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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
BELLSOUTH CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE>
Notice of
1998
Annual Meeting
Proxy Statement
Annual Financial Statements and
Review of Operations
BELLSOUTH
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TABLE OF CONTENTS
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PAGE
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Notice of Annual Meeting................................................................................. 2
Proxy Statement:
Voting Information..................................................................................... 3
Election of Directors.................................................................................. 5
Governance of the Company.............................................................................. 8
Directors' Compensation................................................................................ 10
Stock Ownership of Directors and Executive Officers.................................................... 12
Directors' Proposals................................................................................... 13
Shareholder Proposals.................................................................................. 15
Nominating and Compensation Committee Report on Executive Compensation................................. 22
Compensation Committee Interlocks and Insider Participation............................................ 26
Executive Compensation................................................................................. 27
Five Year Performance Comparison....................................................................... 32
General Information:
Other Matters To Come Before The Meeting............................................................. 33
Shareholder Proposals for the 1999 Proxy Statement................................................... 33
Director Nominees or Other Business for Presentation at the Annual Meeting........................... 33
Section 16(a) Beneficial Ownership Reporting Compliance.............................................. 33
Other Information.................................................................................... 33
Solicitation of Proxies.............................................................................. 34
Exhibit A.............................................................................................. 35
Appendix:
Annual Financial Statements and Review of Operations:
Selected Financial and Operating Data.................................................................. A-1
Management's Discussion and Analysis of Results of Operations
and Financial Condition.............................................................................. A-2
Report of Management................................................................................... A-20
Audit Committee Chairman's Letter...................................................................... A-21
Report of Independent Accountants...................................................................... A-21
Consolidated Statements of Income...................................................................... A-22
Consolidated Balance Sheets............................................................................ A-23
Consolidated Statements of Shareholders' Equity........................................................ A-24
Consolidated Statements of Cash Flows.................................................................. A-25
Notes to Consolidated Financial Statements............................................................. A-26
Market and Dividend Data............................................................................... A-47
Domestic Cellular Proportionate Operating Data......................................................... A-48
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[LOGO]
MARCH 10, 1998
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 27, 1998
To Our Shareholders:
The Annual Meeting of Shareholders of BellSouth Corporation will be held at the
Cobb Galleria Centre Ballroom, 2 Galleria Parkway, Atlanta, Georgia, on Monday,
April 27, 1998 at 9:00 a.m., Eastern Daylight Time. The following items of
business will be discussed and voted upon during the meeting:
1. The election of four directors for a term of three years and one director
for a term of two years.
2. The ratification of the appointment of Coopers & Lybrand L.L.P., certified
public accountants, as BellSouth's independent auditors for the year 1998.
3. Amendments to BellSouth's Restated Articles of Incorporation.
4. Such other matters, including shareholder proposals, that may properly come
before the meeting.
The Board of Directors has fixed March 9, 1998 as the record date for the
determination of the shareholders entitled to notice of, and to vote at, this
meeting or any adjournment.
I look forward to seeing you at the meeting. On behalf of the management and
directors of BellSouth Corporation, I want to thank you for your continued
support and confidence in 1998.
/s/ Arlen G. Yokley
Arlen G. Yokley
Senior Vice President--Corporate Compliance and Corporate Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, SIGN, DATE AND
PROMPTLY MAIL THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
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PROXY STATEMENT
VOTING INFORMATION
PURPOSE
This Proxy Statement and the accompanying proxy card are being mailed to
BellSouth shareholders beginning March 10, 1998. The BellSouth Board of
Directors is soliciting proxies to be used at the 1998 Annual Meeting of
BellSouth Shareholders which will be held on April 27, 1998. Proxies are
solicited to give all shareholders of record an opportunity to vote on matters
to be presented at the Annual Meeting. In the following pages of this Proxy
Statement, you will find information on matters to be voted upon at the Annual
Meeting of Shareholders or any adjournment of that meeting.
WHO CAN VOTE
All shareholders of record of BellSouth Common Stock as of the close of business
on March 9, 1998 are entitled to vote. Shares can be voted at the meeting only
if the shareholder is present or represented by a valid proxy.
SHARES OUTSTANDING
Forty percent of the outstanding shares of BellSouth Common Stock must be
present, either in person or represented by proxy, in order to conduct the
Annual Meeting of BellSouth Shareholders. On January 31, 1998, 1,008,826,041
shares of BellSouth Common Stock were outstanding, including shares issued to
certain grantor trusts, which are not considered outstanding for financial
reporting purposes. We do not know of any shareholder who beneficially owned
more than five percent of BellSouth's stock as of January 31, 1998.
PROXY CARD
If you sign the proxy card but do not specify how you want your shares to be
voted, your shares will be voted by the Directors' Proxy Committee in favor of
the election of all listed nominees and in accordance with the directors'
recommendations on the other subjects listed on the proxy card. The Committee
will vote at its discretion on any other matter that may properly come before
the meeting and is not listed on the proxy card.
If you wish to assign your proxy to someone other than the Directors' Proxy
Committee, you should cross out all three names appearing on the proxy card and
insert the name(s) of up to three other people. The person or persons
representing you must present your signed proxy card and a ballot at the meeting
in order to vote your shares.
VOTING OF SHARES
Each share of BellSouth Common Stock represented at the Annual Meeting is
entitled to one vote on each matter properly brought before the meeting. All
shares entitled to vote and represented by properly executed proxies received
before the polls are closed at the Annual Meeting, and not revoked or
superseded, will be voted at the Annual Meeting in accordance with the
instructions indicated on those proxies.
BELLSOUTH DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN: If you
participate in this Plan, your proxy card represents shares held in the Plan, as
well as shares you hold directly in certificate form registered in the same
name.
FOR BELLSOUTH EMPLOYEES: If you are a participant in one or more of the
following employee payroll-based plans, and the accounts are registered in the
same name, your proxy card also will serve as voting instructions for the
trustees of those plans:
BellSouth Employee Stock Ownership Plan (PAYSOP)
BellSouth Employee Stock Investment Plan (ESIP)
BellSouth Stock Purchase Plan (ESPP)
BellSouth Savings and Security Plan (SSP)
BellSouth Retirement Savings Plan (BRSP)
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The ESIP, ESPP, SSP, and BRSP each provide that the trustee will vote plan
shares represented by proxy cards which are not signed and returned in the same
proportion as shares for which signed cards are returned. Shares in the PAYSOP
are not voted unless the card is signed and returned.
REQUIRED VOTES--ELECTION OF DIRECTOR NOMINEES
Directors are elected by a plurality of the votes, which means the nominees for
the five director positions who receive the largest number of properly executed
votes will be elected as directors. Each share of Common Stock is entitled to
one vote for each of five director nominees. Cumulative voting is not permitted.
Shares that are represented by proxies which are marked "withhold authority" for
the election of one or more director nominees will not be counted in determining
the number of votes cast for those persons.
REQUIRED VOTES--OTHER MATTERS
The outcome of each of the directors' proposals to amend the Restated Articles
of Incorporation will be determined by the vote of a majority of the outstanding
shares of Common Stock. All other matters properly considered at the meeting
will be determined by a majority of the votes cast.
TABULATION OF VOTES
Under certain circumstances, brokers are prohibited from exercising
discretionary authority for beneficial owners who have not returned proxies to
the brokers (so-called "broker non-votes"). In such cases, and in cases where
the shareholder abstains from voting on a matter, those shares will be counted
for the purpose of determining if a quorum is present but will not be included
in the vote totals with respect to those matters and, therefore, will have no
effect on the vote. In addition, proxies which are marked to deny discretionary
authority on other matters will not be counted in determining the number of
votes cast with respect to those matters.
HOW YOU CAN VOTE
Vote your choices by marking the appropriate boxes on the enclosed proxy card.
Sign and return the proxy card promptly in the enclosed self-addressed envelope.
YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR MARKED PROXY CARD PROMPTLY SO YOUR
SHARES CAN BE REPRESENTED, EVEN IF YOU PLAN TO ATTEND THE MEETING IN PERSON. IF
YOU WOULD LIKE TO VOTE IN ACCORDANCE WITH THE DIRECTORS' RECOMMENDATIONS ON THE
MATTERS DISCUSSED IN THIS PROXY STATEMENT, ALL YOU NEED TO DO IS SIGN, DATE AND
RETURN YOUR PROXY CARD.
REVOCATION OF PROXY
If you vote by proxy, you may revoke that proxy at any time before it is voted
at the meeting. You can revoke your proxy by delivering to the Company a proxy
card bearing a later date or by attending the meeting in person and casting a
ballot.
OTHER INFORMATION
ATTENDANCE AT ANNUAL MEETING: If you plan to attend the meeting, please retain
the admission ticket and map attached to the proxy card. Shareholders who do not
have admission tickets, including beneficial owners whose shares are held by
brokers or other institutions, will be admitted upon presentation of proper
identification at the door.
DUPLICATE SUMMARY ANNUAL REPORTS: If you hold BellSouth stock in more than one
shareholder account, you may be receiving multiple copies of the Summary Annual
Report. You can direct us to discontinue mailing multiple reports by marking the
appropriate box on the proxy card for those accounts. Leave at least one account
unmarked so that you continue to receive a Summary Annual Report. Eliminating
redundant mailings will not affect your receipt of future Proxy Statements and
proxy cards. To resume the mailing of a Summary Annual Report to a particular
account, call BellSouth Shareholder Services at 1-800-631-6001.
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PROPOSAL 1: ELECTION OF DIRECTORS
At the date of this Proxy Statement, the Board of Directors of BellSouth
consists of 13 members, 12 of whom are non-employee directors. The Board is
divided into three classes whose terms are staggered so that the term of one
class expires at each Annual Meeting of Shareholders. Five director nominees
have been nominated for election at this meeting.
NOMINEES
The following nominees have been selected by the Nominating and Compensation
Committee and approved by the Board for submission to the shareholders: James H.
Blanchard; Armando M. Codina; Leo F. Mullin; and J. Tylee Wilson, each to serve
a three year term expiring at the Annual Meeting in the year 2001; and William
S. Stavropoulos, to serve a two year term expiring at the Annual Meeting in the
year 2000.
The Board believes that each director nominee will be able to stand for
election. If any nominee becomes unable to stand for election, proxies in favor
of that nominee will be voted in favor of the remaining nominees and in favor of
any substitute nominee named by the Board upon recommendation of the Nominating
and Compensation Committee. If you do not wish your shares voted for one or more
of the nominees, you may so indicate on the proxy card.
FOLLOWING IS THE PRINCIPAL OCCUPATION, AGE AND CERTAIN OTHER INFORMATION FOR
EACH DIRECTOR NOMINEE AND OTHER DIRECTORS SERVING UNEXPIRED TERMS.
NOMINEES FOR ELECTION AT THIS MEETING TO TERMS EXPIRING IN 2001:
[PHOTO] JAMES H. BLANCHARD, 56, CHAIRMAN OF THE
[PHOTO] BOARD AND CHIEF EXECUTIVE OFFICER,
SYNOVUS FINANCIAL CORP., A BANK HOLDING
COMPANY. DIRECTOR SINCE 1994. Director
of BellSouth Telecommunications, Inc.,
November 1988-February 1994. Director of
Columbus Bank and Trust Co.; Synovus
Data Corp.; Total System Services, Inc.;
and W. C. Bradley Co.
[PHOTO] ARMANDO M. CODINA, 51, CHAIRMAN OF THE
[PHOTO] BOARD AND CHIEF EXECUTIVE OFFICER,
CODINA GROUP INC., A REAL ESTATE
DEVELOPMENT COMPANY. DIRECTOR SINCE
1992. Director of BellSouth
Telecommunications, Inc., March
1989-February 1992. Director of American
Bankers Insurance Group, Inc.; AMR
Corporation; FPL Group, Inc.; and
Winn-Dixie Stores.
[PHOTO] LEO F. MULLIN, 55, PRESIDENT AND CHIEF
[PHOTO] EXECUTIVE OFFICER, DELTA AIR LINES,
INC., AN AIR TRANSPORTATION COMPANY.
Director since March 1, 1998. Director
of Delta Air Lines, Inc., and Inland
Steel Industries, Inc. Trustee of Field
Museum of Natural History and
Northwestern University.
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[PHOTO] J. TYLEE WILSON, 66, RETIRED CHAIRMAN OF
[PHOTO] THE BOARD AND CHIEF EXECUTIVE OFFICER,
RJR NABISCO, INC. DIRECTOR SINCE 1985.
Director of Southern Bell, October
1983-February 1985. Director of Carolina
Power & Light Company. Trustee, Wake
Forest University.
</TABLE>
NOMINEE FOR ELECTION AT THIS MEETING TO A TERM EXPIRING IN 2000:
[PHOTO] WILLIAM S. STAVROPOULOS, 58, PRESIDENT
[PHOTO] AND CHIEF EXECUTIVE OFFICER OF THE DOW
CHEMICAL COMPANY, A CHEMICAL MANUFACTUR-
ING COMPANY. DIRECTOR SINCE 1997.
Director of The Chemical Financial
Corp.; Dow Chemical Company; Dow
AgroSciences; Dow Corning Corporation;
and NCR Corporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ABOVE NOMINEES.
------------------------
DIRECTORS WHOSE TERMS CONTINUE UNTIL 1999:
[PHOTO] F. DUANE ACKERMAN, 55, CHAIRMAN OF THE
[PHOTO] BOARD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER OF BELLSOUTH. DIRECTOR SINCE
1993 AND FROM APRIL 1989-APRIL 1991.
Vice Chairman of the Board, President
and Chief Executive Officer, December
1996-December 1997; Vice Chairman of the
Board and Chief Operating Officer,
January 1995-December 1996; President
and Chief Executive Officer, BellSouth
Telecommunications, Inc., November
1992-December 1994. President and Chief
Operating Officer, and Vice Chairman of
the Board, BellSouth Telecommunications,
Inc., December 1991- October 1992; Vice
Chairman and Group President, March
1991-November 1991. Vice
Chairman--Finance and Administration,
BellSouth Corporation, April
1989-February 1991. Director of South
Central Bell, January 1984-April 1985.
Director of American Business Products,
Inc.; and American Heritage Life
Insurance Company. Trustee, Rollins
College.
[PHOTO] REUBEN V. ANDERSON, 55, PARTNER, PHELPS
[PHOTO] DUNBAR, A LAW FIRM. DIRECTOR SINCE 1994.
Mississippi Supreme Court Justice,
1985-1990. Director of The Kroger
Company; and Trustmark National Bank.
Trustee, Tougaloo College.
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[PHOTO] JOHN G. MEDLIN, JR., 64, CHAIRMAN OF THE
[PHOTO] BOARD, WACHOVIA CORPORATION. DIRECTOR
SINCE 1988. Director of Burlington
Industries, Inc.; Media General, Inc.;
Nabisco Holdings Corp.; National Service
Industries, Inc.; RJR Nabisco Holdings
Corp.; and US Airways Group, Inc.
[PHOTO] C. DIXON SPANGLER, JR., 65, CHAIRMAN OF
[PHOTO] THE BOARD, C.D. SPANGLER CONSTRUCTION
CO. DIRECTOR SINCE 1987. President,
University of North Carolina, 1986-1997.
Director of C. D. Spangler Construction
Co.; Golden Eagle Industries, Inc.; and
National Gypsum Co.
[PHOTO] RONALD A. TERRY, 67, RETIRED CHAIRMAN OF
[PHOTO] THE BOARD, FIRST TENNESSEE NATIONAL
CORP. DIRECTOR SINCE 1987. Director of
South Central Bell, January
1984-February 1987. Director of
AutoZone, Inc.; Blue Eagle Golf Centers,
Inc.; Delta Life Corp.; Delta Life and
Annuity; Home Account Network, Inc.; The
Promus Hotel Corporation; and St. Jude
Children's Research Hospital.
</TABLE>
DIRECTORS WHOSE TERMS CONTINUE UNTIL 2000:
[PHOTO] J. HYATT BROWN, 60, CHAIRMAN, PRESIDENT
[PHOTO] AND CHIEF EXECUTIVE OFFICER, POE &
BROWN, INC., AN INSURANCE SERVICES
COMPANY. DIRECTOR SINCE 1994. Director
of BellSouth Telecommunications Inc.,
March 1984-February 1994. Director of
FPL Group, Inc.; First Floridian
Insurance Co.; International Speedway
Corporation; Rock- Tenn Company; Sun
Banks of Volusia County; and SunTrust
Banks Inc.; Trustee, Stetson University.
[PHOTO] PHYLLIS BURKE DAVIS, 66, RETIRED SENIOR
[PHOTO] VICE PRESIDENT, AVON PRODUCTS, INC.
DIRECTOR SINCE 1985. Director of Eaton
Corporation; The TJX Companies, Inc.;
and Trustee of Fidelity Mutual Funds.
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[PHOTO] ROBIN B. SMITH, 58, CHAIRMAN AND CHIEF
[PHOTO] EXECUTIVE OFFICER, PUBLISHERS CLEARING
HOUSE, A MAGAZINE SUBSCRIPTION COMPANY.
DIRECTOR SINCE 1994. Director of Kmart
Corp.; Springs Industries, Inc.; Texaco
Inc.; and two fund clusters administered
by Prudential Investment Management.
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GOVERNANCE OF THE COMPANY
BOARD OF DIRECTORS
The business affairs of BellSouth are managed under the direction of the Board
of Directors in accordance with the Georgia Business Corporation Code, as
implemented by the Company's Articles of Incorporation and By-laws. Members of
the Board are kept informed through reports routinely presented at Board and
committee meetings by the Chief Executive Officer and other officers, and
through other means.
All of the directors are independent, non-employee directors except Mr.
Ackerman, the Chairman of the Board, President and Chief Executive Officer of
BellSouth. Mr. John L. Clendenin, the former Chief Executive Officer of the
Company, retired as Chairman of the Board on December 30, 1997. Directors who
are officers of BellSouth do not participate in any action of the Board relating
to any executive compensation plan described in this Proxy Statement. Mr. Reuben
V. Anderson is a partner in the law firm of Phelps Dunbar, located in Jackson,
Mississippi. During 1997, BellSouth Telecommunications, Inc. retained Phelps
Dunbar with regard to a variety of legal issues. The amount of fees paid to
Phelps Dunbar for such services was less than 5% of the firm's gross revenue for
the last fiscal year.
Shareholders who wish to suggest qualified candidates for consideration as
directors of BellSouth by the Nominating and Compensation Committee should write
to: Secretary, BellSouth Corporation, 1155 Peachtree Street, NE, Room 14B06,
Atlanta, Georgia 30309-3610, stating in detail the qualifications of such
persons.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held 11 meetings in 1997. All directors attended at least
91% of Board and committee meetings during 1997 except Mr. Codina, who attended
71% of the meetings. During 1997, the standing committees listed below assisted
the Board in carrying out its duties.
COMMITTEE ON DIRECTORS AND CORPORATE GOVERNANCE
On February 23, 1998, the Board approved the formation of a new Committee on
Directors and Corporate Governance. This Committee will have responsibility for
considering and recommending nominees for membership on the Board of Directors
of the Company; for assessing the performance of the Board of Directors and
reporting the results to the full Board; for considering issues of corporate
governance; and for recommending the processes and practices through which the
Board will conduct its business. The responsibility for overseeing corporate
governance and director-related matters currently assigned to the Nominating and
Compensation Committee will be assumed by the new Committee.
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COMMITTEES OF THE BOARD
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AUDIT EXECUTIVE FINANCE/STRATEGIC PLANNING NOMINATING AND COMPENSATION
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R. A. Terry, Chair F. D. Ackerman, Chair P. B. Davis, Chair C. D. Spangler, Jr., Chair
R. V. Anderson P. B. Davis F. D. Ackerman J. H. Blanchard
J. G. Medlin, Jr. C. D. Spangler, Jr. J. H. Brown A. M. Codina
W. S. Stavropoulos R. A. Terry R. B. Smith J. T. Wilson
</TABLE>
AUDIT COMMITTEE
The Audit Committee met six times in 1997. Its duties and responsibilities
include the following:
- Provides oversight of the financial reporting process and management's
responsibility for the integrity, accuracy and objectivity of financial
reports and accounting and financial reporting practices.
- Recommends to the Board the appointment of the Company's independent
public accountants.
- Provides oversight of management's responsibility for the integrity of its
accounting and financial reporting practices.
- Provides oversight of management practices relating to ethical
considerations and business conduct, including compliance with laws and
regulations.
EXECUTIVE COMMITTEE
The Executive Committee did not meet in 1997. The Committee meets on call by the
Chairman of the Board during the intervals between Board meetings and has all
the authority of the Board, subject to the limitations imposed by law, the
By-laws or the Board of Directors.
FINANCE/STRATEGIC PLANNING COMMITTEE
The Finance/Strategic Planning Committee met six times in 1997. Its duties and
responsibilities include the following:
- Reviews the long-term business goals and strategies of the Company,
including strategic considerations in the allocation of corporate
resources.
- Oversees the financial objectives, policies, procedures and activities of
the Company.
NOMINATING AND COMPENSATION COMMITTEE
The Nominating and Compensation Committee met ten times in 1997. Its Report on
Executive Compensation begins on page 22. During 1997, the responsibilities of
the Nominating and Compensation Committee included the following:
- Nominate qualified persons as directors and executive officers.
- Establish overall strategy with respect to compensation for directors,
officers and management.
- Oversee the Company's executive succession plan.
- Oversee corporate governance matters.
As a result of the formation of the Committee on Directors and Corporate
Governance, as discussed above, the Nominating and Compensation Committee's
responsibility for overseeing corporate governance and director-related matters
will now be assumed by the new Committee.
DIRECTORS' PROXY COMMITTEE
The Board also has designated a Directors' Proxy Committee, which votes the
shares represented by proxies at the Annual Meeting of Shareholders. Its members
are Messrs. Ackerman, Spangler and Terry.
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DIRECTORS' COMPENSATION
During 1996, the Nominating and Compensation Committee of the Board undertook an
extensive review of the compensation paid to non-employee directors. Working
with an outside consultant, the Committee concluded that the compensation
package should be restructured to place more emphasis on equity in the Company
and less on retirement benefits. The new compensation program, which became
effective May 1, 1997, was designed to more closely align the directors'
interests with those of the Company's shareholders. This goal was accomplished
through the following:
- 50% of the directors' annual retainer is paid in shares of BellSouth
Common Stock and 50% is paid in cash;
- The accrual of retirement benefits under the directors' retirement plan
was discontinued effective April 30, 1997 and current directors were given
the option of receiving their accrued benefits under the current
retirement plan or converting the actuarial present value of the accrued
retirement benefits into deferred BellSouth phantom stock units;
- An annual grant of 200 shares of BellSouth Common Stock will be made to
each director; and
- The BellSouth Corporation Directors' Compensation Deferral Plan, which
became effective May 1, 1997, allows directors to defer receipt of all or
part of their cash or stock compensation into BellSouth phantom stock
units.
FEES AND OTHER COMPENSATION
During 1997, directors who were not employees of BellSouth received the
following:
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Annual retainer $30,000 (50% paid in BellSouth
stock)
Attendance fee for each Board meeting $1,800
Attendance fee for each Committee meeting $1,500
Annual retainer for each Committee chaired $5,000
</TABLE>
Non-employee directors are also provided certain telecommunications services and
death benefits and, while on BellSouth business, travel accident insurance. In
1997, the cost of such benefits was approximately $1,250 per director.
The Company has historically maintained a retirement plan for non-employee
directors who have served on the Board or a subsidiary board for at least five
years and have reached the age of 55. Eligible directors receive an annual
retirement benefit of up to a maximum of 100 percent of the retainer with ten
years or more service. Payments are made for a maximum of 12 years following
retirement. Effective April 30, 1997, as discussed above, benefits no longer
accrue under this plan.
NON-EMPLOYEE DIRECTOR STOCK PLAN
Under the Director Stock Plan, each non-employee director receives an annual
grant of non-qualified stock options to purchase 2,000 shares of BellSouth
Common Stock, together with tandem stock appreciation rights, at an exercise
price per share equal to the fair market value of the stock on the grant date.
The options become exercisable one year after the grant date. In 1997, each of
the 11 eligible non-employee directors were granted options to purchase 2,000
shares of common stock at a per share exercise price of $43.31.
STOCK OWNERSHIP INCENTIVES
To further link director and shareholder interests, the Director Stock Plan also
provides that if the value of BellSouth Common Stock owned by a non-employee
director exceeds five times the amount of the annual retainer for Board members,
that director will receive additional stock options. The director
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receives one additional option for every two shares he or she owns in excess of
five times the retainer amount. The maximum number of additional options that
may be granted annually to any director is 2,000 options. Directors only receive
additional stock options for each excess share one time; thereafter, they must
acquire additional shares in order to continue to receive additional stock
options. The following directors received grants of additional options at a per
share grant price of $43.31 in 1997: Blanchard (310 additional options); Brown
(2,000 additional options); Clendenin (2,000 additional options); Codina (777
additional options); Davis (304 additional options); Medlin (776 additional
options); and Terry (247 additional options).
The director realizes value from the stock options only to the extent that the
price of BellSouth Common Stock on the exercise date exceeds the price of the
stock on the grant date.
NON-EMPLOYEE DIRECTORS' CHARITABLE CONTRIBUTION PROGRAM
The non-employee Directors' Charitable Contribution Program has been terminated
with respect to new members of the Board; however, contributions will continue
to be made on behalf of directors who were members of the Board prior to January
1997. This program was designed to acknowledge the service of Company directors
and to recognize the mutual interests of directors and the Company in supporting
worthy institutions. The program provided that BellSouth would make a
contribution to an educational or cultural organization(s) designated by the
director. Directors had to have five years of service on the Board or on the
board of a subsidiary to qualify for this program. The amount contributed by
BellSouth increased with each year served by the director, up to a maximum
contribution of one million dollars payable after ten years of service. All
charitable deductions for tax purposes accrue solely to the Company and the
individual directors derive no direct financial benefit from the program.
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STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth ownership of shares of BellSouth Common Stock by
each director, by each executive officer named in the Summary Compensation Table
on page 27, and by all directors and executive officers as a group, as of
February 2, 1998. These shares represent in the aggregate less than one percent
of the outstanding shares.
<TABLE>
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BENEFICIAL OWNERSHIP AS OF
FEBRUARY 2, 1998
SHARES AND
CURRENT STOCK UNITS
BENEFICIAL SHARES SUBJECT TO HELD UNDER
NAME HOLDINGS OPTIONS(A) DEFERRAL PLANS(B) TOTAL
<S> <C> <C> <C> <C>
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F. Duane Ackerman....................... 19,799 56,146 50,569 126,514
Walter H. Alford........................ 26,445 17,219 5,011 48,675
Reuben V. Anderson...................... 1,000 4,666 1,703 7,369
James H. Blanchard...................... 7,369 6,869 5,996 20,234
J. Hyatt Brown.......................... 20,444 8,666 5,862 34,972
Armando M. Codina....................... 5,230 5,998 4,421 15,649
Phyllis Burke Davis..................... 3,175 6,664 2,394 12,233
Jere A. Drummond........................ 37,028 49,404 15,347 101,779
R. M. Dykes............................. 5,935 19,945 11,685 37,565
Earle Mauldin........................... 27,744 48,035 23,911 99,690
John G. Medlin, Jr...................... 5,000 6,114 7,963 19,077
Robin B. Smith.......................... 2,000 4,000 765 6,765
C. Dixon Spangler, Jr................... 2,000 6,664 7,240 15,904
William S. Stavropoulos................. 2,200 -- 173 2,373
Ronald A. Terry......................... 800 6,664 10,827 18,291
J. Tylee Wilson......................... 10,000 9,946 1,182 21,128
Directors and Executive Officers as a
group................................... 257,419 412,078 277,861 947,358
</TABLE>
- ------------------
(A) Shares, included in total, which may be acquired within 60 days after
February 2, 1998 through the exercise of stock options. Options are
exercisable at the market price on the date of grant and are not discounted.
Directors and officers realize value from options when exercised and only to
the extent that the price of BellSouth stock on the exercise date exceeds
the price of the stock on the grant date.
(B) Represents shares of BellSouth stock, phantom stock units and accrued
dividends on those shares and units, receipt of which has been deferred
pursuant to various deferral plans. The phantom stock units are payable in
cash, but track the performance of BellSouth stock. Neither the shares nor
the units can be voted or transferred.
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DIRECTORS' PROPOSALS
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, acting upon the recommendation of the Audit Committee,
has appointed the firm of Coopers & Lybrand L.L.P., certified public
accountants, as independent accountants to audit the accounts of BellSouth and
its subsidiaries for the year 1998. Coopers & Lybrand L.L.P. has audited the
accounts and records of BellSouth and its subsidiaries since 1984.
Representatives of Coopers & Lybrand L.L.P. will attend the Annual Meeting and
have the opportunity to make a statement if they desire and will also be
available to answer questions.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
------------------------
PROPOSAL 3: AMENDMENTS TO FAIR PRICE PROVISION
The Board of Directors has unanimously approved and recommends to the
shareholders the adoption of amendments to Article 10 of the Company's Restated
Articles of Incorporation. The changes are being made in order to conform
Article 10 to changes that have been made to the Georgia Business Corporation
Code since the Article was adopted. In 1986, the Company's shareholders adopted
what is now Article 10 of the Company's Restated Articles of Incorporation,
which added statutory provisions which had recently been adopted by the Georgia
legislature. The statutory provisions were designed to ensure that any
multi-step attempt to take over a Georgia company is made on terms which offer
similar treatment to all holders of each class of the company's voting stock.
This discourages the use of so-called "two-tiered transactions," in which an
acquiring party tenders cash at a substantial premium for a major stock interest
in a corporation and later acquires the remaining interest in a so-called
"freeze-out" merger in which minority shareholders may receive a lower cash
price or a different form of consideration (e.g., securities) for their shares
than the shareholders who sold in the first tier. The Board of Directors adopted
a By-law provision, Article V, Section 2, which states that all of the
requirements of these statutory provisions shall be applicable to business
combinations of the Company.
Since 1986, the Georgia legislature has enacted several changes to the statutory
provisions. The reference to "consolidations" has been eliminated since this
conceptual transaction has been subsumed under statutory mergers for purposes of
Georgia corporation law. In addition, the term "share exchanges" has been added
to the definition of "business combinations." Share exchanges were not
previously covered by the statute and are now explicitly included. This change
would prevent either BellSouth or another company from arranging for a share
exchange with existing shareholders on discriminatory terms without approval by
disinterested directors and shareholders. Other changes made by the Georgia
legislature were not substantive and would not affect the rights of BellSouth's
shareholders. The Board feels that it is desirable to amend the provisions of
Article 10 so that it consistently tracks the language of the statute. This will
avoid any question in the future regarding the applicability of the Georgia Code
provisions. If the language in Article 10 differs, even in a non-substantive
way, from the language in the statute, disputes as to meaning and applicability
could arise, resulting in increased litigation expense to the Company. Moreover,
since the Company's By-laws provide that the requirements of these provisions
shall be applicable to business combinations of the Company, it is important to
maintain consistency between the statutory provisions and the provisions of the
Restated Articles of Incorporation.
The Board of Directors has unanimously approved and recommends that the
shareholders vote FOR the following amendments to Section I of Article 10 of the
Articles of Incorporation:
(1) Paragraph (5) of Section I of Article 10 shall be amended as follows:
(a) Subparagraph (5)(A) shall be amended by deleting the phrase "or
consolidation" following the word "merger" in two places; and
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(b) A new subparagraph (5)(B) shall be added which shall read as follows:
"(B) Any share exchange with (i) any interested shareholder or (ii)
any other corporation, whether or not itself an interested
shareholder, which is, or after the share exchange would be, an
affiliate of an interested shareholder that was an interested
shareholder prior to the consummation of the transaction;"
and the remaining subparagraphs of Paragraph (5) of Section I shall be
renumbered accordingly;
(c) Subparagraph (5)(E), which shall become subparagraph (5)(F) if the
proposed amendments are adopted by the shareholders, shall be amended by
deleting the phrase "or consolidation" following the word "merger" and by
adding the phrase "or any share exchange with any of its subsidiaries"
following the phrase "or any merger of the corporation with any of its
subsidiaries";
(2) Paragraph (8) shall be amended by adding the phrase "in addition to the
definition contained in Georgia Business Corporation Code Section 14-2-140,"
following the word "Corporation"; and
(3) A new Paragraph (12) shall be added which shall read as follows:
"(12) "Net assets" means the amount by which the total assets
of the Company exceed the total debts of the Company;"
and the remaining paragraph of Section I shall be renumbered accordingly.
A copy of Section I of Article 10 as it will read if the amendments are approved
by the shareholders at the Annual Meeting is attached to this Proxy Statement as
Exhibit A.
Approval of Proposal 3 requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3.
------------------------
PROPOSAL 4: AMENDMENTS TO DIRECTOR EXCULPATION PROVISION
The Board of Directors has unanimously approved and recommends to the
shareholders the adoption of amendments to Article 11 of the Company's Restated
Articles of Incorporation to reflect changes that have been made by the Georgia
legislature since the Article was adopted. In 1988, the shareholders approved an
amendment to BellSouth's Articles of Incorporation that added a new Article then
designated as Article 14 (now Article 11), which provided:
No director of the Corporation shall be personally liable to the Corporation
or its shareholders for monetary damages for breach of his or her duty of
care or any other duty as a director, except for liability (i) for any
appropriation, in violation of his or her duties, of any business
opportunity of the Corporation, (ii) for acts or omissions not in good faith
or constituting intentional misconduct or a knowing violation of law, (iii)
for the types of liability set forth in Section 14-2-154 of the Georgia
Business Corporation Code, or (iv) for any transaction from which the
director derived an improper personal benefit.
The section of the Georgia Business Corporation Code authorizing such
exculpatory provisions has been amended by the Georgia legislature to change the
phrase"monetary damages for breach of his or her duty of care or any other duty
as a director" to the phrase "monetary damages for any action taken, or any
failure to take any action, as a director," to remove the reference to "not in
good faith," and to make several other technical revisions. The Board of
Directors believes that the phrase "duty of care or any other duty as a
director" in the original statutory provision was intended to provide
exculpation for monetary damages for breaches of any and all of a director's
duties, with certain specified exceptions.
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<PAGE>
Therefore, by replacing this phrase with the phrase "any action taken, or any
failure to take any action," the legislature has not expanded the universe of
acts for which directors can be protected; it has simply used more
straightforward wording. The new language eliminates any reason to litigate
whether a "duty" may have been breached and makes clear that a director will be
entitled to exculpation for monetary damages for any act he or she performs as a
director, and for any failure to act as a director. Elimination of the reference
to "acts or omissions not in good faith" from the list of acts for which a
director could not be exculpated for monetary damages is designed to eliminate a
vague and duplicative standard. "Intentional misconduct or a knowing violation
of law" is a more precise standard that would be inconsistent with "good faith."
The legislative history indicates that this amendment brings the provision more
into line with similar provisions enacted by the legislatures of a number of
other states. It is uncertain, however, whether or not adoption of the amendment
would have the effect of narrowing the circumstances under which a shareholder
may seek monetary damages for actions by directors.
The Board of Directors believes that it is appropriate and advisable to amend
Article 11 of BellSouth's Restated Articles of Incorporation to conform to the
current language of the Code. To the extent that the exculpatory charter
language varies from the language of the enabling statute, disputes as to
meaning and applicability could arise, resulting in greater litigation expense
to the Company and less certainty to the directors who are the beneficiaries of
this provision. The Board has unanimously approved and recommends that the
shareholders vote FOR the amendment to Article 11 of the Restated Articles of
Incorporation to read as follows:
No director of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages for ANY ACTION TAKEN, OR ANY FAILURE TO
TAKE ANY ACTION, as a director, except for liability (i) for any
appropriation, in violation of his or her duties, of any business
opportunity of the Corporation, (ii) for acts or omissions which involve
intentional misconduct or a knowing violation of law, (iii) for the types of
liability set forth in Section 14-2-832 of the Georgia Business Corporation
Code, or (iv) for any transaction from which the director RECEIVED an
improper personal benefit. (New language is italicized.)
BellSouth has not received notice of any suit or proceedings as to which these
provisions would apply, nor would they apply to any pending lawsuits. The new
provisions will only apply to claims for monetary damages brought against the
directors in the future and are not retroactive, nor would they affect the
ability of shareholders to seek equitable remedies against the directors.
Approval of Proposal 4 requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4.
------------------------
SHAREHOLDER PROPOSALS
The following shareholder proposals may be presented for a vote at the Annual
Meeting. We expect the proposals to be presented either by the proponent or a
designated representative. The proposals are printed exactly as they were
submitted by the shareholder, except for changes permitted by the Securities and
Exchange Commission. Spaces are provided on the accompanying proxy card to vote
FOR, AGAINST, or ABSTAIN with respect to each of the proposals.
PROPOSAL 5: EXECUTIVE OFFICERS' INCENTIVE AWARDS
Robert S. Kopach, 4309 San Carlos Drive, Fairfax, Virginia 22030-5371, record
owner of 318 shares of BellSouth Common Stock, has informed the Company that he
intends to present the following proposal at the Annual Meeting:
15
<PAGE>
RESOLVED:
I recommend that the current Short Term and Long Term Incentive awards for
executive officers be abolished. The new Short Term Incentive award I propose
would be tied proportionately to the price of the stock at end of the year.
Example: if stock price is up 20% at end of the year, then the incentive award
would be 20% of salary.
1. Under the existing incentive plans, as illustrated in the Summary
Compensation table, executive officers are getting rich at the expense of
customers, employees and shareholders. Example: Short Term award range from
95% to over 200%. These excessive incentive plans have gotten out of
control. When and where will it end?
2. There is no need for any Long Term Incentive award. Since the annual salary
is more than adequate and the executive officers receive an annual award.
3. Under my proposed Short Term Incentive Plan the executive officers award
would be aligned with the shareholders return by tying their award to the
stock price appreciation. This is clear and fair.
4. We need to bring some justice and equity back into the workplace. There is
too big a gap between what the executive officers make and the pay of the
average worker. The pay an executive officer makes in a few years far
exceeds the average workers total lifetime or career earnings.
5. The only reason management gets away with this abuse of power is that most
of the shareholders do not take the time to read the proxy materials.
Unfortunately, they are too trusting and vote according to the board's
recommendations. Please note that the Board of Directors are mostly
executive officers or retired executive officers from other companies.
Members of the board all hold seats for several other companies. Imagine
that Huh!
6. The media needs to inform and educate the shareholders and public before
proxy materials coming out in order to win a battle such as this. It is
their responsibility to report the news and not worry about the reprisals
such as the loss of advertising dollars.
7. My point has been made the current incentive plans are just wrong. The
Company has the nerve to talk about shareholder value.
8. Management needs to be held accountable. A vote for this proposal will send
a clear message and remind them they work for us the shareholders. Lets make
it right. Make management walk the talk.
BOARD OF DIRECTORS' RECOMMENDATION:
THIS PROPOSAL WAS SUBMITTED AT THE 1993, 1995, 1996 AND 1997 ANNUAL MEETINGS AND
WAS DEFEATED BY A MAJORITY OF THE VOTES CAST. Your directors have again
considered the proposal and continue to believe it would make the executive
officers of the Company less accountable for performance than under the
compensation program now in place.
Short term awards are not extra compensation. Total annual compensation,
including both standard short term awards and base salary, is set at levels
comparable to that at companies similar to BellSouth. A significant part of this
total amount must be earned, under the short term plan, based on how effectively
the executives manage the business during the year. In addition, the BellSouth
Corporation Officer Short Term Incentive Award Plan grants awards intended to
qualify as performance-based under Section 162(m) of the Internal Revenue Code.
If short term awards based on performance were eliminated, there would be no
direct correlation between annual cash compensation and operational performance.
Executives would be less accountable for important goals, such as customer
satisfaction, which they must now achieve to earn a short term award. Setting
measurable standards and paying executives based on their achievement of these
standards is a much more effective way to achieve important goals set by the
Board of Directors.
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<PAGE>
Stock performance is important and is already a part of the Company's
compensation programs. In fact, stock performance, including total return to
shareholders as well as stock price appreciation, is the only measurement under
the Company's long term incentive program. The Nominating and Compensation
Committee Report on Executive Compensation (beginning at page 22 of this Proxy
Statement) explains the compensation programs in detail. Shareholders should
find this Report helpful in evaluating this proposal.
FOR THE REASONS SET FORTH ABOVE, YOUR BOARD OF DIRECTORS
STRONGLY RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" PROPOSAL 5.
------------------------
PROPOSAL 6: SALARY AND COMPENSATION CEILING
Raymond M. Baechle, Jr. and Carla D. Baechle, 6420 W. Falcon's Lea Dr., Davie,
Fl 33331, record owners of 273 shares of BellSouth Common Stock, have informed
the Company that they intend to present the following proposal at the Annual
Meeting:
"Resolved:
The shareholders of BellSouth recommend that the Board of Directors institute a
salary and compensation ceiling such that as to present and future contracts, no
senior executive or director of the Company receive combined salary and other
compensation which is more than nine and one half times the annual wage of a
wage scale 32 non-management employee. Currently this amount would be ($42,952 x
9.5) $408,044.00 annually. As wages increase for non-management employees, so
will this compensation ceiling."
"Reasons:
Officers and directors of public corporations are the employees and not the
owners, except as they may be shareholders in common with other stockholders.
Yet they give the appearance that they run the corporations primarily for their
benefit and incidentally for the shareholders. The Board of Directors, a closed
group which perpetuates itself determines who is to be selected to the Board and
who is to be an officer of the company, as well as the compensation to be
received. Directors and officers can run the corporation as if it were their
property. Thus, officers may drain away millions of dollars in salary, stock
options and other compensation. When the recommended ceiling on salary and
compensation is exeeded [sic], it demonstrates an expression of greed and abuse
of power. A prime example of this is the variable compensation program now in
place which was applied to Mr. Ackerman for the one day of 1996 in which he
served as Chief Executive Officer and to Mr. Clendenin who retired on December
30, 1996."
"The Company argues that a significant part of the executive officer's
compensation is at risk and is earned only if specific performance goals are
met. With the current downsizing trend, executive officers are in a win-win
situation. As more employees are cut, expenses drop, profits increase and their
bonuses increase."
"High compensation need not serve as an incentive for a better run or more
profitable corporation. There is no shortage of qualified people who could do as
good a job as the incumbent officers of the corporation and who have no
hesitation on serving within the aforementioned pay ceiling."
"The officers and directors of the Company seem to forget that it is the average
worker within this company who makes it profitable. We need to bring some
justice and equity into the workplace. There is a large gap between what the
executive officers make and the pay of the average worker."
"The Company has chosen to outsource areas which are closer to the core
business, shifting the cost structure from fixed to variable. It claims this
will increase capabilities and innovation and reduce costs. In reality,
outsourcing has led to promotions of management people, an increase in the
number of people (contractors) to do the same work as those outsoured [sic], and
increased costs. Increased
17
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innovation within the Company is not necessarily the product of outsourcing, it
can be achieved if the employees are given the flexibilty [sic] and empowerment
to do so."
"If you AGREE please mark your proxy FOR this resolution."
BOARD OF DIRECTORS' RECOMMENDATION:
The Board of Directors of the Company reviews the compensation of the Company's
directors and executive officers in light of market conditions, the Company's
financial performance and other factors. As discussed in the Nominating &
Compensation Committee's Report on Executive Compensation at page 22, the Board
believes that competitive compensation levels are necessary to attract and
retain qualified directors and management and to provide appropriate performance
incentives to the Company's executive officers.
The Board of Directors believes that the Company's executive officer
compensation program has allowed the Company to attract and retain talented,
experienced management. Furthermore, compensation policies which attract and
retain qualified directors and management are in the best interests of the
shareholders because qualified management and a qualified board of directors are
integral to enabling the Company to achieve its performance goals.
The Board of Directors therefore believes that inflexible requirements regarding
compensation, such as that contemplated by this proposal, will hinder its
ability to manage the Company for the best interests of the shareholders and
that the Board of Directors should retain discretion with respect to the
compensation of the Company's management.
FOR THE REASONS SET FORTH ABOVE, YOUR BOARD OF DIRECTORS
STRONGLY RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" PROPOSAL 6.
------------------------
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PROPOSAL 7: EXECUTIVE BONUS RESTRICTION
B. Wayne Carmichael, 19269 E. 900 Avenue, Dieterich, IL 62424, Trustee for M.
Katherine Carmichael Trust and record holder of 2,466 shares of BellSouth Common
Stock, has informed the Company that he intends to present the following
proposal at the Annual Meeting:
Executive compensation in excess of one million dollars comes directly from
company earnings and is a dilution of shareholders value, not tax deductible.
The board shall consider shareholders value and interests above self interest of
executives. This proposal does not inhibit the Board from its legal and
fiduciary obligations.
Resolved that the shareholders recommend that the company shall restrict any one
executive bonus to no more than one million dollars per year, including stock
options.
SUPPORTING STATEMENT:
It may be argued that procedures are in place to provide limited compensation.
Facts do not support the argument. Shareholders confidence is low with regard to
Board action.
Chairman of the Board, Mr. Clendenin received 2.7 million dollars in pay plus
options and an additional 3 million dollars to retire early. At the same time
stock value fell 7%. It is also noted, first quarter profit fell 29% from the
same 1996 quarter. Earnings per share fell from 98 cents to 70 cents in the same
period.
This performance should not be rewarded with a big bonus, thus diluting
shareholders value.
We need to bring equity back into the work place. The pay an executive officer
makes in a few years far exceeds the average workers lifetime earnings. It seems
the board of directors have forgotten that they work for the shareholders.
I could go on about the injustices of excess executive compensation. My point
has been made--It is just wrong!
Vote yes for this proposal.
BOARD OF DIRECTORS' RECOMMENDATION:
This proposal, like the proposal presented in four of the last five years by Mr.
Robert Kopach (Proposal 5 at page 15 above) deals with the annual bonuses
awarded to the executive officers of the Company. This proposal seeks to limit
executive bonuses to $1 million per year, including stock options.
Once again, the Board of Directors believes that it would not be in the best
interests of the Company or its shareholders to adopt this proposal. Short term
awards are not simply "extra" compensation. As explained in its Report on
Executive Compensation on page 22, the Nominating & Compensation Committee
carefully targets the executive officers' total annual compensation, including
both standard short term awards and base salary, at levels comparable to those
at companies similar to BellSouth. A significant part of this total amount must
be earned, based on how effectively the executives manage the business during
the year. In addition, the BellSouth Corporation Officer Short Term Incentive
Award Plan grants awards intended to qualify as performance-based under Section
162(m) of the Internal Revenue Code. Placing an arbitrary limit on the amount of
the short term award limits the incentive for the officers to improve the
performance of the business. Setting measurable standards and paying executives
19
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based on their achievement of those standards is a much more effective way to
achieve important goals set by the Board of Directors.
The Board of Directors believes that the proposal's Supporting Statement is
based on erroneous and misleading factual statements and does not support the
proponent's position. The Board is confident that the methods it uses to
determine the incentive awards for the executive officers are in fact in the
best interests of the shareholders of the Company. It therefore believes that
this proposal should be rejected.
<TABLE>
<S> <C>
FOR THE REASONS SET FORTH ABOVE, YOUR BOARD OF DIRECTORS
STRONGLY RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" PROPOSAL 7.
</TABLE>
------------------------
PROPOSAL 8: POLITICAL CONTRIBUTIONS
John P. Sloan and Bernardine J. Sloan, 2741 S. Fourth St., Apt D, Springfield,
IL 62703, record owners of 200 shares of BellSouth Common Stock, have informed
the Company that they intend to present the following proposal at the Annual
Meeting:
SHAREHOLDER PROPOSAL
Recommended:
It is requested that BellSouth (hereafter referred to as the corporation) shall
obtain shareholder consent/ approval for political contributions in excess of
$10,000.00 annually to a political party. Be it further requested that the
corporation shall publish in its annual report to shareholders a list of
political contributions for the previous 12 month period.
Supporting statement of shareholder:
The Corporation, through its Board of Directors, contributes many thousands of
dollars to the political process in an effort to influence political decisions
dealing with a variety of items ranging from socio-economic issues to
environmental factors.
Oftentimes, an individual shareholder many [sic] differ with the corporate view
toward the above issues. But, by virtue of ownership of shares, the shareholder
is giving tacit approval to the Directors to contribute to a political party
which is in opposition to the shareholder's individual views.
At the very least, a shareholder of a public-traded corporation is entitled to
know where and when his/her views differ from the corporate view regarding the
political process and its bearing on socio-economic and environmental factors.
This proposal would reveal any differences between the shareholder's individual
views and corporate activity in the political process. Consequently, the
shareholder would have an opportunity to defend his/ her views by taking
appropriate action.
Without this proposal, a corporate decision to support a political party could
be tantamount to coercive cooptation [sic] of shareholders in accepting or
supporting a political party contrary to a shareholder's individual view.
The publication of political contributions should be in tandem with a limit on
political contributions of $10,000.00. The $10,000.00 limit will help abate
"influence peddling". Huge corporate contributions to a political party
(referred to as "soft money") are ultimately and indirectly used to buy
influence on a
20
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particular issue from a candidate (referred to as "hard money"). Until such a
time that effective campaign finance laws are enacted (which appears remote at
this junction) shareholders must initiate action at the grass roots level in
order to curb the abuse of corporate contributions to the political process.
A past statesman cautioned us on this subject: All that remains to insure
corrupt government is for all good (wo)men to do nothing. The words may not be
the exact quotation, but the message is clear: sit on your rights too long and
you may lose the privilege to exercise them.
If shareholders fail to act on this proposal, its failure could seriously
undermine the principle of "One (wo)man--one vote!"
If shareholders wish to contribute or participate in the political process, most
of us are mature enough to do so on an individual basis. We should not be
subjected to coercive cooptation [sic] in supporting a political party which
stands in opposition to our individual beliefs.
BOARD OF DIRECTORS' RECOMMENDATION:
The Board believes that approval of this shareholder resolution would require
the unnecessary expenditure of funds by the Company and would not provide the
shareholders with any appreciable benefit in return.
It is BellSouth's policy to comply fully with all federal, state and local laws
governing corporate contributions to political candidates. Employees may make
contributions to a Political Action Committee ("PAC") or directly to a state
candidate's campaign. A PAC's funds come solely from voluntary contributions by
the Company's employees, except in some states in which the Company may make
contributions to a PAC. Under federal and state election laws, PACs must
publicly disclose information about their contributions. Many states also
require candidates to disclose contributions above a specified limit. Therefore,
most of the information sought by this proposal is already publicly available.
The Board thus believes that the expenditure of the Company funds and the
employee time that would be required in order to create a report to shareholders
on the Company's political contributions is unnecessary.
The total amount of the Company's corporate political contributions, including
contributions to political parties is quite small and is insignificant in
relation to the Company's business. The Company's corporate expenditures in
support of federal and state government affairs activities on legislative and
regulatory matters are a legitimate business expense. Because the Company's
business operations are subject to numerous laws and regulations, it is critical
that we maintain our access and visibility to the legislators who in effect
control our future. The Board therefore believes that it would not be in the
best interests of the Company to ask shareholders to approve of or consent to
the Company's political contributions. This is an issue related to the business
of the Company that should be left to the judgment of management and the Board
of Directors.
In addition, the inference by the proponents that the Company's political
contributions are somehow abusive or used for improper purposes is false and
misleading. As stated above, the Company complies with all federal, state and
local laws relating to contributions and does not in any way abuse the political
contribution process.
<TABLE>
<S> <C>
FOR THE REASONS SET FORTH ABOVE, YOUR BOARD OF DIRECTORS
STRONGLY RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" PROPOSAL 8.
</TABLE>
------------------------
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NOMINATING AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
POLICY
The Nominating and Compensation Committee of the BellSouth Board of Directors
(the "Committee") is responsible for the oversight and administration of the
Company's executive compensation program. The Committee is composed entirely of
independent, non-employee directors.
The Company's executive compensation program is based on a philosophy that the
total compensation package must be competitive with similar companies in order
to attract and maintain executive talent. The program also seeks to emphasize
variable compensation. The 1997 executive compensation program was based on the
following principles:
- Base salaries are targeted to the median level of salaries paid to
officers in comparable companies with comparable responsibilities.
- Annual incentive awards are dependent upon the Company's performance
against established target levels and its financial performance relative
to its peers.
- Long-term incentive awards include stock options and cash incentives based
on Total Shareholder Return ("TSR"), which is measured by adding the
amount of appreciation in the Company's stock price to the amount of
dividends paid to shareholders. The amounts of the awards are determined
by comparing BellSouth's TSR to the TSR of peer companies. As a result,
officers' rewards are directly linked to the return realized by BellSouth
shareholders.
The 1997 executive compensation program and a specific discussion as to the
compensation of the Chief Executive Officer are set out in detail below.
STOCK OWNERSHIP GUIDELINES
In keeping with its belief that tying the interests of BellSouth executives to
those of the shareholders will result in enhanced shareholder value, the Board
has established executive stock ownership guidelines. Under these guidelines,
the officers are expected to own BellSouth stock valued at between one and four
times their individual base salary amounts, depending upon their position in the
Company. In order to incent officers to exceed the targets, awards of Incentive
Stock Options are made to those who do exceed the targets. In 1997, the Company
awarded 69,796 Incentive Stock Options to 34 officers who exceeded their stock
ownership targets.
BASE SALARY
BellSouth establishes a market-competitive target salary for each officer based
upon his or her job responsibilities. The target salary is established by
utilizing information from general industry surveys, surveys of the
telecommunications industry specifically, and proxy materials of the companies
included in the performance graph on page 32. After reviewing the market
competitiveness of each individual salary and the CEO's recommendations
regarding individual pay treatment, the Committee approved individual salary
levels for the named executive officers as shown on the Summary Compensation
Table on page 27.
ANNUAL INCENTIVE AWARDS
In April 1996, the Company's shareholders approved the BellSouth Corporation
Officer Short Term Incentive Award Plan (the "Incentive Award Plan"). The
purpose of the Incentive Award Plan is to provide annual incentive awards that
qualify as performance-based compensation under Section 162(m) of the Internal
Revenue Code (see discussion below), thus allowing the Company to fully deduct
these
22
<PAGE>
payments. The Incentive Award Plan establishes an overriding performance goal
prohibiting the payment of any short term award to eligible officers unless the
Company has positive Consolidated Earnings, as defined in the plan. Furthermore,
the Incentive Award Plan establishes maximum levels of awards payable to any one
individual. The Committee works within these limitations and then exercises
discretion in determining the actual amount of individual awards. A target
incentive award amount, determined as a percentage of base salary, is
established for each officer.
The Incentive Award Plan is intended to place a significant part of each
executive's annual compensation at risk. Annual incentive awards for a
particular year are based on that year's performance (measured by revenue
growth, net income, and customer satisfaction) and individual achievement of
commitments linked to corporate strategic objectives. Performance objectives are
approved by the Committee at the beginning of each year based on a projection of
the results BellSouth will be required to achieve in order to be a
top-performing company in its peer group. The weight given to each of these
performance components varies, depending upon the officer's particular job
assignment. The measurements and target performance levels for each officer are
tied to the business entity with which he/she is most closely associated. For
1997, the typical executive officer's award, excluding the Chief Executive
Officer's, was weighted as follows: 62.5% financial results; 12.5% customer
satisfaction results; and 25% individual strategic results. In addition, the
officer's award can be adjusted by the Committee based upon a comparison of the
Company's financial performance with the financial performance of the peer group
of companies. Awards of officers who manage a business unit are based on a
comparison of that business unit's financial performance with the financial
performance of companies in a related industry group. If the Company's financial
performance is above the median performance of a selected group of its peers,
officers' awards will be above the median incentive award level. Similarly, if
the Company's performance is below the median performance of its peers,
officers' awards will be below the median incentive award level.
Application of the methodology described above resulted in the payment of the
amounts reported in the Summary Compensation Table on page 27 to the named
executive officers for 1997. The method used to determine the Chief Executive
Officer's annual incentive award is discussed below in the section entitled
"1997 Compensation for the Chief Executive Officer."
LONG TERM INCENTIVE PROGRAM
BellSouth's long term incentive program is intended to focus the officer group
on the achievement of corporate goals over time. Officers must carefully weigh
the short and long term benefits or consequences of their decisions and manage
the business to effectively grow and compete in a rapidly changing
communications marketplace. They also must balance long term business
development with the need for a reasonable current return. The Committee wants
to incent the Company's officers to take the risks necessary to secure a strong
foothold for BellSouth in the competitive marketplace, which is continually
changing to admit new competitors such as alternative local exchange service
providers, cable companies, wireless service providers, and long distance
carriers.
This philosophy is put into effect by basing the Company's long term incentive
plans on the performance of BellSouth stock. First, under the BellSouth
Corporation Stock Plan, each officer receives an annual grant of nonqualified
stock options. The options are issued at market price on the date of grant. The
Company does not issue options at less than fair market value at the date of
grant and the officer receives value from the options only if the stock price
appreciates.
In 1997, in addition to the stock option grants, the Committee also awarded
dividend equivalent rights to each officer for the 1997-1999 performance period,
as described in the section entitled "Long Term
23
<PAGE>
Incentive Plan Awards in Fiscal Year 1997" on page 29. The only performance
factor used to determine payouts under this program is relative Total
Shareholder Return (TSR), which is defined on page 22. The Committee believes
that the grant of dividend equivalent rights emphasizes pay for performance and
provides an additional incentive for officers to maximize TSR.
The amount of stock options and dividend equivalent rights granted to each
officer for 1997 was determined by applying an annual grant level percentage
against each individual executive's base salary. This percentage was comparable
to the grant practices of the high-performing companies, as determined by
examining external surveys and data from proxy statements. The actual number of
stock options granted was determined by using the Black-Scholes option pricing
model. The number of dividend equivalent units awarded was determined by using
the calculated present value of the dividend payment stream on a share of
BellSouth stock, assuming constant dividend amounts. The Committee does not
adjust each annual grant to reflect options or units outstanding or previously
granted to a particular executive officer.
In 1993, 1994 and 1995, the Company's executives received grants of units under
the Shareholder Return Cash Plan ("SRCP"). Each grant provided for five annual
cash payments. The maximum payment under the SRCP is 100% of the value of the
annual dividends paid by the Company on a share of common stock multiplied by
the number of units granted. The actual amount of the payments is determined by
comparing the Company's TSR with the median TSR of a peer group of companies.
BellSouth's TSR exceeded the median TSR of the peer group for all performance
periods. As a result, each officer received the amount reported on the Summary
Compensation Table on page 27.
1997 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
1997 BASE SALARY: F. Duane Ackerman became Chief Executive Officer of the
Company on December 30, 1996, following the retirement of John L. Clendenin. In
determining Mr. Ackerman's 1997 base salary, the Committee reviewed reported
base salary information for the chief executive officers of the other companies
in the peer group as well as the salaries of chief executive officers of other
companies of comparable size. Due to the fact that Mr. Ackerman was newly
promoted to his position, Mr. Ackerman's 1997 salary was not set at the
market-competitive level. However, assuming satisfactory performance, the
Committee intends to increase Mr. Ackerman's salary to a market-competitive
level over the next few years.
1997 SHORT TERM INCENTIVE AWARD: In determining the Chief Executive Officer's
short term incentive award for 1997 performance, the Committee reviewed
BellSouth's 1997 financial performance with respect to the standard plan
measurements of revenue growth, net income, and customer satisfaction. In
addition to taking into account BellSouth's financial performance and customer
satisfaction levels, the Committee considered BellSouth's continuing efforts to
achieve and maintain a competitive position within the communications industry.
Under Mr. Ackerman's leadership in 1997, BellSouth continued to operate in
accordance with the three major components of its corporate strategy: to
strengthen its leadership position as the premier telecommunications company in
the South; to grow its domestic wireless business profitably; and to grow,
evolve and expand its international operations with an emphasis on Latin
America. The following accomplishments are evidence of the success of these
strategies:
- Growth in earnings per share, adjusted for special items, of 12.3%, the
best in the Company's peer group;
- Growth of access lines in service by 4.8%, setting a record for the number
of new access lines in a calendar year;
24
<PAGE>
- Continued growth in revenues from value-added telephone services such as
Caller ID, Call Waiting and MemoryCall-Registered Trademark- voice
messaging service, which generated $1.3 billion in revenues, a 24%
increase over 1996;
- Continued aggressive efforts to ensure that the provisions of the Federal
Telecommunications Act of 1996 are properly applied and that the
marketplace is opened to full and fair competition. The Act gives
BellSouth the ability to compete in the long distance market, clarifies
the rules for entry into the video market and enables BellSouth to jointly
market all of its services, including cellular services;
- Continued improvement in productivity of telephone operations, which now
leads the industry in employee productivity, as measured by the number of
employees per 10,000 access lines;
- Continued growth in domestic and international wireless customers,
bringing total worldwide wireless customers to 6.1 million;
- Continued growth in international operations, particularly in Latin
America, with such significant accomplishments as (a) winning the cellular
license for Sao Paulo, Brazil, the world's third largest city with a
population of 18 million; (b) winning the cellular license for the
northeastern region of Brazil, with a population of 26 million; (c)
acquiring a majority stake in Tele 2000, a telecommunications company in
Peru; (d) acquiring a majority stake in OTECEL, one of two nationwide
wireless telephone companies in Ecuador; and (e) acquiring a 49% stake in
Nicacel, a company that provides cellular service in the Pacific region of
Nicaragua; and
- Continued to take major steps toward providing cable service through the
launch of digital video service in New Orleans and the acquisition of
digital video rights in Atlanta, Miami and other areas of Florida.
Based on these factors, the Committee felt that Mr. Ackerman had provided strong
strategic leadership for the Company. Since there was no pre-established formula
for determining the annual incentive award for the Chief Executive Officer, the
Committee reviewed the factors described above and, exercising its judgment,
awarded the Chief Executive Officer the overall short term incentive award shown
in the Summary Compensation Table on page 27.
1997 LONG TERM INCENTIVE AWARD: The Committee also approved payment to the
Chief Executive Officer of the amount shown in the Summary Compensation Table
for units granted under the Shareholder Return Cash Plan for performance periods
beginning in 1993, 1994 and 1995. This payment represents 100% of the target
value and was based on a comparison of BellSouth's TSR to the median shareholder
return of the peer group shown in the performance graph. Using the same
procedure as is described in "Long Term Incentive Program", above, the Committee
also approved grants of stock options and dividend equivalent rights as shown in
"Option/SAR Grants in 1997" on page 28 and "Long Term Incentive Plan Awards in
1997" on page 29. Finally, the Committee approved the grant of 2,308 Incentive
Stock Options to the Chief Executive Officer in recognition of the fact that his
level of stock ownership for 1996 exceeded the established executive stock
ownership target.
INTERNAL REVENUE CODE SECTION 162(M) IMPLICATIONS FOR EXECUTIVE COMPENSATION
The Committee is responsible for addressing the issues raised by Internal
Revenue Code Section 162(m) ("Section 162(m)"). This Section limits to $1
million per executive officer the Company's deduction for compensation paid to
certain executive officers of the Company which does not qualify as
"performance-based". To qualify as performance-based under Section 162(m),
compensation payments must be made pursuant to a plan that is administered by a
committee of outside directors and must be based on achieving objective
performance goals. In addition, the material terms of the plan
25
<PAGE>
must be disclosed to and approved by shareholders, and the Committee must
certify that the performance goals were achieved before payments can be awarded.
The Committee continues to carefully consider the impact of this tax code
provision and has taken several steps which are designed to comply with its
provisions and to minimize compensation payments for which the Company does not
receive a tax deduction. First, it adopted the BellSouth Corporation Stock Plan
which was approved by the Company's shareholders in 1995. This plan establishes
performance criteria which are intended to qualify awards made under the plan to
the named executive officers as performance-based awards approved by the
shareholders; thus, these awards should not be counted toward the $1,000,000
limitation. Second, it adopted the BellSouth Corporation Officer Short Term
Incentive Award Plan approved by the Company's shareholders in 1996. Awards made
pursuant to this plan are intended to qualify as performance-based awards
approved by the shareholders and thus also should not count toward the
$1,000,000 limitation. Due to these actions and to voluntary deferrals of
compensation, the Company believes that there will be only a minimal loss of tax
deductions related to the named executive officers' 1997 compensation. The
Committee will continue to examine the effects of this tax provision and will
monitor the level of compensation paid to the executive officers in order to
take any steps which may be appropriate in response to the provisions of Section
162(m).
C. Dixon Spangler, Jr., Chairman
James H. Blanchard
Armando M. Codina
J. Tylee Wilson
------------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Nominating and Compensation Committee consists of Messrs. Spangler (Chair),
Blanchard, Codina, and Wilson. None of the members of the Nominating and
Compensation Committee are former or current officers or employees of the
Company or any of its subsidiaries.
26
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The table below shows, for the last three years, the compensation paid or
accrued by BellSouth and its subsidiaries to each of the five named executive
officers.
SUMMARY COMPENSATION TABLE
($000)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS PAYOUTS
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
OTHER
ANNUAL SECURITIES
COMPEN- UNDERLYING LTIP ALL OTHER
NAME AND BONUS SATION OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($)(A) ($)(B) (#) ($)(C) ($)(D)
<S> <C> <C> <C> <C> <C> <C> <C>
F. D. ACKERMAN 1997 $ 825.0 $ 1,300.0 $ 11.0 208,608 $ 148.0 $ 107.4
Chairman of the Board, 1996 $ 610.0 $ 793.0 $ 11.2 115,700 $ 148.0 $ 108.0
President and Chief 1995 $ 498.0 $ 516.3 $ 15.3 138,400 $ 1,186.6 $ 110.6
Executive Officer
J. A. DRUMMOND 1997 $ 500.0 $ 522.5 $ 11.2 89,808 $ 83.2 $ 82.6
President and Chief 1996 $ 438.0 $ 547.5 $ 15.1 72,700 $ 83.2 $ 81.2
Executive Officer--BellSouth 1995 $ 354.0 $ 350.9 $ 9.4 88,040 $ 672.0 $ 76.5
Communications Group
E. MAULDIN 1997 $ 465.0 $ 523.5 $ 12.9 83,708 $ 77.5 $ 107.4
President and Chief 1996 $ 400.0 $ 417.5 $ 13.2 68,911 $ 77.5 $ 108.6
Executive Officer--BellSouth 1995 $ 323.0 $ 321.0 $ 12.1 80,840 $ 640.7 $ 92.4
Enterprises, Inc.
W. H. ALFORD (E) 1997 $ 388.0 $ 358.5 $ 12.0 60,508 $ 77.5 $ 128.8
Executive Vice President and 1996 $ 370.0 $ 370.5 $ 13.0 55,211 $ 77.5 $ 126.8
General Counsel 1995 $ 346.0 $ 273.3 $ 11.9 69,640 $ 587.4 $ 147.2
R. M. DYKES 1997 $ 360.0 $ 349.0 $ 16.9 56,296 $ 35.1 $ 64.9
Executive Vice President and 1996 $ 271.3 $ 307.5 $ 11.8 38,175 $ 35.1 $ 62.3
Chief Financial Officer 1995 $ 222.0 $ 159.1 $ 9.9 34,200 $ 263.0 $ 57.6
</TABLE>
- --------------
Notes
(A) The amounts reported for 1997 and 1996 were amounts earned under the
BellSouth Corporation Officer Short Term Incentive Award Plan. The 1995
amounts also include amounts earned under the Shareholder Return Cash Plan
("SRCP") for the first year of the 1995-1999 performance period.
(B) Tax "gross up" for financial counseling and use of motor vehicle.
(C) The amounts reported for 1997 and 1996 were earned under the SRCP for the
second and subsequent years of five year performance periods beginning in
1993, 1994, and 1995. Amounts reported for 1995 also include the value of
shares that were earned under the BellSouth Corporation Executive Long Term
Incentive Plan, the final payment under this plan.
(D) Included in this category for 1997 are amounts for the five named executive
officers for: (a) above-market interest on voluntary salary deferrals under
nonqualified deferred compensation plans, $60.5, $45.4, $79.1, $98.9, and
$43.0, respectively; (b) Company matching contributions to certain employee
benefit plans, $7.7, $9.7, $7.8, $9.7, and $9.6, respectively; (c) benefits
substantially equal to Company matching contributions that could not be
provided under employee savings plans because of limitations under the
Internal Revenue Code or on amounts deferred from compensation, $29.7,
$18.4, $13.3, $11.3, and $9.9, respectively; and (d) value of benefits from
premiums paid by the Company under the BellSouth Life Insurance Program,
$9.5, $9.1, $7.2, $8.9, and $2.4, respectively. BellSouth uses the Present
Value Ratio Method to determine the portion of each premium dollar
attributable to the executive officer. The Company will recover the cost of
premium payments from the cash value of the policies.
(E) Mr. Alford has announced his intention to retire from the Company effective
April 1, 1998.
27
<PAGE>
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock options
to the five named executive officers during 1997. The Company utilized the
Black-Scholes option pricing model to develop the theoretical values set forth
under the "Grant Date Value" column. The officer realizes value from the stock
options only to the extent that the price of BellSouth Common Stock on the
exercise date exceeds the price of the stock on the grant date. Consequently,
there is no assurance the value realized by an officer will be at or near the
value estimated below. These amounts should not be used to predict stock
performance.
OPTION / SAR GRANTS IN 1997
<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANTS VALUE
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS/ SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION VALUE
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE ($000)
<S> <C> <C> <C> <C> <C>
F. D. ACKERMAN 206,300(A) 3.30% $ 44.38 2/3/07 $1,795.0(C)
2,308(B) .04% $ 43.31 4/28/07 $ 20.5(D)
J. A. DRUMMOND 87,500(A) 1.40% $ 44.38 2/3/07 $ 761.3(C)
2,308(B) .04% $ 43.31 4/28/07 $ 20.5(D)
E. MAULDIN 81,400(A) 1.30% $ 44.38 2/3/07 $ 708.2(C)
2,308(B) .04% $ 43.31 4/28/07 $ 20.5(D)
W. H. ALFORD 58,200(A) .93% $ 44.38 2/3/07 $ 506.4(C)
2,308(B) .04% $ 43.31 4/28/07 $ 20.5(D)
R. M. DYKES 54,000(A) .86% $ 44.38 2/3/07 $ 469.8(C)
2,296(B) .04% $ 43.31 4/28/07 $ 20.4(D)
</TABLE>
- --------------
Notes
(A) Under provisions of the BellSouth Corporation Stock Plan (the "Stock Plan"),
the Board of Directors granted stock options to key employees to purchase
shares of BellSouth Common Stock within prescribed periods at prices equal
to the fair market value of the stock on the date of the grant. Options
granted in 1997 generally become exercisable at the end of three years,
determined from the date of the grant. No stock appreciation rights were
granted in 1997. All options vest immediately in the event of a change in
control.
(B) Incentive Stock Options were awarded to certain officers based on their
achievement of ownership of specified levels of Company stock as established
by the Board of Directors. These options, which have exercise prices equal
to the fair market value of the stock on the date of the grant, are
exercisable six months from the date of the grant. See "Nominating and
Compensation Committee Report on Executive Compensation" at page 22.
(C) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility-19%, dividend yield-3.24%, and a risk-free rate of return of
6.19% based on options being outstanding for a five year term.
(D) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility-19%, dividend yield-3.32%, and a risk-free rate of return of
6.79% based on options being outstanding for a five year term.
28
<PAGE>
OPTION / SAR EXERCISES AND HOLDINGS
The following table sets forth information with respect to the five named
executive officers concerning the exercise of options/SARs during 1997 and
unexercised options /SARs held on December 31, 1997.
AGGREGATED OPTION / SAR EXERCISES IN 1997
AND FISCAL YEAR-END OPTION / SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS / SARS AT OPTIONS / SARS AT
EXERCISE REALIZED FISCAL YEAR-END (#) FISCAL YEAR-END ($000)
NAME (#) ($000) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
F. D. Ackerman 0 0 33,546 566,200 $ 1,021.6 $ 9,656.1
J. A. Drummond 17,170 $ 496.7 37,004 300,000 $ 1,085.1 $ 5,237.9
E. Mauldin 4,300 $ 113.7 35,635 276,600 $ 1,013.1 $ 4,836.1
W. H. Alford 0 0 4,819 236,300 $ 74.9 $ 4,256.7
R. M. Dykes 2,218 $ 58.6 15,145 150,800 $ 412.1 $ 2,523.3
</TABLE>
LONG TERM INCENTIVE PLAN AWARDS IN FISCAL YEAR 1997
The following table provides information concerning awards of dividend
equivalent rights made to the named executive officers during 1997 under the
BellSouth Stock Plan. Each dividend equivalent right is represented as a unit
under the Shareholder Return Cash Program. Each unit awarded provides the
contingent right to receive an amount of cash equal to the total dividends paid
on a share of common stock over a three year performance period. Under the
provisions of the program, payments are made following the performance period
and are adjusted based on a comparison of BellSouth's Total Shareholder Return
("TSR") with the TSR of five other telecommunications companies. If BellSouth's
TSR ranks first, 200% of the award will be paid. If BellSouth's TSR ranks sixth,
no award will be paid. Awards are paid solely in cash and may not be deferred.
Plan participants may not sell, assign or otherwise transfer the awards.
LONG TERM INCENTIVE PLAN AWARDS IN 1997
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE OR ESTIMATED FUTURE PAYOUTS
SHARES, UNITS OTHER UNDER NON-STOCK
OR PERIOD UNTIL PRICE-BASED PLANS ($000)
OTHER RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM
NAME (#) PAYOUT ($) ($) ($)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F. D. Ackerman 134,400 1997-1999 $ 290.3 $ 580.6 $ 1,161.2
J. A. Drummond 57,100 1997-1999 $ 123.3 $ 246.7 $ 493.3
E. Mauldin 53,100 1997-1999 $ 114.7 $ 229.4 $ 458.8
W. H. Alford 38,000 1997-1999 $ 82.1 $ 164.2 $ 328.3
R. M. Dykes 35,200 1997-1999 $ 76.0 $ 152.1 $ 304.1
</TABLE>
29
<PAGE>
PENSION AND OTHER RETIREMENT BENEFITS
The following table shows the estimated single life annual pension annuity
benefit provided to eligible participants under the BellSouth Personal
Retirement Account Pension Plan and the BellSouth Supplemental Executive
Retirement Plan ("SERP") combined, based on the specified remuneration levels
and years of credited service. The SERP provides benefits that would otherwise
be denied participants by reason of certain Internal Revenue Code limitations on
qualified benefit plans. The amounts set forth as payable in the table below
assume an undiscounted retirement age and are reduced, in accordance with the
Plan, by an average Social Security Primary Insurance benefit determined
annually to be payable at age 65.
PENSION PLAN TABLE
($000'S)
<TABLE>
<CAPTION>
YEARS OF SERVICE
REMUNERATION 15 20 25 30 35 40 45
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 200 $ 43.5 $ 63.5 $ 78.5 $ 93.5 $ 103.5 $ 113.5 $ 123.5
400 103.5 143.5 173.5 203.5 223.5 243.5 263.5
600 163.5 223.5 268.5 313.5 343.5 373.5 403.5
800 223.5 303.5 363.5 423.5 463.5 503.5 543.5
1,000 283.5 383.5 458.5 533.5 583.5 633.5 683.5
1,500 433.5 583.5 696.0 808.5 883.5 958.5 1,033.5
1,600 463.5 623.5 743.5 863.5 943.5 1,023.5 1,103.5
</TABLE>
Pension benefits are based on the average compensation (salary and bonus) over
the five-year period preceding retirement. Therefore, the covered compensation
presented in the table below for the five named executive officers is based upon
the last five-year average of pension eligible compensation actually paid and,
as such, will differ from the salary and bonus amounts set forth in the Summary
Compensation Table on page 27. In addition, the number of whole years of
credited service obtained in 1997 is presented.
<TABLE>
<CAPTION>
COVERED
COMPENSATION YEARS OF SERVICE
NAME ($000'S) (#)
- ---------------------------------------------------------------------
<S> <C> <C>
F. D. Ackerman $ 999.8 33
J. A. Drummond $ 659.9 35
E. Mauldin $ 605.8 33
W. H. Alford $ 587.2 33
R. M. Dykes $ 391.6 26
</TABLE>
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
The Board of Directors has authorized the Company, through December 1999, to
enter into long range succession planning arrangements with certain officers
below the Chief Executive Officer level. The agreements require that the officer
retire during the calendar year of his 60th birthday. In order to compensate the
officers for retiring prior to the normal retirement age of 65, the agreements
would entitle them to severance and other benefits. The Company has entered into
agreements of this type with Messrs. Drummond and Mauldin. The agreements call
for benefits that would include payment of an amount equal to two times annual
base pay plus the amount of standard bonus for the year of retirement. In
addition, each of these officers would also receive an enhanced nonqualified
pension
30
<PAGE>
benefit, an additional grant of stock options and dividend equivalent rights
under the BellSouth Corporation Stock Plan equal to the number of options and
dividend equivalent rights, respectively, most recently granted, and financial
counseling through age sixty-seven.
The Company also has an agreement with Mr. Ackerman that was entered into prior
to his becoming Chief Executive Officer. The agreement is presently being
reconsidered by the Board in light of Mr. Ackerman's current position. Mr
Ackerman's current agreement provides for the payment of an amount equal to two
times his annual base pay plus two times his standard bonus for the year of
retirement. In addition, Mr. Ackerman would also receive an enhanced
nonqualified pension benefit, an additional grant of stock options and dividend
equivalent rights under the BellSouth Corporation Stock Plan equal to twice the
number of options and dividend equivalent rights, respectively, most recently
granted, and financial counseling through age sixty-seven.
The Company has also entered into severance agreements (which are presently
effective until January 1, 2000) with the named executive officers that provide
specified payments and enhanced benefits in the event of involuntary termination
of employment incident to a change in control of the Company. In such event, in
their current positions, each of Messrs. Ackerman, Drummond, Mauldin, Alford,
and Dykes would receive payment of an amount equal to three times his annual
base pay plus three times his standard annual bonus. In addition, under these
agreements, each of these officers would receive (i) an immediate cash-out of
his bonus for the year of termination equal to the greater of the full standard
bonus for such year or such bonus based on actual performance results through
the date of termination; and (ii) an immediate cash-out of his dividend
equivalent rights multiplied by the greater of 100% or actual performance
results through the date of termination. All benefits of each such executive
officer under nonqualified deferred compensation plans, supplemental retirement
plans, and similar arrangements would in such event be immediately vested and
nonforfeitable. These agreements also provide for certain gross-up payments to
compensate these executive officers for any excise taxes incurred in connection
with these benefits, and reimbursement for certain outplacement services.
A covered executive officer will be entitled to the benefits under these change
in control severance agreements if, within two years after the occurrence of a
change in control, his employment is terminated by the Company (other than for
cause) or by the executive for good reason. For these purposes, "cause" means
the executive officer's willfully engaging in conduct materially injurious to
the Company, and "good reason" includes the assignment to the executive officer
of duties inconsistent with his prior status and position, certain reductions in
compensation or benefits, and relocation or increased travel obligations.
A "change in control" is defined for purposes of these agreements as: (i) the
acquisition by a party or certain related parties of 20% or more of the
Company's voting securities; (ii) a turnover in a majority of the Board of
Directors in any period of two consecutive years; (iii) a merger or similar
transaction after which the Company's shareholders hold 70% or less of the
voting securities of the surviving entity; (iv) the sale or disposition of a
subsidiary or assets which produced for the most recent fiscal year more than
30% of the Company's total operating revenues or net income; or (v) the
liquidation of the Company or sale of substantially all of its assets.
Should any of Messrs. Ackerman, Drummond, or Mauldin become entitled to both the
benefits described in his long range succession planning agreement discussed
above and his change in control severance agreement, such executive officer may
choose which such agreement shall apply but will in no event be entitled to
benefits under both.
-------------------
31
<PAGE>
FIVE YEAR PERFORMANCE COMPARISON
The following graph compares the cumulative total returns of BellSouth, the
Standard & Poor's 500 Index, and a peer group of other large United States
telecommunications companies (Ameritech Corporation, Bell Atlantic Corporation,
GTE Corporation, SBC Communications, Inc. and U S West, Inc.) over a five year
period.
For the years 1993-1996, NYNEX Corporation and Pacific Telesis Group were part
of the peer group. During the second quarter of 1997, Pacific Telesis merged
with SBC and NYNEX merged with Bell Atlantic in the third quarter. The peer
group returns were adjusted to reflect both mergers.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PEER GROUP BELLSOUTH
<S> <C> <C> <C>
1/1/93 $100.00 $100.00 $100.00
12/31/93 111.13 115.98 119.59
12/31/94 112.64 110.26 117.08
12/31/95 154.82 163.72 195.86
12/31/96 190.27 166.78 189.18
12/31/97 253.66 234.08 271.15
</TABLE>
The above performance chart assumes that $100 was invested on January 1, 1993,
with dividends reinvested. Returns are based on end of period prices. Peer
returns are weighted by market capitalization.
32
<PAGE>
GENERAL INFORMATION
OTHER MATTERS TO COME BEFORE THE MEETING
If any matter not described in this Proxy Statement should properly come before
the meeting, the Directors' Proxy Committee will vote the shares represented by
it in accordance with its best judgment. The Directors' Proxy Committee will not
use its discretionary voting authority with respect to any validly conducted
solicitation in opposition. At the time this Proxy Statement went to press, the
only other matters of which the Company was aware which might be presented for
shareholder action at the annual meeting are as follows: (a) a shareholder has
advised the Company that he may nominate Mr. Hubert C. Blankenship as a director
of the Company; (b) Mr. B. Wayne Carmichael may nominate himself as a director
of the Company; and (c) Mr. Blankenship has advised the Company that he intends
to present a proposal to amend the By-laws of the Company to provide that any
person nominated as a director by a shareholder "shall be included in the
company Proxy Statement and included on the company proxy ballot, even if the
Board of Directors recommends a vote against such person". If any of these
matters are properly presented at the meeting, the Directors' Proxy Committee
would not vote for either Mr. Blankenship or Mr. Carmichael as directors and
would exercise its discretionary authority to vote against Mr. Blankenship's
By-law amendment proposal.
SHAREHOLDER PROPOSALS FOR THE 1999 PROXY STATEMENT
Any shareholder satisfying the Securities and Exchange Commission requirements
and wishing to submit a proposal to be included in the Proxy Statement for the
1999 Annual Meeting of Shareholders should submit the proposal in writing to the
Secretary, BellSouth Corporation, 1155 Peachtree Street, N.E., Room 14B06,
Atlanta, Georgia 30309-3610. BellSouth must receive a proposal by November 10,
1998 in order to consider it for inclusion in the Proxy Statement for the 1999
Annual Meeting of Shareholders.
DIRECTOR NOMINEES OR OTHER BUSINESS FOR PRESENTATION AT THE ANNUAL MEETING
Shareholders who wish to present director nominations or other business at the
annual meeting are required to notify the Secretary of their intent at least 75
days but not more than 120 days before the meeting and the notice must provide
information as required in the By-laws. A copy of these By-laws requirements
will be provided upon request in writing to the Secretary, BellSouth
Corporation, 1155 Peachtree Street, N.E., Room 14B06, Atlanta, Georgia
30309-3610. This requirement does not apply to the deadline for submitting
shareholder proposals for inclusion in the Proxy Statement (see "Shareholder
Proposals for the 1999 Proxy Statement" above), nor does it apply to questions a
shareholder may wish to ask at the meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and any persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
(SEC) initial reports of ownership and reports of changes in ownership of common
stock. Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the year ended December 31, 1997, all such Section 16(a) filing
requirements were met.
OTHER INFORMATION
Consolidated financial statements for BellSouth Corporation are attached as an
appendix to this Proxy Statement and are included in the Annual Report on Form
10-K filed with the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the New York, Boston, Chicago,
33
<PAGE>
Pacific and Philadelphia stock exchanges in the United States and the London,
Frankfurt, Amsterdam and Swiss exchanges. A copy of the 1997 Form 10-K
(excluding exhibits) will be furnished, without charge, by writing to the
Secretary, BellSouth Corporation, 1155 Peachtree Street, N.E., Room 14B06,
Atlanta, Georgia, 30309-3610. The Form 10-K is also available on BellSouth's
home page on the Internet's World Wide Web at http://www.bellsouth.com.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be paid by BellSouth. BellSouth has retained
Morrow & Co., Inc. to solicit proxies, by mail, in person, or by telephone, at
an estimated cost of $18,500 plus reimbursement of reasonable out-of-pocket
expenses. In addition, employees of BellSouth may likewise solicit proxies on
behalf of the Company.
The above Notice of Annual Meeting and Proxy Statement are sent by order of the
BellSouth Board of Directors.
/s/ Arlen G. Yokley
Arlen G. Yokley
Senior Vice President--Corporate Compliance & Corporate Secretary
Dated: March 10, 1998
34
<PAGE>
EXHIBIT A
Amendments to Section I of Article 10 of the Restated Articles of Incorporation
As described in "Directors' Proposals -- Amendments to the Restated Articles
of Incorporation", the Board of Directors recommends that Section I of
Article 10 of the Company's Restated Articles of Incorporation be amended to
read as follows:
1. As used in this Article 10, the term:
(1) "Affiliate" means a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, a specified person.
(2) "Announcement date" means the date of the first general public
announcement of the proposal of the business combination.
(3) "Associate," when used to indicate a relationship with any person,
means:
(A) Any corporation or organization, other than the corporation or a
subsidiary of the corporation, of which such person is an officer,
director, or partner or is the beneficial owner of 10 percent or more of
any class of equity securities;
(B) Any trust or other estate in which such person has a beneficial
interest of 10 percent or more, or as to which such person serves as
trustee or in a similar fiduciary capacity; and
(C) Any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person.
(4) "Beneficial owner"-- a person shall be considered to be the
beneficial owner of any equity securities:
(A) Which such person or any of such person's affiliates or
associates owns, directly or indirectly;
(B) Which such person or any of such person's affiliates or
associates, directly or indirectly, has:
(i) The right to acquire, whether such right is exercisable
immediately or only after the passage of time, pursuant to any
agreement, arrangement, or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise; or
(ii) The right to vote pursuant to any agreement, arrangement,
or understanding; or
(C) Which are owned, directly or indirectly, by any other person
with which such person or any of such person's affiliates or associates
has any agreement, arrangement, or understanding for the purpose of
acquiring, holding, voting, or disposing of equity securities.
(5) "Business combination" means:
(A) Any merger of the corporation or any subsidiary with (i) any
interested shareholder or (ii) any other corporation, whether or not
itself an interested shareholder, which is, or after the merger would
be, an affiliate of an interested shareholder that was an interested
shareholder prior to the consummation of the transaction;
(B) ANY SHARE EXCHANGE WITH (I) ANY INTERESTED SHAREHOLDER OR (II)
ANY OTHER CORPORATION, WHETHER OR NOT ITSELF AN INTERESTED SHAREHOLDER,
WHICH IS, OR AFTER THE SHARE EXCHANGE WOULD BE, AN AFFILIATE OF AN
INTERESTED SHAREHOLDER THAT WAS AN INTERESTED SHAREHOLDER PRIOR TO THE
CONSUMMATION OF THE TRANSACTION;
(C) Any sale, lease, transfer, or other disposition, other than in
the ordinary course of business, in one transaction or in a series of
transactions in any 12 month period, to any
35
<PAGE>
interested shareholder or any affiliate of any interested shareholder,
other than the corporation or any of its subsidiaries, of any assets of
the corporation or any subsidiary having, measured at the time the
transaction or transactions are approved by the board of directors of
the corporation, an aggregate book value as of the end of the
corporation's most recently ended fiscal quarter of 10 percent or more
of the net assets of the corporation as of the end of such fiscal
quarter;
(D) The issuance or transfer by the corporation, or any subsidiary,
in one transaction or a series of transactions in any 12 month period,
of any equity securities of the corporation or any subsidiary which have
an aggregate market value of 5 percent or more of the total market value
of the outstanding common and preferred shares of the corporation whose
shares are being issued, to any interested shareholder or any affiliate
of any interested shareholder, other than the corporation or any of its
subsidiaries, except pursuant to the exercise of warrants or rights to
purchase securities offered pro rata to all holders of the corporation's
voting shares or any other method affording substantially proportionate
treatment to the holders of voting shares;
(E) The adoption of any plan or proposal for the liquidation or
dissolution of the corporation in which anything other than cash will be
received by an interested shareholder or an affiliate of any interested
shareholder; or
(F) Any reclassification of securities, including any reverse stock
split, or recapitalization of the corporation, or any merger of the
corporation WITH ANY OF ITS SUBSIDIARIES, OR ANY SHARE EXCHANGE with any
of its subsidiaries, which has the effect, directly or indirectly, in
one transaction or a series of transactions in any 12 month period, of
increasing by 5 percent or more the proportionate amount of the
outstanding shares of any class or series of equity securities of the
corporation or any subsidiary which is directly or indirectly
beneficially owned by any interested shareholder or any affiliate of any
interested shareholder.
(6) "Continuing director" means any member of the board of directors who
is not an affiliate or associate of an interested shareholder or any of its
affiliates, other than the corporation or any of its subsidiaries, and who
was a director of the corporation prior to the determination date, and any
successor to such continuing director who is not an affiliate or an
associate of an interested shareholder or any of its affiliates, other than
the corporation or its subsidiaries, and is recommended or elected by a
majority of all of the continuing directors.
(7) "Control," including the terms "controlling," "controlled by," and
"under common control with," means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies
of a person, whether through the ownership of voting securities, by
contract, or otherwise, and the beneficial ownership of shares representing
10 percent or more of the votes entitled to be cast by a corporation's
voting shares shall create an irrebuttable presumption of control.
(8) "Corporation," IN ADDITION TO THE DEFINITION CONTAINED IN GEORGIA
BUSINESS CORPORATION CODE SECTION 14-2-140, shall include any trust merging
with a domestic corporation pursuant to Georgia Business Corporation Code
Section 53-12-59.
(9) "Determination date" means the date on which an interested
shareholder first became an interested shareholder.
(10) "Fair market value" means:
(A) In the case of securities, the highest closing sale price,
during the period beginning with and including the determination date and
for 29 days prior to such date, of such a security on the principal United
States securities exchange registered under the Securities Exchange Act of
1934 on which such securities are listed, or, if such securities are not
listed on any such exchange,
36
<PAGE>
the highest closing sales price or, if none is available, the average of the
highest bid and asked prices reported with respect to such a security, in
each case during the 30 day period referred to above, on the National
Association of Securities Dealers, Inc., Automatic Quotation System, or any
system then in use, or, if no such quotations are available, the fair market
value on the date in question of such a security as determined in good faith
at a duly called meeting of the board of directors by a majority of all of
the continuing directors, or, if there are no continuing directors, by the
entire board of directors; and
(B) In the case of property other than securities, the fair market
value of such property on the date in question as determined in good
faith at a duly called meeting of the board of directors by a majority
of all of the continuing directors, or, if there are no continuing
directors, by the entire board of directors of the corporation.
(11) "Interested shareholder" means any person, other than the
corporation or its subsidiaries, that:
(A) Is the beneficial owner of 10 percent or more of the voting
power of the outstanding voting shares of the corporation; or
(B) Is an affiliate of the corporation and, at any time within the
two-year period immediately prior to the date in question, was the
beneficial owner of 10 percent or more of the voting power of the then
outstanding voting shares of the corporation.
For the purpose of determining whether a person is an interested
shareholder, the number of voting shares deemed to be outstanding shall
not include any unissued voting shares which may be issuable pursuant to
any agreement, arrangement, or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
(12) "NET ASSETS" MEANS THE AMOUNT BY WHICH THE TOTAL ASSETS OF THE
CORPORATION EXCEED THE TOTAL DEBTS OF THE CORPORATION.
(13) "Voting shares" means shares entitled to vote generally in the
election of directors.
(New language is italicized.)
37
<PAGE>
BELLSOUTH CORPORATION
ANNUAL FINANCIAL STATEMENTS AND REVIEW OF OPERATIONS
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues................................ $20,561 $19,040 $17,886 $16,845 $15,880
Operating Expenses (1)............................ 15,185 14,261 14,594 12,787 13,593
--------- -------- -------- -------- --------
Operating Income.................................. 5,376 4,779 3,292 4,058 2,287
Interest Expense.................................. 761 721 724 666 689
Gain on Sales of Operations (2)................... 787 442 -- -- --
Other Income, net................................. 19 108 20 11 8
--------- -------- -------- -------- --------
Income Before Income Taxes, Extraordinary Losses
and Accounting Change............................ 5,421 4,608 2,588 3,403 1,606
Provision for Income Taxes........................ 2,151 1,745 1,024 1,243 572
--------- -------- -------- -------- --------
Income Before Extraordinary Losses and Accounting
Change........................................... 3,270 2,863 1,564 2,160 1,034
Extraordinary Losses, net of tax (3).............. (9) -- (2,796) -- (87)
Accounting Change, net of tax..................... -- -- -- -- (67)
--------- -------- -------- -------- --------
Net Income (Loss)............................... $ 3,261 $ 2,863 $(1,232) $ 2,160 $ 880
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Earnings (Loss) Per Share(4):
BASIC:
Income Before Extraordinary Losses and
Accounting Change............................... $ 3.30 $ 2.88 $ 1.57 $ 2.18 $ 1.04
Extraordinary Losses, net of tax (3)............ (.01) -- (2.81) -- (.09)
Accounting Change, net of tax................... -- -- -- -- (.06)
--------- -------- -------- -------- --------
Net Income (Loss)............................... $ 3.29 $ 2.88 $ (1.24) $ 2.18 $ .89
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
DILUTED:
Income Before Extraordinary Losses and
Accounting Change............................... $ 3.29 $ 2.87 $ 1.57 $ 2.18 $ 1.04
Extraordinary Losses, net of tax (3)............ (.01) -- (2.81) -- (.09)
Accounting Change, net of tax................... -- -- -- -- (.06)
--------- -------- -------- -------- --------
Net Income (Loss)............................... $ 3.28 $ 2.87 $ (1.24) $ 2.18 $ .89
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Dividends Declared Per Common Share............... $ 1.44 $ 1.44 $ 1.41 $ 1.38 $ 1.38
Book Value Per Share.............................. $ 15.29 $ 13.37 $ 11.90 $ 14.48 $ 13.60
Return to Average Common Equity................... 22.8% 22.4% (9.2%) 15.4% 6.3%
Weighted-Average Common Shares Outstanding:
Basic........................................... 992 994 993 992 991
Diluted......................................... 995 996 994 993 992
Return on Average Total Capital................... 15.8% 15.0% (2.7%) 11.5% 6.1%
Total Assets...................................... $36,301 $32,568 $31,880 $34,397 $32,873
Capital Expenditures.............................. $ 4,858 $ 4,455 $ 4,203 $ 3,600 $ 3,486
Long-Term Debt.................................... $ 7,348 $ 8,116 $ 7,924 $ 7,435 $ 7,381
Debt Ratio at End of Period (5)................... 42.1% 43.5% 46.7% 39.3% 40.2%
Ratio of Earnings to Fixed Charges................ 7.17 6.55 4.24 5.34 2.98
Total Employees................................... 81,000 81,241 87,571 92,121 95,084
Telephone Employees (6)........................... 57,619 62,425 68,585 73,764 77,958
Telephone Employees per 10,000 Access Lines....... 24.8 28.2 32.5 36.5 40.3
Business Volumes: (7)
Network Access Lines in Service (thousands)..... 23,201 22,135 21,133 20,220 19,333
Access Minutes of Use (millions):
Interstate.................................... 73,634 67,690 62,411 57,778 53,345
Intrastate.................................... 23,472 21,171 19,197 16,888 15,261
Toll Messages (millions)........................ 894 1,023 1,374 1,559 1,511
Cellular Customers (thousands): (8)
Domestic...................................... 4,105 3,612 2,847 2,156 1,559
International................................. 1,882 1,244 655 361 192
--------- -------- -------- -------- --------
Total Cellular Customers.................... 5,987 4,856 3,502 2,517 1,751
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
PCS Customers (thousands): (8).................. 88 31 -- -- --
</TABLE>
- ------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
which reduced net income by $663. See Note L to the Consolidated Financial
Statements. Operating Expenses for 1993 include a charge for restructuring
of $1,136, which reduced net income by $697.
(2) For 1997, represents the pretax gains on the sale of Optus Communications
and ITT World Directories, Inc. The pretax gains on such sales were $578
($352 after tax) and $209 ($128 after tax), respectively. For 1996,
represents the pretax gain on the sale of BellSouth's paging business of
$442 ($344 after tax). See Note B to the Consolidated Financial Statements.
(3) For 1997, reflects charges related to the extinguishment of long-term debt
issues. 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 M to the Consolidated Financial Statements.
(4) Earnings per share amounts for all periods presented have been restated to
conform with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share".
(5) The debt ratio at December 31, 1995 has been adjusted to exclude $485 of
debentures redeemed in January 1996.
(6) Telephone employees exclude those employees in BellSouth Telecommunications'
subsidiaries which are unrelated to telephone operations.
(7) 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.
(8) Calculated on the equity basis, which includes customers served based on
BellSouth's ownership percentage in all markets served.
A-1
<PAGE>
BELLSOUTH CORPORATION
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 (i) local exchange service and toll communications services
within geographic areas, called Local Access and Transport Areas (LATAs), and
(ii) exchange 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 67%, 70% and 70% of BellSouth's Total Operating Revenues for
the years ended December 31, 1997, 1996 and 1995, respectively, were from
network and related services provided by BellSouth Telecommunications. Charges
for local, access and toll services for the year ended December 31, 1997
accounted for approximately 62%, 33% and 5%, respectively, of the network and
related revenues discussed above. Revenues from wireless communications services
and from directory advertising and publishing services accounted for
approximately 17% and 9%, respectively, of Total Operating Revenues for the year
ended December 31, 1997. 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
<TABLE>
<CAPTION>
PERCENT CHANGE
--------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Before Extraordinary Losses....... $ 3,270 $ 2,863 $ 1,564 14.2% 83.1%
Extraordinary Loss for Discontinuance of
SFAS No. 71, net of tax................. -- -- (2,718) -- --
Extraordinary Loss on Early
Extinguishment of Debt,
net of tax.............................. (9) -- (78) -- --
--------- --------- ----------
Net Income (Loss)........................ $ 3,261 $ 2,863 $ (1,232) 13.9% --
--------- --------- ----------
--------- --------- ----------
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Earnings (Loss) Per Share:
<CAPTION>
PERCENT CHANGE
--------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Basic:
Income Before Extraordinary Losses....... $ 3.30 $ 2.88 $ 1.57 14.6% 83.4%
Extraordinary Loss for
Discontinuance of SFAS No. 71,
net of tax.............................. -- -- (2.73) -- --
Extraordinary Loss on Early
Extinguishment of Debt,
net of tax.............................. (.01) -- (.08) -- --
--------- --------- ----------
Earnings (Loss) Per Share................ $ 3.29 $ 2.88 $ (1.24) 14.2% --
--------- --------- ----------
--------- --------- ----------
Diluted:
Income Before Extraordinary Losses....... $ 3.29 $ 2.87 $ 1.57 14.6% 82.8%
Extraordinary Loss for
Discontinuance of SFAS No. 71,
net of tax.............................. -- -- (2.73) -- --
Extraordinary Loss on Early
Extinguishment of Debt,
net of tax.............................. (.01) -- (.08) -- --
--------- --------- ----------
Earnings (Loss) Per Share................ $ 3.28 $ 2.87 $ (1.24) 14.3% --
--------- --------- ----------
--------- --------- ----------
</TABLE>
For a discussion of the extraordinary losses in 1997 and 1995, see
"Extraordinary Losses" below.
Income Before Extraordinary Losses for 1997 increased $407 (14.2%), and
basic earnings per share increased $.42 (14.6%) compared to 1996. The increases
were primarily attributable to the after-tax gains on the sale in 1997 of Optus
Communications ($352) and ITT World Directories ($128) (See Note B to the
Consolidated Financial Statements). In addition, the increases were due to
continued strong growth in key business volumes and expense savings due to
employee reductions under BellSouth Telecommunications' work force reduction
plan initiated in 1995. The increases were partially offset by the $344
after-tax gain on the sale of BellSouth's paging business during the first
quarter of 1996. The increases were further offset by an after-tax charge of $47
related to a regulatory settlement in South Carolina during the second quarter
of 1997.
Income Before Extraordinary Losses for 1996 increased $1,299 (83.1%), and
basic earnings per share increased $1.31 (83.4%) compared to 1995. The increases
were primarily attributable to the effect of an after-tax work force reduction
charge in 1995 of $663. For a discussion of such charge, see "Operating Expenses
- -- Work Force Reduction Charge" below. Also contributing to the increases were
the $344 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.
A-3
<PAGE>
VOLUMES OF BUSINESS
Network Access Lines in Service at December 31 (thousands):
<TABLE>
<CAPTION>
PERCENT CHANGE
----------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
By Type:
Residence.............................. 15,841 15,140 14,653 4.6% 3.3%
Business............................... 7,088 6,732 6,225 5.3 8.1
Other.................................. 272 263 255 3.4 3.1
--------- --------- ---------
Total Access Lines................... 23,201 22,135 21,133 4.8 4.7
--------- --------- ---------
--------- --------- ---------
By State:
Florida................................ 6,237 5,899 5,597 5.7 5.4
Georgia................................ 3,990 3,772 3,550 5.8 6.3
Tennessee.............................. 2,623 2,544 2,435 3.1 4.5
North Carolina......................... 2,337 2,213 2,101 5.6 5.3
Louisiana.............................. 2,267 2,178 2,108 4.1 3.3
Alabama................................ 1,928 1,857 1,792 3.8 3.6
South Carolina......................... 1,404 1,344 1,292 4.5 4.0
Mississippi............................ 1,238 1,193 1,158 3.8 3.0
Kentucky............................... 1,177 1,135 1,100 3.7 3.2
--------- --------- ---------
Total Access Lines................... 23,201 22,135 21,133 4.8 4.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
The total number of access lines in service increased by approximately
1,066,000 (4.8%) to 23,201,000 since December 31, 1996, compared to a 4.7% rate
of increase in 1996. Business and residence access lines increased by 5.3% and
4.6%, respectively, compared to growth rates of 8.1% and 3.3% in 1996. The
decrease in the growth rate for business lines was primarily due to the
migration of business customers from traditional business line services to
high-capacity service arrangements which are not included in business access
line counts. To a lesser degree, the growth rate for business lines was also
affected by the increased presence of facilities-based competition. Many
residential customers order additional access lines for home office purposes,
access to on-line computer services and children's phones. The number of such
additional residence lines, included in total residence lines, increased by
328,000 (21.1%) to 1,884,000 and accounted for 46.8% and 30.8% of the overall
increase in residence access lines and total access lines, respectively, since
December 31, 1996. The growth in all categories of access lines continues to
reflect economic improvement in the southeast and successful marketing programs.
Access Minutes of Use (millions):
<TABLE>
<CAPTION>
PERCENT CHANGE
--------------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interstate............................... 73,634 67,690 62,411 8.8% 8.5%
Intrastate............................... 23,472 21,171 19,197 10.9 10.3
--------- --------- ---------
Total Access Minutes of Use............ 97,106 88,861 81,608 9.3 8.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 1997, total access minutes of
use increased by 8,245 million (9.3%) compared to an increase of 8.9% in 1996.
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
A-4
<PAGE>
of use while reducing toll messages carried over BellSouth Telecommunications'
facilities.) The growth rate in total minutes of use continues to be negatively
impacted by competition and the migration of Interexchange Carriers to
categories of service (e.g., special access) that have a fixed charge as opposed
to a volume-driven charge and to high-capacity services.
<TABLE>
<CAPTION>
PERCENT CHANGE
--------------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Toll Messages (millions)............................... 894 1,023 1,374 (12.6%) (25.5%)
</TABLE>
Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 129 million (12.6%)
in 1997 compared to a decrease of 25.5% in 1996. The decrease in 1997 was
primarily attributable to continued competition from Interexchange Carriers in
the intraLATA toll market as well as the continuing expansion of local area
calling plans (LACPs). Some effects of competition and the expansion of LACPs
result in the transfer of calls from toll to the access and local service
categories, respectively, but the corresponding revenues are not generally
shifted at commensurate rates. Competition from the Interexchange Carriers in
the intraLATA toll market will adversely impact future toll message volumes.
Cellular and personal communications service (PCS) customers served at
December 31 (equity basis) (thousands):
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Domestic Cellular...................................... 4,105 3,612 2,847 13.6% 26.9%
International Cellular(a).............................. 1,882 1,244 655 51.3 89.9
PCS (service initiated mid-1996)....................... 88 31 -- -- --
</TABLE>
- --------------
(a) Excluding the customers of Optus Communications from all periods,
the number of international cellular customers (equity-weighted)
increased by 971 (106.6%) and 477 (109.9%), respectively, for the
years ended December 31, 1997 and 1996.
Domestic cellular customers (equity-weighted) increased by 493,000 (13.6%)
since December 31, 1996. The moderation in the customer growth rate reflects the
impact of increased competition. BellSouth's penetration rate (number of
equity-basis customers as a percentage of the equity-basis population in the
service territory) increased from 8.9% at December 31, 1996 to 10.2% at December
31, 1997. While total minutes of use have continued to increase, average minutes
of use per cellular customer declined due to the continuing trends of increased
penetration into lower-usage market segments and increased competition for
high-usage customers. BellSouth expects these trends to continue.
International cellular customers increased by 638,000 (51.3%) since December
31, 1996 to 1,882,000. Such growth reflects increased demand for wireless
services in the international markets which BellSouth serves and the impact of
the acquisitions of cellular properties in Nicaragua, Ecuador and Peru,
partially offset by the sale of Optus Communications. Growth in total minutes of
use for international cellular properties remained strong, primarily due to
demand stimulated by market-driven pricing programs, enhanced services and
underdeveloped land-line service. However, average minutes of use per
international customer declined due to the addition of customers in lower-usage
market segments.
Domestic PCS customers (equity-weighted) totaled 88,000 at December 31, 1997
compared to 31,000 customers at December 31, 1996.
OPERATING REVENUES
For a discussion of the impact of local service competition on revenues and
volumes of business, see "Operating Environment and Trends of the Business."
A-5
<PAGE>
Total Operating Revenues increased $1,521 (8.0%) in 1997 compared to an
increase of $1,154 (6.5%) during 1996. The increases resulted primarily from
significant increases in revenues from the wireless communications businesses
coupled with growth in revenues from BellSouth's wireline telephone business. In
addition, revenues were positively impacted by the consolidation of certain of
BellSouth's international operations ($122) that had previously been accounted
for under the equity method and included in Other Income, net. Such increases
were partially offset by a $72 reduction of revenues related to a regulatory
settlement in South Carolina. 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.
The components of Total Operating Revenues were as follows:
<TABLE>
<CAPTION>
PERCENT CHANGE
----------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Local Service................................ $ 8,499 $ 8,082 $ 7,294 5.2% 10.8%
Interstate Access............................ 3,673 3,553 3,275 3.4 8.5
Intrastate Access............................ 810 812 884 (0.2) (8.1)
Toll......................................... 734 794 1,009 (7.6) (21.3)
Wireless Communications...................... 3,555 2,799 2,592 27.0 8.0
Directory Advertising and Publishing......... 1,934 1,742 1,677 11.0 3.9
Other Services............................... 1,356 1,258 1,155 7.8 8.9
--------- --------- -----------
Total Operating Revenues................... $ 20,561 $ 19,040 $ 17,886 8.0 6.5
--------- --------- -----------
--------- --------- -----------
</TABLE>
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. Local Service revenues for 1997
increased $417 (5.2%) compared to an increase of $788 (10.8%) in 1996.
The increase in 1997 was due primarily to a 4.8% growth in access lines
since December 31, 1996. Also contributing was an increase of $241 due to higher
customer demand for optional services. Such increases were partially offset by
rate impacts which reduced revenues by $252 primarily due to revenue sharing
accruals recorded in 1997 and a non-recurring revenue reduction of $64 related
to the local service portion of the regulatory settlement in South Carolina.
The increase in 1996 was due primarily to a 4.7% growth in access lines
since December 31, 1995. Also contributing were an increase of $251 due to
higher customer demand for optional services and net rate increases of $88,
which include benefits related to the effects of expanded LACPs.
INTERSTATE ACCESS revenues result from the provision of access services to
Interexchange Carriers to provide telecommunications services between states and
from end-user charges collected from residential and business customers.
Interstate Access revenues increased $120 (3.4%) in 1997 compared to an increase
of $278 (8.5%) in 1996.
The increase for 1997 was attributable primarily to growth in minutes of use
of 8.8%, an increase of $97 due to higher demand for special access services and
an increase in end-user charges of $99 attributable to growth in the number of
access lines. Such increases were partially offset by rate reductions which
decreased revenues by $161 since December 31, 1996.
The 1996 increase was due primarily to growth in minutes of use of 8.5%, an
increase of $69 due to higher demand for special access services and an increase
in end-user charges of $58 attributable to growth in the number of access lines
in service. Such increases were offset by net rate reductions since December 31,
1995 of $25.
A-6
<PAGE>
INTRASTATE ACCESS revenues result from the provision of access services to
Interexchange Carriers which provide telecommunications services between LATAs
within a state. In 1997, Intrastate Access revenues decreased $2 (0.2%) compared
to a decrease of $72 (8.1%) in 1996.
The decreases for 1997 and 1996 were due primarily to rate reductions of $82
and $160, respectively, partially offset by growth in minutes of use of 10.9%
and 10.3%, 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 $60 (7.6%)
in 1997 compared to a decrease of $215 (21.3%) in 1996.
The decrease for 1997 was primarily attributable to continuing competition
from Interexchange Carriers in the intraLATA toll market as well as the
continuing expansion of LACPs, the effect of which reduced toll messages by
12.6%. The decrease was partially offset by $62 related to revenues from
Interexchange Carriers beginning in the second quarter of 1997 for toll messages
originating on BellSouth Telecommunications' public telephones.
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.
The overall decline in intraLATA toll revenues is expected to continue over
the long term.
WIRELESS COMMUNICATIONS revenues include revenues from the domestic and
international cellular communications and PCS businesses as well as revenues
from interconnections by unaffiliated cellular and PCS 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 $756 (27.0%) in 1997 compared to
an increase of $207 (8.0%) in 1996. The 1997 increase includes revenues from
certain of BellSouth's international operations which had previously been
accounted for under the equity method and were consolidated for the first time
in 1997. Excluding those revenues, Wireless Communications revenues would have
increased approximately 22.7%. 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 in 1995. Excluding such paging revenues in 1995,
Wireless Communications revenues increased 24.8% in 1996. The increases for both
years as adjusted were primarily attributable to continued growth of the
customer bases in domestic and international wireless markets.
The number of BellSouth's proportional domestic cellular customers has grown
by 13.6%, 26.9% and 32.1%, and its proportional domestic cellular revenues have
grown by 9.0%, 22.5% and 28.9% for the years ended December 31, 1997, 1996 and
1995, respectively. Its penetration rate has grown to 10.2% at December 31, 1997
from 8.9% and 7.1% at December 31, 1996 and 1995, respectively. Such customer
and revenue growth rates are likely to continue declining, reflecting increasing
penetration rates and competition for wireless customers by additional PCS
carriers. (See "Operating Environment and Trends of the Business -- Wireless
Service Competition.")
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 $192 (11.0%) in 1997 compared to a
$65 (3.9%) increase in 1996.
A-7
<PAGE>
The increase for 1997 primarily reflects volume growth, price increases and
the reclassification to Operating Expenses of commissions associated with
national accounts which had previously reduced revenues. The revenue growth rate
associated with increases in volume and pricing for 1997 was 6.7%.
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 M to the
Consolidated Financial Statements.
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 $98 (7.8%) in 1997 compared to an increase of $103 (8.9%) in 1996.
The increase for 1997 reflects increased demand and prices for nonregulated
services and higher billing-related fees at BellSouth Telecommunications
totaling $138. The increase was partially offset by the effect in 1996 of
positive rate impacts and the sale of a subsidiary which performed computer
maintenance.
The 1996 increase was primarily attributable to higher demand and prices for
nonregulated services, product sales and fees totaling $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.
OPERATING EXPENSES
Total Operating Expenses increased $924 (6.5%) in 1997 compared to a
decrease of $333 (2.3%) in 1996. The 1997 increase was primarily attributable to
growth within BellSouth's domestic and international cellular businesses, as
well as increases associated with the initiation of PCS service. The 1997
increase also includes expenses from certain international operations which had
previously been accounted for under the equity method of accounting and which
were consolidated for the first time in 1997. Excluding the effect of such
international operations, Total Operating Expenses increased approximately 5.7%
in 1997. The decrease in 1996 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:
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
<S> <C> <C> <C> <C> <C>
1997 VS 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- ----------- -----------
Depreciation and Amortization.................. $ 3,964 $ 3,719 $ 3,455 6.6% 7.6%
--------- --------- ---------
Other Operating Expenses:
Cost of Services and Products................ 6,254 6,072 6,184 3.0 (1.8)
Selling, General and Administrative.......... 4,967 4,470 3,873 11.1 15.4
--------- --------- ---------
11,221 10,542 10,057 6.4 4.8
--------- --------- ---------
Subtotal................................... 15,185 14,261 13,512 6.5 5.5
Work Force Reduction Charge.................... -- -- 1,082 -- --
--------- --------- ---------
Total Operating Expenses................... $ 15,185 $ 14,261 $ 14,594 6.5 (2.3)
--------- --------- ---------
--------- --------- ---------
</TABLE>
DEPRECIATION AND AMORTIZATION increased $245 (6.6%) in 1997 compared to a
$264 (7.6%) increase in 1996.
A-8
<PAGE>
The 1997 increase was due primarily to higher levels of property, plant and
equipment since December 31, 1996 resulting from continued growth in the
customer base for wireless and wireline services and continued modernization of
the networks.
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.
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 $679 (6.4%) in 1997 compared to an
increase of $485 (4.8%) in 1996. The increases for 1997 and 1996 were primarily
related to growth in the wireless and wireline businesses. The increase for 1996
was 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.
The 1997 increase was due primarily to increased expenses of $149 and $277
related to the domestic and international cellular customer bases, respectively,
reflecting additional marketing and operating costs associated with higher sales
and expanded operations. The increase related to international operations
includes $76 of expenses related to operations which were consolidated for the
first time in 1997 and which had previously been accounted for under the equity
method. The increase in Other Operating Expenses also reflects higher expenses
associated with the expansion of PCS services of $84 and increased expenses of
$126 in the directory publishing operations.
At BellSouth Telecommunications, Other Operating Expenses increased $12 due
principally to costs associated with 1996 Act compliance of $230, as well as
increased costs due to higher business volumes, new service offerings and
intensified marketing and advertising efforts. The increase was partially offset
by an estimated reduction of $232 in employee-related costs in the core wireline
business, including expenses for employee benefits. The decrease in
employee-related costs reflected net employee reductions in BellSouth
Telecommunications' telephone operations of approximately 4,800 since December
31, 1996, partially offset by annual compensation increases for management and
represented employees. The employee reductions were primarily attributable to a
previously disclosed work force reduction plan. The increase in Other Operating
Expenses at BellSouth Telecommunications was further offset by the April 1996
sale of a subsidiary which performed computer maintenance.
For 1996, expenses related to the domestic and international cellular
businesses increased $342 as a result of sustained growth in the cellular
customer bases. The increase in 1996 also reflects higher expenses associated
with the initiation of PCS services of $69. 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 in
employee-related costs reflects employee reductions attributable to
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.
A-9
<PAGE>
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. The 1995 plan was
substantially completed in 1997 and resulted in the reduction of the wireline
telephone operations work force by approximately 11,600 employees over the term
of the plan. See Note L to the Consolidated Financial Statements.
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
PERCENT CHANGE
--------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest Expense........................................ $ 761 $ 721 $ 724 5.5% (0.4%)
Gain on Sales of Operations............................. 787 442 -- -- --
Other Income, net....................................... 19 108 20 -- --
Provision for Income Taxes.............................. 2,151 1,745 1,024 23.3 70.4
</TABLE>
INTEREST EXPENSE includes interest on debt, certain other accrued
liabilities and capital leases, partially offset by interest capitalized as a
cost of installing equipment and constructing plant. Interest Expense increased
$40 (5.5%) in 1997 compared to a decrease of $3 (0.4%) in 1996.
The increase for 1997 was primarily attributable to higher average debt
balances and interest rates on short-term borrowings.
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.
GAIN ON SALES OF OPERATIONS for 1997 represents the pretax gains on the
sales of BellSouth's investments in Optus Communications and ITT World
Directories, which totaled $578 and $209, respectively. The pretax gain for 1996
represents the sale of BellSouth's paging business in January 1996.
OTHER INCOME, NET includes earnings and losses from unconsolidated
affiliates; income and losses from the sale of investments; interest and
dividend income; minority interests; and other nonoperating items. Other Income,
net decreased $89 in 1997 compared to an increase of $88 in 1996.
The decrease in Other Income, net in 1997 was primarily attributable to
increased equity in losses of unconsolidated affiliates, net, partially offset
by income from the sale of Bellcore, an increase in interest income and other
nonoperating items.
Equity in losses of unconsolidated affiliates was ($242) in 1997 compared to
($76) in 1996. The higher overall equity in losses of unconsolidated affiliates
reflects losses incurred by recently acquired and start-up international
businesses, principally in Latin America, as well as increased losses in the
mobile data communications business and lower earnings from unconsolidated
domestic cellular operations. The increased losses were partially offset by more
favorable results at other unconsolidated international operations, principally
in Israel, Germany and Panama.
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 over 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.
A-10
<PAGE>
PROVISION FOR INCOME TAXES increased $406 (23.3%) in 1997 compared to an
increase of $721 (70.4%) in 1996. BellSouth's effective tax rates were 39.7%,
37.9% and 39.6% in 1997, 1996 and 1995, respectively. The lower effective tax
rate for 1996 compared to 1997 and 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 J to the Consolidated
Financial Statements.
EXTRAORDINARY LOSSES
EARLY EXTINGUISHMENT OF DEBT. During 1997 and 1995, BellSouth recognized
extraordinary losses of $9 and $78, net of current tax benefits of $6 and $49,
respectively, related to the early extinguishment of outstanding debt issues.
See Note E to the Consolidated Financial Statements.
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 application of SFAS No. 71. Accordingly,
BellSouth Telecommunications recorded a noncash extraordinary charge of $2,718
(net of a deferred tax benefit of $1,731). The extraordinary charge reflected
$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 M 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, 1997 and 1996, 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.
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by Operating Activities.......... $ 7,039 $ 5,863 $ 5,443 20.1% 7.7%
</TABLE>
OPERATING ACTIVITIES. Net cash provided by operating activities increased
$1,176 (20.1%) in 1997 compared to an increase of $420 (7.7%) in 1996. The
increase in 1997 was primarily due to a decrease of $1,288 in cash expenditures
for accounts payable and other current liabilities. The increase was also due to
an $842 increase in operating income before depreciation and amortization. The
increases were partially offset by a decrease of $494 in other liabilities and
deferred credits.
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.
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Cash Used for Investing Activities.......... $ (4,949) $ (4,199) $ (4,384) 17.9% (4.2%)
</TABLE>
A-11
<PAGE>
INVESTING ACTIVITIES. BellSouth's primary use of capital resources
continues to be for capital expenditures to support development of the wireline
and wireless networks. Net cash used for investing activities increased $750
(17.9%) in 1997 compared to a decrease of $185 (4.2%) in 1996. The increase in
1997 was primarily due to investments in unconsolidated international
affiliates, specifically in Latin America.
The decrease in 1996 was primarily due to $930 in cash received from the
sale of BellSouth's 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 $4,858 in 1997 and are projected to be
approximately $5.0 billion to $5.5 billion in 1998. In addition to capital
expenditures related to its consolidated operations, BellSouth also makes
significant investments in unconsolidated affiliates. The most significant
commitment to such operations in 1998 is to BellSouth's Brazilian operations.
BellSouth's share of projected license fee commitments and capital expenditure
requirements for its Brazilian operations in 1998 is approximately $900. Capital
expenditures for 1997 were financed internally and funds for investments in
unconsolidated international operations were generated internally and from
external sources. For 1998, capital expenditures and funds for unconsolidated
international investments are expected to be financed primarily through
internally generated funds and, to the extent necessary, from external sources.
Cash used in investing activities for 1997 and 1996 was partially offset by
significant proceeds from sales of various BellSouth interests. Proceeds of
$1,000 in 1997 consisted of the sale of BellSouth's interests in Optus
Communications ($735) and ITT World Directories ($265). Proceeds in 1996 of $930
represented the sale of BellSouth's paging business.
<TABLE>
<CAPTION>
PERCENT CHANGE
----------------------
1997 VS. 1996 VS.
1997 1996 1995 1996 1995
--------- --------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used for) Financing
Activities......................................... $ (698) $ (2,197) $ 46 -- --
</TABLE>
FINANCING ACTIVITIES. During 1997 and 1996, financing activities used cash
of $698 and $2,197, respectively. The decrease in cash used in 1997 primarily
reflects higher net proceeds in 1997 from the issuance of short-term borrowings.
The increased use of cash from 1995 to 1996 of $2,243 primarily reflected
higher levels of net proceeds from all borrowing activities in 1995 compared to
1996.
DEBT ACTIVITIES. During 1997, BellSouth issued $500 of long-term debt. The
purpose of this issuance was to fund investments in international affiliates,
retire commercial paper and for general corporate purposes. Also in 1997,
BellSouth Telecommunications called and redeemed three series of debentures
totaling $600.
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.
BellSouth has committed credit lines aggregating $1,498 with various banks.
Borrowings under the committed credit lines totaled $241 at December 31, 1997.
BellSouth also maintains uncommitted lines of credit of $1,020. At December 31,
1997, there were no borrowings under the uncommitted lines. As of February 9,
1998, shelf registration statements were on file with the Securities and
Exchange Commission under which $1,927 of debt securities could be publicly
offered, $500 of which was registered on February 9, 1998.
In September 1997, BellSouth announced a plan to repurchase up to $1 billion
of its Common Stock through 1998.
A-12
<PAGE>
BellSouth's debt to total capitalization ratio, decreased to 42.1% at
December 31, 1997 from 43.5% at December 31, 1996. The decrease was primarily
caused by an increase in shareholders' equity due to earnings during 1997.
MARKET RATE RISK SENSITIVITY. BellSouth is subject to market rate risks due
to fluctuations in interest rates. The majority of BellSouth's debt is in the
form of long-term, fixed-rate notes and debentures with original maturities
ranging from ten to one hundred years. Accordingly, fluctuations in interest
rates can lead to significant fluctuations in the fair value of such debt
instruments. From time to time, BellSouth enters into interest rate swap
agreements designed to mitigate its exposure to interest rate risks; however,
such activity was immaterial in 1997.
BellSouth is also exposed to foreign currency risk by virtue of its
international operations. Specifically, BellSouth's foreign currency exposure
relates primarily to its foreign currency denominated balance sheet positions in
its international ventures, commitments and, to a limited extent, long-term debt
denominated in foreign currencies. BellSouth is, from time to time, party to
currency swap agreements and foreign exchange forward contracts designed to
mitigate its exposure to foreign currency risks. Such activity has generally
been limited to hedging of specific future commitments and long-term debt
denominated in foreign currencies and was immaterial in 1997. BellSouth has not
engaged in significant hedging of its foreign currency denominated balance sheet
positions in its international ventures.
BellSouth's use of derivative financial instruments is designed to mitigate
foreign currency and interest rate risks, although to some extent they expose
BellSouth to 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.
The following table provides information, by maturity date, about
BellSouth's interest rate sensitive financial instruments, which consist of
fixed and variable rate long-term debt obligations. Fair values for the majority
of BellSouth's long-term debt obligations are based on quotes from dealers.
<TABLE>
<CAPTION>
TOTAL
RECORDED
1998 1999 2000 2001 2002 THEREAFTER AMOUNT FAIR VALUE
--------- --------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate Debt............. $ 3,508 $ 242 $ 522 $ 214 $ 319 $ 5,941 $ 10,746 $ 10,748
Average Interest Rate....... 6.04% 6.98% 6.76% 6.97% 7.67% 6.79% -- --
Variable Rate Debt.......... $ 198 $ 25 $ 33 $ 33 $ 17 $ 3 $ 309 $ 309
Average Interest Rate....... 6.88% 6.41% 6.39% 6.39% 6.44% 7.38% -- --
</TABLE>
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
ECONOMY. The nation's output of goods and services, which grew 2.8% in
1996, grew at the more rapid rate of 3.8% in 1997. Employment in nonfarm
business establishments grew 2.3% during the year and the unemployment rate
averaged 5.0%. Slower economic growth is expected during 1998, as increased
foreign imports, tight labor markets, slow labor force growth and modest
productivity growth act to constrain the pace of growth. The economy of the
nine-state region served by BellSouth Telecommunications' wireline telephone
business grew at about the same pace as the national economy. The number of jobs
in nonfarm businesses grew 2.2% as the unemployment rate averaged 4.7% for the
year. Real income expanded at an estimated 4.0%. 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. The region's cost advantages
A-13
<PAGE>
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.
BellSouth has minimal exposure in Asia and does not expect its businesses to
be materially adversely affected by the recent decline in the value of the
currencies of various Asian countries and the consequent inability of many
substantial businesses in those countries to pay their debts as they mature,
unless these events result in a significant general decline in business activity
in the United States or other areas of the world in which BellSouth does
business. BellSouth's operations abroad, particularly in Latin America, are
sensitive to changes in the value of the currencies in which they conduct
business, and a material decline in one or more of these currencies against the
U.S. dollar could have an adverse impact upon BellSouth's financial position or
annual operating results or cash flows. (See "Financial Condition -- Market Rate
Risk Sensitivity" for a discussion of BellSouth's foreign currency risks.)
REGULATORY AND COMPETITIVE 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 seeking
modification of 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 successfully
sought price regulation, whereby prices of basic services 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.
At the state level, BellSouth Telecommunications is subject to price
regulation plans in all states in its wireline territory, except Tennessee,
where a court order to implement price regulation has been appealed. At the
federal level, BellSouth Telecommunications is operating under a price
regulation plan established by the Federal Communications Commission (FCC) in
1995. The FCC's price cap plan limits aggregate price changes to the rate of
inflation minus a productivity offset, plus or minus exogenous cost changes
recognized by the FCC. The FCC has mandated an increase in the price cap
productivity factor from 5.3% to 6.5%, reducing access charges. The new rates
went into effect beginning July 1, 1997 and were computed as if the 6.5%
productivity factor had been in effect since July 1, 1996. If the Gross Domestic
Product Price Index increases by less than 6.5% over an annual period, further
price reductions will occur.
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 and joint ventures that have substantial capital, technological and
marketing resources.
LOCAL SERVICE COMPETITION. The Telecommunications Act of 1996 (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), such as BellSouth Telecommunications,
negotiate with other carriers for interconnection, use of network elements on an
unbundled basis and resale of local services. If a negotiated agreement cannot
be reached, either party may seek arbitration with the state regulatory
authority, or the FCC if the state fails to act. If rates are disputed, the
arbitrator must set rates for access to network elements on an unbundled basis,
based on cost, which may include a reasonable profit. ILECs are also required to
negotiate to provide retail services at wholesale rates for the purpose of
resale by competing carriers. If agreement
A-14
<PAGE>
cannot be reached, the arbitrator is to set the wholesale rates at BellSouth's
retail rates less costs to be avoided. BellSouth Telecommunications has executed
over 300 interconnection or resale agreements with such carriers. The
arbitration results for the wholesale discount rates vary by state from
approximately 14.8% to 21.8% for both business and residential service.
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. Among the issues specifically addressed
by the order were 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, several other ILECs and several state regulatory bodies appealed the
order to the United States Court of Appeals for the Eighth Circuit, and in July
1997, the court ruled that state commissions, not the FCC, have exclusive
jurisdiction to set prices for local service interconnection, unbundled network
elements and local service resale. In addition, the court vacated other aspects
of the order including the FCC's "pick and choose" rule, which allowed competing
local carriers to select terms from different interconnection agreements in
negotiating their own interconnection agreements. The court also rejected the
FCC's requirement that ILECs submit pre-1996 interconnection agreements to the
state commissions for approval and the presumption that any network element that
can be technically unbundled must be unbundled. Finally, the court rejected the
FCC's requirement that ILECs physically recombine any unbundled network elements
for competing local carriers and only required that such elements be made
available for rebundling.
Certain aspects of the order were upheld by the court including the ability
of the competing local carriers to recombine network elements to produce
complete telecommunications services without providing any of their own
facilities. The court also affirmed the FCC's classification of operations
support systems, operator services, directory assistance and vertical switching
features as unbundled network elements. In addition, the court upheld the FCC's
definition of "technically feasible" interconnection to exclude all economic
considerations. Finally, the court declined to rule on whether or not the Total
Element Long Run Incremental Cost (TELRIC) pricing methodology was inconsistent
with the 1996 Act, leaving the state commissions to make that decision. On
reconsideration, the court further clarified that the 1996 Act does not require
ILECs to provide recombined unbundled network elements. The United States
Supreme Court has agreed to review the court's decision, and a ruling is
expected by mid-1999. In a subsequent order, the Eighth Circuit held that the
FCC may not impose its pricing standards as a condition to granting permission
for the Operating Telephone Companies to provide interLATA communications.
Notwithstanding these developments, however, BellSouth Telecommunications
and a number of carriers have negotiated interconnection agreements, and state
regulatory commissions have arbitrated and approved various terms of
interconnection between BellSouth Telecommunications and other carriers. Some
changes may be made to these agreements when the judicial appeals are concluded.
In attempting to comply with the technical requirements of interconnection,
BellSouth is incurring, and expects to continue to incur, significant costs
associated with the facilitation of interconnection. BellSouth incurred
approximately $400 of costs associated with these efforts in the year ended
December 31, 1997. Of this amount, approximately $230 was expensed as incurred,
and the remainder was capitalized. It remains unclear to what degree, if any,
BellSouth will be compensated for these costs.
As a result of the changes in regulation discussed above, substantial
competition has developed for BellSouth Telecommunications' business customers
which provide a greater concentration of higher margin revenues than do its
residential customers. Competitors include the Interexchange Carriers, such as
AT&T and MCI, and smaller competitive local exchange carriers (CLECs), which
resell local services of BellSouth Telecommunications and other ILECs or provide
service over their own facilities. Because of the fact that significant
residential local service competition would improve BellSouth's prospects for
obtaining regulatory authority to offer interLATA long distance service,
BellSouth believes that the Interexchange Carriers have been slow to enter the
local residential market and, therefore, the
A-15
<PAGE>
development of competition for local residential service customers will continue
to be much slower than for business local service customers.
ACCESS SERVICE. Historically, access charges have been set at levels that
subsidize the cost of providing local residential service. The 1996 Act also
requires that the FCC identify the local service subsidy implicitly 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. In May 1997, the FCC
adopted orders regarding revisions to the price cap plan, access charge reform
and the establishment of a universal service fund. The orders on the price cap
plan and access charge reform resulted in access rate reductions related to
per-minute-of-use charges and increases to per-line charges.
In addition, the access charge reform order resulted in several changes to
the existing interstate access rate structure designed to move access charges,
over time, to more economically efficient levels and to create more efficient
rate structures. Non-traffic-sensitive costs, that were previously recovered on
a per-minute-of-use basis, were changed to be recovered on a flat-rate, per-line
basis. As part of this plan, subscriber line charges (SLCs) were increased and a
new presubscribed interexchange carrier charge (PICC) was established. As SLC
and PICC charges are increased over time, usage charges are reduced.
The universal service order established new funding mechanisms for
high-cost, low-income service areas. BellSouth Telecommunications began
contributing to the new funds on January 1, 1998 and is allowed recovery of its
contributions through increased interstate access charges. Major changes to the
support mechanism to subsidize the provision of services to high-cost areas will
occur January 1, 1999. The new support mechanism, when implemented in 1999, will
be based on forward-looking economic costs; however, a cost model has yet to be
adopted. A new proceeding was initiated in June 1997 to select a cost model with
final FCC action expected in 1998.
All of the foregoing orders have been appealed to United States Courts of
Appeal in several different Circuits.
As a result of the legal requirement to offer expanded interconnection for
interstate special and switched access transport, BellSouth Telecommunications
must permit competitive carriers and customers to terminate their transmission
lines on BellSouth Telecommunications' facilities through collocation
arrangements. The effects of the rules are to increase competition for access
transport. Furthermore, Interexchange Carriers are increasingly connecting their
lines directly to their customers' facilities, bypassing the networks of
BellSouth Telecommunications and thereby avoiding access charges entirely. In
addition, commercial applications of Internet telephony are being developed.
This medium could attract substantial long distance traffic because of its lower
cost structure, because FCC rules do not currently impose access charges on
Internet communications.
WIRELESS SERVICE COMPETITION. BellSouth's wireless communications
businesses face increasing competition from additional providers in each of
BellSouth's markets. The number of BellSouth's proportional domestic cellular
customers has grown by 13.6%, 26.9% and 32.1%, and its proportional domestic
cellular revenues have grown by 9.0%, 22.5% and 28.9% for the years ended
December 31, 1997, 1996 and 1995, respectively. The penetration rate of
BellSouth's domestic cellular services has grown to 10.2% at December 31, 1997
from 8.9% and 7.1% at December 31, 1996 and 1995, respectively. Such growth is
likely to continue declining, reflecting increasing penetration rates and
competition for wireless customers by additional PCS carriers.
The FCC's PCS licensing process has created 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 competes or will compete with BellSouth's local wireline
A-16
<PAGE>
and wireless telephone businesses throughout BellSouth's service territories.
Several competitive PCS systems are now operational.
BellSouth's international wireless operations are generally subject to
competition from at least one other wireless service provider. These competing
wireless 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 operated by the government-owned telephone company, which may have
access to substantial financial resources. BellSouth believes that a number of
these companies will be privatized within the next few years, which may result
in more formidable competition. The number of BellSouth's proportional
international cellular customers, excluding the customers of Optus
Communications in all periods, has grown by 106.6%, 109.9% and 90.4% for the
years ended December 31, 1997, 1996 and 1995, respectively. BellSouth's
proportional share of international cellular revenues, excluding revenues of
Optus Communications, increased 76.4%, 59.0% and 59.3%, respectively, for the
years ended December 31, 1997, 1996 and 1995.
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 Internet services; and (c) controlling costs. Second, BellSouth
will continue to grow profitably its domestic wireless businesses 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 development of businesses covered by its licenses. Third, BellSouth will
continue to grow and develop its Latin American and other international
operations.
NEW SERVICES. The opening of BellSouth Telecommunications' local service
markets to competition can allow BellSouth to qualify for entry into new
business markets. While loss of local service customers and other risks
associated with increased competition are inevitable, BellSouth will have the
opportunity to offer interLATA wireline service under provisions contained in
the 1996 Act. BellSouth believes that in order to remain competitive, it must
aggressively pursue a corporate strategy of expanding its offerings beyond its
traditional businesses and markets. These offerings include interLATA services,
information services, video services and Internet 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. BellSouth
has acquired several cable TV and wireless video rights, and has been providing
both cable TV and wireless video services on a limited basis in certain
metropolitan areas 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 received favorable determinations from the regulatory commissions
in several states in its wireline service territory, but the FCC has rejected
all applications to provide in-region interLATA service on which it has ruled.
The applicants have appealed such denials to the United States Court of Appeals
for the District of Columbia Circuit. In addition, the United States District
Court for the Northern District of Texas has ruled that the provisions of the
1996 Act prohibiting the Holding Companies from providing interLATA service are,
in effect, an unconstitutional bill of attainder and are unenforceable. The
ruling has been stayed pending appeal. BellSouth will continue to seek approvals
from the FCC and other state commissions and judicial review of adverse
decisions which it believes to be erroneous. However, because of the scrutiny of
such applications by the FCC and the Justice Department, the time required to
obtain judicial review of adverse decisions and the possible challenges by the
Interexchange Carriers of any approved applications, it is uncertain when
BellSouth will be authorized to commence interLATA service in any of its
in-region states.
A-17
<PAGE>
YEAR 2000 COMPLIANCE
BellSouth has initiated a company-wide program to identify and address
issues associated with the ability of its date-sensitive information, telephony
and business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. This
program is being conducted by a management team which is coordinating the
efforts of internal resources as well as third party vendors in making all
necessary changes to BellSouth's systems. Some of these changes are being made
as a part of larger systems upgrades. BellSouth plans to have all conversion and
initial testing completed by the end of 1998 and to complete testing and
deployment by mid-1999. Some of the costs associated with these efforts were
incurred in 1997, and the remainder will be incurred over the next two years.
BellSouth estimates the costs of these efforts will be between $100 to $200 over
the life of the project. BellSouth expects to avoid disruption of its
information, telephony and business systems as a result of these efforts.
NEW ACCOUNTING PRONOUNCEMENTS
SEGMENT REPORTING. In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," superseding SFAS No.
14, "Financial Reporting of Segments of a Business Enterprise." SFAS No. 131
establishes new standards for reporting operating segment information in annual
and interim financial statements. The new standard requires reporting of
operating segment information based on the way that financial information for
the entity is organized for senior management for evaluating performance and
allocating resources. The standard is effective for year-end 1998 and need not
be applied to interim financial statements in that year. Comparative information
for earlier years on the same basis of segmentation must also be reported.
At present, BellSouth presents its operations as one business segment in its
financial statements. However, based on a preliminary assessment of the
requirements of the new standard, BellSouth anticipates reporting operating
segment information for multiple reportable segments. Determination of all such
reportable segments, however, has not been finalized.
CAPITALIZATION OF INTERNAL USE SOFTWARE. In 1996, the AICPA issued a
Statement of Position (SOP) exposure draft dealing with the costs of internal
use software. The treatment accorded such costs in the past has been very
diverse in practice. The proposed SOP will require capitalization of such costs
after certain preliminary development efforts have been made. Costs to be
capitalized are direct costs and interest costs related to development efforts.
The proposed SOP is expected to be issued in early 1998 and will require
adoption by BellSouth no later than January 1, 1999. Earlier adoption will be
permitted for years for which financial statements have not been issued.
Adoption of the proposed SOP will result in a temporary increase in earnings
in the year of adoption as a result of the capitalization of costs which had
previously been expensed. If expenditures remain at a consistent level, the
earnings impact will decline in each year following the change. The decline will
continue until the amortization expense related to the capitalized software
costs equals the level of software costs treated as expense prior to the change.
In addition, adoption of the proposed SOP will result in higher levels of
capitalized software costs on the balance sheet.
SAFE HARBOR STATEMENT
CERTAIN OF THE INFORMATION CONTAINED IN THIS AND OTHER REPORTS ADDRESSES
KNOWN TRENDS AND UNCERTAINTIES AFFECTING BELLSOUTH'S BUSINESS AND PROSPECTS AND
MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. BELLSOUTH'S EXPECTATIONS CONTAINED IN
OR UNDERLYING SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON A NUMBER OF
ASSUMPTIONS, INCLUDING BUT NOT LIMITED TO: (1) ECONOMIC GROWTH AND DEMAND FOR
WIRELINE AND WIRELESS COMMUNICATIONS SERVICES CONTINUES IN BELLSOUTH'S SERVICE
TERRITORIES; (2) THE FINAL RESOLUTION OF THE ACCESS REFORM AND UNIVERSAL SERVICE
ORDERS OF THE FCC (AND THE RESULTANT CUSTOMER IMPACTS) IS REASONABLY
EARNINGS-NEUTRAL; (3) LOCAL WIRELINE AND WIRELESS SERVICE COMPETITION DOES NOT
HAVE SIGNIFICANTLY INCREASING ADVERSE IMPACTS
A-18
<PAGE>
ON EARNINGS; (4) THE CONTINUING COSTS TO IMPLEMENT NETWORK CHANGES AND OPERATING
SYSTEMS NECESSARY TO SATISFY REGULATORY CONDITIONS FOR BELLSOUTH'S PROVISION OF
INTERLATA SERVICE ARE NOT MATERIALLY GREATER THAN CURRENTLY PROJECTED; (5)
BELLSOUTH'S EXPECTATIONS AS TO THE COST AND SUCCESS OF ITS EFFORTS FOR YEAR 2000
COMPLIANCE, INCLUDING THE SUCCESS OF ITS KEY SUPPLIERS AND CUSTOMERS, ARE
REASONABLY ACCURATE; AND (6) THE CURRENT LEVEL OF ECONOMIC, MONETARY AND
POLITICAL STABILITY CONTINUES IN FOREIGN COUNTRIES IN WHICH BELLSOUTH HAS
SIGNIFICANT INVESTMENTS OR OPERATIONS. ANY DEVELOPMENTS SIGNIFICANTLY DEVIATING
FROM THESE ASSUMPTIONS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE FORECAST OR IMPLIED IN THE AFOREMENTIONED FORWARD-LOOKING STATEMENTS.
A-19
<PAGE>
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, 1997, 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--Corporate Compliance and Corporate Secretary.
<TABLE>
<S> <C>
/s/ F. Duane Ackerman /s/ Ronald M. Dykes
</TABLE>
<TABLE>
<S> <C>
F. Duane Ackerman Ronald M. Dykes
CHAIRMAN OF THE BOARD, PRESIDENT AND EXECUTIVE VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
</TABLE>
February 3, 1998
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<PAGE>
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 1997 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/ Ronald A. Terry
Ronald A. Terry
CHAIRMAN, AUDIT COMMITTEE
February 3, 1998
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of BellSouth Corporation'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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note M to the consolidated financial statements, BellSouth
Corporation 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, 1998
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<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Revenues:
Network and related services:
Local service....................................................... $ 8,499 $ 8,082 $ 7,294
Interstate access................................................... 3,673 3,553 3,275
Intrastate access................................................... 810 812 884
Toll................................................................ 734 794 1,009
Wireless communications............................................... 3,555 2,799 2,592
Directory advertising and publishing.................................. 1,934 1,742 1,677
Other services........................................................ 1,356 1,258 1,155
--------- --------- ---------
Total Operating Revenues............................................ 20,561 19,040 17,886
--------- --------- ---------
Operating Expenses:
Cost of services and products......................................... 6,254 6,072 6,184
Depreciation and amortization......................................... 3,964 3,719 3,455
Selling, general and administrative................................... 4,967 4,470 3,873
Work force reduction charge (Note L).................................. -- -- 1,082
--------- --------- ---------
Total Operating Expenses............................................ 15,185 14,261 14,594
--------- --------- ---------
Operating Income........................................................ 5,376 4,779 3,292
Interest Expense........................................................ 761 721 724
Gain on Sales of Operations (Note B).................................... 787 442 --
Other Income, net....................................................... 19 108 20
--------- --------- ---------
Income Before Income Taxes and Extraordinary Losses..................... 5,421 4,608 2,588
Provision for Income Taxes (Note J)..................................... 2,151 1,745 1,024
--------- --------- ---------
Income Before Extraordinary Losses...................................... 3,270 2,863 1,564
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note M).................................................... -- -- (2,718)
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E).................................................... (9) -- (78)
--------- --------- ---------
Net Income (Loss)................................................. $ 3,261 $ 2,863 $ (1,232)
--------- --------- ---------
--------- --------- ---------
Weighted-Average Common Shares Outstanding: (Notes A, G)
Basic................................................................. 992 994 993
Diluted............................................................... 995 996 994
Dividends Declared Per Common Share (Note G)............................ $ 1.44 $ 1.44 $ 1.41
Basic Earnings (Loss) Per Share: (Notes A, G)
Income Before Extraordinary Losses.................................... $ 3.30 $ 2.88 $ 1.57
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note M)................................................. -- -- (2.73)
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E)................................................. (.01) -- (.08)
--------- --------- ---------
Net Income (Loss)................................................. $ 3.29 $ 2.88 $ (1.24)
--------- --------- ---------
--------- --------- ---------
Diluted Earnings (Loss) Per Share: (Notes A, G)
Income Before Extraordinary Losses.................................... $ 3.29 $ 2.87 $ 1.57
Extraordinary Loss for Discontinuance of SFAS No. 71,
net of tax (Note M)................................................. -- -- (2.73)
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E)................................................. (0.01) -- (0.08)
--------- --------- ---------
Net Income (Loss)................................................. $ 3.28 $ 2.87 $ (1.24)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-22
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................ $ 2,570 $ 1,178
Temporary cash investments............................................................... 17 51
Accounts receivable, net of allowance for uncollectibles of $246 and $180................ 4,750 4,087
Material and supplies.................................................................... 393 451
Other current assets..................................................................... 387 531
--------- ---------
Total Current Assets................................................................... 8,117 6,298
Investments and Advances (Note B).......................................................... 2,675 2,430
Property, Plant and Equipment, net (Note C)................................................ 22,861 21,825
Deferred Charges and Other Assets.......................................................... 702 610
Intangible Assets, net..................................................................... 1,946 1,405
--------- ---------
Total Assets........................................................................... $ 36,301 $ 32,568
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year (Note E)................................................... $ 3,706 $ 2,124
Accounts payable......................................................................... 1,825 1,446
Other current liabilities (Note D)....................................................... 3,252 2,871
--------- ---------
Total Current Liabilities.............................................................. 8,783 6,441
--------- ---------
Long-Term Debt (Note E).................................................................... 7,348 8,116
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes........................................................ 2,023 1,899
Unamortized investment tax credits....................................................... 213 278
Other liabilities and deferred credits (Note F).......................................... 2,769 2,585
--------- ---------
Total Deferred Credits and Other Liabilities........................................... 5,005 4,762
--------- ---------
Shareholders' Equity (Note G):
Common stock, $1 par value (2,200 shares authorized; 992 and 991 shares outstanding)..... 1,010 1,009
Paid-in capital.......................................................................... 7,750 7,697
Retained earnings........................................................................ 7,382 5,541
Shares held in trust and treasury........................................................ (575) (532)
Guarantee of ESOP debt (Note H).......................................................... (402) (466)
--------- ---------
Total Shareholders' Equity............................................................. 15,165 13,249
--------- ---------
Total Liabilities and Shareholders' Equity............................................. $ 36,301 $ 32,568
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-23
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
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
------ ------------- ------ ------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Net income............................... 3,261
Dividends declared....................... (1,428)
Shares issued for:
Employee benefit plans................. 2 (25) 85
Grantor trusts......................... 1 (1) 1 59 (60)
Acquisitions........................... 2 8 89
Purchase of Treasury Stock............... (3) (157)
ESOP activities and related tax
benefit................................. 8 64
Foreign currency translation
adjustment.............................. 11
------ --- ------ ------- -------- ------ ---------
Balance at
December 31, 1997....................... 1,010 (18) $1,010 $ 7,750 $ 7,382 $(575) $(402)
------ --- ------ ------- -------- ------ ---------
------ --- ------ ------- -------- ------ ---------
<CAPTION>
TOTAL
-------
<S> <C>
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
Net income............................... 3,261
Dividends declared....................... (1,428)
Shares issued for:
Employee benefit plans................. 60
Grantor trusts......................... --
Acquisitions........................... 97
Purchase of Treasury Stock............... (157)
ESOP activities and related tax
benefit................................. 72
Foreign currency translation
adjustment.............................. 11
-------
Balance at
December 31, 1997....................... $15,165
-------
-------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-24
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 3,261 $ 2,863 $ (1,232)
Adjustments to net income (loss):
Gain on sales of operations............................................... (787) (442) --
Depreciation and amortization............................................. 3,964 3,719 3,455
Provision for uncollectibles.............................................. 304 254 213
Deferred income taxes and unamortized investment tax credits.............. 243 120 (1,971)
Pension income............................................................ (164) (14) (53)
Dividends from unconsolidated affiliates.................................. 198 130 149
Losses from unconsolidated affiliates, net................................ 242 76 86
Extraordinary loss for discontinuance of SFAS No. 71...................... -- -- 4,449
Extraordinary loss on early extinguishment of debt........................ 15 -- 127
Work force reduction charge............................................... -- -- 1,082
Net change in:
Accounts receivable and other current assets............................ (742) (645) (770)
Accounts payable and other current liabilities.......................... 580 (708) (283)
Deferred charges and other assets....................................... (125) (126) (28)
Other liabilities and deferred credits.................................. 87 581 315
Other reconciling items, net.............................................. (37) 55 (96)
--------- ---------- ----------
Net cash provided by operating activities................................. 7,039 5,863 5,443
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (4,858) (4,455) (4,203)
Purchases of licenses and other intangible assets........................... (328) (147) (170)
Proceeds from sales of operations........................................... 1,000 930 --
Proceeds from disposition of short-term investments......................... 267 355 187
Purchases of short-term investments......................................... (233) (336) (207)
Proceeds from investment dispositions and repayments of advances............ 59 102 426
Investments in and advances to unconsolidated affiliates.................... (1,083) (620) (521)
Other investing activities, net............................................. 227 (28) 104
--------- ---------- ----------
Net cash used for investing activities.................................... (4,949) (4,199) (4,384)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term borrowings..................... 879 (497) 510
Proceeds from long-term debt................................................ 645 392 2,488
Repayments of long-term debt................................................ (692) (544) (1,555)
Dividends paid.............................................................. (1,428) (1,430) (1,385)
Other financing activities, net............................................. (102) (118) (12)
--------- ---------- ----------
Net cash provided by (used for) financing activities...................... (698) (2,197) 46
--------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.......................... 1,392 (533) 1,105
Cash and Cash Equivalents at Beginning of Period.............................. 1,178 1,711 606
--------- ---------- ----------
Cash and Cash Equivalents at End of Period.................................... $ 2,570 $ 1,178 $ 1,711
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-25
<PAGE>
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 (i) local exchange service and toll communications services
within geographic areas, called Local Access and Transport Areas (LATAs), and
(ii) 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 Total Operating Revenues are derived from
domestic operations. For the year ended December 31, 1997, approximately 67% of
BellSouth's Total Operating Revenues were from network and related services, 17%
were from wireless communications services and 9% were from directory
advertising and publishing services. The remainder of such Total 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 M 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 $193, $163 and $108 for the years ended December 31, 1997, 1996 and 1995,
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
A-26
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
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 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 Income, net.
INTANGIBLE ASSETS. Intangible Assets consist of the excess consideration
paid over the fair value of net tangible assets acquired in business
combinations, and include 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 net cash flows of the related
business unit. Amortization of such intangibles was $58, $49 and $50 for the
years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997
and 1996, accumulated amortization of intangibles was $321 and $220,
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, 1997, 1996 and 1995 were not
material.
DERIVATIVE FINANCIAL INSTRUMENTS. BellSouth generally enters into
derivative financial instruments only for hedging purposes. Deferral accounting
is applied when the derivative reduces the risk of the underlying hedged item
effectively as a result of high inverse correlation with the value of the hedged
item. If a derivative instrument either initially fails or later ceases to meet
the criteria for deferral or settlement accounting, any subsequent gains or
losses are recognized currently in income.
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.
A-27
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
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
$304, $254 and $213 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Revenues from services provided to AT&T Corp., BellSouth's largest customer,
were approximately 8%, 9% and 10% of Total Operating Revenues for 1997, 1996 and
1995, respectively.
MAINTENANCE AND REPAIRS. The cost of maintenance and repairs of plant,
including the cost of replacing minor items not affecting 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. In 1997, BellSouth adopted SFAS No. 128, "Earnings per
Share," which requires the presentation of both basic and diluted earnings per
share. Basic earnings per share is computed based on the weighted-average number
of common shares outstanding during each year. Diluted earnings per share is
based on the sum of the weighted-average number of common shares outstanding
plus common stock equivalents arising out of employee stock options and benefit
plans. Earnings per share information for all prior periods have been restated
to conform to the requirements of the standard. Common stock equivalents
included in the calculation of diluted earnings per share were approximately 3
million, 2 million and 1 million, respectively, for the years ended December 31,
1997, 1996 and 1995. BellSouth's earnings, used for per share calculations, are
the same for both the basic and diluted methods.
A-28
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE B -- INVESTMENTS AND ADVANCES
Investments and Advances as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Investments accounted for under the equity method.................................. $ 2,007 $ 1,676
Advances to and notes receivable from affiliates................................... 631 675
Other investments.................................................................. 37 79
--------- ---------
Total Investments and Advances................................................... $ 2,675 $ 2,430
--------- ---------
--------- ---------
</TABLE>
BellSouth's equity method investments primarily include various partnerships
in domestic and international wireless properties and other international
communications consortia. Losses related to investments accounted for under the
equity method were $(242), $(76) and $(86) for the three years ended December
31, 1997, 1996 and 1995, 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, 1997, BellSouth's aggregate investment in
these entities exceeded the underlying book value of the investees' net assets
by $851. 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
46.5%.
In 1997, two joint ventures in which BellSouth is a partner were awarded
licenses to provide cellular services in Sao Paulo, Brazil and a six-state
region in northeastern Brazil. BellSouth's ownership interests in these entities
is 41.0% and 42.5%, respectively. The joint ventures bid approximately $2,400
and $500, respectively, for the licenses. BellSouth's proportionate shares of
the remaining unpaid portion of such license fees which are required to be paid
in 1998 are $574 and $124, respectively.
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 $194 and $193 at December 31, 1997 and 1996, respectively.
The notes bear interest at rates ranging from 6.31% to 9.31% while the advances
bear interest at the federal funds rate plus .30%. Principal amounts outstanding
at December 31, 1997 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 had been borrowed by Prime as
of December 31, 1997 and 1996, 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. (RAM) are partners in an entity
that owns and operates certain mobile data communications networks. Through its
investment, BellSouth holds a 49%
A-29
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE B -- INVESTMENTS AND ADVANCES (CONTINUED)
interest in the United States mobile data operations and various interests in
foreign mobile data operations ranging from 6% to 72.5%.
Minority interests of consolidated subsidiaries, included as a component of
Other Income, net, were $(34), $(27) and $(62) for the years ended December 31,
1997, 1996 and 1995, respectively.
SALES OF OPERATIONS AND INVESTMENTS. In August 1997, BellSouth sold its
24.5% interest in Optus Communications to Cable and Wireless, a U.K.
telecommunications company. Under the agreement, BellSouth received
approximately $735 in cash for its 490 million shares in Optus Communications.
In addition, BellSouth will receive either a 22.3% interest in Occidente y
Caribe Celular S.A. (Occel), a cellular communications company located in
Colombia, or the equivalent value of that interest in cash, at BellSouth's
option, or if Cable and Wireless is not able to transfer its interest in Occel
to BellSouth within two years from the sale of Optus Communications. The pretax
gain on the sale was $578 ($352 after tax).
In July 1997, BellSouth sold to ITT Corporation its 20% ownership interest
in ITT World Directories Inc. for total proceeds of $265. The pretax gain on
such sale was $209 ($128 after tax).
In November 1997, BellSouth Telecommunications sold to Science Applications
International Corporation its 14.3% interest in Bell Communications Research,
Inc. (Bellcore) for total proceeds of $65. The pretax gain on such sale,
included as a component of Other Income, net, was $38.
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 ($344 after
tax). MCCA's operating revenues and expenses were $349 and $300, respectively,
for the year ended December 31, 1995.
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Outside plant.................................................................... $ 21,642 $ 20,866
Central office equipment......................................................... 18,716 17,442
Operating and other equipment.................................................... 4,523 3,595
Building and building improvements............................................... 4,433 3,595
Furniture and fixtures........................................................... 2,987 3,017
Plant under construction......................................................... 815 716
Station equipment................................................................ 522 638
Land............................................................................. 190 190
--------- ---------
53,828 50,059
Less: Accumulated depreciation................................................. 30,967 28,234
--------- ---------
Total Property, Plant and Equipment, net..................................... $ 22,861 $ 21,825
--------- ---------
--------- ---------
</TABLE>
A-30
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Taxes accrued...................................................................... $ 835 $ 517
Advanced billing and customer deposits............................................. 620 539
Dividends payable.................................................................. 365 363
Salaries and wages payable......................................................... 335 335
Interest and rents accrued......................................................... 309 293
Compensated absences............................................................... 248 244
Other.............................................................................. 540 580
--------- ---------
Total Other Current Liabilities.................................................. $ 3,252 $ 2,871
--------- ---------
--------- ---------
</TABLE>
NOTE E -- DEBT
DEBT MATURING WITHIN ONE YEAR: Debt maturing within one year is summarized
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Short-term notes payable:
Bank loans................................................................... $ 465 $ 73
Commercial paper............................................................. 2,438 1,885
Current maturities of long-term debt........................................... 803 166
--------- ---------
Total Debt Maturing Within One Year.......................................... $ 3,706 $ 2,124
--------- ---------
--------- ---------
Weighted-average interest rate at end of period:
Bank loans................................................................... 7.05% 7.40%
Commercial paper............................................................. 5.92% 5.50%
</TABLE>
BellSouth has committed credit lines aggregating $1,498 with various banks.
Borrowings under the committed lines totaled $241 and $92, respectively, at
December 31, 1997 and 1996. BellSouth also maintains uncommitted lines of credit
aggregating $1,020. At December 31, 1997, 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.
A-31
<PAGE>
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,
1997.
<TABLE>
<CAPTION>
CONTRACTUAL
INTEREST RATES MATURITIES 1997 1996
------------------ -------------- --------- ---------
<S> <C> <C> <C> <C>
BellSouth Telecommunications Debentures: 4.375% - 6.75% 1998 - 2045 $ 1,820 $ 1,905
6.65% - 7% 2095 644 635
7% - 8.25% 2010 - 2035 1,450 2,050
--------- ---------
3,914 4,590
BellSouth Telecommunications Notes............ 5.25% - 7% 1998 - 2008 2,175 2,175
BellSouth Capital Funding Corporation Notes... 4.89% - 9.25% 1998 - 2097 1,290 820
Guarantee of ESOP debt........................ 9.125% - 9.19% 2003 534 594
Other......................................... 275 136
Unamortized discount, net of premium.......... (37) (33)
--------- ---------
8,151 8,282
Current maturities............................ (803) (166)
--------- ---------
Total Long-Term Debt........................ $ 7,348 $ 8,116
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt outstanding (principal amounts) at December 31,
1997 are summarized below. Maturities after the year 2002 include $500 principal
amount of 6.65% debentures due in 2095. At December 31, 1997, such debentures
had an accreted book value of $144.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturities.................. $ 803 $ 274 $ 555 $ 247 $ 336 $ 6,329 $ 8,544
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
</TABLE>
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 1997 and 1995, BellSouth Telecommunications retired certain long-term
debt issues totaling $600 and $1,885, respectively. As a result of the early
extinguishment of these issues, extraordinary losses of $9 ($.01 per share) and
$78 ($.08 per share), net of current tax benefits of $6 and $49, respectively,
were recognized in 1997 and 1995.
At December 31, 1997, shelf registration statements were on file with the
Securities and Exchange Commission under which $1,427 of debt securities could
be offered.
A-32
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Postretirement benefits other than pensions (see Notes H and L).................... $ 787 $ 744
Accrued pension cost (see Notes H and L)........................................... 559 581
Minority interests................................................................. 504 439
Compensation related............................................................... 495 437
Postemployment benefits (see Note L)............................................... 242 229
Other.............................................................................. 182 155
--------- ---------
Total Other Liabilities and Deferred Credits..................................... $ 2,769 $ 2,585
--------- ---------
--------- ---------
</TABLE>
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.
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, 1997, 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 1995, 1996, and 1997 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, 1997 and 1996, the assets held in the trusts
consist of cash and 17,156,663 and 15,796,782 shares, respectively, of BellSouth
Common Stock. Of the total shares of BellSouth Common Stock held by the trusts,
15,946,663 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
A-33
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
financial reporting purposes, the shares are included within Shares Held in
Trust and Treasury, a 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 September 1997,
BellSouth announced a plan to repurchase up to $1 billion of its Common Stock
through 1998. In 1997 and 1996, BellSouth purchased 3,413,989 and 2,207,152
treasury shares for an aggregate of $157 and $85, respectively. A total of
4,124,624 and 276,168 shares, respectively were reissued under various employee
benefit plans and for other purposes.
Shares Held in Trust and Treasury as of December 31, 1997 and 1996 are
comprised of the following:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Shares held by Grantor Trusts........................ 17,156,663 $ 519 15,796,782 $ 458
Shares held in Treasury.............................. 1,220,349 56 1,930,984 74
------------- ----- ------------- -----
Total Shares Held in Trust and Treasury.......... 18,377,012 $ 575 17,727,766 $ 532
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
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. The 1997 and 1996 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.
A-34
<PAGE>
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 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................... $ 247 $ 288 $ 239
Interest cost on projected benefit obligation......................... 818 799 812
Actual return on plan assets.......................................... (2,576) (1,957) (3,041)
Net amortization and deferral......................................... 1,347 856 1,937
--------- --------- ---------
Net pension (income)................................................ $ (164) $ (14) $ (53)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Effective December 31, 1997, the nonrepresented cash balance plans were
recombined from six into one cash balance plan. Although only one nonrepresented
cash balance plan exists, separate demographic pools are maintained to generate
pension income based upon specific company information. The plan recombination
will have no material impact on BellSouth in 1998. The change in net pension
income is affected by several variables, including changes in actuarial
assumptions such as discount rate, return on plan assets and plan amendments.
The consolidated net pension income amounts reflected above are exclusive of
curtailment effects reflected in the work force reduction and restructuring
activities (see Note L) and do not reflect curtailment gains in the amount of
$36 and $43 in 1997 and 1996, respectively.
The following table sets forth the funded status of the plans at December
31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation...................................................... $ 10,222 $ 9,321
--------- ---------
--------- ---------
Accumulated benefit obligation................................................. $ 10,682 $ 9,824
--------- ---------
--------- ---------
Projected benefit obligation................................................... $ 12,335 $ 11,303
Plan assets at fair value........................................................ 17,313 15,614
--------- ---------
Plan assets in excess of projected benefit obligation............................ 4,978 4,311
Unrecognized net gain due to past experience different from assumptions made..... (4,743) (4,286)
Unrecognized prior service cost.................................................. (335) (304)
Unrecognized net asset at transition............................................. (109) (130)
--------- ---------
Accrued pension cost........................................................... $ (209) $ (409)
--------- ---------
--------- ---------
</TABLE>
Accrued pension costs in the previous table consist of $559 and $581 at
December 31, 1997 and 1996, respectively, classified as Other Liabilities and
Deferred Credits and $350 and $172, respectively, classified as Deferred Charges
and Other Assets.
The significant actuarial assumptions at December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted-average discount rate....................................................... 7.0% 7.5%
Weighted-average rate of compensation increase....................................... 5.9% 5.8%
Expected long-term rate of return on plan assets..................................... 8.25 % 8.25 %
</TABLE>
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
A-35
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
active plan participants at adoption. The accounting for the health care plan
does not anticipate future adjustments to the cost-sharing arrangements provided
for in the written plan for employees who retire after December 31, 1991.
BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all health and life benefits
for which BellSouth is liable. Contributions are actuarially determined using
the aggregate cost method, subject to ERISA and Internal Revenue Service
limitations. Assets in the health and life plans consist primarily of equity
securities and fixed income investments.
Net postretirement benefit cost (income) for the years ended December 31,
1997, 1996 and 1995, respectively, is composed of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ---------
HEALTH LIFE HEALTH LIFE HEALTH
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the year..................... $ 27 $ 10 $ 35 $ 12 $ 27
Interest on accumulated postretirement benefit obligation........... 218 45 225 43 223
Actual return on plan assets........................................ (242) (168) (163) (103) (185)
Amortization of transition liability (asset)........................ 96 (13) 96 (13) 110
Other amortization and deferral, net................................ 179 114 115 58 115
--------- --------- --------- --------- ---------
Net postretirement benefit cost (income)............................ $ 278 $ (12) $ 308 $ (3) $ 290
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
LIFE
---------
<S> <C>
Service cost -- benefits earned during the year..................... $ 10
Interest on accumulated postretirement benefit obligation........... 38
Actual return on plan assets........................................ (125)
Amortization of transition liability (asset)........................ (13)
Other amortization and deferral, net................................ 77
---------
Net postretirement benefit cost (income)............................ $ (13)
---------
---------
</TABLE>
A-36
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The consolidated net postretirement benefit cost (income) amounts reflected
above are exclusive of curtailment effects reflected in the work force reduction
and restructuring activities discussed in Note L.
The following table sets forth the plans' funded status at December 31, 1997
and 1996, respectively:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
HEALTH LIFE HEALTH LIFE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $ 2,125 $ 372 $ 1,994 $ 318
Fully eligible active plan participants.................. 524 166 437 135
Other active plan participants........................... 525 167 541 164
--------- --------- --------- ---------
3,174 705 2,972 617
Plan assets at fair value.................................. 1,666 931 1,379 778
--------- --------- --------- ---------
Accumulated postretirement benefit obligation less than (in
excess of) plan assets.................................... (1,508) 226 (1,593) 161
Unrecognized prior service cost............................ 39 47 71 17
Unrecognized net (gains) losses............................ (279) (67) (279) 7
Unrecognized transition obligation (asset)................. 961 (138) 1,057 (144)
--------- --------- --------- ---------
(Accrued) prepaid postretirement benefit cost.............. $ (787) $ 68 $ (744) $ 41
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The significant actuarial assumptions at December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted-average discount rate....................................................... 7.0% 7.5%
Weighted-average rate of compensation increase....................................... 5.9% 5.8%
Health care cost trend rate (1)...................................................... 9.0% 8.5%
Expected long-term rate of return on plan assets (2)................................. 8.25 % 8.25 %
</TABLE>
- --------------
(1) Trend rate used to value the accumulated postretirement obligation in 1997
and 1996 is assumed to decrease to 5% by 2003.
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
trust for 1997 and 1996.
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 $258 at December 31, 1997 and the estimated aggregate service and
interest cost components of the 1997 postretirement benefit cost by $18.
DEFINED CONTRIBUTION PLANS. BellSouth maintains several contributory
savings plans which cover substantially all employees. 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 semiannual loan payment is
made. The Trusts service the
A-37
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Compensation cost..................................... $76 $58 $75
Interest expense...................................... $31 $33 $37
Actual interest on ESOP Notes......................... $50 $56 $62
Cash contributions, excluding dividends paid to the
Trusts............................................... $90 $91 $101
Dividends paid to the Trusts, used for debt service... $43 $44 $44
Shares allocated to participants...................... 16,710,607 14,305,917 11,942,278
Shares committed to be released....................... -- -- --
Shares unallocated.................................... 15,068,117 17,472,807 19,836,446
</TABLE>
NOTE I -- STOCK COMPENSATION PLANS
At December 31, 1997, 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 under the Stock Plan 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
three to 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
A-38
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
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 (loss) and earnings (loss) per share would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) -- as reported....................................... $ 3,261 $ 2,863 $ (1,232)
Net income (loss) -- pro forma......................................... $ 3,242 $ 2,852 $ (1,235)
Basic earnings (loss) per share -- as reported......................... $ 3.29 $ 2.88 $ (1.24)
Basic earnings (loss) per share -- pro forma........................... $ 3.27 $ 2.87 $ (1.24)
Diluted earnings (loss) per share -- as reported....................... $ 3.28 $ 2.87 $ (1.24)
Diluted earnings (loss) per share -- pro forma......................... $ 3.26 $ 2.86 $ (1.24)
</TABLE>
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 1997, 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:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Options outstanding at January 1...................... 18,571,392 14,287,748 10,345,924
Options granted....................................... 6,253,883 5,376,513 5,269,040
Options exercised..................................... (2,000,745) (692,545) (1,226,040)
Options forfeited..................................... (263,124) (400,324) (101,176)
Options outstanding at December 31.................... 22,561,406 18,571,392 14,287,748
Weighted-average option prices per common share:
Outstanding at January 1............................ $34.11 $30.56 $28.65
Granted at fair market value........................ $44.46 $42.50 $30.85
Granted at above fair market value.................. N/A N/A $41.34
Exercised........................................... $29.38 $26.24 $24.46
Forfeited........................................... $40.03 $33.71 $30.10
Outstanding at December 31.......................... $37.33 $34.11 $30.56
Weighted-average fair value of options granted at fair
market value during the year......................... $8.75 $7.66 $5.60
Weighted-average fair value of options granted at
above fair market value during the year.............. N/A N/A $2.48
Options exercisable at December 31.................... 6,032,516 6,523,291 5,242,258
Shares available for grant at December 31............. 9,917,798 9,910,692 10,074,447
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Expected life (years)................................................ 5 7 7
Dividend yield....................................................... 3.24% 3.39% 4.55%
Expected volatility.................................................. 19.0% 15.4% 15.8%
Risk-free interest rate.............................................. 6.22% 5.56% 7.21%
</TABLE>
A-39
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------------ ------------- -------------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$19.81-$29.53 6,347,145 5.38 years $ 27.91 3,151,789 $ 26.97
$29.56-$42.21 4,866,215 6.66 years $ 34.95 1,355,306 $ 35.52
$42.56-$44.19 5,403,479 8.16 years $ 42.64 1,316,821 $ 42.81
$44.38-$55.34 5,944,567 9.12 years $ 44.51 208,600 $ 44.38
$19.81-$55.34 22,561,406 7.31 years $ 37.33 6,032,516 $ 32.95
</TABLE>
NOTE J -- 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.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................................................ $ 1,619 $ 1,390 $ 1,061
Deferred, net.......................................................... 272 170 (148)
Investment tax credits, net............................................ (65) (77) (69)
--------- --------- ---------
1,826 1,483 844
--------- --------- ---------
State:
Current................................................................ 289 235 203
Deferred, net.......................................................... 36 27 (23)
--------- --------- ---------
325 262 180
--------- --------- ---------
Total provision for income taxes..................................... $ 2,151 $ 1,745 $ 1,024
--------- --------- ---------
--------- --------- ---------
</TABLE>
Extraordinary losses in 1997 and 1995 are presented in the Consolidated
Statements of Income, net of tax benefits totaling $6 and $1,780, respectively.
All of the 1997 benefit was current. Of the 1995 benefit, $49 was current and
$1,731 was deferred.
A-40
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE J -- INCOME TAXES (CONTINUED)
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Compensation related............................................................ $ 748 $ 707
Allowance for uncollectibles.................................................... 94 87
Work force reduction charge..................................................... 66 210
Regulatory sharing accruals..................................................... 58 32
Other........................................................................... 186 244
--------- ---------
1,152 1,280
Valuation allowance............................................................. (72) (64)
--------- ---------
Deferred Tax Assets............................................................. 1,080 1,216
--------- ---------
Depreciation.................................................................... (2,206) (2,110)
Equity investments.............................................................. (266) (354)
Issue basis accounting.......................................................... (214) (197)
Licenses........................................................................ (199) (187)
Other........................................................................... (259) (133)
--------- ---------
Deferred Tax Liabilities...................................................... (3,144) (2,981)
--------- ---------
Net Deferred Tax Liability.................................................. $ (2,064) $ (1,765)
--------- ---------
--------- ---------
</TABLE>
The valuation allowance, which increased by $8 and $9 in 1997 and 1996,
respectively, primarily relates to state net operating losses that may not be
utilized during the carryforward period. Of the Net Deferred Tax Asset
(Liability) at December 31, 1997 and 1996, $(41) and $134, respectively, were
current and $(2,023) and $(1,899), respectively, were noncurrent.
A reconciliation of the Federal statutory income tax rate to BellSouth's
effective tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory tax rate................................................. 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit...................... 3.9 3.7 4.5
Amortization of investment tax credits..................................... (1.2) (1.7) (2.7)
Equity of unconsolidated subsidiaries...................................... 1.6 1.6 2.0
Benefit of capital loss carryforward....................................... -- -- (0.4)
Basis difference in disposed subsidiary.................................... -- (1.5) --
Miscellaneous items, net................................................... 0.4 0.8 1.2
--------- --------- ---------
Effective tax rate....................................................... 39.7% 37.9% 39.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH PAID FOR:
Income Taxes............................................................. $ 1,839 $ 1,427 $ 1,231
--------- --------- ---------
--------- --------- ---------
Interest................................................................. $ 759 $ 740 $ 760
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-41
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
In 1997, BellSouth began consolidating certain international operations
which had previously been accounted for under the equity method. Such
consolidation resulted in an increase in assets of $375 (net of a $225 decrease
in equity investments) and a corresponding increase in liabilities.
NOTE L -- 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, consisted of $561 under the provisions of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," related to those employees who would
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 were $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.
The plan was substantially completed in 1997 and resulted in the reduction
of the wireline telephone operations work force by approximately 11,600
employees over the term of the plan.
NOTE M -- 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 application of 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:
<TABLE>
<CAPTION>
PRETAX AFTER TAX
--------- ---------
<S> <C> <C>
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)
--------- ---------
--------- ---------
</TABLE>
A-42
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE M -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
The reduction of telephone plant, $4,896 (pretax), was recorded as an
increase to the related accumulated depreciation accounts, the categories and
amounts of which are as follows:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
Such reduction of plant was determined by an impairment analysis that
identified estimated amounts not recoverable from future discounted cash flows.
The analysis considered projected effects of future competition as well as
changes in technology and capital requirements. The plant-related charge, all of
which related to assets within the regulatory framework, was further supported
by depreciation studies that identified inadequate levels of accumulated
depreciation for certain asset categories. These studies give recognition to the
historical underdepreciation of assets resulting primarily from
regulator-prescribed asset lives that exceeded the estimated economic asset
lives.
For financial reporting purposes, the average depreciable lives of affected
categories of long-lived telephone plant have been reduced to more closely
reflect the economic and technological lives. Differences between
regulator-approved asset lives and the current estimated economic asset lives
are as follows:
<TABLE>
<CAPTION>
COMPOSITE OF ESTIMATED
REGULATOR-APPROVED ECONOMIC ASSET
CATEGORY ASSET LIVES LIVES
- ---------------------------------------------------------------- ----------------------- -------------------
(IN YEARS)
<S> <C> <C>
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
</TABLE>
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.
A-43
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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, 1997 and 1996. 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.
Following is a summary of financial instruments where the fair values differ
from the recorded amounts as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS
Long-Term Debt:
BellSouth Telecommunications Debentures................... $ 3,914 $ 3,949 $ 4,590 $ 4,422
BellSouth Telecommunications Notes........................ 2,175 2,193 2,175 2,141
BellSouth Capital Funding Corporation Notes............... 1,290 1,324 820 856
Guarantee of ESOP Debt.................................... 534 584 594 675
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Interest Rate Swaps......................................... -- (6) -- (5)
Foreign Exchange Forward Contracts.......................... -- (3) -- --
</TABLE>
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, 1997,
the net currency swap receivable, which equals the fair value of the swap, was
$0 and the related net interest receivable was $7, both of which are included in
accounts receivable in the consolidated balance sheet at December 31, 1997.
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, 1997 and 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% at
December 31, 1997 and 1996 and received variable rates averaging 5.69% and 5.52%
at December 31, 1997 and 1996, respectively. These swaps mature at dates ranging
from 2001 to 2002.
A-44
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE N -- FINANCIAL INSTRUMENTS (CONTINUED)
OTHER. BellSouth has also issued letters of credit and financial guarantees
which approximate $356 at December 31, 1997. Of this total, $275 represents the
U.S. Dollar equivalent of the outstanding debt of E-Plus (a partially-owned
wireless communications company located in Germany) guaranteed by BellSouth.
BellSouth has agreed to guarantee E-Plus borrowings up to a U.S. Dollar
equivalent of $397 (705 million German Marks) at December 31, 1997.
Since there is no market for the instruments, it is not practicable to
estimate their fair value.
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject BellSouth to credit risk consist principally of trade accounts
receivable. Concentrations of credit risk with respect to these receivables,
other than those from Interexchange Carriers, are limited due to the composition
of the customer base, which includes a large number of individuals and
businesses. At December 31, 1997 and 1996, approximately $485 and $492,
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 $273,
$269 and $252 for 1997, 1996 and 1995, 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, 1997:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rentals........................ $ 148 $ 142 $ 122 $ 103 $ 88 $ 431 $ 1,034
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
</TABLE>
OUTSIDE PLANT. BellSouth currently self-insures all of its outside plant
against casualty losses. The net book value of outside plant was $7,408 and
$7,621 at December 31, 1997 and 1996, 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.
OUTSOURCING CONTRACTS. Beginning in 1997, BellSouth Telecommunications
contracted with various entities to outsource the performance of certain
engineering functions, as well as its information technology operations and
application development. These contracts expire at various dates through 2008,
are generally renewable, and are cancelable upon the payment of additional fees
or for nonperformance. Future minimum payments for these contracts range from
$465 to $625 annually over the next ten years and replace costs previously
incurred for BellSouth Telecommunications' employees, facilities, equipment and
other costs.
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.
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.
A-45
<PAGE>
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
third quarter 1997 include pretax gains on sales of operations of $787, which
increased net income by $480. The results for first quarter 1996 include a
pretax gain on sale of paging business of $442, which increased net income by
$344.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997
Operating Revenues........................................... $ 4,845 $ 4,923 $ 5,193 $ 5,600
Operating Income............................................. $ 1,353 $ 1,224 $ 1,346 $ 1,453
Income Before Extraordinary Loss............................. $ 693 $ 654 $ 1,185 $ 738
Extraordinary Loss on Early Extinguishment of Debt, net of
tax......................................................... -- -- -- (9)
--------- --------- --------- ---------
Net Income................................................... $ 693 $ 654 $ 1,185 $ 729
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE:
Basic and Diluted
Income Before Extraordinary Loss........................... $ .70 $ .66 $ 1.19 $ .74
Extraordinary Loss on Early Extinguishment of Debt, net of
tax...................................................... -- -- -- (.01)
--------- --------- --------- ---------
Net Income*................................................ $ .70 $ .66 $ 1.19 $ .73
--------- --------- --------- ---------
--------- --------- --------- ---------
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 - Basic................................... $ .98 $ .63 $ .63 $ .64
Earnings Per Share - Diluted................................. $ .97 $ .63 $ .63 $ .64
</TABLE>
- --------------
* Sum of quarterly amounts does not equal annual amount due to rounding.
A-46
<PAGE>
BELLSOUTH CORPORATION
MARKET AND DIVIDEND DATA
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 2, 1998, there were 1,023,757 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.
<TABLE>
<CAPTION>
MARKET PRICES PER SHARE
------------------ DIVIDENDS
HIGH LOW DECLARED
------- ------- ----------
<S> <C> <C> <C>
1997
First Quarter................................................................... $47 5/8 $38 1/8 $ .36
Second Quarter.................................................................. 48 5/8 39 3/8 .36
Third Quarter................................................................... 49 43 5/16 .36
Fourth Quarter.................................................................. 58 1/8 45 1/4 .36
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
</TABLE>
STOCK TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is BellSouth's stock transfer agent
and registrar.
A-47
<PAGE>
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 other unusual items and include equipment
revenue, net of cost.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cellular Revenue, net...................................................................... $ 2,520 $ 2,312
--------- ---------
Operating Expenses......................................................................... 1,364 1,308
Depreciation and Amortization.............................................................. 461 364
--------- ---------
Total Operating Expenses............................................................... 1,825 1,672
--------- ---------
Operating Income........................................................................... 695 640
Other Expenses, net (including interest and taxes)......................................... 301 277
--------- ---------
Net Income............................................................................. $ 394 $ 363
--------- ---------
--------- ---------
Operating Margins as a Percentage of Revenue:
Including Depreciation and Amortization.................................................. 27.6% 27.7%
Excluding Depreciation and Amortization.................................................. 45.9% 43.4%
Operational Comparisons (thousands):
Proportionate Cellular Population Served................................................. 40,235 40,696
Proportionate Cellular Customers......................................................... 4,105 3,612
</TABLE>
A-48
<PAGE>
BELLSOUTH CORPORATION
1155 PEACHTREE STREET, N.E.
ATLANTA, GA 30309-3610
LOGO
PRINTED ON RECYCLED PAPER
[LOGO]
<PAGE>
Please mark
your votes as /X/
indicated in
this example
DIRECTORS' PROPOSALS -- DIRECTORS RECOMMEND A VOTE "FOR"
WITHHOLD FOR ALL
FOR AUTHORITY EXCEPT*
---- --------- -------
1. Elect all Director Nominees (p. 5) / / / / / /
FOR AGAINST ABSTAIN
---- --------- -------
2. Ratification of Auditors (p. 13) / / / / / /
3. Amend Fair Price Provision (p. 13) / / / / / /
4. Amend Exculpation Provision (p. 14) / / / / / /
*Exceptions: ______________________________
TO VOTE FOR ALL NOMINEES, MARK THE "FOR" BOX. TO WITHHOLD VOTING FOR ALL
NOMINEES, MARK THE "WITHHOLD AUTHORITY" BOX. TO WITHHOLD VOTING FOR A
PARTICULAR NOMINEE, MARK THE "FOR ALL EXCEPT" BOX AND ENTER NAME(S) OF THE
EXCEPTION(S) IN THE SPACE PROVIDED.
- ------------------------------------------------------------------------------
SHAREHOLDER PROPOSALS -- DIRECTORS RECOMMEND A VOTE "AGAINST"
For Against Abstain
--- ------- -------
5. Kopach: Executive Compensation (p. 15) / / / / / /
6. Baechle: Executive Compensation (p. 17) / / / / / /
7. Carmichael: Executive Compensation (p. 19) / / / / / /
8. Sloan: Political Contributions (p. 20) / / / / / /
- ------------------------------------------------------------------------------
Discontinue mailing of duplicate Annual Report / /
Mark here if you have written a comment on reverse / /
Signature(s)________________________________________ Date ____________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
DETACH HERE FROM PROXY VOTING CARD
BELLSOUTH
ADMISSION TICKET
- ----------------
This ticket entitles you, the
shareholder, and one guest to
attend the 1998 Annual Meeting.
- ------------------------------------------------------------------------------
ANNUAL MEETING OF BELLSOUTH SHAREHOLDERS
MONDAY, APRIL 27, 1998
8:00 A.M.-DOORS OPEN
9:00 A.M.-MEETING BEGINS
The Cobb Galleria Centre Ballroom - Two Galleria Parkway - Atlanta, Georgia
See reverse side for map of area and directions
- ------------------------------------------------------------------------------
For wheelchair and hearing impaired seating, please see a host/hostess for
assistance.
<PAGE>
PROXY/VOTING INSTRUCTION CARD BELLSOUTH
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS ON APRIL 27, 1998.
The undersigned hereby appoints F. Duane Ackerman, C. Dixon Spangler, Jr.,
and Ronald A. Terry, and each of them, proxies with full power of
substitution, to vote all shares of Common Stock of the undersigned at the
Annual Meeting of Shareholders to be held at 9:00 a.m. EDT, April 27, 1998 at
the Cobb Galleria Centre Ballroom, Two Galleria Parkway, Atlanta, Georgia,
and at any adjournment thereof, upon all subjects that may properly come
before the meeting, including the matters described in the proxy statement
furnished herewith, subject to any directions indicated on the reverse side
of this card. IF NO DIRECTIONS ARE GIVEN, THE PROXIES WILL VOTE FOR THE
ELECTION OF ALL LISTED NOMINEES, IN ACCORD WITH THE DIRECTORS'
RECOMMENDATIONS ON THE OTHER MATTERS LISTED ON THE REVERSE SIDE OF THIS CARD,
AND AT THEIR DISCRETION ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE
MEETING.
Your vote for the election of Directors for the terms set forth in the proxy
statement may be indicated on the reverse side of this card. Nominees are
James H. Blanchard, Armando M. Codina, Leo F. Mullin, William S. Stavropoulos
and J. Tylee Wilson.
This card also provides voting instructions for shares held in the BellSouth
Direct Stock Purchase and Dividend Reinvestment Plan and, if registrations
are identical, shares held in the various employee stock purchase and benefit
plans.
YOUR VOTE IS IMPORTANT. PLEASE SIGN AND DATE ON THE REVERSE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE OR OTHERWISE TO BELLSOUTH CORPORATION,
CHURCH STREET STATION, P.O. BOX 1456, NEW YORK, NEW YORK 10277-1456, SO THAT
YOUR SHARES CAN BE REPRESENTED AT THE MEETING.
Comments:
______________________________________________________________________
______________________________________________________________________
- ------------------------------------------------------------------------------
Detach here.
ANNUAL MEETING
OF BELLSOUTH
SHAREHOLDERS
[MAP] [MAP]
MONDAY
APRIL 27, 1998
9:00 a.m. EDT
DIRECTIONS TO THE COBB GALLERIA CENTRE, TWO GALLERIA PARKWAY, ATLANTA, GEORGIA
NORTHBOUND ON I-75: Take exit 109B (I-285 Westbound); continue west on I-285
and take exit 14 (Cobb Pkwy./U.S. Hwy. 41) and turn left at traffic light,
southbound onto Cobb Pkwy.; continue under overpass and make a left turn at
second traffic light onto Galleria Drive.
SOUTHBOUND ON I-75: Take exit 109 (I-285 Westbound); continue west on I-285
and take the Cobb Pkwy./U.S. Hwy. 41 exit and turn left at traffic light,
southbound onto Cobb Pkwy.; continue under overpass and make a left turn at
second traffic light onto Galleria Drive.
WESTBOUND ON I-285: Take exit 14 (Cobb Pkwy./U.S. Hwy. 41) and turn left at
traffic light, southbound onto Cobb Pkwy.; continue under overpass and make a
left turn at second traffic light onto Galleria Drive.
EASTBOUND ON I-285: Take exit 13 (Cobb Pkwy./U.S. Hwy. 41) and turn right
onto Cobb Pkwy. headed south; turn left at next traffic light onto Galleria
Drive.
