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 June 30, 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 July 31, 1998, 983,704,294 common shares were 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 11 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 13 Results of Operations 14 Volumes of Business 14 Operating Revenues 16 Operating Expenses 18 Other Income Statement Items 19 Financial Condition 20 Regulatory Developments and Competition 21 State Developments 21 Other Matters 22 Safe Harbor Statement 24 Part II 4. Submission of Matters to a Vote of Security Holders 25 6. Exhibits and Reports on Form 8-K 25 PART I - FINANCIAL INFORMATION BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Operating Revenues: Network and related services: Local service $ 2,345 $ 2,068 $ 4,607 $ 4,172 Interstate access 960 928 1,905 1,845 Intrastate access 200 186 406 404 Toll 177 186 352 360 Wireless communications 1,173 815 2,289 1,580 Directory advertising and publishing 419 400 781 761 Other services 390 340 750 646 Total Operating Revenues 5,664 4,923 11,090 9,768 Operating Expenses: Cost of services and products 1,743 1,536 3,410 2,958 Depreciation and amortization 1,074 977 2,117 1,937 Selling, general and administrative 1,413 1,186 2,675 2,296 Total Operating Expenses 4,230 3,699 8,202 7,191 Operating Income 1,434 1,224 2,888 2,577 Interest Expense 203 187 393 370 Gain on Sale of Operations -- -- 155 -- Other Income, net 118 33 146 26 Income Before Income Taxes 1,349 1,070 2,796 2,233 Provision for Income Taxes 531 416 1,086 886 Net Income $ 818 $ 654 $ 1,710 $ 1,347 Weighted-Average Common Shares Outstanding: Basic 989 992 990 992 Diluted 995 994 996 994 Dividends Declared Per Common Share $ .36 $ .36 $ .72 $ .72 Earnings Per Share: Basic $ .83 $ .66 $ 1.73 $ 1.36 Diluted $ .82 $ .66 $ 1.72 $ 1.36 The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts) June 30, December 31, 1998 1997 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 2,222 $ 2,570 Temporary cash investments 94 17 Accounts receivable, net of allowance for uncollectibles of $263 and $246 4,167 4,750 Material and supplies 423 393 Other current assets 483 387 Total Current Assets 7,389 8,117 Investments and Advances 2,762 2,675 Property, Plant and Equipment: Property, plant and equipment 56,182 53,828 Accumulated depreciation 32,705 30,967 Property, Plant and Equipment, net 23,477 22,861 Deferred Charges and Other Assets 936 702 Intangible Assets, net 2,957 1,946 Total Assets $ 37,521 $ 36,301 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year $ 3,082 $ 3,706 Accounts payable 1,665 1,825 Other current liabilities 3,345 3,252 Total Current Liabilities 8,092 8,783 Long-Term Debt 8,535 7,348 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,048 2,023 Unamortized investment tax credits 190 213 Other liabilities and deferred credits 2,813 2,769 Total Deferred Credits and Other Liabilities 5,051 5,005 Shareholders' Equity: Common stock, $1 par value 1,010 1,010 Paid-in capital 7,783 7,714 Retained earnings 8,383 7,382 Accumulated other comprehensive income 5 36 Shares held in trust and treasury (968) (575) Guarantee of ESOP debt (370) (402) Total Shareholders' Equity 15,843 15,165 Total Liabilities and Shareholders' Equity $ 37,521 $ 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 Six Months Ended June 30, 1998 1997 Cash Flows from Operating Activities: Net income $ 1,710 $ 1,347 Adjustments to net income: Depreciation and amortization 2,117 1,937 Gain on sale of operations (155) - Net losses (earnings) and dividends from unconsolidated affiliates 62 147 Provision for uncollectibles 153 125 Deferred income taxes and unamortized investment tax credits (7) 14 Net change in: Accounts receivable and other current assets 259 (126) Accounts payable and other current liabilities (240) 200 Deferred charges and other assets (216) (151) Other liabilities and deferred credits 58 (2) Other reconciling items, net (43) 3 Net cash provided by operating activities 3,698 3,494 Cash Flows from Investing Activities: Capital expenditures (2,480) (1,978) Purchases of licenses and other intangible assets (466) (192) Proceeds from sale of operations 155 - Proceeds from disposition of short-term investments 21 145 Purchases of short-term investments (98) (152) Investments in and advances to unconsolidated affiliates (474) (341) Other investing activities, net 66 61 Net cash used for investing activities (3,276) (2,457) Cash Flows from Financing Activities: Net repayments of short-term borrowings (379) (163) Proceeds from long-term debt 1,453 30 Repayments of long-term debt (737) (19) Dividends paid (714) (713) Purchase of trust and treasury shares (452) (69) Other financing activities, net 59 27 Net cash used for financing activities (770) (907) Net (Decrease) Increase in Cash and Cash Equivalents (348) 130 Cash and Cash Equivalents at Beginning of Period 2,570 1,178 Cash and Cash Equivalents at End of Period $ 2,222 $ 1,308 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 Six Months Ended June 30, 1998 Number of Shares Amount ---------------- ------------------------------------------------------------ Shares Shares Held Accum. Held In Other In Guaran- Trust Compre- Trust tee 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 1,710 1,710 Other compre- hensive income, net of tax: Foreign currency translation (31) (31) adjustment Total comprehen- sive income (b) 1,679 Dividends declared (712) (712) Share issuances for employee benefit plans 1 (23) 56 33 Acquisition- related transactions 1 92 33 125 Purchase of treasury stock (8) (452) (452) Purchase of stock by grantor trust (1) (30) (30) ESOP activities and related tax benefit 3 32 35 ----- ---- ------ ------ ------ --- ------ ------ --------- Balance at June 30, 1998 1,010 (25) $1,010 $7,783 $8,383 $5 $(968) $(370) $15,843 ====== ==== ====== ====== ====== === ====== ====== ========= </TABLE> (a) Such shares are not considered to be outstanding for financial reporting purposes. As of June 30, 1998 there were approximately 17.7 million shares held in trust and 6.9 million treasury shares held by the company. (b) Total comprehensive income for the three-month period ended June 30, 1998 was $783. 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 Six Months Ended June 30, 1997 Number of Shares Amount ----------------- --------------------------------------------------------------- Shares Shares Held Accum. Held In Other In Guaran- Trust Compre- Trust tee 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, 1996 1,009 (18) $1,009 $7,672 $5,541 $25 $(532) $(466) $13,249 Net income 1,347 1,347 Other compre- hensive income, net of tax: Foreign currency translation 8 8 adjustment Total comprehen- sive income (b) 1,355 Dividends (714) (714) declared Share issuances for: Employee benefit 1 (12) 40 28 plans Grantor 1 (1) 1 60 (61) - Trusts Acquisition- related transactions 2 8 89 97 Purchase of treasury stock (1) (69) (69) ESOP activities and related tax 4 33 37 benefit ----- ---- ------ ------ ------ --- ------ ----- ------- Balance at June 30, 1997 1,010 (17) $1,010 $7,728 $6,178 $33 $(533) $(433) $13,983 ===== ==== ====== ====== ====== === ====== ===== ======= </TABLE> (a) Such shares are not considered to be outstanding for financial reporting purposes. As of June 30, 1997 there were approximately 17 million shares held in trust and 400 thousand treasury shares held by the company. (b) Total comprehensive income for the three-month period ended June 30, 1997 was $652. 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 and previous quarterly report on Form 10-Q. 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 other 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 for the three- and six-month periods ended June 30, 1998 and approximately 2 million for the three- and six-month periods ended June 30, 1997. 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 Six Months Ended June 30, 1998 1997 Cash Paid For: Income taxes $ 881 $ 830 Interest $ 383 $ 350 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. Note E -- South Carolina Regulatory Settlement In April 1997, BellSouth Telecommunications, the South Carolina Public Service Commission and other parties agreed on a settlement to claims of alleged overearnings for the years 1992 through 1994. Under the terms of the settlement, BellSouth Telecommunications paid $72 to its customers in 1997. Accordingly, in the second quarter of 1997, BellSouth reduced operating revenues by $72 ($47 or $.05 per share after tax) in connection with the settlement. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) Note F -- Issuance of Debt In June 1998, BellSouth Telecommunications issued $500 of 6 3/8% Debentures, due June 1, 2028 and $500 of 6% Reset Put Securities, due June 15, 2012. The purpose of these issues was to refinance $500 aggregate principal amount of BellSouth Telecommunications' 5 1/4% Notes, which matured on June 8, 1998, and to provide for general corporate purposes, including the refinancing of commercial paper. In conjunction with the issuance of the 6% Reset Put Securities, BellSouth Telecommunications entered into an interest rate swap agreement. Under the agreement, BellSouth Telecommunications will pay a variable rate which is based on LIBOR and will receive a fixed rate of 6% in return. The LIBOR-based rate in effect at June 30, 1998 was 5.782%. The agreement calls for periodic interim settlements and expires June 15, 2002. BELLSOUTH CORPORATION SELECTED OPERATING DATA (Unaudited) Percent Change 1998 vs. 1997 vs. 1998 1997 1996 Network Access Lines in Service at June 30 (Thousands)(a): By Type: Residence 16,182 4.3% 3.8% Business 7,204 3.9 6.4 Other 274 1.5 3.1 Total Access Lines 23,660 4.2 4.6 By State: Florida 6,363 4.9 5.5 Georgia 4,086 5.1 5.0 Tennessee 2,658 2.0 4.2 North Carolina 2,394 4.8 6.0 Louisiana 2,317 4.1 3.5 Alabama 1,948 2.9 3.4 South Carolina 1,432 4.1 3.8 Mississippi 1,266 3.8 3.1 Kentucky 1,196 3.2 3.2 Total Access Lines 23,660 4.2 4.6 Percent Change for the Periods Ended 1998 vs. 1997 vs. 1998 1997 1996 Access Minutes of Use (Millions)(a)(b): Interstate: Three months ended March 31 18,998 7.2% 6.4% Three months ended June 30 19,804 6.8 10.1 Six months ended June 30 38,802 7.0 8.3 Intrastate: Three months ended March 31 6,084 9.6 8.4 Three months ended June 30 6,436 9.6 12.2 Six months ended June 30 12,520 9.6 10.3 Total Access Minutes of Use: Three months ended March 31 25,082 7.8 6.9 Three months ended June 30 26,240 7.4 10.6 Six months ended June 30 51,322 7.6 8.8 Toll Messages (Millions)(a): Three months ended March 31 201 (12.4) (18.1) Three months ended June 30 201 (13.3) (10.5) Six months ended June 30 402 (12.8) (14.5) BELLSOUTH CORPORATION SELECTED OPERATING DATA (Continued) (Unaudited) (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. Cellular and Personal Communications Service (PCS) customers served at June 30(Equity basis)(Thousands)(c): Percent Change 1998 vs. 1997 vs. 1998 1997 1996 Domestic Cellular 4,400 12.8% 20.7% International Cellular (d) 2,390 34.0% 82.8% PCS 129 98.5% -- (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 68.9% for 1998 compared to 1997 and 105.1% for 1997 compared to 1996. For the Six Months Ended June 30, 1998 Ratio of Earnings to Fixed Charges (e) 7.20 (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 and previous quarterly report on Form 10-Q. 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 69% of BellSouth's Total Operating Revenues for the six-month periods ended June 30, 1998 and 1997, respectively, were from wireline services provided by BellSouth Telecommunications. Charges for local, access and toll services for the six-month period ended June 30, 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 six months ended June 30, 1998. The remainder of such revenues was derived principally from sales and maintenance of customer premises equipment (CPE) and other nonregulated services provided by BellSouth Telecommunications. RESULTS OF OPERATIONS For the Three For the Six Months Ended Months Ended June 30, June 30, 1998 1997 1998 1997 Net Income $ 818 $ 654 $ 1,710 $ 1,347 Earnings Per Share: Basic $ .83 $ .66 $ 1.73 $ 1.36 Diluted $ .82 $ .66 $ 1.72 $ 1.36 For the three- and six-month periods ended June 30, 1998, Net Income increased by $164 (25.1%) and $363 (26.9%), respectively, when compared to the same 1997 periods. Basic Earnings Per Share increased $.17 (25.8%) and $.37 (27.2%), respectively, and Diluted Earnings Per Share increased $.16 (24.2%) and $.36 (26.5%), respectively, when compared to the same 1997 periods. The increases for the three- and six-month periods were primarily attributable to continued strong growth in key business volumes in BellSouth's wireline and wireless businesses. In addition, the increase for the six-month period was also due to an after-tax gain of $96 ($.10 per share) resulting from additional proceeds received in connection with the sale of ITT World Directories (see Note D to the Consolidated Financial Statements). Net Income during 1997 was reduced by an after-tax charge of $47 ($.05 per share) related to a regulatory settlement in South Carolina (see Note E to the Consolidated Financial Statements). Volumes of Business The total number of access lines in service as of June 30, 1998 increased by approximately 943,000 (4.2%) since June 30, 1997 to 23,660,000, compared to a 4.6% rate of increase for the same 1997 period. The growth in access lines continues to reflect economic growth in the Southeast and successful marketing programs. Business and residence access lines increased by 3.9% and 4.3%, respectively, compared to growth rates of 6.4% and 3.8% 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. In addition to strong economic growth in the region, the growth rate for residential access lines reflects demand related to 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 286,000 (16.0%) to 2,070,000 and accounted for approximately 42.6% and 30.3% of the overall increase in residence access lines and total access lines, respectively, since June 30, 1997. 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 1,815 million (7.4%) and 3,624 million (7.6%) for the three- and six-month periods ended June 30, 1998 compared to increases of 10.6% and 8.8% for the same 1997 periods. The increases in total access minutes of use were primarily attributable to access line growth, promotions by the interexchange carriers, and intraLATA toll competition (which has the effect of increasing access minutes of use while reducing toll messages carried over BellSouth Telecommunications' facilities). However, 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 such as high-capacity data and digital transmission services. Toll messages are comprised of Message Telecommunications Service and Wide Area Telecommunications Service. For the three- and six-month periods ended June 30, 1998, toll messages decreased by 31 million (13.3%) and 59 million (12.8%) compared to decreases of 10.5% and 14.5% for the same 1997 periods. The decreases in 1998 are 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 499,000 (12.8%) since June 30, 1997 to 4,400,000. The decline in the customer growth rate primarily 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 9.6% at June 30, 1997 to 10.8% at June 30, 1998. Average revenue per proportionate cellular customer decreased from $52 to $46 for each of the three- and six- month periods ended June 30, 1998. Such decreases were primarily attributable to the continuing trends of increased penetration into lower-usage market segments and expanded offering of lower-priced usage plans for high- usage customers. BellSouth expects these trends to continue. International cellular customers (equity-weighted) increased by 606,000 (34.0%) since June 30, 1997 to 2,390,000. 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 975,000 (68.9%) in 1998 compared to 1997 and 725,000 (105.1%) in 1997 compared to 1996. Growth in equity-weighted 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, 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 98.5% since June 30, 1997 to 129,000 at June 30, 1998. PCS service was initiated in selected markets in BellSouth's territory beginning in mid-1996. Operating Revenues Total Operating Revenues increased $741 (15.1%) and $1,322 (13.5%) for the three- and six-month periods ended June 30, 1998 when compared to the same 1997 periods. Such increases include revenues from certain of BellSouth's operations which had been accounted for under the equity method in 1997 and were consolidated in 1998. If these operations had been consolidated in 1997, and excluding the effect of the South Carolina regulatory settlement in 1997, Total Operating Revenues for the three and six months ended June 30, 1998 would have increased approximately 10.1% and 9.7%, respectively. The components of Total Operating Revenues were as follows: For the Three For the Six Months Ended Months Ended June 30, June 30, 1998 1997 1998 1997 Local Service $2,345 $ 2,068 $4,607 $ 4,172 Interstate Access 960 928 1,905 1,845 Intrastate Access 200 186 406 404 Toll 177 186 352 360 Wireless Communications 1,173 815 2,289 1,580 Directory Advertising and Publishing 419 400 781 761 Other Services 390 340 750 646 Total Operating Revenues $ 5,664 $ 4,923 $11,090 $ 9,768 Local Service revenues increased $277 (13.4%) and $435 (10.4%) for the three- and six-month periods ended June 30, 1998, as compared to the same 1997 periods. The increases for the three- and six-month periods were due primarily to a 4.2% growth in access lines in service since June 30, 1997, an increase of $59 and $116, respectively, due to higher customer demand for optional services, such as custom calling features, and an increase in revenues from the provision of data and digital services. Also contributing to the overall increase in revenues for the three- and six-month periods were net rate impacts of $87 and $74, respectively. Such rate impacts were due primarily to a non-recurring revenue reduction of $64, related to the local service portion of the regulatory settlement in South Carolina, which was recorded during second quarter 1997. Interstate Access revenues increased $32 (3.4%) and $60 (3.3%) for the three- and six-month periods ended June 30, 1998 as compared to the same 1997 periods. The increases were primarily due to increases of $42 and $82 in special access revenues and increases in end-user charges attributable to increases in access lines. Special access charges are comprised primarily of revenues from the provision of data and digital services. These increases were partially offset by rate reductions which decreased revenues by $25 and $53 for the three- and six-month periods, respectively. Intrastate Access revenues increased $14 (7.5%) and $2 (0.5%) for the three- and six-month periods ended June 30, 1998 compared to the same 1997 periods. The increases were primarily due to growth in minutes of use of 9.6% for both the three- and six-month periods. The increases were partially offset by rate reductions of $2 and $39, respectively. Toll revenues decreased $9 (4.8%) and $8 (2.2%) for the three- and six-month periods ended June 30, 1998 when compared to the same 1997 periods. The decreases were primarily attributable to a decline in toll messages of 13.3% and 12.8%, respectively. Such decreases were partially offset by charges to interexchange carriers, beginning in the second quarter of 1997, for toll messages originating on BellSouth's public telephones as well as increased revenues from the provision of digital transmission services. Wireless Communications revenues increased $358 (43.9%) and $709 (44.9%) for the three- and six-month periods ended June 30, 1998 when compared to the same 1997 periods. Such increases include revenues from certain of BellSouth's operations which had been accounted for under the equity method in the 1997 periods and were consolidated in the 1998 periods. If these operations had been consolidated in 1997, Wireless Communications revenues for the three and six months would have increased approximately 22.1% and 24.0%, respectively. These increases were 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 $19 (4.8%) and $20 (2.6%) for the three- and six-month periods ended June 30, 1998 when compared to the same 1997 periods. The increases primarily reflect volume growth and price increases partially offset by the effect of book shifts and, in the six-month period, one-time adjustments in 1997. The revenue growth rates associated with increases in volume and pricing for the three- and six- month periods ended June 30, 1998 were 9.5% and 7.8%, respectively. 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 $50 (14.7%) and $104 (16.1%) for the three- and six-month periods ended June 30, 1998 when compared with the same 1997 periods. The increases primarily reflect increased demand and prices for nonregulated services. Operating Expenses Total Operating Expenses increased $531 (14.4%) and $1,011 (14.1%) for the three- and six-month periods ended June 30, 1998 compared to the same 1997 periods. Such increases include expenses from certain of BellSouth's operations which had been accounted for under the equity method in 1997 and were consolidated in 1998. If these operations had been consolidated in 1997, Total Operating Expenses would have increased approximately 9.8% and 9.9%, respectively. The components of Total Operating Expenses were as follows: For the Three For the Six Months Ended Months Ended June 30, June 30, 1998 1997 1998 1997 Depreciation and Amortization $ 1,074 $ 977 $ 2,117 $ 1,937 Other Operating Expenses: Cost of Services and Products 1,743 1,536 3,410 2,958 Selling, General and Administrative 1,413 1,186 2,675 2,296 3,156 2,722 6,085 5,254 Total Operating Expenses $ 4,230 $ 3,699 $ 8,202 $ 7,191 Depreciation and Amortization increased $97 (9.9%) and $180 (9.3%) for the three- and six-month periods ended June 30, 1998 compared to the same periods in 1997. The increases were due primarily to the first-time consolidation of certain operations in 1998 which were treated as equity investments in 1997. Depreciation and amortization for such operations were $57 and $107 for the three- and six-month periods, respectively. The overall increases were also due to higher levels of property, plant and equipment since June 30, 1997 resulting from continued growth in the customer base and continued modernization of the networks utilized in the wireless businesses. Other Operating Expenses increased $434 (15.9%) and $831 (15.8%) for the three- and six-month periods ended June 30, 1998 when compared to the same 1997 periods. Such increases include $172 and $341 in expenses from certain of BellSouth's operations which had been accounted for under the equity method in 1997 and were consolidated in 1998. The increases for the periods were also attributable to increased expenses in international wireless operations of $45 and $111 related to sustained growth in the international cellular customer bases. Such increases reflect additional marketing and operational costs associated with higher levels of sales and expanded operations. At BellSouth Telecommunications, Other Operating Expenses increased $175 (9.0%) and $311 (8.2%) for the three- and six-month periods ended June 30, 1998 when compared to the same 1997 periods. The increases were primarily attributable to increased labor costs, other increased costs in the BellSouth Telecommunications' telephone operations associated with higher business volumes, payments to the Universal Service Fund and costs related to compliance with the Telecommunications Act of 1996. Other Income Statement Items The other income statement components were as follows: For the Three For the Six Months Ended Months Ended June 30, June 30, 1998 1997 1998 1997 Interest Expense $203 $187 $393 $370 Gain on Sale of Operations - - 155 - Other Income, net 118 33 146 26 Provision for Income Taxes 531 416 1,086 886 Interest Expense increased $16 (8.6%) and $23 (6.2%) for the three- and six-month periods ended June 30, 1998 compared to the same 1997 periods. The increases were 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. The increase in average short-term debt balances and related interest expense primarily reflects the consolidation of several international operations which had been accounted for under the equity method prior to 1998. Gain on Sale of Operations for the six-month period ended June 30, 1998 represents additional proceeds received from the sale of ITT World Directories (see Note D to the Consolidated Financial Statements). Other Income, net improved $85 and $120 for the three- and six-month periods ended June 30, 1998 compared to the same 1997 periods. The increases were primarily attributable to improved equity in earnings of unconsolidated affiliates and an increase in interest income, partially offset in the six-month period by higher net minority interest deductions. Equity in earnings of unconsolidated affiliates was $36 and $48 for the three- and six-month periods ended June 30, 1998 compared to equity in losses of ($26) and ($69) for the same 1997 periods. 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 development expenses associated with the start-up operations in Brazil in 1998. Provision for Income Taxes for the three- and six-month periods ended June 30, 1998 increased $115 (27.6%) and $200 (22.6%) when compared to the same 1997 periods. For the three- and six-month periods ended June 30, 1998, BellSouth's effective tax rates were 39.4% and 38.8% compared to 38.9% and 39.7% for the same 1997 periods. 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 Six Months Ended June 30, 1998 1997 Net Cash Provided by Operating Activities $3,698 $3,494 Operating Activities. Net cash provided by operating activities increased $204 (5.8%) in the six-month period ended June 30, 1998 when compared to the same 1997 period. The change is primarily due to a $491 increase in operating income before depreciation and amortization and increased net receipts of accounts receivable. The increase was partially offset by increased cash expenditures for accounts payable and other current liabilities. For the Six Months Ended June 30, 1998 1997 Net Cash Used for Investing Activities $(3,276) $(2,457) 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 $819 (33.3%) in the six-month period ended June 30, 1998 when compared to the same 1997 period. The increase was primarily due to capital expenditures for and investments in BellSouth's consolidated and unconsolidated Latin American affiliates, including the purchase of an additional ownership interest in BellSouth's wireless operations in Venezuela in June 1998. Internal sources provided substantially all cash required for capital expenditures and international investments in the six-month period ended June 30, 1998. For the remainder of 1998, BellSouth expects to continue to finance capital expenditures and international investments primarily through internally generated funds and, to a lesser extent, from external sources. For the Six Months Ended June 30, 1998 1997 Net Cash Used for Financing Activities $(770) $(907) Financing Activities. Net cash used for financing activities decreased $137 (15.1%) in the six-month period ended June 30, 1998 compared to the same 1997 period. The decrease is primarily due to higher net borrowings of debt of $489, substantially offset by an increase in purchases of treasury shares of $383. In June 1998, BellSouth Telecommunications issued $500 of 6 3/8% Debentures, due June 1, 2028 and $500 of 6% Reset Put Securities, due June 15, 2012. The purpose of these issues was to refinance $500 aggregate principal amount of BellSouth Telecommunications' 5 1/4% Notes, which matured on June 8, 1998, and to provide for general corporate purposes, including the refinancing of commercial paper. BellSouth's debt to total capitalization ratio remained flat at 42.2% at June 30, 1998 compared to 42.1% at December 31, 1997. As of July 31, 1998, shelf registration statements were on file with the Securities and Exchange Commission under which $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. Treasury share purchases under this plan totaled $452 for the six months ended June 30, 1998. REGULATORY DEVELOPMENTS AND COMPETITION State Developments Reciprocal Compensation for Internet Traffic. Numerous Competitive Local Exchange Carriers (CLECs) claim entitlement from Incumbent Local Exchange Carriers (ILECs), including BellSouth Telecommunications, for reciprocal compensation to the CLECs for calls originating on the ILEC's networks and connecting with internet service providers served by the CLEC's networks. The CLECs have asserted that such reciprocal compensation is provided for in interconnection agreements between the CLECs and the ILECs. The ILECs have denied any liability for this form of compensation. The courts and state commissions that have considered the matter have ruled against the ILECs with respect to calls to internet service providers. The FCC is considering the underlying jurisdictional issue and is expected to issue a decision. 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. Tennessee. In 1995, BellSouth Telecommunications elected price regulation under an incentive regulation plan whereby prices for basic services and Call Waiting services are to be capped for four years, after which prices may be changed in accordance with an inflation- based formula. As a condition to implementing price regulation, the Tennessee Public Service Commission ordered BellSouth Telecommunications to reduce prices by approximately $56 on an annual basis. BellSouth Telecommunications appealed to the Tennessee Court of Appeals. In October 1997, the court vacated the order requiring the rate reduction and remanded the case to the Tennessee Regulatory Authority (TRA) (the successor to the Tennessee Public Service Commission) with instructions to approve the price regulation plan. In January 1998, the TRA and the Consumer Advocate filed an application for permission to appeal to the Tennessee Supreme Court. In June 1998, the Tennessee Supreme Court denied the application for appeal. BellSouth Telecommunications' application for price regulation is currently pending before the TRA. In early 1998, a bill was introduced in the Tennessee legislature that would impose significant new restrictions on companies electing price regulation. The bill included proposals to require companies to make substantial refunds to customers prior to operating under price regulation and to have initial rates for price regulation purposes established by means of a traditional rate of return earnings investigation. Efforts to adopt such a bill failed in committee. OTHER MATTERS 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. SFAS No. 133 requires adoption by BellSouth no later than January 1, 2000. BellSouth is currently assessing the impact that adoption of SFAS No. 133 will have on its results of operations and financial condition and is undecided as to the date the standard will be adopted. Year 2000 Compliance. BellSouth has initiated a company- wide program to identify and address issues associated with the ability of its date-sensitive information, telephony and business systems as well as certain equipment to properly recognize the Year 2000 in order to avoid interruption of the operation of these systems as a result of the century change on January 1, 2000. The program is also designed to assess the impact on BellSouth of 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 and/or 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. The Year 2000 program is being conducted by a management team that is coordinating the efforts of internal resources as well as third party network 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 necessary in BellSouth's operations are being made as a part of ongoing systems upgrades. BellSouth plans to have all Year 2000 compliance conversion and initial testing for its most critical systems used in its domestic operations completed by the end of 1998 and to complete intersystem testing and deployment by mid-1999. The status of Year 2000 compliance efforts for international entities is less advanced than that for domestic operations. However, Year 2000 conversion, testing and deployment for these systems is expected to be completed by late 1999. Over the years, BellSouth has developed numerous contingency plans for conducting its business operations in the event of crises including system outages or natural disasters. As a part of its Year 2000 compliance efforts, it is reviewing its contingency plans to ensure they adequately address Year 2000 issues that might arise. BellSouth's operational systems, such as billing, accounting, etc., are also being addressed in the endeavor. BellSouth is a member, together with other large telecommunications companies, in an industry group which is 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 the remainder has been or will be incurred during 1998 and 1999. BellSouth estimates the costs of these efforts will be between $100 to $200 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 the mission critical systems that it controls in its domestic and international operations will be Year 2000 compliant by January 1, 2000. However, no assurance can be given that unforeseen circumstances will not arise during the performance of the testing and deployment phases which would adversely affect the Year 2000 compliance of BellSouth's systems. Furthermore, the Year 2000 compliance status of integral third party networks is not yet fully known. As a result, BellSouth is unable to determine the impact that any system interruption would have on BellSouth's results of operations, financial position and cash flows. CWA Working Agreement. On August 8, 1998, BellSouth reached a tentative agreement with the Communications Workers of America (CWA) on new three-year contracts covering approximately 48,000 employees. The contracts, which are subject to ratification by CWA members, 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. 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 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. PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders BellSouth has published the information called for by this item in its "Second Quarter 1998 Report to Shareholders" which was distributed to shareholders on or about May 1, 1998. Shareholders can request a copy of this report by calling BellSouth Shareholder Services on 1- 800-631-6001. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number 4a No instrument which defines the rights of holders of long- and intermediate-term debt of BellSouth Corporation is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, BellSouth Corporation hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10m BellSouth Corporation Executive Life Insurance Plan as amended and restated as the BellSouth Split-Dollar Life Insurance Plan effective January 1, 1998. 10cc BellSouth Supplemental Life Insurance Plan effective January 1, 1998. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of June 30, 1998. (b) Reports on Form 8-K: Date of Event Subject July 21, 1998 Second quarter 1998 Earnings Release and 1998 Financial Projection 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) August 12, 1998 EXHIBIT INDEX Exhibit Number 10m BellSouth Corporation Executive Life Insurance Plan as amended and restated as the BellSouth Split-Dollar Life Insurance Plan effective January 1, 1998. 10cc BellSouth Supplemental Life Insurance Plan effective January 1, 1998. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of June 30, 1998.