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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8607 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, 1997, a total of 991,394,906 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 Notes to Consolidated Financial Statements 6 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 14 Operating Expenses 16 Other Income Statement Items 18 Financial Condition 19 Regulatory Developments and Competition 20 Federal Developments 20 State Developments 21 Other Matters 21 Sale of Operations 21 Brazil Wireless Auctions 22 Competitive Local Exchange Carrier 22 Part II 4. Submission of Matters to a Vote of Security Holders 23 6. Exhibits and Reports on Form 8-K 24 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, 1997 1996 1997 1996 Operating Revenues: Network and related services: Local service $ 2,068 $ 2,021 $ 4,172 $ 3,951 Interstate access 928 871 1,845 1,780 Intrastate access 186 202 404 420 Toll 186 198 360 405 Wireless communications 815 691 1,580 1,316 Directory advertising and publishing 400 367 761 685 Other services 340 270 646 604 Total Operating Revenues 4,923 4,620 9,768 9,161 Operating Expenses: Cost of services and products 1,536 1,499 2,958 2,967 Depreciation and amortization 977 917 1,937 1,820 Selling, general and administrative 1,186 1,016 2,296 2,003 Total Operating Expenses 3,699 3,432 7,191 6,790 Operating Income 1,224 1,188 2,577 2,371 Interest Expense 187 174 370 354 Gain on Sale of Paging Business -- -- -- 442 Other Income, net 33 16 26 52 Income Before Income Taxes 1,070 1,030 2,233 2,511 Provision for Income Taxes 416 401 886 912 Net Income $ 654 $ 629 $ 1,347 $ 1,599 Weighted Average Common Shares Outstanding 992 994 992 994 Dividends Declared Per Common Share $ .36 $ .36 $ .72 $ .72 Earnings Per Share $ .66 $ .63 $ 1.36 $ 1.61 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, 1997 1996 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 1,308 $ 1,178 Temporary cash investments 58 51 Accounts receivable, net of allowance for uncollectibles of $198 and $180 4,064 4,087 Material and supplies 409 451 Other current assets 487 531 Total Current Assets 6,326 6,298 Investments and Advances 2,816 2,430 Property, Plant and Equipment: Property, Plant and Equipment 51,364 50,059 Accumulated Depreciation 29,424 28,234 Property, Plant and Equipment, net 21,940 21,825 Deferred Charges and Other Assets 608 610 Intangible Assets, net 1,705 1,405 Total Assets $ 33,395 $ 32,568 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year $ 2,666 $ 2,124 Accounts payable 1,661 1,446 Other current liabilities 2,870 2,871 Total Current Liabilities 7,197 6,441 Long-Term Debt 7,406 8,116 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,906 1,899 Unamortized investment tax credits 246 278 Other liabilities and deferred credits 2,657 2,585 Total Deferred Credits and Other Liabilities 4,809 4,762 Shareholders' Equity: Common stock, $1 par value 1,010 1,009 Paid-in capital 7,761 7,697 Retained earnings 6,178 5,541 Shares held in trust and treasury (533) (532) Guarantee of ESOP debt (433) (466) Total Shareholders' Equity 13,983 13,249 Total Liabilities and Shareholders' Equity $ 33,395 $ 32,568 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, 1997 1996 Cash Flows from Operating Activities: Net income $ 1,347 $ 1,599 Adjustments to net income: Depreciation and amortization 1,937 1,820 Gain from sale of paging business -- (442) Net losses and dividends from unconsolidated affiliates 147 136 Provision for uncollectibles 125 113 Deferred income taxes and unamortized investment tax credits 14 68 Net change in: Accounts receivable and other current assets (126) (146) Accounts payable and other current liabilities 200 (438) Deferred charges and other assets (151) (164) Other liabilities and deferred credits (2) 99 Other reconciling items, net 3 (89) Net cash provided by operating activities 3,494 2,556 Cash Flows from Investing Activities: Capital expenditures (1,978) (2,185) Proceeds from sale of paging business -- 930 Proceeds from disposition of short-term investments 145 67 Purchases of short-term investments (152) (31) Investments in and advances to unconsolidated affiliates (341) (247) Other investing activities, net (131) 15 Net cash used for investing activities (2,457) (1,451) Cash Flows from Financing Activities: Proceeds from short-term borrowings 9,375 12,649 Repayments of short-term borrowings (9,538) (13,112) Proceeds from long-term debt 30 56 Repayments of long-term debt (19) (527) Dividends paid (713) (715) Other financing activities, net (42) 2 Net cash used for financing activities (907) (1,647) Net Increase (Decrease) in Cash and Cash Equivalents 130 (542) Cash and Cash Equivalents at Beginning of Period 1,178 1,711 Cash and Cash Equivalents at End of Period $ 1,308 $ 1,169 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. 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. 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 Held Common in Common Paid-in Stock Trust Stock Capital and Treasury (1) Balance at December 31, 1996 1,009 (18) $1,009 $7,697 Net Income Dividends declared Shares issued for: Employee benefit plans 1 (12) Grantor Trusts 1 (1) 1 60 Acquisitions 2 8 Purchase of Treasury Stock (1) ESOP activities and related tax benefit Foreign currency translation adjustment 8 ______ ______ ______ ______ Balance at June 30, 1997 1,010 (17) $1,010 $7,761 ====== ====== ====== ====== (1) 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. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) Note B -- BellSouth Corporation Consolidated Shareholders' Equity ---------------------- Amount ----------------------- Shares Guarantee Held of ESOP Retained in Debt Earnings Trust Total and Treasury (1) Balance at December 31, 1996 $5,541 $(532) $(466) $13,249 Net Income 1,347 1,347 Dividends declared (714) (714) Shares issued for: Employee benefit plans 40 28 Grantor Trusts (61) -- Acquisitions 89 97 Purchase of Treasury Stock (69) (69) ESOP activities and related tax benefit 4 33 37 Foreign currency translation adjustment 8 ______ ______ ______ _______ Balance at June 30, 1997 $6,178 $(533) $(433) $13,983 ====== ====== ====== ======= (1) 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. 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, 1997 1996 Cash Paid For: Income taxes $ 830 $ 689 Interest $ 350 $ 373 Noncash Investing and Financing Activities: Shares issued to grantor trusts $ 61 $ 35 Shares issued for acquisitions $ 97 $ -- Note D -- South Carolina Regulatory Settlement On April 29, 1997, BellSouth Telecommunications, the South Carolina Public Service Commission and other parties to proceedings related to claims of alleged overearnings for the years 1992 through 1994 agreed on a settlement. Under the terms of the settlement, BellSouth Telecommunications will pay $72 to its customers. 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. Note E -- 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 ($344 or $.35 per share after tax). Note F -- Derivative Financial Instruments BellSouth generally enters into derivative financial instruments only for hedging purposes. Deferred accounting is applied when the derivative reduces the risk of the underlying hedged item effectively as a result of high inverse correlation with the value of the hedged item. If a derivative instrument either initially fails or later ceases to meet the criteria for deferral or settlement accounting, any subsequent gains or losses are recognized currently in income. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) Note F -- Derivative Financial Instruments (continued) Foreign exchange forward contracts are carried at fair value on the consolidated balance sheets. Gains and losses on foreign exchange forward contracts used as currency hedges of existing assets or liabilities are deferred and offset the deferred losses and gains of the underlying asset or liability. The net effect is ultimately recognized in income as the underlying transaction matures. Gains and losses related to qualifying hedges of firm commitments also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Currency swap contracts entered into as hedges of existing assets and liabilities are carried at fair value in the consolidated balance sheets. Gains and losses on currency swaps are deferred and offset against the deferred currency losses and gains of the underlying asset or liability. The net effect is ultimately recognized in income as the underlying transaction matures. Interest rate swap agreements are treated as off-balance sheet financial instruments. Receipts or payments resulting from these instruments are recognized as adjustments to interest expense as received or paid. BELLSOUTH CORPORATION SELECTED OPERATING DATA (Unaudited) Percent Change 1997 vs. 1996 vs. 1997 1996 1995 Network Access Lines in Service at June 30 (Thousands)(a): By Type: Residence 15,511 3.8% 3.5% Business 6,936 6.4 8.7 Other 270 3.1 2.3 Total Access Lines 22,717 4.6 5.0 By State: Florida 6,066 5.5 5.4 Georgia 3,887 5.0 7.1 Tennessee 2,605 4.2 4.6 North Carolina 2,284 6.0 5.2 Louisiana 2,227 3.5 3.5 Alabama 1,894 3.4 4.1 South Carolina 1,375 3.8 4.0 Mississippi 1,220 3.1 3.5 Kentucky 1,159 3.2 3.6 Total Access Lines 22,717 4.6 5.0 Percent Change for the Periods Ended 1997 vs. 1996 vs. 1997 1996 1995 Access Minutes of Use (Millions)(a)(b): Interstate: Three months ended March 31 17,721 6.4% 10.1% Three months ended June 30 18,552 10.1 8.0 Six months ended June 30 36,273 8.3 9.0 Intrastate: Three months ended March 31 5,552 8.4 13.0 Three months ended June 30 5,873 12.2 9.3 Six months ended June 30 11,425 10.3 11.1 Total Access Minutes of Use: Three months ended March 31 23,273 6.9 10.8 Three months ended June 30 24,425 10.6 8.3 Six months ended June 30 47,698 8.8 9.5 Toll Messages (Millions)(a): Three months ended March 31 230 (18.1) (24.1) Three months ended June 30 232 (10.5) (27.0) Six months ended June 30 462 (14.5) (25.5) 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 1997 vs. 1996 vs. 1997 1996 1995 Domestic Cellular 3,901 20.7% 31.1% International Cellular 1,784 82.8 102.9 PCS 65 -- -- (c) Includes customers served based on BellSouth's ownership percentage in all markets served. For the Six Months Ended June 30, 1997 Ratio of Earnings to Fixed Charges (d) 6.32 (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 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 69% and 72% of BellSouth's Total Operating Revenues for each of the six-month periods ended June 30, 1997 and 1996 were from wireline services provided by BellSouth Telecommunications. Charges for local, access and toll services for the six-month period ended June 30, 1997 accounted for approximately 62%, 33% and 5%, respectively, of the wireline revenues discussed above. Revenues from wireless communications services and directory advertising and publishing services accounted for approximately 16% and 8%, respectively, of Total Operating Revenues for the six months ended June 30, 1997. The remainder of such revenues was derived principally from sales and maintenance of customer premises equipment and other nonregulated services provided by BellSouth Telecommunications. RESULTS OF OPERATIONS For the Three For the Six Months Ended Months Ended June 30, June 30, 1997 1996 1997 1996 Net Income $ 654 $ 629 $ 1,347 $ 1,599 Earnings Per Share $ .66 $ .63 $ 1.36 $ 1.61 For the three and six-month periods ended June 30, 1997, Net Income increased by $25 (4.0%) and decreased by $252 (15.8%) when compared to the same 1996 periods. Earnings Per Share increased $.03 (4.8%) and decreased $.25 (15.5%) when compared to the same 1996 periods. The increase for the three-month period was primarily attributable to continued strong growth in key business volumes and expense savings due to employee reductions under BellSouth Telecommunications' work force reduction plan initiated in 1995. The increase was partially offset by an after-tax charge of $47 ($.05 per share) related to a regulatory settlement in South Carolina (see Note D to the Consolidated Financial Statements). The decrease for the six-month period resulted primarily from the $344 gain ($.35 per share) on sale of BellSouth's paging business (see Note E to the Consolidated Financial Statements) during the first quarter of 1996, partially offset in the first half of 1997 by continued strong growth in key business volumes and expense savings as discussed above. Volumes of Business The total number of access lines in service as of June 30, 1997 increased by approximately 996,000 (4.6%) since June 30, 1996 to 22,717,000, compared to a 5.0% rate of increase for the same period a year ago. The 1996 growth rate was positively impacted by pre- Olympics stimulation, particularly in the business line category. Business and residence access lines increased by 6.4% and 3.8%, respectively, compared to growth rates of 8.7% and 3.5% in the same 1996 period. The increase in residence lines includes additional lines used by customers for home office purposes, access to on-line computer services, children's phones and other uses. The number of additional residence lines increased by 396,000 (28.6%) to 1,783,000 and accounted for approximately 69.0% and 39.8% of the overall increase in residence access lines and total access lines, respectively, since June 30, 1996. 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 2,343 million (10.6%)and 3,838 million (8.8%) for the three and six-month periods ended June 30, 1997, compared to increases of 8.3% and 9.5% for the same 1996 periods. 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 impacted negatively 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 six- month periods ended June 30, 1997, toll messages decreased by 27 million (10.5%) and 78 million (14.5%), compared to a decrease of 27.0% and 25.5% for the same 1996 periods. The decrease in 1997 is primarily attributable to increasing competition from interexchange carriers in the intraLATA toll market as well as the continuing expansion of local area calling plans (LACPs). Competition in the intraLATA toll market coupled with continued expansion of LACPs will adversely impact future toll message volumes. Competition and the effects of expanded 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. Domestic cellular customers (equity-weighted) increased by 670,000 (20.7%) since June 30, 1996 to 3,901,000 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 8.1% at June 30, 1996 to 9.6% at June 30, 1997. While total minutes of use have also continued to increase, average minutes of use per cellular customer have declined slightly from second quarter 1996. Average minutes of use per cellular customer were negatively impacted by the continuing trend of increased penetration into lower-usage market segments. This decrease was partially offset by the impact of customer promotions. Since June 30, 1996, the number of international cellular customers (equity-weighted) increased by 808,000 (82.8%) to 1,784,000. Growth in total minutes of use for international cellular properties remained strong, primarily due to demand stimulated by market-driven pricing programs, enhanced services and underdeveloped land-line service. Similar to the domestic cellular market, average minutes of use per international customer have been negatively impacted by increased penetration into lower-usage market segments. Domestic PCS customers (equity-weighted) totaled 65,000 at June 30, 1997. Operating Revenues Total Operating Revenues increased $303 (6.6%) and $607 (6.6%) for the three- and six-month periods ended June 30, 1997, respectively, when compared to the same 1996 periods. Excluding a $72 reduction of revenues related to a regulatory settlement in South Carolina, the increases in operating revenues for the three- and six-month periods would have been 8.1% and 7.4%, respectively. The components of Total Operating Revenues were as follows: