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 September 30, 1996 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 58-153343 (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 October 31, 1996, a total of 993,425,212 common shares were outstanding. Table of Contents Item Page Part I 1. Financial Statements 3 Consolidated Statements of Income 3 Consolidated Balance Sheets 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 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 16 Other Income Statement Items 18 Financial Condition 19 Regulatory Developments and Competition 20 Federal Developments 20 State Developments 21 Business Developments 22 Part II 6. Exhibits and Reports on Form 8-K 23 PART I - FINANCIAL INFORMATION BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Operating Revenues: Network and related services: Local service $ 2,061 $ 1,857 $ 6,012 $ 5,419 Interstate access 892 805 2,672 2,406 Intrastate access 207 230 627 683 Toll 195 220 600 767 Wireless communications 723 665 2,039 1,888 Directory advertising and publishing 415 366 1,100 1,108 Other services 336 289 940 850 Total Operating Revenues 4,829 4,432 13,990 13,121 Operating Expenses: Cost of services and products 1,516 1,542 4,483 4,530 Depreciation and amortization 940 874 2,760 2,568 Selling, general and administrative 1,172 958 3,175 2,774 Total Operating Expenses 3,628 3,374 10,418 9,872 Operating Income 1,201 1,058 3,572 3,249 Interest Expense 177 172 531 532 Gain on Sale of Paging Business -- -- 442 -- Other Income, net 32 53 84 51 Income Before Income Taxes and Extraordinary Losses 1,056 939 3,567 2,768 Provision for Income Taxes 425 380 1,337 1,105 Income Before Extraordinary Losses 631 559 2,230 1,663 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- -- -- (2,718) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- -- -- (16) Net Income (Loss) $ 631 $ 559 $ 2,230 $(1,071) BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Weighted Average Common Shares Outstanding 994 993 994 993 Dividends Declared Per Common Share $ .36 $ .36 $ 1.08 $ 1.05 Earnings (Loss) Per Share: Income Before Extraordinary Losses $ .63 $ .56 $ 2.24 $ 1.67 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- -- -- (2.73) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- -- -- (.02) Earnings (Loss) Per Share $ .63 $ .56 $ 2.24 $(1.08) The accompanying notes are an integral part of these financial statements. BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts) September 30, December 31, 1996 1995 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 1,338 $ 1,711 Temporary cash investments 44 71 Accounts receivable, net of allowance for uncollectibles of $162 and $171 3,846 3,772 Material and supplies 416 430 Other current assets 404 521 6,048 6,505 Investments and Advances 2,563 2,418 Property, Plant and Equipment: Property, Plant and Equipment 49,232 46,869 Accumulated Depreciation 27,625 25,777 21,607 21,092 Intangible Assets, net 1,321 1,527 Deferred Charges and Other Assets 529 338 Total Assets $ 32,068 $ 31,880 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year $ 2,219 $ 2,951 Accounts payable 1,357 1,724 Other current liabilities 2,671 2,715 6,247 7,390 Long-Term Debt 7,878 7,924 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,728 1,650 Unamortized investment tax credits 297 355 Other liabilities and deferred credits 2,860 2,736 4,885 4,741 Shareholders' Equity: Common stock, $1 par value 1,009 1,007 Paid-in capital 7,664 7,619 Retained earnings 5,262 4,099 Shares held in trust (409) (374) Guarantee of ESOP debt (468) (526) 13,058 11,825 Total Liabilities and Shareholders' Equity $ 32,068 $ 31,880 The accompanying notes are an integral part of these financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions, Except Per Share Amounts) For the Nine Months Ended September 30, 1996 1995 Cash Flows from Operating Activities: Net income (loss) $ 2,230 $(1,071) Adjustments to net income (loss): Extraordinary loss for discontinuance of SFAS No. 71 -- 4,449 Extraordinary loss on early extinguishment of debt -- 26 Depreciation and amortization 2,760 2,568 Gain on sale of paging business (442) -- Net losses and dividends from unconsolidated affiliates 174 143 Provision for losses on bad debts 180 159 Deferred income taxes and amortization of investment tax credits 78 (1,683) Net change in: Accounts receivable and other current assets (295) (308) Accounts payable and other current liabilities (472) (279) Deferred charges and other assets (193) (14) Deferred credits and other liabilities 178 261 Other reconciling items, net (20) (45) Net cash provided by operating activities 4,178 4,206 Cash Flows from Investing Activities: Capital expenditures (3,327) (2,823) Proceeds from sale of paging business 930 -- Proceeds from disposition of short-term investments 254 124 Purchases of short-term investments (228) (151) Investment dispositions and repayments of advances 16 111 Investments in and advances to unconsolidated affiliates (282) (401) Other investing activities, net (35) (47) Net cash used for investing activities (2,672) (3,187) Cash Flows from Financing Activities: Proceeds from short-term borrowings 18,998 14,394 Repayments of short-term borrowings (19,320) (14,802) Proceeds from long-term debt 67 835 Repayments of long-term debt (535) (376) Dividends paid (1,073) (1,027) Other financing activities, net (16) -- Net cash used for financing activities (1,879) (976) Net Increase (Decrease) in Cash and Cash Equivalents (373) 43 Cash and Cash Equivalents at Beginning of Period 1,711 606 Cash and Cash Equivalents at End of Period $ 1,338 $ 649 The accompanying notes are an integral part of these 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. However, BellSouth believes that the disclosures made are adequate for a fair presentation of results of operations, financial position and cash flows. 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 reports on Form 10-Q. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) Note B -- BellSouth Corporation Consolidated Shareholders' Equity Number of Shares Amount Shares Shares Guaran- Held in Held tee of Common Trust/ Common Paid-in Retained in ESOP Stock Treasury Stock Capital Earnings Trust Debt (1) (1) Balance at December 31, 1995 1,007 (13) $1,007 $7,619 $4,099 $(374) $(526) Net Income 2,230 Dividends declared (1,074) Shares issued for: Employee benefit plans 1 1 20 Grantor Trusts 1 (1) 1 34 (35) Treasury shares purchased (1) (30) ESOP activities and related tax benefit 7 58 Foreign currency translation adjustment ______ ______ ______ 21 ________ ______ _______ Balance at September 30, 1996 1,009 (15) $1,009 $7,664 $5,262 $(409) $(468) (1) Such shares are not considered to be outstanding for financial reporting purposes. As of September 30, 1996 there were approximately 14 million shares held in trust and 1 million treasury shares held by the company. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) Note C -- Supplemental Cash Flow Information For the Nine Months Ended September 30, 1996 1995 Cash Paid For: Income taxes $1,074 $ 932 Interest $ 529 $ 566 Noncash Investing and Financing Activities: Shares issued to grantor trusts $ 35 $ 38 Note D -- Sale of Paging Subsidiary In January 1996, BellSouth sold to MobileMedia Corporation its paging subsidiary, Mobile Communications Corporation of America (MCCA), and its two-way nationwide narrowband personal communications services license for a total of $930. The pretax gain on such sale was $442. For the three- and nine-month periods ended September 30, 1995, MCCA's total operating revenues were $92 and $257, respectively. Total operating expenses for the same periods were $81 and $228, respectively. Total assets at December 31, 1995 were $355. Note E -- Extraordinary Losses Discontinuance of SFAS No. 71. In the second quarter 1995, BellSouth Telecommunications, Inc. (BellSouth Telecommunications) discontinued application of SFAS No. 71 and recorded a non-cash extraordinary charge of $2,718 (net of a deferred tax benefit of $1,731). The components of the charge included a $3,002 (after tax) reduction of telephone plant partially offset by a $194 (after tax) benefit for a change in the method by which BellSouth Telecommunications reported its directory publishing revenues, a $71 (after tax) benefit reflecting the removal of regulatory assets and liabilities that were recorded as a result of previous actions by regulators and a $19 (after tax) benefit for the partial acceleration of unamortized investment tax credits associated with the reductions in asset carrying values and in asset lives. Early Extinguishment of Debt. In the second quarter 1995, BellSouth Telecommunications issued $300 of Ten Year Notes, the proceeds from which were used to redeem and refinance an outstanding $300 Debenture issue, due August 1, 2029. As a result of the early extinguishment of this issue, an extraordinary loss of $16 (net of taxes of $10) was recognized in the second quarter 1995. BELLSOUTH CORPORATION SELECTED OPERATING DATA (Unaudited) Percent Change 1996 vs. 1995 vs. 1996 1995 1994 Network Access Lines in Service at September 30 (Thousands)(a): By Type: Residence 15,039 3.4% 3.5% Business 6,639 8.5 7.7 Other 265 3.5 0.8 Total Access Lines 21,943 4.9 4.7 By State: Florida 5,815 5.5 4.6 Georgia 3,738 6.5 6.0 Tennessee 2,525 4.7 4.4 North Carolina 2,192 5.2 5.7 Louisiana 2,170 3.5 3.8 Alabama 1,846 3.8 3.9 South Carolina 1,338 4.1 4.0 Mississippi 1,190 3.2 3.8 Kentucky 1,129 3.4 3.7 Total Access Lines 21,943 4.9 4.7 Percent Change for the Periods Ended 1996 vs. 1995 vs. 1996 1995 1994 Access Minutes of Use (Millions)(a)(b): Interstate: Three months ended March 31 16,660 10.1% 7.7% Three months ended June 30 16,847 8.0 8.2 Three months ended September 30 16,966 8.0 8.5 Nine months ended September 30 50,473 8.7 8.1 Intrastate: Three months ended March 31 5,118 13.0 13.1 Three months ended June 30 5,235 9.3 14.7 Three months ended September 30 5,348 9.5 13.8 Nine months ended September 30 15,701 10.5 13.9 Total Minutes of Use: Three months ended March 31 21,778 10.8 8.9 Three months ended June 30 22,082 8.3 9.6 Three months ended September 30 22,314 8.3 9.7 Nine months ended September 30 66,174 9.1 9.4 Toll Messages (Millions)(a): Three months ended March 31 281 (24.1) (4.3) Three months ended June 30 258 (26.7) (11.4) Three months ended September 30 252 (23.6) (14.9) Nine months ended September 30 791 (24.8) (10.2) 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. Percent Change 1996 vs. 1995 vs. 1996 1995 1994 Cellular Customers Served at September 30(Equity basis)(Thousands)(c): Domestic Cellular 3,333 31.0% 31.9% International Cellular 1,110 101.8 77.9 (c) Includes customers served based on BellSouth's ownership percentage in all markets served. For the Nine Months Ended September 30, 1996 Ratio of Earnings to Fixed Charges (d) 6.8 (d) 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 reports 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 71% of BellSouth's Total Operating Revenues for each of the nine-month periods ended September 30, 1996 and 1995 were from wireline services provided by BellSouth Telecommunications. Charges for local, access and toll services for the nine-month period ended September 30, 1996 accounted for approximately 61%, 33% and 6%, respectively, of the wireline revenues discussed above. Revenues from wireless communications services and directory advertising and publishing services accounted for approximately 15% and 8%, respectively, of Total Operating Revenues for the nine months ended September 30, 1996. The remainder of such revenues was derived principally from other nonregulated services provided by BellSouth Telecommunications. RESULTS OF OPERATIONS For the Three For the Nine Months Ended Months Ended September 30, September 30, 1996 1995 1996 1995 Income Before Extraordinary Losses $ 631 $ 559 $ 2,230 $ 1,663 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- -- -- (2,718) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- -- -- (16) Net Income (Loss) $ 631 $ 559 $ 2,230 $(1,071) Earnings (Loss) Per Share: Income Before Extraordinary Losses $ .63 $ .56 $ 2.24 $ 1.67 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- -- -- (2.73) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- -- -- (.02) Earnings (Loss) Per Share $ .63 $ .56 $ 2.24 $(1.08) For the three and nine-month periods ended September 30, 1996, Income Before Extraordinary Losses increased by $72 (12.9%) and $567 (34.1%), respectively, and Income Before Extraordinary Losses Per Share increased $.07 (12.5%) and $.57 (34.1%), respectively. The increase for the three-month period resulted primarily from continued strong growth in key business volumes and expense savings primarily attributable to employee reductions under BellSouth Telecommunications' restructuring and work force reduction plans. The increase for the nine-month period resulted primarily from the $344 gain ($.35 per share) on sale of BellSouth's paging business (see Note D to the Consolidated Financial Statements) as well as the growth in key business volumes and expense savings previously noted. For a description of the second quarter 1995 extraordinary losses, see Note E to the Consolidated Financial Statements. Volumes of Business The total number of access lines in service as of September 30, 1996 increased by approximately 1,019,000 (4.9%) since September 30, 1995 to 21,943,000, compared to a 4.7% rate of increase for the same period a year ago. Business and residence access lines increased by 8.5% and 3.4%, respectively, compared to growth rates of 7.7% and 3.5% in 1995. The number of second residence lines, included in total residence lines, increased by 280,000 (23.5%) to 1,474,000 and accounted for approximately 57.4% and 27.5% of the overall increases in residence access lines and total access lines, respectively, since September 30, 1995. Such second residence lines are generally used for home office purposes, access to on- line computer services and children's phones. The growth in all categories of access lines was primarily attributable to continued economic improvement 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 1,715 million (8.3%) and 5,528 million (9.1%) for the three- and nine-month periods ended September 30, 1996, respectively, compared to increases of 9.7% and 9.4% for the same periods last year. 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- and nine- month periods ended September 30, 1996, toll messages decreased by 78 million (23.6%) and 261 million (24.8%), respectively, compared to decreases of 14.9% and 10.2% for the corresponding periods in 1995. The decrease in 1996 was primarily attributable to the expansion of local area calling plans (LACPs) in Florida, Georgia and North Carolina and also to increased competition from interexchange carriers in the intraLATA toll market. While the respective impacts of such factors cannot be precisely quantified, BellSouth estimates that about 70% of the decline in toll messages was attributable to expanded LACPs and about 30% was due to increased competition. The expanded LACPs discussed above and future implementation of other such plans in BellSouth Telecommunications' service region, coupled with competition in the intraLATA toll market, will adversely impact future toll message volumes. Expanded LACPs and the effects of competition result in the transfer of calls from toll to local service and access categories, respectively, but the corresponding revenues are not generally shifted at commensurate rates. Domestic cellular customers (equity-weighted) increased by 789,000 (31.0%) since September 30, 1995 to 3,333,000 due to continuing high demand for wireless services. The overall penetration rate (number of customers as a percentage of the total population in the service territory) increased from 6.4% at September 30, 1995 to 8.2% at September 30, 1996. Total minutes of use have also continued to increase and average minutes of use per cellular customer have remained essentially unchanged from third quarter 1995, with stimulation due to promotions being substantially offset by the continuing trend of increased penetration into lower-usage market segments. Since September 30, 1995, the number of international cellular customers increased by 560,000 (101.8%) to 1,110,000. Growth in total minutes of use for international cellular properties remained strong due to demand stimulated by competitive programs, enhanced services and underdeveloped land-line service. Operating Revenues Total Operating Revenues increased $397 (9.0%) and $869 (6.6%) for the three- and nine-month periods ended September 30, 1996, respectively, when compared to the corresponding 1995 periods. The components of Total Operating Revenues were as follows: For the Three For the Nine Months Ended Months Ended September 30, September 30, 1996 1995 1996 1995 Local Service $2,061 $1,857 $ 6,012 $ 5,419 Interstate Access 892 805 2,672 2,406 Intrastate Access 207 230 627 683 Toll 195 220 600 767 Wireless Communications 723 665 2,039 1,888 Directory Advertising and Publishing 415 366 1,100 1,108 Other Services 336 289 940 850 Total Operating Revenues $4,829 $4,432 $13,990 $13,121 Local Service revenues increased $204 (11.0%) and $593 (10.9%) for the three- and nine-month periods ended September 30, 1996, respectively, as compared to the same 1995 periods. The increases for both periods were due primarily to 4.9% growth in access lines in service since September 30, 1995 and the effect of expanded LACPs. Also contributing were increases of approximately $80 and $170, for the three- and nine-month periods, respectively, due to higher customer demand for Touchstar and Custom Calling services, including those offered under the Complete Choicesm plan. Interstate Access revenues increased $87 (10.8%) and $266 (11.1%) for the three- and nine-month periods ended September 30, 1996, respectively, as compared to the same prior year periods. The increases for both periods were attributable primarily to growth in minutes of use of 8.0% and 8.7%, respectively, and, for the nine- month period ended September 30, 1996, net rate activity, which increased revenues by $30. Intrastate Access revenues decreased $23 (10.0%) and $56 (8.2%) for the three- and nine-month periods ended September 30, 1996, respectively, when compared to the corresponding 1995 periods. The decreases were due primarily to rate reductions of $37 and $110, respectively, compared with the same 1995 periods, partially offset by increases attributable to growth in minutes of use of 9.5% and 10.5%, respectively. Toll revenues decreased $25 (11.4%) and $167 (21.8%) for the three- and nine-month periods ended September 30, 1996 when compared to the same prior year periods. The decreases were primarily attributable to the expansion of LACPs and increased competition, the effect of which reduced toll messages by 23.6% and 24.8% in the three- and nine-month periods, respectively. The decreases were lessened as a result of a retroactive independent company settlement during third quarter 1995 which reduced revenues by $31 in both the three- and nine-month periods. Wireless Communications revenues include revenues from the consolidated wireless communications businesses (cellular and, for 1995, paging within BellSouth Enterprises) as well as revenues from interconnections by unaffiliated cellular carriers with BellSouth Telecommunications' network. (BellSouth's interests in the net income or loss of the unconsolidated wireless businesses within BellSouth Enterprises, which are accounted for under the equity method of accounting, are recorded in Other Income, net.) Wireless Communications revenues increased $58 (8.7%) and $151 (8.0%) for the three- and nine-month periods ended September 30, 1996, respectively, when compared to the same periods last year. The increases were primarily attributable to continued growth of the customer base in domestic and international cellular markets, partially offset by the effect of the January 1996 sale of BellSouth's paging business. For the three- and nine-month periods ended September 30, 1995, revenues from paging services were $92 and $257, respectively. Excluding the effects of the sale of the paging business, Wireless Communications revenues increased 26.2% and 25.0% for the three- and nine-month periods, respectively. Directory Advertising and Publishing revenues increased $49 (13.4%) and decreased $8 (.7%) for the three- and nine-month periods ended September 30, 1996, respectively, when compared to the same prior year periods. The increase for the three-month period was due primarily to changes in the issue dates of certain directories and volume growth which increased revenues in the quarter ended September 30, 1996 by $25 and $24, respectively. The decrease for the nine-month period was due primarily to a $41 reduction resulting from the adoption of issue basis accounting, effective in the third quarter of 1995, for all directory revenues in connection with the discontinuance of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," and changes in the issue dates of certain directories which decreased revenues in the nine-month period by $24. The decrease for the nine-month period was partially offset by increased revenues attributable to volume growth of $57. Other Services revenues are principally comprised of revenues from customer premises equipment (CPE) sales and maintenance services, billing and collection services and other nonregulated services (primarily inside wire services) offered by BellSouth Telecommunications. Other Services revenues increased $47 (16.3%) and $90 (10.6%) for the three- and nine-month periods ended September 30, 1996, respectively, when compared to the corresponding 1995 periods. The increases for the three- and nine- month periods were primarily attributable to increased CPE sales, billing and collection services and other non-regulated services offered by BellSouth Telecommunications partially offset by the sale of a subsidiary which performed computer maintenance. The increase for the nine-month period was also due to incremental rate impacts related to potential sharing under certain state regulatory plans. Operating Expenses Total Operating Expenses increased $254 (7.5%) and $546 (5.5%) for the three- and nine-month periods ended September 30, 1996 compared to the same periods in 1995. The components of Total Operating Expenses were as follows: For the Three For the Nine Months Ended Months Ended September 30, September 30, 1996 1995 1996 1995 Depreciation and Amortization $ 940 $ 874 $ 2,760 $ 2,568 Other Operating Expenses: Cost of Services and Products 1,516 1,542 4,483 4,530 Selling, General and Administrative 1,172 958 3,175 2,774 2,688 2,500 7,658 7,304 Total Operating Expenses $ 3,628 $ 3,374 $10,418 $ 9,872 Depreciation and Amortization increased $66 (7.6%) and $192 (7.5%) for the three- and nine-month periods ended September 30, 1996, respectively, compared to the same periods in 1995. The increases were due primarily to higher levels of property, plant and equipment since September 30, 1995, and, in the case of the nine- month period, shorter depreciable lives subsequent to the discontinuance of SFAS No. 71. The higher levels of property, plant and equipment resulted from continued growth in the customer base for wireless and wireline services and continued modernization of the networks. Other Operating Expenses are comprised of Cost of Services and Products and Selling, General and Administrative. Cost of Services and Products includes employee and employee-related expenses associated with network repair and maintenance, material and supplies expense, cost of tangible goods sold and other expenses associated with providing services. Selling, General and Administrative includes expenses related to sales activities such as salaries, commissions, benefits, travel, marketing and advertising expenses and administrative expenses. Other Operating Expenses increased $188 (7.5%) and $354 (4.8%) for the three- and nine-month periods ended September 30, 1996, respectively, when compared to the corresponding 1995 periods. The increases are primarily related to growth in the wireless and wireline businesses. Expenses related to the cellular business increased $93 and $248 for the three- and nine-month periods, respectively, as a result of sustained growth in the cellular customer base, reflecting additional marketing and operational costs associated with higher levels of sales and expanded operations. In addition, other operating expenses increased $25 and $35 in the three- and nine- month periods as a result of expenses incurred in connection with the initiation of personal communications service during 1996. At BellSouth Telecommunications, Other Operating Expenses increased $96 and $188, for the three- and nine-month periods ended September 30, 1996, respectively, due principally to higher business volumes and costs related to initiatives to compete effectively, including new service offerings and intensified marketing and advertising. The increases for the periods were partially offset by decreases of approximately $5 and $97, for the three- and nine-month periods ended September 30, 1996, respectively, for employee-related costs in the core wireline business, including expenses for employee benefits. The decreases in such labor costs reflect net employee reductions in BellSouth Telecommunications' telephone operations of approximately 6,200 since September 30, 1995 primarily attributable to previously-disclosed restructuring and work force reduction plans, partially offset by annual compensation increases for management and represented employees. The increases in other operating expenses at BellSouth Telecommunications were also partially offset by the sale of a subsidiary which performed computer maintenance. The increases for the periods were partially offset by the effect of the January 1996 sale of BellSouth's paging business. For the three- and nine-month periods ended September 30, 1995, Other Operating Expenses for the paging business were $70 and $194, respectively. Excluding the effects of the sale of the paging business, Other Operating Expenses increased 10.6% and 7.7%, respectively. Other Income Statement Items The other income statement components were as follows: For the Three For the Nine Months Ended Months Ended September 30, September 30, 1996 1995 1996 1995 Interest Expense $177 $172 $531 $532 Gain on Sale of Paging Business -- -- 442 -- Other Income, net 32 53 84 51 Provision for Income Taxes 425 380 1,337 1,105 Interest Expense increased $5 (2.9%) and decreased $1 (.2%) for the three- and nine-month periods ended September 30, 1996, respectively, compared to the same periods last year. The increase for the three-month period was primarily attributable to higher average debt balances, partially offset by lower average interest rates on borrowings due in part to refinancings during 1995. Gain on Sale of Paging Business represents the pre-tax gain on the sale of BellSouth's paging business in January 1996. Other Income, net decreased $21 and increased $33 for the three- and nine-month periods ended September 30, 1996, respectively, compared to the corresponding periods in 1995. The decrease in the three-month period was primarily attributable to increased equity in losses of unconsolidated affiliates and the effect of non- strategic business activities partially offset by higher interest income due to the investment of cash proceeds from the sale of the paging business. The increase for the nine-month period was primarily attributable to higher interest income, partially offset by increased equity in losses of unconsolidated affiliates. The amounts of equity in losses of unconsolidated affiliates were ($7) and ($65), respectively, for the three- and nine-month periods ending September 30, 1996 compared to $0 and ($46) for the same periods in 1995. The increased equity in losses of unconsolidated affiliates in the nine-month period was attributable to certain international businesses, principally operations in Germany and Denmark, partially offset by improved results from unconsolidated domestic cellular operations. Provision for Income Taxes increased $45 (11.8%) and $232 (21.0%) for the three- and nine-month periods ended September 30, 1996, respectively, over the comparable 1995 periods. For the three- and nine-month periods ended September 30, 1996, BellSouth's effective tax rates were 40.2% and 37.5%, respectively, compared to 40.5% and 39.9%, respectively, for the same periods last year. The lower effective tax rate for the nine-month period in 1996 was due primarily to a higher tax than book basis for the paging business, which resulted in a lower gain on sale for computing tax expense. 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. While current liabilities exceeded current assets at both September 30, 1996 and December 31, 1995, 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 Nine Months Ended September 30, 1996 1995 Net Cash Provided by Operating Activities $4,178 $4,206 Operating Activities. Net cash provided by operating activities decreased $28 (0.7%) in the first nine months of 1996 compared with the same period in 1995. The decrease was primarily due to liability reductions and payment of a deposit related to a FCC license auction partially offset by increases in operating income. For the Nine Months Ended September 30, 1996 1995 Net Cash Used for Investing Activities $(2,672) $(3,187) 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 decreased $515 (16.2%) in the first nine months of 1996 compared to the corresponding 1995 period. The decrease was primarily due to $930 in cash received from the sale of the paging business, partially offset by higher capital expenditures of $504 related to network development. Internal sources provided substantially all cash required for capital expenditures in the first nine months of 1996. For the remainder of 1996, BellSouth expects to continue to finance capital expenditures primarily through internally generated funds, and, to the extent necessary, from external sources. For the Nine Months Ended September 30, 1996 1995 Net Cash Used for Financing Activities $(1,879) $(976) Financing Activities. Net cash used for financing activities increased $903 (92.5%) in the first nine months of 1996 compared to the same period last year. The increase reflects repayments of $266 in commercial paper and $485 in debentures as well as reductions in the level of new long-term borrowings in 1996. BellSouth's debt to total capitalization ratio decreased to 43.5% at September 30, 1996 from 46.7% at December 31, 1995. The decrease was primarily caused by the repayment of commercial paper described above and the increase in Shareholders' Equity due to earnings during 1996. BellSouth's Board of Directors has authorized the repurchase of an unspecified number of shares of BellSouth Common Stock on the open market or through privately negotiated purchases. As of September 30, 1996, approximately 798,000 shares had been repurchased for an aggregate of $30; 133,000 of such shares had been reissued for an aggregate of $5 under stock option and benefit plans. BellSouth intends to use the remaining shares and any additional purchases for general corporate purposes. In November 1996, BellSouth committed to issue $300 of 6.04% debentures due November 15, 2026. The proceeds of such issuance will be used to retire commercial paper. The issuance of the debentures is scheduled for November 14, 1996. After giving effect to this transaction, shelf registration statements were on file with the Securities and Exchange Commission under which $1,927 of debt securities could be publicly offered. REGULATORY DEVELOPMENTS AND COMPETITION Federal Developments In February 1996, Congress passed the Telecommunications Act of 1996 (the 1996 Act). Among its provisions, the 1996 Act removes state legislative and regulatory barriers to competition for local telephone service, subject only to competitively neutral requirements to preserve and advance universal service, protect the public safety and welfare, maintain the quality of telecommunnications services and safeguard the rights of customers. The 1996 Act also includes requirements that incumbent local exchange carriers (ILECs) negotiate agreements for the interconnection and access to network elements on an unbundled basis, with competing companies. If a negotiated agreement cannot be reached, either party may seek arbitration with the state regulatory authority. The arbitrator must set rates for access to network elements on an unbundled basis, based on cost, and may include a reasonable profit. ILECs are also required to negotiate agreements for providing their retail services at wholesale rates for the purposes of resale by competing companies. If agreement cannot be reached, the arbitrator shall set the wholesale rates at the ILEC's retail rates less costs to be avoided. In connection with the requirements of the 1996 Act, on August 8, 1996, the FCC released an order adopting rules governing interconnection and open competition in the local telephone service industry (the Order). Among the issues specifically addressed by the Order are the network elements that ILECs must make available; pricing standards to be followed by states in setting rates for interconnection, access to network elements on an unbundled basis and resold services. The FCC will address access charges and universal service matters in subsequent proceedings, although an interim access charge plan will lower access charges paid by carriers that purchase unbundled network elements from ILECs. The decision also reduces rates paid by wireless carriers for connection to the wireline networks of the ILECs. BellSouth and several other ILECs joined in an appeal of the Order to the United States Court of Appeals for the Eighth Circuit (the Court). Upon request of several state commissions and ILECs, the Court stayed the Order in part, pending appeal. Such stay relates to pricing prescriptions and certain other terms contained within the Order. The Court has scheduled oral arguments for January 17, 1997. BellSouth is evaluating the impact that the Order may have on its operations. It will not be possible to assess fully its implications until all challenges thereto have been resolved and the state regulatory commissions have addressed the related matters within their jurisdictions. State Developments In order to comply with the requirements of the 1996 Act, all states in BellSouth Telecommunications' local service area have proceedings and other activities in progress necessary to implement open competition for local service. Among the issues being addressed in these proceedings are the level of wholesale discounts required to be offered by the ILECs to carriers providing competing local service and the price of access to network elements on an unbundled basis. A number of carriers have been approved or have filed applications to provide local service in many of the areas in which BellSouth Telecommunications provides service. BellSouth has executed 27 interconnection or resale agreements with such carriers. BellSouth believes that a number of these agreements address all of the 14 checklist items required for interLATA authority contained in the 1996 Act. BellSouth continues to negotiate with a number of other telecommunications companies and is also involved in arbitration proceedings with carriers (including AT&T, MCI and Sprint) with whom BellSouth has been unable to reach agreements on pricing and other provisions. Price regulation plans have been approved or authorized by the requisite legislative or regulatory bodies in all states in the BellSouth Telecommunications local service area. Recent significant developments with respect to discounts to be offered to carriers providing competing local service and other related issues are discussed below. Georgia. In second quarter 1996, the Georgia Public Service Commission ordered a wholesale discount rate to local service resellers of 20.3% for residential services and 17.3% for business services. The discount levels are to remain in effect for a twelve- month period from implementation after which the Commission will conduct a review to determine if any modifications are necessary. BellSouth Telecommunications appealed these discounts to the Superior Court of Fulton County, Georgia which affirmed the Order on October 8, 1996. The Commission also set out a time line starting in the third quarter of 1996 for electronic interface implementation with carriers providing competing local service. Kentucky. In September 1996, the Kentucky Public Service Commission issued an order concerning local competition and universal service funds. The order set an interim, single discount rate of 19.2%. The order also provided that Commission-approved negotiated agreements for interconnection shall be the primary means for implementing local competition. The universal service fund rules established by the Commission are preliminary and interim until the FCC issues its order on this matter. Louisiana. In October 1996, the Louisiana Public Service Commission approved the Administrative Law Judge's recommendation that the wholesale discount based on BellSouth Telecommunications' avoided cost should be 20.72%, subject to adjustment pending further hearings on resale. South Carolina. As previously disclosed, in December 1994, the South Carolina Public Service Commission issued an order which, in addition to a prospective rate reduction of $26 million, required a refund of approximately $29 million, plus interest, based on the 1992 adjusted earnings of BellSouth Telecommunications. The prospective rate reduction was implemented, but the refund was stayed pending judicial review of the decision. On October 23, 1996, the South Carolina Court of Common Pleas entered its order affirming the Commission's order of the refund but reversing the rate of interest applied by the Commission. BellSouth Telecommunications intends to appeal the order to the South Carolina Supreme Court. The Commission has previously postponed review of BellSouth Telecommunications' earnings in 1993 and 1994 until a resolution of the 1992 period is reached. While complete assurance cannot be given as to the outcome of these matters, BellSouth believes that any financial impact would not be material to its financial position, annual operating results or cash flows. BUSINESS DEVELOPMENTS In April 1996, BellSouth Telecommunications received approval from the Florida Public Service Commission to provide competing local service in other carriers' service areas. BellSouth Telecommunications intends to offer local service in the near future to business customers in parts of the Orlando market not previously served by BellSouth Telecommunications. BellSouth plans to begin offering interLATA wireline service within its nine-state local service territory as soon as possible after completion of FCC, appellate court and state regulatory proceedings and satisfaction of requirements arising out of these proceedings. As a result of the appellate proceedings described in "Federal Developments," it is uncertain when BellSouth will be authorized to initiate such service. As permitted by the 1996 Act, BellSouth began offering interLATA wireless service to its cellular customers in February. Also, in March, BellSouth began joint marketing of wireless and wireline services in select markets. PART II -- OTHER INFORMATION 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. 10r BellSouth Personal Retirement Account Pension Plan, as amended and restated effective July 1, 1996. 10x BellSouth Retirement Savings Plan as amended and restated effective July 1, 1996. 10y BellSouth Corporation Officer Short Term Incentive Award Plan. 10z BellSouth Corporation Non-Employee Directors' Stock Plan. 10aa Form of Executive Officer Successor and Retirement Agreement 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule. (b) Reports on Form 8-K: Date of Event Subject October 17, 1996 Third Quarter 1996 Earnings Release and 1997 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/ Ronald M. Dykes RONALD M. DYKES Executive Vice President, Chief Financial Officer and Comptroller (Principal Financial and Accounting Officer) November 12, 1996 EXHIBIT INDEX Exhibit Number 10r BellSouth Personal Retirement Account Pension Plan, as amended and restated effective July 1, 1996. 10x BellSouth Retirement Savings Plan as amended and restated effective July 1, 1996. 10y BellSouth Corporation Officer Short Term Incentive Award Plan. 10z BellSouth Corporation Non-Employee Directors' Stock Plan. 10aa Form of Executive Officer Successor and Retirement Agreement 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule.