<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
BELLSOUTH CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
NOTICE OF
1999
ANNUAL MEETING
Proxy Statement
Annual Financial Statements and
Review of Operations
BELLSOUTH
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
---------
<S> <C>
Notice of Annual Meeting................................................................................. 1
Proxy Statement:
Voting Information..................................................................................... 2
Election of Directors.................................................................................. 4
Governance of the Company.............................................................................. 7
Committees of the Board................................................................................ 8
Director Compensation.................................................................................. 10
Stock Ownership of Directors and Executive Officers.................................................... 12
Ratification of Appointment of Independent Auditors.................................................... 13
Shareholder Proposals.................................................................................. 13
Executive Nominating and Compensation Committee Report on Executive Compensation....................... 16
Compensation Committee Interlocks and Insider Participation............................................ 19
Executive Compensation................................................................................. 20
Five-Year Performance Comparison....................................................................... 26
General Information:
Attendance at the Annual Meeting..................................................................... 27
Other Matters To Come Before The Meeting............................................................. 27
Shareholder Proposals for the 2000 Proxy Statement................................................... 27
Director Nominees or Other Business for Presentation at the 2000 Annual Meeting...................... 27
Section 16(a) Beneficial Ownership Reporting Compliance.............................................. 27
Duplicate Summary Annual Reports..................................................................... 28
Other Information.................................................................................... 28
Solicitation of Proxies.............................................................................. 28
Appendix:
Annual Financial Statements and Review of Operations:
Selected Financial and Operating Data.................................................................. A-1
Management's Discussion and Analysis of Results of Operations
and Financial Condition.............................................................................. A-2
Report of Management................................................................................... A-21
Audit Committee Chairman's Letter...................................................................... A-22
Report of Independent Accountants...................................................................... A-22
Consolidated Statements of Income...................................................................... A-23
Consolidated Balance Sheets............................................................................ A-24
Consolidated Statements of Cash Flows.................................................................. A-25
Consolidated Statements of Shareholders' Equity and Comprehensive Income............................... A-26
Notes to Consolidated Financial Statements............................................................. A-27
Market and Dividend Data............................................................................... A-51
</TABLE>
<PAGE>
[LOGO]
MARCH 9, 1999
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 26, 1999
To Our Shareholders:
The Annual Meeting of Shareholders of BellSouth Corporation will be held at the
Cobb Galleria Centre Ballroom, 2 Galleria Parkway, Atlanta, Georgia, on Monday,
April 26, 1999 at 9:00 a.m., Eastern Daylight Time. The following items of
business will be discussed and voted upon during the meeting:
1. The election of five (5) directors for a term of three years.
2. The ratification of the appointment of PricewaterhouseCoopers LLP, certified
public accountants, as BellSouth's independent auditors for the year 1999.
3. Such other matters, including shareholder proposals, that may properly come
before the meeting.
The Board of Directors has fixed March 8, 1999 as the record date for the
determination of the shareholders entitled to notice of, and to vote at, this
meeting or any adjournment.
We look forward to seeing you at the meeting. On behalf of the management and
directors of BellSouth Corporation, I want to thank you for your continued
support and confidence in 1999.
/s/ Carl E. Swearingen
Carl E. Swearingen
Senior Vice President-Corporate Compliance and Corporate Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, SIGN, DATE AND
PROMPTLY MAIL THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
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PROXY STATEMENT
VOTING INFORMATION
PURPOSE
This Proxy Statement and the accompanying proxy card are being mailed to
BellSouth shareholders beginning March 9, 1999. The BellSouth Board of Directors
is soliciting proxies to be used at the 1999 Annual Meeting of BellSouth
Shareholders which will be held April 26, 1999. Proxies are solicited to give
all shareholders of record an opportunity to vote on matters to be presented at
the Annual Meeting. In the following pages of this Proxy Statement, you will
find information on matters to be voted upon at the Annual Meeting of BellSouth
Shareholders or any adjournment of that meeting.
WHO CAN VOTE
You are entitled to vote if you were a shareholder of record of BellSouth stock
as of the close of business on March 8, 1999. Your shares can be voted at the
meeting only if you are present or represented by a valid proxy.
SHARES OUTSTANDING
Forty percent of the outstanding shares of BellSouth stock must be present,
either in person or represented by proxy, in order to conduct the Annual Meeting
of BellSouth Shareholders. On January 31, 1999, 1,978,049,705 shares of
BellSouth stock were outstanding, including shares issued to certain grantor
trusts, which are not considered outstanding for financial reporting purposes.
We do not know of any shareholder who beneficially owned more than five percent
of BellSouth's stock as of January 31, 1999.
PROXY CARD
If you sign the proxy card but do not specify how you want your shares to be
voted, your shares will be voted by the Directors' Proxy Committee in favor of
the election of all of the director nominees and in accordance with the
directors' recommendations on the other proposals listed on the proxy card. The
Committee will vote at its discretion on any other matter that may properly come
before the meeting.
If you wish to assign your proxy to someone other than the Directors' Proxy
Committee, you should cross out all three names appearing on the proxy card and
insert the name(s) of up to three other people. The person or persons
representing you must present your signed proxy card and a ballot at the meeting
in order to vote your shares.
VOTING OF SHARES
Each share of BellSouth stock represented at the Annual Meeting is entitled to
one vote on each matter properly brought before the meeting. All shares entitled
to vote and represented by properly executed proxies received before the polls
are closed at the Annual Meeting, and not revoked or superseded, will be voted
at the Annual Meeting in accordance with the instructions indicated on those
proxies.
BELLSOUTH DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN: If you
participate in this Plan, your proxy card represents shares held in the Plan, as
well as shares you hold in certificate form registered in the same name.
FOR BELLSOUTH EMPLOYEES: If you are a participant in one or more of the
following employee payroll-based plans, and the accounts are registered in the
same name, your proxy card also will serve as voting instructions for the
trustees of those plans:
BellSouth Employee Stock Ownership Plan (PAYSOP)
BellSouth Employee Stock Investment Plan (ESIP)
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BellSouth Employee Stock Purchase Plan (ESPP)
BellSouth Savings and Security Plan (SSP)
BellSouth Retirement Savings Plan (BRSP)
According to the terms of the ESIP, ESPP, SSP and BRSP, the trustee will vote
plan shares represented by proxy cards which are not signed and returned in the
same proportion as shares for which signed cards are returned. Shares in the
PAYSOP are not voted unless the card is signed and returned.
REQUIRED VOTES--ELECTION OF DIRECTOR NOMINEES
Directors are elected by a plurality of the votes, which means the five nominees
who receive the largest number of properly executed votes will be elected as
directors. Each share of BellSouth stock is entitled to one vote for each of
five director nominees. Cumulative voting is not permitted. Shares that are
represented by proxies which are marked "withhold authority" for the election of
one or more director nominees will not be counted in determining the number of
votes cast for those persons.
REQUIRED VOTES--OTHER MATTERS
The affirmative vote of a majority of the shares present (in person or by proxy
and entitled to vote at the Annual Meeting) is needed to ratify the appointment
of PricewaterhouseCoopers LLP as independent auditors, and to approve the
shareholder proposals. All other matters properly considered at the meeting will
be determined by a majority of the votes cast.
TABULATION OF VOTES
Under certain circumstances, brokers are prohibited from exercising
discretionary authority for beneficial owners who have not returned proxies to
the brokers (so-called "broker non-votes"). In such cases, and in cases where
the shareholder abstains from voting on a matter, those shares will be counted
for the purpose of determining if a quorum is present but will not be included
in the vote totals with respect to those matters and, therefore, will have no
effect on the vote. In addition, proxies which are marked to deny discretionary
authority on other matters will not be counted in determining the number of
votes cast with respect to those matters.
HOW YOU CAN VOTE
Vote your choices by marking the appropriate boxes on the enclosed proxy card.
Sign and return the proxy card in the enclosed self-addressed envelope. YOUR
VOTE IS IMPORTANT. PLEASE RETURN YOUR MARKED PROXY CARD PROMPTLY SO YOUR SHARES
CAN BE REPRESENTED, EVEN IF YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU
WOULD LIKE TO VOTE IN ACCORDANCE WITH THE DIRECTORS' RECOMMENDATIONS ON THE
MATTERS DISCUSSED IN THIS PROXY STATEMENT, ALL YOU NEED TO DO IS SIGN, DATE AND
RETURN YOUR PROXY CARD.
REVOCATION OF PROXY
If you vote by proxy, you may revoke that proxy at any time before it is voted
at the meeting. You can revoke your proxy by delivering to the Company a proxy
card bearing a later date or by attending the meeting in person and casting a
ballot.
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DIRECTORS' PROPOSALS
PROPOSAL 1: ELECTION OF DIRECTORS
At the date of this Proxy Statement, the Board of Directors of BellSouth
consists of 14 members, 13 of whom are nonemployee directors. Ronald A. Terry
will retire from the Board effective April 26, 1999 after fifteen years of
exemplary service to the Company. The Board is divided into three classes with
three-year terms. The terms are staggered so that the term of one class expires
at each Annual Meeting of BellSouth Shareholders. Five director nominees have
been nominated for election at this meeting.
NOMINEES
The following nominees have been selected by the Committee on Directors and
Corporate Governance and approved by the Board for submission to the
shareholders: F. Duane Ackerman; Reuben V. Anderson; Kathleen F. Feldstein; John
G. Medlin, Jr.; and C. Dixon Spangler, Jr., each to serve a three-year term
expiring at the Annual Meeting in the year 2002.
The Board believes that each director nominee will be able to stand for
election. If any nominee becomes unable to stand for election, proxies in favor
of that nominee will be voted in favor of the remaining nominees and in favor of
any substitute nominee named by the Board upon recommendation of the Committee
on Directors and Corporate Governance. If you do not wish your shares voted for
one or more of the nominees, you may so indicate on the proxy card.
FOLLOWING IS THE PRINCIPAL OCCUPATION, AGE AND CERTAIN OTHER INFORMATION FOR
EACH DIRECTOR NOMINEE AND OTHER DIRECTORS SERVING UNEXPIRED TERMS.
NOMINEES FOR ELECTION AT THIS MEETING TO A TERM EXPIRING IN 2002:
F. DUANE ACKERMAN, 56, CHAIRMAN OF THE
[PHOTO] BOARD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, BELLSOUTH CORPORATION. DIRECTOR
SINCE 1993 AND FROM APRIL 1989-APRIL
1991. Vice Chairman of the Board,
President and Chief Executive Officer,
December 1996-December 1997; Vice
Chairman of the Board and Chief
Operating Officer, January 1995-December
1996. President and Chief Executive
Officer, BellSouth Telecommunications,
Inc., November 1992-December 1994;
President and Chief Operating Officer,
and Vice Chairman of the Board,
BellSouth Telecommunications, Inc.,
December 1991- October 1992. Vice
Chairman and Group President, March
1991-November 1991; Vice
Chairman-Finance and Administration,
BellSouth Corporation, April
1989-February 1991. Director of South
Central Bell, January 1984-April 1985.
Director of American Heritage Life
Insurance Company. Trustee, Rollins
College.
REUBEN V. ANDERSON, 56, PARTNER, PHELPS
[PHOTO] DUNBAR, A LAW FIRM. DIRECTOR SINCE 1994.
Mississippi Supreme Court Justice,
1985-1990. Director of The Kroger
Company and Trustmark National Bank.
Trustee, Tougaloo College.
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<TABLE>
<S> <C>
KATHLEEN F. FELDSTEIN, 58, PRESIDENT,
[PHOTO] ECONOMICS STUDIES, INC., A PRIVATE
ECONOMICS CONSULTING FIRM. DIRECTOR
SINCE NOVEMBER 1998. Director of
BankAmerica Corporation; Ionics, Inc.;
The John Hancock Mutual Life Insurance
Company, Inc.; and Knight Ridder.
JOHN G. MEDLIN, JR., 65, CHAIRMAN
[PHOTO] EMERITUS, WACHOVIA CORPORATION. DIRECTOR
SINCE 1988. Director of Burlington
Industries, Inc.; Media General, Inc.;
National Service Industries, Inc.; US
Airways Group, Inc.; and Wachovia
Corporation.
C. DIXON SPANGLER, JR., 66, CHAIRMAN OF
[PHOTO] THE BOARD, C.D. SPANGLER CONSTRUCTION
CO. DIRECTOR SINCE 1987. President,
University of North Carolina, 1986-1997.
Director of C. D. Spangler Construction
Co.; Golden Eagle Industries, Inc.;
National Gypsum Co.; and Sonoco Products
Co.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ABOVE NOMINEES.
------------------------
DIRECTORS WHOSE TERMS CONTINUE UNTIL 2000:
J. HYATT BROWN, 61, CHAIRMAN, PRESIDENT
[PHOTO] AND CHIEF EXECUTIVE OFFICER, POE &
BROWN, INC., AN INSURANCE SERVICES
COMPANY. DIRECTOR SINCE 1994. Director
of BellSouth Telecommunications, Inc.,
March 1984-February 1994. Director of
FPL Group, Inc.; International Speedway
Corporation; Rock-Tenn Company; and Sun-
Trust Banks Inc. Trustee, Stetson
University.
PHYLLIS BURKE DAVIS, 67, RETIRED SENIOR
[PHOTO] VICE PRESIDENT, AVON PRODUCTS, INC.
DIRECTOR SINCE 1985. Director of Eaton
Corporation and The TJX Companies, Inc.
Trustee, Fidelity Mutual Funds.
5
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<TABLE>
<S> <C>
ROBIN B. SMITH, 59, CHAIRMAN AND CHIEF
[PHOTO] EXECUTIVE OFFICER, PUBLISHERS CLEARING
HOUSE, A MAGAZINE SUBSCRIPTION COMPANY.
DIRECTOR SINCE 1994. Director of Kmart
Corp.; Springs Industries, Inc.; Texaco
Inc.; and two fund clusters administered
by Prudential Investment Management.
WILLIAM S. STAVROPOULOS, 59, PRESIDENT
[PHOTO] AND CHIEF EXECUTIVE OFFICER, THE DOW
CHEMICAL COMPANY, A CHEMICAL
MANUFACTURING COMPANY. DIRECTOR SINCE
1997. Director of Chemical Financial
Corp.; The Dow Chemical Company; Dow
Corning Corporation; and NCR
Corporation.
</TABLE>
DIRECTORS WHOSE TERMS CONTINUE UNTIL 2001:
JAMES H. BLANCHARD, 57, CHAIRMAN OF THE
[PHOTO] BOARD AND CHIEF EXECUTIVE OFFICER,
SYNOVUS FINANCIAL CORP., A BANK HOLDING
COMPANY. DIRECTOR SINCE 1994. Director
of BellSouth Telecommunications, Inc.,
November 1988-February 1994. Director of
Total System Services, Inc. Trustee,
Columbus State University Foundation and
University of Georgia Foundation.
ARMANDO M. CODINA, 52, CHAIRMAN OF THE
[PHOTO] BOARD AND CHIEF EXECUTIVE OFFICER,
CODINA GROUP INC., A REAL ESTATE
DEVELOPMENT COMPANY. DIRECTOR SINCE
1992. Director of BellSouth
Telecommunications, Inc., March
1989-February 1992. Director of American
Bankers Insurance Group, Inc.; AMR
Corporation; FPL Group, Inc.; Weeks
Corporation; and Winn-Dixie Stores.
LEO F. MULLIN, 56, PRESIDENT AND CHIEF
[PHOTO] EXECUTIVE OFFICER, DELTA AIR LINES,
INC., AN AIR TRANSPORTATION COMPANY.
DIRECTOR SINCE 1998. Vice Chairman of
Unicom Corporation and its principal
subsidiary, Commonwealth Edison Company,
an electric service utility, December
1995-August 1997. President and Chief
Operating Officer of First Chicago
Corporation, a bank holding company,
November 1993-
July 1995. Director of Delta Air Lines,
Inc. and Inland Steel Industries, Inc.
Trustee, Field Museum of Natural History
and Northwestern University.
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<TABLE>
<S> <C>
J. TYLEE WILSON, 67, RETIRED CHAIRMAN OF
[PHOTO] THE BOARD AND CHIEF EXECUTIVE OFFICER,
RJR NABISCO, INC. DIRECTOR SINCE 1985.
Director of Southern Bell, October
1983-February 1985. Director of Carolina
Power & Light Company. Trustee, Wake
Forest University.
</TABLE>
------------------------
GOVERNANCE OF THE COMPANY
BOARD OF DIRECTORS
The business affairs of BellSouth are managed under the direction of the Board
of Directors in accordance with the Georgia Business Corporation Code, as
implemented by the Company's Articles of Incorporation and By-laws. Members of
the Board are kept informed through reports routinely presented at Board and
committee meetings by the Chief Executive Officer and other officers, and
through other means.
All of the directors are independent, nonemployee directors except Mr. Ackerman,
the Chairman of the Board, President and Chief Executive Officer of BellSouth.
Directors who are officers of BellSouth do not participate in any action of the
Board relating to any executive compensation plan described in this Proxy
Statement. Mr. Rueben V. Anderson is a partner in the law firm of Phelps Dunbar,
located in Jackson, Mississippi. During 1998, two subsidiaries of BellSouth
retained Phelps Dunbar with regard to a variety of legal issues. The amount of
fees paid to Phelps Dunbar for such services was less than 5% of the firm's
gross revenue for the last fiscal year.
Shareholders who wish to suggest qualified candidates for consideration as
directors of BellSouth by the Committee on Directors and Corporate Governance
should write to: Corporate Secretary, BellSouth Corporation, 1155 Peachtree
Street, N.E., Room 14B06, Atlanta, Georgia 30309-3610, stating in detail the
qualifications of such persons.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held eight meetings in 1998. All directors attended at
least 75% of Board and committee meetings held during their tenure during 1998.
The average attendance by directors at the aggregate number of Board and
committee meetings they were scheduled to attend was 98%.
CORPORATE GOVERNANCE REVIEW
During 1998, the Board conducted an in-depth review of its corporate governance
procedures. As a result of this review, it formed a new committee, the Committee
on Directors and Corporate Governance. The new Committee's basic
responsibilities are described on page 8. These steps are designed to ensure
continuing excellence in performance and accountability to the Company's
shareholders.
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COMMITTEES OF THE BOARD
<TABLE>
<CAPTION>
DIRECTORS AND
CORPORATE EXECUTIVE NOMINATING FINANCE/STRATEGIC
AUDIT GOVERNANCE EXECUTIVE AND COMPENSATION PLANNING
- ------------------ --------------------- -------------------- ----------------------- -----------------
<S> <C> <C> <C> <C>
R. A. Terry, Chair J. G. Medlin, Jr., F. D. Ackerman, C. D. Spangler, Jr., P. B. Davis,
R. V. Anderson Chair Chair Chair Chair
K. F. Feldstein A. M. Codina P. B. Davis J. H. Blanchard J. H. Brown
J. G. Medlin, Jr. P. B. Davis J. G. Medlin, Jr. A. M. Codina L. F. Mullin
W. S. Stavropoulos C. D. Spangler, Jr. C. D. Spangler, Jr. J. T. Wilson R. B. Smith
R. A. Terry R. A. Terry
</TABLE>
During 1998, the standing committees listed below assisted the Board in carrying
out its duties:
AUDIT COMMITTEE
The Audit Committee met six times in 1998. Its duties and responsibilities
include the following:
- Provides oversight of the financial reporting process and management's
responsibility for the integrity, accuracy and objectivity of financial
reports and accounting and financial reporting practices.
- Recommends to the Board the appointment of the Company's independent
public accountants.
- Provides oversight of the adequacy of the Company's system of internal
controls.
- Provides oversight of management practices relating to ethical
considerations and business conduct, including compliance with laws and
regulations.
COMMITTEE ON DIRECTORS AND CORPORATE GOVERNANCE
The Committee on Directors and Corporate Governance met twice in 1998. Its
duties and responsibilities include the following:
- Considers and recommends nominees for membership on the Board.
- Recommends strategy and program of compensation for directors.
- Recommends process and oversees assessment of Board performance.
- Oversees and evaluates issues of corporate governance.
- Recommends processes and practices through which the Board will conduct
its business.
EXECUTIVE COMMITTEE
The Executive Committee did not meet in 1998. The Committee meets on call by the
Chairman of the Board during the intervals between Board meetings and has all
the authority of the Board, subject to the limitations imposed by law, the
By-laws or the Board of Directors.
EXECUTIVE NOMINATING AND COMPENSATION COMMITTEE
The Executive Nominating and Compensation Committee (formerly the Nominating and
Compensation Committee) met eight times in 1998. Its Report on Executive
Compensation begins on page 16. Its duties and responsibilities include the
following:
- Nominates qualified persons as executive officers.
- Establishes overall strategy with respect to compensation for officers and
management.
- Provides oversight of Company's qualified employee benefit plans.
- Performs annual appraisal of Chief Executive Officer and reports results
to the Board.
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- Oversees the Company's executive succession plan.
FINANCE/STRATEGIC PLANNING COMMITTEE
The Finance/Strategic Planning Committee met seven times in 1998. Its duties and
responsibilities include the following:
- Reviews, approves or recommends to the full Board the long-term business
goals and strategies of the Company, including strategic considerations in
the allocation of corporate resources.
- Oversees the financial objectives, policies, procedures and activities of
the Company.
DIRECTORS' PROXY COMMITTEE
The Board also has designated a Directors' Proxy Committee, which votes the
shares represented by proxies at the Annual Meeting of Shareholders. Its members
are Messrs. Ackerman, Spangler and Terry.
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DIRECTOR COMPENSATION
FEES AND OTHER COMPENSATION
During 1998, directors who were not employees of BellSouth received the
following:
<TABLE>
<S> <C>
Annual retainer $30,000 (50% paid in BellSouth stock)
Attendance fee for each Board meeting $ 1,800
Attendance fee for each Committee meeting $ 1,500
Annual retainer for each Committee chaired $ 5,000
Annual grant of BellSouth stock 400 shares (after stock split
effective
December 24, 1998)
</TABLE>
Nonemployee directors also are provided certain telecommunications services and
death benefits and, while on BellSouth business, travel accident insurance. In
1998, the cost of such benefits was approximately $1,412 per director.
The Company has historically maintained a retirement plan for nonemployee
directors who have served on the Board or a subsidiary board for at least five
years and have reached the age of 55. Eligible directors receive an annual
retirement benefit of up to a maximum of 100 percent of the retainer with ten
years or more service. Payments are made for a maximum of 12 years following
retirement. Effective April 30, 1997, the accrual of retirement benefits under
this plan was discontinued.
NONEMPLOYEE DIRECTOR STOCK PLAN
Under the BellSouth Nonemployee Director Stock Plan, each nonemployee director
receives an annual grant of nonqualified stock options to purchase 4,000 shares
of BellSouth stock (adjusted to reflect the stock split effective December 24,
1998), together with tandem stock appreciation rights, at an exercise price per
share equal to the fair market value of the stock on the grant date. The options
become exercisable one year after the grant date. In 1998, each of the 12
eligible nonemployee directors was granted options to purchase, on a post-split
basis, 4,000 shares of BellSouth stock at a per share exercise price of $31.50.
STOCK OWNERSHIP INCENTIVES
To further link director and shareholder interests, the Director Stock Plan
provides that if the value of BellSouth stock owned by a nonemployee director
exceeds five times the amount of the annual retainer for Board members, that
director will receive additional stock options. The director receives one
additional option for every two shares owned in excess of five times the
retainer amount. The maximum number of additional options that may be granted
annually to any director is 4,000 options (adjusted to reflect the stock split
effective December 24, 1998). Directors only receive additional stock options
for each excess share one time; thereafter, they must acquire additional shares
in order to continue to receive additional stock options. The following
directors received grants of additional options at a per share grant price of
$31.50 in 1998: Anderson (38 additional options), Blanchard (4,000 additional
options), Brown (4,000 additional options), Codina (4,000 additional options),
Davis (2,296 additional options), Medlin (4,000 additional options), Smith (100
additional options), Spangler (4,000 additional options), Terry (4,000
additional options) and Wilson (1,952 additional options). (All numbers have
been adjusted to reflect the stock split effective December 24, 1998.)
The director realizes value from the stock options only when exercised, and only
to the extent that the price of BellSouth stock on the exercise date exceeds the
price of the stock on the grant date.
NONEMPLOYEE DIRECTORS' CHARITABLE CONTRIBUTION PROGRAM
The Nonemployee Directors' Charitable Contribution Program has been terminated
with respect to new members of the Board; however, contributions will continue
to be made on behalf of directors who were
10
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members of the Board prior to January 1997. This program was designed to
acknowledge the service of Company directors and to recognize the mutual
interests of directors and the Company in supporting worthy institutions. The
program provided that BellSouth would make a contribution to educational or
cultural organization(s) designated by the director upon the director's death or
retirement. Directors had to have five years of service on the Board or on the
board of a subsidiary to qualify for this program. The amount contributed by
BellSouth increased with each year served by the director, up to a maximum
contribution of $1 million, payable after ten years of service. All charitable
deductions for tax purposes accrue solely to the Company and the individual
directors derive no direct financial benefit from the program.
------------------------
11
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STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth ownership of shares of BellSouth stock by each
director, by each executive officer named in the Summary Compensation Table on
page 20, and by all directors and executive officers as a group, as of February
1, 1999. These shares represent in the aggregate less than one percent of the
outstanding shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AS OF
FEBRUARY 1, 1999
SHARES AND
CURRENT STOCK UNITS
BENEFICIAL SHARES SUBJECT TO HELD UNDER
NAME HOLDINGS OPTIONS(A) DEFERRAL PLANS(B) TOTAL
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
F. DUANE ACKERMAN....................... 192,439 278,692 103,130 574,261
REUBEN V. ANDERSON...................... 2,000 16,000 3,899 21,899
JAMES H. BLANCHARD...................... 14,738 19,694 14,636 49,068
J. HYATT BROWN.......................... 41,728 28,000 12,025 81,753
ARMANDO M. CODINA....................... 10,460 25,554 11,593 47,607
CHARLES B. COE.......................... 26,767 94,110 35,570 156,447
PHYLLIS BURKE DAVIS..................... 6,891 28,608 7,049 42,548
JERE A. DRUMMOND........................ 75,333 187,182 31,299 293,814
RONALD M. DYKES......................... 12,456 84,610 28,223 125,289
KATHLEEN F. FELDSTEIN................... 1,000 -- 165 1,165
EARLE MAULDIN........................... 55,057 176,844 54,588 286,489
JOHN G. MEDLIN, JR...................... 10,000 23,116 18,903 52,019
LEO F. MULLIN........................... 9,984 -- 1,697 11,681
ROBIN B. SMITH.......................... 4,000 12,000 1,974 17,974
C. DIXON SPANGLER, JR................... 4,000 28,000 17,453 49,453
WILLIAM S. STAVROPOULOS................. 4,400 -- 2,597 6,997
RONALD A. TERRY......................... 1,600 28,494 24,861 54,955
J. TYLEE WILSON......................... 20,000 34,564 4,689 59,253
DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP................................... 674,657 1,704,292 600,761 2,979,710
</TABLE>
- --------------
(A) Represents shares that may be acquired currently or within 60 days after
February 1, 1999 through the exercise of stock options. The exercise price
of options is the market price of BellSouth stock on the date of grant and
is not discounted. Directors and officers realize value from options only
when exercised and only to the extent that the price of BellSouth stock on
the exercise date exceeds the price of the stock on the grant date.
(B) Represents shares of BellSouth stock, phantom stock units and units
representing accrued dividends, receipt of which has been deferred pursuant
to various deferral plans. The phantom stock units are payable in cash, but
track the performance of BellSouth stock. Neither the shares nor the units
can be voted or transferred.
12
<PAGE>
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, acting upon the recommendation of the Audit Committee,
has appointed the firm of PricewaterhouseCoopers LLP, certified public
accountants, as independent accountants to audit the accounts of BellSouth and
its subsidiaries for the year 1999. PricewaterhouseCoopers LLP and its
predecessor, Coopers & Lybrand LLP, have audited the accounts and records of
BellSouth and its subsidiaries since 1984. Representatives of
PricewaterhouseCoopers LLP will attend the Annual Meeting and have the
opportunity to make a statement if they desire, and also will be available to
answer questions.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
------------------------
SHAREHOLDER PROPOSALS
The following shareholder proposals may be presented for a vote at the Annual
Meeting. We expect the proposals to be presented either by the proponent or a
designated representative. The proposals are printed exactly as they were
submitted by the shareholder, except for changes permitted by the Securities and
Exchange Commission. Spaces are provided on the accompanying proxy card to vote
FOR, AGAINST, or ABSTAIN with respect to each of the proposals.
PROPOSAL 3: EXECUTIVE COMPENSATION
B. Wayne Carmichael, 19269 E. 900 Avenue, Dieterich, IL 62424, Trustee for M.
Katherine Carmichael Trust and recordholder of 4,932 shares of BellSouth stock,
has informed the Company that he intends to present the following proposal at
the Annual Meeting:
The figures for executive pay are simply astonishing. Just how many tens
of millions of dollars are needed to motivate CEOs to do their job
properly?
What is troubling is the disparity between CEO pay and what everyone
else in the company earns for their work.
Resolved: it is recommended that the Board of Directors abolish the
short term and long term incentive awards for executive officers. The
only incentive award to be awarded would be tied proportionately to the
revenue growth at the end of the year.
Example: if dividends are up 5% or 8% at the end of the year, then the
incentive award would be 5% or 8% of salary.
Supporting Statement:
There is too big a gap between what the executive officers make and the
average worker. At a time when the income of 90% of corporate employees
are barely growing as work loads get heavier every day and job
insecurity is a constant, these multimillion dollar windfalls are more
than unseemly. They are arrogant. They imply that no one else but the
CEO is responsible for the good performance of the company--not the team
of workers, the sales people, the managers or the support staff. It is
insulting to workers who are told they are critical members of a team
only to see one individual walk away with a disproportionate share of
the rewards.
Some boards of directors are simply requiring their CEO to buy large
chunks of equity to force them to share stockholders risks and rewards.
We urge all shareholders to mark their proxy for this proposal.
BOARD OF DIRECTORS' RECOMMENDATION:
Your directors believe this proposal would make the executive officers of the
Company LESS accountable for performance than they are under the compensation
program now in place.
Short term awards are not extra compensation. Total annual compensation for the
Company's officers, which includes both standard short term awards and base
salary, is set at levels comparable to that at companies similar to BellSouth.
If short term award amounts were lowered, the Company would have to
13
<PAGE>
proportionately increase the amount of the officers' base salaries in order to
continue to pay compensation that is competitive with the compensation paid by
similar companies. If this competitive position is not maintained, the Board
believes that the Company would be unable to attract and retain qualified
executive candidates.
A significant part of the total amount paid under the short term plan is based
on how effectively the executives manage the business during the year. If short
term awards were no longer based on performance, there would be no direct
correlation between annual cash compensation and operational performance.
Executives would be less accountable for important goals, such as customer
satisfaction, which they must now achieve to earn a short term award. The Board
believes that setting measurable standards and paying executives based on their
achievement of these standards is a much more effective way to achieve important
goals set by the Board of Directors than by simply tying the bonus to revenue
growth, as the proponent suggests. In addition, the short term plan grants
awards intended to qualify as performance-based under Section 162(m) of the
Internal Revenue Code, thus allowing the Company to preserve its tax deduction
for the compensation.
In contrast to the short term incentive award program, which focuses on results
in a particular year, the Company's long term incentive award program is
intended to focus the officers on the achievement of corporate goals over a
period of time. Stock performance, including total return to shareholders as
well as stock price appreciation, is the only measurement under the Company's
long term incentive program. Therefore, the program in essence does exactly what
the proponent of this proposal has asked for--the officers' long term incentive
award is completely dependent on the shareholders' return. The Company believes
that basing the amount of the awards on the total return to the shareholders--
appreciation in stock price plus dividends--ensures that the officers have the
shareholders' best interests in mind as they perform their jobs.
The Executive Nominating and Compensation Committee Report on Executive
Compensation (beginning at page 16 of this Proxy Statement) explains the
compensation programs in detail. The Report includes a discussion of the
Company's stock ownership guidelines, under which all officers of the Company
(not just the Chief Executive Officer) are expected to own BellSouth stock
valued at between one and four times their individual base salary amounts,
depending on their position in the Company. Shareholders should find this Report
helpful in evaluating this proposal.
FOR THE REASONS SET FORTH ABOVE, YOUR BOARD OF DIRECTORS
STRONGLY RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" PROPOSAL 3.
------------------------
PROPOSAL 4: SHAREHOLDER APPROVAL FOR SEVERANCE AGREEMENTS
Marleita Carmichael, 7836 Hixson Pike, Hixson, TN 38343, recordholder of 6,744
shares of BellSouth stock, has informed the Company that she intends to present
the following proposal at the Annual Meeting:
Resolved: That the shareholders of Bell South [sic] urge their Board of
Directors to seek shareholder approval for all future or renewed
severance agreements with the Company's executive officers including
so-called "golden parachute" and "golden good-bye" severance agreements,
that provide more generous pay outs than the senior Management
Retirement Income plan available to other senior managers.
For the purpose of this resolution, "golden good byes" are defined as
severance payments made to executives who terminate their employment
voluntarily, including early retirement, or who are terminated without
good cause.
SUPPORTING STATEMENT:
"Golden good-bye" severance agreements are among the most lucrative and
anti-shareholder executive compensation benefits. Without shareholder
consent such severance agreements create potential conflicts of interest
and undermine shareholder confidence that executive pay is properly
aligned with the interest of shareholders. Example is awarding 5.7
million dollars to Mr. Clendenin to retire early. A waste of
shareholders funds.
14
<PAGE>
Requiring shareholder approval of golden severance agreements is very
poplar [sic] for a very good reason. Directors, including outside
directors, typically owe their lucrative board appointments to incumbent
management. Corporate boards are often not in the best position to
question or challenge the value to shareholders of executive severance
agreements that, at best, pay an executive far more than the company's
normal pension benefits for nothing more than agreeing to resign or
retire gracefully.
Golden severance agreements also reduce shareholder value and tend to
reward mismanagement. A 1990 study by the United Shareholders
Association of 1000 major U.S. Corporations found the average annualized
two year return was 20 percent higher for the 559 companies who [sic]
management did not hold golden parachutes or severances.
The directors will argue this type of agreement would unduly restrict
the Board function of hiring, retaining and terminating senior
management when necessary. Facts do not support this position.
We urge all shareholders to mark their proxy FOR this proposal.
BOARD OF DIRECTORS' RECOMMENDATION:
The Board of Directors believes that it is vitally important for it to have the
discretion to offer severance agreements and special retirement arrangements to
the Company's officers in order to achieve a variety of important corporate
objectives. While the Company has entered into severance agreements with a
number of Company officers, each agreement has been the result of a case-by-case
assessment of the past (and, where appropriate, future) value of the executive's
services, the circumstances of the executive's departure, and other strategic
considerations, and reflects terms tailored to the specific circumstances. For
example, the Company has in the past entered into agreements with certain senior
officers that established well in advance a fixed early retirement date for the
particular officer in furtherance of leadership succession plans. The Company
also has entered into early retirement agreements with officers in connection
with corporate or management reorganizations, or otherwise, in order to make the
most efficient use of corporate resources. The Board believes that these
agreements are important tools for achieving important corporate objectives such
as smooth management transitions, getting the right people in the right
positions, and creating promotional opportunities within the officer ranks to
assist in the retention of other executives (who may otherwise be tempted to
seek opportunities elsewhere if they see little potential for their promotion to
higher office within the Company).
The Board believes that "golden parachute" agreements that would typically be
applicable in change in control situations permit executives to remain focused
and objective when facing a major corporate transaction, enabling them to act
decisively to protect and enhance shareholder value. The severance agreements
currently used by the Company do not allow any of the covered executives to
claim an automatic payment upon a change in control. Instead, an executive will
receive payments under the agreement only if there is both a change in control
and, incident to the change in control, an involuntary termination of the
executive's employment. Thus, it is the employer, and not the executive, who
controls whether termination benefits will be payable.
The Board believes that agreements of this nature, when used judiciously under
appropriate circumstances, will promote shareholders' interests by assisting the
Company in managing, recruiting and retaining the best executives possible to
lead our business. In most cases, it would simply not be feasible for the
Company to wait the several months necessary to obtain shareholder approval
before acting on such crucial matters. Accordingly, the Board believes it should
retain the flexibility to use such agreements, in situations that it deems
appropriate, without the impractical requirement of shareholder approval.
FOR THE REASONS SET FORTH ABOVE, YOUR BOARD OF DIRECTORS
STRONGLY RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" PROPOSAL 4.
------------------------
15
<PAGE>
EXECUTIVE NOMINATING AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
POLICY
The Executive Nominating and Compensation Committee of the BellSouth Board of
Directors (the "Committee") is responsible for the oversight and administration
of the Company's executive compensation program. The Committee is composed
entirely of independent, nonemployee directors.
The Company's executive compensation program is based on a philosophy that the
total compensation package must be competitive with similar companies in order
to attract and retain executive talent. The program also seeks to emphasize
variable compensation. The 1998 executive compensation program was based on the
following principles:
- Base salaries are targeted to the median level of salaries paid to
officers in comparable companies with comparable responsibilities.
- Annual incentive awards are dependent upon the Company's performance
against established target levels and its financial performance relative
to its peers.
- Long-term incentive awards include stock options and cash incentives based
on Total Shareholder Return ("TSR"), which is measured by adding the
amount of appreciation in the Company's stock price to the amount of
dividends paid to shareholders. The amounts of the awards are determined
by comparing BellSouth's TSR to the TSR of peer companies. As a result,
officers' rewards are linked directly to the return realized by BellSouth
shareholders.
The 1998 executive compensation program and a specific discussion as to the
compensation of the Chief Executive Officer are set out in detail below. The
tables included elsewhere in this Proxy Statement reflect the results of the
procedures and principles discussed below.
STOCK OWNERSHIP GUIDELINES
In keeping with its belief that tying the financial interests of BellSouth
executives to those of the shareholders will result in enhanced shareholder
value, the Board has established executive stock ownership guidelines. Under
these guidelines, the officers are expected to own BellSouth stock valued at
between one and four times their individual base salary amounts, depending upon
their position in the Company. In order to incent officers to exceed the
targets, awards of Incentive Stock Options are made to those who do exceed the
targets. In 1998, the Company awarded 76,248 Incentive Stock Options to 29
officers who exceeded their stock ownership targets.
BASE SALARY
BellSouth establishes a market-competitive target salary for each officer based
upon his or her job responsibilities. The target salary is established by
utilizing information from general industry surveys, surveys of the
telecommunications industry specifically, and proxy materials of the companies
included in the performance graph on page 26. The Committee reviewed the market
competitiveness of each individual salary and the CEO's recommendations
regarding individual pay treatment and approved individual salary levels for the
Company's officers.
ANNUAL INCENTIVE AWARDS
The BellSouth Corporation Officer Short Term Incentive Award Plan (the
"Incentive Award Plan"), which was approved by the Company's shareholders in
1996, is designed to provide annual incentive awards that qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
(see discussion below), thus allowing the Company to fully deduct these
payments. The Incentive Award Plan establishes an overriding performance goal
prohibiting the payment of any short-term award to eligible officers unless the
Company has positive consolidated earnings, as defined in the Plan. Furthermore,
the Incentive Award Plan establishes maximum levels of awards payable to any one
individual. The Committee works within these limitations and then exercises
discretion in determining the actual amount of individual awards. A target
incentive award amount, determined as a percentage of base salary, is
established for each officer.
16
<PAGE>
The Incentive Award Plan is intended to place a significant part of each
executive's annual compensation at risk. Annual incentive awards for a
particular year are based on that year's performance (measured by revenue
growth, net income, and customer satisfaction) and individual achievement of
commitments linked to corporate strategic objectives. The Committee approves
performance objectives at the beginning of each year based on a projection of
the results BellSouth will be required to achieve in order to be a
top-performing company in its peer group. The weight given to each of these
performance components varies, depending upon the officer's particular job
assignment. The measurements and target performance levels for each officer are
tied to the business entity with which he/she is most closely associated. In
addition, the officer's award can be adjusted by the Committee based upon a
comparison of the financial performance of the Company or business unit with the
financial performance of the peer group of companies.
The method used to determine the Chief Executive Officer's annual incentive
award is discussed below in the section entitled "1998 Compensation for the
Chief Executive Officer."
LONG TERM INCENTIVE PROGRAM
BellSouth's long term incentive program is intended to focus the officer group
on the achievement of corporate goals over time. Officers must carefully weigh
the short and long term benefits or consequences of their decisions and manage
the business to effectively grow and compete in a rapidly changing
communications marketplace. They also must balance long term business
development with the need for a reasonable current return. The Committee's
intention is to incent the Company's officers to take the risks necessary to
secure a strong foothold for BellSouth in the competitive marketplace, which is
continually changing to admit new competitors such as alternative local exchange
service providers, cable companies, wireless service providers and long distance
carriers.
AWARDS IN 1998: This philosophy is put into effect by basing the Company's long
term incentive plans on the performance of BellSouth stock. First, under the
BellSouth Corporation Stock Plan, each officer receives an annual grant of
nonqualified stock options. The options are issued at market price on the date
of grant. The Company does not issue options at less than fair market value at
the date of grant, and the officer receives value from the options only if the
stock price has appreciated on the date of exercise.
In 1998, in addition to the stock option grants, the Committee also awarded
dividend equivalent rights to each officer for the 1998-2000 performance period,
as described in the section entitled "Long Term Incentive Plan Awards in Fiscal
Year 1998" on page 22. The only performance factor used to determine payouts
under this program is relative Total Shareholder Return ("TSR"), which is
defined on page 16. The Committee believes that the grant of dividend equivalent
rights emphasizes pay for performance and provides an additional incentive for
officers to maximize TSR.
The number of stock options and dividend equivalent rights granted to each
officer for 1998 was determined by applying an annual grant level percentage
against each individual executive's base salary. This percentage was comparable
to the grant practices of high-performing companies, as determined by examining
external surveys and data from proxy statements. The actual number of stock
options granted was determined by using the Black-Scholes option pricing model.
The number of dividend equivalent units awarded was determined by using the
calculated present value of the dividend payment stream on a share of BellSouth
stock, assuming constant dividend amounts. The Committee does not adjust each
annual grant to reflect options or units outstanding or previously granted to a
particular executive officer.
PAYMENTS IN 1998: In 1994 and 1995, the Company's executives received grants of
dividend equivalent rights under the Shareholder Return Cash Program ("SRCP").
Each grant provided for five annual cash payments. The maximum payment was 100%
of the value of the annual dividends paid by the Company on a share of BellSouth
stock multiplied by the number of units granted. The actual amount of the
payments is determined by comparing the Company's TSR with the median TSR of a
peer group of companies. BellSouth's TSR exceeded the median TSR of the peer
group for all performance periods.
The SRCP was amended in 1996. In 1996, under the amended plan, the Company's
executives received grants of units that provided for one cash payment at the
end of a three-year performance period. Actual
17
<PAGE>
awards can vary from 0-200% of the value of the total dividends paid by the
Company on a share of BellSouth stock over the performance period, multiplied by
the number of units granted. The actual amount of the payments is based on a
ranking of the Company's TSR as compared with the TSR of a peer group of
companies. BellSouth's TSR ranking for the 1996-1998 performance period was
number one.
In 1998, each executive received payments for the fifth year of the 1994 grant,
the fourth year of the 1995 grant and the entire 1996 grant performance period.
1998 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
EVALUATION PROCEDURE: In 1998, as discussed in "Corporate Governance Review" on
page 7, the Company conducted an examination of its corporate governance
procedures. As a part of this examination, a new Committee of the Board of
Directors, the Committee on Directors and Corporate Governance, was created. The
new Committee recommended that the Executive Nominating and Compensation
Committee implement a new procedure for evaluating Mr. Ackerman's performance.
The Executive Nominating and Compensation Committee thereupon established this
procedure, which was approved by the full Board of Directors. The procedure
involved the determination of critical job responsibilities for the Chief
Executive Officer. At the beginning of each year, the Chief Executive Officer
will establish objectives related to the critical job responsibilities and
provide a copy to the Committee. At the end of each year, the Chief Executive
Officer will provide the Committee a summary of his major accomplishments
related to the objectives. The Committee will review the accomplishments and
develop an overall evaluation of the Chief Executive Officer that will be
discussed with the Chief Executive Officer by the Committee Chair. The results
of the evaluation also will be reported to the full Board of Directors.
1998 BASE SALARY: In determining Mr. Ackerman's 1998 base salary, the Committee
reviewed reported base salary information for the chief executive officers of
the other companies in the peer group as well as the salaries of chief executive
officers of other companies of comparable size. Based on an analysis of this
data and Mr. Ackerman's performance as Chief Executive Officer, together with
the fact that Mr. Ackerman's salary was previously below market levels, the
Committee increased his salary to the amount reported in the Summary
Compensation Table on page 20. Mr. Ackerman's base salary for 1999, and future
years, will be determined pursuant to the evaluation procedure described above.
1998 SHORT TERM INCENTIVE AWARD: In determining the Chief Executive Officer's
short term incentive award for 1998 performance, the Committee applied the
evaluation procedure discussed above. In November 1998, the Committee conducted
a review of Mr. Ackerman's accomplishments in the following areas: leadership;
financial performance; operations; strategic planning; organization and human
resources; succession planning; external relations; and board relations. The
Committee recognized that under Mr. Ackerman's leadership in 1998, BellSouth
continued to operate in accordance with the three major components of its
corporate strategy: to strengthen its leadership position as the premier
telecommunications company in the South; to grow its domestic wireless business
profitably; and to grow, evolve and expand its international operations with an
emphasis on Latin America. Based on these factors, the Committee felt that Mr.
Ackerman had provided strong strategic leadership for the Company. The Committee
reviewed the factors described above and, exercising its judgment, awarded the
Chief Executive Officer the overall short term incentive award shown in the
Summary Compensation Table on page 20.
1998 LONG TERM INCENTIVE AWARD: The Committee also approved payment to the
Chief Executive Officer of the amount shown in the Summary Compensation Table
for units granted under the Shareholder Return Cash Program for performance
periods beginning in 1994, 1995 and 1996. The amount of this payment was
determined by using the same method as is described for the executive officers
in "Long Term Incentive Program--Payments in 1998," above. The Committee also
approved grants of stock options and dividend equivalent rights to Mr. Ackerman
as shown in "Option / SAR Grants in 1998" on page 21 and "Long Term Incentive
Plan Awards in 1998" on page 23. The number of options and dividend equivalent
rights granted was determined by using the same procedure as is described for
the executive officers in "Long Term Incentive Program--Awards in 1998," above.
18
<PAGE>
AGREEMENT WITH THE CHIEF EXECUTIVE OFFICER: During 1998, the Committee
determined that an agreement entered into between the Chief Executive Officer
and the Company relating to the Chief Executive Officer's retirement from the
Company no longer fit the needs of the Company. The Committee therefore
recommended to the full Board of Directors, and the Board subsequently approved,
a new agreement designed to incent Mr. Ackerman to remain with the Company and
to link the value of the arrangement to his performance as Chief Executive
Officer. The terms of the new agreement are described in "Executive Employment
Agreements and Other Retirement and Change In Control Arrangements" on page 24.
INTERNAL REVENUE CODE SECTION 162(M) IMPLICATIONS FOR EXECUTIVE COMPENSATION
The Committee is responsible for addressing issues raised by Section 162(m) of
the Internal Revenue
Code ("Section 162(m)"). This Section limits the Company's tax deduction for
compensation paid to certain executive officers that does not qualify as
"performance-based" to $1 million per executive officer. To qualify as
performance-based under Section 162(m), compensation payments must be made
pursuant to a plan that is administered by a committee of outside directors and
must be based on achieving objective performance goals. In addition, the
material terms of the plan must be disclosed to and approved by shareholders,
and the Committee must certify that the performance goals were achieved before
payments can be awarded.
The Committee continues to carefully consider the impact of this rule and has
taken several steps that are designed to comply with its provisions and to
minimize compensation payments for which the Company does not receive a tax
deduction. First, it adopted the BellSouth Corporation Stock Plan, which was
approved by the Company's shareholders in 1995. This plan establishes
performance criteria that are intended to qualify awards made under the plan to
the named executive officers as performance-based awards approved by the
shareholders; thus, these awards should not be counted toward the $1 million
limitation. Second, it adopted the BellSouth Corporation Officer Short Term
Incentive Award Plan approved by the Company's shareholders in 1996. Awards made
under this plan are intended to qualify as performance-based awards approved by
the shareholders and thus also should not count toward the $1 million
limitation. Due to these actions and to voluntary deferrals of compensation, the
Company believes that there will be only a minimal loss of tax deductions
related to the named executive officers' 1998 compensation. The Committee will
continue to examine the effects of this tax rule and will monitor the level of
compensation paid to the executive officers in order to take any steps which may
be appropriate in response to the provisions of Section 162(m).
C. Dixon Spangler, Jr., Chair
James H. Blanchard
Armando M. Codina
J. Tylee Wilson
------------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Nominating and Compensation Committee consists of Messrs. Spangler
(Chair), Blanchard, Codina and Wilson. None of the members of the Executive
Nominating and Compensation Committee are former or current officers or
employees of the Company or any of its subsidiaries.
19
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The table below shows, for the last three years, the compensation paid or
accrued by BellSouth and its subsidiaries to each of the five named executive
officers.
SUMMARY COMPENSATION TABLE
($000)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS PAYOUTS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
OTHER
ANNUAL RESTRICTED SECURITIES
COMPEN- STOCK UNDERLYING LTIP ALL OTHER
NAME AND BONUS SATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($)(A) ($)(B) ($)(C) (#)(D) ($)(E) ($)(F)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F. D. ACKERMAN 1998 $ 990.0 $ 2,000.0 $ 11.9 $ 6,345.3 1,942,918 $ 802.4 $ 136.2
Chairman of the 1997 $ 825.0 $ 1,300.0 $ 11.0 417,216 $ 148.0 $ 108.7
Board, President and 1996 $ 610.0 $ 793.0 $ 11.2 231,400 $ 148.0 $ 109.2
Chief Executive
Officer
J. A. DRUMMOND 1998 $ 580.0 $ 900.0 $ 11.3 302,574 $ 497.4 $ 99.5
President and Chief 1997 $ 500.0 $ 522.5 $ 11.2 179,616 $ 83.2 $ 84.3
Executive Officer-- 1996 $ 438.0 $ 547.5 $ 15.1 145,400 $ 83.2 $ 82.8
BellSouth
Communications Group
E. MAULDIN 1998 $ 511.5 $ 799.0 $ 12.0 256,174 $ 454.5 $ 116.7
President and Chief 1997 $ 465.0 $ 523.5 $ 12.9 167,416 $ 77.5 $ 109.0
Executive Officer-- 1996 $ 400.0 $ 417.5 $ 13.2 137,822 $ 77.5 $ 110.0
BellSouth
Enterprises, Inc.
R. M. DYKES 1998 $ 428.0 $ 553.0 $ 12.8 177,920 $ 248.5 $ 71.6
Executive Vice 1997 $ 360.0 $ 349.0 $ 16.9 112,592 $ 35.1 $ 65.4
President and Chief 1996 $ 271.3 $ 307.5 $ 11.8 76,350 $ 35.1 $ 62.5
Financial Officer
C. B. COE 1998 $ 394.8 $ 539.5 $ 13.3 180,374 $ 283.1 $ 65.3
President--BellSouth 1997 $ 336.0 $ 291.0 $ 10.1 105,416 $ 45.2 $ 62.8
Telecommunications, 1996 $ 292.0 $ 309.0 $ 10.6 83,200 $ 45.2 $ 61.2
Inc.
</TABLE>
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(A) These amounts were earned under the BellSouth Corporation Officer Short Term
Incentive Award Plan.
(B) Represents 1998 tax "gross ups" for the five named executive officers as
follows: (a) motor vehicle use, $7.9, $7.0, $6.0, $7.1 and $8.5,
respectively; (b) financial counseling, $4.0, $4.3, $6.0, $5.5 and $4.6,
respectively; (c) imputed interest on loans for FICA taxes of $0.2 for Mr.
Dykes; and (d) brokerage fee for stock option exercises of $0.2 for Mr. Coe.
(C) This item shows the grant date value of shares of restricted stock awarded
to Mr. Ackerman pursuant to the terms of an agreement approved by the Board
of Directors on November 23, 1998, as described in "Executive Employment
Agreements and Other Retirement and Change in Control Arrangements" on page
24. The value shown in the table is based on the closing price of BellSouth
stock on the New York Stock Exchange on the grant date, November 23, 1998.
At December 31, 1998, Mr. Ackerman held 152,440 shares of restricted stock
valued at $7,602.9, based on the closing price of $49.875 of BellSouth stock
on the New York Stock Exchange on December 31,1998. Mr. Ackerman will
receive the dividends paid on these shares at the same rate as the dividend
rate received by all shareholders.
(D) All numbers of securities reflect the two-for-one split of BellSouth stock
effective December 24, 1998.
20
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(E) The amounts reported for 1998 include the amounts that were earned under the
Shareholder Return Cash Program ("SRCP") for the fifth year of the five-year
performance period beginning in 1994, the fourth year of the five-year
performance period beginning in 1995, and the three-year performance period
beginning in 1996. The amounts reported for 1997 and 1996 were earned under
the SRCP for the second and subsequent years of the five-year performance
periods beginning in 1993, 1994 and 1995.
(F) Included in this category for 1998 are amounts for the five named executive
officers for: (a) above-market interest on voluntary salary deferrals under
nonqualified deferred compensation plans, $59.3, $45.2, $72.6, $41.4 and
$34.2, respectively; (b) Company matching contributions to certain employee
benefit plans, $8.0, $10.2, $8.6, $10.7 and $10.8, respectively; (c)
benefits substantially equal to Company matching contributions that could
not be provided under employee savings plans because of limitations under
the Internal Revenue Code or on amounts deferred from compensation, $48.9,
$25.0, $20.8, $15.7 and $14.1, respectively; (d) value of term life
insurance premiums paid by the Company, $5.5, $1.7, $1.6, $0.5 and $1.0,
respectively; and (e) value of benefits from premiums paid by the Company
under the BellSouth Life Insurance Program, $14.5, $17.4, $13.1, $3.3 and
$5.2, respectively. BellSouth uses the Present Value Ratio Method to
determine the portion of each premium dollar attributable to the executive
officer. The Company will recover the cost of premium payments from the cash
value of the policies.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock options
to the five named executive officers during 1998. The Company utilized the
Black-Scholes option pricing model to develop the theoretical values set forth
under the "Grant Date Value" column. The officer realizes value from the stock
options only to the extent that the price of BellSouth stock on the date the
officer exercises the options exceeds the price of the stock on the grant date.
Consequently, there is no assurance the value realized by an officer will be at
or near the value estimated below; these amounts should not be used to predict
stock performance.
OPTION / SAR GRANTS IN 1998 (A)
<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANTS VALUE
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS/ SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION VALUE
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE ($000)
<S> <C> <C> <C> <C> <C>
F. D. ACKERMAN 594,000(B) 3.31% $ 30.91 2/2/08 4$,030.9(E)
1,348,918(C) 7.51% $ 41.00 11/23/10 1$5,670.1(F)
J. A. DRUMMOND 299,400(B) 1.67% $ 30.91 2/2/08 2$,031.8(E)
3,174(D) .02% $ 31.50 4/27/08 $ 22.7(G)
E. MAULDIN 253,000(B) 1.41% $ 30.91 2/2/08 1$,716.9(E)
3,174(D) .02% $ 31.50 4/27/08 $ 22.7(G)
R. M. DYKES 174,800(B) .97% $ 30.91 2/2/08 1$,186.2(E)
3,120(D) .02% $ 31.50 4/27/08 $ 22.3(G)
C. B. COE 177,200(B) .99% $ 30.91 2/2/08 1$,202.5(E)
3,174(D) .02% $ 31.50 4/27/08 $ 22.7(G)
</TABLE>
- --------------
(A) Numbers of securities, exercise prices and present values reflect the
two-for-one split of BellSouth stock effective December 24, 1998.
(B) Under provisions of the BellSouth Corporation Stock Plan, the Board of
Directors granted stock options to key employees to purchase shares of
BellSouth stock within prescribed periods at prices equal to the fair market
value of the stock on the date of the grant. Options granted in 1998
generally become exercisable at the end of three years, determined from the
date of the grant. No stock
21
<PAGE>
appreciation rights were granted to officers in 1998. All options vest
immediately in the event of a change in control.
(C) Mr. Ackerman was granted nonqualified stock options pursuant to the terms of
an agreement approved by the Board of Directors on November 23, 1998, as
described in "Executive Employment Agreements and Other Retirement and
Change In Control Arrangements" on page 24. The options have an exercise
price equal to the fair market value of BellSouth stock on the grant date.
Twenty percent of the options become exercisable on Mr. Ackerman's 60(th)
birthday and an additional 20% become exercisable on each subsequent
birthday, provided that Mr. Ackerman is still employed by the Company on
those dates.
(D) Incentive Stock Options were awarded to certain officers based on their
achievement of ownership of specified levels of Company stock as established
by the Board of Directors. These options, which have exercise prices equal
to the fair market value of the stock on the date of the grant, are
exercisable six months from the date of the grant. See "Executive Nominating
and Compensation Committee Report on Executive Compensation" on page 16.
(E) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility 21%, dividend yield 2.46% and a risk-free rate of return of 5.48%
based on options being outstanding for a five-year term.
(F) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility 21%, dividend yield 1.85% and a risk-free rate of return of 4.87%
based on options being outstanding for an eight-year term.
(G) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility 21%, dividend yield 2.41% and a risk-free rate of return of 5.79%
based on options being outstanding for a five-year term.
OPTION / SAR EXERCISES AND HOLDINGS
The following table sets forth information with respect to the five named
executive officers concerning the exercise of options/SARs during 1998 and
unexercised options/SARs held on December 31, 1998.
AGGREGATED OPTION / SAR EXERCISES IN 1998
AND FISCAL YEAR-END OPTION / SAR VALUES (A)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS / SARS AT OPTIONS / SARS AT
EXERCISE REALIZED FISCAL YEAR-END (#) FISCAL YEAR-END ($000)
NAME (#) ($000) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
F. D. Ackerman 0 0 112,292 3,030,118 $ 3,944.6 $51,370.2
J. A. Drummond 0 0 101,982 874,600 $ 3,487.4 $21,657.3
E. Mauldin 0 0 99,244 781,400 $ 3,360.6 $19,501.0
R. M. Dykes 0 0 43,010 466,800 $ 1,407.1 $11,305.3
C. B. Coe 5,420 $ 96.7 49,710 504,000 $ 1,658.0 $12,420.6
</TABLE>
- --------------
(A) All amounts reflect the two-for-one split of BellSouth stock effective
December 24, 1998.
LONG TERM INCENTIVE PLAN AWARDS IN FISCAL YEAR 1998
The following table provides information concerning awards of dividend
equivalent rights made to the named executive officers during 1998 under the
BellSouth Corporation Stock Plan. Each dividend equivalent right is represented
as a unit under the Shareholder Return Cash Program. Each unit awarded provides
the contingent right to receive an amount of cash equal to the total dividends
paid on a share of BellSouth stock over a three-year performance period. Under
the provisions of the program, payments are made following the performance
period and are adjusted based on a comparison of BellSouth's Total Shareholder
Return ("TSR") with the TSR of five other telecommunications companies.
22
<PAGE>
If BellSouth's TSR ranks first, 200% of the award will be paid. If BellSouth's
TSR ranks sixth, no award will be paid. Awards are paid solely in cash and may
not be deferred. Plan participants may not sell, assign or otherwise transfer
the awards.
LONG TERM INCENTIVE PLAN AWARDS IN 1998
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE OR ESTIMATED FUTURE PAYOUTS
SHARES, UNITS OTHER UNDER NON-STOCK
OR PERIOD UNTIL PRICE-BASED PLANS ($000)
OTHER RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM
NAME (#)(A) PAYOUT ($) ($) ($)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F. D. Ackerman 322,600 1998-2000 $ 361.3 $ 722.6 $ 1,445.2
J. A. Drummond 132,400 1998-2000 $ 148.3 $ 296.6 $ 593.2
E. Mauldin 116,800 1998-2000 $ 130.8 $ 261.6 $ 523.3
R. M. Dykes 83,800 1998-2000 $ 93.9 $ 187.7 $ 375.4
C. B. Coe 77,200 1998-2000 $ 86.5 $ 172.9 $ 345.9
</TABLE>
- --------------
(A) Numbers of units reflect the two-for-one split of BellSouth stock effective
December 24, 1998.
PENSION AND OTHER RETIREMENT BENEFITS
The following table shows the estimated single life annual pension annuity
benefit provided to eligible participants under the BellSouth Personal
Retirement Account Pension Plan and the BellSouth Supplemental Executive
Retirement Plan ("SERP") combined, based on the specified remuneration levels
and years of credited service. The SERP provides benefits that would otherwise
be denied participants by reason of certain Internal Revenue Code limitations on
qualified benefit plans. The amounts set forth as payable in the table below
assume an undiscounted retirement age and are reduced, in accordance with the
SERP, by an average Social Security Primary Insurance Benefit determined
annually to be payable at age 65.
PENSION PLAN TABLE
($000)
<TABLE>
<CAPTION>
YEARS OF SERVICE
REMUNERATION 10 15 20 25 30 35 40 45
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 200 $ 22.8 $ 42.8 $ 62.8 $ 77.8 $ 92.8 $ 102.8 $ 112.8 $ 122.8
400 62.8 102.8 142.8 172.8 202.8 222.8 242.8 262.8
600 102.8 162.8 222.8 267.8 312.8 342.8 372.8 402.8
800 142.8 222.8 302.8 362.8 422.8 462.8 502.8 542.8
1,000 182.8 282.8 382.8 457.8 532.8 582.8 632.8 682.8
1,500 282.8 432.8 582.8 695.3 807.8 882.8 957.8 1,032.8
1,600 302.8 462.8 622.8 742.8 862.8 942.8 1,022.8 1,102.8
</TABLE>
Pension benefits are based on the average compensation (salary and bonus) over
the five-year period preceding retirement. Therefore, the covered compensation
presented in the table below for the five named executive officers is based upon
the last five-year average of pension eligible compensation actually paid and,
as such, will differ from the salary and bonus amounts set forth in the Summary
Compensation Table on page 20. In addition, the number of whole years of
credited service obtained in 1998 is presented.
23
<PAGE>
<TABLE>
<CAPTION>
COVERED
COMPENSATION YEARS OF SERVICE
NAME ($000) (#)
- ---------------------------------------------------------------------
<S> <C> <C>
F. D. Ackerman $ 1,315.7 34
J. A. Drummond $ 789.1 36
E. Mauldin $ 717.6 34
R. M. Dykes $ 503.3 27
C. B. Coe $ 528.0 12
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS AND OTHER RETIREMENT AND CHANGE IN CONTROL
ARRANGEMENTS
AGREEMENT WITH CHIEF EXECUTIVE OFFICER: Prior to his election to the positions
of Chairman of the Board and Chief Executive Officer, Mr. Ackerman had entered
into an agreement with the Company that required his retirement during the
calendar year of his 60(th) birthday. That agreement provided that upon
retirement Mr. Ackerman would be entitled to a severance payment equal to two
times his annual base pay plus two times his standard bonus for the year of
retirement, an enhanced nonqualified pension benefit, additional grants of stock
options and dividend equivalent rights under the Company's long term incentive
program equal to two times the amounts most recently granted, and financial
counseling through age 67.
As previously disclosed, after Mr. Ackerman's election to his current position,
the Board of Directors determined that his retirement agreement should be
reconsidered. As a result, the original agreement has been replaced with a new
agreement, effective November 23, 1998. The new agreement is designed to incent
Mr. Ackerman to remain with the Company beyond the age of 60 and to link
compensation under the agreement to the Company's performance.
Pursuant to the new agreement, Mr. Ackerman has been awarded 152,440 shares of
restricted stock and 1,348,918 nonqualified stock options. These shares of
restricted stock will vest and these options will become exercisable over a
period of five years, beginning with a 20% increment on Mr. Ackerman's 60(th)
birthday and followed by subsequent 20% increments on his 61(st), 62(nd), 63(rd)
and 64(th) birthdays, provided he remains employed by the Company.
Upon Mr. Ackerman's retirement on or after his 65(th) birthday (or on or after
his 60(th) birthday, with the consent of the Board of Directors), he would be
entitled to an enhanced nonqualified pension benefit and certain perquisites
(e.g., financial counseling for seven years and office space for life). Upon
such retirement, all restricted stock would become fully vested and all options
would become fully exercisable.
The new agreement provides for a severance payment to Mr. Ackerman in the event
his employment is terminated by the Company (other than for cause) prior to his
65(th) birthday. The amount of such payment would be equal to two times his
annual base pay in effect at the termination date plus two times his standard
bonus for the year of termination. Mr. Ackerman would receive a bonus for the
year of such termination in an amount no less than his standard bonus. In
addition, all restricted stock would become fully vested and all options would
become fully exercisable.
Finally, the new agreement provides that, in the event Mr. Ackerman dies or
becomes disabled while still employed by the Company, he or his estate will be
paid an amount equal to two times his base pay for the year in which such event
occurs, plus two times his standard bonus for such year. If such event occurs
after Mr. Ackerman's 60(th) birthday, all restricted stock would become fully
vested and all options would become fully exercisable.
SUCCESSION PLANNING ARRANGEMENTS: The Board of Directors has authorized the
Company, through December 1999, to enter into long range succession planning
arrangements with certain officers below
24
<PAGE>
the Chief Executive Officer level. The agreements require that the officer
retire during the calendar year of his 60th birthday. In order to compensate the
officers for retiring prior to the normal retirement age of 65, the agreements
would entitle them to severance and other benefits. The Company has entered into
agreements of this type with Messrs. Drummond and Mauldin. The agreements call
for benefits that would include payment of an amount equal to two times annual
base pay plus the amount of standard bonus for the year of retirement. In
addition, each of these officers would receive an enhanced nonqualified pension
benefit, additional grants under the long term incentive program (stock options
and dividend equivalent rights) equal to the amounts most recently granted, and
financial counseling through age 67.
CHANGE IN CONTROL AGREEMENTS: The Company has also entered into severance
agreements (which are presently effective until January 1, 2000) with the named
executive officers that provide specified payments and enhanced benefits in the
event of involuntary termination of employment incident to a change in control
of the Company. In such event, in their current positions, each of Messrs.
Ackerman, Drummond, Mauldin and Dykes would receive payment of an amount equal
to three times his annual base pay plus three times his standard annual bonus
and Mr. Coe would receive payment of an amount equal to two and one-half times
his annual base pay plus two and one-half times his standard annual bonus. In
addition, under these agreements, each of these officers would receive (i) an
immediate cash-out of his bonus for the year of termination equal to the greater
of the full standard bonus for such year or such bonus based on actual
performance results through the date of termination; and (ii) an immediate
cash-out of his dividend equivalent rights multiplied by the greater of 100% or
actual performance results through the date of termination. All benefits of each
such executive officer under nonqualified deferred compensation plans,
supplemental retirement plans, and similar arrangements would in such event be
immediately vested and nonforfeitable. These agreements also provide for certain
"gross up" payments to compensate these executive officers for any excise taxes
incurred in connection with these benefits, and reimbursement for certain
outplacement services.
A covered executive officer will be entitled to the benefits under these change
in control severance agreements if, within two years after the occurrence of a
change in control, his employment is terminated by the Company (other than for
cause) or by the executive for good reason. For these purposes, "cause" means
the executive officer's willfully engaging in conduct materially injurious to
the Company, and "good reason" includes the assignment to the executive officer
of duties inconsistent with his prior status and position, certain reductions in
compensation or benefits, and relocation or increased travel obligations.
A "change in control" is defined for purposes of these agreements as: (i) the
acquisition by a party or certain related parties of 20% or more of the
Company's voting securities; (ii) a turnover in a majority of the Board of
Directors in any period of two consecutive years; (iii) a merger or similar
transaction after which the Company's shareholders hold 70% or less of the
voting securities of the surviving entity; (iv) the sale or disposition of a
subsidiary or assets which produced for the most recent fiscal year more than
30% of the Company's total operating revenues or net income; or (v) the
liquidation of the Company or sale of substantially all of its assets.
Should any of Messrs. Ackerman, Drummond or Mauldin become entitled to both the
benefits described in his agreement discussed above and his change in control
severance agreement, such executive officer may choose which such agreement
shall apply but will in no event be entitled to benefits under both.
------------------------
25
<PAGE>
FIVE-YEAR PERFORMANCE COMPARISON
The following graph compares the cumulative total returns of BellSouth, the
Standard & Poor's 500 Index, and a peer group of other large United States
telecommunications companies (Ameritech Corporation, Bell Atlantic Corporation,
GTE Corporation, SBC Communications, Inc., and U S West, Inc.) over a five-year
period.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BELLSOUTH PEER GROUP S$P 500
<S> <C> <C> <C>
12/31/93 100.00 100.00 100.00
12/31/94 97.90 95.07 101.36
12/31/95 163.78 141.16 139.31
12/31/96 158.20 143.80 171.21
12/31/97 226.74 201.83 228.35
12/31/98 409.36 286.67 293.35
</TABLE>
The above performance chart assumes that $100 was invested on January 1, 1994,
with dividends reinvested. Prices are as of the end of the period. Peer returns
are weighted by market capitalization.
26
<PAGE>
GENERAL INFORMATION
ATTENDANCE AT THE ANNUAL MEETING
If you plan to attend the meeting, please keep the admission ticket and map
attached to the proxy card. If you come to the meeting and do not have an
admission ticket, or if your shares are held by brokers or other institutions,
you will be admitted upon presentation of proper identification at the door.
OTHER MATTERS TO COME BEFORE THE MEETING
If any matter not described in this Proxy Statement should properly come before
the meeting, the Directors' Proxy Committee will vote the shares represented by
it in accordance with its best judgment. The Directors' Proxy Committee will not
use its discretionary voting authority with respect to any validly conducted
solicitation in opposition. At the time this Proxy Statement went to press, the
Company did not know of any other matters which might be presented for
shareholder action at the Annual Meeting.
SHAREHOLDER PROPOSALS FOR THE 2000 PROXY STATEMENT
Any shareholder satisfying the Securities and Exchange Commission ("SEC")
requirements and wishing to submit a proposal to be included in the Proxy
Statement for the 2000 Annual Meeting of Shareholders should submit the proposal
in writing to the Corporate Secretary, BellSouth Corporation, 1155 Peachtree
Street, N.E., Room 14B06, Atlanta, Georgia 30309-3610. BellSouth must receive a
proposal by November 11, 1999 in order to consider it for inclusion in the Proxy
Statement for the 2000 Annual Meeting of Shareholders.
DIRECTOR NOMINEES OR OTHER BUSINESS FOR PRESENTATION AT THE 2000 ANNUAL MEETING
Shareholders who wish to present director nominations or any other business at
the 2000 Annual Meeting of Shareholders are required to notify the Corporate
Secretary of their intent no later than February 10, 2000 and the notice must
provide information as required in the By-laws. A copy of these By-laws
requirements will be provided upon request in writing to the Corporate
Secretary, BellSouth Corporation, 1155 Peachtree Street, N.E., Room 14B06,
Atlanta, Georgia 30309-3610. This requirement does not apply to the deadline for
submitting shareholder proposals for inclusion in the Proxy Statement (see
"Shareholder Proposals for the 2000 Proxy Statement" above), nor does it apply
to questions a shareholder may wish to ask at the meeting.
The Company retains discretion to vote proxies it receives with respect to
proposals received after February 10, 2000. The Company retains discretion to
vote proxies it receives with respect to proposals received prior to February
10, 2000 provided (i) the Company includes in its proxy statement advice on the
nature of the proposal and how it intends to exercise its voting discretion and
(ii) the proponent does not issue a proxy statement.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and any persons who own more than 10% of the
Company's stock, to file with the SEC initial reports of ownership and reports
of changes in ownership of BellSouth stock. Such persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the year ended December 31, 1998, all such Section 16(a) filing
requirements were met, except that (i) Charles B. Coe's initial report on Form 3
inadvertently failed to include certain shares owned by Mr. Coe, and (ii)
Francis A. Dramis, Jr. inadvertently failed to timely report the indirect
acquisition of certain shares.
27
<PAGE>
DUPLICATE SUMMARY ANNUAL REPORTS
If you hold BellSouth stock in more than one shareholder account, you may be
receiving multiple copies of the Summary Annual Report. You can direct us to
discontinue mailing multiple reports by marking the appropriate box on the proxy
card for those accounts. Leave at least one account unmarked so that you
continue to receive a Summary Annual Report. Eliminating redundant mailings will
not affect your receipt of future Proxy Statements and proxy cards. To resume
the mailing of a Summary Annual Report to a particular account, call BellSouth
Shareholder Services at 1-800-631-6001.
OTHER INFORMATION
Consolidated financial statements for BellSouth Corporation are attached as an
appendix to this Proxy Statement and are included in the Annual Report on Form
10-K filed with the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the New York, Boston, Chicago, Pacific and
Philadelphia stock exchanges in the United States and the London, Frankfurt,
Amsterdam and Swiss exchanges. A copy of the 1998 Form 10-K (excluding exhibits)
will be furnished, without charge, by writing to the Corporate Secretary,
BellSouth Corporation, 1155 Peachtree Street,
N.E., Room 14B06, Atlanta, Georgia, 30309-3610. The Form 10-K is also available
on BellSouth's home page on the Internet's World Wide Web at
http://www.bellsouth.com/investor (click on "Financial Publications").
SOLICITATION OF PROXIES
BellSouth will pay the cost of soliciting proxies. BellSouth has retained Morrow
& Co., Inc. to solicit proxies, by mail, in person or by telephone, at an
estimated cost of $20,000 plus reimbursement of reasonable out-of-pocket
expenses. In addition, employees of BellSouth may likewise solicit proxies on
behalf of the Company.
The above Notice of Annual Meeting and Proxy Statement are sent by order of the
BellSouth Board of Directors.
/s/ Carl E. Swearingen
Carl E. Swearingen
Senior Vice President-Corporate Compliance and Corporate Secretary
Dated: March 9, 1999
28
<PAGE>
BELLSOUTH CORPORATION
ANNUAL FINANCIAL STATEMENTS AND REVIEW OF OPERATIONS
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues................................ $23,123 $20,561 $19,040 $17,886 $16,845
Operating Expenses (1)............................ 17,219 15,185 14,261 14,594 12,787
--------- -------- -------- -------- --------
Operating Income.................................. 5,904 5,376 4,779 3,292 4,058
Interest Expense.................................. 837 761 721 724 666
Gain on Sale of Operations (2).................... 335 787 442 -- --
Other Income, net................................. 349 19 108 20 11
--------- -------- -------- -------- --------
Income Before Income Taxes and Extraordinary
Losses........................................... 5,751 5,421 4,608 2,588 3,403
Provision for Income Taxes........................ 2,224 2,151 1,745 1,024 1,243
--------- -------- -------- -------- --------
Income Before Extraordinary Losses................ 3,527 3,270 2,863 1,564 2,160
Extraordinary Losses, net of tax (3).............. -- (9) -- (2,796) --
--------- -------- -------- -------- --------
Net Income (Loss)............................... $ 3,527 $ 3,261 $ 2,863 $(1,232) $ 2,160
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Earnings (Loss) Per Share (4):
BASIC:
Income Before Extraordinary Losses.............. $ 1.79 $ 1.65 $ 1.44 $ .79 $ 1.09
Extraordinary Losses, net of tax (3)............ -- -- -- (1.41) --
--------- -------- -------- -------- --------
Net Income (Loss) (5)........................... $ 1.79 $ 1.64 $ 1.44 $ (.62) $ 1.09
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
DILUTED:
Income Before Extraordinary Losses.............. $ 1.78 $ 1.64 $ 1.44 $ .79 $ 1.09
Extraordinary Losses, net of tax (3)............ -- -- -- (1.41) --
--------- -------- -------- -------- --------
Net Income (Loss)............................... $ 1.78 $ 1.64 $ 1.44 $ (.62) $ 1.09
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Dividends Declared Per Common Share (4)........... $ .73 $ .72 $ .72 $ .71 $ .69
Book Value Per Share (4).......................... $ 8.26 $ 7.65 $ 6.68 $ 5.95 $ 7.24
Return to Average Common Equity................... 22.3% 22.8% 22.4% (9.2%) 15.4%
Weighted-Average Common Shares Outstanding
(millions) (4):
Basic........................................... 1,970 1,984 1,987 1,986 1,985
Diluted......................................... 1,984 1,989 1,992 1,989 1,986
Return on Average Total Capital................... 15.1% 15.8% 15.0% (2.7%) 11.5%
Total Assets...................................... $39,410 $36,301 $32,568 $31,880 $34,397
Capital Expenditures.............................. $ 5,212 $ 4,858 $ 4,455 $ 4,203 $ 3,600
Long-Term Debt.................................... $ 8,715 $ 7,348 $ 8,116 $ 7,924 $ 7,435
Debt Ratio at End of Period....................... 43.0% 42.1% 43.5% 46.7% 39.3%
Ratio of Earnings to Fixed Charges................ 7.09 7.17 6.55 4.24 5.34
Total Employees................................... 88,450 81,000 81,241 87,571 92,121
Telephone Employees (6)........................... 60,561 57,619 62,425 68,585 73,764
Telephone Employees per 10,000 Switched Access
Lines............................................ 25.2 24.8 28.2 32.5 36.5
Business Volumes (7):
Network Equivalent Access Lines in Service
(thousands):
Switched Access Lines......................... 24,025 23,201 22,135 21,133 20,220
Access Line Equivalents....................... 13,162 9,218 6,158 4,723 3,716
--------- -------- -------- -------- --------
Total Equivalent Access Lines................. 37,187 32,419 28,293 25,856 23,936
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Access Minutes of Use (millions)................ 104,373 97,106 88,861 81,608 74,666
Long Distance Messages (millions)............... 784 894 1,023 1,374 1,559
Wireless Customers (thousands) (8):
Domestic...................................... 4,796 4,193 3,643 2,847 2,156
International................................. 3,439 1,882 1,244 655 361
--------- -------- -------- -------- --------
Total Wireless Customers.................... 8,235 6,075 4,887 3,502 2,517
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
which reduced net income by $663.
(2) For 1998, represents the pretax gains associated with the sale of BellSouth
New Zealand as well as additional proceeds received in 1998 on the 1997 sale
of ITT World Directories, Inc. The pretax gains on those sales were $180
($110 after tax) and $155 ($96 after tax), respectively. 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. See Note B to the Consolidated
Financial Statements. For 1996, represents the pretax gain on the sale of
BellSouth's paging business of $442 ($344 after tax).
(3) For 1997, reflects charges related to the extinguishment of long-term debt
issues. See Note E to the Consolidated Financial Statements. For 1995,
reflects charges of $2,718 ($1.37 per share) for the discontinuance of
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation," and $78 ($.04 per share) related to
the refinancing of long-term debt issues.
(4) Number of shares and per share amounts for prior years have been restated
for a 2-for-1 stock split which occurred in 1998.
(5) Basic earnings per share amounts for 1997 do not sum due to rounding.
(6) Telephone employees exclude those employees in BellSouth Telecommunications'
subsidiaries which are unrelated to telephone operations.
(7) Prior period operating data are revised at later dates to reflect the most
current information. The above information reflects the latest data
available for the periods indicated.
(8) Calculated on the equity basis, which includes customers served based on
BellSouth's ownership percentage in all markets served.
A-1
<PAGE>
BELLSOUTH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
BellSouth Corporation (BellSouth) is a holding company headquartered in
Atlanta, Georgia. BellSouth has two principal and wholly-owned subsidiaries,
BellSouth Telecommunications, Inc. (BellSouth Telecommunications) and BellSouth
Enterprises, Inc. (BellSouth Enterprises). For management purposes, the
operations of these subsidiaries are organized into five operating segments:
wireline communications; domestic wireless; international operations;
advertising and publishing; and other.
Wireline communications is comprised primarily of the operations of
BellSouth Telecommunications. BellSouth Telecommunications operates in nine
Southeastern states and primarily provides (i) local exchange and long distance
service within but not between geographic areas, called Local Access and
Transport Areas (LATAs), and (ii) network access services to enable interLATA
communications using the facilities of long distance carriers. Approximately
71%, 74% and 77% of BellSouth's Total Operating Revenues for the years ended
December 31, 1998, 1997 and 1996, respectively, were from the wireline
communications business. Charges for local service, network access and long
distance service for the year ended December 31, 1998 accounted for
approximately 57%, 28% and 4%, respectively, of the revenues from the wireline
communications business. The remainder of such revenues was derived principally
from sales and maintenance of customer premises equipment and other nonregulated
services provided by BellSouth Telecommunications.
Domestic wireless is comprised of cellular and personal communications
service (PCS) businesses within the U.S. Approximately 12%, 13% and 12% of
BellSouth's Total Operating Revenues for the years ended December 31, 1998, 1997
and 1996, respectively, were from the domestic wireless business. In addition,
BellSouth Enterprises has noncontrolling 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.
International operations is comprised primarily of cellular and PCS
businesses in nine countries in Latin America as well as China, Denmark,
Germany, India and Israel. Approximately 9%, 5% and 3% of BellSouth's Total
Operating Revenues for the years ended December 31, 1998, 1997 and 1996,
respectively, were from international operations. In addition, BellSouth
Enterprises has noncontrolling financial interests in a number of international
businesses whose revenues are not reflected in Total Operating Revenues because
of the method of accounting for such investments.
BellSouth's advertising and publishing business is comprised of companies
that publish, print, sell advertising in, and perform related services
concerning alphabetical and classified telephone directories. Advertising and
publishing revenues accounted for approximately 8%, 9% and 9%, respectively, of
BellSouth's Total Operating Revenues for the years ended December 31, 1998, 1997
and 1996.
BellSouth's other operating segment is comprised primarily of companies
providing Internet access, wireless data, entertainment and various start-up
operations.
A-2
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
PERCENT CHANGE
----------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Income (a)..................................... $ 3,527 $ 3,261 $ 2,863 8.2% 13.9%
Earnings Per Share (a):
Basic............................................ $ 1.79 $ 1.64 $ 1.44 9.1 13.9
Diluted.......................................... $ 1.78 $ 1.64 $ 1.44 8.5 13.9
</TABLE>
- --------------
(a) Net Income and Earnings Per Share for 1997 include an Extraordinary Loss on
Early Extinguishment of Debt of $9.
Net Income for 1998 increased $266 (8.2%) compared to 1997. Diluted Earnings
Per Share increased $.14 (8.5%) and Basic Earnings Per Share increased $.15
(9.1%) when compared to 1997. The increases were due primarily to continued
strong growth in key business volumes in BellSouth's wireline communications
business and improved results from BellSouth's international operations. The
increases also include an after-tax gain of $110 resulting from the sale in 1998
of BellSouth New Zealand, an after-tax gain of $96 resulting from additional
proceeds received during 1998 in connection with the sale of ITT World
Directories and additional income of $62 which resulted from the early repayment
of a loan. (See Note B to the Consolidated Financial Statements.) Net Income
during 1997 was reduced by an after-tax charge of $47 related to a regulatory
settlement in South Carolina. The increases were partially offset by gains on
the sales of Optus Communications ($352 after tax) and ITT World Directories
($128 after tax), which occurred during 1997.
Net Income for 1997 increased $398 (13.9%), and Diluted Earnings Per Share
increased $.20 (13.9%) 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 within the wireline
communications business due to employee reductions under BellSouth
Telecommunications' work force reduction plan initiated in 1995. The increases
were partially offset by a $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.
A-3
<PAGE>
VOLUMES OF BUSINESS
WIRELINE COMMUNICATIONS VOLUMES
Equivalent Access Lines in Service at December 31 (thousands) (a):
<TABLE>
<CAPTION>
PERCENT CHANGE
----------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
By Type:
Switched Access Lines:
Residence..................................... 16,457 15,841 15,140 3.9% 4.6%
Business...................................... 7,294 7,088 6,732 2.9 5.3
Other......................................... 274 272 263 0.7 3.4
--------- --------- ---------
Total Switched Access Lines................. 24,025 23,201 22,135 3.6 4.8
--------- --------- ---------
Access Line Equivalents (b)(c):
Basic Rate ISDN............................... 178 143 96 24.5 49.0
Primary Rate ISDN............................. 526 288 98 82.6 193.9
DS0........................................... 697 644 657 8.2 (2.0)
DS1........................................... 4,343 3,400 2,299 27.7 47.9
DS3........................................... 7,418 4,743 3,008 56.4 57.7
--------- --------- ---------
Total Access Line Equivalents............... 13,162 9,218 6,158 42.8 49.7
--------- --------- ---------
Total Equivalent Access Lines in
Service................................. 37,187 32,419 28,293 14.7 14.6
--------- --------- ---------
--------- --------- ---------
Switched Access Lines By State
(thousands) (a):
Florida......................................... 6,496 6,237 5,899 4.2 5.7
Georgia......................................... 4,159 3,990 3,772 4.2 5.8
Tennessee....................................... 2,677 2,623 2,544 2.1 3.1
North Carolina.................................. 2,444 2,337 2,213 4.6 5.6
Louisiana....................................... 2,344 2,267 2,178 3.4 4.1
Alabama......................................... 1,960 1,928 1,857 1.7 3.8
South Carolina.................................. 1,456 1,404 1,344 3.7 4.5
Mississippi..................................... 1,280 1,238 1,193 3.4 3.8
Kentucky........................................ 1,209 1,177 1,135 2.7 3.7
--------- --------- ---------
Total Switched Access Lines............... 24,025 23,201 22,135 3.6 4.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
- --------------
(a) Prior period operating data are often revised at later dates to reflect
updated information. The above information reflects the latest data
available for the periods indicated.
(b) Access line equivalents are based on conversion factors that result from the
estimated capacity of one switched access line. The conversion factors used
are as follows: Basic Rate ISDN, 2.5/1; Primary Rate ISDN, 24/1; DS0, 1/1;
DS1, 24/1; and DS3, 672/1. Basic Rate ISDN lines are included in BellSouth
Telecommunications' switched access line count as equaling one line. The
amounts shown as access line equivalents are the estimated incremental
equivalent access lines resulting from these lines.
(c) Revenues associated with digital and data services are derived from the sale
of specific high-bandwidth products provisioned over transmission lines with
DS0 or greater capacity. While access line equivalent counts have a
directional relationship with digital and data revenues, growth rates cannot
be compared on an equivalent basis.
A-4
<PAGE>
Switched residence lines increased by 3.9% in the period ended December 31,
1998, compared to a growth rate of 4.6% in 1997. In addition to continued
economic growth in the region, the growth rate reflects demand for additional
lines related to home office purposes, access to on-line computer services and
children's phones. The number of such additional lines increased by 375,000
(19.9%) to 2,259,000 and accounted for approximately 61% of the overall increase
in switched residence access lines since December 31, 1997. The slower growth
rate in 1998 primarily reflects the higher penetration rates in the residential
market.
Switched business lines increased by 2.9% in the period ended December 31,
1998, compared to a growth rate of 5.3% in 1997. The decrease in the growth rate
was primarily due to the migration of business customers from traditional
business line services to digital and data services and, to a lesser degree, by
the increased presence of facilities-based competition.
Access line equivalents increased by 42.8% in 1998 compared to an increase
of 49.7% in 1997. The increase is attributable to continued growth in demand for
digital and data lines that provide services such as bulk data transmission,
video conferencing, ATMs, check/credit card authentication, multimedia and
interconnection with wireless networks.
Total equivalent access lines at December 31, 1998 include 520,000 resold
lines, an increase of 299,000 over the prior year.
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Access Minutes of Use (millions).............. 104,373 97,106 88,861 7.5% 9.3%
</TABLE>
Access minutes of use represent the volume of traffic carried by long
distance carriers between LATAs, both interstate and intrastate, using BellSouth
Telecommunications' local facilities. In 1998, access minutes of use increased
by 7,267 million (7.5%) compared to an increase of 9.3% in 1997. The increases
in access minutes of use were primarily attributable to access line growth,
promotions by the long distance carriers and intraLATA long distance
competition, which has the effect of increasing access minutes of use while
reducing long distance messages carried over BellSouth Telecommunications'
facilities. The growth rate in access minutes of use continues to be negatively
impacted by competition and the migration of long distance 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
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Long Distance Messages (millions)............. 784 894 1,023 (12.3%) (12.6%)
</TABLE>
Long distance messages are comprised of Message Telecommunications Service
and Wide Area Telecommunications Service within LATAs. Long distance messages
decreased by 110 million (12.3%) in 1998 compared to a decrease of 12.6% in
1997. The decrease in 1998 was primarily attributable to continued competition
from long distance carriers in the intraLATA long distance market as well as the
increased penetration of local area calling plans (LACPs) in existing calling
plan areas. Effects of competition and the increasing penetration in existing
LACPs result in the transfer of calls from long distance to the access and local
service categories, respectively, but the corresponding revenues are not
generally shifted at commensurate rates. Competition in the intraLATA long
distance market will continue to adversely impact long distance message volumes.
A-5
<PAGE>
DOMESTIC WIRELESS VOLUMES
Cellular and PCS customers served at December 31 (equity basis) (thousands):
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Customers............................................. 4,796 4,193 3,643 14.4% 15.1%
</TABLE>
Domestic wireless customers (equity basis) increased by 603,000 (14.4%)
during 1998 compared to 550,000 (15.1%) during 1997. The decrease in the growth
rate is primarily due to a reorganization of BellSouth's ownership interests in
its Los Angeles and Houston/Galveston cellular investments. If all periods were
adjusted for the effects of the ownership changes, domestic wireless customers
would have increased 18.6% and 15.4%, respectively, for 1998 and 1997. Average
revenue per wireless customer decreased from 1997 to 1998. The decrease was due
primarily to the continuing shifts to lower-priced usage plans by existing
customers in response to competition and increased penetration into lower-usage
market segments. BellSouth expects these trends to continue.
INTERNATIONAL OPERATIONS VOLUMES
International wireless customers served at December 31 (equity basis)
(thousands):
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Customers (a)(b)...................................... 3,439 1,882 1,244 82.7% 51.3%
</TABLE>
- ------------------
(a) International cellular customers at December 31, 1998 includes 247,000 net
customer additions resulting from BellSouth's purchase of additional
ownership interests in several Latin American markets and excludes the
customers of BellSouth New Zealand, which was sold in 1998. International
cellular customers at December 31, 1997 excludes the customers of Optus
Communications, which was sold in 1997.
(b) Excluding the customers resulting from the 1998 purchases (see note a), and
excluding the customers of Optus Communications and BellSouth New Zealand
from all periods, the number of international cellular customers (equity
basis) increased by 75% and 108.9%, respectively, for the years ended
December 31, 1998 and 1997.
International cellular customers (equity basis) increased by 1,557,000
(82.7%) since December 31, 1997 to 3,439,000. Such growth reflects increased
demand for wireless services in the international markets which BellSouth serves
as well as the effect of BellSouth's purchase of additional ownership interests
in several of its Latin American markets. This growth also included an increase
of 350,000 equity-basis customers resulting from the start-up of operations in
Brazil in mid-1998. These increases were offset by the sale of BellSouth's 65%
ownership interest in its operations in New Zealand during the fourth quarter of
1998. Excluding the effects of the purchases of additional ownership interest
from the 1998 period as well as the customers of BellSouth New Zealand from the
1997 period, equity-basis customers increased 75% from 1997 to 1998. Growth in
equity-basis customers and total minutes of use for international cellular
properties remained strong, primarily due to demand stimulated by successful
marketing programs such as prepaid cellular service and enhanced services and
due to underdeveloped land-line service. Average minutes of use per
international customer, however, declined due to increased penetration of
lower-usage market segments.
International cellular customers increased by 638,000 (51.3%) from December
31, 1996 to 1,882,000 at December 31, 1997. 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,
A-6
<PAGE>
average minutes of use per international customer declined due to the addition
of customers in lower-usage market segments.
OPERATING REVENUES
Total Operating Revenues increased $2,562 (12.5%) in 1998 compared to an
increase of $1,521 (8.0%) during 1997. The increases resulted primarily from
increases in revenues from BellSouth's wireline communications segment coupled
with significant increases in revenues from BellSouth's international
operations. The increase in revenues includes revenues from certain businesses
in BellSouth's international operations and other services that had previously
been accounted for under the equity method and were consolidated for the first
time in either fourth quarter of 1997 or first quarter of 1998. If these
operations had been consolidated in all periods presented, and excluding the
effect of the South Carolina settlement in 1997, Total Operating Revenues would
have increased approximately $2,020 (9.6%) during 1998 and $1,754 (9.1%) during
1997.
The components of Total Operating Revenues were as follows:
<TABLE>
<CAPTION>
PERCENT CHANGE
----------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Wireline communications:
Local service................................ $ 9,399 $ 8,499 $ 8,082 10.6% 5.2%
Network access............................... 4,632 4,483 4,365 3.3 2.7
Long distance................................ 713 734 794 (2.9) (7.6)
Other wireline............................... 1,657 1,462 1,383 13.3 5.7
Domestic wireless.............................. 2,723 2,581 2,204 5.5 17.1
International operations....................... 1,995 948 547 110.4 73.3
Advertising and publishing..................... 1,891 1,837 1,651 2.9 11.3
Other services................................. 113 17 14 N/A 21.4
--------- --------- ---------
Total Operating Revenues..................... $ 23,123 $ 20,561 $ 19,040 12.5 8.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network, optional services
such as custom calling features and certain digital and data services. Local
service revenues for 1998 increased $900 (10.6%) compared to an increase of $417
(5.2%) in 1997.
The increase for 1998 was due primarily to a 3.6% increase in switched
access lines since December 31, 1997, an increase of $246 due to higher customer
demand for optional services such as custom calling features, and an increase in
revenues from the provision of digital and data services. Also contributing were
net rate impacts of $161. These impacts were due primarily to revenue sharing
accruals recorded during 1997 as well as a nonrecurring revenue reduction of $64
in 1997 related to the local service portion of the regulatory settlement in
South Carolina.
The increase in 1997 was due primarily to a 4.8% growth in switched 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 nonrecurring revenue reduction of $64
related to the local service portion of the regulatory settlement in South
Carolina.
NETWORK ACCESS revenues result from the provision of network access services
to long distance carriers to provide telecommunications services between LATAs,
both interstate and intrastate, and from end-user charges collected from
residential and business customers. Network access revenues also include special
access charges for the provision of certain digital and data services. Network
access revenues increased $149 (3.3%) in 1998 compared to an increase of $118
(2.7%) in 1997.
A-7
<PAGE>
The increase in 1998 was attributable primarily to an increase of $148 due
to higher demand for special access services and increases in end-user charges
attributable to increases in switched access lines. Special access revenues are
comprised primarily of revenues from the provision of digital and data services.
Such increases were partially offset by rate reductions which decreased revenues
by $122 since December 31, 1997.
The increase in 1997 was attributable primarily to growth in access minutes
of use of 9.3%, an increase of $97 due to higher demand for special access
services and an increase in end-user charges attributable to growth in the
number of switched access lines. Such increases were partially offset by rate
reductions which decreased revenues by $243.
LONG DISTANCE revenues are received from the provision of long distance
services within 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. Long distance revenues decreased $21 (2.9%)
in 1998 compared to a decrease of $60 (7.6%) in 1997.
The decrease for 1998 was primarily attributable to continuing competition
from long distance carriers in the intraLATA long distance market as well as the
increased penetration of LACPs in existing calling plan areas. The decreases
were partially offset by increases in charges to long distance carriers for
messages originating on BellSouth's public payphones as well as increased
revenues from the provision of digital and data services.
The decrease for 1997 was primarily attributable to continuing competition
from long distance carriers in the intraLATA long distance market as well as the
continuing expansion of LACPs, the effect of which reduced long distance
messages by 12.6%. The decrease was partially offset by $62 related to revenues
from long distance carriers beginning in the second quarter of 1997 for long
distance messages originating on BellSouth Telecommunications' public payphones.
The overall decline in intraLATA long distance revenues is expected to
continue over the long term.
OTHER WIRELINE revenues are principally comprised of revenues from customer
premises equipment sales, maintenance services and other services (primarily
inside wire, billing and collection and voice messaging services) offered by
BellSouth Telecommunications. Other wireline revenues also include billings for
interconnections by unaffiliated wireless carriers with BellSouth
Telecommunications' network. Other wireline revenues increased $195 (13.3%) in
1998 compared to an increase of $79 (5.7%) in 1997.
The increase for 1998 primarily reflects increased demand and prices for
nonregulated services totaling $162.
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.
DOMESTIC WIRELESS revenues include revenues from the domestic cellular and
PCS businesses. BellSouth's interests in the net income or loss of the
unconsolidated domestic wireless businesses within BellSouth Enterprises, which
are accounted for under the equity method of accounting, are recorded in Other
Income, net.
Domestic wireless revenues increased $142 (5.5%) in 1998 compared to an
increase of $377 (17.1%) in 1997. The increases for both years were primarily
due to continued growth in the domestic customer base. The decline in the growth
rate for 1998 is primarily attributable to decreases in per-customer revenue
which resulted from the increased use of lower-priced usage plans by existing
higher-
A-8
<PAGE>
usage customers in response to competition and increased penetration into
lower-usage market segments.
INTERNATIONAL OPERATIONS revenues result primarily from wireless businesses
in Latin America. BellSouth's interests in the net income or loss of the
unconsolidated international businesses within BellSouth Enterprises, which are
accounted for under the equity method of accounting, are recorded in Other
Income, net.
International operations revenues increased $1,047 (110.4%) in 1998 compared
to an increase of $401 (73.3%) in 1997. Such increases include the revenues of
certain operations which had previously been accounted for under the equity
method and were consolidated for the first time in either first quarter 1998 or
fourth quarter 1997. If these operations had been consolidated in all periods
presented, international operations revenues would have increased approximately
$608 (43.8%) and $553 (66.3%), respectively, in 1998 and 1997. Such increases
were primarily due to continued growth in the customer bases of BellSouth's
established Latin American markets in 1998 and 1997 as well as the acquisition
in 1997 of wireless operations in Peru and Ecuador.
ADVERTISING AND PUBLISHING revenues include revenues derived from
publishing, printing, selling advertising in, and performing related services
concerning, alphabetical and classified telephone directories. Advertising and
publishing revenues increased $54 (2.9%) in 1998 compared to a $186 (11.3%)
increase in 1997.
The increase for 1998 primarily reflects volume growth and price increases,
partially offset by the effects of one-time adjustments in 1997. The revenue
growth rate associated with increases in volume and pricing for 1998 was 4.1%.
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%.
OPERATING EXPENSES
Total Operating Expenses increased $2,034 (13.4%) in 1998 compared to an
increase of $924 (6.5%) in 1997. Such increases include expenses from certain
businesses in BellSouth's international operations and other segments that had
previously been accounted for under the equity method. These operations were
consolidated for the first time in either first quarter 1998 or fourth quarter
1997. If these operations had been consolidated in all periods presented, Total
Operating Expenses would have increased $1,501 (9.5%) and $1,094 (7.5%) during
1998 and 1997, respectively. The 1998 increase was primarily attributable to
growth within BellSouth's wireline communications and international operations.
The 1997 increase was primarily attributable to growth within BellSouth's
domestic wireless and international operations. The components of Total
Operating Expenses were as follows:
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
<S> <C> <C> <C> <C> <C>
1998 VS 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
Depreciation and amortization.............. $ 4,357 $ 3,964 $ 3,719 9.9% 6.6%
--------- --------- ---------
Other operating expenses:
Cost of services and products............ 7,080 6,254 6,072 13.2 3.0
Selling, general and administrative...... 5,782 4,967 4,470 16.4 11.1
--------- --------- ---------
12,862 11,221 10,542 14.6 6.4
--------- --------- ---------
Total Operating Expenses............... $ 17,219 $ 15,185 $ 14,261 13.4 6.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
DEPRECIATION AND AMORTIZATION increased $393 (9.9%) in 1998 compared to a
$245 (6.6%) increase in 1997. Adjusted for the effects of expenses related to
operations which were previously accounted for
A-9
<PAGE>
under the equity method, the growth rates for Depreciation and amortization for
1998 and 1997 would have been $270 (6.6%) and $247 (6.4%), respectively.
The 1998 increase was primarily due to higher levels of property, plant and
equipment in the international operations and domestic wireless segments
resulting from the continued growth in the related customer bases and continued
modernization of the networks utilized. The increase also includes additional
amortization expense related to goodwill resulting from BellSouth's purchase of
additional ownership interests in several of its Latin American operations as
well as amortization of new wireless licenses.
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 the international operations and domestic wireless businesses
and continued modernization of the networks.
OTHER OPERATING EXPENSES are comprised of Cost of services and products and
Selling, general and administrative. Cost of services and products includes
employee and employee-related expenses associated with network repair and
maintenance, material and supplies expense, cost of tangible goods sold and
other expenses associated with providing services. Selling, general and
administrative include expenses related to sales activities such as salaries,
commissions, benefits, travel, marketing and advertising expenses and
administrative expenses.
Other operating expenses increased $1,641 (14.6%) in 1998 compared to an
increase of $679 (6.4%) in 1997. Adjusted for the effects of expenses related to
operations that were previously accounted for under the equity method, the
growth rate for Other operating expenses for 1998 and 1997 would have been
$1,231 (10.6%) and $847 (7.9%), respectively.
The 1998 increase was primarily due to increased expenses in the wireline
communications business of $561. These increases were primarily attributable to
increased labor costs of $263 in the telephone operations associated with higher
customer service staffing levels, increased expenses of $164 at unregulated
subsidiaries associated with higher business volumes, and payments to the fund
(Universal Service Fund) provided for by the Telecommunications Act of 1996 (the
1996 Act).
Also contributing to the 1998 increase was growth in expenses within
BellSouth's international operations and domestic wireless businesses of $375
and $112. Such increases reflect additional marketing, customer acquisition, and
operational costs which are associated with higher levels of sales and expanded
operations. The increase in other operating expenses also reflects expenses
related to start-up operations.
The 1997 increase was due primarily to increased expenses of $436 and $234
related to the international and domestic wireless customer bases, respectively,
reflecting additional marketing and operating costs associated with higher sales
and expanded operations. The increase in Other operating expenses also reflects
increased expenses of $167 in the advertising and publishing operations.
At the wireline communications business, Other operating expenses in 1997
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 increases were
partially offset by an estimated reduction of $232 in employee-related costs in
the core wireline communications 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. The employee reductions were primarily attributable to a
work force reduction plan which was initiated in 1995 and substantially
completed in 1997. The increase in Other operating expenses at BellSouth
Telecommunications was further offset by the 1996 sale of a subsidiary which
performed computer maintenance.
A-10
<PAGE>
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest Expense................................... $ 837 $ 761 $ 721 10.0% 5.5%
Gain on Sale of Operations......................... 335 787 442 -- --
Other Income, net.................................. 349 19 108 -- --
Provision for Income Taxes......................... 2,224 2,151 1,745 3.4 23.3
</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
$76 (10.0%) in 1998 compared to an increase of $40 (5.5%) in 1997.
The increase for 1998 was due primarily to higher average debt balances,
partially offset by an increase in interest capitalized for investments being
developed. The increase in average debt balances and related interest expense
primarily reflects the consolidation of several international operations which
had previously been accounted for under the equity method.
The increase for 1997 was primarily attributable to higher average debt
balances and interest rates on short-term borrowings.
GAIN ON SALE OF OPERATIONS for 1998 represents the pretax gains on the sale
of BellSouth New Zealand and additional proceeds received from the sale of ITT
World Directories of $180 and $155, respectively.
Gain on Sale 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.
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 increased $330 in 1998 compared to a decrease of $89 in 1997.
The increase from 1997 to 1998 was primarily attributable to improved equity
in earnings of unconsolidated affiliates, increased interest income, and
additional income from the settlement of a loan. (See Note B to the Consolidated
Financial Statements.) This increase was partially offset by a decrease in other
nonoperating items.
Equity in earnings (losses) was $92 in 1998 compared to $(242) in 1997. The
improvement in overall equity in earnings primarily reflects (1) the first-time
consolidation in 1998 of the wireless data communications business; (2) more
favorable results at other unconsolidated international operations; and (3)
following its sale in July 1997, the cessation of recording losses incurred by
Optus Communications. The improvement was partially offset by expenses
associated with the start-up operations in Brazil in 1998.
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
wireless data communications business and lower earnings from unconsolidated
domestic wireless operations. The increased losses were partially offset by more
favorable results at other unconsolidated international operations, principally
in Israel, Germany and Panama.
A-11
<PAGE>
PROVISION FOR INCOME TAXES increased $73 (3.4%) in 1998 compared to an
increase of $406 (23.3%) in 1997. BellSouth's effective tax rates were 38.7%,
39.7% and 37.9% in 1998, 1997 and 1996, respectively.
The lower effective tax rate in 1998 resulted primarily from improved
results in foreign equity-method subsidiaries which are recorded net of tax
benefits or expense. The effective rate was further reduced by a change in the
mix of income among taxing jurisdictions. The decreases were partially offset by
a reduction in the benefit from investment tax credits.
The higher effective tax rate for 1997 compared to 1996 was due primarily to
a higher tax than book basis for a paging business which was sold in 1996. The
difference in the basis 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.
RESULTS OF SEGMENT OPERATIONS
BellSouth's reportable segments reflect strategic business units that offer
products and services and/or serve different customers. They are managed
differently because each business requires different technologies and/or
marketing strategies. BellSouth evaluates performance based on the Net Income,
exclusive of certain intercompany and certain nonoperating transactions, of each
strategic business unit.
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Segment Income:
Wireline Communications.................................... $ 2,751 $ 2,314 $ 2,005 18.9% 15.4%
Domestic Wireless.......................................... 283 333 303 (15.0) 9.9
International Operations................................... (62) (187) (190) 66.8 1.6
Advertising & Publishing................................... 530 543 526 (2.4) 3.2
Other...................................................... (210) (182) (116) (15.4) (56.9)
</TABLE>
WIRELINE COMMUNICATIONS. Segment income for 1998 increased $437 (18.9%)
compared to $309 (15.4%) for 1997. The increase in both years was primarily
attributable to significant increases in revenues driven by increasing demand
for digital and data services, optional and unregulated services, and services
provided by unregulated subsidiaries. The increase in 1998 revenues was
partially offset by increases in other operating expenses of $561 due primarily
to increased staffing levels within customer service functions and increased
costs at unregulated subsidiaries. 1997 expenses were relatively flat with
increases in costs associated with 1996 Act compliance being offset by reduced
employee costs. In addition, segment income for 1997 was reduced by an after-tax
charge of $47 relating to a regulatory settlement in South Carolina.
DOMESTIC WIRELESS. Segment income for 1998 decreased $50 (15.0%) compared
to an increase of $30 (9.9%) for 1997. Strong customer growth drove increases in
revenues for both years, although revenue per customer decreased as a result of
increased competition, increased penetration into lower-usage market segments
and the increased use of package pricing plans for existing higher-usage
customers. Total expenses increased during both years due to marketing costs
driven by competitive initiatives, customer acquisition costs and depreciation
associated with continuing build-out and upgrade of the network. 1998 expenses
as compared to 1997 increased due primarily to new marketing initiatives,
customer acquisition costs associated with higher customer additions and
expenses related to the build-out of the PCS network. 1997 expenses as compared
to 1996 increased primarily due to costs associated with the start-up of PCS
operations.
A-12
<PAGE>
INTERNATIONAL OPERATIONS. Losses for the segment were $(62) in 1998
compared to $(187) in 1997 and $(190) in 1996. The overall improvement from 1997
to 1998 primarily reflects (1) improved operating results in BellSouth's
operations in Germany, Venezuela, Argentina and Denmark and (2) following its
sale in July 1997, the cessation of recording losses of Optus Communications.
The improvement was offset by losses associated with the start-up of BellSouth's
Brazilian operations as well as lower results at BellSouth's Chilean operations.
Results in 1997 were flat compared to 1996 and included improved results from
BellSouth's operations in Israel and New Zealand offset by losses associated
with the start-up of several operations in Latin America. Strong customer growth
during both years was partially offset by the effect of lower average monthly
revenue per customer.
ADVERTISING AND PUBLISHING. Segment income remained relatively flat at
$530, $543 and $526 for 1998, 1997 and 1996, respectively. External revenues
increased in both 1998 and 1997 primarily due to increases related to volume and
pricing. Operating expenses increased due primarily to volume increases.
OTHER. Losses within the segment were $(210) in 1998 as compared to $(182)
in 1997 and $(116) in 1996. The increased loss for 1998 was primarily
attributable to losses associated with the wireless cable start-up operations,
offset by improved results in the wireless data business. The increased loss for
1997 compared to 1996 was primarily attributable to continuing losses within the
wireless data business as well as expenses related to preparations for entry
into the interLATA long distance business.
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, 1998 and 1997, 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
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by Operating Activities.......... $ 7,741 $ 7,039 $ 5,863 10.0% 20.1%
</TABLE>
OPERATING ACTIVITIES. Net cash provided by operating activities increased
$702 (10.0%) in 1998 compared to an increase of $1,176 (20.1%) in 1997. The 1998
increase is primarily attributable to a $921 increase in operating income before
depreciation and amortization.
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.
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Cash Used for Investing Activities.......... $ (5,627) $ (4,949) $ (4,199) 13.7% 17.9%
</TABLE>
INVESTING ACTIVITIES. BellSouth's primary use of funds continues to be for
capital expenditures to support expansion and development of networks for its
wireline communications, domestic wireless and international operations
segments. Capital expenditures were $5,212 in 1998 and $4,858 and $4,455 in 1997
and 1996, respectively. BellSouth expects capital expenditures in 1999 to
aggregate approximately $5,000.
A-13
<PAGE>
Net cash used for investing activities increased $678 (13.7%) during 1998
compared to 1997. The increase was primarily due to the purchase of additional
ownership interests in BellSouth's wireless operations in Venezuela, Ecuador and
Brazil during 1998 as well as capital expenditures. The increase was partially
offset by cash proceeds from the repayment of a loan in 1998. (See Note B to the
Consolidated Financial Statements.)
Net cash used for investing activities increased $750 (17.9%) in 1997
compared to 1996. The increase in 1997 was primarily due to investments in
unconsolidated international affiliates, specifically in Latin America.
Cash used in investing activities for 1998 and 1997 was partially offset by
proceeds from sales of various BellSouth interests. Proceeds of $410 in 1998
consisted of the sale of BellSouth's interest in BellSouth New Zealand ($255) as
well as additional proceeds associated with the sale of ITT World Directories
($155). Proceeds of $1,000 in 1997 consisted of the sale of BellSouth's
interests in Optus Communications ($735) and ITT World Directories ($265).
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net Cash Used for Financing Activities................................ $ (1,681) $ (698) $ (2,197)
</TABLE>
FINANCING ACTIVITIES. During 1998 and 1997, cash used for financing
activities totaled $1,681 and $698, respectively.
Dividends paid in 1998 were $1,420 as compared to $1,428 and $1,430 in 1997
and 1996, respectively. In December 1998, BellSouth announced a quarterly
dividend payment of $.19 per share, an annual rate of $.76 per share. Cash
dividends declared in each of the first, second and third quarters of 1998 were
$.18 per share. In 1997 and 1996, cash dividends were $.18 per share each
quarter, or $.72 for the year.
BellSouth increased its long-term debt and short-term borrowings by
approximately $1,115 in 1998. Approximately $361 of this increase relates to the
first time consolidation of certain businesses in BellSouth's international
operations and other segments. This compares to an increase of $814 in 1997 over
1996 balances.
BellSouth has committed credit lines aggregating $2,536 with various banks.
Borrowings under the committed credit lines totaled $634 and $241, respectively,
at December 31, 1998 and 1997. BellSouth also maintains uncommitted lines of
credit aggregating $169. At December 31, 1998, borrowings under the uncommitted
lines of credit totaled $45. There were no borrowings under the uncommitted
lines as of December 31, 1997. As of February 3, 1999, shelf registration
statements were on file with the Securities and Exchange Commission under which
$927 of debt securities could be publicly offered.
Treasury share purchases totaled $1,261 during 1998. In November 1998,
BellSouth announced its intent to repurchase up to $3,000 of its Common Stock
during 1999. BellSouth expects to finance the 1999 repurchase primarily through
cash generated from operations.
BellSouth's debt to total capitalization ratio was 43.0% at December 31,
1998, compared to 42.1% at December 31, 1997 and 43.5% at December 31, 1996.
MARKET RISK
BellSouth is exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes and foreign currency
exchange rate fluctuations. To manage this exposure, BellSouth employs risk
management strategies including the use of derivatives such as interest rate
swap agreements, foreign currency forwards and currency swap agreements.
BellSouth does not hold derivatives for trading purposes.
A-14
<PAGE>
INTEREST RATE RISK. BellSouth's objective in managing interest rate risk is
to maintain a balance of fixed and variable rate debt that will lower its
overall borrowing costs within reasonable risk parameters. Interest rate swaps
are used to convert a portion of BellSouth's debt portfolio from a variable rate
to a fixed rate or from a fixed rate to a variable rate.
FOREIGN EXCHANGE RISK. BellSouth's objective in managing foreign exchange
risk is to protect against earnings and cash flow volatility resulting from
changes in foreign exchange rates. Short-term foreign currency transactions and
commitments expose BellSouth to changes in foreign exchange rates. BellSouth
occasionally enters into forward contracts and similar instruments to mitigate
the potential impacts of such risks.
BellSouth's equity investments in Brazil hold approximately $2,300 in U.S.
Dollar-denominated liabilities and recognize foreign currency gains or losses
when converting those liabilities into local currency. BellSouth's equity income
related to these investments is subject to fluctuations in the U.S.
Dollar/Brazilian Real exchange rate. (See "MD&A--Operating
Environment--International Operations.")
BellSouth is subject to risk from changes in foreign exchange rates for its
international operations which use a foreign currency as their functional
currency and are translated to U.S. Dollars. Such changes result in cumulative
translation adjustments which are included in Shareholders' Equity. At December
31, 1998, BellSouth had translation exposure to various foreign currencies with
the most significant being the Brazilian Real and the German Mark. Operations in
countries with hyperinflationary economies consider the U.S. Dollar the
functional currency and reflect translation gains and losses in the
determination of net income.
RISK SENSITIVITY. 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 or contract amount. Such contracts and
agreements have been executed with creditworthy financial institutions, and 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 debt obligations. Fair values for the majority of
BellSouth's long-term debt obligations are based on quotes from dealers.
<TABLE>
<CAPTION>
TOTAL
RECORDED
1999 2000 2001 2002 2003 THEREAFTER AMOUNT FAIR VALUE
--------- --------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate Debt.............. $ 3,425 $ 476 $ 184 $ 318 $ 644 $ 6,778 $ 11,825 $ 12,118
Average Interest Rate........ 6.07% 6.61% 6.98% 7.66% 6.52% 6.65%
Variable Rate Debt........... $ 29 $ 38 $ 235 $ 19 $ 2 $ 51 $ 374 $ 398
Average Interest Rate........ 6.16% 6.08% 7.01% 6.08% 7.75% 6.55%
</TABLE>
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
REGULATION
BellSouth's future operations and financial results will be substantially
influenced by developments in a number of federal and state regulatory
proceedings. Adverse results in these proceedings could materially affect
BellSouth's revenues and expenses and its ability to compete effectively against
other telecommunications carriers.
A-15
<PAGE>
Federal policies being implemented by the Federal Communications Commission
(FCC) strongly favor access reform, whereby the historical subsidy for local
service that is contained in network access charges paid by long distance
carriers is eliminated. Unless compensatory changes are adopted, such as
Universal Service Fund contribution mandates, BellSouth's revenues from this
source, which constituted 20% of its revenues during 1998, are at risk. In
addition, other aspects of access charge regulation and Universal Service Fund
contribution requirements that are applicable to local service carriers such as
BellSouth are also under consideration and could result in greater expense
levels or reduced revenues.
As a result of litigation challenging a number of the FCC's rulings under
the 1996 Act, the U.S. Supreme Court has ruled that the FCC has considerable
authority to establish many pricing, interconnection and other policies that
have been considered within the exclusive jurisdiction of the state public
service commissions. BellSouth expects the FCC to accelerate the growth of local
service competition by aggressively utilizing such power to require
interconnection with competing carriers and the sale of network elements to
competitors who wish to provide communications services to customers in
BellSouth's region.
BellSouth has petitioned the FCC for permission under the 1996 Act to offer
full long distance services. The FCC has denied all of BellSouth's petitions.
BellSouth expects that the FCC will require further changes in BellSouth's
network interconnection elements and operating systems before it will approve
such petitions. Such changes will result in significant additional expenses and
promote local service competition.
BellSouth's intrastate prices are regulated under price regulation plans
provided by statute or approved by state public service commissions. Appeals of
approvals of plans in South Carolina and Tennessee are pending. Some plans are
subject to periodic review and require renewal, with several plans scheduled for
renewal during 1999. These commissions generally required price reductions and
other concessions from BellSouth as a condition to approving these plans, and
there is no assurance that the commissions will not require further
modifications when they consider their renewal.
BellSouth Telecommunications is involved in numerous legal proceedings
associated with state and federal regulatory matters, the disposition of which
could materially impact its operating results and prospects. See Note N to the
Consolidated Financial Statements.
COMPETITION
There are many competitive forces that impact BellSouth's businesses. The
1996 Act removed the regulatory barriers to local service competition and
required BellSouth to open its network to other carriers. The auction of PCS
licenses has created as many as six new wireless competitors in BellSouth's
markets, and the deregulation of international communications markets has
introduced new global competitors to nearly all of BellSouth's international
businesses.
BellSouth expects local service competition to steadily increase,
particularly with respect to its business customers. While competition for local
service revenues could adversely affect BellSouth's results of operations,
opening of local markets can lead to qualification to offer in-region interLATA
long distance wireline services.
The presence of multiple aggressive competitors in BellSouth's domestic and
international wireless markets makes it more difficult to attract new customers
and retain existing ones. Furthermore, while BellSouth does not compete
primarily on the basis of price, low prices offered by competitors attempting to
obtain market share have pressured BellSouth to reduce prices and develop
pricing plans attractive to lower usage customers. These trends are expected to
continue and could adversely affect BellSouth's results of operations in the
future.
A-16
<PAGE>
BellSouth plans to compete through aggressive marketing, competitive pricing
and technical innovation. It will offer consumers a full range of
services--local, long distance, Internet access, wireless and more--while
remaining committed to its high level of customer service and value.
TECHNOLOGY
BellSouth is continually upgrading its networks with digital and optical
technologies, making it capable of delivering a full complement of voice and
data services. This modernization of the network is critical to BellSouth's
success in providing the data connectivity demanded by its customers and to
compete with fiber networks being constructed or currently utilized by start-ups
and cable companies. This effort will require investment of significant amounts
of capital in the future.
BellSouth believes that its dual-mode network with its extended coverage
currently provides a significant competitive advantage over PCS providers.
Digital wireless technology, however, is rapidly evolving and the development of
a common roaming platform for digital wireless technologies could reduce this
advantage. This would result in more intense competition and could have an
adverse effect on BellSouth's results of operations.
INTERNATIONAL OPERATIONS
BellSouth owns significant interests in a number of foreign operations,
primarily in Latin America, which are subject to greater political, monetary,
economic and regulatory risks than its domestic businesses. In particular,
BellSouth holds equity interests in two wireless communications consortia in
Brazil, which are accounted for under the equity method of accounting. At
December 31, 1998, the Brazilian operations had incurred approximately $2,300 in
U.S. Dollar-denominated liabilities. During January 1999 the Brazilian
government allowed its currency to trade freely against other currencies
resulting in an immediate devaluation of the Brazilian Real. For January 1999,
the latest internal financial reporting period, BellSouth will recognize a
foreign exchange rate loss resulting from the devaluation of approximately $364
through recording its share of equity in earnings of its Brazilian equity
investments. The aforementioned exchange loss is subject to further upward or
downward adjustment based on fluctuations in the U.S. Dollar/Brazilian Real
exchange rate.
The impact of the devaluation on an operation depends on the devaluation's
effect on the local economy and the ability of an operation to raise prices
and/or reduce expenses. Additionally, the economies of other countries in Latin
America could be adversely impacted by Brazil's economic and monetary problems.
The likelihood and extent of further devaluation and deteriorating economic
conditions in Brazil and other Latin American countries and the resulting
impacts on BellSouth's results of operations, financial position and cash flows
is not known.
YEAR 2000 READINESS DISCLOSURE
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 and certain equipment to properly recognize the Year 2000
as a result of the century change on January 1, 2000. The program is also
designed to assess the readiness of other entities with which BellSouth does
business.
Inability to reach substantial Year 2000 compliance in BellSouth's systems
and integral third party systems could result in interruption of
telecommunications services, interruption or failure of BellSouth's customer
billing, operating and other information systems and failure of certain
date-sensitive equipment. Such failures could result in substantial claims by
customers as well as loss of revenue due to service interruption, delays in
BellSouth's ability to bill its customers accurately and timely, and increased
expenses associated with litigation, stabilization of operations following such
failures or execution of contingency plans.
A-17
<PAGE>
The Year 2000 program is being conducted by a management team that is
coordinating efforts of internal resources as well as third party providers and
vendors in identifying and making necessary changes to BellSouth's systems
hardware, software and date-sensitive equipment. The program also includes the
international and domestic companies in which BellSouth holds an interest. Some
of the changes that are necessary in BellSouth's operations are being made as a
part of ongoing systems upgrades.
BellSouth's Year 2000 program has been divided into six phases: planning;
inventory; impact analysis; conversion; testing; and implementation. BellSouth
monitors its progress within these six phases based on the number of inventoried
items that have been addressed. Management's target date for completion of all
phases for most of its mission critical applications is June 30, 1999. Mission
critical applications include those that (1) directly affect delivery of primary
services to BellSouth's customers; (2) directly affect BellSouth revenue
recognition and collection; (3) would create noncompliance with any statutes or
laws; and (4) would require significant costs to address in the event of
noncompliance.
BellSouth has identified three main areas of focus for its Year 2000
program. Each focus area includes the hardware, software, embedded chips, third
party vendors and suppliers as well as third party networks that are associated
with the identified systems.
The first focus area, network components, consists of the switches,
transmission systems and associated software that comprise the core of
BellSouth's telephony systems including land-line and wireless domestic and
international services. Outside suppliers provide all hardware and most software
that comprise BellSouth's networks; these components are being remediated by
those third party suppliers. Testing of these components for Year 2000
compliance is being performed by the vendors, BellSouth, and industry groups
such as the Telco Year 2000 Forum. As of December 31, 1998, the planning,
inventory and impact analysis phases for BellSouth Telecommunications were 100%
complete with the remaining phases each approximately 65% complete. The
planning, inventory and impact analysis phases for BellSouth's other domestic
operations were each almost 100% complete with the remaining phases each more
than 25% complete. The planning, inventory and impact analysis phases for
BellSouth's international operations were each approximately 70% complete with
the remaining phases each approximately 50% complete.
The second focus area, information technology systems, consists of those
systems that primarily support "customer care" operations such as order taking
and billing. The software for these systems was developed by both BellSouth and
vendors, and is being remediated and tested by both. As of December 31, 1998,
the planning, inventory and impact analysis phases for BellSouth
Telecommunications were each approximately 95% complete with the remaining
phases each approximately 70% complete. The planning, inventory and impact
analysis phases for BellSouth's other domestic operations were each almost 100%
complete with the remaining phases each approximately 75% complete. The
planning, inventory and impact analysis phases for BellSouth's international
operations were each approximately 70% complete with the remaining phases each
approximately 25% complete.
Building and environmental systems, the third focus area, includes various
products and systems that are not used in support of network or customer care
functions. Building and environmental systems are primarily provided by third
parties and include building operations, office equipment, utilities, etc. As of
December 31, 1998, the planning, inventory and impact analysis phases for
BellSouth Telecommunications were each almost 100% complete with the remaining
phases each approximately 15% complete. The planning, inventory and impact
analysis phases for BellSouth's other domestic operations were each almost 100%
complete with the remaining phases each approximately 10% complete. BellSouth's
international operations are currently in the planning, inventory and impact
analysis phases for their environmental systems.
BellSouth has developed numerous contingency plans for conducting its
business operations in the event of crises including system outages and natural
disasters. As a part of its Year 2000 compliance
A-18
<PAGE>
efforts, BellSouth has chartered a Year 2000 Business Continuity project to
ensure that tested contingency plans are in place in the event that planned Year
2000 compliance activities for its mission critical applications are not
successfully accomplished. This effort is not limited to the risks posed by the
potential Year 2000 failures of internal information systems and
infrastructures, but also includes the potential secondary impact on BellSouth
of Year 2000 failures, including potential systems failures of business partners
and infrastructure service providers. A master Year 2000 Contingency Planning
Guide and associated workbook have been developed and internal training has been
completed. Other major milestones for the contingency planning project include
assessments by the end of first quarter 1999, and the completion of testing and
sign-off of contingency plans during third quarter 1999. Additionally, BellSouth
is a member, together with other large telecommunications companies, of several
industry groups that are addressing the Year 2000 issue and related contingency
plans.
Some of the costs associated with BellSouth's Year 2000 compliance efforts
were incurred in 1997 and 1998. The remainder has been or will be incurred
during 1999 and 2000. Costs are not incurred equally over all phases of the
project, but increase over time. BellSouth anticipates that the conversion and
testing phases will require an increase in spending over the earlier phases of
the project. As of December 31, 1998, approximately $87 of external costs had
been expended towards Year 2000 compliance. BellSouth estimates the total
external cost of its compliance efforts will be between $250 and $350 over the
life of the project. BellSouth intends to continually reassess the estimated
costs and status of Year 2000 remediation efforts.
BellSouth currently anticipates that most of its mission critical
applications will be Year 2000 compliant by June 30, 1999. However, no assurance
can be given that unforeseen circumstances will not arise during the performance
of the testing and implementation phases that would adversely affect the Year
2000 compliance of BellSouth's systems. Furthermore, the Year 2000 compliance
status of integral third party suppliers and networks, which could adversely
impact BellSouth's mission critical applications, cannot be fully known. As a
result, BellSouth is unable to determine the impact that any system interruption
would have on its results of operations, financial position and cash flows.
CWA CONTRACTS
In September 1998, members of the Communications Workers of America (CWA)
ratified new three-year contracts with BellSouth, effective August 9, 1998. The
contracts include basic wage increases totaling 12.39% over the three years
covered by the contracts. In addition, the agreement provides for a standard
award of between 2% and 2.5% of base salary and overtime compensation which is
subject to adjustment based on company performance measures for plan years 1999
and 2000. Other terms of the agreement include pension band increases and
pension plan cash balance improvements for active employees.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The standard requires that all derivative instruments (1)
be recognized as assets or liabilities and (2) be adjusted to fair value each
period. BellSouth will adopt SFAS No. 133 on January 1, 2000 and is currently
assessing the impact that adoption will have on its results of operations and
financial position.
CAPITALIZATION OF INTERNAL USE SOFTWARE. In March 1998, the AICPA issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires
capitalization of certain direct costs and interest costs after preliminary
development efforts have been made. BellSouth adopted SOP 98-1 on January 1,
1999.
A-19
<PAGE>
Adoption of SOP 98-1 will result in a temporary increase in earnings in the
year of adoption, compared to the prior period, as a result of the
capitalization of costs which had previously been expensed. BellSouth currently
believes that this increase will be approximately $375 to $425 ($225 to $250
after tax) for 1999. If expenditures remain at a consistent level, the
comparative 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 SOP 98-1 will result in higher levels of
capitalized software costs on the Consolidated Balance Sheets.
SAFE HARBOR STATEMENT
Statements that do not address historical performance are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are based on a number of assumptions, including but not limited to:
(1) continued domestic economic growth and demand for BellSouth's services; (2)
economic, monetary, regulatory and political stability where BellSouth conducts
its international operations; (3) the reasonable accuracy of BellSouth's
expectations of the impact on its international operations of weakening
currencies in Latin America as compared to the U.S. Dollar; (4) the reasonable
accuracy of BellSouth's expectations of the results of regulatory actions as
well as costs and recoveries with respect to access reform, universal service
and interconnection; (5) the reasonable accuracy of BellSouth's estimate of
regulatory authorization to provide wireline long distance services and the
impact of competition in its markets; and (6) satisfactory identification and
completion of Year 2000 software and hardware revisions by BellSouth and
entities with which it does business. Any developments significantly deviating
from these assumptions could cause actual results to differ materially from
those forecast or implied in the aforementioned forward-looking statements.
A-20
<PAGE>
REPORT OF MANAGEMENT
To the Shareholders of BellSouth Corporation:
These financial statements have been prepared in conformity with generally
accepted accounting principles and have been audited by PricewaterhouseCoopers
LLP, 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, PricewaterhouseCoopers LLP 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 PricewaterhouseCoopers LLP'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, 1998, 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
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, 1999
A-21
<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 1998 and reviewed with the Chief Corporate
Auditor, PricewaterhouseCoopers LLP 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
PricewaterhouseCoopers LLP 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, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
BellSouth Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and shareholders' equity and
comprehensive income present fairly, in all material respects, the financial
position of BellSouth Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 3, 1999
A-22
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Revenues:
Wireline communications:
Local service....................................................... $ 9,399 $ 8,499 $ 8,082
Network access...................................................... 4,632 4,483 4,365
Long distance....................................................... 713 734 794
Other wireline...................................................... 1,657 1,462 1,383
Domestic wireless..................................................... 2,723 2,581 2,204
International operations.............................................. 1,995 948 547
Advertising and publishing............................................ 1,891 1,837 1,651
Other services........................................................ 113 17 14
--------- --------- ---------
Total Operating Revenues............................................ 23,123 20,561 19,040
--------- --------- ---------
Operating Expenses:
Cost of services and products......................................... 7,080 6,254 6,072
Depreciation and amortization......................................... 4,357 3,964 3,719
Selling, general and administrative................................... 5,782 4,967 4,470
--------- --------- ---------
Total Operating Expenses............................................ 17,219 15,185 14,261
--------- --------- ---------
Operating Income........................................................ 5,904 5,376 4,779
Interest Expense........................................................ 837 761 721
Gain on Sale of Operations (Note B)..................................... 335 787 442
Other Income, net....................................................... 349 19 108
--------- --------- ---------
Income Before Income Taxes and Extraordinary Losses..................... 5,751 5,421 4,608
Provision for Income Taxes (Note J)..................................... 2,224 2,151 1,745
--------- --------- ---------
Income Before Extraordinary Losses...................................... 3,527 3,270 2,863
Extraordinary Loss on Early Extinguishment of Debt,
net of tax (Note E).................................................... -- (9) --
--------- --------- ---------
Net Income........................................................ $ 3,527 $ 3,261 $ 2,863
--------- --------- ---------
--------- --------- ---------
Weighted-Average Common Shares Outstanding: (Notes A, G)
Basic................................................................. 1,970 1,984 1,987
Diluted............................................................... 1,984 1,989 1,992
Dividends Declared Per Common Share (Note G)............................ $ .73 $ .72 $ .72
Earnings Per Share: (Notes A, G)
Basic................................................................. $ 1.79 $ 1.64 $ 1.44
Diluted............................................................... $ 1.78 $ 1.64 $ 1.44
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-23
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 3,003 $ 2,570
Temporary cash investments..................................................................... 184 17
Accounts receivable, net of allowance for uncollectibles of $251 and $246...................... 4,629 4,750
Material and supplies.......................................................................... 431 393
Other current assets........................................................................... 459 387
--------- ---------
Total Current Assets......................................................................... 8,706 8,117
Investments and Advances (Note B)................................................................ 2,861 2,675
Property, Plant and Equipment, net (Note C)...................................................... 23,940 22,861
Deferred Charges and Other Assets................................................................ 1,028 702
Intangible Assets, net........................................................................... 2,875 1,946
--------- ---------
Total Assets................................................................................. $ 39,410 $ 36,301
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year (Note E)......................................................... $ 3,454 $ 3,706
Accounts payable............................................................................... 2,219 1,825
Other current liabilities (Note D)............................................................. 3,477 3,252
--------- ---------
Total Current Liabilities.................................................................... 9,150 8,783
--------- ---------
Long-Term Debt (Note E).......................................................................... 8,715 7,348
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes.............................................................. 2,512 2,023
Unamortized investment tax credits............................................................. 167 213
Other liabilities and deferred credits (Note F)................................................ 2,756 2,769
--------- ---------
Total Deferred Credits and Other Liabilities................................................. 5,435 5,005
--------- ---------
Shareholders' Equity (Note G):
Common stock, $1 par value (4,400 shares authorized; 1,950 and 1,984 shares outstanding)....... 2,020 1,010
Paid-in capital................................................................................ 6,766 7,714
Retained earnings.............................................................................. 9,479 7,382
Accumulated other comprehensive income......................................................... (64) 36
Shares held in trust and treasury.............................................................. (1,752) (575)
Guarantee of ESOP debt (Note H)................................................................ (339) (402)
--------- ---------
Total Shareholders' Equity................................................................... 16,110 15,165
--------- ---------
Total Liabilities and Shareholders' Equity................................................... $ 39,410 $ 36,301
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-24
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 3,527 $ 3,261 $ 2,863
Adjustments to net income:
Gain on sale of operations...................................................... (335) (787) (442)
Depreciation and amortization................................................... 4,357 3,964 3,719
Provision for uncollectibles.................................................... 334 304 254
Deferred income taxes and unamortized investment tax credits.................... 304 243 120
Pension income.................................................................. (259) (164) (14)
Dividends from unconsolidated affiliates........................................ 174 198 130
(Income) losses from unconsolidated affiliates, net............................. (92) 242 76
Extraordinary loss on early extinguishment of debt.............................. -- 15 --
Additional income from settlement of loans and advances......................... (102) -- --
Net change in:
Accounts receivable and other current assets.................................. (458) (742) (645)
Accounts payable and other current liabilities................................ 300 580 (708)
Deferred charges and other assets............................................. 1 (125) (126)
Other liabilities and deferred credits........................................ (25) 87 581
Other reconciling items, net.................................................... 15 (37) 55
--------- ---------- ----------
Net cash provided by operating activities....................................... 7,741 7,039 5,863
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................................. (5,212) (4,858) (4,455)
Purchases of licenses and other intangible assets................................. (559) (328) (147)
Proceeds from sale of operations.................................................. 410 1,000 930
Proceeds from disposition of short-term investments............................... 210 267 355
Purchases of short-term investments............................................... (376) (233) (336)
Proceeds from investment dispositions and repayments of advances.................. 432 59 102
Investments in and advances to unconsolidated affiliates.......................... (637) (1,083) (620)
Other investing activities, net................................................... 105 227 (28)
--------- ---------- ----------
Net cash used for investing activities.......................................... (5,627) (4,949) (4,199)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from short-term borrowings........................... (71) 879 (497)
Proceeds from long-term debt...................................................... 1,752 645 392
Repayments of long-term debt...................................................... (782) (692) (544)
Dividends paid.................................................................... (1,420) (1,428) (1,430)
Purchase of treasury shares....................................................... (1,261) (157) (85)
Other financing activities, net................................................... 101 55 (33)
--------- ---------- ----------
Net cash used for financing activities.......................................... (1,681) (698) (2,197)
--------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents................................ 433 1,392 (533)
Cash and Cash Equivalents at Beginning of Period.................................... 2,570 1,178 1,711
--------- ---------- ----------
Cash and Cash Equivalents at End of Period.......................................... $ 3,003 $ 2,570 $ 1,178
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-25
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNT
NUMBER OF SHARES -------------------------------------
------------------------------
SHARES
COMMON HELD IN TRUST COMMON PAID-IN RETAINED
STOCK AND TREASURY STOCK CAPITAL EARNINGS
----------- ----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........................ 1,007 (13) $ 1,007 $ 7,624 $ 4,099
Net income.......................................... 2,863
Other comprehensive income, net of tax:
Foreign currency translation adjustment...........
Total comprehensive income......................
Dividends declared.................................. (1,430)
Share issuances:
Employee benefit plans............................ 1 1 14
Grantor trusts.................................... 1 (1) 1 34
Share purchases:
Treasury.......................................... (3)
Grantor trusts.................................... (1)
ESOP activities and related tax benefit............. 9
----- --- ----------- ----------- -----------
Balance at December 31, 1996........................ 1,009 (18) 1,009 7,672 5,541
Net income.......................................... 3,261
Other comprehensive income, net of tax:
Foreign currency translation adjustment...........
Total comprehensive income......................
Dividends declared.................................. (1,428)
Share issuances:
Employee benefit plans............................ 2 (25)
Grantor trusts.................................... 1 (1) 1 59
Acquisition-related transactions.................... 2 8
Purchase of treasury stock.......................... (3)
ESOP activities and related tax benefit............. 8
----- --- ----------- ----------- -----------
Balance at December 31, 1997........................ 1,010 (18) 1,010 7,714 7,382
Two-for-one stock split (Note G).................... 1,010 (19) 1,010 (1,010)
Net income.......................................... 3,527
Other comprehensive income, net of tax:
Foreign currency translation adjustment...........
Total comprehensive income......................
Dividends declared.................................. (1,435)
Share issuances for employee benefit plans.......... 3 (36) (2)
Acquisition-related transactions.................... 1 92
Share purchases:
Treasury.......................................... (36)
Grantor trusts.................................... (1)
Tax benefit related to stock options................ 6
ESOP activities and related tax benefit............. 7
----- --- ----------- ----------- -----------
Balance at December 31, 1998........................ 2,020 (70) $ 2,020 $ 6,766 $ 9,479
----- --- ----------- ----------- -----------
----- --- ----------- ----------- -----------
<CAPTION>
ACCUMULATED
OTHER SHARES
COMPREHENSIVE HELD IN TRUST GUARANTEE OF
INCOME AND TREASURY ESOP DEBT TOTAL
----------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1995........................ $ (5) $ (374) $ (526) $ 11,825
Net income.......................................... 2,863
Other comprehensive income, net of tax:
Foreign currency translation adjustment........... 30 30
---------
Total comprehensive income...................... 2,893
Dividends declared.................................. (1,430)
Share issuances:
Employee benefit plans............................ 11 26
Grantor trusts.................................... (35) --
Share purchases:
Treasury.......................................... (85) (85)
Grantor trusts.................................... (49) (49)
ESOP activities and related tax benefit............. 60 69
------ ------------- ------ ---------
Balance at December 31, 1996........................ 25 (532) (466) 13,249
Net income.......................................... 3,261
Other comprehensive income, net of tax:
Foreign currency translation adjustment........... 11 11
---------
Total comprehensive income...................... 3,272
Dividends declared.................................. (1,428)
Share issuances:
Employee benefit plans............................ 85 60
Grantor trusts.................................... (60) --
Acquisition-related transactions.................... 89 97
Purchase of treasury stock.......................... (157) (157)
ESOP activities and related tax benefit............. 64 72
------ ------------- ------ ---------
Balance at December 31, 1997........................ 36 (575) (402) 15,165
Two-for-one stock split (Note G).................... --
Net income.......................................... 3,527
Other comprehensive income, net of tax:
Foreign currency translation adjustment........... (100) (100)
---------
Total comprehensive income...................... 3,427
Dividends declared.................................. (1,435)
Share issuances for employee benefit plans.......... 89 51
Acquisition-related transactions.................... 33 125
Share purchases:
Treasury.......................................... (1,261) (1,261)
Grantor trusts.................................... (38) (38)
Tax benefit related to stock options................ 6
ESOP activities and related tax benefit............. 63 70
------ ------------- ------ ---------
Balance at December 31, 1998........................ $ (64) $ (1,752) $ (339) $ 16,110
------ ------------- ------ ---------
------ ------------- ------ ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-26
<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. BellSouth has two principal and wholly-owned
subsidiaries, BellSouth Telecommunications, Inc. (BellSouth Telecommunications)
and BellSouth Enterprises, Inc. (BellSouth Enterprises). BellSouth
Telecommunications primarily provides (i) local exchange and long distance
services within geographic areas, called Local Access and Transport Areas
(LATAs) and (ii) network access services. BellSouth Enterprises owns businesses
providing domestic and international wireless communications services as well as
advertising and publishing products. For management purposes, these operations
are organized into five operating segments: wireline communications; domestic
wireless; international operations; advertising and publishing; and other.
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.
USE OF ESTIMATES. 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.
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 in the Consolidated Balance Sheets. Interest income on cash
equivalents, temporary cash investments and other interest-bearing instruments
was $313, $193 and $163 for the years ended December 31, 1998, 1997 and 1996,
respectively.
MATERIAL AND SUPPLIES. New and reusable material is carried in inventory,
principally at average original cost, except that specific costs are used in the
case of large individual items. Nonreusable material is carried at estimated
salvage value.
PROPERTY, PLANT AND EQUIPMENT. The investment in Property, Plant and
Equipment is stated at original cost. For plant dedicated to providing regulated
telecommunications services, depreciation is based on the remaining life method
of depreciation and straight-line composite rates determined on the basis of
equal life groups of certain categories of telephone plant acquired in a given
year. When depreciable telephone plant is disposed of, the original cost less
net salvage value is charged to accumulated depreciation. The cost of other
property, plant and equipment is depreciated using either 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 to determine whether such intangibles
are fully recoverable from projected net cash flows of
A-27
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
the related business unit. Amortization of such intangibles was $135, $58 and
$49 for the years ended December 31, 1998, 1997 and 1996, respectively. At
December 31, 1998 and 1997, accumulated amortization of intangibles was $462 and
$321, 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 other accumulated comprehensive income.
Operations in countries with hyperinflationary economies consider the U.S.
Dollar the functional currency.
Exchange gains and losses on transactions of BellSouth and its equity
investments 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).
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
underlying exposure. 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.
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. Advertising
and publishing revenues and related directory costs are recognized upon
publication of directories. Revenues derived from other telecommunications
services, principally network access, long distance and wireless airtime usage,
are recognized monthly as services are provided. Allowances for uncollectible
billed services are adjusted monthly. The provision for such uncollectible
accounts was $334, $304 and $254 for the years ended December 31, 1998, 1997 and
1996, respectively.
MAINTENANCE AND REPAIRS. The cost of maintenance and repairs of plant,
including the cost of replacing minor items not resulting in substantial
betterments, is charged to Operating Expenses.
INCOME TAXES. The Consolidated Balance Sheets reflect deferred tax balances
associated with the anticipated tax impact of future income or deductions
implicit in the Consolidated Balance Sheets 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. 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 weighted-average number of common shares
outstanding plus net incremental shares arising out of employee stock options
and benefit plans. Net incremental shares included in the calculation of diluted
earnings per share were approximately 14 million, 5 million and 5 million,
respectively, for the years
A-28
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
ended December 31, 1998, 1997 and 1996. BellSouth's earnings, used for per share
calculations, are the same for both the basic and diluted methods.
NEW ACCOUNTING PRONOUNCEMENTS. In March 1998, the AICPA issued Statement of
Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires capitalization of
certain direct costs and interest costs after preliminary development efforts
have been made. BellSouth adopted SOP 98-1 on January 1, 1999. Adoption of SOP
98-1 will result in a temporary increase in earnings in the year of adoption,
compared to the prior period, as a result of the capitalization of costs which
had previously been expensed.
NOTE B -- INVESTMENTS AND ADVANCES
Investments and Advances as of December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Investments accounted for under the equity method.................................. $ 2,148 $ 2,007
Advances to and notes receivable from affiliates................................... 677 631
Other investments.................................................................. 36 37
--------- ---------
Total Investments and Advances................................................... $ 2,861 $ 2,675
--------- ---------
--------- ---------
</TABLE>
BellSouth's equity method investments primarily include various partnerships
in domestic and international wireless properties and other international
communications consortia. Equity in earnings related to investments accounted
for under the equity method was $92 for the year ended December 31, 1998 while
equity in losses for these investments were $(242) and $(76) for the two years
ended December 31, 1997 and 1996, respectively, and are included as a component
of Other Income, net.
DOMESTIC WIRELESS. BellSouth's domestic wireless equity method investments
consist primarily of its noncontrolling interests in partnerships serving the
Los Angeles and Houston/Galveston Metropolitan Service Areas. In November 1998,
BellSouth and AT&T contributed their respective interests in these partnerships,
and AT&T contributed approximately $1,000, into a new joint venture. BellSouth's
ownership share of Los Angeles, Houston and Galveston changed from 60.0%, 43.6%
and 36.6%, respectively, to 44.4%, 44.4% and 38.8%, respectively. As a result of
the reorganization, BellSouth's proportionate share of the net assets of the new
venture exceeded BellSouth's aggregate book investment balance. The related
excess is being amortized into income using the straight-line method over a
period of approximately 30 years.
INTERNATIONAL OPERATIONS. BellSouth has equity investments in international
wireless operations in Latin America, Europe and other international markets
with ownership ranging from 22.5% to 46.8%.
During 1998, BellSouth purchased additional ownership interests in its
wireless operations in Venezuela, Brazil and Ecuador for approximately $536.
These purchases increased BellSouth's ownership interest in Venezuela by 24.9%
to 78.2% and its interest in Ecuador by 28.2% to 89.4%. In Brazil, the purchases
increased BellSouth's investment in its Sao Paulo operating company to 44.5% and
in its Northeast operation to 46.8%. In all transactions, the excess of the
respective purchase price over the net book value of the assets acquired was
assigned to customer lists and wireless licenses. The excess 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.
A-29
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE B -- INVESTMENTS AND ADVANCES (CONTINUED)
WIRELESS DATA. Prior to 1998, BellSouth and RAM Broadcasting Corporation
(RAM) were partners in an entity that owned and operated certain wireless data
communications networks in the U.S., the U.K. and various other countries.
During 1998, BellSouth purchased the issued and outstanding stock of RAM. As a
result of the transaction, BellSouth holds a 90.0% interest in the United States
operations and a 100% interest in the U.K. operations. Accordingly, these
operations were consolidated at December 31, 1998.
SUMMARY FINANCIAL INFORMATION OF EQUITY INVESTEES. A summary of combined
financial information as reported by the equity investees of BellSouth is set
forth below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Balance Sheet Information:
Current Assets................................................................... $ 1,367 $ 1,294
Noncurrent Assets................................................................ 7,073 6,837
Current Liabilities.............................................................. 1,425 4,360
Noncurrent Liabilities........................................................... 6,070 3,928
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income Statement Information:
Revenues............................................................... $ 3,819 $ 4,734 $ 4,827
Operating Income....................................................... 179 120 91
Net Loss............................................................... (99) (592) (404)
</TABLE>
ADVANCES AND NOTES RECEIVABLE. 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 $161 and $194 at December 31, 1998 and
1997, respectively. The notes bear interest at rates ranging from 6.31% to 7.88%
while the advances bear interest at the federal funds rate plus .30%. Principal
amounts outstanding at December 31, 1998 are due and payable to BellSouth
between November 14, 2001 and January 15, 2038. The instruments require periodic
payments of interest and are collateralized by various real estate holdings.
During 1993, BellSouth entered into a credit agreement with Prime South
Diversified, Inc. (Prime) to provide up to $250 in financing, all of which was
outstanding as of December 31,1997. The loan was collateralized by the stock of
Prime, which indirectly owned Community Cable TV (CCTV) in Las Vegas. The loan
bore interest at a variable rate of 10% to 11%. The loan agreement specified
that in the event Prime sold CCTV, BellSouth would be repaid the principal
balance as well as additional amounts for contingent interest and prepayment
penalties. During 1998, Prime sold its investment in CCTV. As specified in the
loan agreement, BellSouth was repaid the full principal balance as well as
amounts for contingent interest, prepayment penalties and regular interest. As a
result, in 1998, BellSouth recorded additional income of $102 ($62 after tax),
for the amount related to the proceeds from contingent interest and prepayment
penalties.
SALE OF OPERATIONS AND INVESTMENTS. On October 30, 1998, BellSouth sold to
Vodafone Group Plc its 65% ownership interest in BellSouth New Zealand for total
proceeds of $254. The pretax gain on the sale was $180 ($110 after tax).
A-30
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE B -- INVESTMENTS AND ADVANCES (CONTINUED)
In 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 was given an option to receive either an
ownership interest in a cellular communications company located in Colombia or
the equivalent value of that interest in cash. The pretax gain on the sale was
$578 ($352 after tax). During 1998, BellSouth exercised its option and received
an additional $64, which is included in other investing activities in the
Consolidated Statements of Cash Flows.
In 1997, BellSouth sold its 20% interest in ITT World Directories (ITTWD) to
ITT Corporation (ITT) for total proceeds of $265. The pretax gain on such sale
was $209 ($128 after tax). The sale agreement contained certain provisions that
called for additional sales proceeds to be paid to BellSouth in the event that
ITT subsequently resold ITTWD above a certain price. As a result of ITT's
subsequent sale of ITTWD, BellSouth received additional proceeds that resulted
in a pretax gain of $155 ($96 after tax) in the first quarter of 1998.
In 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 the sale, included
as a component of Other Income, net, was $38.
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE
LIVES
(IN YEARS) 1998 1997
------------- --------- ---------
<S> <C> <C> <C>
Outside plant..................................................... 12-20 $ 22,496 $ 21,642
Central office equipment.......................................... 8-10 20,056 18,716
Operating and other equipment..................................... 5-15 6,262 4,523
Building and building improvements................................ 25-45 4,485 4,433
Furniture and fixtures............................................ 10-15 3,089 2,987
Station equipment................................................. 6 563 522
Land.............................................................. -- 207 190
Plant under construction.......................................... -- 816 815
--------- ---------
57,974 53,828
Less: Accumulated depreciation.................................. 34,034 30,967
--------- ---------
Total Property, Plant and Equipment, net...................... $ 23,940 $ 22,861
--------- ---------
--------- ---------
</TABLE>
A-31
<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>
1998 1997
--------- ---------
<S> <C> <C>
Advanced billing and customer deposits............................................. $ 754 $ 620
Taxes accrued...................................................................... 645 835
Dividends payable.................................................................. 379 365
Salaries and wages payable......................................................... 351 335
Interest and rents accrued......................................................... 340 309
Compensated absences............................................................... 254 248
Deferred taxes..................................................................... 207 41
Other.............................................................................. 547 499
--------- ---------
Total Other Current Liabilities.................................................. $ 3,477 $ 3,252
--------- ---------
--------- ---------
</TABLE>
NOTE E -- DEBT
DEBT MATURING WITHIN ONE YEAR. Debt maturing within one year is summarized
as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Short-term notes payable:
Bank loans................................................................... $ 765 $ 465
Commercial paper............................................................. 2,378 2,438
Current maturities of long-term debt........................................... 311 803
--------- ---------
Total Debt Maturing Within One Year.......................................... $ 3,454 $ 3,706
--------- ---------
--------- ---------
Weighted-average interest rate at end of period:
Bank loans................................................................... 7.85% 7.05%
Commercial paper............................................................. 5.30% 5.92%
</TABLE>
BellSouth has committed credit lines aggregating $2,536 with various banks.
Borrowings under the committed credit lines totaled $634 and $241, respectively,
at December 31, 1998 and 1997. BellSouth also maintains uncommitted lines of
credit aggregating $169. At December 31, 1998, borrowings under the uncommitted
lines of credit totaled $45. There were no borrowings under the uncommitted
lines as of December 31, 1997. There are no significant commitment fees or
requirements for compensating balances associated with any lines of credit.
A-32
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE E -- DEBT (CONTINUED)
LONG-TERM DEBT. 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,
1998.
<TABLE>
<CAPTION>
WEIGHTED-
CONTRACTUAL AVERAGE
INTEREST RATES INTEREST RATE MATURITIES 1998 1997
------------------ -------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
BellSouth Telecommunications..... 4.375% - 6% 5.70% 2000 - 2045 $ 1,495 $ 1,565
6.125% - 7% 6.48% 2000 - 2033 3,219 2,730
7.5% - 8.25% 7.79% 2032 - 2035 1,150 1,150
6.65% - 7% 6.92% 2095 654 644
--------- ---------
6,518 6,089
BellSouth Capital Funding
Corporation..................... 5.25% - 8.65% 6.45% 1999 - 2097 1,469 1,290
Guarantee of ESOP debt........... 9.125% - 9.19% 2003 467 534
Other................................................................................ 602 275
Unamortized discount, net of premium................................................. (30) (37)
--------- ---------
9,026 8,151
Current maturities................................................................... (311) (803)
--------- ---------
Total Long-Term Debt............................................................... $ 8,715 $ 7,348
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt outstanding (principal amounts) at December 31,
1998 are summarized below. Maturities after the year 2003 include $500 principal
amount of 6.65% debentures due in 2095. At December 31, 1998, such debentures
had an accreted book value of $154.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturities.................. $ 311 $ 514 $ 419 $ 337 $ 646 $ 7,175 $ 9,402
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
</TABLE>
Debt issued by BellSouth's wholly-owned subsidiary, BellSouth Capital
Funding Corporation (Capital Funding) is 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.
In December 1998, Capital Funding issued $300 of 5.375% Notes, due December
22, 2008. The purpose of these issues was to retire commercial paper.
In June 1998, BellSouth Telecommunications issued $500 of 6 3/8% Debentures,
due June 1, 2028. In addition, during June 1998, BellSouth Telecommunications
issued $500 of 6% Reset Put Securities due June 15, 2012 (REPS). REPS are a debt
instrument with embedded put and call option features. The REPS are subject to
mandatory redemption from the existing holders on June 15, 2002 through either
(i) the exercise by the callholder of its right to purchase the REPS or (ii) the
repurchase of the REPS by BellSouth Telecommunications. If the call option is
exercised, the callholder will, based on BellSouth Telecommunications' then
current credit spreads, determine the interest to be paid on the REPS.
During 1997, BellSouth Telecommunications retired certain long-term debt
issues totaling $600. As a result of the early extinguishment of these issues,
extraordinary losses of $9, net of current tax benefits of $6, were recognized
in 1997.
A-33
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE E -- DEBT (CONTINUED)
At December 31, 1998, shelf registration statements were on file with the
Securities and Exchange Commission under which $927 of debt securities could be
publicly offered.
NOTE F -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits are summarized as follows at December
31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Postretirement benefits other than pensions (Note H)............................... $ 792 $ 787
Compensation related............................................................... 544 495
Accrued pension cost (Note H)...................................................... 470 559
Minority interests................................................................. 451 504
Postemployment benefits............................................................ 243 242
Other.............................................................................. 256 182
--------- ---------
Total Other Liabilities and Deferred Credits..................................... $ 2,756 $ 2,769
--------- ---------
--------- ---------
</TABLE>
NOTE G -- SHAREHOLDERS' EQUITY
STOCK SPLIT. In November 1998, 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 December 3, 1998 received on December 24, 1998 one
additional share of Common Stock for each share owned as of the record date. As
a result of the split, 1,010,156,851 shares were issued and $1,010 was
transferred from Paid-In Capital to Common Stock. Also in November 1998,
BellSouth's Board of Directors approved an increase in the number of authorized
shares of Common Stock to 4,400,000,000 from 2,200,000,000. Amounts related to
common shares for all periods presented have been restated to reflect the stock
split.
PREFERRED STOCK AUTHORIZED. BellSouth's Articles of Incorporation authorize
100 million shares of cumulative First Preferred Stock having a par value of $1
per share, of which 30 million shares have been reserved and designated Series A
for possible issuance under BellSouth's Shareholder Rights Plan. As of December
31, 1998, 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 $43.75 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 December 1999.
SHARES HELD IN TRUST AND TREASURY. During 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, 1998 and 1997, the assets held in the trusts consist
of cash and
A-34
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
35,578,926 and 34,313,326 shares, respectively, of BellSouth Common Stock. Of
the total shares of BellSouth Common Stock held by the trusts, 31,893,326 were
issued by BellSouth directly to the trusts out of previously unissued shares and
3,685,600 shares were acquired in open market transactions through use of the
trusts' funds.
The total cost of the shares issued by BellSouth as of the date of funding
the trusts is included in Common Stock and Paid-In Capital; however, because
these shares are not considered outstanding for financial reporting purposes,
the shares are included within Shares Held in Trust and Treasury, a 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 trusts
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 plan to repurchase shares of its Common Stock. In 1998 and 1997,
BellSouth purchased 36,170,168 and 6,827,978 shares for an aggregate of $1,261
and $157, respectively. A total of 4,294,072 and 8,249,248 shares, respectively,
were reissued under various employee benefit plans and for other purposes.
In November 1998, BellSouth announced its intent to repurchase up to $3,000
of its Common Stock during 1999.
Shares Held in Trust and Treasury, at cost, as of December 31, 1998 and 1997
are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
------------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Shares Held by Grantor Trusts........................ 35,578,926 $ 557 34,313,326 $ 519
Shares Held in Treasury.............................. 34,316,794 1,195 2,440,698 56
------------- --------- ------------- -----
Total Shares Held in Trust and Treasury.......... 69,895,720 $ 1,752 36,754,024 $ 575
------------- --------- ------------- -----
------------- --------- ------------- -----
</TABLE>
GUARANTEE OF ESOP DEBT. The amount equivalent to BellSouth's guarantee of
the amortizing notes issued by its ESOP trusts are 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.)
A-35
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS. Substantially all
nonrepresented and represented employees of BellSouth are covered by
noncontributory defined benefit pension plans, as well as postretirement health
and life insurance welfare plans. Principal plans are discussed below; other
plans are not significant individually or in the aggregate.
The pension 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 1998 and 1997
projected benefit obligations assumed 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 through 1998. During 1998, BellSouth established a cash balance plan for
represented employees based upon an initial cash balance amount, negotiated
pension band increases and interest credits effective January 1, 1999. The 1998
and 1997 represented pension obligations included the projected effect of future
bargained-for improvements. 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.
A-36
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Effective for fiscal year 1998, BellSouth adopted SFAS No. 132, "Employers
Disclosure about Pensions and Other Postretirement Benefits." The new standard
revises and combines disclosures for pensions and other postretirement benefits,
but does not change the measurement or recognition of those plans. Accrued
health care costs and prepaid life assets have been combined. The following
tables, prepared in accordance with the new standard, reconcile the changes in
obligations, plan assets and funded status at December 31:
<TABLE>
<CAPTION>
RETIREE HEALTH
PENSION BENEFITS AND LIFE
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of the year....... $ 12,335 $ 11,303 $ 3,879 $ 3,590
Service cost.......................................... 273 247 34 37
Interest cost......................................... 841 818 263 263
Amendments............................................ 670 (55) 110 --
Actuarial losses...................................... 319 910 651 200
Benefits paid......................................... (932) (877) (247) (211)
Curtailments.......................................... (4) (13) -- --
Special termination benefits.......................... 2 2 -- --
--------- --------- --------- ---------
Benefit obligation at the end of the year............. $ 13,504 $ 12,335 $ 4,690 $ 3,879
--------- --------- --------- ---------
--------- --------- --------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year........ $ 17,313 $ 15,614 $ 2,597 $ 2,157
Actual return on plan assets.......................... 1,602 2,576 224 410
Employer contribution................................. -- -- 262 234
Plan participants' contributions...................... -- -- 9 7
Benefits paid......................................... (932) (877) (247) (211)
--------- --------- --------- ---------
Fair value of plan assets at end of year.............. $ 17,983 $ 17,313 $ 2,845 $ 2,597
--------- --------- --------- ---------
--------- --------- --------- ---------
FUNDED STATUS
As of end of year..................................... $ 4,479 $ 4,978 $ (1,845) $ (1,282)
Unrecognized prior service cost....................... 380 (335) 162 86
Unrecognized net (gain) or loss....................... (4,714) (4,743) 243 (346)
Unrecognized net (asset) or obligation................ (89) (109) 740 823
--------- --------- --------- ---------
Prepaid or (accrued) benefit cost..................... $ 56 $ (209) $ (700) $ (719)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Amounts recognized in the Consolidated Balance Sheets consist of:
<TABLE>
<CAPTION>
RETIREE HEALTH
PENSION BENEFITS AND LIFE
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Prepaid benefit cost.................................. $ 526 $ 350 $ 92 $ 68
Accrued benefit liability............................. (470) (559) (792) (787)
</TABLE>
A-37
<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 pension and retiree health and life (income) cost are as
follows:
<TABLE>
<CAPTION>
PENSION BENEFITS RETIREE HEALTH AND LIFE
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.............................. $ 273 $ 247 $ 288 $ 34 $ 37 $ 47
Interest cost............................. 841 818 799 263 263 268
Expected return on plan assets............ (1,209) (1,101) (1,056) (167) (149) (136)
Amortization of prior service cost........ (40) (3) (1) 35 34 34
Amortization of (gain)/loss............... (103) (104) (23) (4) (2) 9
Amortization of transition
(asset)/obligation...................... (21) (21) (21) 82 83 83
--------- --------- --------- --------- --------- ---------
Net periodic benefit/(income) cost........ $ (259) $ (164) $ (14) $ 243 $ 266 $ 305
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</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 change in net
pension income and net retiree health and life costs 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
and postretirement cost amounts above are exclusive of curtailment effects
reflected in the work force reduction activity and do not reflect pension
curtailment gains in the amount of $9, $36 and $43 in 1998, 1997 and 1996,
respectively.
During 1998, BellSouth modified the presentation of the salary rate
assumption to reflect a more comparable weighted-average compensation increase.
The revised presentation has been included for all years and has no impact on
BellSouth's expenses or obligations. The significant actuarial assumptions at
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS RETIREE HEALTH AND LIFE
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER
31:
Discount rate........................... 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Expected return on plan assets.......... 8.25% 8.25% 8.25% 8.25% 8.25% 8.25%
Rate of compensation increase........... 5.10% 5.00% 5.00% 5.10% 5.00% 5.00%
Health care cost trend rate............. -- -- -- 8.50% 8.00% 8.50%
</TABLE>
The health care cost trend rate used to value the accumulated postretirement
obligation in 1998 and 1997 is assumed to decrease to 5% by 2003. Assumed health
care cost trend rates have a significant effect on the amounts reported for the
health care plan. A one-percentage-point change in assumed health care cost
trend rates would have the following effects as of December 31, 1998:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
----------------- -----------------
<S> <C> <C>
Effect on total of service and interest cost components......................... $ 23 $ (18)
Effect on postretirement benefit obligation..................................... $ 322 $ (253)
</TABLE>
A-38
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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. 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 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>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Compensation cost..................................... $46 $76 $58
Interest expense...................................... $28 $31 $33
Actual interest on ESOP Notes......................... $44 $50 $56
Cash contributions, excluding dividends paid to the
Trusts............................................... $80 $90 $91
Dividends paid to the Trusts, used for debt service... $42 $43 $44
Shares allocated to participants...................... 38,310,726 33,421,214 28,611,834
Shares committed to be released....................... -- -- --
Shares unallocated.................................... 25,246,722 30,136,234 34,945,614
</TABLE>
NOTE I -- STOCK COMPENSATION PLANS
At December 31, 1998, 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
A-39
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
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 cost for BellSouth's stock-based
compensation plans been determined in accordance with the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," BellSouth's Net Income and
earnings per share would have been changed to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income -- as reported.............................................. $ 3,527 $ 3,261 $ 2,863
Net income -- pro forma................................................ $ 3,488 $ 3,242 $ 2,852
Basic earnings per share -- as reported................................ $ 1.79 $ 1.64 $ 1.44
Basic earnings per share -- pro forma.................................. $ 1.77 $ 1.63 $ 1.44
Diluted earnings per share -- as reported.............................. $ 1.78 $ 1.64 $ 1.44
Diluted earnings per share -- pro forma................................ $ 1.76 $ 1.63 $ 1.43
</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 1998, 1997 and 1996 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>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Options outstanding at January 1...................... 45,122,812 37,142,784 28,575,496
Options granted....................................... 17,963,592 12,507,766 10,753,026
Options exercised..................................... (2,784,312) (4,001,490) (1,385,090)
Options forfeited..................................... (1,099,182) (526,248) (800,648)
-------------- -------------- --------------
Options outstanding at December 31.................... 59,202,910 45,122,812 37,142,784
-------------- -------------- --------------
-------------- -------------- --------------
Weighted-average option prices per common share:
Outstanding at January 1............................ $18.67 $17.06 $15.28
Granted at fair market value........................ $31.95 $22.23 $21.25
Exercised........................................... $15.35 $14.69 $13.12
Forfeited........................................... $23.47 $20.02 $16.86
Outstanding at December 31.......................... $22.77 $18.67 $17.06
Weighted-average fair value of options granted at fair
market value during the year......................... $7.22 $4.38 $3.83
Options exercisable at December 31.................... 14,733,210 12,065,032 13,046,582
Shares available for grant at December 31............. 19,504,179 19,835,596 19,821,384
</TABLE>
A-40
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Expected life (years).............................................. 5 5 7
Dividend yield..................................................... 2.40% 3.24% 3.39%
Expected volatility................................................ 21.0% 19.0% 15.4%
Risk-free interest rate............................................ 5.42% 6.22% 5.56%
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
- ----------------- ------------- -------------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$12.10-$15.08 13,766,824 4.73 years $ 14.27 7,598,268 $ 13.79
$15.13-$21.28 14,994,422 6.62 years $ 20.25 3,957,306 $ 20.12
$21.38-$29.22 12,938,740 8.09 years $ 22.27 2,305,338 $ 21.90
$30.91-$44.48 17,502,924 9.33 years $ 31.99 872,298 $ 30.96
------------- -------------
$12.10-$44.48 59,202,910 7.30 years $ 22.77 14,733,210 $ 17.77
------------- -------------
------------- -------------
</TABLE>
NOTE J -- INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
Consolidated Balance Sheets reflect the anticipated tax impact of future taxable
income or deductions implicit in the Consolidated Balance Sheets in the form of
temporary differences. These temporary differences reflect the difference
between the basis in assets and liabilities as measured in the Consolidated
Financial Statements and as measured by tax laws using enacted tax rates.
A-41
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE J -- INCOME TAXES (CONTINUED)
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................................................ $ 1,652 $ 1,619 $ 1,389
Deferred, net.......................................................... 221 252 147
Investment tax credits, net............................................ (45) (65) (77)
--------- --------- ---------
1,828 1,806 1,459
--------- --------- ---------
State:
Current................................................................ 234 289 235
Deferred, net.......................................................... 34 36 27
--------- --------- ---------
268 325 262
--------- --------- ---------
Foreign:
Current................................................................ 34 -- 1
Deferred, net.......................................................... 94 20 23
--------- --------- ---------
128 20 24
--------- --------- ---------
Total provision for income taxes..................................... $ 2,224 $ 2,151 $ 1,745
--------- --------- ---------
--------- --------- ---------
</TABLE>
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Compensation related............................................................ $ 657 $ 748
Allowance for uncollectibles.................................................... 97 94
Work force reduction charge..................................................... 53 66
Regulatory sharing accruals..................................................... 47 58
Other........................................................................... 138 186
--------- ---------
992 1,152
Valuation allowance............................................................. (81) (72)
--------- ---------
Deferred Tax Assets............................................................. 911 1,080
--------- ---------
Depreciation.................................................................... (2,297) (2,206)
Equity investments.............................................................. (530) (266)
Licenses........................................................................ (238) (199)
Issue basis accounting.......................................................... (236) (214)
Other........................................................................... (329) (259)
--------- ---------
Deferred Tax Liabilities...................................................... (3,630) (3,144)
--------- ---------
Net Deferred Tax Liability.................................................. $ (2,719) $ (2,064)
--------- ---------
--------- ---------
</TABLE>
The valuation allowance, which increased by $9 and $8 in 1998 and 1997,
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, 1998 and 1997, $(207) and $(41), respectively, were
current and $(2,512) and $(2,023), respectively, were noncurrent.
A-42
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE J -- INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory income tax rate to BellSouth's
effective tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory tax rate....................................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit............................ 3.0 3.9 3.7
Amortization of investment tax credits........................................... (0.5) (1.2) (1.7)
Equity of unconsolidated subsidiaries............................................ 0.6 1.6 1.6
Miscellaneous items, net......................................................... 0.6 0.4 (0.7)
--- --- ---
Effective tax rate............................................................. 38.7% 39.7% 37.9%
--- --- ---
--- --- ---
</TABLE>
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH PAID FOR:
Income Taxes............................................................. $ 2,021 $ 1,839 $ 1,427
--------- --------- ---------
--------- --------- ---------
Interest................................................................. $ 838 $ 759 $ 740
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1998, BellSouth contributed its ownership interests in certain domestic
wireless operations to a new joint venture. As a result of the transaction, net
assets were increased by approximately $300 with a corresponding increase to
liabilities.
In 1998 as well as in 1997, BellSouth began consolidating certain operations
which had previously been accounted for under the equity method. Such
consolidation resulted in an increase in assets of $519 and $375 (net of
decreases of $228 and $225 in Investments and Advances), respectively, and
corresponding increases in liabilities.
NOTE L -- SEGMENT INFORMATION
BellSouth Corporation has four reportable operating segments: (1) wireline
communications; (2) domestic wireless; (3) international operations; and (4)
advertising and publishing. Wireline communications include local exchange and
access services to business and residential customers in a nine-state region
located in the Southeastern United States. Domestic wireless consists primarily
of cellular and PCS businesses throughout BellSouth's nine-state wireline
service region and in certain other markets. International operations include a
variety of communications services, mainly wireless telephony, in areas within
nine countries in Latin America, as well as China, Denmark, Germany, India and
Israel. Advertising and publishing businesses publish, print and sell
advertising in alphabetical and classified telephone directories. The operations
of all other businesses which fall below the reporting thresholds are included
in the "Other" segment below, and includes entities providing Internet access,
wireless data, entertainment and various start-up operations.
A-43
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE L -- SEGMENT INFORMATION (CONTINUED)
BellSouth's reportable segments reflect strategic business units that offer
different products and services and/or serve different customers. They are
managed differently because each business requires different technologies and/or
marketing strategies. BellSouth evaluates performance based on the net income,
exclusive of certain intercompany and certain nonoperating items of each
strategic business unit.
The accounting policies underlying the reported segment data are the same as
those described in the summary of significant accounting policies (see Note A).
Generally, BellSouth accounts for intersegment sales and transfers as if the
sales and transfers were to third parties at current market prices. Corporate
and Eliminations includes intercompany eliminations as well as certain
nonoperating items.
The follow table provides information for each operating segment:
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
WIRELINE DOMESTIC INTERNATIONAL ADVERTISING TOTAL CORPORATE AND
COMMUNICATIONS WIRELESS OPERATIONS AND PUBLISHING OTHER SEGMENTS ELIMINATIONS
------------------ ----------- --------------- --------------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues:
External revenues... $ 16,401 $ 2,723 $ 1,995 $ 1,891 $ 113 $ 23,123 $ --
Intersegment
revenues.......... 221 7 -- -- 227 455 (455)
-------- ----------- ------- ------- --------- ----------- -------
Total Operating
Revenues........ 16,622 2,730 1,995 1,891 340 23,578 (455)
-------- ----------- ------- ------- --------- ----------- -------
Operating Expenses:
Depreciation &
amortization...... 3,363 513 357 25 94 4,352 5
Other operating
expense........... 8,387 1,843 1,404 1,017 607 13,258 (396)
-------- ----------- ------- ------- --------- ----------- -------
Total Operating
Expenses........ 11,750 2,356 1,761 1,042 701 17,610 (391)
-------- ----------- ------- ------- --------- ----------- -------
Operating Income...... 4,872 374 234 849 (361) 5,968 (64)
Interest Expense...... 551 84 85 7 26 753 84
Gain on Sale of
Operations.......... -- -- -- -- -- -- 335
Other Income, net:
Interest income..... 3 17 27 -- 19 66 247
Equity in earnings
(losses) of
unconsolidated
subsidiaries...... -- 165 (69) (4) -- 92 --
Other nonoperating
items............. -- (5) (50) 9 46 -- (56)
-------- ----------- ------- ------- --------- ----------- -------
Income Before Income
Taxes............... 4,324 467 57 847 (322) 5,373 378
Provision for (Benefit
from) Income
Taxes............... 1,573 184 119 317 (112) 2,081 143
-------- ----------- ------- ------- --------- ----------- -------
Segment Net Income.... $ 2,751 $ 283 $ (62) $ 530 $ (210) $ 3,292 $ 235
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Total Assets.......... $ 23,916 $ 6,540 $ 4,449 $ 1,288 $ 1,273 $ 37,466 $ 1,944
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Capital Expenditures.. $ 3,512 $ 692 $ 710 $ 36 $ 253 $ 5,203 $ 9
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Equity Method
Investments......... $ -- $ 1,610 $ 521 $ -- $ 61 $ 2,192 $ (44)
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
<CAPTION>
CONSOLIDATED
---------------
<S> <C>
Operating Revenues:
External revenues... $ 23,123
Intersegment
revenues.......... --
---------------
Total Operating
Revenues........ 23,123
---------------
Operating Expenses:
Depreciation &
amortization...... 4,357
Other operating
expense........... 12,862
---------------
Total Operating
Expenses........ 17,219
---------------
Operating Income...... 5,904
Interest Expense...... 837
Gain on Sale of
Operations.......... 335
Other Income, net:
Interest income..... 313
Equity in earnings
(losses) of
unconsolidated
subsidiaries...... 92
Other nonoperating
items............. (56)
---------------
Income Before Income
Taxes............... 5,751
Provision for (Benefit
from) Income
Taxes............... 2,224
---------------
Segment Net Income.... $ 3,527
---------------
---------------
Total Assets.......... $ 39,410
---------------
---------------
Capital Expenditures.. $ 5,212
---------------
---------------
Equity Method
Investments......... $ 2,148
---------------
---------------
</TABLE>
A-44
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE L -- SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
WIRELINE DOMESTIC INTERNATIONAL ADVERTISING TOTAL CORPORATE AND
COMMUNICATIONS WIRELESS OPERATIONS AND PUBLISHING OTHER SEGMENTS ELIMINATIONS
------------------ ----------- --------------- --------------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues:
External revenues... $ 15,178 $ 2,581 $ 948 $ 1,837 $ 17 $ 20,561 $ --
Intersegment
revenues.......... 168 8 -- 7 185 368 (368)
-------- ----------- ------- ------- --------- ----------- -------
Total Operating
Revenues........ 15,346 2,589 948 1,844 202 20,929 (368)
-------- ----------- ------- ------- --------- ----------- -------
Operating Expenses:
Depreciation &
amortization...... 3,332 446 126 22 33 3,959 5
Other operating
expense........... 7,826 1,731 758 967 312 11,594 (373)
-------- ----------- ------- ------- --------- ----------- -------
Total Operating
Expenses........ 11,158 2,177 884 989 345 15,553 (368)
-------- ----------- ------- ------- --------- ----------- -------
Operating Income...... 4,188 412 64 855 (143) 5,376 --
Interest Expense...... 534 59 37 5 33 668 93
Gain on Sale of
Operations.......... -- -- -- -- -- -- 787
Other income, net:
Interest income..... 4 13 15 -- 59 91 101
Equity in earnings
(losses) of
unconsolidated
subsidiaries...... -- 164 (220) 11 (197) (242) --
Other nonoperating
items............. 37 33 (4) 2 38 106 (37)
-------- ----------- ------- ------- --------- ----------- -------
Income Before Income
Taxes and
Extraordinary
Losses.............. 3,695 563 (182) 863 (276) 4,663 758
Provision for (Benefit
from) Income
Taxes............... 1,372 230 5 320 (94) 1,833 318
Extraordinary Loss on
Early Extinguishment
of Debt, net of
tax................. (9) -- -- -- -- (9) --
-------- ----------- ------- ------- --------- ----------- -------
Segment Net Income.... $ 2,314 $ 333 $ (187) $ 543 $ (182) $ 2,821 $ 440
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Total Assets.......... $ 23,226 $ 5,859 $ 3,278 $ 1,262 $ 1,326 $ 34,951 $ 1,350
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Capital Expenditures.. $ 3,440 $ 823 $ 412 $ 21 $ 158 $ 4,854 $ 4
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Equity Method
Investments......... $ -- $ 1,338 $ 693 $ -- $ 112 $ 2,143 $ (136)
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
<CAPTION>
CONSOLIDATED
---------------
<S> <C>
Operating Revenues:
External revenues... $ 20,561
Intersegment
revenues.......... --
---------------
Total Operating
Revenues........ 20,561
---------------
Operating Expenses:
Depreciation &
amortization...... 3,964
Other operating
expense........... 11,221
---------------
Total Operating
Expenses........ 15,185
---------------
Operating Income...... 5,376
Interest Expense...... 761
Gain on Sale of
Operations.......... 787
Other income, net:
Interest income..... 192
Equity in earnings
(losses) of
unconsolidated
subsidiaries...... (242)
Other nonoperating
items............. 69
---------------
Income Before Income
Taxes and
Extraordinary
Losses.............. 5,421
Provision for (Benefit
from) Income
Taxes............... 2,151
Extraordinary Loss on
Early Extinguishment
of Debt, net of
tax................. (9)
---------------
Segment Net Income.... $ 3,261
---------------
---------------
Total Assets.......... $ 36,301
---------------
---------------
Capital Expenditures.. $ 4,858
---------------
---------------
Equity Method
Investments......... $ 2,007
---------------
---------------
</TABLE>
A-45
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE L -- SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
WIRELINE DOMESTIC INTERNATIONAL ADVERTISING TOTAL CORPORATE AND
COMMUNICATIONS WIRELESS OPERATIONS AND PUBLISHING OTHER SEGMENTS ELIMINATIONS
------------------ ----------- --------------- --------------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues:
External revenues... $ 14,624 $ 2,204 $ 547 $ 1,651 $ 14 $ 19,040 $ --
Intersegment
revenues.......... 152 3 7 -- 123 285 (285)
-------- ----------- ------- ------- --------- ----------- -------
Total Operating
Revenues........ 14,776 2,207 554 1,651 137 19,325 (285)
-------- ----------- ------- ------- --------- ----------- -------
Operating Expenses:
Depreciation &
amortization...... 3,255 324 98 21 16 3,714 5
Other operating
expense........... 7,814 1,497 481 800 187 10,779 (237)
-------- ----------- ------- ------- --------- ----------- -------
Total Operating
Expenses........ 11,069 1,821 579 821 203 14,493 (232)
-------- ----------- ------- ------- --------- ----------- -------
Operating Income...... 3,707 386 (25) 830 (66) 4,832 (53)
Interest Expense...... 552 41 28 3 -- 624 97
Gain on Sale of
Operations.......... -- -- -- -- -- -- 442
Other income, net:
Interest income..... 8 4 19 1 30 62 100
Equity in earnings
(losses) of
unconsolidated
subsidiaries...... -- 195 (163) 23 (131) (76) --
Other nonoperating
items............. 12 (22) 11 (2) (12) (13) 35
-------- ----------- ------- ------- --------- ----------- -------
Income Before Income
Taxes............... 3,175 522 (186) 849 (179) 4,181 427
Provision for (Benefit
from) Income
Taxes............... 1,170 219 4 323 (63) 1,653 92
-------- ----------- ------- ------- --------- ----------- -------
Segment Net Income.... $ 2,005 $ 303 $ (190) $ 526 $ (116) $ 2,528 $ 335
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Total Assets.......... $ 23,038 $ 5,294 $ 1,369 $ 1,226 $ 767 $ 31,694 $ 874
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Capital Expenditures.. $ 3,206 $ 985 $ 177 $ 28 $ 55 $ 4,451 $ 4
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
Equity Method
Investments......... $ -- $ 1,355 $ 294 $ 46 $ 136 $ 1,831 $ (155)
-------- ----------- ------- ------- --------- ----------- -------
-------- ----------- ------- ------- --------- ----------- -------
<CAPTION>
CONSOLIDATED
---------------
<S> <C>
Operating Revenues:
External revenues... $ 19,040
Intersegment
revenues.......... --
---------------
Total Operating
Revenues........ 19,040
---------------
Operating Expenses:
Depreciation &
amortization...... 3,719
Other operating
expense........... 10,542
---------------
Total Operating
Expenses........ 14,261
---------------
Operating Income...... 4,779
Interest Expense...... 721
Gain on Sale of
Operations.......... 442
Other income, net:
Interest income..... 162
Equity in earnings
(losses) of
unconsolidated
subsidiaries...... (76)
Other nonoperating
items............. 22
---------------
Income Before Income
Taxes............... 4,608
Provision for (Benefit
from) Income
Taxes............... 1,745
---------------
Segment Net Income.... $ 2,863
---------------
---------------
Total Assets.......... $ 32,568
---------------
---------------
Capital Expenditures.. $ 4,455
---------------
---------------
Equity Method
Investments......... $ 1,676
---------------
---------------
</TABLE>
Net revenues to external customers are based on the location of the
customer. Geographic information as of December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
UNITED
STATES INTERNATIONAL TOTAL
--------- ------------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenues.................................................................. $ 21,128 $ 1,995 $ 23,123
Long-lived assets......................................................... 27,082 3,622 30,704
YEAR ENDED DECEMBER 31, 1997
Revenues.................................................................. $ 19,613 $ 948 $ 20,561
Long-lived assets......................................................... 25,948 2,236 28,184
YEAR ENDED DECEMBER 31, 1996
Revenues.................................................................. $ 18,493 $ 547 $ 19,040
Long-lived assets......................................................... 25,102 1,168 26,270
</TABLE>
A-46
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE M -- 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 long-term debt is estimated based on the closing market
prices for each issue at December 31, 1998 and 1997. Fair value estimates for
the Guarantee of ESOP Debt, Capital Funding long-term debt, 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
ESTIMATED ESTIMATED
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS
Long-Term Debt:
BellSouth Telecommunications.............................. $ 6,518 $ 6,771 $ 6,089 $ 6,142
Capital Funding........................................... 1,469 1,523 1,290 1,324
Guarantee of ESOP Debt.................................... 467 519 534 584
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Interest Rate Swaps......................................... -- (13) -- (6)
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 or contract 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, 1998,
the net currency swap receivable, which equals the fair value of the swap, was
$7 and the related net interest receivable was $7, both of which are included in
accounts receivable in the Consolidated Balance Sheets at December 31, 1998.
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, 1998 and 1997,
BellSouth was a party to various interest rate swaps with an aggregate notional
amount of $920. Under swap agreements, BellSouth paid fixed rates averaging
6.11% and 7.13% at December 31, 1998 and 1997 and received variable rates
averaging 5.54% and 5.69% at December 31, 1998 and 1997, respectively. BellSouth
also paid variable rates averaging 5.69% and
A-47
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE M -- FINANCIAL INSTRUMENTS (CONTINUED)
received fixed rates averaging 6.00% at December 31, 1998. The swaps mature at
dates ranging from 2001 to 2002.
OTHER. BellSouth has also issued letters of credit and financial guarantees
which approximate $523 at December 31, 1998. Of this total, $360 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 $422 (705 million German Marks) at December 31, 1998. 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 long distance carriers, are limited due to the composition
of the customer base, which includes a large number of individuals and
businesses. At December 31, 1998 and 1997, approximately $472 and $485,
respectively, of trade accounts receivable were from long distance carriers.
NOTE N -- COMMITMENTS AND CONTINGENCIES
LEASES. BellSouth has entered into operating leases for facilities and
equipment used in operations. Rental expense under operating leases was $242,
$273 and $269 for 1998, 1997 and 1996, 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, 1998:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rentals......................... $212 $197 $181 $168 $148 $663 $1,569
---- ---- ---- ---- ---- ----- ------
---- ---- ---- ---- ---- ----- ------
</TABLE>
OUTSIDE PLANT. BellSouth currently self-insures all of its outside plant
against casualty losses. The net book value of outside plant was $7,234 and
$7,408 at December 31, 1998 and 1997, 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
$400 to $625 annually over the next nine years.
RECIPROCAL COMPENSATION. Following the enactment of the Telecommunications
Act of 1996, BellSouth Telecommunications and various competitive local exchange
carriers (CLECs) entered into interconnection agreements providing for, among
other things, the payment of reciprocal compensation for local calls initiated
by the customers of one carrier that are completed on the network of the other
carrier. Numerous CLECs claim entitlement from BellSouth Telecommunications for
compensation associated with dial-up calls originating on BellSouth
Telecommunications' network and connecting with Internet service providers
(ISPs) served by the CLECs' networks. BellSouth Telecommunications has
A-48
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE N -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
maintained that, because the Federal Communications Commission (FCC) has
previously determined that Internet calls over dedicated lines are
jurisdictionally interstate, dial-up calls to ISPs are not local calls for which
terminating compensation is due under the interconnection agreements. The courts
and state commissions that have considered the matter have ruled that such calls
invoke the reciprocal compensation obligation. The FCC has indicated that it
would release an order in which it would address the jurisdictional nature of
switched ISP traffic. BellSouth Telecommunications believes that it has a good
basis for its claims that such reciprocal compensation is not owed to the CLECs.
However, at December 31, 1998, BellSouth Telecommunications' exposure related to
unrecorded amounts withheld from CLECs was approximately $135, including accrued
interest.
OTHER 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 predivestiture events involving environmental
liabilities, rates, taxes, contracts and torts. Certain contingent liabilities
for predivestiture 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 results of operations, financial position or cash flows.
NOTE O -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the following summary of quarterly financial information, all adjustments
necessary for a fair presentation of each period were included. The results for
fourth quarter 1998 include a pretax gain of $180 ($110 after tax) on the sale
of BellSouth's operation in New Zealand as well as additional income of $102
($62 after tax) which resulted from the early repayment of a loan. First quarter
1998 results include a pretax gain of $155 ($96 after tax) resulting from
additional proceeds from the sale of ITT World Directories. The results for
third quarter 1997 include pretax gains on sales of operations of $787, which
increased net income by $480.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1998
Operating Revenues........................................... $ 5,426 $ 5,664 $ 5,865 $ 6,168
Operating Income............................................. $ 1,454 $ 1,434 $ 1,463 $ 1,553
Net Income................................................... $ 892 $ 818 $ 814 $ 1,003
Earnings Per Share--Basic and Diluted(a)..................... $ .45 $ .41 $ .41 $ .51
1997
Operating Revenues........................................... $ 4,845 $ 4,923 $ 5,193 $ 5,600
Operating Income............................................. $ 1,353 $ 1,224 $ 1,346 $ 1,453
Net Income................................................... $ 693 $ 654 $ 1,185 $ 729
Earnings Per Share--Basic and Diluted(a)..................... $ .35 $ .33 $ .60 $ .37
</TABLE>
- --------------
(a) Due to rounding, the sum of quarterly EPS amounts may not agree to
year-to-date EPS amounts.
A-49
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE P -- SUBSEQUENT EVENT
BellSouth holds equity interests in two wireless communications consortia in
Brazil, which are accounted for under the equity method of accounting. At
December 31, 1998, the Brazilian operations had incurred approximately $2,300 in
U.S. Dollar-denominated liabilities. During January 1999 the Brazilian
government allowed its currency to trade freely against other currencies
resulting in an immediate devaluation of the Brazilian Real. For January 1999,
the latest internal financial reporting period, BellSouth will recognize a
foreign exchange rate loss resulting from the devaluation of approximately $364
through recording its share of equity in earnings of its Brazilian equity
investments. The aforementioned exchange loss is subject to further upward or
downward adjustment based on fluctuations in the U.S. Dollar/Brazilian Real
exchange rate.
A-50
<PAGE>
BELLSOUTH CORPORATION
MARKET AND DIVIDEND DATA
The principal market for trading in BellSouth Common Stock is the New York
Stock Exchange, Inc. (NYSE). BellSouth Common Stock is also listed on the
Boston, Chicago, Pacific and Philadelphia exchanges in the United States and the
London, Frankfurt, Amsterdam and Swiss exchanges. The ticker symbol for
BellSouth Common Stock is BLS. At February 1, 1999, there were 978,796 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
December 1998. 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>
1996
First Quarter................................................................... $22 15/16 $18 $ .18
Second Quarter.................................................................. 21 3/16 17 5/8 .18
Third Quarter................................................................... 21 11/16 17 5/8 .18
Fourth Quarter.................................................................. 22 18 1/8 .18
1997
First Quarter................................................................... $23 13/16 $19 1/16 $ .18
Second Quarter.................................................................. 24 5/16 19 11/16 .18
Third Quarter................................................................... 24 1/2 21 21/32 .18
Fourth Quarter.................................................................. 29 1/16 22 5/8 .18
1998
First Quarter................................................................... $34 7/32 $27 1/16 $ .18
Second Quarter.................................................................. 34 3/4 30 1/2 .18
Third Quarter................................................................... 39 1/16 32 5/32 .18
Fourth Quarter.................................................................. 50 36 5/8 .19
</TABLE>
STOCK TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is BellSouth's stock transfer agent and
registrar.
A-51
<PAGE>
BELLSOUTH CORPORATION
1155 PEACHTREE STREET, N.E.
ATLANTA, GA 30309-3610
LOGO
PRINTED ON RECYCLED PAPER
[LOGO]
<PAGE>
Please Mark your
Votes as indicated /x/
in this example
<TABLE>
<CAPTION>
DIRECTORS' PROPOSALS--DIRECTORS RECOMMEND A VOTE "FOR" SHAREHOLDER PROPOSALS--
- ---------------------------------------------------------------------------------- DIRECTORS RECOMMEND A VOTE "AGAINST"
----------------------------------------------
WITHHOLD FOR ALL
FOR AUTHORITY EXCEPT FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
<S> <C> <C>
Elect all 2. Ratification 3. B.W. Carmichael:
Director Auditors (p. 13) Executive
Nominees Compensation (p. 13)
(p. 4)
4. M. Carmichael:
Severance
Agreements (p. 14)
</TABLE>
Exceptions:
To vote for all nominees, mark the "For" box. To withhold voting for all
nominees, mark the "Withhold Authority" box. To withhold voting for a
particular nominee, mark the "For All Except" box and enter name(s) of the
exception(s) in the space provided.
Discontinue mailing of
duplicate Annual Report
Signature(s) Date
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
Detach here from proxy voting card
[LOGO]
ADMISSION TICKET
- ----------------
This ticket entitles you, the
shareholder, and one guest to
attend the 1999 Annual Meeting.
ANNUAL MEETING OF BELLSOUTH SHAREHOLDERS
MONDAY, APRIL 26, 1999
8:00 A.M.--DOORS OPEN
9:00 A.M.--MEETING BEGINS
The Cobb Galleria Centre Ballroom--Two Galleria Parkway--Atlanta, Georgia
See reverse side for map of area and directions.
FOR WHEELCHAIR AND HEARING IMPAIRED SEATING, PLEASE SEE A HOST/
HOSTESS FOR ASSISTANCE.
<PAGE>
[LOGO]
PROXY/VOTING INSTRUCTION CARD
This proxy is solicited on behalf of the Board of Directors for the BellSouth
Annual Meeting of Shareholders on April 26, 1999.
The undersigned hereby appoints F. Duane Ackerman, C. Dixon Spangler, Jr.,
and Ronald A. Terry, and each of them, proxies with full power of
substitution, to vote all shares of BellSouth stock of the undersigned at the
Annual Meeting of Shareholders to be held at 9:00 A.M. EDT, April 26, 1999 at
the Cobb Galleria Centre Ballroom, Two Galleria Parkway, Atlanta, Georgia,
and at any adjournment thereof, upon all subjects that may properly come
before the meeting, including the matters described in the proxy statement
furnished herewith, subject to any directions indicated on the reverse side
of this card. If no directions are given, the proxies will vote for the
election of all listed nominees, in accord with the Directors'
recommendations on the other matters listed on the reverse side of this card,
and at their discretion on any other matter that may properly come before the
meeting.
Your vote for the election of Directors for the terms set forth in the proxy
statement may be indicated on the reverse side of this card. Nominees are F.
Duane Ackerman, Rueben V. Anderson, Kathleen F. Feldstein, John G. Medlin,
Jr. and C. Dixon Spangler, Jr.
This card also provides voting instructions for shares held in the BellSouth
Direct Stock Purchase and Dividend Reinvestment Plan and, if registrations
are identical, shares held in the various employee stock purchase and benefit
plans.
Your vote is important. Please sign and date on the reverse and return
promptly in the enclosed envelope or otherwise to BellSouth Corporation,
Church Street Station, P.O. Box 1456, New York, New York 10277-1456, so that
your shares can be represented at the meeting.
- -------------------------------------------------------------------------------
Detach here
ANNUAL MEETING [MAP] [MAP]
OF BELLSOUTH
SHAREHOLDERS
MONDAY
APRIL 26, 1999
9:00 A.M. EDT
DIRECTIONS TO THE COBB GALLERIA CENTRE, TWO GALLERIA PARKWAY, ATLANTA, GEORGIA
Northbound on I-75: Take exit 109B (I-285 Westbound); take Cobb Pkwy./U.S.
Hwy. 41 exit and turn left at traffic light, southbound onto Cobb Pkwy.;
continue under overpass and make a left turn at second traffic light onto
Galleria Drive.
Southbound on I-75: Take exit 109 (I-285 Westbound); continue west on I-285
and take the Cobb Pkwy./U.S. Hwy. 41 exit and turn left at traffic light,
southbound onto Cobb Pkwy.; continue under overpass and make a left turn at
second traffic light onto Galleria Drive.
Westbound on I-285: Take exit 14 (Cobb Pkwy./U.S. Hwy. 41) and turn left at
traffic light, southbound onto Cobb Pkwy.; continue under overpass and make a
left turn at second traffic light onto Galleria Drive.
Eastbound on I-285: Take exit 13 (Cobb Pkwy./U.S. Hwy. 41) and turn right onto
Cobb Pkwy. headed south; turn left at next traffic light onto Galleria Drive.
