2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 May 8, 1996, a total of 994,195,411 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 9 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Results of Operations 11 Volumes of Business 12 Operating Revenues 13 Operating Expenses 14 Other Income Statement Items 16 Financial Condition 16 Regulatory and Competitive Environment 18 Regulation 18 Competition and Business Developments 19 Part II 6. Exhibits and Reports on Form 8-K 20 PART I - FINANCIAL INFORMATION BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months Ended March 31, 1996 1995 Operating Revenues: Network and related services: Local service $1,930 $1,769 Interstate access 909 795 Intrastate access 218 226 Toll 207 281 Wireless communications 625 600 Directory advertising and publishing 318 353 Other services 334 275 Total Operating Revenues 4,541 4,299 Operating Expenses: Cost of services and products 1,468 1,503 Depreciation and amortization 903 835 Selling, general and administrative 987 866 Total Operating Expenses 3,358 3,204 Operating Income 1,183 1,095 Interest Expense 180 174 Gain on Sale of Paging Business 442 -- Other Income (Expense), net 36 (11) Income Before Income Taxes 1,481 910 Provision for Income Taxes 511 363 Net Income $ 970 $ 547 Weighted Average Common Shares Outstanding 994 993 Dividends Declared Per Common Share $ .36 $ .345 Earnings Per Share $ .98 $ .55 The accompanying notes are an integral part of these financial statements. BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts) March 31, December 31, 1996 1995 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 988 $ 1,711 Temporary cash investments 57 71 Accounts receivable, net of allowance for uncollectibles of $161 and $171 3,629 3,772 Material and supplies 450 430 Other current assets 472 521 5,596 6,505 Investments and Advances 2,529 2,418 Property, Plant and Equipment: Property, Plant and Equipment 47,389 46,869 Accumulated Depreciation 26,359 25,777 21,030 21,092 Intangible Assets, net 1,304 1,527 Deferred Charges and Other Assets 410 338 Total Assets $ 30,869 $ 31,880 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year $ 1,588 $ 2,951 Accounts payable 1,239 1,724 Other current liabilities 2,909 2,715 5,736 7,390 Long-Term Debt 7,904 7,924 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,698 1,650 Unamortized investment tax credits 336 355 Other liabilities and deferred credits 2,699 2,736 4,733 4,741 Shareholders' Equity: Common stock, $1 par value 1,008 1,007 Paid-in capital 7,646 7,619 Retained earnings 4,713 4,099 Shares held in trust (374) (374) Guarantee of ESOP debt (497) (526) 12,496 11,825 Total Liabilities and Shareholders' Equity $ 30,869 $ 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 Three Months Ended March 31, 1996 1995 Cash Flows from Operating Activities: Net income $ 970 $ 547 Adjustments to net income: Depreciation and amortization 903 835 Gain from sale of paging business (442) -- Net losses and dividends from unconsolidated affiliates 58 45 Provision for losses on bad debts 56 49 Deferred income taxes and unamortized investment tax credits (2) (12) Net change in accounts receivable and other current assets 84 91 Net change in accounts payable and other current liabilities (380) (325) Net change in deferred charges and other assets (73) (21) Net change in other liabilities and deferred credits 7 77 Other reconciling items, net (55) 24 Net cash provided by operating activities 1,126 1,310 Cash Flows from Investing Activities: Capital expenditures (882) (815) Proceeds from sale of paging business 930 -- Proceeds from disposition of short-term investments 44 42 Purchases of short-term investments (30) (2) Investment dispositions and repayments of advances 5 39 Investments in and advances to unconsolidated affiliates (164) (130) Other investing activities, net (38) 6 Net cash used for investing activities (135) (860) Cash Flows from Financing Activities: Proceeds from short-term borrowings 5,527 4,324 Repayments of short-term borrowings (6,433) (4,503) Proceeds from long-term debt 34 35 Repayments of long-term debt (499) (7) Dividends paid (358) (342) Other financing activities, net 15 (3) Net cash used for financing activities (1,714) (496) Net (Decrease) in Cash and Cash Equivalents (723) (46) Cash and Cash Equivalents at Beginning of Period 1,711 606 Cash and Cash Equivalents at End of Period $ 988 $ 560 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. Effective June 30, 1995, BellSouth discontinued application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." For the three months ended March 31, 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 970 Dividends declared (358) Shares issued for employee benefit plans 1 1 15 ESOP activities and related tax benefit 2 29 Foreign currency translation adjustment ______ ______ ______ 12 ________ ______ _______ Balance at March 31, 1996 1,008 (13) $1,008 $7,646 $4,713 $(374) $(497) (1) Such shares are not considered to be outstanding for financial reporting purposes. 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 Three Months Ended March 31, 1996 1995 Cash Paid For: Income taxes $ 37 $ 31 Interest $ 157 $ 202 BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In Millions, Except Per Share Amounts) 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-month period ended March 31, 1995, MCCA's total operating revenues and total operating expenses were $81 and $73, respectively, and total assets at December 31, 1995 were $355. BELLSOUTH CORPORATION SELECTED OPERATING DATA (Unaudited) Percent Change 1996 vs. 1995 vs. 1996 1995 1994 Network Access Lines in Service at March 31 (Thousands)(a): By Type: Residence 14,865 3.5% 3.4% Business 6,370 7.9 7.7 Other 257 0.8 0.6 Total Access Lines 21,492 4.8 4.6 By State: Florida 5,702 5.1 4.9 Georgia 3,624 6.2 5.8 Tennessee 2,473 4.6 4.5 Louisiana 2,136 3.6 3.7 North Carolina 2,134 5.2 5.4 Alabama 1,818 4.0 3.5 South Carolina 1,313 4.0 3.8 Mississippi 1,177 3.6 3.7 Kentucky 1,115 3.7 3.2 Total Access Lines 21,492 4.8 4.6 For the Three Percent Change for Months Ended the Periods Ended March 31, 1996 vs. 1995 vs. 1996 1995 1994 Access Minutes of Use (Millions)(a)(b): Interstate 16,660 10.1% 7.7% Intrastate 5,118 13.0 13.1 Total Minutes of Use 21,778 10.8 8.9 Toll Messages (Millions)(a) 281 (24.1) (4.3) (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 March 31 (Equity basis)(Thousands)(c): Domestic Cellular 3,046 31.3% 37.9% International Cellular 855 106.0 85.1 (c) Includes customers served based on BellSouth's ownership percentage in all markets served. For the Three Months Ended March 31, 1996 Ratio of Earnings to Fixed Charges (d) 8.2 (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. 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 three-month periods ended March 31, 1996 and 1995, respectively, were from wireline services provided by BellSouth Telecommunications. Charges for local, access and toll services for the three-month period ended March 31, 1996 accounted for approximately 59%, 35% 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 three months ended March 31, 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 Months Ended March 31, 1996 1995 Net Income $970 $547 Earnings Per Share $.98 $.55 For the three-month period ended March 31, 1996, Net Income increased by $423 (77.3%); Earnings Per Share increased $.43 (78.2%). The increase resulted primarily from the $344 gain ($.35 per share) on sale of BellSouth's paging business (see Note D to the Consolidated Financial Statements), continued strong growth in key business volumes and expense savings attributable to employee reductions under BellSouth Telecommunications' restructuring and work force reduction plans. Volumes of Business The total number of access lines in service since March 31, 1995 increased by approximately 977,000 (4.8%) to 21,492,000, compared to a 4.6% rate of increase for the same prior year period. Business and residence access lines increased by 7.9% and 3.5%, respectively, compared to growth rates of 7.7% and 3.4% in 1995. The number of second residence lines, included in total residence lines, increased by 252,000 (22.9%) to 1,353,000 and accounted for approximately 49.7% and 25.8% of the overall increase in residence access lines and total access lines, respectively, since March 31, 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 2,118 million (10.8%)for the three-month period ended March 31, 1996 compared to an increase of 8.9% for the same period 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-month period ended March 31, 1996, toll messages decreased by 89 million (24.1%) compared to a decrease of 4.3% for the corresponding period 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. 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 726,000 (31.3%) since March 31, 1995 to 3,046,000 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 5.8% at March 31, 1995 to 7.6% at March 31, 1996. Total minutes of use have also continued to increase and average minutes of use per cellular customer have remained essentially unchanged from first quarter 1995, with stimulation due to promotions being substantially offset by the continuing trend of increased penetration into lower-usage market segments. Since March 31, 1995, the number of international cellular customers increased by 440,000 (106.0%) to 855,000. 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 $242 (5.6%) for the three-month period ended March 31, 1996 when compared to the corresponding 1995 period. The components of Total Operating Revenues were as follows: For the Three Months Ended March 31, 1996 1995 Local Service $1,930 $1,769 Interstate Access 909 795 Intrastate Access 218 226 Toll 207 281 Wireless Communications 625 600 Directory Advertising and Publishing 318 353 Other Services 334 275 Total Operating Revenues $4,541 $4,299 Local Service revenues increased $161 (9.1%)for the three-month period ended March 31, 1996 as compared to the same 1995 period. The increase was due primarily to 4.8% growth in access lines in service since March 31, 1995. Also contributing was an increase of $31 due to higher customer demand for Touchstar and Custom Calling services, and the effect of expanded LACPs. Interstate Access revenues increased $114 (14.3%) for the three- month period ended March 31, 1996 as compared to the same prior year period. The increase was attributable primarily to growth in minutes of use of 10.1% and rate activity, the net effect of which increased revenues by $38. Intrastate Access revenues decreased $8 (3.5%) for the three-month period ended March 31, 1996 when compared to the corresponding 1995 period. The decrease was due primarily to rate reductions of $32 compared with first quarter 1995, partially offset by increases attributable to growth in minutes of use of 13.0%. Toll revenues decreased $74 (26.3%) for the three-month period ended March 31, 1996 when compared to the same prior year period. The decrease was primarily attributable to net rate reductions compared with first quarter 1995 of approximately $57 and a decline in toll messages of 24.1%. Such factors reflect the expansion of LACPs and increased competition. 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 $25 (4.2%) for the three- month period ended March 31, 1996 when compared to the same period last year. The increase was 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-month period ended March 31, 1995, revenues from paging services were $81. Excluding the effects of the sale of the paging business, Wireless Communications revenues increased 20.4%. Directory Advertising and Publishing revenues decreased $35 (9.9%) for the three-month period ended March 31, 1996 when compared to the same prior year period. The decrease was due primarily to a $40 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." The decrease was also due to changes in the issue dates of certain directories, which reduced revenues by $12 in the first quarter of 1996. Such 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 increased $59 (21.5%) for the three-month period ended March 31, 1996 when compared to the corresponding 1995 period. The increase was primarily attributable to incremental rate impacts related to potential sharing under certain state regulatory plans. Operating Expenses Total Operating Expenses increased $154 (4.8%) for the three-month period ended March 31, 1996 compared to the same period in 1995. The components of Total Operating Expenses were as follows: For the Three Months Ended March 31, 1996 1995 Depreciation and Amortization $ 903 $ 835 Other Operating Expenses: Cost of Services and Products 1,468 1,503 Selling, General and Administrative 987 866 2,455 2,369 Total Operating Expenses $ 3,358 $ 3,204 Depreciation and Amortization increased $68 (8.1%) for the three- month period ended March 31, 1996 compared to the same period in 1995. The increase was due primarily to higher levels of property, plant and equipment since March 31, 1995 resulting from continued growth in the customer base for wireless and wireline services and continued modernization of the networks, and shorter asset lives for property, plant and equipment in use subsequent to the discontinuance of SFAS No. 71. 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 $86 (3.6%) for the three-month period ended March 31, 1996 when compared to the corresponding 1995 period. The increase for the period was primarily attributable to increased expenses of $66 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 $40 due principally to higher business volumes and initiatives to effectively position the business for increased competition, partially offset by a decrease of approximately $66 for labor costs in the core wireline business, including expenses for employee benefits. The decrease in such labor costs reflects employee reductions of approximately 6,100 since March 31, 1995 attributable to previously-disclosed restructuring and work force reduction plans, partially offset by annual compensation increases for management and represented employees. Also contributing to the overall increase in Other Operating Expenses was approximately $25 related to volume growth and higher material costs in the directory advertising and publishing businesses. The increase for the period was partially offset by the effect of the January 1996 sale of BellSouth's paging business. For the three-month period ended March 31, 1995, Other Operating Expenses for the paging business were $61. Excluding the effects of the sale of the paging business, Other Operating Expenses increased 6.4%. Other Income Statement Items The other income statement components were as follows: For the Three Months Ended March 31, 1996 1995 Interest Expense $180 $174 Gain on Sale of Paging Business 442 -- Other Income (Expense), net 36 (11) Provision for Income Taxes 511 363 Interest Expense increased $6 (3.4%) for the three-month period ended March 31, 1996 compared to the same period last year. The increase was primarily attributable to higher average debt levels partially offset by lower average interest rates on long-term borrowings due 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 (Expense), net increased $47 for the three-month period ended March 31, 1996 compared to the corresponding period in 1995. The increase was primarily attributable to higher interest income due to the investment of cash proceeds from the sale of the paging business and also to increased loans to unconsolidated affiliates. Equity in losses of unconsolidated affiliates was ($28) in the first quarter of 1996 compared to ($32) for the same period in 1995. The lower overall losses in 1996 reflect improved results from unconsolidated domestic cellular operations and mobile data communications businesses, substantially offset by increased losses from certain international businesses, principally operations in Germany and Denmark. Provision for Income Taxes increased $148 (40.8%) for the three- month period ended March 31, 1996 over the comparable 1995 period. For the three-month period ended March 31, 1996, BellSouth's effective tax rate was 34.5% compared to 39.9% for the same period last year. The lower effective tax rate 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 March 31, 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 Three Months Ended March 31, 1996 1995 Net Cash Provided by Operating Activities $1,126 $1,310 Operating Activities. Net cash provided by operating activities decreased $184 (14.0%) in the first three months of 1996 compared with the same period in 1995, primarily due to a $125 change in the cash used for the reduction of liabilities. For the Three Months Ended March 31, 1996 1995 Net Cash Used for Investing Activities $(135) $(860) 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 $725 (84.3%) in the first three 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 $67 related to network development and increased investment in unconsolidated affiliates of $34. Internal sources provided substantially all cash required for capital expenditures in the first three 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 Three Months Ended March 31, 1996 1995 Net Cash Used for Financing Activities $(1,714) $(496) Financing Activities. Net cash used for financing activities increased $1,218 (245.6%) in first three months of 1996 compared to the same period last year. The increase reflects repayments of $873 in commercial paper and $485 in debentures during first quarter 1996. Refinancing of both short- and long-term debt is possible during the remainder of the year depending on prevailing market interest rates. As of May 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 43.0% at March 31, 1996 from 46.7% at December 31, 1995. The decrease was primarily caused by the repayment of commercial paper described above. 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. REGULATORY AND COMPETITIVE ENVIRONMENT Regulation Price regulation plans have been approved or authorized by the requisite legislative or regulatory bodies in all states in the BellSouth Telecommunications service area. At the federal level, BellSouth Telecommunications continues to operate under an interim price regulation plan established by the Federal Communications Commission (FCC) in 1995. Recent significant developments with respect to price regulation and other related issues are discussed below. Louisiana. Effective April 1, 1996, the Louisiana Public Service Commission approved a price regulation plan that will remain in effect for a six-year term, subject to review. Under the provisions of the price regulation plan, rates for basic services, which include the provision of local exchange services, are capped for five years, after which an inflation-based formula may be used to change prices. After five years, no individual basic service rate can be increased by more than 10% in any twelve-month period. Prices for interconnection services are capped for three years, after which no individual service can be increased more than 10% in any twelve-month period. For non-basic services, price increases may not exceed 20% in any twelve-month period. In addition, the Commission approved local competition rules effective March 15, 1996. In connection with the approval of price regulation, the Louisiana Commission concluded its review of BellSouth Telecommunications' earnings by requiring an aggregate $70 rate reduction, to be implemented ratably over a three-year period beginning April 1, 1996, and an immediate $9 refund to existing customers. North Carolina. In May 1996, the North Carolina Utilities Commission modified a price regulation plan previously submitted by BellSouth Telecommunications. The modified plan, which is currently under review by the company, will become effective June 3, 1996, subject to BellSouth Telecommunications' acceptance of such modifications by May 20, 1996. Under the terms of the modified 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 rates 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 touchtone service by the first anniversary of the plan, will total approximately $60 over the next three years. Tennessee. In order to implement BellSouth Telecommunications' price regulation plan, the Tennessee Public Service Commission had required a $56 rate reduction on an annual basis, which BellSouth Telecommunications appealed to the Tennessee Court of Appeals (the Court). In its rulings, the Court has stayed implementation of both the rate reduction and price regulation plan pending further consideration of the issues. A decision is expected later in 1996. Competition and Business Developments Among its provisions, the Telecommunications Act of 1996 (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. In order to comply with the requirements of the 1996 Act, all states in BellSouth Telecommunications' service area have proceedings and other activities in progress to consider rules and regulations necessary to implement open competition for local service. A number of carriers have been approved or filed applications to provide local service in many of the areas in which BellSouth Telecommunications provides service. In April 1996, BellSouth Telecommunications received approval from the Florida Public Service Commission to provide competing local service in other carriers' service areas. Initially, BellSouth Telecommunications plans to serve business customers in parts of the Orlando market not currently served by BellSouth Telecommunications. As permitted by the 1996 Act, BellSouth began providing interLATA wireless service to its cellular customers in February. Also, in March, BellSouth began joint marketing cellular and wireline services in Macon, Georgia through BellSouth Telecommunications' sales offices. BellSouth expects to extend joint marketing of such services throughout its service region by the end of 1996. BellSouth plans to begin offering interLATA wireline service within its nine-state territory as soon as possible after completion of FCC and state regulatory proceedings, expected to be concluded in late 1996 or early 1997; however, it is uncertain when BellSouth will be authorized to initiate such interLATA wireline service. 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. 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 April 18, 1996 First Quarter 1996 Earnings Release and 1996 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) May 13, 1996 EXHIBIT INDEX Exhibit Number 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule.