-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UmJyxjHY0evqxO+2KU2kswLFxfgBkb+i9MXWLD+5PLYOxAkG+mVyhPw8iO2kMyqq SBPjS+Qa2ccqZftvj97F7g== 0000732713-04-000211.txt : 20040802 0000732713-04-000211.hdr.sgml : 20040802 20040730180728 ACCESSION NUMBER: 0000732713-04-000211 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLSOUTH CORP CENTRAL INDEX KEY: 0000732713 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 581533433 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08607 FILM NUMBER: 04943337 BUSINESS ADDRESS: STREET 1: 1155 PEACHTREE ST NE STREET 2: ROOM 15G03 CITY: ATLANTA STATE: GA ZIP: 30309-3610 BUSINESS PHONE: 4042492000 MAIL ADDRESS: STREET 1: 1155 PEACHTREE STREET NE CITY: ATLANTA STATE: GA ZIP: 30309-3610 10-Q 1 q20410q.txt UNITED STATES 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, 2004 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., 30309-3610 Atlanta, Georgia (Zip Code) (Address of principal executive offices) 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 ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __X__ No ___ At July 29, 2004, 1,830,737,118 common shares were outstanding. Table of Contents Item Page Part I 1. Financial Statements Consolidated Statements of Income ................... 3 Consolidated Balance Sheets ......................... 4 Consolidated Statements of Cash Flows ............... 5 Consolidated Statements of Shareholders' Equity And Comprehensive Income ......................... 6 Notes to Consolidated Financial Statements .......... 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 19 3. Qualitative and Quantitative Disclosures about Market Risk................................................... 31 4. Controls and Procedures.................................. 31 Part II 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities ........................ 34 4. Submission of Matters to a Vote of Security Holders...... 34 6. Exhibits and Reports on Form 8-K ........................ 35 PART I - FINANCIAL INFORMATION BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (Unaudited) For the Three Months For the Six Months Ended June 30, Ended June 30, 2003 2004 2003 2004 (As (As Adjusted Adjusted - Note C) - Note C) - ----------------------------------- ----------- ---------- --------- ------- Operating Revenues: Communications group $ 4,545 $ 4,562 $ 9,053 $ 9,047 Advertising and publishing 520 507 1,014 986 All other 14 14 26 26 ----------- ---------- --------- ------- Total Operating Revenues 5,079 5,083 10,093 10,059 Operating Expenses: Cost of services and products (excludes depreciation and amortization shown separately below) 1,765 1,789 3,440 3,587 Selling, general, and administrative expenses 989 930 1,908 1,839 Depreciation and amortization 953 914 1,902 1,812 Provisions for restructuring 18 8 138 21 ----------- ---------- --------- ------- Total Operating Expenses 3,725 3,641 7,388 7,259 Operating income 1,354 1,442 2,705 2,800 Interest expense 233 211 491 426 Net earnings (losses) of equity affiliates 177 151 348 255 Gain on sale of operations - - - 462 Other income (expense), net 121 73 197 137 ----------- ---------- --------- ------- Income from Continuing Operations Before Income Taxes, Discontinued Operations and Cumulative Effect of Changes in Accounting Principle 1,419 1,455 2,759 3,228 Provision for Income Taxes 511 516 1,001 1,139 ----------- ---------- --------- ------- Income from Continuing Operations Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle 908 939 1,758 2,089 Income (Loss) from Discontinued Operations, Net of Tax 43 57 108 506 ----------- ---------- --------- ------- Income Before Cumulative Effect of Changes in Accounting Principle 951 996 1,866 2,595 Cumulative Effect of Changes in Accounting Principle, Net of Tax - - 315 - ----------- ---------- --------- ------- Net Income $ 951 $ 996 $ 2,181 $ 2,595 =========== ========== ========= ======= Weighted-Average Common Shares Outstanding: Basic 1,847 1,832 1,853 1,832 Diluted 1,851 1,836 1,856 1,837 Dividends Declared Per Common Share $ 0.23 $ 0.27 $ 0.44 $ 0.52 Basic Earnings Per Share: Income from Continuing Operations Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle $ 0.49 $ 0.51 $ 0.95 $ 1.14 Income (Loss) from Discontinued Operations, Net of Tax 0.02 0.03 0.06 0.28 Cumulative Effect of Accounting Changes, Net of Tax - - 0.17 - ----------- ---------- --------- ------- Net Income $ 0.51 $ 0.54 $ 1.18 $ 1.42 =========== ========== ========= ======= Diluted Earnings Per Share: Income from Continuing Operations Before Discontinued Operations and Before Cumulative Effect of Changes in Accounting Principle $ 0.49 $ 0.51 $ 0.95 $ 1.14 Income (Loss) from Discontinued Operations, Net of Tax 0.02 0.03 0.06 0.28 Cumulative Effect of Accounting Changes, Net of Tax - - 0.17 - ----------- ---------- --------- ------- Net Income* $ 0.51 $ 0.54 $ 1.18 $ 1.41 =========== ========== ========= ======= *Net income per share does not sum due to rounding The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) December 31, June 30, 2003 2004 ------------------------------------- (unaudited) ASSETS Current Assets: Cash and cash equivalents.............. $ 4,556 $ 6,216 Accounts receivable, net of allowance for uncollectibles of $496 and $338........................ 2,870 2,436 Material and supplies.................. 375 319 Other current assets .................. 1,048 870 Assets of discontinued operations...... -- 3,928 ---------------- --------------- Total current assets................ 8,849 13,769 ---------------- --------------- Investments and advances.................. 8,552 8,638 Property, plant and equipment, net........ 23,807 22,104 Deferred charges and other assets......... 5,855 6,033 Goodwill.................................. 342 249 Intangible assets, net.................... 2,297 1,501 ---------------- --------------- Total assets....................... $ 49,702 $ 52,294 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year........ $ 3,491 $ 3,262 Accounts payable..................... 1,339 883 Other current liabilities............ 3,628 3,301 Liabilities of discontinued operations......................... -- 2,469 ---------------- --------------- Total current liabilities ......... 8,458 9,915 ---------------- --------------- Long-term debt ........................... 11,489 10,341 ---------------- --------------- Noncurrent liabilities: Deferred income taxes................ 5,349 6,180 Other noncurrent liabilities......... 4,694 4,342 ---------------- --------------- Total noncurrent liabilities....... 10,043 10,522 ---------------- --------------- Shareholders' equity: Common stock, $1 par value (8,650 shares authorized; 1,830 and 1,831 shares outstanding).......... 2,020 2,020 Paid-in capital...................... 7,729 7,748 Retained earnings.................... 16,540 18,126 Accumulated other comprehensive income (loss)...................... (585) (460) Shares held in trust and treasury.... (5,992) (5,918) ---------------- --------------- Total shareholders' equity... 19,712 21,516 ---------------- --------------- Total liabilities and shareholders' equity............. $ 49,702 $ 52,294 ================ =============== The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (Unaudited) For the Six Months Ended June 30, 2003 2004 ----------------------------------- Cash Flows from Operating Activities: As Adjusted - Note C) Income from continuing operations before discontinued operations and cumulative effect of changes in accounting principles ................. $ 1,758 $ 2,089 Adjustments to reconcile income to cash provided by operating activities from continuing operations: Depreciation and amortization......... 1,902 1,812 Provision for uncollectibles.......... 287 195 Net losses (earnings) of equity affiliates.......................... (348) (255) Net (gains) losses on sale or impairment of equity securities..... 8 3 Deferred income taxes and investment tax credits.............. 506 603 Pension income........................ (267) (242) Pension settlement (gains) losses..... 87 -- Stock-based compensation expense...... 60 58 Gain on sale of operations............ -- (462) Net Change in: Accounts receivable and other current assets...................... 63 (124) Accounts payable and other current liabilities......................... 124 84 Deferred charges and other assets..... 131 (77) Other liabilities and deferred credits............................. (36) 20 Other reconciling items, net.............. 12 93 -------------- -------------- Net cash provided by operating activities from continuing operations ......................... 4,287 3,797 ============== ============== Cash Flows from Investing Activities: Capital expenditures...................... (1,265) (1,366) Proceeds from sale of operations ......... -- 525 Proceeds from sale of debt and equity securities.............................. 26 34 Investments in debt and equity securities.............................. (21) (416) Proceeds from repayment of loans and advances................................ 1,899 109 Settlement of derivatives on advances .... (352) (17) Other investing activities, net........... (1) 5 -------------- -------------- Net cash provided by (used in) investing activities from continuing operations .............. 286 (1,126) ============== ============== Cash Flows from Financing Activities: Net borrowings (repayments) of short-term debt......................... (398) (339) Proceeds from the issuance of long-term debt ......................... -- 696 Repayments of long-term debt.............. (1,556) (221) Dividends paid............................ (759) (914) Purchase of treasury shares............... (322) (99) Other financing activities, net........... 22 51 -------------- -------------- Net cash used in financing activities from continuing operations ......................... (3,013) (826) ============== ============== Net increase (decrease) in cash and cash equivalents from continuing operations.............................. 1,560 1,845 Net increase (decrease) in cash and cash equivalents from discontinued operations.............................. 80 (185) -------------- -------------- Net increase (decrease) in cash and cash equivalents.............. 1,640 1,660 Cash and cash equivalents at beginning of period............................... 2,482 4,556 -------------- -------------- Cash and cash equivalents at end of period ................................. $ 4,122 $ 6,216 ============== ============== The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN MILLIONS) (Unaudited)
Number of Shares Amount ------------------ ------------------------------------------------------------------- (a) Accum. (a) Shares Other Shares Held in Compre- Held in Trust hensive Trust Guarantee Common and Common Paid-in Retained Income and of ESOP Stock Treasury Stock Capital Earnings (Loss) Treasury Debt Total Balance at December 31, 2002 2,020 (160) $ 2,020 $ 7,546 $ 14,531 $ (740) $ (5,372) $ (79) $ 17,906 Net Income 2,181 2,181 Other comprehensive income, net of tax Foreign currency translation adjustment (b) (45) (45) Net unrealized losses on securities 28 28 Net unrealized gains on derivatives (c) (22) (22) Total comprehensive income (d) 2,142 Dividends declared (815) (815) Share issuances for employee benefit plans 2 (15) (42) 79 22 Purchase and sales of treasury stock by grantor trust (112) 112 -- Purchase of treasury stock (15) (322) (322) Stock-based compensation 67 67 Tax benefit related to stock options 22 22 ESOP activities and related tax benefit 1 34 35 Balance at June 30, 2003 2,020 (173) $ 2,020 $ 7,620 $ 15,744 $ (779) $ (5,503) $ (45) $ 19,057 Balance at December 31, 2003 2,020 (190) $ 2,020 $ 7,729 $ 16,540 $ (585) $ (5,992) $ -- $ 19,712 Net Income 2,595 2,595 Other comprehensive income, net of tax Foreign currency translation adjustment(b) 92 92 Net unrealized losses on securities 10 10 Net unrealized gains on derivatives (c) 23 23 Total comprehensive income (d) 2,720 Dividends declared (946) (946) Purchase and sales of treasury stock by grantor trust 2 (2) -- Purchase of treasury stock (4) (99) (99) Share issuances for employee benefit plans 5 (61) (63) 175 51 Stock-based compensation 62 62 Tax benefit related to stock options 16 16 Balance at June 30, 2004 2,020 (189) $ 2,020 $ 7,748 $ 18,126 $ (460) $ (5,918) $ -- $ 21,516 (a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of June 30, 2003, there were approximately 49 shares held in trust and 124 shares held in treasury. As of June 30, 2004, there were approximately 26 shares held in trust and 163 shares held in treasury. (b) Net unrealized foreign currency translation adjustments include realized losses of $86 in 2003 and realized gains of $13 in 2004. (c) Net unrealized gains on derivatives include adjustments for realized gains of $20 in 2003 and $3 in 2004. (d) Total comprehensive income was $1,031 for second quarter 2003 and $1,007 for second quarter 2004.
The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE A - PREPARATION OF INTERIM FINANCIAL STATEMENTS In this report, BellSouth Corporation and its subsidiaries are referred to as "we" or "BellSouth." The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of our significant accounting policies and other information, you should read this report in conjunction with the consolidated financial statements included in our latest annual report on Form 10-K, as modified by the current report on Form 8-K dated July 30, 2004. Certain amounts within the prior year's information have been reclassified to conform to the current year's presentation. NOTE B - EARNINGS PER SHARE Basic earnings per share is computed on the weighted-average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted-average number of common shares outstanding plus net incremental shares arising out of employee stock options and benefit plans. The following is a reconciliation of the weighted-average share amounts (in millions) used in calculating earnings per share: For the Three Months For the Six Months Ended June 30, Ended June 30, 2003 2004 2003 2004 Basic common shares outstanding 1,847 1,832 1,853 1,832 Incremental shares from stock options and benefit plans 4 4 3 5 ----- ----- ----- ----- Diluted common shares outstanding 1,851 1,836 1,856 1,837 ===== ===== ===== ===== The earnings amounts used for per-share calculations are the same for both the basic and diluted methods. Outstanding options to purchase 80 million shares for the three months and six months ended June 30, 2004 were not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the common stock or the effect was anti-dilutive. Outstanding options to purchase 95 million shares for the three months ended June 30, 2003 and 91 million shares for the six months ended June 30, 2003 were also not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the common stock or the effect was anti-dilutive. NOTE C - DISCONTINUED OPERATIONS In March 2004, we signed an agreement with Telefonica Moviles, the wireless affiliate of Telefonica, S.A. (Telefonica), to sell all our interests in our Latin American operations. Cash proceeds at closing are expected to be $4.4 billion. Net cash inflow will be $3.4 billion after consideration of the $1 billion of cash held in these operations that will transfer to Telefonica at closing. Based on the net book value of our investment and the anticipated proceeds, we expect to record an after-tax gain of approximately $1.5 billion at the closing of the transaction. The transaction is subject to governmental approvals and other closing conditions. It is expected to close in stages as closing conditions are satisfied, with the closings expected to occur in the second half of 2004. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we have classified the results of our Latin American segment as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the Latin American operations as one line item on the income statement. Beginning with the second quarter of 2004, long-lived assets of the Latin America group ceased to be depreciated (amortized) in accordance with SFAS No. 144. Summary Financial Information The assets and liabilities of our Latin American operations are aggregated and presented as current assets and current liabilities in the consolidated balance sheet at June 30, 2004. Additional detail related to the assets and liabilities of our discontinued operations follows: BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE C - DISCONTINUED OPERATIONS (Continued) At June 30, 2004: Current assets (excluding cash of $1,010) $ 1,383 Property, plant and equipment, net 1,309 Investments and advances 274 Intangible assets, net 930 Other non-current assets 32 -------------- -------------- Total Assets $ 3,928 ============== Current liabilities $ 1,660 Long-term debt 430 Other non-current liabilities 379 -------------- -------------- Total Liabilities $ 2,469 ============== Summarized results of operations for the discontinued operations are as follows: For the Three Months For the Six Months Ended June 30, Ended June 30, -------------- -------------- 2003 2004 2003 2004 Operating revenue $ 563 $679 $ 1,072 $ 1,356 Operating income $ 81 $212 $ 110 $ 283 Income before income taxes $ 54 $109 $ 103 $ 153 Provision (benefit) for income taxes $ 11 $ 52 $ (5) $(353) Net income from discontinued operations $ 43 $ 57 $ 108 $ 506 Tax over Book Basis Differential Our tax basis in the Latin America investments exceeds the book basis by approximately $1.7 billion. No US tax benefit was previously recognized on losses generated by the Latin American operations due to the essentially permanent duration of those investments. The agreement with Telefonica provides evidence that the temporary difference will reverse in the foreseeable future and, accordingly, in the first quarter of 2004 we recorded a $424 tax benefit in accordance with SFAS No. 109, "Accounting for Income Taxes." Tax expense of $8 was booked related to additional basis differential created in second quarter 2004 adjusting the year-to-date benefit to $416. In addition, a tax benefit of $184 has been recorded for the year-to-date period directly to equity, related to the cumulative currency translation balance associated with the discontinued operations. Buyout of Minority Partners In March and April 2004, we purchased interests and other rights of minority partners in Argentina, Ecuador and Colombia. These purchases bring our ownership interest to 100% in Argentina and Ecuador and to 77.6% in Colombia. The aggregate purchase price of these acquisitions, including payment of minority shareholder loans, was $177. The assignment of the purchase price to the estimated fair values of assets acquired and liabilities assumed resulted in an increase to intangible assets of $55 and an increase to goodwill of $81. In connection with the purchase of our minority partner in Argentina, the consideration paid exceeded the fair value by approximately $33. Accordingly, this amount was recognized as a charge to income/loss from discontinued operations in the second quarter. Put-Call Arrangements We own a 78.2% interest in Telcel, our Venezuelan operation. Telcel's other major shareholder holds an indirect 21% interest in Telcel. Under a Stock Purchase Agreement, that shareholder has the right to initiate a process that could require us to purchase (the puts), and we have the right to initiate a process that could require that shareholder to sell (the calls) to us, the shareholder's interest in Telcel. Notice of the initiation of the process with respect to approximately half of that shareholder's interest was to be given in 2000 and notice with respect to the remaining balance was to be given in 2002. If we exercise our call right, we would purchase that shareholder's interest at between 100% and 120% of its appraised fair value. If we are required to purchase the interest (the puts), we would do so at between 80% and 100% of appraised fair value. In 2000, the shareholder initiated a process for appraising the value of approximately half of its interest in Telcel, but the process was not completed. The shareholder also has sent a letter purporting to exercise the balance of the puts under the Stock Purchase Agreement. We are currently in arbitration with the shareholder over alleged breaches by BellSouth and the shareholder of the Stock Purchase Agreement, including the timing of the valuation and whether the process was properly initiated in 2000. The shareholder is seeking damages and specific performance, and BellSouth is seeking, among other things, unspecified damages and a ruling that it has not breached the Stock Purchase Agreement in any BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE C - DISCONTINUED OPERATIONS (Continued) respect. The arbitration also relates to an alleged oral agreement to buy out the shareholder's entire interest in Telcel, which agreement we argue does not exist. Hearings on these matters occurred in January and April 2004. If the arbitration panel rules against BellSouth, it is possible that the appraised fair value of the shareholder's interest in Telcel could be substantially in excess of current value. At this time, the likely outcome of this arbitration cannot be predicted, nor can a reasonable estimate of the amount of loss, if any, be made. We are the majority shareholder in BellSouth Colombia, a wireless operator in Colombia. We have agreed with our partner to a put and call agreement whereby we can acquire, or could be compelled by our partner to acquire, additional shares of the Colombian operation currently held by our partner for a price equal to the appraised fair value. Under the remaining put/call option, the residual balance of our partner's shares can be called by us or put to us beginning in 2006 until 2009. We cannot predict if either party will exercise its rights under this put/call option provision. Upon completion of the pending acquisition of our Colombian operations by Telefonica Moviles, the shareholders agreement will be assigned to Telefonica and all of our obligations under the shareholders agreement will cease. Venezuela Currency We consolidate the operations of Telcel in Venezuela. There are currency restrictions in place in Venezuela that limit our ability to physically convert local currency to US Dollars. Because of the currency controls, we are accumulating significant balances in Bolivars held in local banks. We are utilizing available alternatives in order to convert the currency into US Dollars when possible. Due to the currency controls, there is no free market currency exchange rate. Therefore, in preparing our consolidated financial statements, we used the exchange rate established by the Venezuelan government of 1,920 Bolivars to the US Dollar to translate the local currency financial statements into our reporting currency, the US Dollar. When the Bolivar resumes trading on the open market, the exchange rate may be different from the rate set by the government. A significant devaluation of the local currency would result in a decline in revenues and, to a lesser extent, operating expenses when reported in the US Dollar. To the extent permissible by regulatory and market conditions, a portion of the effect of a devaluation could be offset by local rate increases. As an example, a devaluation in the Venezuelan currency from the average rate used in our financial statements to 3,000 Bolivars to the US Dollar would equate to a decrease in revenues of approximately $203 for the six months ended June 30, 2004, not taking into consideration any potential impacts from offsetting local rate increases. Such a change in the exchange rate would also result in a reduction in the company's net assets of approximately $192, which would be reported as a reduction in shareholders' equity through the cumulative foreign currency translation adjustment. Because certain expenses are settled in US Dollars, determination of the net income impact of such a devaluation is not practicable. We are monitoring the situation, but continue to believe it is temporary in nature. Therefore, we have continued to consolidate the financial statements of this operation in accordance with SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." In the event the currency restrictions are deemed other-than-temporary, we would cease to consolidate this operation and would reflect the investment using the cost method of accounting. Colombia Debt Restructure On March 19, 2004, our Colombian operation completed the refinancing of its senior secured debt. According to the terms of the refinancing, (1) the maturity was extended from 2005 to 2007, (2) on a pro rata basis with our partner, we agreed to provide support in the aggregate amount of $70 for 30 months and (3) we and our partner pledged 100% of the capital stock of the Colombian operations as security for the loan. As of June 30, 2004, BellSouth's consolidated balance sheet reflects the $139 remaining investment in the loan participation agreement and the debt of $477 as assets and liabilities of discontinued operations. NOTE D - EMPLOYEE BENEFIT PLANS Substantially all of our employees are covered by noncontributory defined benefit pension plans, as well as postretirement health and life insurance welfare plans ("other benefits"). The following details pension and postretirement benefit costs included in operating expenses (in cost of sales and selling, general and administrative expenses) in the accompanying Consolidated Statements of Income. We account for these costs in accordance with SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Components of net periodic benefit costs for the three months and six months ended June 30 were as follows: BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE D - EMPLOYEE BENEFIT PLANS (Continued) Pension Benefits Other Benefits ---------------------- ----------------------- ---------------------- ----------------------- For the Three Months For the Three Months Ended June 30, Ended June 30, ---------------------- ----------------------- ----------- ---------- ------------ ---------- 2003 2004 2003 2004 ---- ---- ---- ---- Service cost $ 45 $ 44 $ 12 $ 12 Interest cost ................... 186 174 120 108 Expected return on plan assets .. (347) (329) (78) (80) Amortizations: Unrecognized net obligation ... (1) -- 18 18 Unrecognized prior service cost (10) (11) 41 40 Unrecognized (gain) loss....... (7) 1 27 24 ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- Net periodic benefit cost (income) ............. (134) (121) 140 122 ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- Settlements ................... 20 -- -- -- ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- Net periodic benefit cost (income), adjusted.... $ (114) $ (121) $140 $122 =========== ========== ============ ========== Pension Benefits Other Benefits ---------------------- ----------------------- ---------------------- ----------------------- For the Six Months For the Six Months Ended June 30, Ended June 30, ---------------------- ----------------------- ----------- ---------- ------------ ---------- 2003 2004 2003 2004 ---- ---- ---- ---- Service cost .................... $ 91 $ 88 $ 25 $ 23 Interest cost ................... 371 348 241 216 Expected return on plan assets .. (693) (659) (156) (160) Amortizations: Unrecognized net obligation ... (2) -- 36 43 Unrecognized prior service cost (20) (22) 81 93 Unrecognized (gain) loss....... (14) 3 54 45 ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- Net periodic benefit cost (income) .. (267) (242) 281 260 ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- Settlements ................. 89 -- -- -- ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- Net periodic benefit cost (income), adjusted..... $ (178) $ (242) $281 $ 260 =========== ========== ============ ========== In 2003, lump-sum distributions from the pension plans exceeded the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost resulting in a charge to income of $89. Of the $89 in pension settlement charges, $87 was recognized in operating results because a portion of the settlement charges was capitalized in connection with labor related to network construction. Medicare Prescription Drug Subsidy In December 2003, the Medicare Prescription Drug Act was signed into law. The Act allows companies that provide certain prescription drug benefits for retirees to receive a federal subsidy beginning in 2006. We accounted for the government subsidy provided for in the Medicare Act in the calculation of our 2003 retiree medical obligation, resulting in a reduction to the liability of $575. We had previously accounted for the subsidy provided under the Act as a plan amendment under SFAS No. 106. Effective January 1, 2004, we changed the method to treat the subsidy as an actuarial gain. The cumulative effect of the change in method was $6. This change did not affect the retiree medical obligation. Employer Contributions For the quarter ended June 30, 2004 we made no contributions to our pension plans and anticipate no funding for the remainder of 2004. As of June 30, 2004, we have contributed $253 to fund other benefits (primarily retiree medical) and expect to contribute an additional $120 to $170 of funding for other benefits during the remainder of 2004. Cash-Balance Pension Plan In July 2003, a Federal district court in Illinois ruled that the benefit formula used in International Business Machines Corporation's cash balance pension plan violated the age discrimination provisions of ERISA. The IBM decision conflicts with decisions of at least two other district courts, including most recently a June 2004 decision of the federal district court in Maryland in a case involving ARINC, Inc. Proposed regulations validating the cash balance design were recently withdrawn by the Treasury Department while Congress considers legislative action to clarify the legal status of cash balance plans under age discrimination rules. At this time, it is unclear what effect, if any, these decisions or Congressional action may have on our tax-qualified cash balance pension plans or our financial condition. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE E - INVESTMENTS AND ADVANCES Cingular We own an approximate 40% economic interest in Cingular, a joint venture with SBC Communications. Because we exercise influence over the financial and operating policies of Cingular, we use the equity method of accounting for this investment. The following table presents summarized financial information of Cingular for the periods indicated. December 31, 2003 June 30, 2004 Balance Sheet Information: Current assets $ 3,300 $ 2,445 Noncurrent assets $22,226 $23,608 Current liabilities $ 3,187 $ 3,089 Noncurrent liabilities $13,196 $13,241 Minority interest $ 659 $ 660 Members' capital $ 8,484 $ 9,063 For the Three Months For the Six Months Ended June 30, Ended June 30, 2003 2004 2003 2004 ---- ---- ---- ---- Income Statement Information: Operating revenues $ 3,874 $ 4,155 $ 7,512 $ 8,097 Operating income $ 756 $ 680 $ 1,472 $ 1,239 Net income $ 410 $ 351 $ 829 $ 578 As of June 30, 2004, our book investment exceeded our proportionate share of the net assets of Cingular by $229. On February 17, 2004, Cingular announced an agreement to acquire AT&T Wireless, which will create the largest wireless carrier in the United States. The acquisition, which is subject to the approvals of federal regulatory authorities and to other customary closing conditions, is expected to be completed in the fourth quarter of 2004. Sonofon On February 12, 2004, we closed on a previously announced agreement to sell our interest in Danish wireless provider, Sonofon, for 3.68 billion Danish Kroner to Telenor ASA. We received 3.05 billion Danish Kroner, or $525, for our 46.5% equity stake and 630 million Danish Kroner, or $109, for our shareholder loan and accrued interest, reduced by a settlement of $17 associated with foreign currency swap contracts. As a result of these transactions, we recorded a gain of $462, or $295 net of tax, which included the recognition of cumulative foreign currency translation gains of $13. NOTE F - DEBT Issuance On June 22, 2004, we sold $700 of 30-year, 6.55 percent notes, due June 15, 2034, at a discounted rate of 99.367 percent, resulting in net proceeds of $696. In addition, we incurred debt issuance costs of $6 related to this transaction. Early Redemption In June 2004, we announced our intention to redeem $517 of 40-year, 7.375 percent quarterly interest bonds, due August 1, 2039, on August 1, 2004. The redemption price will be 100 percent of the principal amount, but will result in an estimated loss of $16, or $11 net of tax, due to the remaining discount that will be fully expensed. As of June 30, 2004, this debt is classified as current maturities of long-term debt in our balance sheet. NOTE G - PURCHASE OF TREASURY SHARES During second quarter 2004, we purchased 3.9 million shares of our common stock for an aggregate cost of $99. There were no purchases in first quarter 2004. For the six months ended June 30, 2003, we purchased 14.8 million shares of our common stock for an aggregate cost of $322. There were no purchases during second quarter 2003, however $67 of first quarter 2003 purchases settled in April 2003. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE H - WORKFORCE REDUCTION AND RESTRUCTURING Based on ongoing challenges in the telecom industry, continued economic pressures, the uncertainty resulting from Federal Communications Commission (FCC) regulatory rulings, as well as productivity improvements, we have made adjustments to our force levels to match lower demand. During the first half of 2004, we initiated a workforce reduction of approximately 1,100 positions, primarily in network operations where the volume of work continues to decline. Charges in earnings have been recognized in accordance with the provisions of SFAS No. 112, "Employers Accounting for Postemployment Benefits" and consisted primarily of cash severance, outplacement and payroll taxes under pre-existing separation pay plans. The following table summarizes activity associated with the workforce reduction and restructuring liability for the six months ended June 30, 2004: Type of Cost ------------------------------ Employee Other Exit Separations Costs Total Balance at December 31, 2003 $ 66 $ 6 $ 72 Additions 33 -- 33 Deductions (64) (5) (69) ----- ---- ----- Balance at June 30, 2004 $ 35 $ 1 $ 36 ===== ==== ===== The $33 in additions to the accrual associated with employee separations relates to accruals for estimated payments for the current year workforce reductions. Deductions to the accrual of $64 consist of $52 in cash severance payments and $12 for adjustment to the accrual due to estimated demographics being different than actual demographics of employees that separated from the Company. Deductions from the accrual for other exit costs consist primarily of changes to prior estimates. NOTE I - SEGMENT INFORMATION As a result of the pending sale of our Latin American operations, we now have three reportable operating segments: (1) Communications group; (2) Domestic wireless (representing our 40% interest in Cingular); and (3) Advertising and publishing. The following table provides information for each operating segment: For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ------------------ 2003 2004 2003 2004 ---- ---- ---- ---- Communications group External revenues $ 4,545 $ 4,562 $ 9,053 $ 9,097 Intersegment revenues 41 41 109 81 ------- ------- ------- ------- Total segment revenues 4,586 4,603 9,162 9,178 Segment operating income 1,162 1,192 2,412 2,362 Segment net income 679 702 1,388 1,389 Domestic wireless Total segment revenues $ 1,549 $ 1,662 $ 3,004 $ 3,239 Segment operating income 303 272 589 496 Segment net income 104 89 205 148 Advertising and publishing External revenues $ 520 $ 507 $ 1,014 $ 986 Intersegment revenues 5 4 9 7 ----- ----- ------- ----- Total segment revenues 525 511 1,023 993 Segment operating income 252 247 495 486 Segment net income 157 150 306 297 BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE I - SEGMENT INFORMATION (Continued) RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ------------------ 2003 2004 2003 2004 ---- ---- ---- ---- Operating revenues Total reportable segments $ 6,660 $ 6,776 $ 13,189 $ 13,410 Cingular proportional consolidation (1,549) (1,662) (3,004) (3,239) South Carolina settlement - - - (50) Corporate, eliminations and other (32) (31) (92) (62) -------- -------- --------- --------- Total consolidated $ 5,079 $ 5,083 $ 10,093 $ 10,059 ======== ======== ========= ========= Operating income Total reportable segments $ 1,717 $ 1,711 $ 3,496 $ 3,344 Cingular proportional consolidation (303) (272) (589) (496) South Carolina settlement - - - (53) Restructuring charge - (8) (54) (21) Pension settlement loss (20) - (87) - Corporate, eliminations and other (40) 11 (61) 26 -------- -------- -------- -------- Total consolidated $ 1,354 $ 1,442 $ 2,705 $ 2,800 ======== ======== ======== ======== Net Income Total reportable segments $ 940 $ 941 $ 1,899 $ 1,834 Net gain (loss) on sale of operations - - - 295 South Carolina settlement - - - (33) Net losses on sale or impairment of securities (5) - (5) (4) Cumulative effect of changes in accounting principle - - 315 - Restructuring charge - (6) (33) (14) Pension settlement loss (12) - (53) - Discontinued operations 43 57 108 506 Corporate, eliminations and other (15) 4 (50) 11 -------- -------- -------- -------- Total consolidated $ 951 $ 996 $ 2,181 $ 2,595 ======== ======== ======== ======== Reconciling items are transactions or events that are included in reported consolidated results but are excluded from segment results due to their nonrecurring or nonoperational nature. NOTE J - RELATED PARTY TRANSACTIONS We have made advances to Cingular that totaled $3,812 at June 30, 2004. We also generate revenues from Cingular for the provision of local interconnect, long distance services and sales agency fees from Cingular. For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ------------------ 2003 2004 2003 2004 ---- ---- ---- ---- Interest income on advances $ 71 $ 56 $ 141 $ 113 Revenues $ 103 $ 129 $ 201 $ 246 In addition, we have receivables and payables incurred in the ordinary course of business recorded in our balance sheets as follows: December 31, 2003 June 30, 2004 --------------------- ---------------- Receivable from Cingular $ 57 $66 Payable to Cingular $ 33 $28 BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE K - CONTINGENCIES GUARANTEES In most of our sale and divestiture transactions, we indemnify the purchaser for various items including labor and general litigation as well as certain tax matters. Generally, the terms last one to five years for general and specific indemnities and, in some cases, for the statutory review periods for tax matters. The events or circumstances that would require us to perform under the indemnity are transaction and circumstance specific. We regularly evaluate the probability of having to incur costs associated with these indemnities and have accrued for expected losses that are probable. In addition, in the normal course of business, we indemnify counterparties in certain agreements. The nature and terms of these indemnities vary by transaction. Historically, we have not incurred significant costs related to performance under these types of indemnities. RECIPROCAL COMPENSATION Following the enactment of the Telecommunications Act of 1996, our telephone company subsidiary, BellSouth Telecommunications, Inc. (BST), and various competitive local exchange carriers (CLECs) entered into interconnection agreements providing for, among other things, the payment of reciprocal compensation for local calls initiated by the customers of one carrier that are completed on the network of the other carrier. These agreements were the subject of litigation before various regulatory commissions. After an FCC ruling in April 2001 prescribing new rates, BellSouth settled its claims with competitors for traffic occurring through mid-June 2001, and entered into agreements that contained the FCC rates for traffic occurring from mid-June 2001 forward. The District of Columbia Circuit Court of Appeals, in the second quarter of 2002, remanded the ruling to the FCC to implement a rate methodology consistent with the Court's opinion. The FCC's previous rules and rates remain in effect while it reconsiders them. If the FCC redefines the rate methodology in a manner that increases the prescribed rates and requires retroactive application, payments to CLECs could be material to our results of operations. LEGAL PROCEEDINGS Employment Claim On April 29, 2002 five African-American employees filed a putative class action lawsuit, captioned Gladys Jenkins et al. v. BellSouth Corporation, against the Company in the United States District Court for the Northern District of Alabama. The complaint alleges that BellSouth discriminated against current and former African-American employees with respect to compensation and promotions in violation of Title VII of the Civil Rights Act of 1964 and 42 USC Section 1981. Plaintiffs purport to bring the claims on behalf of two classes: a class of all African-American hourly workers employed by BellSouth at any time since April 29, 1998, and a class of all African-American salaried workers employed by BellSouth at any time since April 29, 1998 in management positions at or below Job Grade 59/Level C. The plaintiffs are seeking unspecified amounts of back pay, benefits, punitive damages and attorneys' fees and costs, as well as injunctive relief. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of the amount of loss, if any, be made. Securities Claim From August through October 2002 several individual shareholders filed substantially identical class action lawsuits against BellSouth and three of its senior officers alleging violations of the federal securities laws. The cases have been consolidated in the United States District Court for the Northern District of Georgia and are captioned In re BellSouth Securities Litigation. Pursuant to the provisions of the Private Securities Litigation Reform Act of 1995, the court has appointed a Lead Plaintiff. The Lead Plaintiff filed a Consolidated and Amended Class Action Complaint on or about July 15, 2003 and named four outside directors as additional defendants. The Consolidated and Amended Class Action Complaint alleges that during the period November 7, 2000 through February 19, 2003, the Company (1) overstated the unbilled receivables balance of its advertising and publishing subsidiary; (2) failed to properly implement SAB 101 with regard to its recognition of advertising and publishing revenues; (3) improperly billed CLECs to inflate revenues, (4) failed to take a reserve for refunds that ultimately came due following litigation over late payment charges and (5) failed to properly write down goodwill of its Latin American operations. The plaintiffs are seeking an unspecified amount of damages, as well as attorneys' fees and costs. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of loss, if any, be made. In February 2003, a similar complaint was filed in the Superior Court of Fulton County, Georgia on behalf of participants in BellSouth's Direct Investment Plan alleging violations of Section 11 of the Securities Act. Defendants removed this action to federal court pursuant to the provisions of the Securities Litigation Uniform Standards Act of 1998. On or about July 3, 2003, the federal court issued a ruling that the case should be remanded to Fulton County Superior Court. The plaintiffs are seeking an unspecified amount of damages, as well as attorneys' fees and costs. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of loss, if any, be made. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE K - CONTINGENCIES (Continued) In September and October 2002 three substantially identical class action lawsuits were filed in the United States District Court for the Northern District of Georgia against BellSouth, its directors, three of its senior officers, and other individuals, alleging violations of the Employee Retirement Income Security Act (ERISA). The cases have been consolidated and on April 21, 2003, a Consolidated Complaint was filed. In January 2004, a fourth ERISA class action lawsuit was filed in the same court. The plaintiffs, who seek to represent a putative class of participants and beneficiaries of BellSouth's 401(k) plans (the "Plans"), allege in the Consolidated Complaint that the company and the individual defendants breached their fiduciary duties in violation of ERISA, by among other things, (1) failing to provide accurate information to the Plans' participants and beneficiaries; (2) failing to ensure that the Plans' assets were invested properly; (3) failing to monitor the Plans' fiduciaries; (4) failing to disregard Plan directives that the defendants knew or should have known were imprudent and (5) failing to avoid conflicts of interest by hiring independent fiduciaries to make investment decisions. The plaintiffs are seeking an unspecified amount of damages, injunctive relief, attorneys' fees and costs. Certain underlying factual allegations regarding BellSouth's advertising and publishing subsidiary and its Latin American operation are substantially similar to the allegations in the putative securities class action captioned In re BellSouth Securities Litigation, which is described above. At this time, the likely outcome of the cases cannot be predicted, nor can a reasonable estimate of loss, if any, be made. Antitrust Claims In December 2002, a consumer class action alleging antitrust violations of Section 1 of the Sherman Antitrust Act was filed against BellSouth, Verizon, SBC and Qwest in Federal Court in the Southern District of New York. The complaint alleged that defendants conspired to restrain competition by "agreeing not to compete with one another and otherwise allocating customers and markets to one another." The plaintiffs are seeking an unspecified amount of treble damages and injunctive relief, as well as attorneys' fees and expenses. In October 2003, the district court dismissed the complaint for failure to state a claim and the case is now on appeal. OTHER CLAIMS We are subject to claims arising in the ordinary course of business involving allegations of personal injury, breach of contract, anti-competitive conduct, employment law issues, regulatory matters and other actions. BST is also subject to claims attributable to pre-divestiture events involving environmental liabilities, rates, taxes, contracts and torts. Certain contingent liabilities for pre-divestiture events are shared with AT&T Corp. While complete assurance cannot be given as to the outcome of these claims, we believe that any financial impact would not be material to our results of operations, financial position or cash flows. NOTE L - SUBSIDIARY FINANCIAL INFORMATION We have fully and unconditionally guaranteed all of the outstanding debt securities of BST, which is a 100% owned subsidiary of BellSouth. In accordance with SEC rules, BST is no longer subject to the reporting requirements of the Securities Exchange Act of 1934, and we are providing the following unaudited condensed consolidating financial information. BST is listed separately because it has debt securities, registered with the SEC, that we have guaranteed. The BST and Parent columns reflect the application of equity method accounting for investments in their subsidiaries. The Other column represents all other wholly owned subsidiaries excluding BST and BST subsidiaries. The Adjustments column includes the necessary amounts to eliminate the intercompany balances and transactions between BST, Other and Parent and to consolidate wholly owned subsidiaries to reconcile to our consolidated financial information. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE L - SUBSIDIARY FINANCIAL INFORMATION (Continued) Condensed Consolidating Statements of Income
For the Three Months Ended June 30, 2003 ------------------------------------------------------------------------------ BST Other Parent Adjustments Total ------------------------------------------------------------------------------ Total operating revenues ........................ $ 4,335 $ 1,393 $ -- $ (649) $ 5,079 Total operating expenses ........................ 3,705 1,045 15 (1,040) 3,725 ------------- ------------- ----------- ----------- ---------- Operating income (loss) ......................... 630 348 (15) 391 1,354 Interest expense ................................ 135 14 147 (63) 233 Equity in earnings .............................. 287 183 973 (1,266) 177 Other income (expense), net ..................... (21) 90 52 -- 121 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before income taxes, discontinued operations, and cumulative effect of changes in accounting principle 761 607 863 (812) 1,419 Provision (benefit) for income taxes ............ 178 216 (45) 162 511 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before discontinued operations and cumulative effect of changes in accounting principle............. 583 391 908 (974) 908 Discontinued operations, net of tax.............. -- 43 43 (43) 43 Cumulative effect of changes in accounting principle, net of tax......................... -- -- -- -- -- ------------- ------------- ----------- ----------- ---------- Net income (loss) ............................... $ 583 $ 434 $ 951 $ (1,017) $ 951 ============= ============= =========== =========== ==========
For the Three Months Ended June 30, 2004 ------------------------------------------------------------------------------ BST Other Parent Adjustments Total ------------------------------------------------------------------------------ Total operating revenues ........................ $ 4,243 $ 1,599 $ -- $ (759) $ 5,083 Total operating expenses ........................ 3,691 1,121 (13) (1,158) 3,641 ------------- ------------- ----------- ----------- ---------- Operating income ................................ 552 478 13 399 1,442 Interest expense ................................ 124 4 136 (53) 211 Equity in earnings .............................. 275 154 980 (1,258) 151 Other income (expense), net ..................... 5 45 41 (18) 73 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before income taxes, discontinued operations, and cumulative effect of changes in accounting principle...... 708 673 898 (824) 1,455 Provision (benefit) for income taxes ............ 157 241 (41) 159 516 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before discontinued operations and cumulative effect of changes in accounting principle............. 551 432 939 (983) 939 Discontinued operations, net of tax.............. -- 57 57 (57) 57 Cumulative effect of changes in accounting principle, net of tax......................... -- -- -- -- -- ------------- ------------- ----------- ----------- ---------- Net income (loss) ............................... $ 551 $ 489 $ 996 $ (1,040) $ 996 ============= ============= =========== =========== ==========
For the Six Months Ended June 30, 2003 ------------------------------------------------------------------------------ BST Other Parent Adjustments Total ------------------------------------------------------------------------------ Total operating revenues ........................ $ 8,732 $ 2,660 $ -- $ (1,299) $ 10,093 Total operating expenses ........................ 7,444 1,959 36 (2,051) 7,388 ------------- ------------- ----------- ----------- ---------- Operating income (loss) ......................... 1,288 701 (36) 752 2,705 Interest expense ................................ 281 45 297 (132) 491 Equity in earnings .............................. 536 362 1,905 (2,455) 348 Other income (expense), net ..................... (21) 141 106 (29) 197 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before income taxes, discontinued operations, and cumulative effect of changes in accounting principle...... 1,522 1,159 1,678 (1,600) 2,759 Provision (benefit) for income taxes ............ 371 404 (80) 306 1,001 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before discontinued operations and cumulative effect of changes in accounting principle............. 1,151 755 1,758 (1,906) 1,758 Discontinued operations, net of tax.............. -- 108 108 (108) 108 Cumulative effect of changes in accounting principle, net of tax......................... 816 (501) 315 (315) 315 ------------- ------------- ----------- ----------- ---------- Net income (loss) ............................... $ 1,967 $ 362 $ 2,181 $ (2,329) $ 2,181 ============= ============= =========== =========== ==========
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE L - SUBSIDIARY FINANCIAL INFORMATION (Continued) Condensed Consolidating Statements of Income (Continued)
For the Six Months Ended June 30, 2004 ------------------------------------------------------------------------------ BST Other Parent Adjustments Total ------------------------------------------------------------------------------ Total operating revenues ........................ $ 8,431 $ 3,116 $ -- $(1,488) $10,059 Total operating expenses ........................ 7,334 2,195 (19) (2,251) 7,259 ------------- ------------- ----------- ----------- ---------- Operating income ................................ 1,097 921 19 763 2,800 Interest expense ................................ 248 10 275 (107) 426 Equity in earnings .............................. 531 257 2,176 (2,709) 255 Other income (expense), net ..................... 4 567 64 (36) 599 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before income taxes, discontinued operations, and cumulative effect of changes in accounting principle............................ 1,384 1,735 1,984 (1,875) 3,228 Provision (benefit) for income taxes ............ 309 628 (105) 307 1,139 ------------- ------------- ----------- ----------- ---------- Income from continuing operations before 1,075 1,107 2,089 (2,182) 2,089 discontinued operations and cumulative effect of changes in accounting principle Discontinued operations, net of tax.............. -- 506 506 (506) 506 Cumulative effect of changes in accounting principle, net of tax......................... -- -- -- -- -- ------------- ------------- ----------- ----------- ---------- Net income (loss) ............................... $ 1,075 $ 1,613 $ 2,595 $(2,688) $ 2,595 ============= ============= =========== =========== ==========
Condensed Consolidating Balance Sheets
December 31, 2003 June 30, 2004 --------------------------------------------------- ------------------------------------------------- BST Other Parent Adjust- Total BST Other Parent Adjust- Total ments ments ---------------------------------------- ---------- ---------------------------------------- -------- ASSETS Current assets: Cash and cash equivalents .... $ 5 $ 1,190 $ 3,227 $ 134 $4,556 $ 32 $ 1,090 $ 5,040 $ 54 $ 6,216 Accounts receivable, net ..... 68 1,143 3,204 (1,545) 2,870 73 920 2,505 (1,062) 2,436 Other current assets ......... 393 831 81 118 1,423 450 615 11 113 1,189 Assets of discontinued operations ................. -- -- -- -- -- -- 3,928 -- --- 3,928 ---------------------------------------- ---------- ---------------------------------------- -------- Total current assets ......... 466 3,164 6,512 (1,293) 8,849 555 6,553 7,556 (895) 13,769 ---------------------------------------- ---------- ---------------------------------------- -------- Investments and advances ..... 3,464 7,913 22,609 (25,434) 8,552 3,424 7,141 23,891 (25,818) 8,638 Property, plant and equipment, net ........................ 21,818 1,947 4 38 23,807 21,458 609 3 34 22,104 Deferred charges and other assets ..................... 5,029 287 72 467 5,855 5,158 282 96 497 6,033 Intangible assets, net ....... 1,036 1,460 5 138 2,639 1,002 616 6 126 1,750 ---------------------------------------- ---------- ---------------------------------------- -------- Total assets ................. $31,813 $14,771 $29,202 $(26,084) $49,702 $31,597 $15,201 $31,552 $(26,056) $52,294 ======================================== ========== ======================================== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Debt maturing within one year $ 2,454 $ 920 $ 2,470 $(2,353) $ 3,491 $2,349 $ (180) $2,659 $(1,566) $ 3,262 Other current liabilities .... 3,942 1,724 916 (1,615) 4,967 3,958 1,239 903 (1,916) 4,184 Liabilities of discontinued operations.................. -- -- -- -- -- -- 2,469 -- -- 2,469 ---------------------------------------- ---------- ---------------------------------------- -------- Total current liabilities .... 6,396 2,644 3,386 (3,968) 8,458 6,307 3,528 3,562 (3,482) 9,915 ---------------------------------------- ---------- ---------------------------------------- -------- Long-term debt ............... 4,970 845 6,301 (627) 11,489 4,360 110 6,474 (603) 10,341 ---------------------------------------- ---------- ---------------------------------------- -------- Noncurrent liabilities: Deferred income taxes ........ 4,408 1,519 (751) 173 5,349 4,872 1,622 (550) 236 6,180 Other noncurrent liabilities . 2,991 1,074 554 75 4,694 2,975 792 550 25 4,342 ---------------------------------------- ---------- ---------------------------------------- -------- Total noncurrent liabilities . 7,399 2,593 (197) 248 10,043 7,847 2,414 -- 261 10,522 ---------------------------------------- ---------- ---------------------------------------- -------- Shareholders' equity.......... 13,048 8,689 19,712 (21,737) 19,712 13,083 9,149 21,516 (22,232) 21,516 ---------------------------------------- ---------- ---------------------------------------- -------- Total liabilities and shareholders' equity ....... $31,813 $14,771 $29,202 $(26,084) $49,702 $31,597 $15,201 $31,552 $(26,056) $52,294 ======================================== ========== ======================================== ========
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) (Unaudited) NOTE L - SUBSIDIARY FINANCIAL INFORMATION (Continued) Condensed Consolidating Cash Flow Statements
For the Six Months Ended June 30, 2003 ------------------------------------------------------------------------------- BST Other Parent Adjustments Total ----------- -------- ---------- ----------------- --------- Cash flows from continuing operations: Cash flows from operating activities ........ $ 3,367 $ 887 $ 2,344 $ (2,311) $ 4,287 Cash flows from investing activities ........ (1,365) (189) 683 1,157 286 Cash flows from financing activities ........ (2,002) (722) (1,430) 1,141 (3,013) Cash flows from discontinued operations ....... -- 80 -- -- 80 ----------- -------- ---------- ----------- ---------- Net (decrease) increase in cash ............... $ -- $ 56 $ 1,597 $ (13) $ 1,640 =========== ========= ========== =========== ==========
For the Six Months Ended June 30, 2004 ------------------------------------------------------------------------------- BST Other Parent Adjustments Total ----------- -------- ---------- ----------------- --------- Cash flows from continuing operations: Cash flows from operating activities ........ $ 3,020 $ 78 $ 1,846 $ (1,147) $ 3,797 Cash flows from investing activities ........ (1,329) 188 698 (683) (1,126) Cash flows from financing activities ........ (1,664) (181) (731) 1,750 (826) Cash flows from discontinued operations........ -- (185) -- -- (185) ----------- --------- ---------- ----------- ---------- Net (decrease) increase in cash ............... $ 27 $ (100) $ 1,813 $ (80) $ 1,660 =========== ========= ========== =========== ==========
(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) BELLSOUTH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our latest annual report on Form 10-K, as amended by the current report on Form 8-K dated July 30, 2004, and our other filings with the SEC. Overview We are a Fortune 100 company with annual revenues of over $20 billion. Our core business is wireline communications and our largest customer segment is the retail consumer. We have significant interests in wireless communications through our ownership of approximately 40 percent of Cingular Wireless (Cingular), the nation's second largest wireless company. We also operate one of the largest directory advertising businesses in the United States. The great majority of our revenues are generated based on monthly recurring services. We operate much of our business in one of the country's strongest regional economies, where the population is increasing, real income growth is outpacing the national average and a diverse mix of businesses require advanced information and communication technology solutions. The Southeast is a net migration region, with positive net migration averaging almost 500 thousand annually. The region's real income is expected to grow 10 to 15 percent faster than the national average in the next five years. REGULATION AND COMPETITION The Telecommunications Act of 1996 required local telephone companies to open their existing facilities to use by competitors on "non-discriminatory" terms and prices under what is referred to as an unbundled network element platform, or UNE-P. This requirement has distorted the competitive landscape by allowing competitors to rent access lines at deeply discounted rates that are generally below our historical cost. Utilizing UNE-P, competitors are able to market telephone service and generate reasonable margins with little to no capital investment at risk. A judicial decision that became effective in mid-June invalidated certain FCC rules that governed the provision of wholesale access to our network by local service competitors. We have begun the process of reforming our contracts with competitors to reflect the court's decision. We also await new rules from the FCC that must reflect the court's decision. In addition, we have offered competitors commercial and tariffed services that would replace the services required by the invalidated rules for longer terms at market-based prices. The development of revised and new contracts with competitors will take at least several months. As a result of these changes in regulatory policy governing local telephone service, AT&T announced it will no longer be competing for residential local and standalone long distance customers. They stated that service will continue for existing residential customers; however, they will no longer be investing to acquire new customers in this segment. We also have a pending reconsideration request on the architectural requirements related to fiber deployment for broadband before the FCC. In addition, the FCC is reviewing UNE pricing rules, including an evaluation of the total element long run incremental cost (TELRIC) methodology, access charge reform and potential regulation of voice over Internet protocol (VoIP). ACQUISITIONS AND DISPOSITIONS On February 17, 2004, Cingular announced an agreement to acquire AT&T Wireless, which will create the largest wireless carrier in the United States. The acquisition, which is subject to the approvals of federal regulatory authorities and to other customary closing conditions, is expected to be completed in the fourth quarter of 2004. On March 5, 2004, we signed an agreement with Telefonica Moviles, the wireless affiliate of Telefonica, S.A., to sell all our interests in our Latin American operations. The transaction is subject to governmental approvals and other closing conditions. It is expected to close in stages as closing conditions are satisfied, with the closings expected to occur in the second half of 2004. HIGHLIGHTS AND OUTLOOK Consolidated revenues for the first half of 2004 were essentially flat compared to the first half of 2003 reflecting top line pressures caused by the loss of 1.6 million retail access lines to UNE-P competitors and technology substitution. Revenue contraction due to line loss and pricing pressures was offset by solid revenue growth in long distance and DSL. Through the first half of the year, we added approximately 1.2 million long distance customers to total 5.1 million at June 30, 2004, while net new DSL subscriber additions of 276,000 brought our total to 1.7 million. Our cost structure is heavily weighted towards labor and depreciation. In the Communications group, we adjust our workforce as market share of access lines shifts. Since the beginning of 2001, we reduced our workforce in this group by 14,600 employees or 20%. In the first half of (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) 2004, we announced that the needs of the business would require additional force reductions of nearly 1,100 employees. Maintaining operating margins going forward will be challenging as competition intensifies and we are forced to achieve continued increases in productivity. While there have been some encouraging developments on the regulatory front, there will be other events (healthcare costs, roll-out of VoIP telephony by cable providers) that will put pressure on margins. Approximately 45,000 of our employees are represented by the Communications Workers of America (CWA). The largest collective bargaining agreements between the CWA and our subsidiaries are due to expire on August 7, 2004. We are currently in negotiations with the union on new contracts. We can provide no assurance that we will be able to complete new agreements with the union prior to the expiration of the contracts or that we will not be competitively disadvantaged if we are unable to do so. We have put into place contingency plans to maintain all essential service functions in the event of a work stoppage. Despite the lack of growth in the traditional business, cash flows were strong in the first half of 2004 as we delivered $2.4 billion in operating free cash flow from continuing operations (cash flow from operating activities less capital expenditures). During the quarter, we increased the quarterly cash dividend by eight percent to 27 cents per common share. - -------------------------------------------------------------------------------- Consolidated Results of Operations - -------------------------------------------------------------------------------- Key financial and operating data for the three and six months ended June 30, 2003 and 2004 are set forth below. All references to earnings per share are on a diluted basis. The discussion of consolidated results should be read in conjunction with the more detailed discussion of results by segment directly following this section. Following generally accepted accounting principles (GAAP), our financial statements reflect results for the Latin American operations as Discontinued Operations. The operational results and other activity, including the tax over book basis gain, associated with the Latin American segment have been presented on one line item in the income statement separate from Continuing Operations.
For the Three Months For the Six Months Ended June 30, % Ended June 30, % 2003 2004 Change 2003 2004 Change - -------------------------------------------------------- ------------ ----------- ----------- ------------ ----------- ----------- - -------------------------------------------------------- ------------ ----------- ----------- ------------ ----------- ----------- Results of operations: Total operating revenues $ 5,079 $5,083 0.1% $ 10,093 $10,059 -0.3% Operating expenses Cost of services and products 1,765 1,789 1.4% 3,440 3,587 4.3% Selling, general, and administrative expenses 989 930 -6.0% 1,908 1,839 -3.6% Depreciation and amortization 953 914 -4.1% 1,902 1,812 -4.7% Provision for restructuring 18 8 -55.6% 138 21 -84.8% ----- ----- ----- ----- Total operating expenses 3,725 3,641 -2.3% 7,388 7,259 -1.7% Operating income 1,354 1,442 6.5% 2,705 2,800 3.5% Interest expense 233 211 -9.4% 491 426 -13.2% Net (losses) earnings of equity affiliates 177 151 -14.7% 348 255 -26.7% Gain (loss) on sale of operations - - 0.0% - 462 * Other income (expense), net 121 73 -39.7% 197 137 -30.5% ----- ----- ----- ----- Income from continuing operations before income taxes and cumulative effect of changes in accounting principle, net of tax 1,419 1,455 2.5% 2,759 3,228 17.0% Provision for income taxes 511 516 1.0% 1,001 1,139 13.8% ----- ----- ----- ----- Income from continuing operations before discontinued operations and cumulative effect of changes in accounting principle 908 939 3.4% 1,758 2,089 18.8% Income from discontinued operations, net of tax 43 57 32.6% 108 506 * Income before cumulative effect of changes in accounting principle 951 996 4.7% 1,866 2,595 39.1% ----- ----- ----- ----- Cumulative effect of changes in accounting principle, net of tax - - 0.0% 315 - -100.0% ----- ----- ----- ----- Net (loss) income $ 951 $ 996 4.7% $ 2,181 $ 2,595 19.0% ===== ===== ======= ======= * Not meaningful
(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) Operating Revenues Consolidated revenues were essentially flat during the second quarter and the year-to-date periods in 2004 compared to the corresponding periods in 2003. Communications group revenues increased $17 in the second quarter but were down slightly in the year-to-date period. Year-to-date 2004 revenues reflect the impact of a $50 customer refund accrual recorded during the first quarter 2004 associated with a settlement agreement with the South Carolina Consumer Advocate. Absent the accrual, revenues would have increased $46. Growth in both periods reflect the impact of revenue declines associated with competitive line losses and related pricing pressures offset by growth in DSL and long distance. Beyond our traditional wireline business, Advertising and publishing group revenues were down $28 in the year-to-date period compared to the corresponding period in 2003 impacted by a reduction in print revenues due to lower overall spending by our advertisers. Operating Expenses The $84 decline in operating expenses in the second quarter of 2004 as compared to the second quarter 2003 is primarily attributable to reductions in uncollectible expense, access fees paid to other carriers and lower depreciation and amortization expense attributable to the declines in capital expenditures partially offset by increases in the costs of goods for the provision of long distance services associated with the growth in subscribers, higher labor costs and advertising costs. These expenses are discussed in greater detail in our Communications group segment results section. Year-to-date operating expenses declined $129 as compared to the prior year. In addition to the factors affecting the second quarter comparison, the year-to-date 2004 comparison is favorably impacted by $117 in restructuring charges taken in the prior year. Interest Expense Interest expense decreased $22 for the second quarter and $65 for the year-to-date period compared to the same periods in the prior year. Interest expense related to interest-bearing debt was down $19 for the second quarter and down $38 in the year-to-date period, compared to the same periods in the prior year, reflecting lower average debt balances caused by scheduled maturities and early redemptions in 2003. The remaining variances relate to interest accruals on other liabilities and contingencies. Net earnings (losses) of equity affiliates
For the Three Months For the Six Months Ended June 30, Ended June 30, 2003 2004 Change 2003 2004 Change ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ Cingular $ 166 $ 141 $ (25) $ 331 $ 236 $ (95) Other equity investees 11 10 (1) 17 19 2 ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ Total $ 177 $ 151 $ (26) $ 348 $ 255 $ (93) ------------ ------------- ------------ ------------ ------------ ------------
Earnings from Cingular in the 2004 periods were lower compared to the same periods in 2003 primarily due to significant growth in customers and the costs related to that growth. Gain (loss) on sale of operations The gain on sale of operations in 2004 relates to the sale of our interest in Danish wireless provider, Sonofon, for 3.68 billion Danish Kroner to Telenor ASA. We received 3.05 billion Danish Kroner, or $525, for our 46.5% equity stake and 630 million Danish Kroner, or $109, for our shareholder loan and accrued interest, reduced by a settlement of $17 associated with foreign currency swap contracts. As a result of these transactions, we recorded a gain of $462, or $295 net of tax, which included the recognition of cumulative foreign currency translation gains of $13. Other income (expense), net
For the Three Months For the Six Months Ended June 30, Ended June 30, 2003 2004 Change 2003 2004 Change ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ Interest Income $ 90 $ 70 $ (20) $ 174 $ 139 $ (35) Foreign currency transaction gains (losses) 25 - (25) 29 (1) (30) Other, net 6 3 (3) (6) (1) 5 ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ Total Other Income (Expense), net $ 121 $ 73 $ (48) $ 197 $ 137 $ (60) ------------ ------------- ------------ ------------ ------------ ------------
The decrease in interest income reflects a lower rate on our advance to Cingular and to a lesser extent the loss of income on an advance to Dutch telecommunications provider Royal KPN N.V. (KPN) due to early repayment in 2003. Foreign currency transaction gains in 2003 relate primarily to the advance to KPN. (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) Provision for income taxes The provision for income taxes increased $5 in the second quarter of 2004 as compared to the second quarter of 2003 while the effective tax rate declined to 35.5% from 36.0% in the second quarter of 2003. The provision increased $138 in the year-to-date period in 2004 compared to the corresponding period in 2003. The effective tax rate decreased to 35.3% in the year-to-date period in 2004 from 36.3% in the year-to-date period in 2003. The lower effective tax rates in 2004 were impacted by a favorable permanent difference for the Medicare Part D subsidy and a true up of taxes payable associated with divested operations. Income (loss) from discontinued operations, net of tax Income from discontinued operations, net of tax, increased $14 in the second quarter of 2004 compared to the same period in 2003 primarily due to improved operating income in 2004. The improvement in operating income was primarily due to the cessation of depreciation and amortization expense in the second quarter 2004 for the assets of the discontinued operations as required by GAAP as well as strong revenue growth in the region. In addition, income from discontinued operations in the second quarter of 2003 included a $73 loss, net of tax, on the sale of Brazil. Partially offsetting these improvements were foreign exchange losses of $34 in second quarter 2004 compared to foreign exchange gains of $73 in second quarter 2003. In addition, second quarter 2004 included a loss of $33 related to the purchase of additional ownership share in Argentina. Income from discontinued operations, net of tax, increased $398 in the year-to-date-period 2004 compared to the same period in 2003 primarily due to a $416 tax benefit recorded in 2004 related to excess tax basis over book basis in our Latin America investments. No US tax benefit has previously been recognized on losses generated by the Latin American operations due to the essentially permanent duration of those investments. The sale agreement with Telefonica provides evidence that the temporary difference will reverse in the foreseeable future and, accordingly, we recorded a $416 tax benefit in accordance with SFAS No. 109. Excluding this tax adjustment, income from discontinued operations, net of tax, would have been flat. From an operational perspective, these operations experienced strong growth in both customers and revenue. Operating revenue in the Latin America operations for the year-to-date period in 2004 increased $284 or 26.5% over year-to-date 2003 due to strong growth in customers and traffic throughout the portfolio. End-of-period customers increased 29% and total billed minutes of use increased 34% compared to last year. Operating income in the Latin American operations also increased due to the strength in business volumes as well as the cessation of depreciation and amortization expense in second quarter 2004. Cumulative effect of changes in accounting principle Asset Retirement Obligations Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). In connection with the adoption of this standard, we recorded the cumulative effect of accounting change that increased 2003 net income by $816. Revenue Recognition for Publishing Revenues Effective January 1, 2003, we changed our method for recognizing revenues and expenses related to our directory publishing business from the publication and delivery method to the deferral method. The cumulative effect of the change in accounting method is reflected in the income statement as a decrease to 2003 net income of $501. - -------------------------------------------------------------------------------- Results by Segment - -------------------------------------------------------------------------------- Our reportable segments reflect strategic business units that offer similar products and services and/or serve similar customers. We have three reportable operating segments: o Communications group; o Domestic wireless; and o Advertising and publishing. Management evaluates the performance of each business unit based on net income, exclusive of internal charges for use of intellectual property and adjustments for unusual items that may arise. Unusual items are transactions or events that are included in reported consolidated results but are excluded from segment results due to their nonrecurring or nonoperational nature. In addition, when changes in our business affect the comparability of current versus historical results, we will adjust historical operating information to reflect the current business structure. See Note I for a reconciliation of segment results to the unaudited consolidated financial information. (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) The following discussion highlights our performance in the context of these segments. For a more complete understanding of our industry, the drivers of our business, and our current period results, you should read this discussion in conjunction with our consolidated financial statements, including the related notes. - -------------------------------------------------------------------------------- Communications Group - -------------------------------------------------------------------------------- The Communications group includes our core domestic businesses including: all domestic wireline voice, data, broadband, e-commerce, long distance, Internet services and advanced voice features. The group provides these services to an array of customers, including residential, business and wholesale. During the first half of 2004, the Communications group continued to emphasize interLATA long distance and FastAccess(R) DSL, encouraging customers to purchase packages containing multiple telecommunications services. We also continued to experience the loss of retail access lines due to competition and technology substitution, and we expect these trends to continue during the remainder of 2004.
For the Three Months For the Six Months Ended June 30, % Ended June 30, % 2003 2004 Change 2003 2004 Change -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Segment operating revenues: Voice $3,171 $3,153 -0.6% $ 6,334 $6,322 -0.2% Data 1,065 1,116 4.8% 2,155 2,208 2.5% Other 350 334 -4.6% 673 648 -3.7% ----- ----- ----- ----- Total segment operating revenues 4,586 4,603 0.4% 9,162 9,178 0.2% Segment operating expenses: Cost of services and products 1,712 1,730 1.1% 3,337 3,475 4.1% Selling, general, and administrative expenses 768 778 1.3% 1,532 1,550 1.2% Depreciation and amortization 944 903 -4.3% 1,881 1,791 -4.8% ----- ----- ----- ----- Total segment operating expenses 3,424 3,411 -0.4% 6,750 6,816 1.0% Segment operating income 1,162 1,192 2.6% 2,412 2,362 -2.1% -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Segment net income $ 679 $ 702 3.4% $1,388 $1,389 0.1% -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Segment net income including unusual items $ 656 $ 697 6.3% $2,107 $1,342 -36.3% -------------------------------------------------------------------------------------------------------------------------------- Key Indicators (000s except where noted) -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Switched access lines(1): Residential retail: Primary 12,836 11,876 -7.5% Additional 1,758 1,447 -17.7% ----- ----- Total Retail Residence 14,594 13,323 -8.7% Residential wholesale: Resale 238 127 -46.6% UNE-P 1,369 2,149 57.0% ----- ----- Total Wholesale Residence 1,607 2,276 41.6% ----- ----- Total Residence 16,201 15,599 -3.7% Business retail 5,542 5,282 -4.7% Business wholesale Resale 75 63 -16.0% UNE-P 634 740 16.7% --- --- Total Wholesale Business 709 803 13.3% Other Retail/Wholesale Lines (primarily public) 166 102 -38.6% --- --- Total Switched Access Lines (2) 22,618 21,786 -3.7% ISDN line equivalents Residence 16 11 -31.3% Business 1,516 1,477 -2.6% ----- ----- Total ISDN Adjusted Access lines in Service 24,150 23,274 -3.6% DSL customers 1,225 1,738 41.9% Long distance customers 2,786 5,131 84.2% Access minutes of use (millions) 23,053 22,753 -1.3% 45,848 46,046 0.4% Capital expenditures $ 665 $ 713 7.2% $1,231 $1,325 7.6% -------------------------------------------------------------------------------------------------------------------------------- (1) 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. (2) In the first quarter 2004, we augmented our presentation of access lines from only an ISDN adjusted method to also disclosing an actual reported basis. The ISDN adjusted amounts are also provided in the table above for comparison purposes to peer companies.
(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) Segment operating revenues Voice Voice revenues decreased $18 in the second quarter and decreased $12 year-to-date when compared to the same periods in 2003 driven primarily by continued access line loss offset by the growth in interLATA long distance. Total switched access lines declined 832,000 or 3.7% for the year-to-date period with retail line losses being partially offset by increases in wholesale lines. The access line decline was the result of continued share loss and technology substitution. Wholesale lines, which consist primarily of unbundled network element - platform (UNE-P) lines, totaled over 3 million at June 30, 2004, up 780,000 lines year over year. The vast majority of the quarterly UNE-P additions were residential. When lines over which we provide retail services are converted to UNE-P, we lose revenue and margin. On average, the revenue from our provision of UNE-P does not permit us to recover the fully allocated costs we incur to provide it. To mitigate this loss, we are actively seeking reform of the pricing rules that regulators use to set UNE-P prices. We also continue to actively market our own retail services and bundles. In efforts to combat share loss, we continue to grow our package services. BellSouth AnswersSM is our signature residential package that combines wireline, wireless and Internet services. The package combines the Complete Choice calling plan of local service and multiple convenience calling features with BellSouth Long Distance, BellSouth FastAccess(R)DSL or dial-up Internet, and Cingular Wireless services. In April 2004, we began adding DIRECTV(R) digital satellite television service to the BellSouth AnswersSM bundles through our web channel to enhance the effectiveness of our bundle. We ended the quarter with more than 3.7 million residential packages, representing a 31% penetration of our retail primary line residence base. Over 80% of Answers customers have long distance in their package and over 40% have either DSL or dial-up Internet. Long distance voice revenue increased $147 in the second quarter and $320 year-to-date when compared to the same periods in 2003, driven primarily by growth in interLATA and wireless long distance. InterLATA revenues increased $157 in the second quarter and $323 year-to-date when compared to the same periods in 2003. Substantial interLATA growth reflects continued large market share gains driven by marketing efforts and unlimited minute offers. At June 30, 2004, we had 5.1 million long distance customers, a penetration rate of 39% of primary residential access lines and 48% of mass-market small business accounts. We also continued to grow our long distance offerings in complex business. We recorded $49 in complex long distance revenue in the second quarter of 2004 compared to $13 in the same quarter of 2003. Revenue from wholesale long distance services provided to Cingular increased $13 for the second quarter and $25 year-to-date when compared to the same periods in 2003. This increase was caused by higher volumes associated with the proliferation of wireless package plans that include long distance. Switched access revenues are down in the second quarter and year-to-date when compared to the same periods in 2003 due to volume and rate decreases. Switched access rates were lower due to effects of the CALLs program, an FCC access reform initiative. The decline in rates, however, is substantially offset by higher subscriber line charges which are also included in voice revenues. Switched access MOUs decreased 1.3% compared to the second quarter of 2003. The decrease is due to the impact of access line loss and the continuing shift of wholesale lines from resale to UNE-P and alternative communications services, primarily wireless and e-mail. Data Data revenues increased $51 in the second quarter and $53 year-to-date when compared to the same period in 2003. Data revenues were driven by strong growth from the sale of FastAccess(R) DSL service partially offset by decreases in revenue from other data products. Combined wholesale and retail DSL revenues were up $68 in the second quarter and $125 year-to-date when compared to the same periods in 2003 due primarily to a larger customer base. As of June 30, 2004, we had over 1.7 million DSL customers, an increase of over 500 thousand customers compared to June 30, 2003. Retail data services grew 12.7% in the second quarter and grew 13.0% year-to-date when compared to the corresponding periods in 2003 driven primarily by the growth from the sale of FastAccess(R) DSL service. During the second quarter of 2004 we added 126 thousand net retail customers and, on a year-to-date basis, we added 283 thousand net retail customers. We offer three broadband speeds to meet the varying needs of our mass market customers. The original version - BellSouth FastAccess(R) DSL Ultra- runs at speeds of up to 1.5 megabits. Since mid-2003, we have offered a lower speed version - BellSouth FastAccess(R) DSL Lite - running at speeds up to 256 kilobits. DSL Lite accounted for about one-third of second quarter 2004 gross additions. In April 2004, we began offering Fast Access DSL Xtreme, delivering download speeds of up to 3.0 megabits and upload speeds of up to 384 kilobits. We believe our broadband offers are among the most competitively priced in our markets. Retail customer additions were offset somewhat by wholesale disconnects as we continue to see a shift in customer mix to retail. Revenue from other retail data products was flat for both the quarter and year-to-date periods. Revenues from the sale of wholesale data transport services to other communications providers, including long distance companies and CLECs, declined 2.9% in the second quarter and declined 7.3% year-to-date when compared to the same (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) periods in 2003, primarily due to the lingering impacts of soft enterprise demand and continued network consolidation by large inter-exchange carriers. Other Other communications revenue decreased $16 in the second quarter and decreased $25 year-to-date when compared to the same periods in 2003 primarily due to the phase-out of our payphone business. Segment operating expenses Cost of services and products Cost of services and products of $1,730 in second quarter and $3,475 year-to-date increased $18 and $138, respectively, from the same periods in 2003. Cost of services increase for second quarter was impacted by increases of $45 in costs of goods for the provision of long distance services; increases in salary and wages of $6 impacted by pay increases and a change in employee mix slightly offset by lower average workforce, offset by decreases of $34 in access fees due to volume declines, settlements and significant reductions of customer name dipping (CNAM). Cost of services increase year-to-date was impacted by increases of $115 in costs of goods for the provision of long distance services; increases of $35 in contract services related to network planning projects and equipment installations; increases in labor costs of $32 impacted by salary increases, and a change in employee mix slightly offset by lower average workforce, and decreases of $51 in access fees due to volume declines, settlements and significant reductions of CNAM. Selling, general, and administrative expenses Selling, general, and administrative expenses of $778 in second quarter and $1,550 year-to-date increased $10 and $18, respectively, from the same periods in 2003. The second quarter increase reflects an additional $34 in corporate affiliate billings, an increase of $24 in salary and wage expense driven by incentive awards and pay increases partially offset by lower headcount, and increased advertising expense of $20 in response to consumer competitive campaigns. The increases were substantially offset by the decrease in the provision for uncollectibles of $39 driven by continued improvement in our collection process, a $20 reserve adjustment and improved economic conditions. The year-to-date increase reflects an increase of $45 in salary and wage expense driven by incentive awards and pay increases partially offset by lower headcount, an increase in advertising expense of $14 in response to consumer competitive campaigns and to a lesser extent increased corporate affiliate billings. These increases were substantially offset by the decrease in the provision for uncollectibles of $61 driven by the reasons impacting the quarter periods described above, and a decrease in rent, fees, and sales commissions. Depreciation and amortization Depreciation and amortization expense decreased $41 during second quarter and $90 year-to-date when compared to the same periods in 2003. The primary driver of the year-over-year decline in depreciation expense relates to lower depreciation rates under the group life method of depreciation. The lower depreciation rates were precipitated primarily by the reductions in capital expenditures over the past several years. Amortization expense increased due to higher levels of capitalized software. Unusual items excluded from segment net income Unusual items that were excluded from this segment's net income consisted of the following: for second quarter, unusual items of $(5) for severance costs; for year-to-date 2004, unusual items of $(47) for the South Carolina regulatory settlement and severance; for second quarter 2003, unusual items of $(23) related to severance costs, pension settlement losses, and costs associated with the early extinguishment of debt; for year-to-date 2003, special items of $719 for the cumulative effect of change in accounting principle related to the adoption of FAS 143 offset by restructuring charges and costs associated with the early extinguishment of debt. - -------------------------------------------------------------------------------- Domestic Wireless - -------------------------------------------------------------------------------- We own an approximate 40% economic interest in Cingular, a joint venture with SBC Communications. Because we exercise influence over the financial and operating policies of Cingular, we use the equity method of accounting for this investment. Under the equity method of accounting, we record our proportionate share of Cingular's earnings in our consolidated statements of income. These earnings are included in the caption "Net earnings (losses) of equity affiliates." For management purposes, we evaluate our Domestic wireless segment based on our proportionate share of Cingular's results. Accordingly, results for our Domestic wireless segment reflect the proportional consolidation of approximately 40% of Cingular's results. (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) Data revenue played an increasingly important role in revenue composition in 2003 and early 2004, and those impacts are expected to continue to increase through the remainder of 2004. Further, competition continues to be intense, with up to six competitors in most of the significant domestic wireless markets. Cingular's pending acquisition of AT&T Wireless, which is expected to close in the fourth quarter of 2004, will significantly impact the results of our wireless segment effective with the closing.
For the Three Months For the Six Months Ended June 30, % Ended June 30, % 2003 2004 Change 2003 2004 Change --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Segment operating revenues: Service revenues $1,447 $1,521 5.1% $2,804 $2,944 5.0% Equipment revenues 102 141 38.2% 200 295 47.5% Total segment operating revenues 1,549 1,662 7.3% 3,004 3,239 7.8% Segment operating expenses: Cost of services and products 536 579 8.0% 1,023 1,163 13.7% Selling, general, and administrative expenses 507 585 15.4% 994 1,133 14.0% Depreciation and amortization 203 226 11.3% 398 447 12.3% Total segment operating expenses 1,246 1,390 11.6% 2,415 2,743 13.6% Segment operating income 303 272 -10.2% 589 496 -15.8% --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Segment net income $ 104 $ 89 -14.4% $ 205 $148 -27.8% --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Segment net income including unusual items $ 104 $ 89 -14.4% $ 205 $148 -27.8% Key Indicators: --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Cellular/PCS Customers (000s) 9,056 10,018 10.6% Wireless service average monthly revenue per customer - Cellular/PCS $ 53.12 $50.32 -5.3% $51.95 $49.15 -5.4% Capital Expenditures $ 267 $ 313 17.2% $ 398 $447 12.3% ---------------------------------------------------------------------------------------------------------------------------------
Segment operating revenues Cingular's cellular/PCS customers at June 30, 2004 increased 11% compared to June 30, 2003. Net cellular/PCS additions in the second quarter of 2004 decreased 21% compared to second quarter of 2003 and increased 35% in the year-to-date period 2004 as compared to 2003. During the second quarter 2004, Cingular's postpaid and reseller customer bases increased compared to prior year. Postpaid gross additions were 78% of all gross additions for the second quarter of 2004 and were 74% of all gross additions for the year-to-date period 2004. The cellular/PCS churn rate was 2.7% in both the second quarter of 2004 and the year-to-date period 2004 compared with a 2.5% churn rate in the second quarter of 2003 and 2.6% in the year-to-date period 2003. To date, wireless local number portability has not materially impacted Cingular's customer churn rate. Segment operating revenues grew $113 during the second quarter of 2004 and $235 in the year-to-date period as compared to the same periods in 2003. Service revenues increased $74 in the second quarter of 2003 and $140 in the year-to-date period, driven by the increase in the average subscriber base for both periods offset by lower average revenue per user (ARPU) for both periods. ARPU for cellular/PCS customers declined $2.80 in both the second quarter and year-to-date periods when compared to the corresponding period in the prior year. The decrease in ARPU is related to several items including the increase in customers on FamilyTalk(R) plans and the success of the RollOver Minutes program. Additionally, ARPU decreased due to reductions in revenues from roaming when compared to the second quarter of 2003 and to the year-to-date period 2003, reflecting a reduction in roaming rates with major roaming partners to support all-inclusive rate plans. Also, outcollect roaming revenue dropped as other carriers continue to build out and/or better utilize their own networks. Partially offsetting these decreases were increases in service revenue including an increase in Universal Service Fund (USF) regulatory fees and a 60% increase in data revenues from the second quarter of 2003 and a 45% increase in data revenues from the year-to-date period 2003, reflective of higher penetration and usage of SMS short messaging data services with Cingular's cellular/PCS customers as well as revenue increases related to its Mobitex data network. Equipment revenues increased $39 in the second quarter of 2004 and $95 in the year-to-date period 2004 compared to the same periods in 2003 due to higher unit sales. Handset sales were impacted by postpaid/prepaid customer gross additions during the quarter and year-to-date periods and increased upgrade activity as a result of Cingular's GSM conversions and a move towards higher functionality handsets for the year-to-date period. (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) Segment operating expenses Cost of services and products Cost of services and products increased $43 during the second quarter of 2004 and $140 during the year-to-date period 2004 compared to the same 2003 periods. Cingular's expense growth was driven by customer gross additions during the quarter and year-to-date periods, and by upgrade activity and by increased expenses related to USF/regulatory fees for the year-to-date period. Additionally, a 29.7% second quarter increase and a 31.1% year-to-date increase in system minutes of use on the network and associated network system expansion costs resulted in higher quarter-over-quarter and higher year-to-date over year-to-date expenses. Selling, general, and administrative expenses Selling, general, and administrative expenses increased $78 in the second quarter of 2004 and increased $139 year-to-date 2004 when compared to the same periods in 2003, due to higher commissions expense as a result of higher gross additions, increased advertising and promotion costs, increased uncollectibles expense and higher customer service as a result of customer retention and other service improvement initiatives. Depreciation and amortization Depreciation and amortization increased $23 in the second quarter of 2004 and increased $49 in the year-to-date period 2004 when compared to the same periods in 2003. The increase in depreciation expense of $23 for the second quarter of 2004 and $49 for the year-to-date period 2004 was attributable to higher levels of gross property, plant and equipment, including Cingular's GSM network overlay. Amortization expense was flat compared to the same periods in 2003. Unusual items excluded from segment net income There were no unusual items that were excluded from this segment's net income. - -------------------------------------------------------------------------------- Advertising and Publishing - -------------------------------------------------------------------------------- Our Advertising and publishing segment is comprised of companies in the U.S. that publish, print, sell advertising in and perform related services concerning alphabetical and classified telephone directories and electronic media offerings. While revenue growth for the first half of 2004 continued to reflect a decline, stronger demand in advertising has helped increase contract sales for directories sold during 2004. Although the improving demand should result in higher advertising spending, we expect continued competitive pressure to impact volumes and pricing.
For the Three Months For the Six Months Ended June 30, % Ended June 30, % 2003 2004 Change 2003 2004 Change ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ Segment operating revenues $525 $ 511 -2.7% $1,023 $993 -2.9% Segment operating expenses: Cost of services and products 82 90 9.8% 160 170 6.3% Selling, general, and administrative expenses 184 167 -9.2% 354 323 -8.8% Depreciation and amortization 7 7 0.0% 14 14 0.0% --- --- --- --- Total segment operating expenses 273 264 -3.3% 528 507 -4.0% Segment operating income 252 247 -2.0% 495 486 -1.8% ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ Segment net income $157 $ 150 -4.5% $306 $297 -2.9% ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ Segment net income (loss) including unusual items $156 $150 -3.8% $ (199) $ 297 249.2% Capital expenditures $ 5 $ 6 20.0% $ 12 $ 14 16.7% ------------------------------------------------------------------------------------------------------------------------------
Segment operating revenues Segment operating revenues decreased $14 from second quarter 2003 to second quarter 2004, and decreased $30 on a year-to-date basis. The decreases include a reduction in print revenues, partially offset by an increase in electronic media revenues. Sales agency commission revenues were flat quarter-over-quarter but decreased slightly for the year-to-date period 2004 compared to the year-to-date period 2003 as the result of a discontinued line of business. The print revenue decline between periods was primarily driven by the amortization of revenues from directories issued in the latter half of 2003. The decline in revenues from 2003 directories was attributable to the lingering effects of weak economic conditions in 2003 that affected the directory advertising environment, and the continued impact of online and offline media competition. Revenues from directories issued in the first half of 2004 were flat when compared to their 2003 issues, (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) attributable to the factors discussed previously. Based on recent directory sales volumes, revenues from directories to be issued in the second half of 2004 are expected to show positive growth over their previous issues. Segment operating expenses Cost of services and products increased $8 from second quarter 2003 to second quarter 2004 and $10 on a year-to-date basis. These increases primarily reflect the impact of increased distribution volumes. Selling, general, and administrative expenses decreased $17 quarter-over-quarter and $31 year-over-year. Uncollectible expense drove this reduction, decreasing $10 for the quarter and $31 for the year-to-date period. The decrease reflects the impact of improved collection performance between periods. Variable costs associated with selling also decreased as the result of the reduction in revenues. Partially offsetting these decreases was increased spending for advertising in response to a more competitive environment. Depreciation and amortization expenses were flat between periods. Unusual items excluded from segment net income Unusual items that were excluded from this segment's net income consisted of the following: in second quarter 2003, special items of $(1) related to severance costs and pension settlement losses; in year-to-date 2003, special items of $(505) included the cumulative effect of change in accounting principle and severance and pension costs. - -------------------------------------------------------------------------------- Liquidity and Financial Condition - -------------------------------------------------------------------------------- Net cash provided by (used for): For the Six Months Ended June 30, 2003 2004 Change ------------------------------- ---------- ---------- ------------------- ------------------------------- ---------- ---------- --------- --------- Continuing Operations Operating activities..... $4,287 $3,797 $(490) -11.4% Investing activities..... $286 $(1,126) $(1,412) * Financing activities..... $(3,013) $(826) $2,187 72.6% Discontinued Operations $80 $(185) $(265) * ------------------------------- ---------- ---------- --------- --------- *Not meaningful. CONTINUING OPERATIONS Net cash provided by operating activities Cash generated by operations decreased $490 during the first half of 2004 compared to the prior year due primarily to higher income tax payments in 2004, a previously accrued payment of approximately $81 to MCI WorldComm related to its bankruptcy settlement, and lower operating margins before depreciation and amortization in the Communications Group. Operating income excluding depreciation and amortization in the Communications group decreased $140 in the first half of 2004 compared to the same period in 2003. Net cash used for investing activities Capital expenditures Capital expenditures consist primarily of (a) gross additions to property, plant and equipment having an estimated service life of one year or more, plus incidental costs of preparing the asset for its intended use, and (b) gross additions to capitalized software. Our capital expenditures of $1,366 during the first half of 2004 and $1,265 during the first half of 2003 were incurred to support our wireline network, to promote the introduction of new products and services and to increase operating efficiency and productivity. The increase in capital expenditures compared to the prior period relates primarily to the timing of capital projects and related expenditures as we expect spending in 2004 to be comparable to 2003. Other investing activities During the first half of 2004 we received $525 for the sale of our investment in Sonofon and $109 for the repayment of our shareholder loan and accrued interest, reduced by a settlement of $17 associated with currency swap contracts. In addition, activity related to purchases and sales of debt and equity securities resulted in a net cash outlay of $382. During the first half of 2003, we received $1,450 in net proceeds resulting from an early repayment by KPN of the entire outstanding balance of the loan we had extended to them and the settlement of related currency swaps. In addition, we sold our entire interest in two real estate partnerships for net proceeds of $26. In conjunction with the sale, we received proceeds of $97 for the repayment of loans we had extended to the partnerships. We also purchased equity securities for a net expenditure of $21. (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) Net cash used for financing activities During the first half of 2004 we utilized cash from operations to reduce short-term borrowings by $339. We also issued $700 of new long-term debt to take advantage of favorable interest rates. The proceeds were used to refinance $200 in maturing debt during the second quarter and will be used to refinance $500 of callable debt in the third quarter. In addition, we paid dividends of 50 cents per share totaling $914 and purchased 3.9 million shares of our common stock for an aggregate of $99. During the first half of 2003 we reduced short-term borrowings by $398 and long-term borrowings by $1,556. In addition, we paid dividends of 41 cents per share totaling $759 and purchased 14.8 million shares of our common stock for an aggregate cost of $322. DISCONTINUED OPERATIONS In the first half of 2004, cash and cash equivalents decreased $185 primarily due to $177 in expenditures related to the purchase of interests and other rights of minority partners in Argentina, Colombia and Ecuador. In addition, capital expenditures were $137 and distributions to minority partners were $55. Year-to-date operating cash flow from discontinued operations of $224 was driven by strong operational results. In the first half of 2003, cash and cash equivalents increased $80 primarily due to operating cash flow from discontinued operations of $139. In addition, investing cash flows included proceeds of $35 from the sale of Colombian securities and $20 related to the sale of an equity investment in Brazil. Partially offsetting these cash inflows were capital expenditures of $95. ANTICIPATED SOURCES AND USES OF FUNDS Cash flows from operations are our primary source of cash for funding existing operations, capital expenditures, debt interest and principal payments, and dividend payments to shareholders. Should the need arise, however, we believe we are well positioned to raise capital in the public debt markets. At June 30, 2004, our consolidated cash balance was $6,216, which includes approximately $1 billion related to our Latin American Discontinued Operations. At June 30, 2004, our corporate debt rating was A1 from Moody's Investor Service and A+ from Standard and Poor's. Our short-term credit rating at June 30, 2004 was P-1 from Moody's and A-1 from Standard and Poor's. Moody's and Standard & Poor's have placed our long-term and short-term ratings on negative credit watch due to the pending acquisition by Cingular of AT&T Wireless. Our authorized commercial paper program as of June 30, 2004 was $8.0 billion, with $1.1 billion outstanding. We believe that we have ready access to the commercial paper market in the event funding in excess of our operating cash flows is needed. We have a syndicated line of credit in the amount of $1.5 billion in case we are unable to access the commercial paper market. We do not have any balances outstanding under the line of credit. We also have a registration statement on file with the SEC under which $1.6 billion of long-term debt securities could be issued. In addition, we filed a new shelf registration with the SEC on July 30, 2004 for $6.95 billion of debt securities. This registration statement is not yet effective. Our 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. We believe that these sources of funds will be sufficient to meet the operating needs of our business for at least the next twelve months. The Communications group and Advertising and publishing group generate substantially all of our consolidated cash provided by operating activities. These segments generate sufficient cash flow to fund operating, investing and financing needs and dividend excess cash to BellSouth for corporate uses. The Domestic Wireless segment, which consists entirely of our equity investment in Cingular, typically has not relied on BellSouth for funding. Beginning on August 1, 2004, any cash needs not satisfied through Cingular's own operations will be borrowed from BellSouth and SBC, on a pro rata basis. In addition, we are committed to funding our pro rata share of Cingular's acquisition of AT&T Wireless as described in the following paragraph. In July 2004, Cingular's Board of Directors approved the termination of its bank credit facilities and its intention to cease issuing commercial paper and long-term debt. As previously disclosed, on February 17, 2004, Cingular announced an agreement to acquire AT&T Wireless, which will create the largest wireless carrier in the United States. We have committed to funding our proportionate share of the all cash deal. Our funding requirement will be approximately $16 billion. Funding will be achieved through a mix of existing cash on hand, cash generated from operations prior to closing the transaction and asset sales. We plan to access the public debt markets for the remainder. We currently anticipate our likely external funding needs for this transaction to be in the $5 to $6 billion range. However, due to the timing of the closing of the sale of our Latin American operations and the timing of accessibility to cash held by AT&T Wireless, our borrowings in the short term may exceed this range. In March 2004, we signed an agreement with Telefonica Moviles, the wireless affiliate of Telefonica, S.A. to sell all our interests in our Latin American operations. Cash proceeds at closing are expected to be $4.4 billion. Net cash inflow will be $3.4 billion after consideration of the $1 billion of cash held in these operations that will transfer to Telefonica at closing. The transaction is subject to governmental approvals and other closing conditions. It is expected to close in (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) stages as closing conditions are satisfied, with the final closing expected to occur in the second half of 2004. These net proceeds will be used to fund a portion of the AT&T Wireless transaction described above, and are reflected in our external borrowing estimate of the $5 to $6 billion range previously noted. Debt Instruments On March 19, 2004, our Colombian operation completed the refinancing of its senior secured debt. According to the terms of the refinancing, (1) the maturity was extended from 2005 to 2007, (2) on a pro rata basis with our partner, we agreed to provide support in the aggregate amount of $70 for 30 months and (3) we and our partner pledged 100% of the capital stock of the Colombian operations as security for the loan. As of June 30, 2004, BellSouth's consolidated balance sheet reflects the $139 remaining investment in the loan participation agreement and the debt of $477 as assets and liabilities of discontinued operations. - -------------------------------------------------------------------------------- Market Risk - -------------------------------------------------------------------------------- For a complete discussion of our market risks, you should refer to the caption "Quantitative and Qualitative Disclosure About Market Risk" in our 2003 annual report on Form 10-K, as modified by the current report on Form 8-K dated July 30, 2004, and our other filings with the SEC. Our primary exposure to market risks relates to unfavorable movements in interest rates and foreign currency exchange rates. We do not anticipate any significant changes in our objectives and strategies with respect to managing such exposures. In order to limit our risk from fluctuations in interest rates, we enter into interest rate swap agreements to exchange fixed and variable rate interest payment obligations without the exchange of the underlying principal amounts. In first quarter 2004, we entered into an additional interest rate swap, bringing the total notional value of our fair value hedges to $600. We did not enter into any additional cash flow hedges. - -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements and Aggregate Contractual Obligations - -------------------------------------------------------------------------------- Other than as set forth below, there are no material changes with respect to off-balance sheet arrangements and aggregate contractual obligations as presented in our 2003 Annual Report on Form 10-K, as modified by the current report on Form 8-K dated July 30, 2004, and our other filings with the SEC. Sales and other transaction taxes generally are required to be collected by the vendor from the purchaser and remitted to the appropriate taxing authority. In some instances, however, it is not clear whether the tax applies to a particular transaction. When, as a purchaser, BellSouth wants to take the position that a tax does not apply to a given transaction, it will request that the vendor not bill the tax to BellSouth. As a condition of not billing the tax, vendors sometimes request, and BellSouth generally agrees, to indemnify and hold the vendor harmless in the event that the taxing authority asserts a claim against the vendor for the tax. We believe any amounts subject to these types of indemnification would not have a material impact on our results of operations, financial position or cash flows. Venezuelan put-call provision We own a 78.2% interest in Telcel, our Venezuelan operation. Telcel's other major shareholder holds an indirect 21% interest in Telcel. Under a Stock Purchase Agreement, that shareholder has the right to initiate a process that could require us to purchase (the puts), and we have the right to initiate a process that could require that shareholder to sell (the calls) to us, the shareholder's interest in Telcel. Notice of the initiation of the process with respect to approximately half of that shareholder's interest was to be given in 2000 and notice with respect to the remaining balance was to be given in 2002. If we exercise our call right, we would purchase that shareholder's interest at between 100% and 120% of its appraised fair value. If we are required to purchase the interest (the puts), we would do so at between 80% and 100% of appraised fair value. In 2000, the shareholder initiated a process for appraising the value of approximately half of its interest in Telcel, but the process was not completed. The shareholder also has sent a letter purporting to exercise the balance of the puts under the Stock Purchase Agreement. We are currently in arbitration with the shareholder over alleged breaches by BellSouth and the shareholder of the Stock Purchase Agreement, including the timing of the valuation and whether the process was properly initiated in 2000. The shareholder is seeking damages and specific performance, and BellSouth is seeking, among other things, unspecified damages and a ruling that it has not breached the Stock Purchase Agreement in any respect. The arbitration also relates to an alleged oral agreement to buy out the shareholder's entire interest in Telcel, which agreement we argue does not exist. Hearings on these matters occurred in January and April 2004. If the arbitration panel rules against BellSouth, it is possible that the appraised fair value of the shareholder's interest in Telcel could be substantially in excess of current value. At this time, the likely outcome of this arbitration cannot be predicted, nor can a reasonable estimate of the amount of loss, if any, be made. (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) Colombian Put-Call We are the majority shareholder in BellSouth Colombia, a wireless operator in Colombia. We have agreed with our partner to a put and call agreement whereby we can acquire, or could be compelled by our partner to acquire, additional shares of the Colombian operation currently held by our partner for a price equal to the appraised fair value. Under the remaining put/call option, the residual balance of our partner's shares can be called by us or put to us beginning in 2006 until 2009. We cannot predict if either party will exercise its rights under this put/call option provision. Upon completion of the pending acquisition of our Colombian operations by Telefonica Moviles, the shareholders agreement will be assigned to Telefonica and all of our obligations under the shareholders agreement will cease. - -------------------------------------------------------------------------------- Operating Environment - -------------------------------------------------------------------------------- Domestic Economic Trends Real gross domestic product (GDP) grew at an average annual rate of 4.5 percent in the first quarter of 2004, the third consecutive quarter of strong growth. Business fixed investment spending, residential construction, government purchases, personal consumption, and exports all contributed to the broad -based growth. Nonagricultural employment increased by 1.25 million in the first half of the year. Sustained expansion is expected in the second half of the year. On average, the economy of the nine-state region tends to closely track the US economy. Employment in the region near mid-year was 1.1 percent higher than in the same period a year ago. A gain of 1.6 percent is anticipated for all of 2004. Residential construction activity has been very strong in the region as in the nation. Housing starts are on pace to exceed 2003's level of 533 thousand. Other Matters in the Domestic Business In April 2004, MCI (formerly known as WorldCom) emerged from bankruptcy. As a result, in the second quarter 2004, we made a net payment to MCI of approximately $81 related to our previously accrued and disclosed settlement. Legal Matters We are involved in numerous legal proceedings associated with state and federal regulatory matters. While complete assurance cannot be given as to the outcome of these matters, we believe that any financial impact would not be material, individually or in the aggregate, to our results of operations, financial position or cash flows. See Note K to our consolidated interim financial statements. Item 3. Qualitative and Quantitative Disclosures About Market Risk See the caption labeled "Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. We also have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries. The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations (Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated) in any control system, misstatements due to error or fraud may occur and not be detected. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures are effective at providing reasonable assurance that all material information relating to BellSouth (including consolidated subsidiaries) required to be included in our Exchange Act reports is reported in a timely manner. In addition, based on such evaluation we have identified no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting. Cautionary Language Concerning Forward-Looking Statements In addition to historical information, this document contains forward-looking statements regarding events, financial trends and critical accounting policies that may affect our future operating results, financial position and cash flows. These statements are based on our assumptions and estimates and are subject to risks and uncertainties. For these statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. There are possible developments that could cause our actual results to differ materially from those forecast or implied in the forward-looking statements. You are cautioned not to place undue reliance on these forward- looking statements, which are current only as of the date of this filing. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. While the below list of cautionary statements is not exhaustive, some factors, in addition to those contained throughout this document, that could affect future operating results, financial position and cash flows and could cause actual results to differ materially from those expressed in the forward-looking statements are: o a change in economic conditions in domestic or international markets where we operate or have material investments which could affect demand for our services; o changes in US or foreign laws or regulations, or in their interpretations, which could result in the loss, or reduction in value, of our licenses, concessions or markets, or in an increase in competition, compliance costs or capital expenditures; o continued pressures on the telecommunications industry from a financial, competitive and regulatory perspective; o the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; o changes in the federal and state regulations governing the terms on which we offer wholesale services to our competitors; o continued successful penetration of the interLATA long distance market; o consolidation in the wireline and wireless industries in which we operate; o higher than anticipated start-up costs or significant up-front investments associated with new business initiatives; o the outcome of pending litigation; o unanticipated higher capital spending from, or delays in, the deployment of new technologies; o the impact of terrorist attacks on our business; o the impact and the success of the wireless joint venture with SBC Communications, known as Cingular Wireless, including marketing and product development efforts, technological change, financial capacity and closing and integration of the pending acquisition of AT&T Wireless; o Cingular Wireless' failure to realize, in the amounts and within the timeframe contemplated, the capital and expense synergies and other financial benefits expected from its proposed acquisition of AT&T Wireless as a result of technical, logistical, regulatory and other factors; o the unwillingness of banks or other lenders to lend to our international operations or to restructure existing debt, particularly in Latin America; and o continued deterioration in foreign currencies relative to the US Dollar in foreign countries in which we operate, particularly in Latin America. PART II -- OTHER INFORMATION Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table contains information about our purchases of our equity securities during April, May and June 2004. Issuer Purchases of Equity Securities Total Number of Approximate Shares Purchased Dollar Value Total Number Average as Part of a that May Yet Be of Shares Price Paid Publicly Purchased Under Period Purchased (1) per Share Announced Plan the Plan (2) ------ ------------- ---------- ---------------- --------------- April 1-30, 2004 -- -- -- -- May 1-31, 2004 3,887,200 25.37 -- -- June 1-30, 2004 12,943 25.03 -- -- - ------------------- ------------- ---------- ---------------- --------------- Total 3,900,143 25.37 -- -- (1) Includes 12,943 shares purchased from employees to pay taxes related to the vesting of restricted shares, at an average of $25.03, and 3,887,200 shares purchased from the external markets, at an average of $25.37. Excludes shares purchased from employees to pay taxes related to the exercise of stock options. (2) Our publicly announced stock repurchase program expired pursuant to its terms on December 31, 2003. Item 4. Submission of Matters to a Vote of Security Holders Our annual meeting of shareholders was held on April 26, 2004. The voting results were as follows: Number of Shares Outstanding as of Record Date: 1,869,138,851 Number of Shares Present: 1,569,137,733 Percent of Shares Present: 83.95% Proposal Number 1: Election of Directors For Withheld James H. Blanchard 1,502,820,251 66,317,482 Armando M. Codina 1,505,653,931 63,483,802 Leo F. Mullin 1,526,162,636 42,975,097 The terms of the following directors continued after the meeting: F. Duane Ackerman Reuben V. Anderson J. Hyatt Brown Kathleen F. Feldstein James P. Kelly Robin B. Smith William S. Stavropoulos Proposal Number 2: Ratification of Independent Accountants For Against Abstain - --------------------------- ----------------- ------------------ 1,508,001,380 46,296,422 14,839,931 Proposal Number 3: Approve Amendment to Elect Directors Annually For Against Abstain - --------------------------- ----------------- ------------------ 1,516,533,760 35,545,381 17,058,592 Proposal Number 4: Approving the Stock and Incentive Compensation Plan For Against Abstain Broker Non-Votes - -------------- ------------ ----------- ---------------- 1,145,161,997 164,793,102 10,412,841 248,769,793 Proposal Number 5: Shareholder Proposal re: Executive Compensation For Against Abstain Broker Non-Votes - ------------ -------------- ----------- ---------------- 169,008,940 1,115,827,061 35,531,939 248,769,793 Proposal Number 6: Shareholder Proposal re: CEO Compensation For Against Abstain Broker Non-Votes - ------------ -------------- ----------- ---------------- 161,662,194 1,144,716,218 13,989,528 248,769,793 Proposal Number 7: Shareholder Proposal re: Disclosure of Political Contributions For Against Abstain Broker Non-Votes - ------------ -------------- ----------- ---------------- 185,716,780 1,048,126,005 86,525,155 248,769,793 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number - ------------------- 4a No instrument which defines the rights of holders of our long- and intermediate-term debt is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to furnish a copy of any such instrument to the SEC upon request. 10v-3 BellSouth Corporation Stock and Incentive Compensation Plan as amended June 28, 2004. 10pp Revolving Credit Agreement by and Among BellSouth Corporation, SBC Communications Inc. and Cingular Wireless LLC, dated as of August 1, 2004. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 31a Section 302 certification of F. Duane Ackerman. 31b Section 302 certification of Ronald M. Dykes. 32 Statement Required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: Date of Event Subject April 7, 2004 Announcing changes to composition of Board of Directors and committees of our Board of Directors. April 22, 2004 Press release announcing financial results for first quarter of 2004. June 22, 2004 Announcing issuance and sale of $700 million aggregate principal amount of 6.55% Notes due 2034, and filing certain related documents as exhibits. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BELLSOUTH CORPORATION By /s/ W. Patrick Shannon ---------------------- W. PATRICK SHANNON Vice President - Finance (Principal Accounting Officer) July 30, 2004 EXHIBIT INDEX Exhibit Number -------- 4a No instrument which defines the rights of holders of our long- and intermediate-term debt is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to furnish a copy of any such instrument to the SEC upon request. 10v-3 BellSouth Corporation Stock and Incentive Compensation Plan as amended June 28, 2004. 10pp Revolving Credit Agreement by and Among BellSouth Corporation, SBC Communications Inc. and Cingular Wireless LLC, dated as of August 1, 2004. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 31a Section 302 certification of F. Duane Ackerman. 31b Section 302 certification of Ronald M. Dykes. 32 Statement Required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-10 2 q20410qex10v3.txt EXHIBIT 10V-3 Exhibit 10v-3 BELLSOUTH CORPORATION STOCK AND INCENTIVE COMPENSATION PLAN (As Amended June 28, 2004) 1. Purpose. The purpose of the Plan is to strengthen BellSouth Corporation, a Georgia corporation (the "Company"), by providing an incentive to its and its Subsidiaries' (as defined herein) employees, officers, consultants and directors, thereby encouraging them to devote their abilities and industry to the success of the Company's business enterprise. It is intended that this purpose be achieved by extending to employees (including future employees who have received a formal written offer of employment), officers, consultants and directors of the Company and its Subsidiaries an added incentive for high levels of performance and unusual efforts through the grant of Restricted Stock, Restricted Stock Units, Options, Stock Appreciation Rights, Dividend Equivalent Rights, Performance Awards, Annual Incentive Awards and Share Awards (as each term is herein defined). 2. Definitions. For purposes of the Plan: 2.1 "Administrator" means the Compensation Committee, the Director Committee or the Company Administrator, as applicable. 2.2 "Affiliate" means any entity directly or indirectly controlled by, controlling or under common control with the Company. 2.3 "Agreement" means a written or electronic agreement between the Company and a Participant evidencing the grant of an Option or Award and setting forth the terms and conditions thereof. 2.4 "Annual Bonus Pool" has the meaning set forth in Section 10.2. 2.5 "Annual Incentive Award" has the meaning set forth in Section 10.2. 2.6 "Award" means a grant of Restricted Stock, a Restricted Stock Unit, a Stock Appreciation Right, a Performance Award, a Dividend Equivalent Right, a Share Award, an Annual Incentive Award or any or all of them. 2.7 "Beneficiary" means an individual designated as a Beneficiary pursuant to Section 21.4. 2.8 "Board" means the Board of Directors of the Company. 2.9 "Cause" means: (a) intentional failure to perform reasonably assigned duties, (b) dishonesty or willful misconduct in the performance of duties, (c) involvement in a transaction in connection with the performance of duties to the Company or any of its Subsidiaries which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit or (d) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). 2.10 "Change in Capitalization" means any increase or reduction in the number of Shares, any change (including, but not limited to, in the case of a spin-off, dividend or other distribution in respect of Shares, a change in value) in the Shares or any exchange of Shares for a different number or kind of Shares or other securities of the Company or another corporation, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants, rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of Shares, repurchase of Shares, change in corporate structure or otherwise. 2.11 "Change in Control" means the occurrence of any of the following: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term "person" is used for purposes of Section 13(d) or 14(d) of the Exchange Act), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than twenty percent (20%) of (i) the then-outstanding Shares or (ii) the combined voting power of the Company's then-outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred pursuant to this paragraph (a), the acquisition of Shares or Voting Securities in a Non-Control Acquisition (as hereinafter defined) shall not constitute a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person the majority of the voting power, voting equity securities or equity interest of which is owned, directly or indirectly, by the Company (for purposes of this definition, a "Related Entity"), (ii) the Company or any Related Entity, or (iii) any Person in connection with a Non-Control Transaction (as hereinafter defined); (b) The individuals who, as of the effective date of the Plan, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the members of the Board or, following a Merger (as hereinafter defined), the board of directors of (i) the corporation resulting from such Merger (the "Surviving Corporation"), if fifty percent (50%) or more of the combined voting power of the then-outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly, by another Person (a "Parent Corporation") or (ii) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; provided, however, that, if the election, or nomination for election by the Company's common shareholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of the Plan, be considered a member of the Incumbent Board; and provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest"), including by reason of any agreement intended to avoid or settle any Proxy Contest; or (c) The consummation of: (i) A merger, consolidation or reorganization (x) with or into the Company or (y) in which securities of the Company are issued (a "Merger"), unless such Merger is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a Merger in which: (A) the shareholders of the Company immediately before such Merger own directly or indirectly immediately following such Merger at least sixty percent (60%) of the combined voting power of the outstanding voting securities of (1) the Surviving Corporation, if there is no Parent Corporation or (2) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least a majority of the members of the board of directors of (1) the Surviving Corporation, if there is no Parent Corporation, or (2) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; and (C) no Person other than (1) the Company or another corporation that is a party to the agreement of Merger, (2) any Related Entity, or (3) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to the Merger, was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to the Merger had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Shares or Voting Securities, has Beneficial Ownership, directly or indirectly, of twenty percent (20%) or more of the combined voting power of the outstanding voting securities or common stock of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; provided, however, that any Person described in clause (4) of this subsection (C) may not, immediately following the Merger, Beneficially Own more than thirty percent (30%) of the combined voting power of the outstanding voting securities of the Surviving Corporation or the Parent Corporation, as applicable, for the Merger to constitute a Non-Control Transaction; (ii) A complete liquidation or dissolution of the Company; or (iii) The sale or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person (other than (x) a transfer to a Related Entity or (y) the distribution to the Company's shareholders of the stock of a Related Entity or any other assets). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding Shares or Voting Securities as a result of the acquisition of Shares or Voting Securities by the Company which, by reducing the number of Shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons; provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares or Voting Securities by the Company and, after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Shares or Voting Securities and such Beneficial Ownership increases the percentage of the then outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. If a Participant's employment is terminated by the Company without Cause prior to the date of a Change in Control but the Participant reasonably demonstrates that the termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (B) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed, such termination shall be deemed to have occurred after a Change in Control for purposes of the Plan provided a Change in Control shall actually have occurred. 2.12 "Chief Executive Officer" means the Chief Executive Officer of the Company. 2.13 "Code" means the Internal Revenue Code of 1986, as amended. 2.14 "Company" means BellSouth Corporation, a Georgia corporation. 2.15 "Company Administrator" means the Chief Executive Officer, the Company's senior officer responsible for human resources matters or such other person or persons as are designated by the Compensation Committee to administer the Plan on behalf of Participants who are neither Non-Employee Directors nor Covered Employees. 2.16 "Compensation Committee" means the Executive Nominating and Compensation Committee of the Board, or any successor committee of the Board which administers the Plan as provided in Section 3. 2.17 "Covered Employee" means, with respect to any grant of an Option or Award, a Participant who (a) the Compensation Committee deems may be or become a covered employee as defined in Section 162(m)(3) of the Code for any year that such Option or Award may result in remuneration to the Participant and for which year such Participant may receive remuneration over $1 million which would not be deductible under Section 162(m) of the Code but for the provisions of the Plan and any other "qualified performance-based compensation" plan (as defined under Section 162(m) of the Code) of the Company; provided, however, that the Compensation Committee may determine that a Participant has ceased to be a Covered Employee prior to settlement of any Option or Award or (b) is designated as a Covered Employee for purposes of the Plan. 2.18 "Director" means a member of the Board. 2.19 "Director Committee" means the Director Nominating and Corporate Governance Committee of the Board, or any successor committee of the Board which administers the Plan as provided in Section 3. 2.20 "Disability": (a) shall have the meaning set forth in the Company's principal management long-term disability plan under which the Participant is covered, if any; or (b) if the Participant is not covered under the Company's principal management long-term disability plan, shall have the meaning set forth in any other Company-sponsored long-term disability plan under which the Participant is covered; or (c) if Participant is not covered under any such plan, shall mean disability within the meaning of Section 22(e)(3) of the Code. 2.21 "Division" means any of the operating units or divisions of the Company designated as a Division by the Administrator. 2.22 "Dividend Equivalent Right" means a right to receive cash or Shares based on the value of dividends that are paid with respect to Shares. 2.23 "Effective Date" means the date of approval of the Plan by the Company's shareholders` pursuant to Section 21.5. 2.24 "Eligible Director" means a Director who is not an employee of the Company or any Subsidiary. 2.25 "Eligible Individual" means any of the following individuals who is designated by the Administrator as eligible to receive Options or Awards subject to the conditions set forth herein: (a) any Director, officer or employee of the Company or a Subsidiary, (b) any individual to whom the Company or a Subsidiary has extended a formal, written offer of employment, and (c) any consultant or advisor of the Company or a Subsidiary. 2.26 "Eligible Officer" means an Officer designated by the Compensation Committee under Section 10.1. 2.27 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.28 "Fair Market Value" on any date means (a) for purposes of Sections 4.2, 5.7, 6.5, 8.2, 9.1(d) and 21.2, and for purposes of Sections 5.2 and 6.3(b) with respect to Covered Employees and Directors, the average of the high and low sales prices of the Shares on such date on the New York Stock Exchange, or if there are no sales on such day, for the most recent prior day in which a Share was sold on the New York Stock Exchange, and (b) for all other purposes means a price that is based on the opening, closing, actual, high, low, or average selling prices of a Share on the applicable date, the preceding trading day, the next succeeding trading day, or an average of trading days, as determined by the Compensation Committee in its discretion. Such definition(s) of Fair Market Value shall be specified in each Agreement and may differ depending on whether Fair Market Value is in reference to the grant, exercise, vesting, settlement, or payout of an Award. If, however, the accounting standards used to account for equity awards granted to Participants are substantially modified subsequent to the effective date of the Plan, the Compensation Committee shall have the ability to determine an Award's Fair Market Value based on the relevant facts and circumstances. 2.29 "Good Reason" means a reduction in a Participant's annual base salary as in effect immediately before a Change in Control or the failure to pay a bonus award to which a Participant is otherwise entitled under any of the short-term or long-term incentive plans in which the Participant participates (or any successor incentive compensation plans) at the time such awards are usually paid. 2.30 "Incentive Stock Option" means an Option satisfying the requirements of Section 422 of the Code and designated by the Administrator as an Incentive Stock Option. 2.31 "Net Income" for a fiscal year means the amount reported as "income before cumulative effect of accounting changes" in the Company's Form 10-K filed with the Securities and Exchange Commission for that fiscal year, as determined in accordance with generally accepted accounting principles. 2.32 "Nonemployee Director" means a Director who is a "nonemployee director" within the meaning of Rule 16b-3 promulgated under the Exchange Act. 2.33 "Nonqualified Stock Option" means an Option which is not an Incentive Stock Option. 2.34 "Operating Cash Flow" for a fiscal year means the amount reported as "net cash provided by operating activities" in the Company's Form 10-K filed with the Securities and Exchange Commission for that fiscal year, as determined in accordance with generally accepted accounting principles. 2.35 "Option" means a Nonqualified Stock Option and/or an Incentive Stock Option. 2.36 "Outside Director" means a Director who is an "outside director" within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. 2.37 "Parent" means any corporation which is a "parent corporation" (within the meaning of Section 424(e) of the Code) with respect to the Company. 2.38 "Participant" means a person to whom an Award or Option has been granted under the Plan. 2.39 "Performance Awards" means Performance Shares, Performance Units, Performance-Based Restricted Stock or any or all of them. 2.40 "Performance-Based Compensation" means any Option or Award that is intended to constitute "performance based compensation" within the meaning of Section 162(m)(4)(C) of the Code and the regulations promulgated thereunder. 2.41 "Performance-Based Restricted Stock" means Shares issued or transferred to an Eligible Individual under Section 9.2. 2.42 "Performance Cycle" means the time period specified by the Administrator at the time Performance Awards are granted during which the performance of the Company, a Subsidiary or a Division will be measured. 2.43 "Performance Objectives" means the objectives set forth in Sections 9.3 and 10.2 for the purpose of determining the degree of payout and/or vesting of Performance Awards and Annual Incentive Awards, respectively. 2.44 "Performance Shares" means Performance Shares granted to an Eligible Individual under Section 9.1. 2.45 "Performance Units" means Performance Units granted to an Eligible Individual under Section 9.1. 2.46 "Plan" means the BellSouth Corporation Stock and Incentive Compensation Plan, as amended from time to time. 2.47 "Prior Plans" means the Amended and Restated BellSouth Corporation Stock Plan, the BellSouth Corporation Stock Option Plan, the BellSouth Executive Long Term Incentive Plan, the BellSouth Corporation Non-Employee Director Stock Option Plan and the BellSouth Corporation Non-Employee Director Stock Plan. 2.48 "Restricted Stock" means Shares issued or transferred to an Eligible Individual pursuant to Section 8. 2.49 "Restricted Stock Units" means rights granted to an Eligible Individual under Section 8 representing a number of hypothetical Shares. 2.50 "Share Award" means an Award of Shares granted pursuant to Section 11. 2.51 "Shares" means the common stock, par value $1 per share, of the Company and any other securities into which such Shares are changed or for which such Shares are exchanged. 2.52 "Stock Appreciation Right" means a right to receive all or some portion of the increase, if any, in the value of the Shares as provided in Section 6 hereof. 2.53 "Subsidiary" means (a) except as provided in subsection (b) below, any corporation which is a subsidiary corporation within the meaning of Section 424(f) of the Code with respect to the Company, and (b) in relation to the eligibility to receive Options or Awards other than Incentive Stock Options and continued employment for purposes of Options and Awards (unless the Administrator determines otherwise), any entity, whether or not incorporated, in which the Company directly or indirectly owns at least ten percent (10%) or more of the outstanding equity or other ownership interests. 2.54 "Ten-Percent Shareholder" means an Eligible Individual who, at the time an Incentive Stock Option is to be granted to him or her, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, a Parent or a Subsidiary. 2.55 "Termination Date" means the date that is ten (10) years after the Effective Date, unless the Plan is earlier terminated by the Board pursuant to Section 17 hereof. 3. Administration. 3.1 Committees; Procedure. The Plan shall be administered by the Compensation Committee with respect to Covered Employees, by the Director Committee with respect to Eligible Directors and, subject to rules, regulations and guidelines that may be established by the Compensation Committee, by the Company Administrator with respect to all other Eligible Individuals. The Compensation Committee or the Director Committee may adopt such rules, regulations and guidelines as it deems are necessary or appropriate for the administration of the Plan. Subject to such rules, regulations or guidelines, the Company Administrator shall have the power to adopt rules, regulations and guidelines to permit it to administer the Plan with respect to Eligible Individuals other than Covered Employees. The Compensation Committee shall consist of at least two (2) Directors, each of whom shall be a Nonemployee Director and an Outside Director. For purposes of the preceding sentence, if one or more members of the Compensation Committee is not a Nonemployee Director and an Outside Director but recuses himself or herself or abstains from voting with respect to a particular action taken by the Compensation Committee, then the Compensation Committee, with respect to that action, shall be deemed to consist only of the members of the Compensation Committee who have not recused themselves or abstained from voting. 3.2 Administrator Powers. Subject to the express terms and conditions set forth herein, the Administrator shall have the power from time to time to: (a) determine those Eligible Individuals to whom Options shall be granted under the Plan and the number of such Options to be granted and prescribe the terms and conditions (which need not be identical) of each such Option, including the exercise price per Share, the vesting schedule and the duration of each Option, and make any amendment or modification to any Option Agreement consistent with the terms of the Plan; (b) select those Eligible Individuals to whom Awards shall be granted under the Plan and determine the number of Shares or amount of cash in respect of which each Award is granted, the terms and conditions (which need not be identical) of each such Award, and make any amendment or modification to any Agreement consistent with the terms of the Plan; (c) construe and interpret the Plan and the Options and Awards granted hereunder and establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable, including so that the Plan and the operation of the Plan comply with Rule 16b-3 under the Exchange Act, the Code to the extent applicable and other applicable law, and otherwise to make the Plan fully effective; (d) determine the duration and purposes for leaves of absence which may be granted to a Participant on an individual basis without constituting a termination of employment or service for purposes of the Plan; (e) exercise its discretion with respect to the powers and rights granted to it as set forth in the Plan; and (f) generally, exercise such powers and perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan. All decisions and determinations by the Administrator in the exercise of the above powers shall be final, binding and conclusive upon the Company, its Subsidiaries, the Participants and all other persons having any interest therein. 3.3 Notwithstanding anything herein to the contrary, with respect to Participants working outside the United States, the Administrator may determine the terms and conditions of Options and Awards and make such adjustments to the terms thereof as are necessary or advisable to fulfill the purposes of the Plan taking into account matters of local law or practice, including tax and securities laws of jurisdictions outside the United States. 3.4 Indemnification. No member of the Compensation Committee, the Director Committee or the Company Administrator shall be liable for any action, failure to act, determination or interpretation made in good faith with respect to the Plan or any transaction hereunder. The Company hereby agrees to indemnify each member of the Compensation Committee, the Director Committee and the Company Administrator for all costs and expenses and, to the extent permitted by applicable law, any liability incurred in connection with defending against, responding to, negotiating for the settlement of or otherwise dealing with any claim, cause of action or dispute of any kind arising in connection with any actions in administering the Plan or in authorizing or denying authorization to any transaction hereunder. 3.5 No Repricing of Options or Stock Appreciation Rights. The Administrator shall have no authority to make any adjustment (other than in connection with a stock dividend, recapitalization or other transaction where an adjustment is permitted or required under the terms of the Plan) or amendment, and no such adjustment or amendment shall be made, that reduces or would have the effect of reducing the exercise price of an Option or Stock Appreciation Right previously granted under the Plan, whether through amendment, cancellation or replacement grants, or other means, unless the Company's shareholders shall have approved such adjustment or amendment. 4. Stock Subject to the Plan; Grant Limitations. 4.1 Aggregate Number of Shares Authorized for Issuance. Subject to any adjustment as provided in the Plan, the Shares to be issued under the Plan may be, in whole or in part, authorized but unissued Shares or issued Shares which shall have been reacquired by the Company and held by it as treasury shares. The aggregate number of Shares that may be made the subject of Awards or Options granted under the Plan shall not exceed eighty million (80,000,0000), no more than five million (5,000,000) of which may be granted as Incentive Stock Options. 4.2 Individual Limit. The aggregate number of Shares that may be the subject of Options, Stock Appreciation Rights, Performance-Based Restricted Stock and Performance Shares, together with the Share-Equivalent number of Performance Units, granted to an Eligible Individual in any calendar year may not exceed two and one-half million (2,500,000). For purposes of this Section 4, the Share-Equivalent number of Performance Units shall be equal to the quotient of (i) the aggregate dollar amount in which the Performance Units are denominated, divided by (ii) the Fair Market Value of a Share on the date of grant. 4.3 Calculating Shares Available. (a) Upon the granting of an Award or an Option, the number of Shares available under this Section 4 for the granting of further Awards and Options shall be reduced as follows: (i) In connection with the granting of an Option, Stock Appreciation Right (other than a Stock Appreciation Right Related to an Option), Restricted Stock Unit, Share Award or Award of Restricted Stock, Performance-Based Restricted Stock or Performance Shares, the number of Shares available under this Section 4 for the granting of further Options and Awards shall be reduced by the number of Shares in respect of which the Option or Award is granted or denominated; provided, however, that if any Option is exercised by tendering Shares, either actually or by attestation, to the Company as full or partial payment of the Option Price, the maximum number of Shares available under this Section 4 shall be increased by the number of Shares so tendered. (ii) In connection with the granting of a Performance Unit, the number of Shares available under this Section 4 for the granting of further Options and Awards initially shall be reduced by Shares Equivalent number of Performance Units granted, with a corresponding adjustment if the Performance Unit is ultimately settled in whole or in part with a different number of Shares. (iii) In connection with the granting of a Dividend Equivalent Right, the number of Shares available under this Section 4 shall not be reduced; provided, however, that if Shares are issued in settlement of a Dividend Equivalent Right, the number of Shares available for the granting of further Options and Awards under this Section 4 shall be reduced by the number of Shares so issued. (b) Notwithstanding Section 4.3(a), in the event that an Award is granted that, pursuant to the terms of the Agreement, cannot be settled in Shares, the aggregate number of Shares that may be made the subject of Awards or Options granted under the Plan shall not be reduced. Whenever any outstanding Option or Award or portion thereof expires, is canceled, is settled in cash (including the settlement of tax withholding obligations using Shares) or is otherwise terminated for any reason without having been exercised or payment having been made in respect of the entire Option or Award, the number of Shares available under this Section 4 shall be increased by the number of Shares previously allocable under Section 4.3(a) to the expired, canceled, settled or otherwise terminated portion of the Option or Award. In addition, upon settlement of a Stock Appreciation Right in Shares, the excess of the number of Shares covered by the Stock Appreciation Right over the number of Shares issued in settlement of the Stock Appreciation Right may again be the subject of Options or Awards granted hereunder. 5. Stock Options. 5.1 Authority of Administrator. Subject to the provisions of the Plan, the Administrator shall have full and final authority to select those Eligible Individuals who will receive Options, and the terms and conditions of the grant to any such Eligible Individual shall be set forth in an Agreement. Incentive Stock Options may be granted only to Eligible Individuals who are employees of the Company or any Subsidiary. 5.2 Exercise Price. The purchase price or the manner in which the exercise price is to be determined for Shares under each Option shall be determined by the Administrator and set forth in the Agreement; provided, however, that the exercise price per Share under each Option shall not be less than the greater of (i) the par value of a Share and (ii) 100% of the Fair Market Value of a Share on the date the Option is granted (110% in the case of an Incentive Stock Option granted to a Ten-Percent Shareholder); provided, further, however, that Fair Market Value with respect to Options granted to Covered Employees and Directors shall be determined in accordance with Section 2.28(a). 5.3 Maximum Duration. Options granted hereunder shall be for such term as the Administrator shall determine; provided that an Incentive Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Shareholder) and a Nonqualified Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted; provided, further, however, that unless the Administrator provides otherwise an Option (other than an Incentive Stock Option) may, upon the death of the Participant prior to the expiration of the Option, be exercised for up to one (1) year following the date of the Participant's death even if such period extends beyond ten (10) years from the date the Option is granted. The Administrator may, subsequent to the granting of any Option, extend the term thereof, but in no event shall the term as so extended exceed the maximum term provided for in the preceding sentence. 5.4 Vesting. Subject to Section 5.9, each Option shall become exercisable in such installments (which need not be equal) and at such times as may be designated by the Administrator and set forth in the Agreement. To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. The Administrator may accelerate the exercisability of any Option or portion thereof at any time. 5.5 Limitations on Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined as of the date of the grant) of Shares with respect to which Incentive Stock Options granted under the Plan and "incentive stock options" (within the meaning of Section 422 of the Code) granted under all other plans of the Company or its Subsidiaries (in either case determined without regard to this Section 5.5) are exercisable by a Participant for the first time during any calendar year exceeds $100,000, such Incentive Stock Options shall be treated as Nonqualified Stock Options. In applying the limitation in the preceding sentence in the case of multiple Option grants, unless otherwise required by applicable law, Options which were intended to be Incentive Stock Options shall be treated as Nonqualified Stock Options according to the order in which they were granted such that the most recently granted Options are first treated as Nonqualified Stock Options. 5.6 Transferability. (a) Except as otherwise provided in this Section 5.6, no Option shall be transferable by the Participant otherwise than by will or by the laws of descent and distribution, and an Option shall be exercisable during the lifetime of such Participant only by the Participant or his or her guardian or legal representative. The Administrator may set forth in the Agreement evidencing an Option (other than an Incentive Stock Option) at the time of grant or thereafter, that the Option, or a portion thereof, may be transferred to any third party, including but not limited to, members of the Participant's immediate family, to trusts solely for the benefit of such immediate family members and to partnerships in which such family members and/or trusts are the only partners. In addition, for purposes of the Plan, unless otherwise determined by the Administrator at the time of grant or thereafter, a transferee of an Option pursuant to this Section 5.6(a) shall be deemed to be the Participant; provided that the rights of any such transferee thereafter shall be nontransferable except that such transferee, where applicable under the terms of the transfer by the Participant, shall have the right previously held by the Participant to designate a Beneficiary. For this purpose, immediate family means the Participant's spouse, parents, children, stepchildren and grandchildren and the spouses of such parents, children, stepchildren and grandchildren. The terms of an Option shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Participant. Notwithstanding Section 21.2, or the terms of any Agreement, the Company or any Subsidiary shall not withhold any amount attributable to the Participant's tax liability from any payment of cash or Shares to a transferee or transferee's Beneficiary under this Section 5.6(a), but may require the payment of an amount equal to the Company's or any Subsidiary's withholding tax obligation as a condition to exercise or as a condition to the release of cash or Shares upon exercise or upon transfer of the option. (b) The approval of this Plan by the Company's shareholders shall constitute an amendment of each of the Prior Plans in a manner such that the provisions of Section 5.6(a) above shall be incorporated into each of the Prior Plans and any inconsistent provisions in the Prior Plans shall be deleted. Outstanding option grants under the Prior Plans shall be interpreted in a manner consistent with the amendment to the Prior Plans described in the preceding sentence. The election by a Participant or Beneficiary (including for this purpose a participant or beneficiary under the Prior Plans) to transfer any such options pursuant to this Section 5.6(b) shall constitute consent by the Participant or Beneficiary to such amendment if such consent is required. 5.7 Method of Exercise. The exercise of an Option shall be made only by giving written notice delivered in person or by mail to the person designated by the Company, specifying the number of Shares to be exercised and, to the extent applicable, accompanied by payment therefor and otherwise in accordance with the Agreement pursuant to which the Option was granted. The exercise price for any Shares purchased pursuant to the exercise of an Option shall be paid in any or any combination of the following forms: (a) cash or its equivalent (e.g., a check) or (b) the transfer, either actually or by attestation, to the Company of Shares that have been held by the Participant for at least six (6) months (or such lesser period as may be permitted by the Administrator) prior to the exercise of the Option, such transfer to be upon such terms and conditions as determined by the Administrator or (c) in the form of other property as determined by the Administrator. In addition, Options may be exercised through a registered broker-dealer pursuant to such cashless exercise procedures that are, from time to time, deemed acceptable by the Administrator. Any Shares transferred to the Company as payment of the exercise price under an Option shall be valued at their Fair Market Value on the date of exercise of such Option. If requested by the Administrator, the Participant shall deliver the Agreement evidencing the Option to the Company, which shall endorse thereon a notation of such exercise and return such Agreement to the Participant. No fractional Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. 5.8 Rights of Participants. No Participant shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (a) the Option shall have been exercised pursuant to the terms thereof, (b) the Company shall have issued and delivered Shares (whether or not certificated) to the Participant, a securities broker acting on behalf of the Participant or such other nominee of the Participant, and (c) the Participant's name, or the name of his or her broker or other nominee, shall have been entered as a shareholder of record on the books of the Company. Thereupon, the Participant shall have full voting, dividend and other ownership rights with respect to such Shares, subject to such terms and conditions as may be set forth in the applicable Agreement. 5.9 Effect of Change in Control. Unless otherwise provided in an Agreement, (a) in the event of a Change in Control, all Options outstanding on the date of such Change in Control shall become immediately and fully exercisable and (b) in the event that a Participant's (other than a Director's) employment with the Company and its Subsidiaries terminates within two (2) years following a Change in Control as a result of a termination by the Company without Cause or by the Participant for Good Reason, each Option held by the Participant that was exercisable as of the date of termination of the Participant's employment shall remain exercisable for a period ending not before the earlier of (a) the first anniversary of the termination of the Participant's employment or service and (b) the expiration of the stated term of the Option. 6. Stock Appreciation Rights. 6.1 Grant. The Administrator may in its discretion, either alone or in connection with the grant of an Option, grant Stock Appreciation Rights to Eligible Individuals in accordance with the Plan, the terms and conditions of which shall be set forth in an Agreement. A Stock Appreciation Right may be granted (a) at any time if unrelated to an Option or (b) if related to an Option, either at the time of grant or at any time thereafter during the term of the Option. 6.2 Stock Appreciation Right Related to an Option. If granted in connection with an Option, a Stock Appreciation Right shall cover the same Shares covered by the Option (or such lesser number of Shares as the Administrator may determine) and shall, except as provided in this Section 6, be subject to the same terms and conditions as the related Option. (a) Exercise; Transferability. A Stock Appreciation Right granted in connection with an Option (i) shall be exercisable at such time or times and only to the extent that the related Option is exercisable, (ii) shall be exercisable only if the Fair Market Value of a Share on the date of exercise exceeds the exercise price specified in the Agreement evidencing the related Incentive Stock Option and (iii) shall not be transferable except to the extent the related Option is transferable. (b) Amount Payable. Upon the exercise of a Stock Appreciation Right related to an Option, the Participant shall be entitled to receive an amount determined by multiplying (i) the excess of the Fair Market Value of a Share on the date preceding the date of exercise of such Stock Appreciation Right over the per Share exercise price under the related Option, by (ii) the number of Shares as to which such Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Administrator may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted. (c) Treatment of Related Options and Stock Appreciation Rights Upon Exercise. Upon the exercise of a Stock Appreciation Right granted in connection with an Option, the Option shall be canceled to the extent of the number of Shares as to which the Stock Appreciation Right is exercised, and upon the exercise of an Option granted in connection with a Stock Appreciation Right, the Stock Appreciation Right shall be canceled to the extent of the number of Shares as to which the Option is exercised or surrendered. 6.3 Stock Appreciation Right Unrelated to an Option. A Stock Appreciation Right unrelated to an Option shall cover such number of Shares as the Administrator shall determine. (a) Terms; Duration. Stock Appreciation Rights unrelated to Options shall contain such terms and conditions as to exercisability, vesting and duration as the Administrator shall determine, but in no event shall they have a term of greater than ten (10) years; provided that unless the Administrator provides otherwise a Stock Appreciation Right may, upon the death of the Participant prior to the expiration of the Award, be exercised for up to one (1) year following the date of the Participant's death even if such period extends beyond ten (10) years from the date the Stock Appreciation Right is granted. (b) Amount Payable. Upon exercise of a Stock Appreciation Right unrelated to an Option, the Grantee shall be entitled to receive an amount determined by multiplying (i) the excess of the Fair Market Value of a Share on the date immediately preceding the date of exercise of such Stock Appreciation Right over the Fair Market Value of a Share on the date the Stock Appreciation Right was granted, by (ii) the number of Shares as to which the Stock Appreciation Right is being exercised; provided, however, that for purposes of this Section 6.3(b), in respect of Stock Appreciation Rights granted to Covered Employees and Directors, Fair Market Value shall be determined in accordance with Section 2.28(a). Notwithstanding the foregoing, the Administrator may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted. (c) Transferability. (i) Except as otherwise provided in this Section 6.3(c), no Stock Appreciation Right unrelated to an Option shall be transferable by the Participant otherwise than by will or the laws of descent and distribution, and a Stock Appreciation Right shall be exercisable during the lifetime of such Participant only by the Participant or his or her guardian or legal representative. The Administrator may set forth in the Agreement evidencing a Stock Appreciation Right at the time of grant or thereafter, that the Award, or a portion thereof, may be transferred to any third party, including but not limited to, members of the Participant's immediate family, to trusts solely for the benefit of such immediate family members and to partnerships in which such family members and/or trusts are the only partners. In addition, for purposes of the Plan, unless otherwise determined by the Administrator at the time of grant or thereafter, a transferee of a Stock Appreciation Right pursuant to this Section 6.3(c) shall be deemed to be the Participant; provided that the rights of any such transferee thereafter shall be nontransferable except that such transferee, where applicable under the terms of the transfer by the Participant, shall have the right previously held by the Participant to designate a Beneficiary. For this purpose, immediate family means the Participant's spouse, parents, children, stepchildren and grandchildren and the spouses of such parents, children, stepchildren and grandchildren. The terms of a Stock Appreciation Right shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Participant. Notwithstanding Section 21.2, or the terms of any Agreement, the Company or any Subsidiary shall not withhold any amount attributable to the Participant's tax liability from any payment of cash or Shares to a transferee or transferee's Beneficiary under this Section 6.3(c), but may require the payment of an amount equal to the Company's or any Subsidiary's withholding tax obligation as a condition to exercise or as a condition to the release of cash or Shares upon exercise or upon transfer of the Stock Appreciation Right. (ii) The approval of this Plan by the Company's shareholders shall constitute an amendment of each of the Prior Plans in a manner such that the provisions of Section 6.3(c)(i) above shall be incorporated into each of the Prior Plans and any inconsistent provisions in the Prior Plans shall be deleted. Outstanding stock appreciation rights under the Prior Plans shall be interpreted in a manner consistent with the amendment to the Prior Plans described in the preceding sentence. The election by a Participant or Beneficiary (including for this purpose a participant or beneficiary under the Prior Plans) to transfer any such stock appreciation rights pursuant to this Section 6.3(c) shall constitute consent by the Participant or Beneficiary to such amendment if such consent is required. 6.4 Method of Exercise. Stock Appreciation Rights shall be exercised by a Participant only by giving written notice delivered in person or by mail to the person designated by the Company, specifying the number of Shares with respect to which the Stock Appreciation Right is being exercised. If requested by the Administrator, the Participant shall deliver the Agreement evidencing the Stock Appreciation Right being exercised and the Agreement evidencing any related Option to the Company, which shall endorse thereon a notation of such exercise and return such Agreement to the Participant. 6.5 Form of Payment. Payment of the amount determined under Section 6.2(b) or 6.3(b) may be made in the discretion of the Administrator solely in whole Shares in a number determined at their Fair Market Value on the date preceding the date of exercise of the Stock Appreciation Right, or solely in cash, or in a combination of cash and Shares. If the Administrator decides to make full payment in Shares and the amount payable results in a fractional Share, payment for the fractional Share will be made in cash. 6.6 Effect of Change in Control. Unless otherwise provided in an Agreement, (a) in the event of a Change in Control, all Stock Appreciation Rights shall become immediately and fully exercisable and (b) in the event a Participant's (other than a Director's) employment with the Company and its Subsidiaries terminates as a result of a termination within two (2) years following a Change in Control by the Company without Cause or by the Participant for Good Reason, each Stock Appreciation Right held by the Participant that was exercisable as of the date of termination of the Participant's employment shall remain exercisable for a period ending not before the earlier of the first anniversary of (a) the termination of the Participant's employment or service and (b) the expiration of the stated term of the Stock Appreciation Right. 7. Dividend Equivalent Rights. The Administrator may in its discretion, grant Dividend Equivalent Rights either in tandem with an Option or Award or as a separate Award, to Eligible Individuals in accordance with the Plan. The terms and conditions applicable to each Dividend Equivalent Right shall be specified in the Agreement under which the Dividend Equivalent Right is granted. Amounts payable in respect of Dividend Equivalent Rights may be payable currently or, if applicable, deferred until the lapsing of restrictions on such Dividend Equivalent Rights or until the vesting, exercise, payment, settlement or other lapse of restrictions on the Option or Award to which the Dividend Equivalent Rights relate. In the event that the amount payable in respect of Dividend Equivalent Rights are to be deferred, the Administrator shall determine whether such amounts are to be held in cash or reinvested in Shares or deemed (notionally) to be reinvested in Shares. If amounts payable in respect of Dividend Equivalent Rights are to be held in cash, there may be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Administrator, in its discretion, may determine. Dividend Equivalent Rights may be settled in cash or Shares or a combination thereof, in a single installment or multiple installments, as determined by the Administrator. 8. Restricted Stock; Restricted Stock Units. 8.1 Restricted Stock. The Administrator may grant to Eligible Individuals Awards of Restricted Stock, which shall be evidenced by an Agreement. Each Agreement shall contain such restrictions, terms and conditions as the Administrator may, in its discretion, determine and (without limiting the generality of the foregoing) such Agreements may require that an appropriate legend be placed on Share certificates. Awards of Restricted Stock shall be subject to the terms and provisions set forth below in this Section 8.1 and in Section 8.3. (a) Rights of Participant. Shares of Restricted Stock granted pursuant to an Award hereunder shall be issued in the name of the Participant as soon as reasonably practicable after the Award is granted provided that the Participant has executed an Agreement evidencing the Award, the appropriate blank stock powers and, in the discretion of the Administrator, an escrow agreement and any other documents which the Administrator may require as a condition to the issuance of such Shares. At the discretion of the Administrator, Shares issued in connection with an Award of Restricted Stock shall be deposited together with the stock powers with an escrow agent (which may be the Company) designated by the Administrator. Unless the Administrator determines otherwise and as set forth in the Agreement, upon delivery of the Shares to the escrow agent, the Participant shall have all of the rights of a shareholder with respect to such Shares, including the right to vote the Shares and to receive all dividends or other distributions paid or made with respect to the Shares. (b) Non-transferability. Until all restrictions upon the Shares of Restricted Stock awarded to a Participant shall have lapsed in the manner set forth in Section 8.1(c), such Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. (c) Lapse of Restrictions. (i) Generally. Subject to the provisions of Section 8.3, restrictions upon Shares of Restricted Stock awarded hereunder shall lapse at such time or times and on such terms and conditions as the Administrator may determine. The Agreement evidencing the Award shall set forth any such restrictions. (ii) Effect of Change in Control. Unless otherwise determined by the Administrator at the time of grant and set forth in the Agreement evidencing the Award of Restricted Stock, restrictions on Shares of Restricted Stock shall lapse upon termination of a Participant's employment with, or service as a Director of, the Company and its Subsidiaries within two (2) years following a Change in Control if such termination is by the Company without Cause or by the Participant for Good Reason. The Administrator may determine at the time of the grant or thereafter and set forth in the Agreement evidencing the Award of Restricted Stock that terminations of employment under other circumstances within two (2) years following a Change in Control will result in the lapse of restrictions on Shares of Restricted Stock. (d) Treatment of Dividends. At the time an Award of Restricted Stock is granted, the Administrator may, in its discretion, determine that the payment to the Participant of dividends, or a specified portion thereof, declared or paid on such Shares by the Company shall be (i) deferred until the lapsing of the restrictions imposed upon such Shares and (ii) held by the Company for the account of the Participant until such time. In the event that dividends are to be deferred, the Administrator shall determine whether such dividends are to be reinvested in Shares (which shall be held as additional Shares of Restricted Stock) or held in cash. If deferred dividends are to be held in cash, there may be credited interest on the amount of the account at such times and at a rate per annum as the Administrator, in its discretion, may determine. Payment of deferred dividends in respect of Shares of Restricted Stock (whether held in cash or as additional Shares of Restricted Stock), together with interest accrued thereon, if any, shall be made upon the lapsing of restrictions imposed on the Shares in respect of which the deferred dividends were paid, and any dividends deferred (together with any interest accrued thereon) in respect of any Shares of Restricted Stock shall be forfeited upon the forfeiture of such Shares. (e) Delivery of Shares. Upon the lapse of the restrictions on Shares of Restricted Stock, the Administrator shall cause a stock certificate or evidence of book entry Shares to be delivered to the Participant with respect to such Shares of Restricted Stock, free of all restrictions hereunder. 8.2 Restricted Stock Unit Awards. The Administrator may grant to Eligible Individuals Awards of Restricted Stock Units, which shall be evidenced by an Agreement. Each such Agreement shall contain such restrictions, terms and conditions as the Administrator may, in its discretion, determine. Awards of Restricted Stock Units shall be subject to the terms and provisions set forth below in this Section 8.2 and in Section 8.3. (a) Payment of Awards. Each Restricted Stock Unit shall represent the right of the Participant to receive a payment upon vesting of the Restricted Stock Unit or on any later date specified by the Administrator equal to the Fair Market Value of a Share as of the date the Restricted Stock Unit was granted, the vesting date or such other date as determined by the Administrator at the time the Restricted Stock Unit was granted. The Administrator may, at the time a Restricted Stock Unit is granted, provide a limitation on the amount payable in respect of each Restricted Stock Unit. The Administrator may provide for the settlement of Restricted Stock Units in cash or with Shares having a Fair Market Value equal to the payment to which the Participant has become entitled. (b) Effect of Change in Control. Unless otherwise determined by the Administrator at the time of grant and set forth in the Agreement evidencing the Award of Restricted Stock Units, Restricted Stock Units shall become fully vested upon termination of a Participant's employment with, or service as a Director of, the Company and its Subsidiaries within two (2) years following a Change in Control if such termination is by the Company without Cause or by the Participant for Good Reason. The Administrator may determine at the time of the grant or thereafter and set forth in the Agreement evidencing the Award of Restricted Stock Units that terminations of employment under other circumstances within two (2) years following a Change in Control will result in the full vesting of Restricted Stock Units. 8.3 Minimum Vesting for Restricted Stock and Restricted Stock Unit Award. Except as otherwise provided in Sections 8.1(c)(ii) and 8.2(b), Awards of Restricted Stock and Restricted Stock Units shall not vest more rapidly than with respect to one-third of the Shares subject to such Award on each of the first three anniversaries of the date such Award is granted, other than with respect to up to four million (4,000,000) Shares, which may be subject to such shorter vesting schedules as the Administrator shall determine. 9. Performance Awards. 9.1 Performance Units and Performance Shares. The Administrator, in its discretion, may grant Awards of Performance Units and/or Performance Shares to Eligible Individuals, the terms and conditions of which shall be set forth in an Agreement. (a) Performance Units. Performance Units shall be denominated in a specified dollar amount and, contingent upon the attainment of specified Performance Objectives within the Performance Cycle, represent the right to receive payment as provided in Sections 9.1(c) and (d) of the specified dollar amount or a percentage (which may be more than 100%) of the specified dollar amount depending on the level of Performance Objective attained; provided, however, that the Administrator may at the time a Performance Unit is granted specify a maximum amount payable in respect of a vested Performance Unit. Each Agreement shall specify the number of Performance Units to which it relates, the Performance Objectives which must be satisfied in order for the Performance Units to vest and the Performance Cycle within which such Performance Objectives must be satisfied. (b) Performance Shares. Performance Shares shall be denominated in Shares and, contingent upon the attainment of specified Performance Objectives within the Performance Cycle, each Performance Share represents the right to receive payment as provided in Sections 9.1(c) and (d) of the Fair Market Value of a Share on the date the Performance Share was granted, the date the Performance Share became vested or any other date specified by the Administrator or a percentage (which may be more than 100%) of such amount depending on the level of Performance Objective attained; provided, however, that the Administrator may at the time a Performance Share is granted specify a maximum amount payable in respect of a vested Performance Share. Each Agreement shall specify the number of Performance Shares to which it relates, the Performance Objectives which must be satisfied in order for the Performance Shares to vest and the Performance Cycle within which such Performance Objectives must be satisfied. (c) Vesting and Forfeiture. Subject to Sections 9.3(c) and 9.4, a Participant shall become vested with respect to the Performance Shares and Performance Units to the extent that the Performance Objectives set forth in the Agreement are satisfied for the Performance Cycle; provided, however, that, except as may be provided pursuant to Section 9.4, no Performance Cycle for Performance Shares and Performance Units shall be less than one (1) year. (d) Payment of Awards. Subject to Sections 9.3(c) and 9.4, payment to Participants in respect of vested Performance Shares and Performance Units shall be made as soon as practicable after the last day of the Performance Cycle to which such Award relates or at such other time or times as the Administrator may determine. Subject to Section 9.4, such payments may be made entirely in Shares valued at their Fair Market Value, entirely in cash, or in such combination of Shares and cash as the Administrator in its discretion shall determine at any time prior to such payment; provided, however, that if the Administrator in its discretion determines to make such payment entirely or partially in Shares of Restricted Stock, the Administrator must determine the extent to which such payment will be in Shares of Restricted Stock and the terms of such Restricted Stock at the time the Award is granted. 9.2 Performance-Based Restricted Stock. The Administrator, in its discretion, may grant Awards of Performance-Based Restricted Stock to Eligible Individuals, the terms and conditions of which shall be set forth in an Agreement. Each Agreement may require that an appropriate legend be placed on Share certificates. Awards of Performance-Based Restricted Stock shall be subject to the following terms and provisions: (a) Rights of Participant. Performance-Based Restricted Stock shall be issued in the name of the Participant as soon as reasonably practicable after the Award is granted or at such other time or times as the Administrator may determine; provided, however, that no Performance-Based Restricted Stock shall be issued until the Participant has executed an Agreement evidencing the Award, the appropriate blank stock powers and, in the discretion of the Administrator, an escrow agreement and any other documents which the Administrator may require as a condition to the issuance of such Performance-Based Restricted Stock. At the discretion of the Administrator, Shares issued in connection with an Award of Performance-Based Restricted Stock shall be deposited together with the stock powers with an escrow agent (which may be the Company) designated by the Administrator. Except as restricted by the terms of the Agreement, upon delivery of the Shares to the escrow agent, the Participant shall have, in the discretion of the Administrator, all of the rights of a shareholder with respect to such Shares, including the right to vote the Shares and to receive all dividends or other distributions paid or made with respect to the Shares. Each Agreement shall specify the number of Shares of Performance-Based Restricted Stock to which it relates, the Performance Objectives which must be satisfied in order for the Performance-Based Restricted Stock to vest and the Performance Cycle within which such Performance Objectives must be satisfied. (b) Lapse of Restrictions. Subject to Sections 9.3(c) and 9.4, restrictions upon Performance-Based Restricted Stock awarded hereunder shall lapse and such Performance-Based Restricted Stock shall become vested at such time or times and on such terms, conditions and satisfaction of Performance Objectives as the Administrator may, in its discretion, determine at the time an Award is granted; provided, however, that, except as may be provided pursuant to Section 9.4, no Performance Cycle for Performance-Based Restricted Stock shall be less than one (1) year. (c) Treatment of Dividends. At the time the Award of Performance-Based Restricted Stock is granted, the Administrator may, in its discretion, determine that the payment to the Participant of dividends, or a specified portion thereof, declared or paid on Shares represented by such Award which have been issued by the Company to the Participant shall be (i) deferred until the lapsing of the restrictions imposed upon such Performance-Based Restricted Stock and (ii) held by the Company for the account of the Participant until such time. In the event that dividends are to be deferred, the Administrator shall determine whether such dividends are to be reinvested in Shares (which shall be held as additional Shares of Performance-Based Restricted Stock) or held in cash. If deferred dividends are to be held in cash, there may be credited interest on the amount of the account at such times and at a rate per annum as the Administrator, in its discretion, may determine. Payment of deferred dividends in respect of Shares of Performance-Based Restricted Stock (whether held in cash or in additional Shares of Performance-Based Restricted Stock), together with interest accrued thereon, if any, shall be made upon the lapsing of restrictions imposed on the Performance-Based Restricted Stock in respect of which the deferred dividends were paid, and any dividends deferred (together with any interest accrued thereon) in respect of any Performance-Based Restricted Stock shall be forfeited upon the forfeiture of such Performance-Based Restricted Stock. (d) Delivery of Shares. Upon the lapse of the restrictions on Shares of Performance-Based Restricted Stock awarded hereunder, the Administrator shall cause a stock certificate or evidence of book entry Shares to be delivered to the Participant with respect to such Shares, free of all restrictions hereunder. 9.3 Performance Objectives (a) Establishment. Performance Objectives for Performance Awards may be expressed in terms of (i) consolidated earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization), (ii) net income, (iii) operating income, (iv) earnings per Share, (v) book value per Share, (vi) return on shareholders' equity, (vii) expense management, (viii) return on investment, (ix) improvement in capital structure, (x) profitability of an identifiable business unit or product, (xi) maintenance or improvement of profit margins, (xii) stock price, (xiii) market share, (xiv) revenues or sales, (xv) costs, (xvi) cash flow, (xvii) working capital, (xviii) return on assets, (xix) total shareholder return or (xx) any combination of the foregoing. Performance Objectives may be in respect of the performance of the Company, any of its Subsidiaries, any of its Divisions or any combination thereof. Performance Objectives may be absolute or relative (to prior performance of the Company or to the performance of one or more other entities or external indices) and may be expressed in terms of a progression within a specified range. The Performance Objectives with respect to a Performance Cycle shall be established in writing by the Administrator by the earlier of (i) the date on which a quarter of the Performance Cycle has elapsed and (ii) the date which is ninety (90) days after the commencement of the Performance Cycle, and in any event while the performance relating to the Performance Objectives remain substantially uncertain. (b) Effect of Certain Events. Unless otherwise provided by the Administrator at the time the Performance Objectives in respect of a Performance Award are established, performance shall be adjusted to omit the effects of extraordinary items, gain or loss on the disposal of a business segment (other than provisions for operating losses or income during the phase-out period), unusual or infrequently occurring events and transactions that have been publicly disclosed and the cumulative effects of changes in accounting principles, all as determined in accordance with generally accepted accounting principles (to the extent applicable). In addition, at the time of the granting of a Performance Award, or at any time thereafter, the Administrator may provide for the manner in which performance will be measured against the Performance Objectives (or may adjust the Performance Objectives) to reflect the impact of specified corporate transactions (such as a stock split or stock dividend), special charges, and tax law changes; provided, that in respect of Performance Awards to Covered Employees, such provisions shall be permitted only to the extent permitted under Section 162(m) of the Code and the regulations promulgated thereunder without adversely affecting the treatment of any Performance Award as Performance-Based Compensation. (c) Determination of Performance. Prior to the vesting, payment, settlement or lapsing of any restrictions with respect to any Performance Award granted to a Covered Employee, the Administrator shall certify in writing that the applicable Performance Objectives have been satisfied to the extent necessary for such Award to qualify as Performance-Based Compensation. In respect of a Performance Award, the Administrator may, in its sole discretion, reduce the amount of cash paid or number of Shares issued that become vested or on which restrictions lapse. The Administrator shall not be entitled to exercise any discretion otherwise authorized hereunder with respect to such Awards if the ability to exercise such discretion or the exercise of such discretion itself would cause the compensation attributable to such Awards to fail to qualify as Performance-Based Compensation. 9.4 Effect of Change in Control. In the event of a Change in Control, unless otherwise determined by the Administrator and set forth in the Agreement evidencing the Award: (a) Participants shall (i) become vested in a portion of all then outstanding Performance Units and Performance Shares determined by multiplying (x) the number of such Performance Units and Performance Shares that would have vested based on the greater of actual levels of achievement attained against the applicable Performance Objective (determined as if the Performance Cycle ended on the date of the Change in Control) and the target levels of achievement established for the Performance Cycle, by (y) a fraction, the numerator of which is the number of days that have elapsed during the Performance Cycle through the date of the Change in Control and the denominator of which is the total number of days in the Performance Cycle and (ii) be entitled to receive in respect of all Performance Units and Performance Shares which become vested as a result of a Change in Control a cash payment within ten (10) days after such Change in Control. (b) All restrictions shall lapse immediately on a portion of all then outstanding Shares of Performance-Based Restricted Stock determined by multiplying (x) the number of such Shares on which such restrictions would have lapsed based on the greater of actual levels of achievement attained against the applicable Performance Objective (determined as if the Performance Cycle ended on the date of the Change in Control) and the target levels of achievement established for the Performance Cycle, by (y) a fraction, the numerator of which is the number of days that have elapsed during the Performance Cycle through the date of the Change in Control and the denominator of which is the total number of days in the Performance Cycle. 9.5 Non-transferability. Until the vesting of Performance Units and Performance Shares or the lapsing of any restrictions on Performance-Based Restricted Stock, as the case may be, such Performance Units, Performance Shares or Performance-Based Restricted Stock shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. 10. Annual Incentive Awards. 10.1 Eligibility. The Compensation Committee shall designate which Officers are eligible for Annual Incentive Awards under the Plan ("Eligible Officers"). An individual shall not be ineligible by reason of being a Director. The Compensation Committee may establish such additional rules for eligibility as it determines are appropriate. The actual payment of an Annual Incentive Award to any Eligible Officer shall be subject to the provisions of this Section 10. 10.2 Awards. Eligible Officers are eligible to receive a cash payment in respect of a fiscal year (an "Annual Incentive Award") determined as a percentage of an incentive pool, which pool is equal to the greater of: (a) nine-tenths of one percent (0.9%) of the Operating Cash Flow for the fiscal year; or (b) one and one-half percent (1.5%) of the Net Income for the fiscal year (the "Annual Bonus Pool"). The terms and conditions of Annual Incentive Awards shall be as determined by the Compensation Committee and set forth in an Award Agreement. Such terms and conditions shall be consistent with the provisions of this Section 10 and shall be consistent with such awards qualifying as Performance-Based Compensation. 10.3 Performance Objectives and Performance-Based Limit. Annual Incentive Awards shall only be payable under the Plan in respect of a fiscal year if the Company has positive Operating Cash Flow or Net Income for such year. Within the first ninety (90) days of each fiscal year, the Compensation Committee shall determine the percentage of the Annual Bonus Pool that represents the potential Annual Incentive Award for each Eligible Officer for that fiscal year. In no event may the Annual Bonus Pool percentage for any Eligible Officer exceed twenty-five percent (25%) of the Annual Bonus Pool. The sum of the Annual Bonus Pool percentages for all Eligible Officers cannot exceed one hundred percent (100%) of the Annual Bonus Pool. 10.4 Determination of Performance. Prior to the payment of any Annual Incentive Award to an Eligible Officer and following receipt of a report from the Company's independent auditor of the Operating Cash Flow and Net Income for the year, the Compensation Committee shall certify in writing that the applicable Performance Objective has been satisfied and the amount of the Annual Bonus Pool, in each case, to the extent necessary so that all Annual Incentive Awards for Eligible Officers who are Covered Employees qualify as Performance-Based Compensation. 10.5 Calculation of Annual Incentive Awards. As soon as practicable after the determination of the Annual Bonus Pool for a fiscal year, the Compensation Committee shall calculate the amount of each Eligible Officer's Annual Incentive Award based on his or her allocated portion of the Annual Bonus Pool; provided, however, that the Compensation Committee may, in its discretion, reduce the amount payable in respect of an Annual Incentive Award for any Eligible Officer. In no event may the portion of the Annual Bonus Pool allocated to an Eligible Officer be increased in any way, including as a result of the reduction of any other Eligible Officer's allocated portion. No portion of the Annual Bonus Pool which is not paid to Eligible Officers in respect of a particular year shall be carried over to any subsequent year. 10.6 Payment of Annual Incentive Awards. All Annual Incentive Awards shall be paid by the Company and its Subsidiaries in cash as soon as practicable following certification by the Compensation Committee pursuant to Section 10.4 and the calculation pursuant to Section 10.5. Such payment, however, may be subject to deferral under any plan or program the Administrator may establish for this purpose, provided that any additional amounts credited under any such deferral plan or program during the period of deferral shall be determined based either on a reasonable rate of interest or on a specific investment or deemed investment including Shares, as may be determined by the Compensation Committee within the limits of the regulations under Section 162(m) of the Code. 10.7 Effect of Certain Events. At the time of the granting of an Annual Incentive Award, or at any time thereafter, the Compensation Committee may provide for the manner in which performance will be measured against the Performance Objectives (or may adjust the Performance Objectives) to reflect the impact of specified corporate transactions (such as a stock split or stock dividend), special charges, and tax law changes; provided, however, that such provisions shall be permitted only to the extent permitted under Section 162(m) of the Code and the regulations promulgated thereunder without adversely affecting the treatment of any Annual Incentive Award as Performance-Based Compensation. 10.8 Non-transferability. Annual Incentive Awards shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. 10.9 No Right to Award. No person shall have any claim to be paid an Annual Incentive Award under the Plan and there is no obligation for uniformity of treatment of Eligible Officers under Section 10 of the Plan. The selection of Eligible Officers to receive Annual Incentive Awards and the amount of the Annual Incentive Awards rest completely in the absolute and final discretion of the Compensation Committee. The Compensation Committee's discretion is limited only by the Annual Bonus Pool and the limits provided in Sections 10.3 and 10.5. Neither the existence of the Annual Bonus Pool, nor any prior practice by the Compensation Committee as to the payment or amount of Annual Incentive Awards, shall be deemed to create an obligation for the Compensation Committee to pay any Annual Incentive Award for any year or to pay an Annual Incentive Award equal to the allocated percentage of the Annual Bonus Pool or any other amount. 11. Share Awards. The Administrator may grant a Share Award to any Eligible Individual on such terms and conditions as the Administrator may determine in its sole discretion. Share Awards may be made as additional compensation for services rendered by the Eligible Individual or may be in lieu of cash or other compensation to which the Eligible Individual is entitled from the Company. 12. Awards to Directors. 12.1 Authority of Director Committee. Subject to the provisions of the Plan, the Director Committee shall have the full and final authority to award Options and Awards to Eligible Directors, and the terms and conditions of any grant to any such Eligible Director shall be set forth in an Agreement. This Section 12 sets forth special provisions that, unless otherwise provided in an Agreement, shall be applicable to Options and Awards granted to Eligible Directors under the Plan. 12.2 Aggregate Limit. Options or Awards in respect of no more than two and one-half million (2,500,000) Shares shall be granted to Eligible Directors under the Plan. 12.3 Individual Limit. Grants of Options and Awards to any Eligible Director in any calendar year shall not be made in respect of more than twenty-five thousand (25,000) Shares. 12.4 Vesting. Unless otherwise provided in an Agreement, an Option or Award granted to an Eligible Director under the Plan shall become exercisable and the restrictions on an Award granted to an Eligible Director shall lapse, as applicable, on the first anniversary of the date of grant; provided, however, that in the event that, prior to the first anniversary of the date of grant, (a) the Director terminates his service on the Board by reason of (i) death, (ii) Disability, or (iii) retirement (as determined in accordance with the then applicable retirement policy for Directors), or (b) a Change in Control shall occur, then an Option or Award shall become immediately exercisable and the restrictions on an Award shall immediately lapse, as applicable, upon the occurrence of such event. Subject to the foregoing, an Option or Stock Appreciation Right granted to a Director shall be exercisable at any time in whole or in part (but if in part, in an amount equal to at least 100 Shares or, if less, the number of Shares remaining to be exercised under the Award or Option) on any business day of the Company before the date such Option or Award expires in accordance with Section 12.4. 12.5 Duration. Unless otherwise provided in an Agreement, an Option or Stock Appreciation Right granted to an Eligible Director shall expire on the earlier of: (a) the first date on or after the date of grant and prior to a Change in Control on which the Director (i) resigns from or is not re-elected to the Board prior to being eligible for retirement or (ii) resigns as a result of an interest or affiliation which would prohibit continued service as a director; (b) the date the Option or Stock Appreciation Right has been exercised in full; or (c) one day after the expiration of the ten-year period which begins on the date of grant of the Option or Stock Appreciation Right or, in the case of a Director who dies within one (1) year prior to such day, the last day of the one-year period which begins on the date of the Director's death. 13. Effect of a Termination of Employment. The Agreement evidencing the grant of each Option and each Award shall set forth the terms and conditions applicable to such Option or Award upon a termination or change in the status of the employment of the Participant by the Company, a Subsidiary or a Division (including a termination or change by reason of the sale of a Subsidiary or a Division), which, except for Director Options, shall be as the Administrator may, in its discretion, determine at the time the Option or Award is granted or thereafter. 14. Adjustment Upon Changes in Capitalization. 14.1 In the event of a Change in Capitalization, the Administrator shall conclusively determine the appropriate adjustments, if any, to (a) the maximum number and class of Shares or other stock or securities with respect to which Options or Awards may be granted under the Plan, (b) the maximum number and class of Shares or other stock or securities that may be issued upon exercise of Incentive Stock Options, (c) the maximum number and class of Shares or other stock or securities with respect to which Options or Awards may be granted to any Eligible Individual in any calendar year, (d) the number and class of Shares or other stock or securities which are subject to outstanding Options or Awards granted under the Plan and the exercise price therefore, if applicable and (e) the Performance Objectives. 14.2 Any such adjustment in the Shares or other stock or securities (a) subject to outstanding Incentive Stock Options (including any adjustments in the exercise price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code or (b) subject to outstanding Options or Awards that are intended to qualify as Performance-Based Compensation shall be made in such a manner as not to adversely affect the treatment of the Options or Awards as Performance-Based Compensation. 14.3 If, by reason of a Change in Capitalization, a Participant shall be entitled to, or shall be entitled to exercise an Option with respect to, new, additional or different shares of stock or securities of the Company or any other corporation, such new, additional or different shares shall thereupon be subject to all of the conditions, restrictions and performance criteria which were applicable to the Shares subject to the Award or Option, as the case may be, prior to such Change in Capitalization. 15. Effect of Certain Transactions. Subject to Sections 5.9, 6.6, 8.1(c)(ii), 8.2(c) and 9.4 or as otherwise provided in an Agreement, following (a) the liquidation or dissolution of the Company or (b) a merger or consolidation of the Company (a "Transaction"), either (i) each outstanding Option or Award shall be treated as provided for in the agreement entered into in connection with the Transaction or (ii) if not so provided in such agreement, each Optionee and Grantee shall be entitled to receive in respect of each Share subject to any outstanding Options or Awards, as the case may be, upon exercise of any Option or payment or transfer in respect of any Award, the same number and kind of stock, securities, cash, property or other consideration that each holder of a Share was entitled to receive in the Transaction in respect of a Share; provided, however, that such stock, securities, cash, property, or other consideration shall remain subject to all of the conditions, restrictions and performance criteria which were applicable to the Options and Awards prior to such Transaction. Without limiting the generality of the foregoing, the treatment of outstanding Options and Stock Appreciation Rights pursuant to clause (i) of this Section 15 in connection with a Transaction in which the consideration paid or distributed to the Company's stockholders is not entirely shares of common stock of the acquiring or resulting corporation may include the cancellation of outstanding Options and Stock Appreciation Rights upon consummation of the Transaction provided either (x) the holders of affected Options and Stock Appreciation Rights have been given a period of at least fifteen (15) days prior to the date of the consummation of the Transaction to exercise the Options or Stock Appreciation Rights (whether or not they were otherwise exercisable) or (y) the holders of the affected Options and Stock Appreciation Rights are paid (in cash or cash equivalents) in respect of each Share covered by the Option or Stock Appreciation Right being cancelled an amount equal to the excess, if any, of the per share price paid or distributed to stockholders in the transaction (the value of any non-cash consideration to be determined by the Administrator in its sole discretion) over the exercise price of the Option or Stock Appreciation Right. For avoidance of doubt, (1) the cancellation of Options and Stock Appreciation Rights pursuant to clause (y) of the preceding sentence may be effected notwithstanding anything to the contrary contained in this Plan or any Agreement and (2) if the amount determined pursuant to clause (y) of the preceding sentence is zero or less, the affected Option or Stock Appreciation Right may be cancelled without any payment therefor. The treatment of any Option or Award as provided in this Section 15 shall be conclusively presumed to be appropriate for purposes of Section 14. 16. Interpretation. 16.1 Section 16 Compliance. The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act and the Administrator shall interpret and administer the provisions of the Plan or any Agreement in a manner consistent therewith. Any provisions inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. 16.2 Section 162(m). Unless otherwise expressly stated in the relevant Agreement, each Option, Stock Appreciation Right, Annual Incentive Award and Performance Award granted to a Covered Employee under the Plan is intended to be Performance-Based Compensation. Accordingly, unless otherwise determined by the Administrator, if any provision of the Plan or any Agreement relating to such an Option or Award does not comply or is inconsistent with Section 162(m) of the Code or the regulations promulgated thereunder (including IRS Regulation 1.162-27 unless and to the extent it is superseded by an interim or final regulation), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Administrator discretion to increase the amount of compensation otherwise payable to a Covered Employee in connection with any such Option or Award upon the attainment of the Performance Objectives. 17. Termination and Amendment of the Plan or Modification of Options and Awards. 17.1 Plan Amendment or Termination. The Board may at any time terminate the Plan and the Board may at any time and from time to time amend, modify or suspend the Plan; provided, however, that: (a) no such amendment, modification, suspension or termination shall impair or adversely alter any Options or Awards theretofore granted under the Plan, except with the consent of the Participant, nor shall any amendment, modification, suspension or termination deprive any Participant of any Shares which he or she may have acquired through or as a result of the Plan; and (b) no material amendment and, to the extent necessary under any applicable law, regulation or exchange requirement, no other amendment shall be effective unless approved by the shareholders of the Company in accordance with applicable law, regulation or exchange requirement. 17.2 Modification of Options and Awards. No modification of an Option or Award shall adversely alter or impair any rights or obligations under the Option or Award without the consent of the Participant. 18. Non-Exclusivity of the Plan. The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 19. Limitation of Liability. As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to: (a) give any person any right to be granted an Option or Award other than at the sole discretion of the Administrator; (b) give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan; (c) limit in any way the right of the Company or any Subsidiary to terminate the employment of any person at any time; or (d) be evidence of any agreement or understanding, express or implied, that the Company will employ any person at any particular rate of compensation or for any particular period of time. 20. Regulations and Other Approvals; Governing Law. 20.1 Except as to matters of federal law, the Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Georgia without giving effect to conflicts of laws principles thereof. 20.2 The obligation of the Company to sell or deliver Shares with respect to Options and Awards granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Administrator. 20.3 The Board may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority, or to obtain for Eligible Individuals granted Incentive Stock Options the tax benefits under the applicable provisions of the Code and regulations promulgated thereunder. 20.4 Each Option and Award is subject to the requirement that, if at any time the Administrator determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or Award or the issuance of Shares, no Options or Awards shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Administrator. 20.5 Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act and Rule 144 or other regulations promulgated thereunder. The Administrator may require any individual receiving Shares pursuant to an Option or Award granted under the Plan, as a condition precedent to receipt of such Shares, to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under the Securities Act or pursuant to an exemption applicable under the Securities Act or the rules and regulations promulgated thereunder. The certificates evidencing any of such Shares shall be appropriately amended or have an appropriate legend placed thereon to reflect their status as restricted securities as aforesaid. 21. Miscellaneous. 21.1 Multiple Agreements. The terms of each Option or Award may differ from other Options or Awards granted under the Plan at the same time, or at some other time. The Administrator may also grant more than one Option or Award to a given Eligible Individual during the term of the Plan, either in addition to, or subject to Section 3.4, in substitution for, one or more Options or Awards previously granted to that Eligible Individual. 21.2 Withholding of Taxes. (a) The Company or any Subsidiary shall withhold from any payment of cash or Shares to a Participant or other person under the Plan an amount sufficient to cover any withholding taxes which may become required with respect to such payment or shall take any other action as it deems necessary to satisfy any income or other tax withholding requirements as a result of the grant or exercise of any Award under the Plan. The Company or any Subsidiary shall have the right to require the payment of any such taxes and require that any person furnish information deemed necessary by the Company or any Subsidiary to meet any tax reporting obligation as a condition to exercise or before making any payment pursuant to an Award or Option. Unless otherwise specified in an Agreement at the time of grant, a Participant may, in satisfaction of his or her obligation to pay withholding taxes in connection with the exercise, vesting or other settlement of an Option or Award, elect to have withheld a portion of the Shares then issuable to him or her having an aggregate Fair Market Value equal to the withholding taxes. (b) If a Participant makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to such Participant pursuant to the exercise of an Incentive Stock Option within the two-year period commencing on the day after the date of the grant or within the one-year period commencing on the day after the date of transfer of such Share or Shares to the Participant pursuant to such exercise, the Participant shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office. 21.3 Plan Unfunded. The Plan shall be unfunded. Except for reserving a sufficient number of authorized Shares to the extent required by law to meet the requirements of the Plan, the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure payment of any Award or Option granted under the Plan. 21.4 Beneficiary Designation. Each Participant may, from time to time, name one or more individuals (each, a "Beneficiary") to whom any benefit under the Plan is to be paid in case of the Participant's death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 21.5 Effective Date/Term. The effective date of the Plan shall be the date on which the Plan is approved by the affirmative vote of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting of shareholders duly held in accordance with the applicable laws of the State of Georgia within twelve (12) months of the adoption of the Plan by the Board (the "Effective Date"). Upon such approval of the Plan by the shareholders, no further awards shall be granted under the Prior Plans or under the BellSouth Corporation Officer Short Term Incentive Award Plan. The Plan shall terminate on the Termination Date. No Option or Award shall be granted after the Termination Date. The applicable terms of the Plan, and any terms and conditions applicable to Options and Awards granted prior to the Termination Date shall survive the termination of the Plan and continue to apply to such Options and Awards. EX-10 3 q20410qex10pp.txt EXHIBIT 10PP Exhibit 10pp REVOLVING CREDIT AGREEMENT BY AND AMONG BELLSOUTH CORPORATION, SBC COMMUNICATIONS INC. AND CINGULAR WIRELESS LLC DATED AS OF AUGUST 1, 2004 REVOLVING CREDIT AGREEMENT This Revolving Credit Agreement (the "Agreement"), dated as of the 1st day of August 2004, by and among BellSouth Corporation, a Georgia corporation ("BellSouth"), SBC Communications Inc., a Delaware corporation ("SBC," and along with BellSouth, each a "Lender" and, collectively, the "Lenders") and Cingular Wireless LLC, a Delaware limited liability company ("Cingular"). ARTICLE I GENERAL PROVISIONS Section 1.01. Definitions. For the purposes of this Agreement, the following terms shall have the meanings specified or referred to in this Section 1.01: "Agreement" shall have the meaning set forth in the Preamble to this Agreement. "Available Cash" means, for any Business Day, the result, rounded down to the nearest $1,000,000, of (a) the amount of cash of Cingular and its direct and indirect wholly owned Subsidiaries held in banks and available for withdrawal by Cingular, less (b) Cingular's good faith estimate of the amount, if any, of cash required for expenditures expected to occur later during the same Business Day. "Average Monthly LIBOR Rate" shall mean, for any calendar month, the average 30-day LIBOR rate as reported by Bloomberg or another generally available reporting service jointly selected by the Lenders. "BellSouth" shall have the meaning set forth in the Preamble to this Agreement. "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in both the State of Georgia and the State of Texas are authorized or obligated by law or executive order to close. "Cingular" shall have the meaning set forth in the Preamble to this Agreement. "Cingular Advance" shall have the meaning set forth in Section 2.04. "Cingular Advance Interest Rate" means, for any day, a rate equal to the Average Monthly LIBOR Rate for the calendar month during which such day occurs. "Cingular Bank Account" means the United States bank account listed in Exhibit B hereto, or such other bank account as the Designated Financial Officer of Cingular shall specify by written notice to each of the Lenders. "Cingular Business Plan" means, with respect to any fiscal year, the most recent detailed annual plan and projections for such fiscal year that has been approved from time to time by the Strategic Review Committee. "Daily Notification" shall have the meaning set forth in Section 2.02. "Designated Financial Officer" means, with respect to each of Cingular, BellSouth and SBC, the person or persons designated in Section 4.02 to receive notices on behalf of such party, or such other person as the party may designate by written notice to each of the other parties. "Dollars" or "$" means lawful currency of the United States of America. "Effective Date" means the date of this Agreement. "Interest Rate" means, for any day, a rate equal to the Average Monthly LIBOR Rate for the calendar month during which such day occurs plus 0.05%. "Lender" and "Lenders" shall have the meanings set forth in the Preamble to this Agreement. "Lender Bank Account," with respect to each Lender, means the United States bank account listed in Exhibit B hereto, or such other bank account as the Designated Financial Officer of such Lender shall specify by written notice to Cingular. "Manager" means Cingular Wireless Corporation, a Delaware corporation. "Percentage Interests" shall mean with respect to each Lender, the percentage of the outstanding common shares of Manager assuming full conversion by each Lender and its Subsidiaries of all units owned in Cingular (currently, 60%/40% for SBC and BellSouth, respectively). "Person" means an individual, corporation, partnership, limited liability company, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Relative Debt Percentage Interest" means, as of any date, with respect to each Lender, the ratio of the amount outstanding under the Revolving Loans owed to such Lender by Cingular to the amount outstanding under the Revolving Loans owed to both Lenders by Cingular. "Revolving Loans" shall have the meaning set forth in Section 2.02(b). "SBC" shall have the meaning set forth in the Preamble to this Agreement. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Shareholder Loans" means indebtedness of Cingular to SBC, BellSouth, or any of their respective Subsidiaries pursuant to the Amended, Restated and Consolidated Subordinated Promissory Notes, dated July 1, 2003, issued by Cingular in favor of SBC, BellSouth and Cellular Credit Corporation, a wholly owned Subsidiary of BellSouth, and all interest and penalties thereunder. "Significant Subsidiary" means, with respect to any Person, any "significant subsidiary," within the meaning of Regulation S-X promulgated under the Securities Act of such Person. "Stockholders' Agreement" means the Stockholders' Agreement by and among SBC, BellSouth and Manager, dated as of October 2, 2000, as amended. "Strategic Review Committee" shall have the meaning ascribed to such term in the certificate of incorporation of Manager. "Subsidiary" means, with respect to any Person, any "subsidiary" within the meaning of Regulation S-X promulgated under the Securities Act, of such Person. "Termination Date" means July 31, 2005 or such later date to which the Termination Date has been extended pursuant to Section 4.01, or if such date is not a Business Day, the next Business Day or such other date determined in accordance with Section 4.01. Section 1.02. Interpretation of Definitions. All definitions in the singular shall, unless the context specifies otherwise, include and mean the plural, and all references to the masculine gender shall include the feminine, and vice versa. ARTICLE II FORECASTS; REVOLVING LOANS Section 2.01. Forecasts. (a) On the first Business Day of November of each fiscal year Cingular shall deliver to each of the Lenders a reasonably detailed forecast of Cingular's estimated monthly and annual cash flow, including a capital spending plan, for the following fiscal year. The forecast for the remainder of the fiscal year 2004 is attached hereto as Exhibit A. (b) Within 30 days of the end of each calendar quarter, Cingular shall deliver to each of the Lenders a forecast of its sources and uses of cash for each calendar quarter for the remainder of such calendar year. (c) On each Business Day, Cingular shall deliver to each of the Lenders a forecast of its anticipated cash requirements for each Business Day during the following two calendar weeks (the "Daily Forecast"). Section 2.02. Daily Notification. Not later than 11:15 a.m. (Eastern Time) on each Business Day, the Designated Financial Officer of Cingular shall send an e-mail to the Designated Financial Officer of each Lender (the "Daily Notification") setting forth for such Business Day: (a) the amount of Available Cash, if any; and (b) if there is no Available Cash, the amount of cash, if any, (i) to be repaid from Cingular Advances made to the Lenders, or (ii) if no Cingular Advances are outstanding, then to be borrowed hereunder from each Lender, which amount for each Lender shall be the product of (i) the aggregate amount to be borrowed as reflected in the Daily Notification and (ii) that Lender's Percentage Interest (the "Revolving Loans"). Section 2.03. The Revolving Loans. (a) Subject to the terms of this Agreement, each Lender, individually and not jointly with the other Lender, agrees to make available to Cingular, on a revolving basis, the Revolving Loans with respect to it as set forth in each Daily Notification. Cash advanced on any day under the Revolving Loans shall be made in Dollars and shall be delivered severally by the Lenders by wire transfer of immediately available funds to the Cingular Bank Account on such day. The outstanding principal amount advanced under all Revolving Loans shall bear interest at the Interest Rate which shall accrue from day to day from the date such advance is made up to but not including the date on which such Revolving Loan is repaid. Interest shall be calculated on the basis of such actual number of days elapsed over 360 and shall be determined with respect to each calendar month at the end of such month. (b) Notwithstanding the foregoing, in no event shall a Lender be required to advance funds to Cingular (i) if the Revolving Loan proceeds are to be used for expenditures that are not set forth in or contemplated by the Cingular Business Plan (or, in the event the Cingular Business Plan has not yet been approved, the requested funds are to be used for expenditures outside the normal course of business as determined by the Designated Financial Officers of SBC and BellSouth) or otherwise approved by the Strategic Review Committee; (ii) after the Termination Date, (iii) if the advance would give rise to an Event of Default under Article III (iv); (iv) after the occurrence of an Event of Default under Article III(v) or (vi); or (v) if the amount requested in the Daily Notifications is in excess of $250,000,000 and such amount has not been set forth in the Daily Forecast on each of the five Business Days prior to the request. Section 2.04. Application of Available Cash. In the event that, on any Business Day, Available Cash is in excess of $5,000,000, such Available Cash shall be applied as follows: (i) first, to the repayment of any principal amount outstanding under the Revolving Loans in proportion to the Lender's Relative Debt Percentage Interests and (ii) second, as loans to each of the Lenders, in each case in proportion to their Percentage Interests (a "Cingular Advance"). The outstanding principal amount of each Cingular Advance shall bear interest at the Cingular Advance Interest Rate which shall accrue from day to day from the date such Cingular Advance is made up to but not including the date on which such Cingular Advance is repaid. Interest shall be calculated on the basis of such actual number of days elapsed over 360 and shall be determined with respect to each calendar month at the end of such month. Any payments due to the Lenders pursuant to this Section 2.04 shall be made in Dollars and delivered by wire transfer of immediately available funds to the Lenders' respective Lender Bank Accounts promptly after receipt of such Daily Notification identifying such Available Cash. Section 2.05 Repayment and Application of Cingular Advances. (a) On the first Business Day of each calendar month, if the aggregate principal amount of the Cingular Advances outstanding is in excess of $5,000,000, each of the Lenders shall repay its Cingular Advances by wire transfer of immediately available funds to the Cingular Bank Account. Accrued interest on any principal amounts outstanding under the Revolving Loan of such Lender and the Cingular Advances made to such Lender during any month shall be netted against each other on the first Business Day of each calendar month. After giving effect to such netting, (i) in the event that Cingular owes any Lender accrued interest on the Revolving Loans from such Lender, such accrued interest shall be added, as of the first Business Day of such calendar month, to the aggregate outstanding principal amount of the Revolving Loans from such Lender, and (ii) in the event that such Lender owes Cingular accrued interest on the Cingular Advances, such accrued interest shall, on such date, be paid by such Lender, individually and not jointly, to Cingular together with any repayment of principal or, if no such amounts are payable to Cingular pursuant to Section 2.05(a), such accrued interest shall be added, as of the first Business Day of such calendar month, to the aggregate amount of the Cingular Advances owed by such Lender to Cingular. (b) Cingular shall apply the amount received in respect of the Cingular Advances as follows: (i) first, to repay the principal amount outstanding under the Revolving Loans, if any, in proportion to the Lenders' Relative Debt Percentage Interests; (ii) second, to repay the outstanding principal amount of the Shareholder Loans in proportion to the Lenders' Percentage Interests; and (iii) third, as a distribution on a pro rata basis to the members of Cingular, from time to time. Each of the Lenders hereby waive, and will cause each of their respective Subsidiaries that are parties to the Shareholder Loans to waive, any requirement that notice of such repayment of the Shareholder Loans be given. Any repayments made under clause (ii) above shall be applied to the particular Shareholder Loan of a Lender (or its Subsidiary) as the Designated Financial Officer of such Lender shall direct in writing to Cingular in advance. Cingular shall take all actions necessary to approve and effect the distributions set forth above in a tax efficient manner. Section 2.06. Recordkeeping. Each Lender agrees to maintain a record of the aggregate principal amount outstanding, together with accrued interest, under such Lender's Revolving Loan and the aggregate principal amount outstanding, together with accrued interest, of any Cingular Advance received by such Lender hereunder and shall provide a copy of such record to Cingular upon the reasonable request of Cingular in writing to such Lender; provided, however, that failure of a Lender to provide a copy of such record shall in no way affect its rights or Cingular's obligations hereunder. The entries in such record of a Lender shall be binding and conclusive upon Cingular absent manifest error. ARTICLE III EVENTS OF DEFAULT Each of the following events shall constitute an "Event of Default": (i) the failure of Cingular to pay any principal amount outstanding under any Revolving Loan when and as the same shall have become due and payable and such failure shall continue unremedied for a period of 5 days; (ii) the failure of Cingular to pay any interest or other amount on any Revolving Loan when and as the same shall have become due and payable and such failure shall continue unremedied for a period of 10 days; (iii) the failure of Cingular in any way to comply with or breach of any other covenant contained in this Agreement and such failure, or breach, as the case may be, shall continue unremedied in any material respect for a period of 30 days following notice to Cingular by either Lender of such failure or breach; (iv) any default by Cingular under any bond, debenture, note, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by Cingular (or by any Subsidiary of Cingular, the repayment of which Cingular has guaranteed or for which Cingular is directly responsible or liable as obligor or guarantor), having a principal amount outstanding in excess of $100,000,000 (other than indebtedness which is non-recourse to Cingular or its Subsidiaries) under the terms of the instrument under which the indebtedness is issued or secured, whether such indebtedness now exists or shall hereafter be created, which default shall have resulted in such indebtedness being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, or there being deposited with an unaffiliated depository, in trust, money in the necessary amount to discharge such indebtedness; (v) Cingular or any Significant Subsidiary of Cingular shall (a) commence a voluntary case under the Bankruptcy Code of 1978, as amended or other federal bankruptcy law (as now or hereafter in effect); (b) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts; (c) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws; (d) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign; (e) be unable to, or admit in writing its inability to, pay its debts as they become due; or (f) make a general assignment for the benefit of creditors; or (g) make a conveyance fraudulent as to creditors under any state or federal law; or (vi) the commencement of a case or other proceeding against Cingular or any Significant Subsidiary of Cingular in any court of competent jurisdiction seeking (a) relief under the Bankruptcy Code of 1978, as amended or other federal bankruptcy law (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts or (b) the appointment of a trustee, receiver, custodian, liquidator or the like for Cingular or such Significant Subsidiary, and such involuntary case or proceeding shall remain undismissed and unstayed for a period of 60 days. ARTICLE IV MISCELLANEOUS Section 4.01. Termination of the Agreement. (a) On or prior to any Termination Date then in effect, the Lenders acting jointly may extend the term of this Agreement for a period of 364 days measured from such Termination Date (in which case, subject to the terms and conditions of this Agreement, the Termination Date shall instead be the last day of such 364-day period). Notwithstanding anything herein to the contrary, a Termination Date shall occur (i) upon 90 days written notice by one or both Lenders upon an Event of Default (other than an Event of Default described in clauses (v) or (vi) of Article III) or (ii) by both Lenders at any time. Within 90 days after the Termination Date, all outstanding principal amounts under the Revolving Loans, together with all accrued interest thereon and all such other amounts then owing by Cingular to the Lenders hereunder, shall be paid in full by Cingular and all outstanding principal amounts under the Cingular Advances, together with all accrued interest thereon and all such other amounts then owing by Lenders to Cingular hereunder, shall be paid in full by the Lenders. If any principal or interest owing to any Lender under the Revolving Loans is not paid when due, such overdue amount shall be bear interest for each day until paid at a rate per annum equal to the Interest Rate plus 2%. In no event shall the amount of interest due or payable under this Agreement exceed the maximum rate of interest allowed by applicable law and, in the event any such payment is inadvertently paid by Cingular or inadvertently received by any Lender, then such excess sum shall be applied in accordance with Section 2.05(a)(ii) (to the extent allowed by applicable law). It is the express intent of the parties hereto that Cingular not pay and no Lender or any of its Subsidiaries receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by Cingular under applicable law. (b) Upon the occurrence of an Event of Default described in clause (v) or (vi), the obligation of each Lender to advance funds hereunder shall automatically terminate and the principal amount then outstanding under the Revolving Loans, together with all accrued interest thereon, and any other amounts owing to each of the Lenders hereunder shall immediately become due and payable, without demand or notice of any kind, the requirements of which are hereby expressly waived by Cingular. Section 4.02. Notices. Any notice to be given hereunder shall be in writing, shall be sent to the address (including email address) of the relevant party as identified in this Section 4.02 or as otherwise specified by such party from time to time in a notice to each of the other parties hereto, and shall be deemed given (i) on the earlier of the date of receipt or the date three Business Days after deposit of such notice in the United States mail, if sent postage prepaid, certified mail, return receipt requested or (ii) when actually received, if personally delivered, delivered by email or delivered by any other manner. BellSouth: BellSouth Corporation 1155 Peachtree Street NE Suite 14E04 Atlanta, GA 30309 Attn: Keith Cornelius Email: keith.cornelius@bellsouth.com SBC: SBC Communications Inc. 175 East Houston Room No. 7G10 San Antonio, TX 78205 Attn: Dan James Email: DJ1402@txmail.sbc.com Cingular: Cingular Wireless LLC 5565 Glenridge Connector Suite 1816 Atlanta, GA 30342 Attn: Sean Foley Email sean.foley@cingular.com Section 4.03. Agreement Binding; Assignment. This Agreement and the rights, duties and obligations of the parties hereunder (including all rights with respect to the Revolving Loans) and thereunder shall bind and inure to the benefit of the parties hereto and their respective successors and assigns and shall not be transferable or assignable without the prior written consent of each of the Lenders; provided, that each Lender may transfer or assign all or part of its rights or obligations hereunder to any wholly-owned Subsidiary of such Lender without the prior written consent of the other Lenders; provided, further that no such transfer or assignment shall be effective until such Lender delivers to the other parties hereto a written undertaking in form and substance reasonably satisfactory to the other parties pursuant to which such Lender guarantees the performance of the obligations hereunder by such Subsidiary. Section 4.04. Waivers; Remedies Cumulative. No delay or omission to exercise any right, power or remedy accruing to any Lender under this Agreement shall impair any such right, power or remedy of such Lender, nor shall it be construed to be a waiver of any such right, power or remedy. Any waiver, permit, consent or approval of any kind or character on the part of a Lender of any breach or default under this Agreement, or any waiver on the part of a Lender of any provisions or condition of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies under this Agreement or by law or otherwise afforded to a Lender, shall be cumulative and not alternate. No waiver, consent or approval given by either Lender in favor of Cingular shall be effective unless also given by the other Lender. Section 4.05. Governing Law. This Agreement and any other instrument or agreement required hereunder shall be governed by, and construed under, the laws of the State of Delaware without regard to principles of conflicts of law. Section 4.06. Amendments. This Agreement may not be amended, supplemented or modified except by a written instrument, signed by the party or parties affected or to be affected thereby. Section 4.07. Expenses. Cingular shall pay all expenses incurred by the Lenders in the collection of amounts payable under this Agreement that are not paid when due, including, without limitation, the reasonable fees and disbursements of counsel to the Lenders. Cingular shall not be required to pay the expenses of collection of a Lender when the inability of Cingular to pay such amounts was due to the fault of that Lender in not complying with this Agreement. Section 4.08. Shareholder Loans. The parties agree that to the extent any of the terms and provisions of this Agreement conflict or are inconsistent with any of the terms and provisions of the Shareholder Loans, such terms and provisions of this Agreement shall supercede the conflicting terms and provisions of the Shareholder Loans. Subject to the foregoing, the Shareholder Loans shall remain in full force and effect in accordance with their respective terms and provisions. Section 4.09. Obligations of the Lenders Several. The obligations of the Lenders pursuant to this Agreement are several. Failure of any Lender to carry out those obligations does not relieve any other Lender of its obligations hereunder. Section 4.10. Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, all of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized officers, as of the date first above written. BELLSOUTH CORPORATION By: /s/ Lynn Wentworth Name: Lynn Wentworth Title: Vice President and Treasurer SBC COMMUNICATIONS INC. By: /s/ Jonathan P. Klug Name: Jonathan P. Klug Title: Vice President and Treasurer CINGULAR WIRELESS LLC By: Cingular Wireless Corporation, its sole manager By: /s/ Sean Foley Name: Sean Foley Title: Vice President and Treasurer EX-11 4 q20410qex11.txt Exhibit 11 BellSouth Corporation Computation of Earnings Per Share (Dollars in Millions) For the Three Months For the Six Ended Months Ended June 30, June 30, 2003 2004 2003 2004 - ------------------------------------ EARNINGS PER SHARE - BASIC: - ------------------------------------ Income From Continuing Operations Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle $ 908 $ 939 $ 1,758 $ 2,089 Discontinued Operations, net of tax 43 57 108 506 Cumulative Effect of Changes in Accounting Principle, net of tax -- -- 315 -- ----- ----- ------- ------- Net Income $951 $996 $2,181 $2,595 ===== ===== ======= ======= Weighted Average Shares Outstanding 1,847 1,832 1,853 1,832 Earnings Per Common Share Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle $ 0.49 $ 0.51 $ 0.95 $ 1.14 Discontinued Operations, net of tax 0.02 0.03 0.06 0.28 Cumulative Effect of Changes in Accounting Principle, net of tax -- -- 0.17 -- ------ ------ ------ ------ Earnings Per Share $ 0.51 $ 0.54 $ 1.18 $ 1.42 ====== ====== ====== ====== - ------------------------------------ EARNINGS PER SHARE - DILUTED: - ------------------------------------ Income From Continuing Operations Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle $ 908 $ 939 $ 1,758 $2,089 Discontinued Operations, net of tax 43 57 108 506 Cumulative Effect of Changes in Accounting Principle, net of tax -- -- 315 -- ------ ------ ------ ------ Net Income $951 $996 $2,181 $2,595 ====== ====== ====== ====== Weighted Average Shares Outstanding 1,847 1,832 1,853 1,832 Incremental shares from assumed exercise of stock options and payment of performance share awards 4 4 3 5 ------ ------ ------ ------ Diluted Shares Outstanding 1,851 1,836 1,856 1,837 ====== ====== ====== ====== Earnings Per Common Share Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle $ 0.49 $ 0.51 $ 0.95 $ 1.14 Discontinued Operations, net of tax 0.02 0.03 0.06 0.28 Cumulative Effect of Changes in Accounting Principle, net of tax -- -- 0.17 -- ------ ------ ------ ------ Earnings Per Share* $ 0.51 $ 0.54 $ 1.18 $ 1.41 ====== ====== ====== ====== *Earnings Per Share does not sum due to rounding. EX-12 5 q20410qex12.txt Exhibit 12 BellSouth Corporation Computation Of Earnings To Fixed Charges (Dollars In Millions) For the Six Months Ended June 30, Earnings 2003 2004 Income from continuing operations before provision for income taxes, minority interest, discontinued operations, and cumulative effect of accounting change $2,759 $3,228 Equity in (earnings) losses of unconsolidated affiliates (348) (255) Fixed Charges 549 482 Distributed income of equity affiliates 4 -- Interest capitalized (5) (2) --------- --------- Income, as adjusted $2,959 $3,453 --------- --------- Fixed Charges Interest expense $ 491 $ 426 Interest capitalized 5 2 Portion of rental expense representative of interest factor 53 54 -------- --------- Fixed Charges $ 549 $ 482 -------- --------- -------- --------- Ratio of Earnings to Fixed Charges 5.39 7.16 ======== ========= EX-31 6 q20410qex31a.txt EXHIBIT 31A Exhibit 31a I, F. Duane Ackerman, certify that 1. I have reviewed this report on Form 10-Q of BellSouth Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 29, 2004 /s/ F. Duane Ackerman F. Duane Ackerman Chairman of the Board, Chief Executive Officer and President A signed original of this written statement required by Section 302 has been provided to BellSouth Corporation and will be retained by BellSouth Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 7 q20410qex31b.txt EXHIBIT 31B Exhibit 31b I, Ronald M. Dykes, certify that 1. I have reviewed this report on Form 10-Q of BellSouth Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 29, 2004 /s/ Ronald M. Dykes Ronald M. Dykes Chief Financial Officer A signed original of this written statement required by Section 302 has been provided to BellSouth Corporation and will be retained by BellSouth Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 q20410qex32.txt Exhibit 32 Statement Required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 This certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the United States Code and shall not be relied on by any other person for any other purpose. In connection with the Quarterly Report on Form 10-Q of BellSouth Corporation (the "Company") for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, F. Duane Ackerman, Chairman of the Board, Chief Executive Officer and President of the Company, and Ronald M. Dykes, Chief Financial Officer, of the Company, certify that o the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and o information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ F. Duane Ackerman F. Duane Ackerman July 29, 2004 /s/ Ronald M. Dykes Ronald M. Dykes July 29, 2004 A signed original of this written statement required by Section 906 has been provided to BellSouth Corporation and will be retained by BellSouth Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----