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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
COMMISSION FILE NUMBER 1-8607
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BELLSOUTH CORPORATION
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A GEORGIA I.R.S. EMPLOYER
CORPORATION NO. 58-1533433
1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610
Telephone number 404 249-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York, Boston, Chicago,
(par value $1 per share) Pacific and Philadelphia
and Stock Exchanges
Preferred Stock Purchase Rights
Support Obligations for New York Stock Exchange
7.12% Debentures due 7/15/2097 of
BellSouth Capital Funding Corporation
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None.
At February 2, 1998, 991,356,878 shares of Common Stock and Preferred Stock
Purchase Rights were outstanding.
At February 2, 1998, the aggregate market value of the voting stock held by
non-affiliates was $60,039,546,602.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated March 10,
1998, issued in connection with the 1998 annual meeting of shareholders (Part
III).
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
Safe Harbor Statement......................................................................................... 1
1. Business........................................................................................... 1
General............................................................................................ 1
Business Operations................................................................................ 2
Telephone Company Operations....................................................................... 2
Other Telecommunications Business Operations....................................................... 10
Competition........................................................................................ 13
Research and Development........................................................................... 19
Licenses and Franchises............................................................................ 19
Employees.......................................................................................... 20
2. Properties......................................................................................... 20
General............................................................................................ 20
Capital Expenditures............................................................................... 21
Environmental Matters.............................................................................. 22
3. Legal Proceedings.................................................................................. 22
4. Submission of Matters to a Vote of Shareholders.................................................... 22
Additional Information -- Description of BellSouth Stock...................................................... 22
Executive Officers............................................................................................ 25
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 27
6. Selected Financial and Operating Data.............................................................. 28
7. Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 29
Results of Operations.............................................................................. 29
Volumes of Business................................................................................ 31
Operating Revenues................................................................................. 32
Operating Expenses................................................................................. 35
Other Income Statement Items....................................................................... 37
Extraordinary Losses............................................................................... 38
Financial Condition................................................................................ 38
Operating Environment and Trends of the Business................................................... 40
Year 2000 Compliance............................................................................... 45
New Accounting Pronouncements...................................................................... 45
Safe Harbor Statement.............................................................................. 45
8. Consolidated Financial Statements and Supplementary Data........................................... 47
Report of Management............................................................................... 47
Audit Committee Chairman's Letter.................................................................. 48
Report of Independent Accountants.................................................................. 48
Consolidated Statements of Income.................................................................. 49
Consolidated Balance Sheets........................................................................ 50
Consolidated Statements of Shareholders' Equity.................................................... 51
Consolidated Statements of Cash Flows.............................................................. 52
Notes to Consolidated Financial Statements......................................................... 53
Supplementary Data -- Domestic Cellular Proportionate Operating Data............................... 74
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 74
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ITEM PAGE
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PART III
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*10. Directors and Executive Officers of the Registrant................................................. 75
*11. Executive Compensation............................................................................. 75
*12. Security Ownership of Certain Beneficial Owners and Management..................................... 75
*13. Certain Relationships and Related Transactions..................................................... 75
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 75
Signatures.................................................................................................... 79
Consent of Independent Accountants............................................................................ 80
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*Included in BellSouth Corporation's definitive proxy statement dated March 10,
1998 and incorporated herein by reference.
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PART I
SAFE HARBOR STATEMENT
CERTAIN OF THE INFORMATION CONTAINED IN THIS AND OTHER REPORTS ADDRESSES
KNOWN TRENDS AND UNCERTAINTIES AFFECTING BELLSOUTH CORPORATION'S BUSINESS AND
PROSPECTS AND MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. BELLSOUTH CORPORATION'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 CORPORATION'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 ON EARNINGS; (4) THE CONTINUING COSTS TO IMPLEMENT NETWORK CHANGES AND
OPERATING SYSTEMS NECESSARY TO SATISFY REGULATORY CONDITIONS FOR BELLSOUTH
CORPORATION'S PROVISION OF INTERLATA SERVICE ARE NOT MATERIALLY GREATER THAN
CURRENTLY PROJECTED; (5) BELLSOUTH CORPORATION'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 CORPORATION 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.
ITEM 1. BUSINESS
GENERAL
BellSouth Corporation (BellSouth) is a holding company providing
telecommunications services, systems and products primarily through two
wholly-owned subsidiaries, BellSouth Telecommunications, Inc. (BellSouth
Telecommunications) and BellSouth Enterprises, Inc. (BellSouth Enterprises).
BellSouth Telecommunications provides predominantly tariffed wireline
telecommunications services to approximately two-thirds of the population and
one-half of the territory within Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina and Tennessee. BellSouth's other
businesses (predominantly domestic and international wireless communications
services and advertising and publishing products) are conducted primarily
through subsidiaries of BellSouth Enterprises. BellSouth has its principal
executive offices at 1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610
(telephone number 404-249-2000).
BellSouth was incorporated in 1983 under the laws of the State of Georgia.
On December 31, 1983, pursuant to a consent decree approved by the United States
District Court for the District of Columbia entitled "Modification of Final
Judgment" (the MFJ) settling antitrust litigation brought by the United States
Department of Justice (the Justice Department) in 1974 and the related Plan of
Reorganization, American Telephone and Telegraph Company, now AT&T Corp. (AT&T),
formed several holding companies including BellSouth (the Holding Companies),
and transferred to them one or more of the operating telephone companies (the
Operating Telephone Companies) that were formerly part of the Bell System. As a
result, AT&T transferred to BellSouth its 100% ownership of South Central Bell
Telephone Company (South Central Bell) and Southern Bell Telephone and Telegraph
Company (Southern Bell). On January 1, 1984, ownership of the Holding Companies
was transferred by AT&T to its shareholders. As a result, BellSouth became a
publicly traded company. BellSouth Telecommunications is the surviving
corporation from the merger of South Central Bell and Southern Bell, effective
at midnight, December 31, 1991.
Under the MFJ, the Operating Telephone Companies could provide local
exchange, exchange access, information access and toll telecommunications
services within their assigned geographical territories, termed "Local Access
and Transport Areas" (LATAs). Although prohibited from providing
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wireline service between LATAs, the Operating Telephone Companies provided
exchange access services that linked a subscriber's telephone or other equipment
in one of their LATAs to the transmission facilities of carriers (the
Interexchange Carriers), that provided toll telecommunications services between
different LATAs.
The Telecommunications Act of 1996 (the 1996 Act) supercedes the MFJ,
providing for the development of competition in local telecommunications
markets; the conditions under which the Operating Telephone Companies can
provide interLATA wireline telecommunications and other services; and the
provision by the Operating Telephone Companies of video services within their
service areas. The ability of the Operating Telephone Companies to enter
businesses previously proscribed to them by the MFJ is, however, generally
subject to numerous and rigorous criteria and the development of and compliance
with newly mandated regulations of the Federal Communications Commission (FCC).
To date, the FCC has rejected all applications to provide interLATA wireline
service. (See "Telephone Company Operations -- InterLATA Toll Service.")
BUSINESS OPERATIONS
Approximately 67%, 70% and 70% of BellSouth's total operating revenues for
the years ended December 31, 1997, 1996 and 1995, respectively, were from
wireline telecommunications services provided by BellSouth Telecommunications.
The remainder was derived principally from domestic and international wireless
operations, directory advertising and publishing, billing and collection and
other nonregulated services. Revenues from services (predominantly exchange
access services) provided to AT&T, BellSouth's largest customer, comprised
approximately 8%, 9% and 10% of 1997, 1996 and 1995 total operating revenues,
respectively.
TELEPHONE COMPANY OPERATIONS
BellSouth Telecommunications provides, predominantly, local exchange,
exchange access and intraLATA toll services within each of the 38 LATAs in its
nine-state wireline service territory. BellSouth Telecommunications provided
approximately 23,201,000 customer access lines at December 31, 1997, an overall
increase of 4.8% since December 31, 1996. The increase was primarily
attributable to continued economic growth in BellSouth Telecommunications'
nine-state service region. Growth in additional residential lines ordered by
existing customers accounted for approximately 30.8% of the overall increase in
total access lines since December 31, 1996. (See "MD&A -- Results of Operations
- -- Volumes of Business.")
At December 31, 1997, approximately 81% of BellSouth Telecommunications'
access lines were in 44 metropolitan areas, each having a population of 125,000
or more. Many localities and some sizable areas in the states in which BellSouth
Telecommunications operates are served primarily by non-affiliated telephone
companies. BellSouth Telecommunications does not furnish, on a significant
scale, local exchange, exchange access or toll services in the areas served by
such companies. BellSouth Telecommunications is increasingly facing competition
for local and intraLATA customers within its wireline service territory. (See
"Competition -- Network and Related Services.")
LOCAL AND INTRALATA TOLL SERVICES
Charges for local service for each of the years ended December 31, 1997,
1996 and 1995 accounted for approximately 41%, 42% and 41%, respectively, of
BellSouth's total operating revenues. Local service operations provide lines
from telephone exchange offices to subscribers' premises for the origination and
termination of telecommunications, including the following: basic local
telephone service provided through the regular switched network; dedicated
private line facilities for voice and special services, such as transport of
data, radio and video; switching services for customers' internal communications
through facilities owned by BellSouth Telecommunications; services for data
transport that include managing and configuring special service networks; and
dedicated low or high capacity public
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or private digital networks. Other local service revenue is derived from
intercept and directory assistance, public telephones and various optional
central office features, such as Caller ID, Call Waiting, Call Return and 3-Way
Calling services. As other authorized telecommunications carriers compete in the
provision of local service, BellSouth Telecommunications will increasingly sell
to such carriers unbundled network elements and discounted local service for
resale.
BellSouth Telecommunications offers certain enhanced services, such as
MemoryCallSM voice messaging service, through its network. These services differ
from basic services in that they employ computer processing applications to
alter the subscriber's transmitted information; provide the subscriber
additional, different or restructured information; or involve subscriber
interaction with stored information. The terms of many of these service
offerings are not regulated under the rules of the FCC, but the FCC prescribes
the method by which such services may be provided (for example, through
structurally separated subsidiaries or arrangements providing access to
competitive providers). Total revenue from enhanced and other optional services
was approximately $1.31 billion, $1.06 billion and $794 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
BellSouth Telecommunications provides intraLATA toll services within (but
not between) its 38 LATAs. Such toll services provided approximately 4%, 4% and
6% of BellSouth's total operating revenues for the years ended December 31,
1997, 1996 and 1995, respectively. These services include the following:
intraLATA service beyond the local calling area; Wide Area Telecommunications
Service (WATS or 800 services) for customers with highly concentrated demand;
and special services, such as transport of data, radio and video. In recent
years, these toll revenues have decreased as competition for toll customers has
intensified and as local area calling plans have been expanded. Toll revenues
are expected to continue to be negatively impacted by competition.
REGULATION OF LOCAL AND TOLL SERVICES
BellSouth Telecommunications is subject to regulation of its intrastate
services by a state authority in each state where it provides intrastate
telecommunications services; such regulation covers rates, services, competition
and other issues.
RATE REGULATION
Traditionally, BellSouth Telecommunications' rates were set in each state in
its wireline service territory at levels that were anticipated to generate
revenues sufficient to cover its allowed expenses and to provide an opportunity
to earn a fair rate of return on its capital investment. Such a regulatory
structure, generally known as rate of return regulation, was acceptable in a
less competitive era; however, as discussed below, the regulatory processes have
changed in response to the increasingly competitive telecommunications
environment.
Under the first generation of alternative regulation, generally known as
incentive regulation, economic incentives were provided to lower costs and
increase productivity through the potential availability of "shared" earnings
over a benchmark rate of return. Generally, when levels above targeted returns
were reached, earnings were "shared" by providing refunds or price reductions to
customers.
Under the next generation of alternative regulation, generally known as
price regulation, the state authorities establish maximum prices that can be
charged for certain telecommunications services. While such plans limit the
amount of increases in prices for specified services, they enhance BellSouth
Telecommunications' ability to adjust prices and service options to respond more
effectively to changing market conditions and competition and provide an
opportunity to benefit more fully from productivity enhancements. For these
reasons, BellSouth Telecommunications has focused its regulatory and legislative
efforts on establishing price regulation, and such plans are now operational
throughout BellSouth Telecommunications' wireline service territory, except in
Tennessee where a court order to implement price regulation has been appealed.
While some state price regulation plans are not subject to either review or
renewal, other state plans contain specified termination dates and/or review
periods. No
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assurance can be given that plans subject to review or renewal will retain
prices or other terms currently applicable.
The following section contains a brief description of certain regulatory
proceedings in BellSouth Telecommunications' nine-state wireline service
territory.
ALABAMA
BellSouth Telecommunications' rates were subject to an incentive regulation
plan from 1988 to September 1995 and to a price regulation plan thereafter.
Under the price regulation plan, prices for basic services, including local
exchange services for residence and business customers, are capped until 2000,
after which prices may be changed in accordance with an inflation-based formula.
Aggregate price increases for non-basic services are limited to 10% annually.
Intrastate switched access rates must be reduced below interstate switched
access rates. Reductions related to intrastate switched access are estimated to
be $25 million through 1999. Additional terms of the price regulation plan
require annual price reductions aggregating $57 million through 1999, excluding
intrastate switched access reductions.
FLORIDA
From 1988 through 1992, an incentive regulation plan was in effect in
Florida. In 1994, the Florida Public Service Commission extended the plan
retroactively from 1993 to 1997, with required price reductions aggregating
approximately $300 million over a three-year period. Effective January 1996,
BellSouth Telecommunications elected to be regulated under price regulation;
however, it was still required to comply with the sharing provisions of the
previous incentive plan through 1997.
Under the price regulation plan, prices for basic services, which include
flat-rate residential and single-line business local exchange services, are
capped until 2001, after which prices may be changed in accordance with an
inflation-based formula. Prices for certain non-basic services, including
multi-line business service, are capped until 1999 at the rates in effect in
July 1995. Prices for other non-basic services may be adjusted annually subject
to defined limitations.
GEORGIA
From 1990 to August 1995, BellSouth Telecommunications operated under an
incentive regulation plan in Georgia. Thereafter, it has operated under a price
regulation plan. Under the price regulation plan, basic residence and
single-line business rates are capped until 2000, after which prices may be
changed in accordance with an inflation-based formula. Rates for intrastate
switched access services may be no higher than the rates charged for interstate
switched access services.
KENTUCKY
From 1988 to July 1995, an incentive regulation plan was in effect in
Kentucky. BellSouth Telecommunications' rates are now regulated under a price
regulation plan. Under the price regulation plan, basic residential rates are
capped until 1998, after which prices may be changed in accordance with an
inflation-based formula. Intrastate switched access rates are limited to rates
in effect for interstate switched access. Prices for services deemed competitive
under the plan can be set by BellSouth Telecommunications in response to market
conditions.
LOUISIANA
From February 1992 to April 1996, an incentive regulation plan was in effect
in Louisiana. Effective April 1996, the Louisiana Public Service Commission
approved a price regulation plan that will remain in effect for a six-year term.
Under the provisions of the price regulation plan, prices for basic services,
which include the provision of local exchange service, are capped until 2001,
after which prices may be changed in accordance with an inflation-based formula.
After 2001, no individual basic service price can be increased by more than 10%
in any twelve-month period. Prices for interconnection services are
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capped until 1999, after which no individual service can be increased more than
10% in any twelve-month period. For non-basic services, price increases may not
exceed 20% in any twelve-month period.
Concurrently with the approval of price regulation, the Louisiana Commission
concluded its review of BellSouth Telecommunications' earnings by requiring an
aggregate $70 million price reduction, to be apportioned over a three-year
period beginning April 1, 1996.
MISSISSIPPI
From June 1990 through December 1995, an incentive regulation plan was in
effect in Mississippi. Effective January 1996, the Mississippi Public Service
Commission approved a six-year price regulation plan. Under the provisions of
the plan, prices for basic services, which include the provision of basic local
telephone service, are capped until 1999, after which the basic service category
rates will be revised annually to effect an annual reduction in revenues of 1%
or $3.75 million, whichever is greater, for the last three years of the plan. In
addition, intrastate switched access rates are capped at the same level as
interstate switched access rates over the life of the plan.
NORTH CAROLINA
Prior to June 1996, traditional rate of return regulation was in effect in
North Carolina. Since then, BellSouth Telecommunications has been subject to a
price regulation plan under which prices for residence basic local exchange
service are capped until 1999, after which time any price increases are limited
by an inflation-based formula. For business basic local exchange,
interconnection and certain non-basic services, any increases in current prices
are also subject to inflation-based formulas. Prices for toll switched access
services were capped at the June 1996 prices, after giving effect to specified
price reductions ordered in conjunction with approval of the price regulation
plan.
SOUTH CAROLINA
Prior to 1996, BellSouth Telecommunications' rates were regulated on a
traditional rate of return basis. In January 1996, the South Carolina Public
Service Commission approved a price regulation plan which includes provisions
that basic local exchange residence and business service flat rates will not
increase until 2001, after which prices may be changed in accordance with an
inflation-based formula. Intrastate switched access rates will be capped until
1999, after which prices may be changed in accordance with an inflation-based
formula. The rates for non-basic services will be set by BellSouth
Telecommunications, subject only to the limitation that the price for any
individual service may not be increased more than 20% in a twelve-month period.
In April 1997, BellSouth Telecommunications, the South Carolina Public
Service Commission and other parties agreed on a settlement to claims of alleged
overearnings for the years 1992 through 1994. Under the terms of the settlement,
BellSouth Telecommunications paid $72 million to its customers in 1997.
TENNESSEE
An incentive regulation plan, which had been in effect since August 1990,
ended in 1995. In June 1995, a law was enacted in Tennessee that allowed
qualified service providers to elect price regulation. BellSouth
Telecommunications elected price regulation under which the prices for basic
services and Call Waiting services are to be capped for four years, after which
prices may be changed in accordance with an inflation-based formula. Prices for
services other than basic services are to be adjusted based on an
inflation-based formula.
In order to implement the price regulation election, the Tennessee Public
Service Commission required BellSouth Telecommunications to reduce prices by
approximately $56 million on an annual basis. BellSouth Telecommunications
appealed to the Tennessee Court of Appeals. The court stayed implementation of
both the rate reduction and price regulation plan pending further consideration
of the
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issues. In October 1997, the court vacated the order requiring the rate
reduction and remanded the case to the Tennessee Regulatory Authority (successor
to the Tennessee Public Service Commission) with instructions to approve the
price regulation plan. In January 1998, the Tennessee Regulatory Authority and
the Consumer Advocate filed an application for permission to appeal to the
Tennessee Supreme Court.
A bill has been introduced in the Tennessee legislature that would impose
significant new restrictions on companies electing price regulation.
Specifically, the bill would require BellSouth Telecommunications to agree to
make substantial refunds to customers and to have its initial rates for price
regulation purposes established by means of a traditional rate of return
earnings investigation. It is too early to assess the degree of support that
this proposal might receive in the legislature.
REGULATION OF LOCAL SERVICE COMPETITION
The 1996 Act requires the elimination of state legislative and regulatory
barriers to competition for local telephone service, subject only to
competitively neutral requirements to preserve and advance universal service,
protect the public safety and welfare, maintain the quality of
telecommunications services and safeguard the rights of customers. The 1996 Act
also includes requirements that incumbent local exchange carriers (ILECs), 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 their retail
services at wholesale rates for the purpose of resale by competing carriers. If
agreement cannot be reached, the arbitrator shall set the wholesale rates at the
ILEC's retail rates less costs to be avoided. BellSouth Telecommunications has
executed over 300 interconnection or resale agreements with such carriers.
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 ILECs must make available; pricing
standards to be followed by states in setting rates for interconnection; access
to network elements on an unbundled basis; and resold services. BellSouth,
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 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 also 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
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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.
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 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 million of costs associated with these efforts in the year
ended December 31, 1997. Of this amount, approximately $230 million was expensed
as incurred, and the remainder was capitalized. It remains unclear to what
degree, if any, BellSouth will be compensated for these costs.
REGULATION OF ACCESS SERVICES
BellSouth Telecommunications provides access services by connecting the
equipment and facilities of its subscribers with the communications networks of
Interexchange Carriers. These connections are provided by linking these carriers
and subscribers through the public switched network of BellSouth
Telecommunications or through dedicated private lines furnished by BellSouth
Telecommunications. The FCC regulates rates and other aspects of interstate
access services. State regulatory commissions have jurisdiction over the
provision of access to the Interexchange Carriers to complete intrastate
telecommunications.
Interstate and intrastate access charges, which are payable both by
Interexchange Carriers and subscribers, provided approximately 22%, 23% and 23%
of BellSouth's total operating revenues for the years ended December 31, 1997,
1996 and 1995, respectively. These charges are designed to recover the costs of
the common and dedicated facilities and switching equipment used to connect
networks of Interexchange Carriers with the telephone company's local network
and to subsidize the cost of providing local service to rural and other
high-cost areas. The FCC regulates interstate access charges through its price
cap and access charge rules. The state commissions have authorized BellSouth
Telecommunications to collect from the Interexchange Carriers and, in several
states, from customers, fees for providing intrastate access services. In
connection with the approval of price regulation plans, many states have
required BellSouth Telecommunications to reduce intrastate access rates to bring
them to parity with interstate access rates.
Historically, access charges have been set at levels that subsidize the cost
of providing local residential service. The 1996 Act 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.
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. BellSouth Telecommunications had been pricing its
services based on a 5.3% productivity factor, which meant that price increases
would only occur to the extent that the Gross Domestic Product Price Index of
the United States (the Index) increased by greater than 5.3% over an annual
period. If the Index increased by less than 5.3%, price reductions would occur.
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. The net access charge reductions resulted primarily from an
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FCC-mandated increase in the price cap productivity factor from 5.3% to 6.5%.
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.
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. SLCs for
primary residential and single-line business access lines remained unchanged at
$3.50 per line, per month. SLCs for non-primary (or "additional") residential
access lines increased from $3.50 to $5.00 per line, per month, and SLCs for
multi-line business customers increased from $6.97 to $8.17 per line, per month
beginning in January 1998. PICCs were established on January 1, 1998 and are
charged to Interexchange Carriers for recovery of non-traffic-sensitive costs
not recovered through SLCs. These charges were established for primary
residential and single-line business access lines, non-primary residential
access lines and multi-line business access lines and were initially set at
$.53, $1.50 and $2.75, respectively, per line, per month, beginning January
1998. BellSouth believes that the net effect of these changes will be
substantially revenue-neutral.
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.
The order also established significant discounts to be provided to eligible
schools and libraries for all telecommunications services, internal connections
and Internet access. It also established support for rural health care providers
so that they may pay rates comparable to those that urban health care providers
pay for similar services. Industry-wide annual costs of the program are to be
capped at approximately $2.7 billion and are to be funded out of the universal
service fund. Local and Interexchange Carriers' contributions to the education
and health care funds would be assessed by the fund administrator on the basis
of their interstate and intrastate end-user revenues.
All of the foregoing orders have been appealed to United States Courts of
Appeal in several different Circuits.
INTERLATA TOLL SERVICE
As a result of the 1996 Act, BellSouth and the other Holding Companies and
their affiliates are freed from the judicial restrictions of the MFJ that
generally prohibited the provision of interLATA communications throughout their
wireline service territories and elsewhere. The 1996 Act establishes in its
place a new restriction and a procedure for its removal. These companies may
apply to the FCC on a state-by-state basis to offer in-region interLATA wireline
services, and the FCC must act on each such application within 90 days. The FCC
must grant such application if it determines that the applicant (a) has met a
competitive checklist; (b) has shown (i) the presence of a facilities-based
provider offering both residential and business local services (Track A) or (ii)
if there is no such provider, a statement that has been approved or permitted to
take effect by state regulatory authorities of the terms under which it would be
willing to interconnect with a competitive local carrier (Track B); (c) will
operate in accordance with the separate subsidiary requirement; and (d) has
presented an application consistent with the public interest. The FCC is
required to consult with state regulatory authorities and the Justice Department
when reviewing the application.
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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 Operating Telephone 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.
------------------------
In addition to the above matters, BellSouth and BellSouth Telecommunications
are parties to or subject to numerous other proceedings pending before federal
and state regulatory and judicial bodies. These matters involve, among other
things, terms and conditions of services provided by BellSouth
Telecommunications and its affiliates, rates charged for such services, access
reform, universal service, number portability and relationships with competitive
service providers and their affiliates. No assurance can be given as to the
outcome of any such proceedings.
PUBLIC TELEPHONES
In April 1997, BellSouth Telecommunications transferred its payphone
business assets to a separate subsidiary, BellSouth Public Communications, Inc.
(BPC), in order to satisfy an FCC order which required ILECs to reassign their
payphone business assets from regulated telephone company accounts to separate
unregulated accounts or to transfer assets to a separate subsidiary. BPC has
received certification as an independent payphone provider in each of the nine
states where BellSouth Telecommunications provides wireline telephone service.
BPC plans to continue to provide independent payphone services throughout
BellSouth Telecommunications' territory and will selectively provide payphone
services in areas served by unaffiliated telephone companies. Also beginning in
April, BPC is authorized to begin receiving per-call compensation from
Interexchange Carriers for calls originating on its payphone equipment.
BILLING AND COLLECTION SERVICES
BellSouth Telecommunications provides, under contract and/or tariff, billing
and collection services for certain long distance services of AT&T and several
other Interexchange Carriers. The agreement with AT&T extends through the year
2000, subject to the right of AT&T to assume billing and collection for certain
of its services prior to the expiration of the agreement. BellSouth Enterprises
also provides limited billing and collection services in foreign countries.
OPERATOR SERVICES
Directory assistance and local and toll operator services are provided by
BellSouth Telecommunications in its service areas. Toll operator services
include alternate billing arrangements, such as collect calls, third number
billing, person-to-person and calling card calls; dialing instructions;
pre-billed credit; and rate information. In addition, directory assistance is
provided for some other carriers which do not directly provide such services for
their own customers.
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INTERNET ACCESS
In 1996, BellSouth Telecommunications began providing Internet access, a
customized version of Netscape Navigator-TM-, electronic mail and a gateway to
local and national information. Internet access is provided as BellSouth.net-SM-
service to over 182,000 customers at December 31, 1997.
SELLING AND MAINTAINING EQUIPMENT
To a limited extent, BellSouth sells and maintains telecommunications
equipment in the nine states where BellSouth Telecommunications provides
wireline telephone service. The Holding Companies, Lucent Technologies, Inc. and
other substantial enterprises compete in the provision of these services and
products.
OTHER TELECOMMUNICATIONS BUSINESS OPERATIONS
DIRECTORY ADVERTISING AND PUBLISHING
BellSouth Enterprises owns a group of companies which publish, print and
sell advertising in, and perform related services concerning, alphabetical and
classified telephone directories. Increasingly, such companies provide
directories in electronic form over the Internet and CD-ROM media. Directory
advertising and publishing revenues represented approximately 9% of BellSouth's
total operating revenues for each of the last three years. Two of BellSouth's
advertising and publishing companies also provide publishing and related
products and services to other directory publishers. During 1997, such BellSouth
companies published approximately 485 directories for BellSouth
Telecommunications and contracted with approximately 125 non-affiliated
companies to sell advertising space in approximately 500 of their publications.
WIRELESS COMMUNICATIONS
BellSouth Enterprises provides wireless communications services, which
consist mainly of cellular telephone services. Revenues from wireless
communications comprised approximately 17%, 15% and 14% of BellSouth's total
operating revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, BellSouth Enterprises has non-controlling financial
interests in a number of wireless businesses whose revenues are not reflected in
operating revenues because of the method of accounting for such investments.
Under the MFJ, the Holding Companies generally were prohibited from
providing interLATA wireless communications. The 1996 Act lifted this
prohibition, and in February 1996, BellSouth began offering the interLATA
component of its wireless communications in conjunction with its wireless
offerings. Approximately 2.4 million customers subscribe to such interLATA
service. In areas where it does not have long distance telephone facilities,
BellSouth connects with the networks of the Interexchange Carriers.
The 1996 Act allows BellSouth to market wireless services jointly with local
wireline services; previously, separate marketing was required. This change has
enabled BellSouth to more efficiently offer and provide integrated
telecommunications services. In March 1996, BellSouth began joint marketing of
wireless and wireline services in selected markets.
DOMESTIC CELLULAR OPERATIONS
The predominant part of BellSouth's wireless communications operations is
cellular radio telephone service. Cellular radio telephone systems provide
customers with high-quality and readily available two-way communications
services that interconnect with wireline and other cellular telephone networks.
The cellular networks of BellSouth and other carriers utilize analog technology,
which offers
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seamless roaming across systems. Many carriers are also adding TDMA (Time
Division Multiple Access) or CDMA (Code Division Multiple Access) digital
technology to their systems which will enable greater capacity, technically
superior service quality and new features. BellSouth is utilizing TDMA digital
technology in adding digital capabilities to its cellular systems. Unlike
separate analog systems, TDMA systems are incompatible with CDMA networks,
thereby precluding customers from roaming from a TDMA system to a CDMA system,
or vice-versa. However, all digital cellular telephones are dual-mode,
containing analog technology as well as a particular digital technology. This
enables digital customers to roam using the analog mode if they enter a digital
system utilizing an incompatible technology.
The domestic cellular telephone business has become a significant
contributor to BellSouth's operations, primarily due to the continued expansion
of the customer base for mobile communications services. BellSouth maintains and
operates cellular systems through wholly-owned subsidiaries and partnerships
with other entities. Cellular service and related equipment are marketed to
consumers, directly and through authorized agents, and to businesses that resell
the service.
The rates charged by cellular carriers are not regulated by the FCC or the
states in which BellSouth's cellular operations are located. State governments
are generally preempted by federal law from regulating the rates charged by
cellular carriers.
At December 31, 1997, businesses in which BellSouth had an equity interest
provided cellular service to a total of approximately 5,294,000 domestic
customers in 15 states. BellSouth's proportionate share of such total customers,
based on its percentage ownership interests of such businesses, was
approximately 4,105,000 customers. (See "Consolidated Financial Statements and
Supplementary Data -- Domestic Cellular Proportionate Operating Data.")
BellSouth's proportionate interest in the aggregate population (POPs) served by
its domestic cellular systems was approximately 40,235,000 persons at December
31, 1997, and its penetration rate was approximately 10.2%. Within its
nine-state wireline service territory, BellSouth and its partners offer cellular
service in cities including Atlanta, Miami, New Orleans, Memphis, Louisville,
Birmingham and Orlando, while outside its wireline service territory BellSouth
and its partners offer cellular service in cities including Los Angeles,
Houston, Indianapolis and Honolulu.
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 growth is
likely to continue declining, reflecting increasing penetration rates and
competition for wireless customers by additional personal communications service
(PCS) carriers. (See "Personal Communications Service.")
In November 1997, BellSouth completed an exchange with United States
Cellular Corporation of certain cellular properties. Under the agreement,
BellSouth traded its ownership interests in cellular properties in Wisconsin and
Illinois for new or increased equity ownership of cellular properties located in
or adjacent to BellSouth Telecommunications' nine-state wireline service
territory.
PERSONAL COMMUNICATIONS SERVICE
In 1995, the FCC began auctioning radio spectrum for providing digital
mobile communications service, commonly referred to as personal communications
service, or PCS. PCS utilizes only digital technology, which provides greater
security and clarity than the analog technology used on existing cellular
systems. The three most commonly deployed technologies in the United States are
GSM (Global System for Mobile Communications), TDMA and CDMA. GSM is also widely
used by international cellular and PCS systems. Within the domestic PCS markets,
however, none of the existing technologies has become dominant. Because these
competing digital technologies are not compatible with each other, PCS currently
does not offer the seamless roaming characteristics that are offered by analog
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cellular services. In addition, PCS networks currently are largely concentrated
in more densely populated areas and are significantly more limited than cellular
networks in their service coverage.
BellSouth, through its BellSouth Mobility DCS subsidiary, owns interests in
PCS licenses covering most of North Carolina, South Carolina and eastern
Tennessee. A BellSouth consortium is building and operating the network in the
Carolinas while BellSouth alone is building and operating the network in eastern
Tennessee. BellSouth's proportionate POPs covered by these licensed territories
is 7,700,000. Both of these systems, which utilize the GSM technology, have been
operational since the summer of 1996 and continue to expand their coverage
footprint within their given licensed areas.
In January 1997, BellSouth won additional licenses in 37 Basic Trading Areas
(BTAs) in the FCC's D-and E-block auctions. These markets cover 12,700,000 POPs
in smaller areas within or adjacent to BellSouth's wireline service territory.
Currently, BellSouth, through its BellSouth Mobility subsidiary, plans to deploy
TDMA in thirty-four of these BTAs and BellSouth Mobility DCS is building and
operating GSM-based networks in the three remaining BTAs.
At the present time, it is unclear which digital technology, if any, will
become the generally accepted standard in the United States. To overcome the
incompatibility of the existing technologies, PCS equipment manufacturers are
developing PCS handsets that operate within multiple technologies and
bandwidths. Presently, dual-band/dual-mode handsets are available that can
process both analog cellular and digital calls. These handsets enable roaming
from PCS systems to analog cellular systems. In addition, BellSouth has begun
investigating third generation technologies in data, voice and video that may
provide for a more standard platform for PCS transmission.
INTERNATIONAL WIRELESS OPERATIONS
Outside the United States, BellSouth owns interests in consortia that hold
licenses for, and are building and/or operating, wireless telephone systems in
Argentina, Brazil, Denmark, Ecuador, Germany, India, Israel, New Zealand,
Nicaragua, Panama, Peru, Uruguay and Venezuela. Through a wholly-owned
subsidiary, BellSouth holds a regional concession for a wireless telephone
system in Chile. At December 31, 1997, these systems provided cellular or PCS
service to a total of approximately 4,072,000 international customers.
BellSouth's proportionate share of such customers, based on its percentage
ownership interests in such systems, was approximately 1,882,000 customers.
BellSouth's proportionate interest in the aggregate population covered by its
international wireless systems was approximately 88,878,000 persons at December
31, 1997, and its penetration rate was approximately 2.7%. BellSouth's wireless
services are provided under regional licenses to areas within Argentina, India,
Nicaragua, Peru, Uruguay and Chile and under nationwide licenses in Denmark,
Ecuador, Germany, Israel, New Zealand, Panama and Venezuela. Upon completion of
networks currently being developed, services will be provided to certain areas
in Brazil under regional licenses beginning in the first half of 1998.
MOBILE DATA
BellSouth owns interests in five wireless data communications networks
worldwide utilizing L.M. Ericsson's Mobitex technology. These networks provide
services in the United States, the United Kingdom, the Netherlands, Belgium and
Singapore, enabling wireless data applications such as computer-aided dispatch,
electronic mail, transaction processing and remote data entry, paging and
message retrieval. They are also well-suited for fixed applications such as
credit card validation and telemetry.
OTHER INTERNATIONAL OPERATIONS
In August 1997, BellSouth sold its 24.5% interest in Optus Communications
Pty. Ltd (Optus) to Cable and Wireless, a U.K. telecommunications company. Under
the agreement, BellSouth received approximately $735 million in cash for its 490
million shares in Optus. In addition, BellSouth will receive
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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
BellSouth's interest in Optus.
BellSouth operates a competing domestic and international wireline long
distance business in Chile under a nationwide concession. In addition, in
January 1997, BellSouth purchased an interest in a company that offers wireline
and wireless cable television and paging services in Peru.
DOMESTIC BROADBAND SERVICES
The 1996 Act eliminated prohibitions on telephone companies' provision of
cable television services in their service territories, although many federal
courts had already held such prohibitions unconstitutional. Although ILECs may
not acquire or joint venture with established cable television providers in
their wireline territories, they may provide cable television services over
their own facilities.
BellSouth has constructed several networks, and provided cable television
services to a limited degree, in several areas within its wireline service
territory to assess the extent to which it wishes to enter this business. It has
also obtained licenses to provide wireless cable services in various
metropolitan areas including New Orleans, Atlanta and Louisville, as well as
several markets in the state of Florida (including Miami) and is currently
providing services in limited areas under these licenses.
BellSouth, Ameritech Corporation, GTE Corporation, Southern New England
Telecommunications Corporation and The Walt Disney Company have formed a
business to acquire, develop, market and deliver traditional and interactive
video programming services to consumers. BellSouth intends to offer such
services to its cable television customers.
COMPETITION
GENERAL
BellSouth is subject to increasing competition in all areas of its business.
Regulatory, legislative and judicial actions and technological developments have
expanded the types of available services and products and the number of
companies that may offer them. Increasingly, this competition is from large
companies and joint ventures that have substantial capital, technological and
marketing resources.
NETWORK AND RELATED SERVICES
LOCAL SERVICE
Federal and state law provide for local service competition throughout
BellSouth Telecommunications' wireline service territory, and the state public
service commissions have granted numerous carrier applications for authority to
offer local telephone service. As a result, 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 development of competition for residential local service
customers will continue to be much slower than for business local service
customers.
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An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by telecommunications
providers in all major metropolitan areas throughout BellSouth
Telecommunications' wireline service territory. These networks offer certain
high-volume users a competitive alternative to the public and private line
offerings of BellSouth Telecommunications. Furthermore, wireless services, such
as cellular, PCS and paging services, and Internet services increasingly compete
with wireline communications services. PCS service is digital, which provides
greater security and clarity than analog cellular service. Such services are
provided by, among others, a number of well-capitalized entities, including AT&T
and other Holding Companies, in most of BellSouth's markets.
As technological and regulatory developments make it more feasible for cable
television to carry data and voice communications, BellSouth Telecommunications
will face increased competition within its region from cable television
ventures. For example, MediaOne, an affiliate of USWest Media Group, has begun
offering local wireline service in Atlanta in 1998 over its enhanced cable
television network.
Joint ventures and mergers between major telecommunications companies (e.g.,
the proposed mergers of MCI/WorldCom, Inc. and AT&T/Teleport Communications
Group) will result in large, well-capitalized carriers that will provide
formidable competition to BellSouth across a number of markets, including local
and long distance telephone and Internet services.
Competition for local service revenues could adversely affect BellSouth's
results of operations. However, the opening of local markets to competition,
among other things, can allow BellSouth to qualify to offer in-region interLATA
service as contemplated in the 1996 Act. (See "BellSouth Competitive Strategy.")
ACCESS SERVICE
FCC rules require BellSouth Telecommunications to offer expanded
interconnection for interstate special and switched access transport. As a
result, BellSouth Telecommunications must permit competitive carriers and
customers to terminate their transmission lines on BellSouth Telecommunications'
facilities in its central office buildings through collocation arrangements. The
effects of the rules are to increase competition for access transport.
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 interLATA traffic because of its lower cost structure,
because FCC rules do not currently impose access charges on Internet
communications.
TOLL SERVICE
A number of companies compete with BellSouth Telecommunications in its
nine-state region for intraLATA toll business by reselling toll services
obtained at bulk rates from BellSouth Telecommunications or, subject to the
approval of the applicable state public utility commission, providing toll
services over their own facilities. Commissions in the states in BellSouth
Telecommunications' wireline service territory have allowed the latter type of
intraLATA toll calling, whereby the Interexchange Carriers are assigned a
multiple digit access code (10XXX) that customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislatures
or commissions in three states have authorized competing carriers to provide
intraLATA toll presubscribed calling with a single digit access code (1+),
giving them dialing parity with the ILEC in that area. Commissions in several
other states are considering how and when such authorization should be
implemented. However, the 1996 Act prohibits states from ordering the
implementation of new toll dialing parity until the earlier of (a) three years
from the enactment of the 1996 Act or (b) such time as the Operating Telephone
Company has qualified to provide in-region interLATA services.
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The 1996 Act permits the Holding Companies to offer interLATA toll service
outside of the states containing their local wireline service territories.
Holding Companies and other carriers have announced plans to compete for such
interLATA toll service in BellSouth Telecommunications' territory. AT&T, MCI,
Sprint and a number of other carriers, including other Holding Companies,
currently provide toll services to BellSouth's local service customers.
DIRECTORY ADVERTISING AND PUBLISHING
In BellSouth's advertising and publishing business, competition for
advertising revenues has expanded. Many different media compete for advertising
revenues, and some newspaper organizations and other companies have begun
publishing their own directories. Competition for directory sales agency
contracts for the sale of advertising in publications of nonaffiliated companies
also continues to be strong. Directory listings are now offered in various media
besides paper books, such as CD ROM, the Internet and other electronic databases
through telephone company and third party networks. As such offerings expand and
are enhanced through interactivity and other features, BellSouth will experience
heightened competition in its directory advertising and publishing businesses.
BellSouth has responded to the increased competition and its changing market
environment with new directory products, product enhancements, multi-media
delivery options, including Internet directory services, pricing changes,
competitive advertising, local promotions, directory redeliveries and extended
distributions.
WIRELESS COMMUNICATIONS
The FCC has jurisdiction over the licensing of cellular mobile radio
services in domestic markets. The FCC limits entry for providers of cellular
mobile telecommunications to two licensees for each defined metropolitan
statistical area (MSA) and each rural service area (RSA) within the country.
Each MSA and RSA in which BellSouth participates in the provision of cellular
mobile communications has a competing service provider. In many markets,
competing cellular service is provided by businesses owned or controlled by a
Holding Company, AT&T or a major telephone company.
The FCC's PCS licensing process has created multiple new competitors for
BellSouth's businesses. Licenses to provide PCS service 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 and
wireless telephone businesses throughout BellSouth's service territories.
Several competitive PCS systems are now operational in BellSouth's service
territories. If all PCS licensees construct and operate wireless businesses,
there could be six or more PCS systems operating in certain areas.
BellSouth's international wireless operations are generally subject to
competition from at least one other wireless service provider. These competing
service providers are generally supported by partners who are at least as
well-capitalized as BellSouth and its partners. In some cases, the competing
provider is operated by the government-owned telephone company, which may have
access to substantial financial resources. BellSouth believes that a number of
these government-owned telephone companies will be privatized within the next
few years, which may result in more formidable competition.
The FCC has approved construction of enhanced specialized mobile radio
(ESMR) systems in many cities around the country. These digital mobile
communications systems provide service very similar to cellular telephone
service. There has been a consolidation of the licenses required to provide ESMR
service, so that control of this business is concentrated in the hands of a few
potential operators, giving them the ability to offer services like nationwide
roaming.
BellSouth's wireless data businesses experience competition from private and
public wireless data networks, two-way paging networks, specialized mobile radio
networks, cellular networks and PCS networks. The degree and type of competition
vary from country to country. BellSouth's primary mobile
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data competitor is Motorola, Inc.'s ARDIS data messaging business. Certain of
the Holding Companies and other carriers are developing competing mobile data
offerings using Cellular Digital Packet Data (CDPD), a cellular-based system
specifically designed for packet data applications and PCS-based services. Other
wireless data competitors include GSM operators, which may offer an integrated
packet data standard around the turn of the century.
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 service 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 business by (a) deploying value-added products and services
and competitive technology; (b) strengthening and expanding distribution
channels, including joint marketing with BellSouth Telecommunications; and (c)
expanding in-region wireless coverage through development of businesses covered
by its PCS licenses. Third, BellSouth will continue to grow and develop its
Latin American and other international operations.
BellSouth markets all its services and products under the BellSouth brand
name to give them a clear, consistent identity in the marketplace. BellSouth
believes that its brand name is widely recognized and held in high esteem by its
customers. A primary marketing strategy is to enhance the recognition and
reputation of this mark throughout its service territory by jointly marketing
all BellSouth services and products with special attention to each customer
base. BellSouth's goal is for its brand name to become synonymous with quality
service and state-of-the-art technology. Accordingly, significant increases in
marketing and advertising costs have been and will be incurred. BellSouth
advertises in the various media in its territory, in connection with major
events, such as the Olympics, the Super Bowl, PGA golf tournaments and NASCAR
events, and through its affiliation with several professional and collegiate
sports organizations, which offer BellSouth a broader platform to showcase its
products and services.
WIRELINE TELECOMMUNICATIONS
BellSouth Telecommunications has organized its marketing efforts to parallel
its four major customer bases: consumer, small business, complex business and
interconnection services (predominantly exchange access services.)
A substantial portion of the growth in BellSouth Telecommunications'
revenues from local service is derived from the sale of additional residential
lines and optional calling services to its residential customers. These
offerings are marketed in a variety of packages with varying pricing features
that are designed to appeal to a wide range of BellSouth Telecommunications'
residential customers. A substantial number of these sales are made by customer
service representatives who are on call 24 hours a day, seven days a week, as
they are contacted by subscribers on other matters.
BellSouth Telecommunications' small business services are marketed by
customer service representatives through varied pricing and service options.
BellSouth Telecommunications' products and services, such as video conferencing,
ISDN service and telecommunications equipment and systems, are also demonstrated
and sold through marketing arrangements with retailers and other independent
sales representatives.
BellSouth Telecommunications markets highly specialized services and
products to large and complex business customers. In addition to telephone
lines, product and service offerings to these customers include Internet access,
special networks, high-speed data transmission, business teleconferencing and
industry-specific communications configurations.
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FCC rules require BellSouth to offer interconnection capabilities to CLECs.
BellSouth Telecommunications already has many interconnection agreements in
place and continues to negotiate more. To strengthen bonds with these customers,
each customer has been assigned an account manager, and service centers have
been established to handle unbundled network element and resale orders.
Interconnection helps BellSouth Telecommunications open its markets to
competition, which, among other things, can facilitate BellSouth's qualification
to offer interLATA wireline service under provisions contained in the 1996 Act.
BellSouth is considering offering bundled telecommunications services inside
and outside the local wireline service territory of BellSouth Telecommunications
through its own CLEC. Subject to regulatory approval in the states in which it
intends to provide service, the BellSouth CLEC would have the same flexibility
as other non-affiliated carriers to resell services provided by ILECs, including
BellSouth Telecommunications and other telecommunications service providers.
The marketing of many of BellSouth's nontraditional wireline services is
enhanced by alliances with other service providers and suppliers. For instance,
Netscape Communications Corporation provides BellSouth's Internet users with its
Web browser, and persons who visit the Netscape Web site are offered a
convenient way to sign up for BellSouth's Internet service. Additional
arrangements with Yahoo! Inc. and Wired Ventures Limited further enhance
BellSouth's Internet services marketing strategy.
WIRELESS COMMUNICATIONS
Many of BellSouth's other services and products, such as cellular and PCS
services, including the long distance component of these wireless services,
Internet services and video services, are sold by BellSouth Telecommunications'
service representatives. In addition to utilizing BellSouth Telecommunications'
distribution channels, BellSouth's wireless offerings are sold through
company-owned stores and kiosks located in retail stores, such as Kroger and
Wal-Mart. Retailers such as Radio Shack, Best Buy and Circuit City are also part
of the wireless distribution channels. In addition, services and products are
made available through BellSouth's home page on the Worldwide Web, through a
telemarketing organization which contacts over 1 million potential customers
each month and through a substantial direct sales force.
BellSouth's PCS service in the Carolinas is also marketed through
BellSouth's partners in that system, including Duke Power Company. BellSouth was
the first operational PCS provider in this market, giving it a marketing
advantage over other rivals who purchased PCS licenses covering the same
territory. BellSouth's PCS service offers a number of packages of optional
features with pricing enhancements intended to attract cellular customers from
the incumbent cellular carriers in that territory.
ADVERTISING AND PUBLISHING
Advertising and publishing products are marketed to organizations and
companies with unique directory needs. Export directories, a home improvement
guide, a health and medical guide, consumer tips and a restaurant and
entertainment guide are examples of such directories. Internet users in many
markets have access to BellSouth Interactive Yellow Pages. Directories are also
marketed to non-affiliated telephone companies.
INTERNATIONAL TELECOMMUNICATIONS
BellSouth currently has operations in Latin America, Europe and
Asia-Pacific. Most of these operations consist of cellular and PCS services, and
BellSouth seeks to expand the operations into new lines of business, where
practicable. Such new lines of business include local exchange, long distance,
Internet and other information services.
17
<PAGE>
During 1997, BellSouth acquired several existing operations in Latin
America, and, with its consortium partners, won two licenses to provide cellular
services in Sao Paulo, Brazil and a six-state region in northeast Brazil. With
these additions, BellSouth now has operations in nine Latin American countries.
To capitalize on its strong presence in the region, BellSouth has begun to
market its services in several countries in the region under its brand name at
local operations and is planning the future introduction of regional lines of
business, such as roaming and long distance, using the BellSouth brand name.
This transition is intended to maximize the value of BellSouth's brand name to
its domestic and international businesses while benefitting from the strong
market position created by the individual operating companies and partners.
LONG DISTANCE
In 1996, BellSouth began offering interLATA services to its wireless
customers. At December 31, 1997, BellSouth had approximately 2.4 million
wireless interLATA customers. Additionally, BellSouth has begun marketing 800
calling card services.
BellSouth plans to begin offering interLATA wireline service to its
residential and business customers in each of its in-region states as soon as
the FCC approves its application for each state. The ability to offer interLATA
wireline services is considered critical to BellSouth's competitive strategy as
it opens its local service markets to competition.
REGULATORY AND LEGISLATIVE CHANGES
BellSouth's primary regulatory focus has been directed toward seeking the
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. BellSouth Telecommunications has
price regulation plans implemented in all states in its wireline service
territory except in Tennessee. The FCC also regulates BellSouth's interstate
services using price regulation.
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 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.
18
<PAGE>
RESEARCH AND DEVELOPMENT
BellSouth conducts its research and development activities internally and
through external vendors, primarily Bell Communications Research, Inc.
(Bellcore). Bellcore provides research and development and other services to
BellSouth and the other Holding Companies. In November 1997, BellSouth completed
the sale of its 14.3% interest in Bellcore to Science Applications International
Corporation. BellSouth has contracted with Bellcore for ongoing support of
engineering and systems. In addition, BellSouth is a member of the National
Telecommunications Alliance, an organization which supports its commitment to
national security and emergency preparedness.
LICENSES AND FRANCHISES
BellSouth Telecommunications' local exchange business is typically provided
under certificates of public convenience and necessity granted pursuant to state
statutes and public interest findings of the various public utility commissions
of the states in which BellSouth Telecommunications does business. These
certificates provide for franchises of indefinite duration, subject to the
maintenance of satisfactory service at reasonable rates.
The domestic cellular, PCS and mobile data systems in which BellSouth has an
interest are operated under licenses granted by the FCC. A carrier holding a
license to provide cellular service in a territory has limited eligibility for
PCS licensure covering the same territory. Prior approval of the FCC is required
for the assignment of a license or the transfer of control of a license. The
licenses are generally issued for up to 10-year periods. At the end of the
license period, a renewal application must be filed. BellSouth believes renewal
will generally be granted on a routine basis upon showing compliance with FCC
regulations and continuing service to the public. Licenses may be revoked and
license renewal applications may be denied for cause. With regard to cellular
licenses, the FCC has established the procedures and standards for conducting
comparative renewal proceedings, including the award of a "renewal expectancy"
that effectively eliminates the need to consider competing applicants when the
incumbent meets specified criteria.
The wireless cable systems operate under licenses granted by the FCC for
defined geographic areas. The licenses have been either purchased through FCC
auction or through acquisition of existing businesses. Such licenses are
generally granted for five to ten year periods. The licenses are not subject to
automatic renewal but renewals are generally granted upon reapplication.
The wired cable systems over which BellSouth provides domestic cable
services are operated under cable franchises granted by the city or
unincorporated county government with local franchising authority for the
geographic service area in question. These cable franchises are generally issued
for 10 to 15 year periods. They typically require the payment of cable franchise
fees to the local franchising authority, capped by federal law at 5% of gross
cable related revenues, and various forms of financial and facilities support
for a limited number of government, education and public access channels.
International systems also operate under licenses granted by the governments
in the countries where such systems are located. The foreign licenses are issued
for varied terms and are generally renewable at the end of the initial license
period. As is the case with BellSouth's domestic wireless properties, the
foreign licenses may be revoked and license renewal applications may be denied
for cause.
BellSouth believes that it owns or has licenses to use all patents,
copyrights, trademarks and other intellectual property necessary for it to
conduct its present business operations. It is not anticipated that any of such
property will be subject to expiration or non-renewal of rights that would
materially and adversely affect BellSouth or its subsidiaries.
19
<PAGE>
EMPLOYEES
At December 31, 1997, 1996 and 1995, BellSouth and its subsidiaries employed
approximately 81,000, 81,200 and 87,600 persons, respectively. Of those totals,
approximately 57,600, 62,400 and 68,600, respectively, were telephone employees
of BellSouth Telecommunications. About 57% of BellSouth's employees at December
31, 1997 were represented by the Communications Workers of America (the CWA),
which is affiliated with the AFL-CIO. BellSouth's and BellSouth
Telecommunications' collective bargaining agreements with the CWA are scheduled
to terminate on August 6, 1998. Negotiations with the CWA over the terms of new
agreements will begin in early June 1998. The outcome of these negotiations
cannot be determined at this time.
During 1995, BellSouth Telecommunications completed a 1993 plan to reduce
its work force by approximately 10,200 employees. Also during 1995, BellSouth
Telecommunications announced a plan to further reduce its work force by
approximately 11,300 employees by the end of 1997. BellSouth Telecommunications
substantially completed the 1995 plan in 1997. (See "MD&A -- Results of
Operations -- Operating Expenses -- Work Force Reduction Charge.")
In 1997, BellSouth Telecommunications announced plans to outsource certain
engineering functions, as well as its information technology operations and
application development. Approximately 2,200 employees have left or will leave
BellSouth Telecommunications in connection with these outsourcing efforts which
are expected to be complete by the end of 1998. BellSouth Telecommunications has
contracted with various entities to perform these outsourced functions. 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 million to $625 million
annually over the next ten years and replace costs previously incurred for
BellSouth Telecommunications' employees, facilities, equipment and other costs.
BellSouth Telecommunications outsourced these functions to improve capabilities
and cost effectiveness.
ITEM 2. PROPERTIES
GENERAL
BellSouth's properties do not lend themselves to description by character or
location of principal units. BellSouth's investment in property, plant and
equipment, 89% of which is held by BellSouth Telecommunications, consisted of
the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Outside plant.................................................... 40% 42%
Central office equipment......................................... 35 35
Operating and other equipment.................................... 9 8
Land and buildings............................................... 9 8
Furniture and fixtures........................................... 6 6
Plant under construction......................................... 1 1
---- ----
100% 100%
---- ----
---- ----
</TABLE>
Outside plant consists of connecting lines (aerial, underground and buried
cable) not on customers' premises, the majority of which are on or under public
roads, highways or streets, while the remainder is on or under private property.
BellSouth currently self-insures all of its outside plant against casualty
losses. Central office equipment substantially consists of digital electronic
switching equipment and circuit equipment. Land and buildings consist
principally of central offices. Operating and other equipment consists of
wireless network equipment, embedded intrasystem wiring (substantially all of
which is on the premises of customers), motor vehicles and other equipment.
Central office equipment, buildings, furniture and fixtures and certain
operating and other equipment are insured under a blanket property insurance
program. This
20
<PAGE>
program provides substantial limits of coverage against "all risks" of loss
including fire, windstorm, flood, earthquake and other perils not specifically
excluded by the terms of the policies.
Substantially all of the installations of central office equipment for the
wireline business are located in buildings and on land owned by BellSouth
Telecommunications. Many garages, administrative and business offices and
telephone service centers are in leased quarters. Most of the land and buildings
associated with BellSouth's non-wireline businesses and administrative functions
are leased.
BellSouth Telecommunications' customers are now served by electronic
switching systems and a digital network, which provides capabilities for
BellSouth Telecommunications to furnish advanced data transmission and
information management services. BellSouth is currently adding digital
capabilities to its analog cellular systems utilizing TDMA digital technology.
CAPITAL EXPENDITURES
Capital expenditures consist of gross additions to property, plant and
equipment having an estimated service life of one year or more, plus the
incidental costs of preparing the asset for its intended use.
The total investment in property, plant and equipment has increased from
$39.8 billion at January 1, 1993 to $53.8 billion at December 31, 1997, not
including deductions of accumulated depreciation. Significant additions to
property, plant and equipment will be required to meet the demand for
telecommunications services and to continually modernize and improve such
services to meet competitive demands. Population and economic expansion is
projected by BellSouth in certain growth centers within its nine-state area
during the next five to ten years. Expansion of the network will be needed to
accommodate such projected growth.
BellSouth's capital expenditures for 1993 through 1997 were as follows:
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
1997........................................................ $ 4,858
1996........................................................ 4,455
1995........................................................ 4,203
1994........................................................ 3,600
1993........................................................ 3,486
</TABLE>
BellSouth projects capital expenditures of approximately $5.0 billion to
$5.5 billion for 1998, consisting of $3.4 billion for BellSouth
Telecommunications and $1.6 billion to $2.1 billion primarily for BellSouth's
consolidated wireless and international businesses. A majority of the
expenditures will be to expand, enhance and modernize its current wireline and
domestic cellular operating systems, to develop international wireless and other
businesses and for property additions to complete construction of PCS systems in
the United States.
In addition to its consolidated operations, BellSouth and various partners
own licenses to operate wireless communications services in numerous foreign
countries. BellSouth accounts for its investments in certain of these entities
under the equity method of accounting. Accordingly, the capital expenditure
requirements for those entities are not included in the above projection. In
1998, the most significant commitment to such operations is BellSouth's
commitment to its Brazilian operations. BellSouth's share of projected license
fee commitments and capital expenditure requirements for its Brazilian
operations in 1998 is approximately $900 million.
In 1997, BellSouth generated substantially all of its funds for capital
expenditures internally and funds for its unconsolidated international
investments through both internally generated funds and external sources. In
1998, projected capital expenditures and international investments are expected
to be financed primarily through internally generated funds and, to the extent
necessary, from external sources.
21
<PAGE>
ENVIRONMENTAL MATTERS
BellSouth is subject to a number of environmental matters as a result of its
operations and the shared liability provisions related to the divestiture from
AT&T. As a result, BellSouth expects that it will be required to expend funds to
remedy certain facilities, including those Superfund sites for which BellSouth
has been named as a potentially responsible party, for the remediation of sites
with underground fuel storage tanks and other expenses associated with
environmental compliance. At December 31, 1997, BellSouth's recorded liability,
related primarily to remediation of these sites, was approximately $31 million.
BellSouth monitors its operations with respect to potential environmental
issues, including changes in legally mandated standards and remediation
technologies. BellSouth's recorded liability reflects those specific issues
where remediation activities are currently deemed to be probable and where the
cost of remediation is estimable. BellSouth continues to believe that
expenditures in connection with additional remedial actions under the current
environmental protection laws or related matters would not be material to its
financial position or annual operating results or cash flows.
ITEM 3. LEGAL PROCEEDINGS
BellSouth and its subsidiaries are subject to claims arising in the ordinary
course of business involving allegations of personal injury, breach of contract,
anti-competitive conduct, employment law issues, regulatory matters and other
actions. While complete assurance cannot be given as to the outcome of any legal
claims, BellSouth believes that any financial impact would not be material to
its financial position or annual operating results or cash flows. See Note O to
the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of shareholders in the fourth quarter of
the fiscal year ended December 31, 1997.
------------------------
ADDITIONAL INFORMATION
DESCRIPTION OF BELLSOUTH STOCK
GENERAL
The Articles of Incorporation of BellSouth authorize the issuance of
2,200,000,000 shares of common stock, par value $1 per share (the Common Stock),
and 100,000,000 shares of cumulative, first preferred stock, par value $1 per
share (the Preferred Stock). BellSouth's Board of Directors (the Board) is
authorized to provide for the issuance, from time to time, of the Preferred
Stock in series and, as to each series, to fix the number of shares in such
series and the voting, dividend, redemption, liquidation, retirement and
conversion provisions applicable to the shares of such series. No shares of
Preferred Stock are outstanding. The Board has created Series A First Preferred
Stock consisting of 30 million shares (the Series A Preferred Stock) for
possible issuance under BellSouth's Shareholder Rights Plan. (See "Preferred
Stock Purchase Rights" and "Market for Registrant's Common Equity and Related
Stockholder Matters.")
DIVIDEND RIGHTS
The holders of Common Stock are entitled to receive, from funds legally
available for the payment thereof, dividends when and as declared by resolution
of the Board. While any series of Preferred Stock is outstanding, no dividends
(other than dividends payable solely in Common Stock) may be declared or paid on
Common Stock, and no Common Stock may be purchased, redeemed or otherwise
acquired for value, (a) unless dividends on all outstanding shares of Preferred
Stock for the current and all past dividend periods have been paid or declared
and provision made for payment thereof and (b) unless all
22
<PAGE>
requirements with respect to any purchase, retirement or sinking fund or funds
applicable to all outstanding series of Preferred Stock have been satisfied.
Dividends on the Preferred Stock would be cumulative.
VOTING RIGHTS
Except in connection with the "business combinations" and "fair price"
provisions discussed below, holders of shares of Common Stock are entitled to
one vote, in person or by proxy, for each share held on the applicable record
date with respect to each matter submitted to a vote at a meeting of
shareholders, but such holders do not have cumulative voting rights. The holders
of any series of Preferred Stock, when issued, may receive the right to vote as
a class on certain amendments to the Articles of Incorporation and on certain
other matters, including the election of directors in the event of certain
defaults, which may include non-payment of Preferred Stock dividends.
LIQUIDATION RIGHTS
In the event of voluntary or involuntary liquidation of BellSouth, holders
of the Common Stock will be entitled to receive, after creditors have been paid
and the holders of the Preferred Stock, if any, have received their liquidation
preferences and accumulated and unpaid dividends, all the remaining assets of
BellSouth.
PRE-EMPTIVE RIGHTS; CONVERSION RIGHTS; REDEMPTION
No shareholders of any class shall be entitled to any pre-emptive rights to
subscribe for or purchase any shares or other securities issued by BellSouth.
The Common Stock has no conversion rights and is not subject to redemption.
PREFERRED STOCK PURCHASE RIGHTS
The Board has declared a dividend of one preferred stock purchase right
(Right) for each share of Common Stock from time to time outstanding. Under
certain circumstances, each Right will entitle the holder to purchase one
one-hundredth of a share of Series A Preferred Stock, $1.00 par value (Common
Equivalent Preferred Stock), which unit is substantially equivalent in voting
and dividend rights to one whole share of the Common Stock, at a price of $87.50
per one-hundredth of a share of Common Equivalent Preferred Stock (the Purchase
Price). The Rights are not presently exercisable and may be exercised only if a
person or group acquires 10% of the outstanding voting stock of BellSouth
without the prior approval of the Board (Acquiring Person) or announces a tender
or exchange offer that would result in ownership of 25% or more of the Common
Stock.
If an Acquiring Person becomes such without prior Board approval, the Rights
are adjusted, and each holder, other than the Acquiring Person, then has the
right to receive, on payment of the Purchase Price, the number of shares of
Common Stock, units of the Common Equivalent Preferred Stock or other assets
having a market value equal to twice the Purchase Price.
The Rights currently trade with the Common Stock and expire in 1999.
BUSINESS COMBINATIONS
The Georgia legislature has enacted legislation which generally prohibits a
corporation which has adopted a by-law electing to be covered thereby (which
BellSouth has done) from engaging in any "business combination" (i.e., a merger,
consolidation or other specified corporate transaction) with an "interested
shareholder" (i.e., a 10% shareholder or an affiliate of the corporation which
was a 10% shareholder at any time within the preceding two years) for a period
of five years from the date such person becomes an interested shareholder,
unless the interested shareholder (a) prior to becoming an interested
shareholder, obtained the approval of the Board of Directors for either the
business combination or the transaction which resulted in the shareholder
becoming an interested shareholder, (b) becomes the owner of at least 90% of the
outstanding voting stock of the corporation in the same
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<PAGE>
transaction in which the interested shareholder became an interested
shareholder, excluding for purposes of determining the number of shares
outstanding those shares owned by officers, directors, subsidiaries and certain
employee stock plans of the corporation or (c) subsequent to the acquisition of
10% or more of the outstanding voting stock of the corporation, acquires
additional shares resulting in ownership of at least 90% of the outstanding
voting stock of the corporation and obtains approval of the business combination
by the holders of a majority of the shares of voting stock of the corporation,
other than those shares held by an interested shareholder, officers, directors,
subsidiaries and certain employee stock plans of the corporation. BellSouth's
"business combinations" by-law may be repealed only by an affirmative vote of
two-thirds of the continuing directors and a majority of the votes entitled to
be cast by the shareholders, other than interested shareholders, and shall not
be effective until 18 months after such shareholder vote. The Georgia statute
provides that a domestic corporation which has thus repealed such a by-law may
not thereafter readopt the by-law as provided therein.
FAIR PRICE PROVISIONS
"Fair price" provisions contained in the Articles of Incorporation require,
generally, in connection with a merger or similar transaction between BellSouth
and an "interested shareholder" (a 10% shareholder or an affiliate of BellSouth
which was a 10% shareholder at any time within the preceding two years), the
unanimous approval of BellSouth's directors not affiliated with the interested
shareholder or the affirmative vote of two-thirds of such directors and a
majority of the outstanding shares held by disinterested shareholders, unless
(a) within the past three years the shareholder has been an interested
shareholder and has not increased its shareholdings by more than one percent in
any 12-month period or (b) all shareholders receive at least the same
consideration for their shares as the interested shareholder previously paid.
Additionally, these provisions may be revised or rescinded only upon the
affirmative vote of at least two-thirds of the directors not affiliated with an
interested shareholder and a majority of the outstanding shares held by
disinterested shareholders.
BOARD CLASSIFICATION; REMOVAL OF DIRECTORS
Board classification provisions adopted by the shareholders and contained in
the By-laws prescribe a shareholder vote for approximately one-third of the
directors, instead of all directors, at each annual meeting of shareholders for
a three-year term. Additionally, such provisions provide that shareholders may
remove directors from office only for cause, amend the By-laws with respect to
the number of directors or amend the board classification provisions only by the
affirmative vote of the holders of at least 75% of the outstanding shares
entitled to vote for the election of directors.
LIMITATION ON SHAREHOLDERS' PROCEEDINGS
BellSouth's By-laws require 75 days advance notice of shareholder
nominations for directors and of other matters to be brought before annual
shareholders' meetings. Such By-laws also provide that a special shareholders'
meeting may not be called by fewer than three-quarters of the outstanding shares
entitled to vote at the meeting.
------------------------
The provisions discussed under the five preceding sub-headings and the
ability to issue Preferred Stock, such as the Series A Preferred Stock described
above, with characteristics established by the Board and without the consent of
the holders of Common Stock and the ability to issue additional shares of Common
Stock may have the effect of discouraging takeover attempts and may also have
the effect of maintaining the position of incumbent management. In addition,
these provisions may have a significant effect on the ability of shareholders of
BellSouth to benefit from certain kinds of transactions that may be opposed by
the incumbent Board.
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<PAGE>
EXECUTIVE OFFICERS
The executive officers of BellSouth Corporation are listed below:
<TABLE>
<CAPTION>
THIS
OFFICER OFFICE
NAME AGE OFFICE SINCE SINCE
- ------------------------- --- ------------------------------------------------------------ ------- ------
<S> <C> <C> <C> <C>
F. Duane Ackerman 55 Chairman of the Board, President and Chief Executive Officer 1983 1997
Walter H. Alford* 59 Executive Vice President and Senior General Counsel 1983 1998
Richard A. Anderson 40 Group President -- Complex Business Services 1993 1998
C. Sidney Boren 54 Executive Staff Officer 1984 1997
Robert L. Capell, III 50 Senior Vice President -- Advanced Data Networks 1995 1998
Keith O. Cowan 41 Vice President -- Corporate Development 1996 1996
Mark E. Droege 44 Vice President -- Financial Management and Treasurer 1996 1996
Jere A. Drummond 58 President and Chief Executive Officer -- BellSouth 1983 1998
Communications Group
Ronald M. Dykes 51 Executive Vice President and Chief Financial Officer 1988 1995
John R. Gunter* 56 Vice President -- Network Strategies 1988 1998
Phil S. Jacobs 48 Senior Vice President -- Managed Network Solutions and 1993 1998
President BellSouth BSE, Inc.
David J. Markey 57 Vice President -- Governmental Affairs 1986 1993
Charles C. Miller, III 45 President -- International 1990 1995
Charles R. Morgan 51 Executive Vice President and General Counsel 1998 1998
William C. Pate 38 Vice President -- Advertising and Public Relations 1997 1997
William F. Reddersen 51 Group President -- Value Added Networks 1987 1998
John G. Robinson 35 Vice President -- Strategic Management 1997 1998
W. Patrick Shannon 35 Vice President and Controller 1997 1997
Richard D. Sibbernsen 51 Vice President -- Human Resources 1997 1997
Arlen G. Yokley 60 Senior Vice President -- Corporate Compliance and Corporate 1984 1996
Secretary
</TABLE>
The following officers of the companies indicated may be deemed to be
executive officers of BellSouth Corporation:
<TABLE>
<S> <C> <C> <C> <C>
Charles B. Coe 50 President -- BellSouth Telecommunications 1988 1998
Earle Mauldin 57 President and Chief Executive Officer -- BellSouth 1987 1995
Enterprises, Inc.
</TABLE>
All of the executive officers of BellSouth, other than Mr. Cowan, Mr.
Morgan, Mr. Pate, Mr. Robinson, Mr. Shannon and Mr. Sibbernsen have for at least
the past five years held high level management or executive positions with
BellSouth or its subsidiaries. Mr. Cowan was a partner at the law firm of Alston
&
- ------------------------
* Messrs. Alford and Gunter have announced their plans to retire from
BellSouth effective April 1, 1998 and during the summer of 1998,
respectively. Prior to becoming Executive Vice President and Senior General
Counsel in February 1998, Mr. Alford had been Executive Vice President and
General Counsel since 1988.
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<PAGE>
Bird before joining BellSouth in 1996. Prior to joining BellSouth in February
1998, Mr. Morgan was a partner with Mayer, Brown & Platt, a Chicago-based
international law firm, and prior to that was Vice President, General Counsel
and Secretary of Chiquita Brands International, Inc. Mr. Pate, prior to joining
BellSouth in 1996, was employed by MCI where he was responsible for that
company's domestic and international advertising. Prior to joining BellSouth in
1993, Mr. Robinson held the position of Senior Engagement Manager with McKinsey
& Company. Prior to joining BellSouth in 1997, Mr. Shannon was employed by
USWest, Inc. as Chief Financial Officer of MediaOne, a company that provides
cable TV services. In 1997, Mr. Sibbernsen joined BellSouth from TNT Limited, a
worldwide transportation company where he was head of corporate human resources
and responsible for that company's global human resources strategies and
programs.
All officers serve until their successors have been elected and qualified.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for trading in BellSouth Common Stock is the New York
Stock Exchange, Inc. (NYSE). BellSouth Common Stock is also listed on the
Boston, Chicago, Pacific and Philadelphia exchanges in the United States and the
London, Frankfurt, Amsterdam and Swiss exchanges. The ticker symbol for
BellSouth Common Stock is BLS. At February 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.
27
<PAGE>
ITEM 6. 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.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
BellSouth Corporation (BellSouth) is a holding company headquartered in
Atlanta, Georgia whose operating telephone company subsidiary, BellSouth
Telecommunications, Inc. (BellSouth Telecommunications) serves, in the
aggregate, approximately two-thirds of the population and one-half of the
territory within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. BellSouth Telecommunications
primarily provides (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 1996
VS. 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>
29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Earnings (Loss) Per Share:
<CAPTION>
PERCENT CHANGE
----------------
1997 1996
VS. 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.
30
<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
31
<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."
32
<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.
33
<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.
34
<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.
35
<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.
36
<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.
37
<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>
38
<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.
39
<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
40
<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
41
<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
42
<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
43
<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.
44
<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
45
<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.
46
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Shareholders of BellSouth Corporation:
These financial statements have been prepared in conformity with generally
accepted accounting principles and have been audited by Coopers & Lybrand
L.L.P., independent accountants, whose report is contained herein.
The integrity and objectivity of the data in these financial statements,
including estimates and judgments relating to matters not concluded by the end
of the year, are the responsibility of the management of BellSouth. Management
has also prepared all other information included therein unless indicated
otherwise.
Management maintains a system of internal accounting controls which is
continuously reviewed and evaluated. However, there are inherent limitations
that should be recognized in considering the assurances provided by any system
of internal accounting controls. The concept of reasonable assurance recognizes
that the cost of a system of internal accounting controls should not exceed, in
management's judgment, the benefits to be derived. Management believes that
BellSouth's system does provide reasonable assurance that the transactions are
executed in accordance with management's general or specific authorizations and
are recorded properly to maintain accountability for assets and to permit the
preparation of financial statements in conformity with generally accepted
accounting principles. Management also believes that this system provides
reasonable assurance that access to assets is permitted only in accordance with
management's authorizations, that the recorded accountability for assets is
compared with the existing assets at reasonable intervals and that appropriate
action is taken with respect to any differences. Management also seeks to assure
the objectivity and integrity of its financial data by the careful selection of
its managers, by organizational arrangements that provide an appropriate
division of responsibility and by communications programs aimed at assuring that
its policies, standards and managerial authorities are understood throughout the
organization. Management is also aware that changes in operating strategy and
organizational structure can give rise to disruptions in internal controls.
Special attention is given to controls while the changes are being implemented.
Management maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. In addition, as part of its audit of these financial
statements, Coopers & Lybrand L.L.P. completed a review of the accounting
controls to establish a basis for reliance thereon in determining the nature,
timing and extent of audit tests to be applied. Management has considered the
internal auditor's and Coopers & Lybrand L.L.P.'s recommendations concerning the
system of internal controls and has taken actions that it believes are
cost-effective in the circumstances to respond appropriately to these
recommendations. Management believes that as of December 31, 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
47
<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
48
<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.
49
<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.
50
<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.
51
<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.
52
<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
53
<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.
54
<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.
55
<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%
56
<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>
57
<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.
58
<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.
59
<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
60
<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.
61
<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
62
<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>
63
<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
64
<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
65
<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>
66
<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.
67
<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>
68
<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>
69
<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.
70
<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.
71
<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.
72
<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.
73
<PAGE>
SUPPLEMENTARY DATA
BELLSOUTH CORPORATION
DOMESTIC CELLULAR
PROPORTIONATE OPERATING DATA
(DOLLARS IN MILLIONS)
(UNAUDITED)
The following table sets forth unaudited, supplemental financial data for
BellSouth's domestic cellular operations reflecting proportionate consolidation
of entities in which BellSouth has an interest. This presentation differs from
the consolidation methodology used to prepare BellSouth's principal financial
statements in accordance with generally accepted accounting principles. The
proportionate operating data reflect BellSouth's ownership percentage of
entities consolidated for financial reporting purposes and BellSouth's ownership
percentage in the entities which are accounted for on the equity method for
financial reporting purposes. The data exclude gains (losses) from the
disposition of property interests and 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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change in accountants or disagreements on the adoption of appropriate
accounting standards or financial disclosure has occurred during the periods
included in this report.
PART III
ITEMS 10 THROUGH 13.
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure on page 25 in Part I of this report
since the registrant did not furnish such information in its definitive proxy
statement prepared in accordance with Schedule 14A.
74
<PAGE>
The additional information required by these items will be included in the
registrant's definitive proxy statement dated March 10, 1998 as follows, and is
herein incorporated by reference pursuant to General Instruction G(3):
<TABLE>
<CAPTION>
PAGE(S) IN
DEFINITIVE
PROXY
ITEM DESCRIPTION STATEMENT
- ----------------- ---------------------------------------------------------------------------- -----------------
<S> <C> <C>
10. Directors and Executive Officers of the Registrant.......................... 5-12
11. Executive Compensation...................................................... 26-31(a)
12. Security Ownership of Certain Beneficial
Owners and Management...................................................... 12
13. Certain Relationships and Related Transactions.............................. 26(b)
- -----------------
(a) Beginning with "Compensation Committee Interlocks and Insider Participation"
(b) Includes only "Compensation Committee Interlocks and Insider Participation"
</TABLE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE(S) IN THIS
FORM 10-K
-----------------
<S> <C>
a. Documents filed as a part of the report:
(1) Financial Statements:
Report of Independent Accountants........................................................ 48
Consolidated Statements of Income........................................................ 49
Consolidated Balance Sheets.............................................................. 50
Consolidated Statements of Shareholders' Equity.......................................... 51
Consolidated Statements of Cash Flows.................................................... 52
Notes to Consolidated Financial Statements............................................... 53
(2) Financial statement schedules have been omitted because the required information is
contained in the financial statements and notes thereto or because such schedules are not
required or applicable.
(3) Exhibits: Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto. All management contracts or
compensatory plans or arrangements required to be filed as exhibits to this Form 10-K
Report pursuant to Item 14(c) are filed as Exhibits 10a through 10y inclusive.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C>
3a Restated and Amended Articles of Incorporation of BellSouth Corporation as of February 23, 1998.
3b Bylaws of BellSouth Corporation as Amended on February 23, 1998.
4 BellSouth Corporation Shareholder Rights Agreement. (Exhibit 4-b to Form 8-K. Date of report November
27, 1989.)
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
4a No instrument which defines the rights of holders of long and intermediate term debt of BellSouth
Corporation is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, BellSouth Corporation hereby agrees to furnish a copy of any such instrument to the SEC upon
request.
<S> <C>
10a BellSouth Corporation Officer Short Term Incentive Award Plan. (Exhibit 10y to Form 10-Q for the quarter
ended September 30, 1996, File No. 1-8607.)
10b BellSouth Corporation Executive Long Term Incentive Plan. (Exhibit 10e to Form 10-K for the year ended
December 31, 1991, File No. 1-8607.)
10c BellSouth Corporation Executive Long Term Disability and Survivor Protection Plan as amended and
restated effective January 1, 1994. (Exhibit 10c-1 to Form 10-K for the year ended December 31, 1993,
File No. 1-8607.)
10d BellSouth Corporation Executive Transfer Plan. (Exhibit 10ee to Registration Statement No. 2-87846.)
10e BellSouth Corporation Death Benefit Program. (Exhibit 10ff to Form 10-K for the year ended December 31,
1989, File No. 1-8607.)
10f BellSouth Corporation Plan For Non-Employee Directors' Travel Accident Insurance. (Exhibit 10ii to
Registration Statement No. 2-87846.)
10g BellSouth Corporation Executive Incentive Award Deferral Plan as amended and restated effective
September 23, 1996. (Exhibit 10g to Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10h BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated effective November
25, 1996. (Exhibit 10h to Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10i BellSouth Corporation Supplemental Executive Retirement Plan as amended on May 18, 1995. (Exhibit 10j-1
to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10j BellSouth Corporation Directors Retirement Plan. (Exhibit 10qq to Form 10-K for the year ended December
31, 1986, File No. 1-8607.)
10k BellSouth Corporation Financial Counseling Plan. (Exhibit 10r to Form 10-K for the year ended December
31, 1992, File No. 1-8607.)
10k-1 Amendment dated November 3, 1995 to the BellSouth Corporation Financial Counseling Plan for Executives.
(Exhibit 10l-1 to Form 10-K for the year ended December 31, 1995, File No. 1-8607.)
10l BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors. (Exhibit 10gg to
Registration Statement No. 2-87846.)
10m BellSouth Corporation Executive Life Insurance Plan. (Exhibit 10v to Form 10-K for the year ended
December 31, 1992, File No. 1-8607.)
10n BellSouth Corporation Non-Employee Directors' Stock Option Plan. (Exhibit 10z to Form 10-Q for the
quarter ended March 31, 1997, File No. 1-8607.)
10o Form of Executive Officer Successor and Retirement Agreement. (Exhibit 10aa to Form 10-Q for the quarter
ended September 30, 1996, File No. 1-8607.)
10p BellSouth Non-Employee Directors Charitable Contribution Program. (Exhibit 10z to Form 10-K for the year
ended December 31, 1992, File No. 1-8607.)
10q BellSouth Personal Retirement Account Pension Plan, as amended and restated effective July 1, 1996.
(Exhibit 10r to Form 10-Q for the quarter ended September 30, 1996, File No. 1-8607.)
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
10q-1 Amendment dated April 15, 1997 to the BellSouth Personal Retirement Account Pension Plan (Exhibit 10q-1
to Form 10-Q for the quarter ended March 31, 1997, File No. 1-8607.)
<S> <C>
10q-2 Amendment dated September 12, 1997 to the BellSouth Personal Retirement Account Pension Plan (Exhibit
10q-1 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-8607.)
10q-3 Amendment dated October 31, 1997 to the BellSouth Personal Retirement Account Pension Plan (Exhibit
10q-2 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-8607.)
10r BellSouth Corporation Trust Under Executive Benefit Plan(s) as amended April 28, 1995. (Exhibit 10u-1 to
Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10r-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Executive Benefit Plan(s).
(Exhibit 10s-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10s BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) as amended April 28, 1995.
(Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10s-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit
Plan(s). (Exhibit 10t-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10t BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) as amended April 28, 1995. (Exhibit
10w-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10t-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Board Directors Benefit Plan(s).
(Exhibit 10u-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10u BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) as amended April 28,
1995. (Exhibit 10x-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10u-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors
Benefit Plan(s). (Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10v BellSouth Corporation Stock Plan as amended on September 23, 1996 and November 24, 1996. (Exhibit 10v to
Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10w BellSouth Retirement Savings Plan as amended and restated effective July 1, 1996. (Exhibit 10x to Form
10-Q for the quarter ended September 30, 1996, File No. 1-8607.)
10w-1 Amendment dated February 18, 1997 to the BellSouth Retirement Savings Plan (Exhibit 10w-1 to Form 10-Q
for the quarter ended March 31, 1997, File No. 1-8607.)
10w-2 Amendment dated June 24, 1997 to the BellSouth Retirement Savings Plan (Exhibit 10w-2 to Form 10-Q/A for
the quarter ended June 30, 1997, File No. 1-8607.)
10x BellSouth Corporation Officer Estate Enhancement Plan and Agreement. (Exhibit 10x to Form 10-K for the
year ended December 31, 1996, File No. 1-8607.)
10y BellSouth Change in Control Executive Severance Agreements. (Exhibit 10y to Form 10-K for the year ended
December 31, 1996, File No. 1-8607.)
11 Computation of Earnings Per Share.
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of BellSouth.
24 Powers of Attorney.
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
27 Financial Data Schedule.
<S> <C>
99a Annual report on Form 11-K for BellSouth Retirement Savings Plan for the fiscal year ended December 31,
1997 (to be filed as an amendment hereto within 180 days of the end of the period covered by this
report.)
</TABLE>
<TABLE>
<S> <C>
99b Annual report on Form 11-K for BellSouth Savings and Security ESOP Plan for the
fiscal year ended December 31, 1997 (to be filed as an amendment hereto within 180
days of the end of the period covered by this report.)
</TABLE>
b. Reports on Form 8-K:
<TABLE>
<CAPTION>
DATE OF EVENT SUBJECT
- -------------------- ------------------------------------------------------------------------
<S> <C>
January 22, 1998 Fourth Quarter 1997 Earnings Release
</TABLE>
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BELLSOUTH CORPORATION
/s/ W. PATRICK SHANNON
---------------------------------------------------------------------------
W. Patrick Shannon
VICE PRESIDENT AND CONTROLLER
February 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
F. Duane Ackerman*
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL OFFICER:
Ronald M. Dykes*
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PRINCIPAL ACCOUNTING OFFICER:
W. Patrick Shannon*
VICE PRESIDENT AND CONTROLLER
<TABLE>
<S> <C>
DIRECTORS:
F. Duane Ackerman* John G. Medlin, Jr.*
Reuben V. Anderson* Robin B. Smith*
James H. Blanchard* C. Dixon Spangler, Jr.*
J. Hyatt Brown* William S. Stavropoulos*
Armando M. Codina* Ronald A. Terry*
Phyllis Burke Davis* J. Tylee Wilson*
*By: /s/ W. PATRICK SHANNON
---------------------------------
</TABLE>
W. Patrick Shannon
(INDIVIDUALLY AND AS ATTORNEY-IN-FACT)
February 25, 1998
79
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of BellSouth Corporation on Form S-3 (Nos. 33-29411, 33-48929, 33-49461,
33-51449, 33-63173, 333-21233, 333-31301 and 333-45607) and Form S-8 (Nos.
33-38265, 33-38264, 33-38263, 33-30773, 33-30772, 33-26518, 33-12165, 2-94802,
33-49459, 333-01427, 333-01429, 333-13783 and 333-38295) of our report, dated
February 3, 1998, which includes an explanatory paragraph stating that the
Company discontinued accounting for the operations of BellSouth
Telecommunications, Inc. in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
effective June 30, 1995, on our audits of the consolidated financial statements
of BellSouth Corporation as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, which report is included in
this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 25, 1998
80
<PAGE>
EXHIBIT 3a
BELLSOUTH CORPORATION
ARTICLES OF INCORPORATION
--------------------
Incorporated Under the Laws
of the State of Georgia
on October 13, 1983
--------------------
Restated
by Board of Directors
February 23, 1998
Secretary's Department
19A01 Campanile Building
1155 Peachtree Street, N.E.
Atlanta, Georgia 30309-3610
<PAGE>
RESTATED AND AMENDED
ARTICLES OF INCORPORATION
OF
BELLSOUTH CORPORATION
1.
The name of the Corporation is BellSouth Corporation.
2.
The Corporation is organized pursuant to the provisions of the Georgia
Business Corporation Code.
3.
The Corporation shall have perpetual duration.
4.
The purposes for which the Corporation is organized are:
(1) To act as a holding company for the stock of companies engaged in
the telephone and other communications businesses; and
(2) To conduct any business and engage in any activities not
specifically prohibited to corporations for profit under the laws
of the State of Georgia; and the Corporation shall have all the
powers necessary to conduct such businesses and engage in such
activities, including, but not limited to, the powers enumerated
in the Georgia Business Corporation Code or any amendment thereto.
5.
The aggregate number of shares of stock which the Corporation is
authorized to issue is 2,300,000,000 shares, consisting of 2,200,000,000
shares of Common Stock having a par value of $1 per share and 100,000,000
shares of First Preferred Stock having a par value of $1 per share.
The Common Stock shall be deemed to be stock entitled to vote within the
meaning of any of the provisions of the laws of the State of Georgia, and
each holder of Common Stock shall, at every meeting of stockholders, be
entitled to one vote, in person or by proxy, for each share of such stock
held by such holder.
The authorized but unissued shares of First Preferred Stock and Common
Stock shall be available for issue and sale at any time and from time to
time, either in whole or in part, and upon such terms and conditions and for
such consideration, not less than the par value thereof, as may be provided
by the Board of Directors of the Corporation or, if authorized by the By-laws
of the Corporation, the Executive Committee of the Board of Directors.
<PAGE>
The Corporation may issue fractional shares in connection with any
dividend reinvestment plan and for any other legitimate corporate purposes
permitted by the Georgia Business Corporation Code.
The following is a description of the terms, provisions, preferences,
rights, voting powers, restrictions and limitations of the First Preferred
Stock:
A. Dividends on the First Preferred Stock shall be cumulative.
B. The First Preferred Stock shall rank superior to the Common Stock both
as to the payment of dividends (other than dividends payable solely in shares
of Common Stock) and as to amounts distributable upon the voluntary or
involuntary liquidation of the Corporation.
C. At any time after full cumulative dividends for all previous dividend
periods shall have been paid on the First Preferred Stock and each other
class of stock ranking superior to or in parity with the First Preferred
Stock as to dividends, and after declaring and making provision for the
payment in full of the quarterly dividends for the current dividend period on
the First Preferred Stock and on each other class of stock ranking superior
to or in parity with the First Preferred Stock as to dividends, and after all
requirements with respect to any purchase, retirement or sinking fund or
funds for all series of the First Preferred Stock and each other class of
stock ranking superior to or in parity with the First Preferred Stock have
been complied with, then, but not prior thereto, out of any funds of the
Corporation lawfully available therefor, dividends may be declared and paid
on the class or classes of stock junior to the First Preferred Stock as to
dividends, subject to the respective terms and provisions applying thereto.
The provisions of this paragraph shall not be applicable to dividends payable
solely in shares of Common Stock to holders of the Common Stock. If at any
time the Corporation shall fail to pay full cumulative dividends on any
shares of the First Preferred Stock or on any other class of stock ranking
superior to or in parity with the First Preferred Stock, or if at any time
the Corporation shall be in default under the requirements with respect to
any purchase, retirement or sinking fund or funds applicable to any series of
the First Preferred Stock or any other class of stock ranking superior to or
in parity with the First Preferred Stock, thereafter until such dividends
shall have been paid or declared and set apart for payment and any other such
default remedied, the Corporation shall not purchase, redeem, or otherwise
acquire for consideration any shares of any class of stock then outstanding
and ranking in parity with or junior to the First Preferred Stock.
D. In the event of any voluntary or involuntary liquidation of the
Corporation, after payment or provision for payment of the debts and other
liabilities of the Corporation, after making provision for preferred stock
superior to the First Preferred Stock as to payments upon liquidation and
before any distribution to the holders of the Common Stock or any subordinate
preferred stock, the holders of each series of the First Preferred Stock
shall be entitled to receive out of the net assets of the Corporation an
amount in cash for each share equal to the amount fixed and determined by the
Board of Directors in the resolution providing for the issuance of the
particular series of First Preferred Stock, plus all dividends accumulated
and unpaid on each such share of First Preferred Stock up to the date fixed
for distribution, and no more. If the amount payable to the holders of the
First Preferred Stock cannot be paid in full, the holders of the shares of
First Preferred Stock shall share ratably in any distribution of assets in
proportion to the sums which would have been paid to them upon such
distribution if all sums payable to holders of the First Preferred Stock and
all classes of stock in parity with the First Preferred Stock were
2
<PAGE>
paid and discharged in full. For the purposes of this paragraph, the
voluntary sale, conveyance, lease, exchange or transfer of all or
substantially all the property or assets of the Corporation or a
consolidation or merger of the Corporation with one or more other
corporations (whether or not the Corporation is the corporation surviving
such consolidation or merger) shall not be deemed to be a voluntary or
involuntary liquidation.
E. For purposes hereof, any class or classes of stock shall be deemed to
rank (i) superior to the First Preferred Stock, either as to dividends or as
to distributions in liquidation, if the holders of such class or classes
shall be entitled to the receipt of dividends or to the receipt of amounts
distributable upon liquidation or the Corporation, as the case may be, in
preference or priority to the holders of the First Preferred Stock; (ii) in
parity with the First Preferred Stock, either as to dividends or as to
distributions in liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share thereof be
different from those of the First Preferred Stock, if the holders of such
class or classes of stock shall be entitled to the receipt of dividends or to
the receipt of amounts distributable upon liquidation of the Corporation, as
the case may be, in proportion to their respective dividend rates or
liquidation prices, without preference or priority one over the other with
respect to the holders of the First Preferred Stock; and (iii) junior to the
First Preferred Stock, either as to dividends or as to distributions in
liquidation, if the rights of the holders of such class or classes shall be
subject or subordinate to the rights of the holders of the First Preferred
Stock in respect of receipt of dividends (other than dividends payable in
shares of Common Stock) or to the receipt of amounts distributable upon
liquidation of the Corporation, as the case may be.
F. All shares of First Preferred Stock shall be identical except that the
Board of Directors of the Corporation is hereby expressly authorized and
empowered to divide the First Preferred Stock into one or more series, and,
prior to the issuance of any of such shares in any particular series, to fix
and determine, in the manner provided by law, the following provisions of
such series:
(a) The distinctive designation of such series and the number of
shares to be included in such series;
(b) The rate of dividend, the times of payment and the date from which
the dividends shall be accumulated;
(c) Whether shares can be redeemed and, if so, the redemption price
and the terms and conditions of redemption;
(d) The amount payable upon shares in the event of voluntary or
involuntary liquidation;
(e) Purchase, retirement or sinking fund provisions, if any, for the
redemption or purchase of shares;
(f) The terms and conditions, if any, on which shares may be converted;
(g) Whether or not shares have voting rights, and the extent of any
such voting rights, which rights may include, without limitation, the right
to vote generally with the Common Stock for the election of members of the
Board of Directors and on other matters and/or the right, either generally or
upon the occurrence of specified
3
<PAGE>
circumstances, to vote specially as a class for the election of one or more
members of the Board of Directors; and
(h) Any other preferences, rights, restrictions and qualifications of
shares of such class or series, permitted by law and these Articles of
Incorporation.
G. After the Board of Directors of the Corporation has established a
series in accordance with the terms of applicable law and these Articles of
Incorporation, the Board of Directors may at any time and from time to time
increase or decrease the number of shares contained in such series, but not
below the number of shares thereof then issued, by adopting a resolution
making such change.
H. Each share of First Preferred Stock within an individual series shall
be identical in all respects with the other shares of such series, except as
to the date, if any, from which dividends thereon shall accumulate.
5A. SERIES A FIRST PREFERRED STOCK
Designation and Amount. There shall be a series of the First Preferred Stock
designated as "Series A First Preferred Stock". The number of shares
constituting such series shall be 30,000,000 and such series shall have the
preferences, limitations and relative rights set forth below.
Section 1. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any other series of First Preferred Stock or any other shares of preferred
stock of the Corporation ranking prior and superior to the shares of Series A
First Preferred Stock with respect to dividends, each holder of one
one-hundredth (1/100) of a share (a "Unit") of Series A First Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for that purpose, (i) quarterly
dividends payable in cash on the first day of January, April, July, and
October in each year (each such date being a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the
first issuance of such Unit of Series A First Preferred Stock, in an amount
per Unit (rounded to the nearest cent) equal to the greater of (a) $.63 or
(b) subject to the provision for adjustment hereinafter set forth, the
aggregate per share amount of all cash dividends declared on shares of the
Common Stock of the Corporation, par value $1.00 per share (the "Common
Stock"), since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series A First Preferred Stock, and (ii) subject to the
provision for adjustment hereinafter set forth, quarterly distributions
(payable in kind) on each Quarterly Dividend Payment Date in an amount per
Unit equal to the aggregate per share amount of all non-cash dividends or
other distributions (other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock, by
reclassification or otherwise) declared on shares of Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of a Unit
of Series A First Preferred Stock. In the event that the Corporation shall at
any time after November 27, 1989, (the "Rights Declaration Date") (i) declare
any dividend on outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii)
combine outstanding shares of Common Stock into a smaller number of shares,
then in each such case, the amount to which the holder of a Unit of Series A
First Preferred
4
<PAGE>
Stock was entitled immediately prior to such event pursuant to the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which shall be the number of shares of Common Stock that are
outstanding immediately after such event, and the denominator of which shall
be the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on Units of
Series A First Preferred Stock as provided in paragraph (A) above immediately
after it declares a dividend or distribution on the shares of Common Stock
(other than a dividend payable in shares of Common Stock); provided, however,
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$.63 per Unit on the Series A First Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series A First Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issuance of such Unit of
Series A First Preferred Stock, unless the date of issuance of such Unit is
prior to the record date for the first Quarterly Dividend Payment Date, in
which case, dividends on such Unit shall begin to accrue from the date of
issuance of such Unit, or unless the date of issuance is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of
holders of Units of Series A First Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either
of which events such dividends shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not
bear interest. Dividends paid on Units of Series A First Preferred Stock in
an amount less than the aggregate amount of all such dividends at the time
accrued and payable on such Units shall be allocated pro rata on a
unit-by-unit basis among all Units of Series A First Preferred Stock at the
time outstanding. The Board of Directors may fix a record date for the
determination of holders of Units of Series A First Preferred Stock entitled
to receive payment of a dividend or distribution declared thereon, which
record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
Section 2. Voting Rights. The holders of Units of Series A First
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
Unit of Series A First Preferred Stock shall entitle the holder thereof to
one vote on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of
Common Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the number of votes per Unit
to which holders of Units of Series A First Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such number
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
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(B) Except as otherwise provided herein or by law, the holders of Units
of Series A First Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(C) (i) If at any time dividends on any Units of Series A First
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, then during the period (a "default period") from the
occurrence of such event until such time as all accrued and unpaid dividends
for all previous quarterly dividend period and for the current quarterly
dividend period on all Units of Series A First Preferred Stock then
outstanding shall have been declared and paid or set apart for payment, all
holders of Units of Series A First Preferred Stock, voting separately as a
class, shall have the right to elect two Directors.
(ii) During any default period, such voting rights of the holders of
Units of Series A First Preferred Stock may be exercised initially at a
special meeting, called pursuant to subparagraph (iii) of this Section 3(C)
or at any annual meeting of shareholders, and thereafter at annual meetings
of shareholders, provided that neither such voting rights nor any right of
the holders of Units of Series A First Preferred Stock to increase, in
certain cases, the authorized number of Directors may be exercised at any
meeting unless one-third of the outstanding Units of Series A Preferred Stock
shall be present at such meeting in person or by proxy. The absence of a
quorum of the holders of Common Stock shall not affect the exercise by the
holders of Units of Series A First Preferred Stock of such rights. At any
meeting at which the holders of Series A First Preferred Stock shall exercise
such voting right initially during an existing default period, they shall
have the right, voting separately as a class, to elect Directors to fill two
vacancies in the Board of Directors, if any such vacancies may then exist,
or, if such right is exercised at an annual meeting, to elect two Directors.
If the number which may be so elected at any special meeting does not amount
to the required number, the holders of the Series A First Preferred Stock
shall have the right to make such increase in the number of Directors as
shall be necessary to permit the election by them of the required number.
After the holders of Units of Series A First Preferred Stock shall have
exercised their right to elect Directors during any default period, the
number of Directors shall not be increased or decreased except as approved by
a vote of the holders of Units of Series A First Preferred Stock as herein
provided or pursuant to the rights of any equity securities ranking senior to
the Series A First Preferred Stock.
(iii) Unless the holders of Series A First Preferred Stock shall,
during an existing default period, have previously exercised their right to
elect Directors, the Board of Directors may order, or any stockholder or
shareholders owning in the aggregate not less than two-thirds of the total
number of Units of Series A First Preferred Stock outstanding may request in
writing, the calling of a special meeting of the holders of Units of Series A
First Preferred Stock, which meeting shall thereupon be called by the
Secretary of the Corporation. Notice of such meeting and of any annual
meeting at which holders of Units of Series A First Preferred Stock are
entitled to vote pursuant to this paragraph (C)(iii) shall be given to each
holder of record of Units of Series A First Preferred Stock by mailing a copy
of such notice to him at his last address as the same appears on the books of
the Corporation. Such meeting shall be called for a time not earlier than 30
days and not later than 50 days after such order or request or, if the
Corporation is in default of the calling of such meeting within 50 days after
such order or request, such meeting may be called on similar notice by any
stockholder or shareholders owning in the aggregate not less
6
<PAGE>
than two-thirds of the total number of outstanding Units of Series A First
Preferred Stock.
(iv) During any default period, the holders of shares of Common Stock
and Units of Series A First Preferred Stock, and other classes or series of
stock of the Corporation, if applicable, shall continue to be entitled to
elect all the Directors until the holders of Units of Series A First
Preferred Stock shall have exercised their right to elect two Directors
voting as a separate class, after the exercise of which right (x) the
Directors so elected by the holders of Units of Series A First Preferred
Stock shall continue in office until their successors shall have been elected
by such holders or until the expiration of the default period, and (y) any
vacancy in the Board of Directors may (except as provided in paragraph
(C)(ii) of this Section 3) and filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of capital stock
which elected the Director whose office shall have become vacant. References
in this paragraph (C) to Directors elected by the holders of a particular
class of capital stock shall include Directors elected by such Directors to
fill vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Units of Series A First Preferred Stock as a separate class
to elect Directors shall cease, (y) the term of any Directors elected by the
holders of Units of Series A First Preferred Stock as a separate class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the Articles or By-Laws irrespective of any increase made
pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such
number being subject, however, to change thereafter in any manner provided by
law or in the Articles or By-Laws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding sentence
may be filled by a majority of the remaining Directors.
(vi) The provisions of this paragraph (C) shall govern the election of
Directors by holders of Units of Series A First Preferred Stock during any
default period notwithstanding any provisions of the Articles to the contrary.
(D) Except as set forth herein, holders of Units of Series A First
Preferred Stock shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote with holders
of Shares of Common Stock as set forth herein) for taking any corporate
action.
Section 3. Certain Restrictions.
(A) Until all accrued and unpaid dividends and distributions, whether or
not declared, on outstanding Units of Series A First Preferred Stock shall
have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
junior stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of parity stock, except dividends paid ratably on Units of Series
A First Preferred Stock and shares of all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of such Units and all such shares are then entitled;
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<PAGE>
(iii) redeem or purchase or otherwise acquire for consideration shares
of any parity stock, provided, however, that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any junior stock;
(iv) purchase or otherwise acquire for consideration any Units of
Series A First Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors)
to all holders of such Units.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section
4, purchase or otherwise acquire such shares at such time and in such manner.
Section 4. Reacquired Shares. Any Units of Series A First Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall become Treasury shares.
Section 5. Liquidation, Dissolution or Winding Up.
(A) Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, no distributions shall be made (i) to the holders of
shares of junior stock unless the holders of Units of Series A First
Preferred Stock shall have received, subject to adjustment as hereinafter
provided in paragraph (B), the greater of either (a) $.01 per Unit plus an
amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, or (b) an amount per
unit equal to the aggregate per share amount to be distributed to holders of
shares of Common Stock or (ii) to the holders of shares of parity stock,
unless simultaneously therewith distributions are made ratably on Units of
Series A First Preferred Stock and all other shares of such parity stock in
proportion to the total amounts to which the holders of Units of Series A
First Preferred Stock are entitled under clause (i)(a) of this sentence and
to which the holders of shares of such parity stock are entitled, in each
case, upon such liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of
Common Stock, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, then in each such case, the aggregate amount to
which holders of Units of Series A First Preferred Stock were entitled
immediately prior to such event pursuant to clause (i)(b) of paragraph (A) of
this Section 6 shall be adjusted by multiplying such amount by a fraction,
the numerator of which shall be the number of shares of Common Stock that are
outstanding immediately after such event, and the denominator of which shall
be the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 6. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or converted into other
stock or securities, cash and/or any other property, then in any such case,
Units of Series A First Preferred Stock shall at the same time be similarly
exchanged for or converted into an amount per Unit (subject to the provision
for adjustment hereinafter set forth) equal to the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is
8
<PAGE>
converted or exchanged. In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on outstanding shares of
Common Stock payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock, or (iii) combine outstanding shares of Common Stock
into a smaller number of shares, then in each such case, the amount set forth
in the immediately preceding sentence with respect to the exchange or
conversion of Units of Series A First Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event, and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.
Section 7. Redemption. The units of Series A First Preferred Stock shall
not be redeemable.
Section 8. Ranking. The Units of Series A First Preferred Stock shall
rank junior to all other series of the Preferred Stock and to any other class
of preferred stock that hereafter may be issued by the Corporation as to the
payment of dividends and the distribution of assets, unless the terms of any
such series or class shall provide otherwise.
Section 9. Amendment. The Articles shall not hereafter be amended,
either directly or indirectly, or through merger or consolidation with
another corporation, in any manner that would alter or change the powers,
preferences or special rights of the Series A First Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding Units of Series A First Preferred Stock,
voting separately as a class.
Section 10. Fractional Shares. The Series A First Preferred Stock may be
issued in Units or other fractions of a share, which Units or fractions shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions, and
to have the benefit of all other rights of holders of Series A First
Preferred Stock.
Section 11. Certain Definitions. As used herein with respect to the
Series A First Preferred Stock, the following terms shall have the following
meanings:
(A) The term "junior stock" (i) as used in Section 4, shall mean the
Common Stock and any other class or series of capital stock of the
Corporation hereafter authorized or issued over which the Series A First
Preferred Stock has preference or priority as to the payment of dividends,
and (ii) as used in Section 6, shall mean the Common Stock and any other
class or series of capital stock of the Corporation over which the Series A
First Preferred Stock has preference or priority in the distribution of
assets on any liquidation, dissolution or winding up of the Corporation.
(B) The term "parity stock" (i) as used in Section 4, shall mean any
class or series of stock of the Corporation hereafter authorized or issued
ranking pari passu with the Series A First Preferred Stock as to dividends,
and (ii) as used in Section 6, shall mean any class or series of stock of the
Corporation ranking pari passu with the Series A First Preferred Stock in the
distribution of assets on any liquidation, dissolution or winding up.
9
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5B. TREASURY STOCK
Shares of stock of the Corporation which have been issued, have been
subsequently acquired by and belong to the Corporation and have not been
canceled, shall be designated treasury shares, and shall be deemed to be
issued but not outstanding.
6.
No holder of shares of stock of the Corporation of any class shall have or
be entitled to any preemptive rights to subscribe for or to purchase any
shares or other securities issued by the Corporation.
7.
Subject to the provisions of the Georgia Business Corporation Code, the
Board of Directors shall have the power to distribute a portion of the assets
of the Corporation, in cash or in property, to holders of shares of the
Corporation out of the capital surplus of the Corporation.
8.
The Corporation shall have the full power to purchase and otherwise
acquire, and dispose of, its own shares and securities granted by the laws of
the State of Georgia and shall have the right to purchase its shares out of
its unreserved and unrestricted capital surplus available therefor as well as
out of its unreserved and unrestricted earned surplus available therefor.
9.
The Corporation shall not commence business until it shall have received
not less than $500 in payment for the issuance of its shares.
10.
I. 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 l0
percent or more of any class of equity securities;
10
<PAGE>
(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 or consolidation 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 or consolidation
would be, an affiliate of an interested shareholder that was an
interested shareholder prior to the consummation of the
transaction;
(B) 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
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;
(C) 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
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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;
(D) 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
(E) Any reclassification of securities, including any reverse stock
split, or recapitalization of the corporation, or any merger or
consolidation of the corporation 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" 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
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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, 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,
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; 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) (i) Is the beneficial owner of 10 percent or more of the voting
power of the outstanding voting shares of the corporation; or
(ii) 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;
and
(B) For the purpose of determining whether a person is an interested
shareholder, the number of voting shares deemed to outstanding
shall not include any unissued voting shares which be issuable
pursuant to any agreement, arrangement, understanding, or upon
exercise of conversion rights, warrants options, or otherwise.
(12) "Voting shares" means shares entitled to vote generally in the
election of directors.
II. In addition to any vote otherwise required by law or the articles of
incorporation of the corporation, a business combination shall be:
(1) Unanimously approved by the continuing directors, provided that the
continuing directors constitute at least three members of the
board of directors at the time of such approval; or
(2) Recommended by at least two-thirds of the continuing directors and
approved by a majority of the votes entitled to be cast by holders
of voting shares, other than voting shares beneficially owned by
the interested
13
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shareholder who is, or whose affiliate is, a party to the business
combination.
III. (a) As used in this Section III, the term "interested shareholder"
refers to the interested shareholder which is party to, or an affiliate of
which is party to, the business combination in question.
(b) The vote required by Section II of this Article does not apply to a
business combination if each of the following conditions is met:
(1) The aggregate amount of the cash, and the fair market value as of
five days before the consummation of the business combination of
consideration other than cash, to be received per share by holders
of any class of common shares or any class or series of preferred
shares in such business combination is at least equal to the
highest of the following:
(A) The highest per share price, including any brokerage
commissions, transfer taxes, and soliciting dealers' fees, paid
by the interested shareholder for any shares of the same class
or series acquired by it:
(i) Within the two-year period immediately prior to the
announcement date; or
(ii) In the transaction in which it became an interested
shareholder, whichever is higher;
(B) The fair market value per share of such class or series as
determined on the announcement date and as determined on the
determination date, whichever is higher; or
(C) In the case of shares other than common shares, the highest
preferential amount per share to which the holders of shares of
such class or series are entitled in the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the
corporation; provided that this subparagraph shall only apply
if the interested shareholder has acquired shares of such class
or series within the two-year period immediately prior to the
announcement date;
(2) The consideration to be received by holders of any class or series
of outstanding shares is to be in cash or in the same form as the
interested shareholder has previously paid for shares of the same
class or series. If the interested shareholder has paid for shares
of any class or series of shares with varying forms of
consideration, the form of consideration for such class or series
of shares shall be either cash or the form used to acquire the
largest number of shares of such class or series previously
acquired by it;
(3) After the interested shareholder has become an interested
shareholder and prior to the consummation of such business
combination:
(A) Unless approved by a majority of the continuing directors, there
shall have been:
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(i) No failure to declare and pay at the regular date therefor
any full periodic dividends, whether or not cumulative, on any
outstanding preferred shares of the corporation;
(ii) No reduction in the annual rate of dividends paid on any
class of common shares, except as necessary to reflect any
subdivision of the shares;
(iii) An increase in such annual rate of dividends as is necessary
to reflect any reclassification, including any reverse share
split, recapitalization, reorganization, or any similar
transaction which has the effect of reducing the number of
outstanding shares; and
(iv) No increase in the interested shareholder's percentage
ownership of any class or series of shares of the corporation
by more than 1 percent in any 12 month period.
(B) The provisions of divisions (b)(3)(A)(i) and (ii) of this
Section III shall not apply if the interested shareholder or an
affiliate or associate of the interested shareholder did not
vote as a director of the corporation in a manner inconsistent
with divisions (b)(3)(A)(i) and (ii) of this Section III and
the interested shareholder, within ten days after any act or
failure to act inconsistent with divisions (b)(3)(A)(i) and
(ii) of this Section III, notified the board of the corporation
in writing that the interested shareholder disapproved thereof
and requested in good faith that the board of directors rectify
the act or failure to act; and
(4) After the interested shareholder has become an interested
shareholder, the interested shareholder has not received the
benefit, directly or indirectly, except proportionately as a
shareholder, of any loans, advances, guarantees, pledges, or other
financial assistance or any tax credits or other tax advantages
provided by the corporation or any of its subsidiaries, whether in
anticipation of or in connection with such business combination or
otherwise.
IV. (a) This Article may only be repealed or amended by the affirmative vote
of at least two-thirds of the continuing directors and a majority of the
votes entitled to be cast by voting shares of the corporation, other than
shares beneficially owned by any interested shareholder and affiliates and
associates of any interested shareholder, in addition to any other vote
required by the articles of incorporation or by law.
(b) The requirements of Section II of this Article shall never apply to
business combinations with an interested shareholder or its affiliates if,
during the three-year period immediately preceding the consummation of the
business combination, the interested shareholder has not at any time during
such period:
(1) Ceased to be an interested shareholder; or
(2) Increased its percentage ownership of any class or series of common
or preferred shares of the corporation by more than 1 percent in
any 12 month period.
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<PAGE>
11.
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.
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Exhibit 3b
BELLSOUTH CORPORATION
Incorporated under the Laws
of the State of Georgia
on October l3, l983
Adopted
October 24, l983
--------------------
BY-LAWS
As Amended
February 23, 1998
Secretary Department
19A01 Campanile Building
1155 Peachtree Street, N.E.
Atlanta, Georgia 30309-3610
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
----------------------------------------------------------
<S> <C>
Article I.......................... Shareholders
Article II......................... Directors
Article III........................ Officers
Article IV......................... Stock
Article V.......................... Business Combinations
Article VI......................... Seal
Article VII........................ Indemnity
Article VIII....................... Amendment of By-laws
</TABLE>
2
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BY-LAWS
OF
BELLSOUTH CORPORATION
ARTICLE I
Shareholders
Section l. Annual Meeting. The annual meeting of the shareholders for
the election of Directors and for the transaction of such other business as
may properly come before the meeting shall be held on such date and at such
time and place as the Board of Directors may by resolution provide. Notice
of any nominations of persons for election to the Board of Directors or of
any other business to be brought before an annual meeting of shareholders by
a shareholder must be provided in writing to the Secretary of the Corporation
not later than the close of business on the seventy-fifth (75th) day nor
earlier than the close of business on the one hundred and twentieth (120th)
day prior to the date which is twelve (12) months after the anniversary of
the annual meeting of shareholders held in the prior year. Such
shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (including such person's written consent to being named in the Proxy
Statement as a nominee and to serving as a director if elected, and evidence
reasonably satisfactory to the Company that such nominee has no interests
that would limit their ability to fulfill their duties of office; (b) as to
any other business that the shareholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such shareholder and the beneficial owner, if
any, on whose behalf the proposal is made; and (c) as to the shareholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such shareholder,
as they appear on the Corporation's books, and of such beneficial owner and
(ii) the class and number of shares of the Corporation that are owned
beneficially and held of record by such shareholder and such beneficial
owner. In addition, if the shareholder intends to solicit proxies from the
shareholders of the Corporation, such shareholder's notice shall notify the
Corporation of this intent. If a shareholder fails to notify the Corporation
of his or her intent to solicit proxies and does in fact solicit proxies, the
Chairman of the Board shall have the authority, in his or her discretion, to
strike the proposal or nomination by the shareholder.
Section 2. Special Meeting. A special meeting of the shareholders may be
called at any time by the Board of Directors or the Chief Executive Officer
and shall be called upon written request to the Chief Executive Officer or
Secretary, signed by the holders of at least three-quarters of the
outstanding shares entitled to vote at such meeting. The written request
3
<PAGE>
shall set forth (a) a brief description of the purpose of the proposed
meeting and business to be brought before such meeting, and any material
interest in such business of any shareholder and beneficial owner, if any, on
whose behalf the proposal is made; (b) if the shareholders requesting the
special meeting propose to nominate one or more persons for election as
directors, as to each such person all information that is required to be
disclosed in solicitations of proxies for elections of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including each such person's
written consent to being named in a proxy statement as a nominee and to
serving as director if elected, and evidence reasonably satisfactory to the
Company that such nominee has no interests that would limit his or her
ability to fulfill his or her duties of office; and (c) as to the
shareholders giving the notice and the beneficial owner, if any on whose
behalf the request is made, (i) the name and address of each such
shareholder, as they appear on the Company's books, and of such beneficial
owner and (ii) the class and number of shares of the Company that are owned
beneficially and held of record by such shareholders and beneficial owners.
In addition, if the shareholder intends to solicit proxies from the
shareholders of the Corporation, such shareholder's notice shall notify the
Corporation of this intent. If a shareholder fails to notify the Corporation
of his or her intent to solicit proxies and does in fact solicit proxies, the
Chairman of the Board shall have the authority, in his or her discretion, to
strike the proposal or nomination proposed by the shareholder.
Section 3. Notice of Meetings of Shareholders. Written notice of each
meeting of shareholders, stating the place and time of the meeting, shall be
mailed to each shareholder entitled to vote at such meeting at such
shareholder's address shown on the records of the Corporation not less than
thirty nor more than sixty days prior to such meeting. If the notice is for a
special meeting, the notice shall also include the purpose or purposes for
which the special meeting is being called and shall indicate that the notice
is being issued by or at the direction of the person or persons calling the
meeting. Failure to receive notice of any meeting of shareholders shall not
invalidate the meeting. Notice of any meeting may be given by or at the
direction of the Chairman, the President, the Secretary or by the person or
persons calling such meeting.
Section 4. Quorum; Required Shareholder Vote. A quorum for the
transaction of business at any meeting of the shareholders shall exist when
the holders of forty per centum of the outstanding shares entitled to vote
are represented either in person or by proxy. At any duly constituted
meeting, or at any adjournment thereof, the affirmative vote of the majority
of the shares represented at the meeting and entitled to vote on the subject
matter shall be the act of the shareholders, unless a greater vote is
required by law, by the Articles of Incorporation or by these By-laws. The
holders of a majority of the voting shares represented at a meeting may
adjourn such meeting to another time or place despite the absence of a quorum.
Section 5. Ballots. All elections by shareholders shall be by ballot.
4
<PAGE>
Section 6. Proxies. A shareholder may vote either in person or by a
proxy which such shareholder has duly executed in writing, or by any other
method permitted by the Official Code of Georgia Annotated.
Section 7. Inspectors of Elections. The Board of Directors, in advance
of any shareholders' meeting, shall appoint an Inspector or Inspectors to act
at the meeting or any adjournment, thereof. Any vacancy may be filled by
appointment of the Board in advance of the meeting or at the meeting by the
person presiding thereat.
ARTICLE II
Directors
Section l. Power of Directors. The Board of Directors shall direct the
management of the business and affairs of the Corporation and may exercise
all of the powers of the Corporation, subject to any restrictions imposed by
law, by the Articles of Incorporation or by these By-laws.
Section 2. Composition of the Board. The Board of Directors of the
Corporation shall consist of thirteen (13) natural persons of the age of
eighteen years or over. The Directors shall be divided into three classes (of
at least three directors each), as nearly equal in number of directors as
possible, with the term of each class to be three years. Each Director shall
hold office for the term for which elected, which term shall end at an Annual
Meeting of Shareholders, and until his successor shall have been elected and
qualified, or until his earlier retirement, resignation, removal from office,
or death. The authorized number of directors may be increased or decreased
from time to time by vote of a majority of the then authorized number of
directors or by the affirmative vote of the holders of at least 75% of the
voting power of all shares of the Corporation entitled to vote generally in
the election of directors, voting together as a single class; provided,
however, that such number shall not be less than nine.
Section 3. Election of Chairman of the Board and Vice Chairmen of the
Board. The Board of Directors may elect from among their number a Chairman
of the Board, and may also elect from among their number a Vice Chairman or
Vice Chairmen of the Board (referred to in these By-laws as a "Vice Chairman"
or "Vice Chairmen").
Section 4. Chairman of the Board. The Chairman of the Board (referred
to in these By-laws as the "Chairman") shall preside, when present, at all
meetings of the Board of Directors and shall have such other powers and
duties as may be conferred upon or assigned to the Chairman by the Board of
Directors.
Section 5. Vice Chairmen of the Board. The Vice Chairman (or if there
be more than one Vice Chairman, the Vice Chairman designated by the Chairman)
of the Board, shall preside at meetings of the Board of Directors in the
absence of the Chairman and at meetings of the
5
<PAGE>
Shareholders in the absence of the Chief Executive Officer, and shall perform
such other duties as the Board or Chairman may assign.
Section 6. Meetings of the Board; Notice of Meetings; Waiver of Notice.
The Annual Meeting of the Board of Directors, for the purpose of electing
officers and transacting such other business as may be brought before the
meeting, shall be held each year immediately following the Annual Meeting of
the shareholders. Regular meetings shall be held at such times and places as
the Board of Directors or Committees may determine, and no notice of such
regular meetings need be given. Special meetings of the Board of Directors
may be called at any time by the Chief Executive Officer or by any two
members of the Executive Committee, and shall be called by the Chief
Executive Officer or the Secretary upon request in writing signed by two or
more directors and specifying the purpose or purposes of the meeting. Notice
of the time and place of such special meetings shall be given to each
Director, in person or by first class mail, telegraph, cablegram or
telephone, or by any other means customary for expedited business
communications, at least two (2) days before the meeting. Neither the
business to be transacted at, nor the purpose of, any meeting of the Board of
Directors need be stated in the notice of such meeting.
Section 7. Quorum; Vote Requirement. One-third of the number of
Directors fixed in these By-laws at any time shall constitute a quorum for
the transaction of business at any meeting. When a quorum is present, the
vote of a majority of the Directors present shall be the act of the Board of
Directors, unless a greater vote is required by law, by the Articles of
Incorporation or by these By-laws.
Section 8. Action of Board Without Meeting. Any action required or
permitted to be taken at a meeting of the Board of Directors or any committee
thereof may be taken without a meeting if written consent, setting forth the
action so taken, is signed by all the Directors or committee members and
filed with the minutes of the proceedings of the Board of Directors or
committee. Such consent shall have the same force and effect as a unanimous
affirmative vote of the Board of Directors or committee, as the case may be.
Section 9. Committees. The Board of Directors, by resolution adopted by
a majority of all of the Directors, may designate from among its members an
Executive Committee and other committees, each composed of three (3) or more
Directors, and may fix the quorum thereof. Any committee so designated shall
serve at the pleasure of and may exercise such authority as is delegated by
the Board of Directors, provided that no committee shall have the authority
of the Board of Directors to (1) approve or propose to shareholders action
required to be approved by shareholders, (2) fill vacancies on the board of
directors or on any of its committees, (3) amend the Articles of
Incorporation, (4) adopt, amend, or repeal By-laws, or (5) approve a plan of
merger not requiring shareholder approval.
Section l0. Executive Committee. The Executive Committee shall consist
of the Chairman and the President and such other Directors as are designated
from time to time by the Board of Directors. The Chief Executive Officer may
designate an Alternate Chairman who shall preside during the absence or
disability of the Chief Executive Officer. The Executive
6
<PAGE>
Committee shall, except as otherwise provided herein, by law or by resolution
of the Board of Directors, have all the authority of the Board of Directors
during the intervals between the meetings of the Board of Directors.
Section 11. Vacancies. A vacancy occurring in the Board of Directors by
reason of the removal of a Director by the shareholders shall be filled by
the shareholders, or, if authorized by the shareholders, by the remaining
Directors. Any other vacancy occurring in the Board of Directors, including,
without limitation, any vacancy occurring by reason of an amendment to these
By-laws increasing the number of Directors, may be filled by the affirmative
vote of a majority of the remaining Directors, though less than a quorum of
the Board of Directors, or, if the vacancy is not so filled, or if no
director remains, by the shareholders. A Director elected to fill a vacancy
shall serve for the unexpired term of his predecessor in office or, if such
vacancy occurs by reason of an amendment to these By-laws increasing the
number of Directors, until the next election of Directors by the shareholders
and the election and qualification of the successor.
Section l2. Telephone Conference Meetings. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board or committee by means of telephone
conference or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
Section l3. Removal of Directors. Subject to the rights of the holders
of any series of Preferred Stock then outstanding, any director, or all
directors, may be removed from office at any time, with cause, only by the
affirmative vote of the holders of at least 75% of the voting power of all
the shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
ARTICLE III
Officers
Section l. Executive Structure. The officers of the Corporation shall be
elected by the Board of Directors and shall consist of a Chairman of the
Board, if there be one, a President, a Vice Chairman or Vice Chairmen of the
Board, if there be any and if elected as an officer or officers of the
Corporation, such number of Executive Vice Presidents and Vice Presidents as
the Board of Directors shall from time to time determine, a Secretary, a
Treasurer, a Controller and such other officers or assistant officers as may
be elected or appointed by the Board of Directors. The Board shall designate
either the Chairman or the President as the Chief Executive Officer of the
Corporation and may designate a Chief Operating Officer. Each officer shall
hold office for the term for which such officer has been elected or appointed
and until such officer's successor has been elected or appointed and has
qualified, or until such officer's earlier resignation, removal from office,
or death. Any two or more
7
<PAGE>
offices may be held by the same person, except that neither the Chairman nor
the President shall serve as Secretary or Assistant Secretary.
Section 2. Chief Executive Officer. The Chief Executive Officer shall,
under the direction of the Board of Directors, have responsibility for the
general direction of the Corporation's business, policies and affairs. The
Chief Executive Officer shall preside, when present, at all meetings of the
shareholders and at all meetings of the Executive Committee. The Chief
Executive Officer shall have such other authority and perform such other
duties as usually appertain to the chief executive office in business
corporations or as are provided by the Board of Directors. The Chief
Executive Officer shall be empowered at any time and from time to time to
issue and promulgate rules, regulations and directives relating to the
conduct of the business and affairs of the Corporation, and the Secretary of
the Corporation shall maintain a record of such rules, regulations and
directives.
Section 3. Chief Operating Officer. If there be one, the Chief Operating
Officer shall, under the direction of the Chief Executive Officer, have
direct superintendence of the Corporation's business, policies, properties
and affairs. The Chief Operating Officer shall have such further powers and
duties as from time to time may be conferred upon or assigned to such officer
by the Board of Directors or the Chief Executive Officer. In the absence or
disability of the Chief Executive Officer, the Chief Operating Officer shall
perform the duties and exercise the powers of the Chief Executive Officer.
Section 4. President. The President shall have such powers and duties as
from time to time may be conferred upon or assigned to the President by the
Board of Directors or the Chief Executive Officer (if the President is not
the Chief Executive Officer).
Section 5. Vice Presidents. The Executive Vice Presidents, if any, and
Vice Presidents shall have such powers and duties as from time to time may be
conferred upon or assigned to them by the Board of Directors, the Chairman,
or the President. An Executive Vice President or other officer may be
responsible for the assignment of duties to subordinate Vice Presidents.
Section 6. Secretary. The Secretary shall send all requisite notices of
meetings of the shareholders, the Board of Directors, and the Executive
Committee. The Secretary shall attend all meetings of the shareholders, the
Board of Directors, and the Executive Committee, and shall keep a true and
faithful record of the proceedings. The Secretary shall have custody of the
seal of the Corporation, and of all records, books, documents, and papers of
the Corporation, except those required to be in the custody of the Treasurer
or the Controller and except such subsidiary records as may be kept in
departmental offices. The Secretary shall sign and execute all documents
which require his signature and execution, and shall affix the seal of the
Corporation thereto and attest the same when necessary. Assistant
Secretaries shall have such of the authority and perform such of the duties
of the Secretary as may be provided in these By-laws or assigned to them by
the Board of Directors or by the Secretary. During the Secretary's absence or
inability, the Secretary's authority and duties shall be possessed by such
Assistant Secretary or Assistant Secretaries as the Board of Directors, or
the Secretary with the approval of the Chairman, or the President may
designate.
8
<PAGE>
Section 7. Treasurer. The Treasurer shall receive and have charge of all
funds and securities of the Corporation. The Treasurer shall deposit the
funds to the credit of the Corporation in such depositories as shall be
approved from time to time by the Chairman, the President, the Executive Vice
President or Vice President responsible for financial matters, or the
Treasurer, and the Treasurer shall disburse the same only on written approval
of the Controller or the Controller's duly authorized representative, or
under such other rules and regulations and upon such other disbursement
instruments as the Chairman or the Executive Vice President or Vice President
responsible for financial matters may adopt or authorize. The Treasurer shall
keep full and regular books showing all the Treasurer's receipts and
disbursements. Assistant Treasurers shall have such of the authority and
perform such of the duties of the Treasurer as may be provided in these
By-laws or assigned to them by the Board of Directors or by the Treasurer.
During the Treasurer's absence or inability, the Treasurer's authority and
duties shall be possessed by such Assistant Treasurer or Assistant Treasurers
as the Board of Directors, or the Treasurer upon the approval of the
Chairman, the President or the officer responsible for financial matters, may
designate. The Treasurer and each Assistant Treasurer shall give such
security for the faithful performance of such officer's duties as the Board
of Directors may require.
Section 8. Controller. The Controller shall be the principal accounting
officer of the Corporation and shall have custody and charge of all books of
account, except those required by the Treasurer in keeping record of the work
of the Treasurer's office, and shall have supervision over such subsidiary
accounting records as may be kept in departmental offices. The Controller
shall have access to all books of account, including the records of the
Secretary and the Treasurer, for obtaining information necessary to verify or
complete the records of the Controller's office. The Controller or a duly
authorized representative shall certify to the authorizations and approvals
pertaining to all vouchers; and no payments from the general cash shall be
made by the Treasurer except on vouchers bearing the written approval of the
Controller or an authorized representative, unless the Board of Directors,
the Chairman or other officer responsible for financial matters provides
otherwise. Assistant Controllers shall have such of the authority and perform
such of the duties of the Controller as may be provided in these By-laws or
assigned to them by the Board of Directors or by the Controller. During the
Controller's absence or inability, the Controller's authority and duties
shall be possessed by such Assistant Controller or Assistant Controllers as
the Board of Directors, or the Controller upon the approval of the Chairman,
the President or other officer responsible for financial matters may
designate.
Section 9. Other Duties and Authority. Each officer, employee and agent
of the Corporation shall have such other duties and authority as may be
conferred upon such officer by the Board of Directors or delegated to such
officer by the Chairman, the President or the responsible officer.
Section 10. Removal of Officers. Any officer may be removed at any time
by the Board of Directors with or without cause, and such vacancy may be
filled by the Board of Directors.
9
<PAGE>
Section 11. Appointed Officers. The Board of Directors, the Chairman,
the President, or the officer responsible for administrative matters may,
from time to time, appoint individuals to serve in such designated capacities
for the Corporation (such as Vice President, Assistant Vice President,
Assistant Secretary, Assistant Treasurer or Assistant Controller) as may be
deemed appropriate. Each appointed officer shall perform such duties and
shall have such authority as shall be delegated to such officer from time to
time by the officer of the Corporation to whom such appointed officer is
responsible. Any duty or authority delegated to any appointed officer
pursuant to this Section may be withdrawn, with or without cause, at any time
by the Board of Directors, the Chairman, the President, the officer
responsible for administrative matters or such officer delegating such duty
or authority to the appointed officer.
ARTICLE IV
Stock
Section l. Issuance of Stock, Stock Certificates. The Board of
Directors, and any duly constituted committee of the Board of Directors,
shall have the power and authority to issue shares of capital stock of the
Corporation, provided, however, that the stock issued by a committee of the
Board of Directors shall be issued in connection with a purpose which is
within the authority delegated to such committee by the full Board of
Directors. The shares of stock of the Corporation may be represented by
certificates in such form as may be approved by the Board of Directors, which
certificates shall be signed or signed by facsimile by the Chairman or
President and the Secretary or Treasurer or an Assistant Secretary or
Assistant Treasurer of the Corporation; and which shall be sealed with the
seal of the Corporation or a facsimile thereof. Notwithstanding the
foregoing provisions regarding share certificates, officers of the
Corporation may provide that some or all of any or all classes or series of
the Corporation's common or any preferred shares may be uncertified shares.
No share certificate shall be issued until the consideration for such shares
has been fully paid or otherwise provided for.
Section 2. Transfer of Stock. Shares of stock of the Corporation shall
be transferred on the books of the Corporation upon surrender to the
Corporation of certificates representing the shares to be transferred
accompanied by an assignment in writing of such shares properly executed by
the shareholder of record or such shareholder's duly authorized
attorney-in-fact and with all taxes on the transfer having been paid. The
Corporation may refuse any requested transfer until furnished evidence
satisfactory to it that such transfer is proper. The Board of Directors may
make such rules concerning the issuance, transfer and registration of stock,
the cancellation of stock and certificates, and requirements regarding the
replacement of lost, destroyed or wrongfully taken stock certificates
(including any requirement of an indemnity bond prior to issuance of any
replacement certificate) as it deems appropriate.
10
<PAGE>
Section 3. Registered Shareholders. The Corporation may deem and treat
the holder of record of any stock as the absolute owner for all purposes and
shall not be required to take any notice of any right or claim of right of
any other person.
Section 4. Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other purpose, the
Board of Directors of the Corporation may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be
not more than fifty days and, in the case of a meeting of shareholders, not
less than ten days prior to the date on which the particular action requiring
such determination of shareholders is to be taken.
ARTICLE V
Business Combinations
Section 1. All of the requirements within Part 2 of Article 11 of
Chapter 2 of Title 14 of the Official Code of Georgia Annotated, in the form
enacted and amended by Georgia Laws, l985, Page 527, as amended, shall be
applicable to business combinations of the Corporation.
Section 2. All of the requirements within Part 3 of Article 11 of
Chapter 2 of Title 14 of the Official Code of Georgia Annotated, in the form
enacted by Georgia Laws, 1988, Page 158, as amended, shall be applicable to
business combinations of the Corporation.
ARTICLE VI
Seal
The common seal of the Corporation shall bear within concentric circles
the words "BellSouth Corporation" with the word "Seal" in the center. The
seal and its attestation may be by facsimile.
ARTICLE VII
Indemnity
Section 1. Any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including any
action by or in the right of the Corporation), by reason of the fact that
such person is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Corporation
11
<PAGE>
against expenses (including reasonable attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, to the maximum extent
permitted by, and in the manner provided by, the Georgia Business Corporation
Code.
Section 2. The Board of Directors is expressly authorized on behalf of
the Corporation to enter indemnity agreements between the Corporation and any
director or officer of the Corporation, or any person serving at the request
of the Corporation as a director, officer, trustee, agent or fiduciary of
another corporation, partnership, joint venture, employee benefit plan, trust
or enterprise, in form and content acceptable to the Board and substantially
in the form of agreement submitted to and approved by the shareholders of the
Corporation. Such agreements may provide that the Corporation shall
indemnify such persons and provide for procedural rights intended to assure
that appropriate indemnification is available against expenses (including
reasonable attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such persons in connection with such
action, suit or proceeding. No indemnification may be made for liability (i)
for any appropriation, in violation of a director's 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 14-2-832 of the Georgia
Business Corporation Code, or (iv) for any transaction from which the person
derived an improper personal benefit.
ARTICLE VIII
Amendment of By-laws
The Board of Directors shall have the power to alter, amend or repeal
the By-laws or adopt new by-laws, but any by-laws adopted by the Board of
Directors may be altered, amended or repealed and new by-laws adopted by the
shareholders. The shareholders may prescribe that any by-law or by-laws
adopted by them, including, without limitation, a by-law establishing the
number of Directors, shall not be altered, amended or repealed by the Board
of Directors. Action by the Board of Directors with respect to the By-laws
shall be taken by an affirmative vote of a majority of all of the Directors
then in office. Action by the shareholders with respect to the By-laws shall
be taken by an affirmative vote of a majority of the shares entitled to vote
at an election of Directors.
Notwithstanding the preceding sentence, the affirmative vote of the
holders of at least 75% of the voting power of all shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal, or adopt any provision
inconsistent with, Section 2 or l3 of Article II of these By-laws, or this
sentence.
12
<PAGE>
EXHIBIT 11
BellSouth Corporation Computation of Earnings Per Share
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Earnings (Loss) Per Share--Basic:
Income Before Extraordinary Losses.................................................. $ 3,270 $ 2,863 $ 1,564
Extraordinary Loss forDiscontinuance of Statement of Financial Accounting Standards
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)
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding................................................. 992 994 993
--------- --------- ---------
--------- --------- ---------
Earnings Per Common Share Before Extraordinary Losses............................... $ 3.30 $ 2.88 $ 1.57
Extraordinary Loss for Discontinuance of Statement of Financial Accounting Standards
No. 71, net of tax................................................................ -- -- (2.73)
Extraordinary Loss on Early Extinguishment of Debt, net of tax...................... (.01) -- (0.08)
--------- --------- ---------
Earnings (Loss) Per Share........................................................... $ 3.29 $ 2.88 $ (1.24)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION> FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Earnings (Loss) Per Share - Diluted:
Income Before Extraordinary
Losses.............................................................................. $ 3,270 $ 2,863 $ 1,564
Extraordinary Loss for Discontinuance of Statement
of Financial Accounting Standards 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)
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding................................................. 992 994 993
Incremental shares from assumed exercise of stock
options and payment of performance share awards................................... 3 2 1
--------- --------- ---------
Total Shares........................................................................ 995 996 994
--------- --------- ---------
--------- --------- ---------
Earnings Per Common Share Before Extraordinary Losses............................... $ 3.29 $ 2.87 $ 1.57
Extraordinary Loss for Discontinuance of Statement of
Financial Accounting Standards No. 71, net of tax................................. --- --- (2.73)
Extraordinary Loss on Early Extinguishment of Debt,
net of tax........................................................................ (.01) --- (0.08)
--------- --------- ---------
Earnings (Loss) Per Share........................................................... $ 3.28 $ 2.87 $ (1.24)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 12
BellSouth Corporation
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1. Earnings
(a) Income from continuing operations before
deductions for taxes and interest................ $6,182 $5,329 $3,312 $4,069 $2,318
(b) Portion of rental expense
representative of interest factor................ 91 90 84 100 104
(c) Equity in losses from less-
than-50% owned investments (accounted for under
the equity method of accounting)................. 78 68 163 79 45
(d) Excess of earnings over
distributions of less-than-50%-owned investments
(accounted for under the equity method of
accounting)...................................... (85) (53) (45) (53) (37)
--------- --------- --------- --------- ---------
TOTAL....................................... $6,266 $5,434 $3,514 $4,195 $2,430
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
2. Fixed Charges
(a) Interest.................................. $783 $739 $745 $686 $712
(b) Portion of rental expense representative of
interest factor.................................. 91 90 84 100 104
--------- --------- --------- --------- ---------
TOTAL....................................... $874 $829 $829 $786 $816
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio (1 divided by 2)........................... 7.17 6.55 4.24 5.34 2.98
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
BELLSOUTH ORGANIZATION OF COMPANIES
(AS OF DECEMBER 31, 1997)
ATTACHMENT TO 10-K
<TABLE>
<CAPTION>
Jurisdiction
--------------------
<S> <C>
Abiatar S.A. Uruguay
Acadiana Cellular General Partnership Delaware
Alabama Cellular Service, Inc. Georgia
ALLTEL Cellular Associates of South Carolina Limited Partnership Delaware
American Cellular Communications Corporation Delaware
Anniston-Westel Company, Inc. Florida
Arlax S.A. Peru
Astros S.A. Peru
Atlanta-Athens MSA Limited Partnership Delaware
Atlanta Multichannel Television, Inc. Georgia
B.A. Celular Inversora S.A. Argentina
Bakersfield Cellular Telephone Company California
Bakersfield Holdings, Inc. Georgia
BBS Holdings, Inc. Georgia
BCP S.A. Brazil
Beijing Ji Tong - BellSouth Communication & Information
Engineering Co., Ltd. China
Belgium New System L.P. Delaware
Bell IP Holding L.L.C. Delaware
BellSouth Advertising & Publishing Corporation Georgia
BellSouth Applied Technologies, Inc. Georgia
BellSouth Asia/Pacific Enterprises, Inc. Delaware
BellSouth Brazil, Inc. Georgia
BellSouth BSE Holdings, Inc. Delaware
BellSouth BSE, Inc. Delaware
BellSouth BSE of Virginia, Inc. Virginia
BellSouth Business Systems, Inc. Georgia
BellSouth Capital Funding Corporation Georgia
BellSouth Carolinas PCS, L.L.C. Delaware
BellSouth Carolinas PCS, L.P. (d/b/a BellSouth Mobility DCS) Delaware
BellSouth Cellular Corp. Georgia
BellSouth Cellular National Marketing, Inc. Georgia
BellSouth Cellular Systems, Inc. Delaware
BellSouth Chile Holdings, Inc. Georgia
BellSouth Chile, Inc. Georgia
BellSouth Chile S.A. Chile
BellSouth China, Inc. Delaware
BellSouth China Holdings, Inc. Delaware
BellSouth Colombia, Inc. Delaware
</TABLE>
<PAGE>
<TABLE>
<S> <C>
BellSouth Communication Systems, Inc. Georgia
BellSouth Comunicaciones S.A. Chile
BellSouth Corporate Aviation and Travel Services, Inc. Georgia
BellSouth Corporation Georgia
BellSouth Denmark Capital Finance Limited British Virgin Islands
BellSouth Direct Marketing, Inc. Georgia
BellSouth D. C., Inc. Georgia
BellSouth EC Holdings, Inc. Delaware
BellSouth Ecuador Holdings (BVI) I Limited British Virgin Islands
BellSouth Ecuador Holdings (BVI) II Limited British Virgin Islands
BellSouth Ecuador Holdings, Inc. Delaware
BellSouth Ecuador Holdings Partnership British Virgin Islands
BellSouth Enterprises, Inc. Georgia
BellSouth Entertainment, Inc. Georgia
BellSouth Foundation, Inc. Georgia
BellSouth Guatemala Holdings, Inc. Delaware
BellSouth Holdings B.V. The Netherlands
BellSouth Holding GmbH Germany
BellSouth Holdings, Inc. Delaware
BellSouth Information Systems, Inc. (BIS) Georgia
BellSouth Interactive Media Services, Inc. Georgia
BellSouth International (Asia/Pacific), Inc. Georgia
BellSouth International Capital Finance Limited Cayman Islands
BellSouth International, Inc. Georgia
BellSouth International Limited England
BellSouth International U.K. Trustee Limited England
BellSouth Inversiones S.A. Chile
BellSouth Inversora S.A. Argentina
BellSouth IP Holdings, Inc. Delaware
BellSouth Israel, Inc. Georgia
BellSouth Latin American Holdings I, Ltd British Virgin Islands
BellSouth Latin American Holdings II, Ltd. British Virgin Islands
BellSouth Latin American Investments I, Ltd. British Virgin Islands
BellSouth Latin American Investments II, Ltd. British Virgin Islands
BellSouth Long Distance Holdings, Inc. Delaware
BellSouth Long Distance, Inc. Delaware
BellSouth Marketing Services, Inc. Georgia
BellSouth Mexico, Inc. Delaware
BellSouth Mobile Data, Inc. Georgia
BellSouth Mobile Data Services, Inc. Georgia
BellSouth Mobile Systems, Inc. Delaware
BellSouth Mobility Communications, Inc. Georgia
BellSouth Mobility Inc Georgia
BellSouth.net Inc. Delaware
BellSouth New Zealand New Zealand
BellSouth New Zealand Holdings Limited New Zealand
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
BellSouth New Zealand Limited New Zealand
BellSouth Nicaragua (BVI) Limited British Virgin Islands
BellSouth Nicaragua Holdings, Inc. Delaware
BellSouth Panama Holdings, Inc. Delaware
BellSouth Panama Limited Cayman Islands
BellSouth Personal Communications, Inc. (d/b/a BellSouth Mobility DCS) Delaware
BellSouth Peru BVI Limited British Virgin Islands
BellSouth Peru Holdings, Inc. Delaware
BellSouth Products, Inc. Georgia
BellSouth Public Communications, Inc. Georgia
BellSouth Resources, Inc. Georgia
BellSouth Shanghai Centre, Ltd. Georgia
BellSouth Telecommunications, Inc. Georgia
BellSouth Venezuela (BVI) Limited British Virgin Islands
BellSouth Venezuela Holdings, Inc. Delaware
BellSouth Venezuela, S.A. Venezuela
BellSouth Ventures Corporation Georgia
BellSouth Wireless Cable, Inc. Delaware
BellSouth Wireless, Inc. Georgia
BellSouth Worldwide Holdings B.V. The Netherlands
Berry Network, Inc. Georgia
Berry-Sprint Publishing, Inc. Georgia
Billing & Management Systems S.A. Peru
Bloomington Cellular Telephone Company Delaware
Bombshell Comercio e Participacoes Ltda. Brazil
BSB S.A. Brazil
BSC Cayman General Partnership Cayman Islands
BSCC Cellular of Texas, L.P. Texas
BSC de Panama S.A. Panama
BSC Guatemala, Sociedad Anonima Guatemala
BSD Cellular Communication Israel
BSE S.A. Brazil
BSIT International Communications Israel
BSNZ Wireless Holdings Limited New Zealand
B-Side Carriers L.P. Delaware
B-Side L.L.C. Delaware
Cable Sistemas S.A. Peru
CellCom Israel, Ltd. Israel
Cellular Credit Corporation Delaware
Cellular Holdings of Texas, Inc. Delaware
Cellular Radio of Chattanooga Georgia
Cellular Systems Texas
Cellular Vision Peru S.A. Peru
Celular Catarinense S.A. Brazil
Century Cellunet of North Louisiana Cellular Limited Partnership Delaware
Centweight B.V. The Netherlands
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Charisma Communications Corp. of the Southwest Delaware
Chattanooga CGSA, Inc. Georgia
Chattanooga MSA Limited Partnership Delaware
Compania de Radiocomunicaciones Moviles S.A. Argentina
Compania de Telecomunicaciones Comtal Limitada Chile
Connector Comercio e Participacoes Ltda. Brazil
Controling S.A. Brazil
Corporate Media Partners (d/b/a Americast) Delaware
CSL Associates Georgia
CSL Chastain Associates Georgia
CSL Colonnade Associates Georgia
CSL Exchange South Associates Georgia
CSL Twelfth Street Associates Georgia
CSL Western Way Associates Georgia
CTM S.A. Argentina
Decatur RSA Limited Partnership Delaware
Empresa Difusora Radio Tele S.A. Peru
E-Plus Mobilfunk GmbH Germany
E-Plus Service GmbH Germany
Florida 511 Florida
Florida Cellular Service, Inc. Georgia
Florida RSA #2B (Indian River) Limited Partnership Delaware
Galveston Cellular Partnership Texas
Galveston Cellular Telephone Company Delaware
Galveston Mobile Corporation Delaware
Galveston Mobile Partnership Delaware
Gary Cellular Corporation Delaware
Gary Cellular Telephone Company New York
Georgia Cellular Corporation Delaware
Georgia Cellular Holdings, Inc. Georgia
Georgia RSA No. 1 Limited Partnership Delaware
Georgia RSA No. 2 Limited Partnership Delaware
Georgia RSA No. 3 Limited Partnership Delaware
German Mobilfunk Investments, Inc. Delaware
Germany New System L.P. Delaware
Gfd Gesellschaft fur Datanfunk mbH Germany
Gulf Coast Cellular Telephone Company Alabama
Harley S.A. Peru
Hawaii Cellular Corporation Hawaii
Honolulu Cellular Telephone Company New York
Houston Cellular Corporation Texas
Houston Cellular Telephone Company Texas
Houston Mobile Cellular Communications Company Texas
Huntsville Cellular Telephone Corp., Inc. Alabama
Huntsville MSA Limited Partnership Delaware
Indiana Cellular Corporation Delaware
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
InfoVentures Georgia
InfoVentures of Atlanta Georgia
Inmuebles Aries S.A. Peru
Intelligent Media Ventures, Inc. (d/b/a IntelliVentures) Georgia
International Card Systems S.A. Peru
Jackson Acquisitions Corp. Georgia
Jackson Cellular Corporation Mississippi
Jackson Holdings, Inc. Georgia
Jacksonville MSA Limited Partnership Delaware
Kentucky CGSA, Inc. Georgia
Kokomo Celltelco Partnership Indiana
L. M. Berry and Company (d/b/a The Berry Company) Georgia
Lafayette MSA Limited Partnership Delaware
Los Angeles Cellular Corporation California
Los Angeles Cellular Telephone Company California
Los Angeles RCCs, Inc. California
Louisiana CGSA, Inc. Georgia
Louisiana RSA No. 7 Cellular General Partnership Delaware
Louisiana RSA No. 8 Limited Partnership Delaware
MCTA Mississippi
Memphis CGSA, Inc. Georgia
Memphis SMSA Limited Partnership Delaware
Movicel S.A. Colombia
Movicom Colombia S.A. Colombia
Movicom S.A. Brazil
M-T Cellular, Inc. Tennessee
Muncie Cellular Telephone Company, Inc. Delaware
National Telecommunications Alliance, Inc. Delaware
Netherlands New System L.P. Delaware
Nicacel Nicaragua (BVI) Limited British Virgin Islands
North American GSM Alliance, Inc. Delaware
Northeastern Georgia RSA Limited Partnership Delaware
Northeast Mississippi Cellular, Inc. Mississippi
Ondacom Wireless Services, Inc. Delaware
Orlando CGSA, Inc. Georgia
Orlando SMSA Limited Partnership Delaware
Otecel S.A. Ecuador
Peck Holdings Corp. British Virgin Islands
Pittsburgh SMSA Limited Partnership Delaware
Polisistemas S.A. Ecuador
Prime Enterprises II, L.P. Delaware
R.A. Celular Inversora S.A. Argentina
RAM/BSE Communications, L.P. Delaware
RAM Mobile Data Belgium, S.C.S.. Belgium
RAM Mobile Data Belgium SC Belgium
RAM Mobile Data C. V. The Netherlands
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
RAM Mobile Data Limited England
RAM Mobile Data (Netherlands) B. V. The Netherlands
RAM Mobile Data Network GmbH Germany
RAM Mobile Data USA Limited Partnership Delaware
RCTC Wholesale Corporation Virginia
Recep Comercio e Participacoes Ltda. Brazil
Richmond Cellular Telephone Company Virginia
ROU Celular Inversora S. A. Panama
Santabel Comercio e Participacoes Ltda. Brazil
Singapore Technologies Cellular Pte Ltd Singapore
Skycell Communications Limited India
Skytel Del Peru S.A. Peru
South Carolina Cellular Service, Inc. Georgia
South Florida Television Inc. Delaware
Spectrum Telecomunicaciones, S.A. de C.V. Mexico
Stevens Graphics, Inc. Georgia
ST Mobile Data Pte. Ltd. Singapore
Sunlink Corporation Georgia
TCIL BellSouth Limited India
TechSouth, Inc. Georgia
Telcel Celular, C.A. Venezuela
Telcell S.A. Brazil
Tele Cable S.A. Peru
Telecomunicaciones BBS, C.A. Venezuela
Tele Editories S.A. Peru
Telefonia Celular de Nicaragua, S.A. (d/b/a Nicacel) Nicaragua
Telefonia Movel do Sul S.A.. Brazil
Tele-Man Ltd. Israel
Tele-Man Netherlands B.V. The Netherlands
Tele 2000, S.A. Peru
Tennessee RSA Limited Partnership Delaware
Terre-Haute Cellular Telephone Company, Inc. Delaware
T.V. Cable Del Peru S.A. Peru
Vencorp. Cayman Islands
Vidcomm, Inc. Georgia
Waivetel S.A. Brazil
Westel-Indianapolis Company Florida
Westel-Los Angeles Company Florida
Westel-Milwaukee Company, Inc. Wisconsin
Westel Richmond, Inc. Virginia
Wireless Cable of Atlanta, Inc. Georgia
1155 Peachtree Associates Georgia
</TABLE>
6
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and
each of them, as attorneys for him in his name, place and stead in his
capacities in the Company to execute and cause to be filed the said Annual
Report and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand on the
date indicated.
<TABLE>
<S> <C>
/s/ F. DUANE ACKERMAN February 23, 1998
- ------------------------------------ ------------------------------------
F. Duane Ackerman Date
Chairman of the Board,
President and Chief Executive
Officer
Director
(Principal Executive Officer)
/s/ RONALD M. DYKES February 23, 1998
- ------------------------------------ ------------------------------------
Ronald M. Dykes Date
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ W. PATRICK SHANNON February 23, 1998
- ------------------------------------ ------------------------------------
W. Patrick Shannon Date
Vice President and Controller
(Principal Accounting Officer)
</TABLE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacitiy as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ REUBEN V. ANDERSON
- ------------------------------------
REUBEN V. ANDERSON
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ JAMES H. BLANCHARD
- ------------------------------------
JAMES H. BLANCHARD
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ J. HYATT BROWN
- ------------------------------------
J. HYATT BROWN
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ ARMANDO M. CODINA
- ------------------------------------
ARMANDO M. CODINA
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for her in her name, place and stead in of her capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand on the date
indicated.
/s/ PHYLLIS BURKE DAVIS
- ------------------------------------
PHYLLIS BURKE DAVIS
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ JOHN G. MEDLIN, JR.
- ------------------------------------
JOHN G. MEDLIN, JR.
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for her in her name, place and stead in her capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand on the date
indicated.
/s/ ROBIN B. SMITH
- ------------------------------------
ROBIN B. SMITH
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ C. DIXON SPANGLER, JR.
- ------------------------------------
C. DIXON SPANGLER, JR.
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ WILLIAM S. STAVROPOULOS
- ------------------------------------
WILLIAM S. STAVROPOULOS
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ RONALD A. TERRY
- ------------------------------------
RONALD A. TERRY
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 1997.
NOW THEREFORE, the undersigned hereby constitutes and appoints F. Duane
Ackerman, Ronald M. Dykes, W. Patrick Shannon and Arlen G. Yokley, and each of
them, as attorneys for him in his name, place and stead in his capacity as a
Director of the Company to execute and cause to be filed the said Annual Report
and to execute and cause to be filed any amendment or supplement thereto
(including any Form 11-K) deemed by them to be necessary or desirable, hereby
giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.
/s/ J. TYLEE WILSON
- ------------------------------------
J. TYLEE WILSON
DIRECTOR
FEBRUARY 23, 1998
- ------------------------------------
DATE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,570
<SECURITIES> 17
<RECEIVABLES> 4,996
<ALLOWANCES> 246
<INVENTORY> 393
<CURRENT-ASSETS> 8,117
<PP&E> 53,828
<DEPRECIATION> 30,967
<TOTAL-ASSETS> 36,301
<CURRENT-LIABILITIES> 8,873
<BONDS> 7,348
0
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<COMMON> 1,010
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<TOTAL-LIABILITY-AND-EQUITY> 36,301
<SALES> 487
<TOTAL-REVENUES> 20,561
<CGS> 1,000
<TOTAL-COSTS> 10,218
<OTHER-EXPENSES> 4,967
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<INTEREST-EXPENSE> 761
<INCOME-PRETAX> 5,421
<INCOME-TAX> 2,151
<INCOME-CONTINUING> 3,270
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<EXTRAORDINARY> (9)
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</TABLE>