 $ 88 $ 483 $ 1,117
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
OUTSIDE PLANT. BellSouth currently self-insures all of its outside plant
against casualty losses. The net book value of outside plant was $7,621 and
$8,080 at December 31, 1996 and 1995, respectively. Such outside plant, located
in the nine Southeastern states served by BellSouth Telecommunications, is
susceptible to damage from severe weather conditions and other perils, including
hurricanes.
LEGAL CLAIMS. BellSouth and its subsidiaries are subject to claims arising
in the ordinary course of business involving allegations of personal injury,
breach of contract, anti-competitive conduct, employment law issues, regulatory
matters and other actions. BellSouth Telecommunications is also subject to
claims attributable to pre-divestiture events involving environmental
liabilities, rates, taxes, contracts and torts. Certain contingent liabilities
for pre-divestiture events are shared with AT&T Corp.
With respect to regulatory matters, the South Carolina Public Service
Commission has ordered BellSouth Telecommunications to refund approximately $29,
plus interest, based on an investigation of its 1992 earnings. The refund was
stayed pending judicial review of the decision. In 1996, the South Carolina
Court of Common Pleas entered an order affirming the Commission's order of the
refund. BellSouth Telecommunications intends to pursue an appeal of this
decision. The Commission has postponed review of BellSouth Telecommunications'
earnings in 1993 and 1994 until a resolution of the 1992 period is reached.
While complete assurance cannot be given as to the outcome of any legal
claims, BellSouth believes that any financial impact would not be material to
its financial position or annual operating results or cash flows.
62
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE P -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the following summary of quarterly financial information, all adjustments
necessary for a fair presentation of each period were included. The results for
first quarter 1996 include a gain on sale of paging business of $442, which
increased net income by $344. The results for fourth quarter 1995 include a work
force reduction charge of $1,082, which reduced net income by $663.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1996
Operating Revenues........................................... $ 4,541 $ 4,620 $ 4,829 $ 5,050
Operating Income............................................. $ 1,183 $ 1,188 $ 1,201 $ 1,207
Net Income................................................... $ 970 $ 629 $ 631 $ 633
Earnings Per Share........................................... $ .98 $ .63 $ .63 $ .64
1995
Operating Revenues........................................... $ 4,299 $ 4,390 $ 4,432 $ 4,765
Operating Income............................................. $ 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 (LOSS) 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)
--------- --------- --------- ---------
--------- --------- --------- ---------
63
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,
--------------------
1996 1995
--------- ---------
Cellular Revenue, net...................................................................... $ 2,312 $ 1,888
--------- ---------
Operating Expenses......................................................................... 1,308 1,065
Depreciation and Amortization.............................................................. 364 298
--------- ---------
Total Operating Expenses............................................................... 1,672 1,363
--------- ---------
Operating Income........................................................................... 640 525
Other Expenses, net (including interest and taxes)......................................... 277 233
--------- ---------
Net Income............................................................................. $ 363 $ 292
--------- ---------
--------- ---------
Operating Margins as a Percentage of Revenue:
Including Depreciation and Amortization.................................................. 27.7% 27.8%
Excluding Depreciation and Amortization.................................................. 43.4% 43.6%
Operational Comparisons (thousands):
Proportionate Cellular Population Served................................................. 40,696 39,937
Proportionate Cellular Customers......................................................... 3,612 2,847
64
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, 1997 as follows, and is
herein incorporated by reference pursuant to General Instruction G(3):
PAGE(S) IN
DEFINITIVE
PROXY
ITEM DESCRIPTION STATEMENT
- ----------------- ---------------------------------------------------------------------------- -----------------
10. Directors and Executive Officers of the Registrant.......................... 5 - 12
11. Executive Compensation...................................................... 21 - 28 (a)
12. Security Ownership of Certain Beneficial
Owners and Management...................................................... 12
13. Certain Relationships and Related Transactions.............................. 21 (b)
- ------------------------
(a) Beginning with "Compensation Committee Interlocks and Insider
Participation" through but not including "Five Year Performance
Comparison"
(b) Includes only "Compensation Committee Interlocks and Insider
Participation"
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........................................................ 40
Consolidated Statements of Income........................................................ 41
Consolidated Balance Sheets.............................................................. 42
Consolidated Statements of Shareholders' Equity.......................................... 43
Consolidated Statements of Cash Flows.................................................... 44
Notes to Consolidated Financial Statements............................................... 45-64
(2) Financial statement schedules have been omitted because the required information is
contained in the financial statements and notes thereto or because such schedules are not
required or applicable.
(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 10y inclusive.
65
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 Officer Short Term Incentive Award Plan. (Exhibit 10y to Form 10-Q for the quarter
ended September 30, 1996, 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 as amended and
restated effective January 1, 1994. (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 as amended and restated effective
September 23, 1996.
10h BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated effective November
25, 1996.
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 Corporation Directors Retirement Plan. (Exhibit 10qq to Form 10-K for the year ended December
31, 1986, File No. 1-8607).
10k BellSouth Corporation Financial Counseling Plan. (Exhibit 10r to Form 10-K for the year ended December
31, 1992, File No. 1-8607).
10k-1 Amendment dated November 3, 1995 to the BellSouth Corporation Financial Counseling Plan for Executives.
(Exhibit 10l-1 to Form 10-K for the year ended December 31, 1995, File No. 1-8607).
10l BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors. (Exhibit 10gg to
Registration Statement No. 2-87846).
10m BellSouth Corporation Executive Life Insurance Plan. (Exhibit 10v to Form 10-K for the year ended
December 31, 1992, File No. 1-8607).
10n BellSouth Corporation Non-Employee Directors' Stock Option Plan. (Exhibit 10z to Form 10-Q for the
quarter ended September 30, 1996, File No. 1-8607).
10o Form of Executive Officer Successor and Retirement Agreement. (Exhibit 10aa to Form 10-Q for the quarter
ended September 30, 1996, File No. 1-8607).
10p BellSouth Non-Employee Directors Charitable Contribution Program. (Exhibit 10z to Form 10-K for the year
ended December 31, 1992, File No. 1-8607).
66
EXHIBIT
NUMBER
- ---------
10q BellSouth Personal Retirement Account Pension Plan, as amended and restated effective July 1, 1996.
(Exhibit 10r to Form 10-Q for the quarter ended September 30, 1996, File No. 1-8607).
10r 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).
10r-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Executive Benefit Plan(s).
(Exhibit 10s-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10s 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).
10s-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit
Plan(s). (Exhibit 10t-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10t 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).
10t-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Board Directors Benefit Plan(s).
(Exhibit 10u-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10u 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).
10u-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors
Benefit Plan(s). (Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10v BellSouth Corporation Stock Plan as amended on September 23, 1996 and November 24, 1996.
10w BellSouth Retirement Savings Plan as amended and restated effective July 1, 1996. (Exhibit 10x to Form
10-Q for the quarter ended September 30, 1996, File No. 1-8607).
10x BellSouth Corporation Officer Estate Enhancement Plan and Agreement.
10y BellSouth Change in Control Executive Severance Agreements.
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 Retirement Savings Plan for the fiscal year ended December 31,
1996 (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, 1996 (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 23, 1997 Fourth Quarter 1996 Earnings Release
67
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 AND
CHIEF FINANCIAL OFFICER
February 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
F. Duane Ackerman*
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL OFFICER:
Ronald M. Dykes*
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PRINCIPAL ACCOUNTING OFFICER:
W. Patrick Shannon*
VICE PRESIDENT AND CONTROLLER
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 25, 1997
68
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, 33-48929, 33-49461,
33-51449, 33-63173 and 333-21233) and Form S-8 (Nos. 33-38265, 33-38264,
33-38263, 33-30773, 33-30772, 33-26518, 33-12165, 2-94802, 33-49459, 333-01427,
333-01429 and 333-13783) of our report, dated February 3, 1997, 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, on our audits of the
consolidated financial statements of BellSouth Corporation as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 25, 1997
69