SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8607 BELLSOUTH CORPORATION (Exact name of registrant as specified in its charter) Georgia 58-1533433 (State of Incorporation) (I.R.S. Employer Identification Number) 1155 Peachtree Street, N. E., Atlanta, Georgia 30309-3610 (Address of principal executive offices) (Zip Code) Registrant's telephone number 404 249-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ At April 30, 1998, a total of 990,094,691 common shares was outstanding. Table of Contents Item Page Part I 1. Financial Statements 3 Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Consolidated Statements of Shareholders' Equity and Comprehensive Income 6 Notes to Consolidated Financial Statements 8 Selected Operating Data 10 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 12 Results of Operations 13 Volumes of Business 13 Operating Revenues 15 Operating Expenses 17 Other Income Statement Items 18 Financial Condition 19 Regulatory Developments and Competition 20 Federal Developments 20 State Developments 20 Other Matters 20 Safe Harbor Statement 21 Part II 6. Exhibits and Reports on Form 8-K 22 PART I - FINANCIAL INFORMATION BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months Ended March 31, 1998 1997 Operating Revenues: Network and related services: Local service $ 2,262 $ 2,104 Interstate access 945 917 Intrastate access 206 218 Toll 175 174 Wireless communications 1,116 765 Directory advertising and publishing 362 361 Other services 360 306 Total Operating Revenues 5,426 4,845 Operating Expenses: Cost of services and products 1,667 1,422 Depreciation and amortization 1,043 960 Selling, general and administrative 1,262 1,110 Total Operating Expenses 3,972 3,492 Operating Income 1,454 1,353 Interest Expense 190 183 Gain on Sale of Operations 155 -- Other Income (Expense), net 28 (7) Income Before Income Taxes 1,447 1,163 Provision for Income Taxes 555 470 Net Income $ 892 $ 693 Weighted-Average Common Shares Outstanding: Basic 991 992 Diluted 997 994 Dividends Declared Per Common Share $ .36 $ .36 Earnings Per Share: Basic $ .90 $ .70 Diluted $ .89 $ .70 The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts) March 31, December 31, 1998 1997 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 2,120 $ 2,570 Temporary cash investments 9 17 Accounts receivable, net of allowance for uncollectibles of $253 and $246 4,433 4,750 Material and supplies 421 393 Other current assets 533 387 Total Current Assets 7,516 8,117 Investments and Advances 2,896 2,675 Property, Plant and Equipment: Property, plant and equipment 55,283 53,828 Accumulated depreciation 31,933 30,967 Property, Plant and Equipment, net 23,350 22,861 Deferred Charges and Other Assets 754 702 Intangible Assets, net 2,427 1,946 Total Assets $ 36,943 $ 36,301 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year $ 3,302 $ 3,706 Accounts payable 1,619 1,825 Other current liabilities 3,620 3,252 Total Current Liabilities 8,541 8,783 Long-Term Debt 7,673 7,348 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,016 2,023 Unamortized investment tax credits 201 213 Other liabilities and deferred credits 2,820 2,769 Total Deferred Credits and Other Liabilities 5,037 5,005 Shareholders' Equity: Common stock, $1 par value 1,010 1,010 Paid-in capital 7,706 7,714 Retained earnings 7,919 7,382 Accumulated other comprehensive income 40 36 Shares held in trust and treasury (614) (575) Guarantee of ESOP debt (369) (402) Total Shareholders' Equity 15,692 15,165 Total Liabilities and Shareholders' Equity $ 36,943 $ 36,301 The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months Ended March 31, 1998 1997 Cash Flows from Operating Activities: Net income $ 892 $ 693 Adjustments to net income: Depreciation and amortization 1,043 960 Gain on sale of operations (155) - Net losses (earnings) and dividends from unconsolidated affiliates 37 69 Provision for uncollectibles 76 66 Deferred income taxes and unamortized investment tax credits (16) (10) Net change in: Accounts receivable and other current assets 88 (18) Accounts payable and other current liabilities 30 178 Deferred charges and other assets (9) (70) Other liabilities and deferred credits 46 (10) Other reconciling items, net 24 16 Net cash provided by operating activities 2,056 1,874 Cash Flows from Investing Activities: Capital expenditures (1,226) (871) Purchases of licenses and other intangible assets (105) (24) Proceeds from sale of operations 155 - Proceeds from disposition of short-term investments 19 63 Purchases of short-term investments (11) (55) Investments in and advances to unconsolidated affiliates (483) (290) Other investing activities, net 58 11 Net cash used for investing activities (1,593) (1,166) Cash Flows from Financing Activities: Net repayments of short-term borrowings (499) (626) Proceeds from long-term debt 231 28 Repayments of long-term debt (199) (9) Dividends paid (357) (357) Other financing activities, net (89) 24 Net cash used for financing activities (913) (940) Net Decrease in Cash and Cash Equivalents (450) (232) Cash and Cash Equivalents at Beginning of Period 2,570 1,178 Cash and Cash Equivalents at End of Period $ 2,120 $ 946 The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (In Millions) <TABLE> <CAPTION> For the Three Months Ended March 31, 1998 -------------------------------------------------------------------------------------- Number of Shares Amount ------------ ----------------------------------------------------------------------- Shares Shares Held Accum. Held In Other In Guarantee Trust Compre- Trust of Common and Common Paid-in Retained hensive and ESOP Stock Treasury Stock Capital Earnings Income Treasury Debt Total (a) (a) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1,010 (18) $1,010 $7,714 $7,382 $36 $(575) $(402) $15,165 1997 Net income 892 892 Other compre- hensive income, net of tax: Foreign currency translation 4 4 adjustment Total compre- hensive income 896 Dividends (357) (357) declared Shares issued for: Employee benefit (13) 32 19 plans Acquisitions 1 5 33 38 Purchase of treasury stock (2) (80) (80) Purchase of stock for grantor trust (24) (24) ESOP activities and related tax 2 33 35 benefit ----- ---- ------ ------ ------ ---- -------- ------- ------- Balance at March 31, 1998 1,010 (19) $1,010 $7,706 $7,919 $40 $(614) $(369) $15,692 ===== ==== ====== ====== ====== ==== ======== ====== ======= </TABLE> (a) Such shares are not considered to be outstanding for financial reporting purposes. As of March 31, 1998 there were approximately 17.6 million shares held in trust and 1.6 million treasury shares held by the company. The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (In Millions) <TABLE> <CAPTION> For the Three Months Ended March 31, 1997 --------------------------------------------------------------------------------- Number of Shares Amount ----------------- ----------------------------------------------------------------- Shares Shares Held Accum. Held In Other In Guarantee Trust Compre- Trust of Common and Common Paid-in Retained hensive and ESOP Stock Treasury Stock Capital Earnings Income Treasury Debt Total (a) (a) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1,009 (18) $1,009 $7,672 $5,541 $25 $(532) $(466) $13,249 1996 Net income 693 693 Other compre- hensive income, net of tax: Foreign currency translation 10 10 adjustment Total compre- hensive income 703 Dividends (357) (357) declared Shares issued for Employee benefit plans 1 (9) 33 24 ESOP activities and related tax benefit 2 32 34 ----- ---- ----- ------ ------ --- ------ ----- ------- Balance at March 31, 1997 1,009 (17) $1,009 $7,663 $5,879 $35 $(499) $(434) $13,653 ===== ==== ====== ======= ====== === ====== ====== ======= </TABLE> (a) Such shares are not considered to be outstanding for financial reporting purposes. As of March 31, 1997 there were approximately 15.8 million shares held in trust and 1.1 million treasury shares held by the company. The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In Millions, Except Per Share Amounts) Note A -- Preparation of Interim Financial Statements The consolidated financial statements of BellSouth Corporation (BellSouth) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Certain amounts have been reclassified from previous presentations. These consolidated 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. In the opinion of BellSouth, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles have been either condensed or omitted pursuant to SEC rules and regulations. BellSouth believes, however, that the disclosures made are adequate for a fair presentation of results of operations, financial position and cash flows. Beginning in 1998, BellSouth adopted Statement of Financial Accounting Standards (SFAS) No. 130 - "Comprehensive Income". The calculation of comprehensive income is included in the accompanying Consolidated Statements of Shareholders' Equity and Comprehensive Income. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in BellSouth's latest annual report on Form 10-K. Note B -- Earnings per Share In 1997, BellSouth adopted SFAS No. 128 - "Earnings per Share," which requires the presentation of both basic and diluted earnings per share. Basic earnings per share is computed based on the weighted- average number of common shares outstanding during each year. Diluted earnings per share is based on the sum of the weighted-average number of common shares outstanding plus common stock equivalents arising out of employee stock options and benefit plans. Earnings per share information for the prior period has been restated to conform to the requirements of the standard. Common stock equivalents included in the calculation of diluted earnings per share were approximately 6 million and 2 million for the three-month periods ended March 31, 1998 and 1997, respectively. BellSouth's earnings, used for per share calculations, are the same for both the basic and diluted methods. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) Note C -- Supplemental Cash Flow Information For the Three Months Ended March 31, 1998 1997 Cash Paid For: Income taxes $ 45 $ 59 Interest $ 149 $ 133 In January 1998, 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 (net of a $228 decrease in investments and advances) and a corresponding increase in liabilities. Note D -- Gain on Sale of Operations In July 1997, BellSouth sold its 20% interest in ITT World Directories (ITTWD) to ITT Corporation (ITT). The sale agreement contained certain provisions which 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 which resulted in a pretax gain of $155 ($96 after tax) in the first quarter of 1998. BELLSOUTH CORPORATION SELECTED OPERATING DATA (Unaudited) Percent Change 1998 vs. 1997 vs. 1998 1997 1996 Network Access Lines in Service at March 31 (Thousands)(a): By Type: Residence 16,127 4.8% 3.6% Business 7,148 4.3 7.6 Other 273 2.6 3.5 Total Access Lines 23,548 4.6 4.8 By State: Florida 6,333 5.4 5.4 Georgia 4,057 5.6 6.0 Tennessee 2,653 2.7 4.4 North Carolina 2,370 5.0 5.7 Louisiana 2,305 4.3 3.5 Alabama 1,950 3.5 3.6 South Carolina 1,427 4.5 4.0 Mississippi 1,262 3.9 3.2 Kentucky 1,191 3.4 3.3 Total Access Lines 23,548 4.6 4.8 Percent Change for the Periods Ended 1998 vs. 1997 vs. 1998 1997 1996 Access Minutes of Use (Millions)(a)(b): Interstate 18,998 7.2% 6.4% Intrastate 6,084 9.6 8.4 Total Access Minutes of Use 25,082 7.8 6.9 Toll Messages (Millions)(a) 201 (12.4) (18.1) (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) Minutes of Use are classified as either interstate or intrastate based on the percentage interstate usage factor. This factor is updated periodically. BELLSOUTH CORPORATION SELECTED OPERATING DATA (Continued) (Unaudited) Cellular and Personal Communications Service (PCS) customers served at March 31(Equity basis)(Thousands)(c): Percent Change 1998 vs. 1997 vs. 1998 1997 1996 Domestic Cellular 4,230 12.4% 23.6% International Cellular(d) 2,098 39.8% 75.6% PCS 105 113.4% -- (c) Includes customers served based on BellSouth's ownership percentage in all markets served. (d) Excluding the customers of Optus Communications, which was sold in July 1997, from all periods, the growth rates would have been 83.2% for 1998 compared to 1997 and 92.8% for 1997 compared to 1996. For the Three Months Ended March 31, 1998 Ratio of Earnings to Fixed Charges (e) 7.5 (e) For the purpose of this ratio: (i) earnings have been calculated by adding income before income taxes, gross interest expense, such portion of rental expense representative of the interest factor on such rentals and equity in losses from less-than-50%-owned investments (accounted for under the equity method of accounting) less the excess of earnings over distributions from less-than-50%-owned investments (accounted for under the equity method of accounting); (ii) fixed charges are comprised of gross interest expense and such portion of rental expense representative of the interest factor on such rentals. BELLSOUTH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in Millions, Except Per Share Amounts) Management's Discussion and Analysis of Results of Operations and Financial Condition (MD&A) should be read in conjunction with MD&A in BellSouth Corporation's (BellSouth) latest annual report on Form 10-K. BellSouth is a holding company headquartered in Atlanta, Georgia whose operating telephone company subsidiary, BellSouth Telecommunications, Inc. (BellSouth Telecommunications), serves, in the aggregate, approximately two-thirds of the population and one-half of the territory within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. BellSouth Telecommunications primarily provides local exchange and toll communications services within geographic areas, called Local Access and Transport Areas (LATAs), and provides network access services to enable interLATA and intraLATA communications using the long-distance facilities of interexchange carriers. Through subsidiaries, other telecommunications services and products are provided primarily within the nine-state BellSouth Telecommunications region. BellSouth Enterprises, Inc. (BellSouth Enterprises), another wholly-owned subsidiary, owns businesses providing primarily wireless and international communications services and advertising and publishing products. Approximately 66% and 70% of BellSouth's Total Operating Revenues for each of the three-month periods ended March 31, 1998 and 1997 were from wireline services provided by BellSouth Telecommunications. Charges for local, access and toll services for the three-month period ended March 31, 1998 accounted for approximately 63%, 32% and 5%, respectively, of the wireline revenues discussed above. Revenues from wireless communications services and directory advertising and publishing services accounted for approximately 21% and 7%, respectively, of Total Operating Revenues for the three months ended March 31, 1998. The remainder of such revenues was derived principally from sales and maintenance of customer premises equipment and other nonregulated services provided by BellSouth Telecommunications. RESULTS OF OPERATIONS For the Three Months Ended March 31, 1998 1997 Net Income $ 892 $ 693 Earnings Per Share: Basic $ .90 $ .70 Diluted $ .89 $ .70 For the three-month period ended March 31, 1998, Net Income increased by $199 (28.7%) when compared to the same 1997 period. Basic Earnings Per Share increased $.20 (28.6%) and Diluted Earnings Per Share increased $.19 (27.1%) when compared to the same 1997 period. The increases for the three-month period were primarily attributable to continued strong growth in key business volumes in BellSouth's wireline and wireless businesses. In addition, the increases were also due to an after-tax gain of $96 resulting from additional proceeds received in connection with the sale of ITT World Directories (see Note D to the Consolidated Financial Statements). Volumes of Business The total number of access lines in service as of March 31, 1998 increased by approximately 1,034,000 (4.6%) since March 31, 1997 to 23,548,000, compared to a 4.8% rate of increase for the same 1997 period. Business and residence access lines increased by 4.3% and 4.8%, respectively, compared to growth rates of 7.6% and 3.6% in the same 1997 period. The decrease in the growth rate for business lines was primarily due to the migration of business customers from traditional business line services to high-capacity service arrangements which are not included in business line counts. To a lesser degree, the growth rate for business lines was also affected by the increased presence of facilities-based competition. Many residential customers order additional access lines for home office purposes, access to on-line computer services and children's phones. The number of such additional residence lines included in total residence lines increased by 338,000 (20.3%) to 2,000,000 and accounted for approximately 46.1% and 32.7% of the overall increase in residence access lines and total access lines, respectively, since March 31, 1997. The growth in access lines continues to reflect economic growth in the Southeast and successful marketing programs. Access minutes of use represent the volume of traffic carried by interexchange carriers, both interstate and intrastate, using BellSouth Telecommunications' local facilities. Total access minutes of use increased by 1,809 million (7.8%) for the three-month period ended March 31, 1998 compared to an increase of 6.9% for the same 1997 period. The increase in access minutes of use was primarily attributable to access line growth, promotions by the interexchange carriers, and intraLATA toll competition (which has the effect of increasing access minutes of use while reducing toll messages carried over BellSouth Telecommunications' facilities). The growth rate in total minutes of use continues to be negatively impacted by competition and the migration of interexchange carriers to categories of service (e.g., special access) that have a fixed charge as opposed to a volume-driven charge and to high-capacity services. Toll messages are comprised of Message Telecommunications Service and Wide Area Telecommunications Service. For the three-month period ended March 31, 1998, toll messages decreased by 29 million (12.4%) compared to a decrease of 18.1% for the same 1997 period. The decrease in 1998 is primarily attributable to continuing competition from interexchange carriers in the intraLATA toll market as well as the continuing expansion of local area calling plans (LACPs). Effects of competition and the expansion of LACPs result in the transfer of calls from toll to access and local service categories, respectively, but the corresponding revenues are not generally shifted at commensurate rates. Competition in the intraLATA toll market will adversely impact future toll message volumes. Domestic cellular customers (equity-weighted) increased by 466,000 (12.4%) since March 31, 1997 to 4,230,000. The moderation in the customer growth rate reflects the impact of increased competition. BellSouth's penetration rate (number of equity-basis customers as a percentage of the equity-basis population in the service territory) increased from 9.2% at March 31, 1997 to 10.5% at March 31, 1998. While total minutes of use have continued to increase, average minutes of use per cellular customer declined since first quarter 1997 due to the continuing trends of increased penetration into lower-usage market segments and increased competition for high-usage customers. BellSouth expects these trends to continue. International cellular customers (equity-weighted) increased by 597,000 (39.8%) since March 31, 1997 to 2,098,000. Such growth reflects increased demand for wireless services in the international markets which BellSouth serves and the impact of the acquisitions of cellular properties in Nicaragua, Ecuador and Peru, partially offset by the sale of Optus Communications. Excluding the customers of Optus Communications from all periods, the number of international cellular customers (equity-weighted) increased by 953,000 (83.2%) in 1998 compared to 1997 and 92.8% in 1997 compared to 1996. Growth in total minutes of use for international cellular properties remained strong, primarily due to demand stimulated by market-driven pricing programs, enhanced services and underdeveloped land-line service. However, average minutes of use per international customer declined due to the addition of customers in lower-usage market segments. Domestic PCS customers (equity-weighted) increased 113.4% to 105,000 at March 31, 1998. Operating Revenues Total Operating Revenues increased $581 (12.0%) for the three-month period ended March 31, 1998 when compared to the same 1997 period. Such increase includes revenues from certain of BellSouth's operations which had been accounted for under the equity method in first quarter 1997 and were consolidated in first quarter 1998. If these operations had been consolidated in 1997, Total Operating Revenues would have increased approximately 9.5%. The components of Total Operating Revenues were as follows: For the Three Months Ended March 31, 1998 1997 Local Service $ 2,262 $ 2,104 Interstate Access 945 917 Intrastate Access 206 218 Toll 175 174 Wireless Communications 1,116 765 Directory Advertising and Publishing 362 361 Other Services 360 306 Total Operating Revenues $ 5,426 $ 4,845 Local Service revenues increased $158 (7.5%) for the three-month period ended March 31, 1998, as compared to the same 1997 period. The increase for the period was due primarily to a 4.6% growth in access lines in service since March 31, 1997. Also contributing was an increase of $50 due to higher customer demand for optional services such as custom calling features. Such increases were partially offset by rate impacts which reduced revenues by $13 for the three-month period. Interstate Access revenues increased $28 (3.1%) for the three-month period ended March 31, 1998 as compared to the same 1997 period. The increase was primarily due to a $40 increase in special access revenues and an increase in end-user charges attributable to an increase in access lines. These increases were partially offset by rate reductions which decreased revenues by $29. Intrastate Access revenues decreased $12 (5.5%) for the three-month period ended March 31, 1998 compared to the same 1997 period. The decrease was primarily due to rate reductions of $38. The decrease was partially offset by growth in minutes of use of 9.6%. Toll revenues increased $1 (0.6%) for the three-month period ended March 31, 1998 when compared to the same 1997 period. The increase was primarily attributable to charges to interexchange carriers, beginning in the second quarter of 1997, for toll messages originating on BellSouth's public telephones. Such increase was substantially offset by a decline in toll messages of 12.4%. Wireless Communications revenues increased $351 (45.9%) for the three- month period ended March 31, 1998 when compared to the same 1997 period. Such increase includes revenues from certain of BellSouth's operations which had been accounted for under the equity method in first quarter 1997 and were consolidated in first quarter 1998. If these operations had been consolidated in 1997, Wireless Communications revenues would have increased approximately 27.4%. That increase was primarily attributable to continued growth of the customer base in international and domestic wireless markets and the acquisition in 1997 of various international wireless operations. Directory Advertising and Publishing revenues increased $1 (0.3%) for the three-month period ended March 31, 1998 when compared to the same 1997 period. The increase primarily reflects volume growth and price increases substantially offset by one-time adjustments in 1997. The revenue growth rate associated with increases in volume and pricing for the three-month period ended March 31, 1998 was 5.7%. Other Services revenues are principally comprised of revenues from customer premises equipment (CPE) sales, maintenance services and other services (primarily inside wire, billing and collection and voice messaging services) offered by BellSouth Telecommunications. Other Services revenues increased $54 (17.6%) for the three-month period ended March 31, 1998 when compared with the same 1997 period. The increase reflects increased demand and prices for nonregulated services and higher billing-related fees. Operating Expenses Total Operating Expenses increased $480 (13.7%) for the three-month period ended March 31, 1998 compared to the same 1997 period. Such increase includes expenses from certain of BellSouth's operations which had been accounted for under the equity method in first quarter 1997 and were consolidated in first quarter 1998. If these operations had been consolidated in 1997, Total Operating Expenses would have increased approximately 10.2%. The components of Total Operating Expenses were as follows: For the Three Months Ended March 31, 1998 1997 Depreciation and Amortization $ 1,043 $ 960 Other Operating Expenses: Cost of Services and Products 1,667 1,422 Selling, General and Administrative 1,262 1,110 2,929 2,532 Total Operating Expenses $ 3,972 $ 3,492 Depreciation and Amortization increased $83 (8.6%) for the three-month period ended March 31, 1998 compared to the same period in 1997. The increase was due primarily to higher levels of property, plant and equipment since March 31, 1997 resulting from continued growth in the customer base and continued modernization of the networks utilized in the wireless businesses. The increase also included $38 in depreciation and amortization from the first-time consolidation of certain operations in 1998 which were treated as equity investments in 1997. Other Operating Expenses increased $397 (15.7%) for the three-month period ended March 31, 1998 when compared to the same 1997 period. Such increase includes $125 in expenses from certain of BellSouth's operations which had been accounted for under the equity method in first quarter 1997 and were consolidated in first quarter 1998. The increase for the period was also attributable to increased expenses in international wireless operations of $108 related to acquisitions and sustained growth in the international cellular customer bases. Such increase reflects additional marketing and operational costs associated with higher levels of sales and expanded operations. At BellSouth Telecommunications, Other Operating Expenses increased $136 (7.4%) for the three-month period ended March 31, 1998 when compared to the same 1997 period. The increase for the period was primarily attributable to increased costs in the company's telephone operations associated with higher business volumes, implementation of the Telecommunications Act of 1996 and payments to the Universal Service Fund. Other Income Statement Items The other income statement components were as follows: For the Three Months Ended March 31, 1998 1997 Interest Expense $190 $183 Gain on Sale of Operations 155 - Other Income (Expense), net 28 (7) Provision for Income Taxes 555 470 Interest Expense increased $7 (3.8%) for the three-month period ended March 31, 1998 compared to the same 1997 period. The increase was primarily attributable to higher average debt balances and interest rates on short-term borrowings, partially offset by an increase in interest capitalized for investments being developed. Gain on Sale of Operations for the three-month period ended March 31, 1998 represents additional proceeds received from the sale of ITT World Directories. See Note D to the Consolidated Financial Statements. Other Income, net improved $35 for the three-month period ended March 31, 1998 compared to the same 1997 period. The increase was primarily attributable to improved equity in earnings of unconsolidated affiliates and an increase in interest income partially offset by higher net minority interest deductions. Equity in earnings of unconsolidated affiliates was $11 for the three- month period ended March 31, 1998 compared to equity in losses of ($44) for the same 1997 period. The improvement in overall equity in earnings primarily reflects (i) the first-time consolidation in 1998 of the mobile data communications business; (ii) more favorable results at other unconsolidated international operations; and (iii) the cessation of losses incurred by Optus following its sale in 1997. The improvement was partially offset by losses from the start-up operations in Brazil and the consolidation in 1998 of certain international wireless operations previously accounted for under the equity method. Provision for Income Taxes for the three-month period ended March 31, 1998 increased $85 (18.1%) when compared to the same 1997 period. For the three-month period ended March 31, 1998, BellSouth's effective tax rate was 38.4% compared to 40.4% for the same 1997 period. The decrease in the effective tax rate in 1998 resulted primarily from improvements in the earnings of equity investments which are generally reported net of income tax expense and from the lower effective tax rate of newly consolidated international operations. FINANCIAL CONDITION BellSouth uses the net cash generated from its operations and external financing to fund capital expenditures, pay dividends and invest in and operate its existing operations and new businesses. On occasion, BellSouth's current liabilities exceed current assets. However, 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. In addition, BellSouth believes such sources of funds will be sufficient to meet the needs of its business for the foreseeable future. For the Three Months Ended March 31, 1998 1997 Net Cash Provided by Operating Activities $2,056 $1,874 Operating Activities. Net cash provided by operating activities increased $182 (9.7%) in the three-month period ended March 31, 1998 when compared to the same 1997 period. The change is primarily due to a $184 increase in operating income before depreciation and amortization. For the Three Months Ended March 31, 1998 1997 Net Cash Used for Investing Activities $(1,593) $(1,166) Investing Activities. BellSouth's primary use of capital resources continues to be for capital expenditures to support development of the wireline and wireless networks. Net cash used for investing activities increased $427 (36.6%) in the three-month period ended March 31, 1998 when compared to the same 1997 period. The increase was primarily due to capital expenditures and investments in BellSouth's consolidated and unconsolidated Latin American affiliates. Internal sources provided substantially all cash required for capital expenditures and international investments in the three-month period ended March 31, 1998. For the remainder of 1998, BellSouth expects to continue to finance capital expenditures and international investments primarily through internally generated funds and, to the extent necessary, from external sources. For the Three Months Ended March 31, 1998 1997 Net Cash Used for Financing Activities $(913) $(940) Financing Activities. Net cash used for financing activities was relatively flat with a decrease of $27 (2.9%) in the three-month period ended March 31, 1998 compared to the same 1997 period. BellSouth's debt to total capitalization ratio decreased to 41.1% at March 31, 1998 from 42.1% at December 31, 1997. The decrease was primarily caused by an increase in stockholders' equity resulting from undistributed earnings. As of April 30, 1998, shelf registration statements were on file with the Securities and Exchange Commission under which $1,927 of debt securities could be publicly offered. In September 1997, BellSouth announced a plan to repurchase up to $1 billion of its Common Stock through 1998. REGULATORY DEVELOPMENTS AND COMPETITION Federal Developments Local Number Portability Cost Recovery. On May 5, 1998 the FCC adopted an order that will allow telecommunications carriers, such as BellSouth Telecommunications, to recover, over five years, their carrier-specific costs of implementing long-term number portability, which allows customers to retain their local telephone numbers in the event they change local carriers. The order allows for such cost recovery to begin no earlier than February 1, 1999 in the form of a surcharge from customers to whom number portability is available. BellSouth is currently evaluating the impact the order will have in future periods. State Developments Reciprocal Compensation for Internet Traffic. Several Competitive Local Exchange Carriers (CLECs) are engaged in regulatory proceedings with several Incumbent Local Exchange Carriers (ILECs), including BellSouth, concerning the payment of reciprocal compensation to the CLECs for calls originating on the ILECs' networks and terminating with Internet Service Providers served by the CLECs' networks. The CLECs have asserted that such reciprocal compensation is provided for in interconnection agreements between the CLECs and the ILECs. BellSouth denies any liability for this form of compensation. It is too early to assess the impact of the ultimate resolution of these issues on the results of operations, financial position and cash flows of BellSouth. OTHER MATTERS 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. SOP 98-1 requires adoption by BellSouth no later than January 1, 1999. BellSouth intends to adopt SOP 98-1 beginning January 1, 1999. Adoption of SOP 98-1 will result in a temporary increase in earnings in the year of adoption as a result of the capitalization of costs which had previously been expensed. If expenditures remain at a consistent level, the earnings impact will decline in each year following the change. The decline will continue until the amortization expense related to the capitalized software costs equals the level of software costs treated as expense prior to the change. In addition, adoption of SOP 98-1 will result in higher levels of capitalized software costs on the balance sheet. 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 economic growth and demand for BellSouth's services; (2) continued monetary, regulatory and political stability where BellSouth conducts its international operations; (3) the reasonable accuracy of BellSouth's expectations of costs and recoveries with respect to access reform, universal service and interconnection; (4) 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 (5) satisfactory resolution of Year 2000 software revisions. 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. PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number 3a Amended Articles of Incorporation of BellSouth Corporation as of April 27, 1998. 4a No instrument which defines the rights of holders of long- and intermediate-term debt of BellSouth Corporation is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, BellSouth Corporation hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10i BellSouth Corporation Supplemental Executive Retirement Plan as amended March 23, 1998. 10q-4 Amendment dated April 17, 1998 to the BellSouth Personal Retirement Account Pension Plan. 10w-3 Amendment dated May 5, 1998 to the BellSouth Retirement Savings Plan. 10z BellSouth Compensation Deferral Plan as amended and restated effective October 1, 1997. 10aa BellSouth Employee Stock Investment Plan. 10aa-1 Amendment dated November 27, 1996 to the BellSouth Employee Stock Investment Plan. 10aa-2 Amendment dated March 21, 1997 to the BellSouth Employee Stock Investment Plan. 10aa-3 Amendment dated May 5, 1998 to the BellSouth Employee Stock Investment Plan. 10bb BellSouth Officer Motor Vehicle Policy. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of March 31, 1998. 27-a Revised Financial Data Schedule as of December 31, 1997. 27-b Revised Financial Data Schedule as of December 31, 1996. 27-c Revised Financial Data Schedule as of December 31, 1995. 27-d Revised Financial Data Schedule as of September 30, 1997. 27-e Revised Financial Data Schedule as of June 30, 1997. Item 6. Exhibits and Reports on Form 8-K (continued) 27-f Revised Financial Data Schedule as of March 31, 1997. 27-g Revised Financial Data Schedule as of September 30, 1996. 27-h Revised Financial Data Schedule as of June 30, 1996. 27-i Revised Financial Data Schedule as of March 31, 1996. (b) Reports on Form 8-K: Date of Event Subject February 27, 1998 ITT World Directories Additional Proceeds and BellSouth Capital Funding Registration Statement Exhibits April 20, 1998 First Quarter 1998 Earnings Release and 1998 Financial Projection April 27, 1998 Chairman's comments to shareholders SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BELLSOUTH CORPORATION By /s/ W. Patrick Shannon W. PATRICK SHANNON Vice President and Controller (Principal Accounting Officer) May 13, 1998 EXHIBIT INDEX Exhibit Number 3a Amended Articles of Incorporation of BellSouth Corporation as of April 27, 1998. 10i BellSouth Corporation Supplemental Executive Retirement Plan as amended March 23, 1998. 10q-4 Amendment dated April 17, 1998 to the BellSouth Personal Retirement Account Pension Plan. 10w-3 Amendment dated May 5, 1998 to the BellSouth Retirement Savings Plan. 10z BellSouth Compensation Deferral Plan as amended and restated effective October 1, 1997. 10aa BellSouth Employee Stock Investment Plan. 10aa-1 Amendment dated November 27, 1996 to the BellSouth Employee Stock Investment Plan. 10aa-2 Amendment dated March 21, 1997 to the BellSouth Employee Stock Investment Plan. 10aa-3 Amendment dated May 5, 1998 to the BellSouth Employee Stock Investment Plan. 10bb BellSouth Officer Motor Vehicle Policy. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of March 31, 1998. 27-a Revised Financial Data Schedule as of December 31, 1997. 27-b Revised Financial Data Schedule as of December 31, 1996. 27-c Revised Financial Data Schedule as of December 31, 1995. 27-d Revised Financial Data Schedule as of September 30, 1997. 27-e Revised Financial Data Schedule as of June 30, 1997. 27-f Revised Financial Data Schedule as of March 31, 1997. 27-g Revised Financial Data Schedule as of September 30, 1996. 27-h Revised Financial Data Schedule as of June 30, 1996. 27-i Revised Financial Data Schedule as of March 31, 1996.