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, 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 July 31, 1996, a total of 993,967,026 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 18 Regulatory Developments and Competition 20 Federal Developments 20 State Developments 20 Business Developments 21 Part II 4. Submission of Matters to a Vote of Security Holders 22 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 Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Operating Revenues: Network and related services: Local service $ 2,021 $ 1,793 $ 3,951 $ 3,562 Interstate access 871 806 1,780 1,601 Intrastate access 202 227 420 453 Toll 198 266 405 547 Wireless communications 691 623 1,316 1,223 Directory advertising and publishing 367 389 685 742 Other services 270 286 604 561 Total Operating Revenues 4,620 4,390 9,161 8,689 Operating Expenses: Cost of services and products 1,499 1,485 2,967 2,988 Depreciation and amortization 917 859 1,820 1,694 Selling, general and administrative 1,016 950 2,003 1,816 Total Operating Expenses 3,432 3,294 6,790 6,498 Operating Income 1,188 1,096 2,371 2,191 Interest Expense 174 186 354 360 Gain on Sale of Paging Business -- -- 442 -- Other Income (Expense), net 16 9 52 (2) Income Before Income Taxes and Extraordinary Losses 1,030 919 2,511 1,829 Provision for Income Taxes 401 362 912 725 Income Before Extraordinary Losses 629 557 1,599 1,104 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- (2,718) -- (2,718) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- (16) -- (16) Net Income (Loss) $ 629 $(2,177) $ 1,599 $(1,630) BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months For the Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Weighted Average Common Shares Outstanding 994 993 994 993 Dividends Declared Per Common Share $ .36 $ .345 $ .72 $ .69 Earnings (Loss) Per Share: Income Before Extraordinary Losses $ .63 $ .56 $ 1.61 $ 1.11 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- (2.73) -- (2.73) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- (.02) -- (.02) Earnings (Loss) Per Share $ .63 $(2.19) $ 1.61 $(1.64) The accompanying notes are an integral part of these financial statements. BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts) June 30, December 31, 1996 1995 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 1,169 $ 1,711 Temporary cash investments 35 71 Accounts receivable, net of allowance for uncollectibles of $154 and $171 3,852 3,772 Material and supplies 434 430 Other current assets 366 521 5,856 6,505 Investments and Advances 2,601 2,418 Property, Plant and Equipment: Property, Plant and Equipment 48,372 46,869 Accumulated Depreciation 26,999 25,777 21,373 21,092 Intangible Assets, net 1,313 1,527 Deferred Charges and Other Assets 501 338 Total Assets $ 31,644 $ 31,880 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year $ 2,047 $ 2,951 Accounts payable 1,410 1,724 Other current liabilities 2,661 2,715 6,118 7,390 Long-Term Debt 7,897 7,924 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,740 1,650 Unamortized investment tax credits 317 355 Other liabilities and deferred credits 2,789 2,736 4,846 4,741 Shareholders' Equity: Common stock, $1 par value 1,009 1,007 Paid-in capital 7,691 7,619 Retained earnings 4,987 4,099 Shares held in trust (409) (374) Guarantee of ESOP debt (495) (526) 12,783 11,825 Total Liabilities and Shareholders' Equity $ 31,644 $ 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 Six Months Ended June 30, 1996 1995 Cash Flows from Operating Activities: Net income (loss) $ 1,599 $ (1,630) 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 1,820 1,694 Gain on sale of paging business (442) -- Net losses and dividends from unconsolidated affiliates 136 102 Provision for losses on bad debts 113 110 Deferred income taxes and unamortized investment tax credits 68 (1,727) Net change in accounts receivable and other current assets (146) (218) Net change in accounts payable and other current liabilities (438) (524) Net change in deferred charges and other assets (164) 6 Net change in deferred credits and other liabilities 99 202 Other reconciling items, net (89) 13 Net cash provided by operating activities 2,556 2,503 Cash Flows from Investing Activities: Capital expenditures (2,185) (1,828) Proceeds from sale of paging business 930 -- Proceeds from disposition of short-term investments 67 112 Purchases of short-term investments (31) (146) Investment dispositions and repayments of advances 5 2 Investments in and advances to unconsolidated affiliates (247) (302) Other investing activities, net 10 (35) Net cash used for investing activities (1,451) (2,197) Cash Flows from Financing Activities: Proceeds from short-term borrowings 12,649 9,261 Repayments of short-term borrowings (13,112) (9,457) Proceeds from long-term debt 56 844 Repayments of long-term debt (527) (353) Dividends paid (715) (694) Other financing activities, net 2 (2) Net cash used for financing activities (1,647) (401) Net Decrease in Cash and Cash Equivalents (542) (95) Cash and Cash Equivalents at Beginning of Period 1,711 606 Cash and Cash Equivalents at End of Period $ 1,169 $ 511 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 report on Form 10- Q. For the three and six months ended June 30, 1995, weighted average common shares and related per share amounts have been restated to reflect a two-for-one stock split effective in November 1995. 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 Held tee of Common in Common Paid-in Retained in ESOP Stock Trust 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 1,599 Dividends declared (716) Shares issued for: Employee benefit plans 1 1 16 Grantor Trusts 1 (1) 1 34 (35) Treasury shares purchased for employee benefit plans (12) ESOP activities and related tax benefit 5 31 Foreign currency translation adjustment ______ ______ ______ 34 ________ ______ _______ Balance at June 30, 1996 1,009 (14) $1,009 $7,691 $4,987 $(409) $(495) (1) Such shares are not considered to be outstanding for financial reporting purposes. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) Note C -- Supplemental Cash Flow Information The following supplemental information is presented in accordance with the provisions of SFAS No. 95, "Statement of Cash Flows." For the Six Months Ended June 30, 1996 1995 Cash Paid For: Income taxes $ 689 $ 696 Interest $ 373 $ 375 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 six-month periods ended June 30, 1995, MCCA's total operating revenues were $84 and $165, respectively. Total operating expenses for the same periods were $74 and $147, 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 June 30 (Thousands)(a): By Type: Residence 14,937 3.5% 3.7% Business 6,522 8.7 7.7 Other 262 2.3 1.3 Total Access Lines 21,721 5.0 4.8 By State: Florida 5,750 5.4 4.8 Georgia 3,701 7.1 6.2 Tennessee 2,500 4.6 4.6 North Carolina 2,155 5.2 5.7 Louisiana 2,151 3.5 3.9 Alabama 1,832 4.1 3.9 South Carolina 1,325 4.0 4.2 Mississippi 1,184 3.5 4.1 Kentucky 1,123 3.6 3.6 Total Access Lines 21,721 5.0 4.8 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 Six months ended June 30 33,507 9.0 7.9 Intrastate: Three months ended March 31 5,118 13.0 13.1 Three months ended June 30 5,235 9.3 14.7 Six months ended June 30 10,353 11.1 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 Six months ended June 30 43,860 9.5 9.3 Toll Messages (Millions)(a): Three months ended March 31 281 (24.1) (4.3) Three months ended June 30 257 (27.0) (11.4) Six months ended June 30 538 (25.5) (7.9) (a) Prior period operating data are often revised at later dates to reflect updated information. The above information reflects the latest data available for the periods indicated. (b) Minutes of Use are classified as either interstate or intrastate based on the percentage interstate usage factor. This factor is updated periodically. BELLSOUTH CORPORATION SELECTED OPERATING DATA (Continued) (Unaudited) Percent Change 1996 vs. 1995 vs. 1996 1995 1994 Cellular Customers Served at June 30 (Equity basis)(Thousands)(c): Domestic Cellular 3,231 31.1% 36.6% International Cellular 976 102.9 81.8 (c) Includes customers served based on BellSouth's ownership percentage in all markets served. For the Six Months Ended June 30, 1996 Ratio of Earnings to Fixed Charges (d) 7.3 (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 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 72% and 71% of BellSouth's Total Operating Revenues for the six-month periods ended June 30, 1996 and 1995, respectively, were from wireline services provided by BellSouth Telecommunications. Charges for local, access and toll services for the six-month period ended June 30, 1996 accounted for approximately 60%, 34% and 6%, respectively, of the wireline revenues discussed above. Revenues from wireless communications services and directory advertising and publishing services accounted for approximately 14% and 7%, respectively, of Total Operating Revenues for the six months ended June 30, 1996. The remainder of such revenues was derived principally from other nonregulated services provided by BellSouth Telecommunications. RESULTS OF OPERATIONS Per share amounts for 1995 have been restated to reflect a two-for- one stock split effective in November 1995. For the Three For the Six Months Ended Months Ended June 30, June 30, 1996 1995 1996 1995 Income Before Extraordinary Losses $ 629 $ 557 $ 1,599 $ 1,104 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- (2,718) -- (2,718) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- (16) -- (16) Net Income (Loss) $ 629 $(2,177) $ 1,599 $(1,630) Earnings (Loss) Per Share: Income Before Extraordinary Losses $ .63 $ .56 $ 1.61 $ 1.11 Extraordinary Loss for Discontinuance of SFAS No. 71, net of tax -- (2.73) -- (2.73) Extraordinary Loss on Early Extinguishment of Debt, net of tax -- (.02) -- (.02) Earnings (Loss) Per Share $ .63 $(2.19) $ 1.61 $(1.64) For the three and six-month periods ended June 30, 1996, Income Before Extraordinary Losses increased by $72 (12.9%) and $495 (44.8%), respectively, and Income Before Extraordinary Losses Per Share increased $.07 (12.5%) and $.50 (45.0%), respectively. The increase for the three-month period resulted primarily from continued strong growth in key business volumes and expense savings attributable to employee reductions under BellSouth Telecommunications' restructuring and work force reduction plans. The increase for the six-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 since June 30, 1995 increased by approximately 1,030,000 (5.0%) to 21,721,000, compared to a 4.8% rate of increase for the same prior year period. Business and residence access lines increased by 8.7% and 3.5%, respectively, compared to growth rates of 7.7% and 3.7% in 1995. The number of second residence lines, included in total residence lines, increased by 237,000 (20.6%) to 1,387,000 and accounted for approximately 47.2% and 23.0% of the overall increases in residence access lines and total access lines, respectively, since June 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, including increased business activity in Georgia in preparation for the Olympics, and successful marketing programs. Access minutes of use represent the volume of traffic carried by interexchange carriers between LATAs, both interstate and intrastate, using BellSouth Telecommunications' local facilities. Total access minutes of use increased by 1,695 million (8.3%) and 3,813 million (9.5%) for the three- and six-month periods ended June 30, 1996, respectively, compared to increases of 9.6% and 9.3% 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 six- month periods ended June 30, 1996, toll messages decreased by 95 million (27.0%) and 184 million (25.5%), respectively, compared to decreases of 11.4% and 7.9% 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 767,000 (31.1%) since June 30, 1995 to 3,231,000 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 6.1% at June 30, 1995 to 8.1% at June 30, 1996. Total minutes of use have also continued to increase and average minutes of use per cellular customer have remained essentially unchanged from second quarter 1995, with stimulation due to promotions being substantially offset by the continuing trend of increased penetration into lower-usage market segments. Since June 30, 1995, the number of international cellular customers increased by 495,000 (102.9%) to 976,000. 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 $230 (5.2%) and $472 (5.4%) for the three- and six-month periods ended June 30, 1996, respectively, when compared to the corresponding 1995 periods. The components of Total Operating Revenues were as follows: For the Three For the Six Months Ended Months Ended June 30, June 30, 1996 1995 1996 1995 Local Service $2,021 $1,793 $3,951 $3,562 Interstate Access 871 806 1,780 1,601 Intrastate Access 202 227 420 453 Toll 198 266 405 547 Wireless Communications 691 623 1,316 1,223 Directory Advertising and Publishing 367 389 685 742 Other Services 270 286 604 561 Total Operating Revenues $4,620 $4,390 $9,161 $8,689 Local Service revenues increased $228 (12.7%) and $389 (10.9%) for the three- and six-month periods ended June 30, 1996, respectively, as compared to the same 1995 periods. The increases for both periods were due primarily to 5.0% growth in access lines in service since June 30, 1995. Also contributing were increases of $40 and $71, for the three- and six-month periods, respectively, due to higher customer demand for Touchstar and Custom Calling services, and the effect of expanded LACPs. Interstate Access revenues increased $65 (8.1%) and $179 (11.2%) for the three- and six-month periods ended June 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 9.0%, respectively, and, for the six- month period ended June 30, 1996, net rate activity, which increased revenues by $34. Intrastate Access revenues decreased $25 (11.0%) and $33 (7.3%) for the three- and six-month periods ended June 30, 1996, respectively, when compared to the corresponding 1995 periods. The decreases were due primarily to rate reductions of $40 and $71, respectively, compared with the same 1995 periods, partially offset by increases attributable to growth in minutes of use of 9.3% and 11.1%, respectively. Toll revenues decreased $68 (25.6%) and $142 (26.0%) for the three- and six-month periods ended June 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 27.0% and 25.5%, respectively. 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 (Expense), net.) Wireless Communications revenues increased $68 (10.9%) and $93 (7.6%) for the three- and six-month periods ended June 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 six-month periods ended June 30, 1995, revenues from paging services were $84 and $165, respectively. Excluding the effects of the sale of the paging business, Wireless Communications revenues increased 28.2% and 24.4% for the three- and six-month periods, respectively. Directory Advertising and Publishing revenues decreased $22 (5.7%) and $57 (7.7%) for the three- and six-month periods ended June 30, 1996, respectively, when compared to the same prior year periods. The decreases for both periods were due primarily to changes in the issue dates of certain directories which decreased revenues in the quarter and six months ended June 30, 1996 by $50 and $53, respectively. The decrease for the six-month period was also due 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." Both decreases were partially offset by increased revenues attributable to volume growth. 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 decreased $16 (5.6%) and increased $43 (7.7%) for the three- and six-month periods ended June 30, 1996, respectively, when compared to the corresponding 1995 periods. The decrease for the quarter was primarily attributable to the disposition of a subsidiary which performed computer maintenance. The increase for the six-month period was primarily attributable to incremental rate impacts related to potential sharing under certain state regulatory plans, partially offset by the disposition of a sudsidiary previously noted. Operating Expenses Total Operating Expenses increased $138 (4.2%) and $292 (4.5%) for the three- and six-month periods ended June 30, 1996 compared to the same periods in 1995. The components of Total Operating Expenses were as follows: For the Three For the Six Months Ended Months Ended June 30, June 30, 1996 1995 1996 1995 Depreciation and Amortization $ 917 $ 859 $ 1,820 $ 1,694 Other Operating Expenses: Cost of Services and Products 1,499 1,485 2,967 2,988 Selling, General and Administrative 1,016 950 2,003 1,816 2,515 2,435 4,970 4,804 Total Operating Expenses $ 3,432 $ 3,294 $ 6,790 $ 6,498 Depreciation and Amortization increased $58 (6.8%) and $126 (7.4%) for the three- and six-month periods ended June 30, 1996, respectively, compared to the same periods in 1995. The increases were due primarily to higher levels of property, plant and equipment since June 30, 1995, and 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 $80 (3.3%) and $166 (3.5%) for the three- and six-month periods ended June 30, 1996, respectively, when compared to the corresponding 1995 periods. The increases were primarily attributable to increased expenses of $88 and $155, respectively, related to sustained growth in the cellular customer base, reflecting additional marketing and operational costs associated with higher levels of sales and expanded operations. At BellSouth Telecommunications, Other Operating Expenses increased $52 and $92, for the three- and six-month periods ended June 30, 1996, respectively, due principally to higher business volumes and initiatives to effectively position the business for increased competition, partially offset by decreases of approximately $28 and $92, for the three- and six-month periods ended June 30, 1996, respectively, for labor 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 6,000 since June 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 for the periods were partially offset by the effect of the January 1996 sale of BellSouth's paging business. For the three- and six-month periods ended June 30, 1995, Other Operating Expenses for the paging business were $63 and $124, respectively. Excluding the effects of the sale of the paging business, Other Operating Expenses increased 6.0% and 6.2%, respectively. 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, 1996 1995 1996 1995 Interest Expense $174 $186 $354 $360 Gain on Sale of Paging Business -- -- 442 -- Other Income (Expense), net 16 9 52 (2) Provision for Income Taxes 401 362 912 725 Interest Expense decreased $12 (6.5%) and $6 (1.7%) for the three- and six-month periods ended June 30, 1996, respectively, compared to the same periods last year. The decrease for the three-month period was primarily attributable to lower average interest rates on borrowings due in part to refinancings during 1995, partially offset by higher average balances of long-term debt. Gain on Sale of Paging Business represents the pre-tax gain on the sale of BellSouth's paging business in January 1996. Other Income (Expense), net increased $7 and $54 for the three- and six-month periods ended June 30, 1996, respectively, compared to the corresponding periods in 1995. The increases were primarily attributable to higher interest income due to the investment of cash proceeds from the sale of the paging business. The amounts of equity in losses of unconsolidated affiliates were ($30) and ($58), respectively, for the three- and six-month periods ending June 30, 1996 compared to ($13) and ($45) for the same periods in 1995. The higher overall losses in 1996 reflect increased losses from certain international businesses, principally operations in Germany and Denmark, partially offset in the six-month period by improved results from unconsolidated domestic cellular operations. Provision for Income Taxes increased $39 (10.8%) and $187 (25.8%) for the three- and six-month periods ended June 30, 1996, respectively, over the comparable 1995 periods. For the three- and six-month periods ended June 30, 1996, BellSouth's effective tax rates were 38.9% and 36.3%, respectively, compared to 39.4% and 39.7%, respectively, for the same periods last year. The lower effective tax rate for the six-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 June 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 Six Months Ended June 30, 1996 1995 Net Cash Provided by Operating Activities $2,556 $2,503 Operating Activities. Net cash provided by operating activities increased $53 (2.1%) in the first six months of 1996 compared with the same period in 1995, primarily due to an increase in operating income. For the Six Months Ended June 30, 1996 1995 Net Cash Used for Investing Activities $(1,451) $(2,197) 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 $746 (34.0%) in the first six 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 $357 related to network development. Internal sources provided substantially all cash required for capital expenditures in the first six 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 Six Months Ended June 30, 1996 1995 Net Cash Used for Financing Activities $(1,647) $(401) Financing Activities. Net cash used for financing activities increased $1,246 (310.7%) in the first six months of 1996 compared to the same period last year. The increase reflects repayments of $459 in commercial paper and $485 in debentures as well as the absence of new long-term borrowings in 1996. As of August 1, 1996, shelf registration statements were on file with the Securities and Exchange Commission under which $2,227 of debt securities could be publicly offered. BellSouth's debt to total capitalization ratio decreased to 43.6% at June 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 June 30, 1996, approximately 254,000 shares have been repurchased for an aggregate of $12. The company intends to reissue the shares as stock options are exercised under existing plans. 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 preempts state legislative and regulatory barriers to competition for local telephone service, subject only to competitively neutral requirements to assure quality service consistent with public safety, convenience and consumer welfare. The 1996 Act also includes requirements that incumbent local exchange carriers (ILECs) unbundle network elements, capabilities and functions for purchase by authorized competing companies. The price of these unbundled items is calculated based on the cost of the item and may include a reasonable profit. ILECs are also required to sell their retail services to authorized competing local carriers for resale. The 1996 Act provides that services to be resold are to be provided to the competing companies at the ILECs' retail rates, discounted for avoided costs. 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. Among the issues specifically addressed by the FCC order are the network elements that ILECs must make available; pricing guidelines to be followed by states in setting rates for interconnection, unbundled network elements and resold services; and access charges paid by interexchange carriers providing competing local service. 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 is evaluating the impact that the order released on August 8 will have on its operations. It will not be possible to assess fully its implications until all likely 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 to consider rules and regulations necessary to implement open competition for local service. Among the issues being addressed in these proceedings is the level of discounts required to be offered by the ILECs to competing local carriers. A number of competing local 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 15 interconnection or resale agreements with competing local carriers. BellSouth believes that a number of these agreements address all of the 14 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 certain local exchange competitors with whom BellSouth was unable to reach agreements on all points negotiated. 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 competing local carriers, price regulation and other related issues are discussed below. Georgia. In second quarter 1996, the Georgia Public Service Commission ordered a wholesale discount level of 20.3% for residential services and 17.3% for business services, both of which were greater than BellSouth's proposals and the Commission Staff's recommendations (but less than proposed by other carriers). The discount levels are to remain in effect for a 12-month period from implementation after which the Commission will conduct a review to determine if modification is necessary. After reconsideration, the Commission also set out a time line starting in the third quarter 1996 for electronic interface implementation with competing local carriers. On July 11, BellSouth Telecommunications appealed the Commission's order to the Superior Court of Fulton County, Georgia. North Carolina. In May 1996, the North Carolina Utilities Commission modified a price regulation plan previously submitted by BellSouth Telecommunications. The modified plan became effective June 24, 1996. Under the terms of such plan, prices for residence basic local exchange services are capped for three years, after which any price increases are limited subject to an inflation-based formula. For business basic local exchange, interconnection and certain non-basic services, any increases in current prices are also subject to inflation-based formulas. Prices for toll switched access services are capped at current prices, after giving effect to specified rate reductions ordered in conjunction with approval of the price regulation plan. Such rate reductions, including the toll switched access component and elimination of charges for touch- tone service by the first anniversary of the plan, will total approximately $60 over the next three years. 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 and state regulatory proceedings and satisfaction of requirements arising out of these proceedings, expected to be concluded in late 1996 or early 1997; however, 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 cellular and wireline services in select markets. BellSouth expects to extend joint marketing of such services throughout its service region by the end of 1996. PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders BellSouth's 1995 Annual Meeting of Shareholders was held on April 22, 1996. At the meeting, the following items were submitted to a vote of the shareholders: Election of Directors: The following directors were elected with not less than 97.3% of the votes cast to serve terms expiring in 1999: For Withheld F. Duane Ackerman 768,767,257 15,987,849 Reuben V. Anderson 763,671,315 21,083,791 John G. Medlin, Jr. 768,658,654 16,096,452 C. Dixon Spangler, Jr. 768,673,956 16,081,150 Ronald A. Terry 768,488,342 16,266,764 Ratification of Coopers & Lybrand L.L.P. as Independent Auditors: For Against Abstain 772,126,596 6,857,213 5,771,297 Director Proposal Regarding Officer Short Term Incentive Award Plan: Broker Non- For Against Abstain Votes 679,934,830 85,795,319 19,024,957 0 Shareholder Proposal Regarding Officer Incentives: Broker Non- For Against Abstain Votes 98,300,295 590,128,359 25,217,029 71,109,423 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-8 Amendment dated July 22, 1996 to the BellSouth Personal Retirement Account Pension Plan. 10s-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Executive Benefit Plan(s). 10t-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s). 10u-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Board of Directors Benefit Plan(s). 10v-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s). 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 July 17, 1996 Second Quarter 1996 Earnings Release 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) August 12, 1996 EXHIBIT INDEX Exhibit Number 10r-8 Amendment dated July 22, 1996 to the BellSouth Personal Retirement Account Pension Plan. 10s-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Executive Benefit Plan(s). 10t-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s). 10u-1 Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Board of Directors Benefit Plan(s). 10v-1 Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s). 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule.