-----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, C8wO2eBeysGGVttWjZZhleIh0zReFS83CIWnVqVL9gd4RIeNiGZ3xpKrp71ZCY1d Gb/u0qg0D7ypnbzb45rP2w== 0000732713-99-000006.txt : 19990513 0000732713-99-000006.hdr.sgml : 19990513 ACCESSION NUMBER: 0000732713-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: SEC FILE NUMBER: 001-08607 FILM NUMBER: 99617792 BUSINESS ADDRESS: STREET 1: 1155 PEACHTREE ST NE STREET 2: ROOM 15G03 CITY: ATLANTA STATE: GA ZIP: 30309-3610 BUSINESS PHONE: 4042492000 10-Q 1 BELLSOUTH FIRST QUARTER 1999 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 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 ___ At April 30, 1999, 1,894,062,053 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 ............... 8 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ....................... 13 3. Qualitative and Quantitative Disclosures about Market Risk .. 25 Part II 6. Exhibits and Reports on Form 8-K ............................ 27 PART I - FINANCIAL INFORMATION - --------------------------------------------------------------------------------
BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Millions, Except Per Share Amounts) For the Three Months Ended March 31, 1999 1998 Operating Revenues: Wireline communications: Local service ..................................... $2,654 $2,414 Network access .................................... 1,191 1,151 Long distance ..................................... 150 175 Other wireline .................................... 280 236 Total wireline communications ................... 4,275 3,976 Domestic wireless .................................... 744 644 International operations ............................. 561 452 Advertising and publishing ........................... 343 336 Other ................................................ 50 18 Total Operating Revenues........................... 5,973 5,426 Operating Expenses: Operational and support expenses ..................... 3,253 2,929 Depreciation and amortization ........................ 1,113 1,043 Total Operating Expenses ........................... 4,366 3,972 Operating Income ........................................ 1,607 1,454 Interest Expense ........................................ 226 190 Gain on Sale of Operations .............................. -- 155 Net Equity in Earnings (Losses) of Unconsolidated Businesses ............................ (266) 11 Other Income, net ....................................... 59 17 Income Before Income Taxes .............................. 1,174 1,447 Provision for Income Taxes .............................. 559 555 Net Income ......................................... $ 615 $ 892 Weighted-Average Common Shares Outstanding (Note C): Basic ................................................ 1,932 1,983 Diluted .............................................. 1,951 1,993 Dividends Declared Per Common Share ..................... $ .19 $ .18 Earnings Per Share: Basic ................................................ $ .32 $ .45 Diluted .............................................. $ .32 $ .45
The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts) March 31, December 31, 1999 1998 (Unaudited) ASSETS Current Assets: Cash and cash equivalents ................................................................ $1,779 $ 3,003 Temporary cash investments ............................................................... 209 184 Accounts receivable, net of allowance for uncollectibles of $246 and $251 ................ 4,450 4,629 Material and supplies .................................................................... 426 431 Other current assets ..................................................................... 526 459 Total Current Assets ................................................................... 7,390 8,706 Investments and Advances .................................................................. 2,515 2,861 Property, Plant and Equipment ............................................................. 58,944 57,974 Less: accumulated depreciation ............................................................ 34,874 34,034 Property, Plant and Equipment, net ..................................................... 24,070 23,940 Deferred Charges and Other Assets ......................................................... 1,066 1,028 Intangible Assets, net .................................................................... 3,134 2,875 Total Assets .............................................................................. $38,175 $39,410 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Debt maturing within one year ............................................................ $4,570 $3,454 Accounts payable ......................................................................... 1,492 2,219 Other current liabilities ................................................................ 3,863 3,477 Total Current Liabilities .............................................................. 9,925 9,150 Long-Term Debt ............................................................................ 8,406 8,715 Noncurrent Liabilities: Deferred income taxes .................................................................... 2,656 2,512 Unamortized investment tax credits ....................................................... 157 167 Other noncurrent liabilities ............................................................ 2,629 2,756 Total Noncurrent Liabilities ........................................................... 5,442 5,435 Shareholders' Equity: Common stock, $1 par value (4,400 shares authorized; 1,907 and 1,950 shares outstanding) ................................................................... 2,020 2,020 Paid-in capital .......................................................................... 6,766 6,766 Retained earnings ........................................................................ 9,718 9,479 Accumulated other comprehensive income ................................................... (222) (64) Shares held in trust and treasury ........................................................ (3,577) (1,752) Guarantee of ESOP debt.................................................................... (303) (339) Total Shareholders' Equity ............................................................. 14,402 16,110 Total Liabilities and Shareholders' Equity ................................................ $38,175 $39,410
The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions) For the Three Months Ended March 31, 1999 1998 Cash Flows from Operating Activities: Net income ...................................................................... $ 615 $ 892 Adjustments to net income: Depreciation and amortization ............................................... 1,113 1,043 Gain on sale of operations .................................................. -- (155) Net equity in losses (earnings) of unconsolidated businesses ............... 266 (11) Provision for uncollectibles ................................................ 84 76 Deferred income taxes and unamortized investment tax credits ................ 104 (16) Dividends received from unconsolidated businesses............................ 14 48 Net change in: Accounts receivable and other current assets ................................ (11) 88 Accounts payable and other current liabilities .............................. (308) 30 Deferred charges and other assets ........................................... (128) (9) Other liabilities and deferred credits ...................................... (113) 46 Other reconciling items, net .................................................... 6 24 Net cash provided by operating activities ................................... 1,642 2,056 Cash Flows from Investing Activities: Capital expenditures ............................................................ (1,387) (1,226) Purchases of licenses and other intangible assets ............................... (38) (105) Proceeds from sale of operations ................................................ -- 155 Proceeds from disposition of short-term investments ............................. 181 19 Purchases of short-term investments ............................................. (205) (11) Investments in and advances to unconsolidated businesses ........................ (55) (483) Proceeds from repayment of loans and advances.................................... 15 1 Other investing activities, net ................................................. 11 57 Net cash used for investing activities ...................................... (1,478) (1,593) Cash Flows from Financing Activities: Net borrowings (repayments) of short-term debt .................................. 982 (499) Proceeds from long-term debt .................................................... 6 231 Repayments of long-term debt .................................................... (181) (199) Dividends paid .................................................................. (371) (357) Purchase of treasury shares ..................................................... (1,841) (80) Other financing activities, net ................................................. 17 (9) Net cash used for financing activities ...................................... (1,388) (913) Net Decrease in Cash and Cash Equivalents ........................................ (1,224) (450) Cash and Cash Equivalents at Beginning of Period ................................. 3,003 2,570 Cash and Cash Equivalents at End of Period ....................................... $1,779 $ 2,120
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (In Millions) For the Three Months Ended March 31, 1999 Number of Shares Amount ------------------------ -------------------------------------------------------------------------- Accum. Shares Other Shares Guarantee Held In Compre- Held In of ESOP Common Trust and Common Paid-in Retained hensive Trust and Debt Stock Treasury Stock Capital Earnings Income Treasury Total (a) (a) Balance at December 31, 1998 ................ 2,020 (70) $2,020 $6,766 $9,479 $(64) $(1,752) $(339) $16,110 Net income ................. 615 615 Other comprehensive income, net of tax: Foreign currency translation adjustment .. (158) (158) Total comprehensive income . 457 Dividends declared ......... (369) (369) Share issuances for employee benefit plans ... (10) 20 10 Purchase of treasury stock .................... (43) (1,841) (1,841) Purchase of stock by grantor trust ............ (4) (4) ESOP activities and related tax benefit ...... 3 36 39 ----- ---- ------ ------ ------ --- ------ ------ ------- Balance at March 31, 1999 .. 2,020 (113) $2,020 $6,766 $9,718 $(222) $(3,577) $(303) $14,402
(a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of March 31, 1999, there were approximately 35.7 shares held in trust and 76.9 shares held in treasury. The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (In Millions) For the Three Months Ended March 31, 1998 Number of Shares Amount ------------------------ -------------------------------------------------------------------------- Accum. Shares Other Shares Guarantee Held In Compre- Held In of ESOP Common Trust and Common Paid-in Retained hensive Trust and Debt Stock Treasury Stock Capital Earnings Income Treasury Total (a) (a) Balance at December 31, 1997 .................. 1,010 (18) $1,010 $7,714 $7,382 $ 36 $(575) $(402) $15,165 Net income .................. 892 892 Other comprehensive income, net of tax: Foreign currency translation adjustment .. 4 4 Total comprehensive income .. 896 Dividends declared .......... (357) (357) Share issuances for employee benefit plans .... (13) 32 19 Acquisition-related transactions .............. 1 5 33 38 Purchase of treasury stock ..................... (2) (80) (80) Purchase of stock by grantor trust .......... (24) (24) ESOP activities and related tax benefit ....... 2 33 35 ----- ---- -------- -------- ------ --- ------ ------ ------- Balance at March 31, 1998 ... 1,010 (19) $1,010 $7,706 $7,919 $40 $(614) $(369) $15,692
(a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of March 31, 1998, there were approximately 17.6 shares held in trust and 1.6 shares held in treasury. The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars In Millions) 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 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 shown. 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. Certain amounts have been reclassified within the prior year's information to conform to the current year's presentation. Note B - New Accounting Pronouncements In the first quarter of 1999, we adopted a new accounting standard (SOP 98-1) related to the capitalization of certain costs for internal-use software development. Adoption of the new standard resulted in an increase in earnings as a result of the capitalization of costs which had previously been expensed. The first quarter impact was an increase in income before income taxes of $108 and net income of $65 or $.03 per share. The adoption also changed the classification of these expenditures in the consolidated statements of cash flows from operating to investing activities. Note C - Earnings Per Share Prior period amounts related to weighted-average common shares and dividends declared per common share have been adjusted for the two-for-one-stock split which occurred in December 1998. The following is a reconciliation of the weighted-average share amounts (in millions) used in calculating earnings per share: For the Three Months Ended March 31, 1999 1998 Basic common shares outstanding ........ 1,932 1,983 Incremental shares from stock options .. 19 10 Diluted common shares outstanding ...... 1,951 1,993 The earnings amounts used for per share calculations are the same for both the basic and diluted methods. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note D - Segment Information We have four reportable operating segments: (1) Wireline communications; (2) Domestic wireless; (3) International operations; and (4) Advertising and publishing. We have included the operations of all other businesses falling below the reporting threshold in the "Other" segment. The "reconciling items" shown below include Corporate Headquarters and capital funding activities, intercompany eliminations and other nonoperating items. The following table provides information for each operating segment: First Quarter % 1999 1998 Change Wireline communications External revenues ....................... $ 4,275 $ 3,976 7.5 Intersegment revenues ................... 48 44 9.1 Total revenues ........................ $ 4,323 $ 4,020 7.5 Operating income ........................ $ 1,413 $ 1,223 15.5 Segment net income ...................... $ 801 $ 683 17.3 Domestic wireless External revenues ....................... $ 744 $ 644 15.5 Intersegment revenues ................... 4 2 N/M* Total revenues ........................ $ 748 $ 646 15.8 Operating income ........................ $ 87 $ 91 (4.4) Net equity in earnings (losses) of unconsolidated businesses ............ $ 31 $ 35 (11.4) Segment net income ...................... $ 60 $ 69 (13.0) International operations External revenues ....................... $ 561 $ 452 24.1 Intersegment revenues ................... -- -- -- Total revenues ........................ $ 561 $ 452 24.1 Operating income ........................ $ 51 $ 51 -- Net equity in earnings (losses) of unconsolidated businesses ............ $ (13) $ (21) 38.1 Segment net loss ........................ $ (20) $ (5) N/M Advertising and publishing External revenues ....................... $ 343 $ 336 2.1 Intersegment revenues ................... 3 2 N/M Total revenues ........................ $ 346 $ 338 2.4 Operating income ........................ $ 140 $ 137 2.2 Net equity in earnings (losses) of unconsolidated businesses ............ $ (1) $ -- N/M Segment net income ...................... $ 84 $ 86 (2.3) * Not Meaningful BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note D - Segment Information (continued) First Quarter % 1999 1998 Change Other External revenues ........................... $ 50 $ 18 N/M Intersegment revenues ....................... 70 54 29.6 Total revenues ............................ $ 120 $ 72 66.7 Operating loss .............................. $ (84) $ (64) (31.3) Net equity in earnings (losses) of unconsolidated businesses ................ $ 1 $ (3) N/M Segment net loss ............................ $ (57) $ (40) (42.5) Reconciling items External revenues ........................... $ -- $ -- N/M Intersegment revenues ....................... (125) (102) (22.5) Total revenues ............................ $(125) $(102) (22.5) Operating income ............................ $ -- $ 11 N/M Net equity in earnings (losses) of unconsolidated businesses (Note E) .................................. $(284) $ -- N/M Segment net (loss) income ................... $(253) $ 99 N/M Note E - Devaluation of Brazilian Currency We hold equity interests in two wireless communications operations in Brazil. During January 1999, the government of Brazil allowed its currency to trade freely against other currencies. As a result, the Brazilian Real experienced a devaluation against the US Dollar. The devaluation resulted in the entities recording exchange losses related to their net US Dollar-denominated liabilities. Our share of the foreign exchange rate losses for the first quarter was $280. These exchange losses are subject to further upward or downward adjustment based on fluctuations in the exchange rates between the US Dollar and the Brazilian Real. Note F - Gain on Sale of Operations In 1997, we sold our 20% interest in ITT World Directories (ITTWD) to ITT Corporation (ITT). The sale agreement contained provisions that called for additional sales proceeds to be paid to us in the event that ITT subsequently resold ITTWD above a certain price. As a result of ITT's subsequent sale of ITTWD, we received additional proceeds that resulted in a pretax gain of $155 ($96 after tax) in the first quarter of 1998. Note G - Lease of Communications Towers In March 1999, we signed a preliminary agreement with Crown Castle International, Inc. (Crown) for the lease of approximately 1,850 of our wireless communications towers in exchange for $610, to be paid in a combination of cash and Crown common stock. We will retain, outside of the leases, a portion of the towers for use in operating our wireless network. Under the definitive agreement, Crown will manage, maintain and remarket the remaining space on the towers. In addition, we agreed to enter into a five-year, build-to-suit agreement with Crown covering up to 500 towers. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note H - Supplemental Cash Flow Information For the Three Months Ended March 31, 1999 1998 Cash Paid For: Income taxes ............................ $ 57 $ 45 Interest ................................ $159 $149 Note I - Summary Financial Information for Equity Investees The following table displays the summary unaudited financial information for our equity method businesses. These amounts are shown on a 100 percent basis. For the Three Months Ended March 31, % 1999 1998 Change Revenues ......................... $ 1,210 $ 715 69.2 Operating income .................. $ 33 $ (31) N/M Net loss .......................... $ (938) $ (6) N/M Note J - Contingencies Following the enactment of the Telecommunications Act of 1996, our telephone company subsidiary, BellSouth Telecommunications, Inc. (BST), entered into interconnection agreements with various competitive local exchange carriers (CLECs). These agreements provide 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. Numerous CLECs have claimed entitlement from BST for compensation associated with dial-up calls originating on BST's network and connecting with Internet service providers (ISPs) served by the CLECs' networks. It is BST's position that dial-up calls to ISPs are not local calls for which terminating compensation is due under the interconnection agreements. The courts and state commissions that have considered the matter to date, however, have ruled that such calls invoke the reciprocal compensation obligation. In February 1999, the Federal Communications Commission (FCC) issued a decision that such ISP traffic does not terminate at the ISP and, therefore, is interstate in nature, rather than local. The FCC stated further that it would not interfere with prior state commissions' decisions regarding this matter. We continue to believe that we have a good basis for our claims that BST does not owe such reciprocal compensation to the CLECs. BST has, however, received an unfavorable ruling before a state commission subsequent to the FCC's decision. BST has appealed this decision like those released prior to the FCC's order. At March 31, 1999, our exposure related to these disputed claims was approximately $240, including accrued interest. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note K - Subsequent Events Qwest agreement. During April 1999, we announced a new business agreement with Qwest Communications International Inc. (Qwest). As part of this agreement, and subject to customary regulatory approvals, we would purchase a ten percent ownership interest in Qwest for approximately $3.5 billion. We expect the purchase to be completed during second quarter 1999. South Carolina. In 1994, the South Carolina General Assembly adopted a statute which gave the South Carolina Public Service Commission (SCPSC) the authority to regulate telephone utilities by alternative regulation. In January 1996, the SCPSC issued an order approving BST's price regulation plan. In April 1999, the South Carolina Supreme Court ruled that the SCPSC's approval of BST's price regulation plan did not meet the statutory requirements. BST has filed a petition for rehearing with the Court. BELLSOUTH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in Millions, Except Per Share Amounts) 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 Results of Operations and Financial Condition (MD&A) in conjunction with the MD&A in our latest annual report on Form 10-K. - -------------------------------------------------------------------------------- Consolidated Results of Operations - -------------------------------------------------------------------------------- Key financial and operating data for the first quarter of 1999 and 1998 are as follows: ---------------------- ---------- First Quarter % ---------------------- 1999 1998 Change ---------- ----------- ---------- Revenues $ 5,973 $ 5,426 10.1 - ---------------------------------------------------- ----------- ---------- Expenses $ 4,366 $ 3,972 9.9 - ---------------------------------------------------- ----------- ---------- EBITDA(a) $ 2,720 $ 2,497 8.9 - ---------------------------------------------------- ----------- ---------- EBITDA margin 45.5% 46.0% -50bps - ---------------------------------------------------- ----------- ---------- Access line counts (000's): - ---------------------------------------------------- ----------- ---------- Switched access lines 24,361 23,548 3.5 - ---------------------------------------------------- ----------- ---------- Access line equivalents 16,065 11,537 39.2 - ---------------------------------------------------- ----------- ---------- Total equivalent access lines 40,426 35,085 15.2 - ---------------------------------------------------- ----------- ---------- Digital and data revenues $ 555 $426 30.3 - ---------------------------------------------------- ----------- ---------- Convenience feature revenues $ 434 $357 21.6 - ---------------------------------------------------- ----------- ---------- Access minutes of use (millions) 26,825 25,082 6.9 - ---------------------------------------------------- ----------- ---------- Proportionate wireless customers (000's): - ---------------------------------------------------- ----------- ---------- Domestic(b) 5,005 4,185 19.6 - ---------------------------------------------------- ----------- ---------- International(c) 4,012 2,031 97.5 - ---------------------------------------------------- ----------- ---------- (a) EBITDA represents income before net interest expense, income taxes, depreciation and amortization, net equity in earnings (losses) of unconsolidated businesses and other income, net. EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance and because our management believes that EBITDA is an additional meaningful measure of performance and liquidity. EBITDA is not intended to present cash flows for the period, nor has it been presented as an alternative to operating income (loss) as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The items excluded from the calculation of EBITDA are significant components in understanding and assessing our financial performance. Our computation of EBITDA may not be comparable to the computation of similarly titled measures of other companies. EBITDA does not represent funds available for discretionary uses. (b) During fourth quarter 1998, we reorganized our Los Angeles and Houston/Galveston cellular partnerships with AT&T. We have restated 1998 domestic wireless customers to reflect this reorganization and provide a more meaningful presentation of existing properties. (c) During fourth quarter 1998, we sold our interest in BellSouth New Zealand. We have restated 1998 international wireless customers to exclude the customers of BellSouth New Zealand and provide a more meaningful presentation of existing operations. - ------------------------------------------------------------------------------- Overview - ------------------------------------------------------------------------------- Net income and earnings per share for the first quarter of 1999 and 1998 are as follows (all references to earnings per share are on a diluted basis): ----------------------- ----------- First Quarter % ----------------------- 1999 1998 Change ----------- ----------- ----------- As Reported: - ------------------------------------------- ----------- ----------- ----------- Net income $ 615 $ 892 (31.1) - ------------------------------------------- ----------- ----------- ----------- Earnings per share $ .32 $ .45 (28.9) - ------------------------------------------- ----------- ----------- ----------- Normalized: - ------------------------------------------- ----------- ----------- ----------- Net income $ 895 $ 796 12.4 - ------------------------------------------- ----------- ----------- ----------- Earnings per share $ .46 $ .40 15.0 - ------------------------------------------- ----------- ----------- ----------- First quarter 1999 reported results were greatly affected by the impacts of the devaluation of the Brazilian Real in early January 1999. Our share of the foreign exchange losses in our Brazilian wireless properties reduced net income for the quarter by $280 or $.14 per share (included in Net Equity in Earnings (Losses) of Unconsolidated Businesses). The quarter-over-quarter comparison is also impacted by the first quarter 1998 gain related to the sale of our investment in ITT World Directories of $96 or $.05 per share. On a normalized basis, results reflect strong revenue growth in our core wireline business, a 30.3% growth in digital and data services revenues and significant increases in our international and domestic wireless customer bases. Expense growth was driven by increased spending in our core wireline business for customer service and network support functions, volume-driven increases at our international and domestic wireless businesses and expenses for development and promotion of new business initiatives including high-speed data and Internet service offerings. On January 1, 1999 we adopted a new accounting standard on capitalization of internal-use software. The quarter-over-quarter impact of capitalizing software costs under the new standard was a benefit of $65 or $.03 per share to first quarter 1999 net income. - -------------------------------------------------------------------------------- Results by Segment - -------------------------------------------------------------------------------- Our reportable segments reflect strategic business units that offer different products and services and/or serve different customers. We have four reportable operating segments: (1) Wireline communications; (2) Domestic wireless; (3) International operations; and (4) Advertising and publishing. We have included the operations of all other businesses falling below the reporting threshold in the "Other" segment. We evaluate the performance of each strategic business unit based on net income, exclusive of charges for use of intellectual property rights and adjustments for special items that may arise. Intersegment revenues and expenses are not eliminated. Special items are transactions or events that are included in reported consolidated results but are excluded from segment results due to their non-recurring or non-operational nature. The results of businesses in which we own noncontrolling interests are not included in our reported revenues and expenses but are included in the Net Equity in Earnings (Losses) of Unconsolidated Businesses line item. - -------------------------------------------------------------------------------- Wireline Communications - -------------------------------------------------------------------------------- Wireline communications include local exchange, network access and intraLATA long distance services to business and residential customers in a nine-state region located in the southeastern United States. - ------------------------------------------ ----------------------- ----------- First Quarter % 1999 1998 Change - ------------------------------------------ ----------- ----------- ----------- Operating revenues: Local service $2,654 $2,414 9.9 Network access 1,191 1,151 3.5 Long distance 150 175 (14.3) Other wireline 328 280 17.1 - ------------------------------------------ ----------- ----------- ----------- Total operating revenues $4,323 $4,020 7.5 - ------------------------------------------ ----------- ----------- ----------- Operating expenses $2,910 $2,797 4.0 - ------------------------------------------ ----------- ----------- ----------- Operating income $1,413 $1,223 15.5 - ------------------------------------------ ----------- ----------- ----------- Segment net income $ 801 $ 683 17.3 - ------------------------------------------ ----------- ----------- ----------- - ------------------------------------------ ----------- ----------- ----------- EBITDA $2,246 $2,049 9.6 - ------------------------------------------ ----------- ----------- ----------- EBITDA margin 52.0% 51.0% +100bps - ------------------------------------------ ----------- ----------- ----------- Operating Revenues Local service The $240 increase in local service revenues is attributable to growth in access lines and strong demand for digital and data services and convenience features. We ended the first quarter with over 40 million total equivalent access lines, an increase of 15.2% over the prior year. Residential access lines increased 3.9% to 16,764,000 in first quarter 1999, driven by economic growth in our nine-state region as well as demand for additional residence lines for home office purposes, Internet access and children's phones. We added 385,000 second lines since last year, increasing the penetration rate to 16.6%. Business access lines, including data circuits, grew 25.2% propelled by expanding demand for our digital and data services. Switched business access lines grew 2.5% to 7,325,000 lines in service. This growth rate reflects the continued migration of new and existing business customers to high-capacity data lines. Revenues from optional convenience features such as custom calling features (e.g., Caller ID, Call Waiting, Call Return) and MemoryCall(R) service increased $77 or 21.6%. We continued to drive growth of convenience feature usage through our Complete Choice Package, a one-price bundled offering of over 20 features. Increased penetration of extended local area calling plans also increased revenues by approximately $44 over first quarter 1998. Network access Network access revenues grew $40 in first quarter 1999, due largely to higher demand. Access minutes of use rose 6.9% to 26,825 million in first quarter 1999 from 25,082 million in first quarter 1998. Increases in switched access lines and promotional activities by long distance carriers continue to be the primary drivers of the increase in minutes of use. The growth rate in total minutes of use continues to be negatively impacted by competition and the migration of long distance carriers to categories of service (such as special access) that have a fixed charge and are excluded from minutes of use counts. Revenues from special access services grew approximately $34 as Internet service providers and high-capacity users increased their use of our network. These increases were largely offset by rate reductions related to the Federal Communications Commission's productivity factor adjustment and access reform that decreased revenues by $38 compared to first quarter 1998. Long distance The $25 decrease is primarily attributable to a regulatory ruling related to compensation we receive from long distance carriers for interconnection to our public payphones. Also contributing to the decline in revenues was an 11.9% decrease in long distance message volumes since first quarter 1998. Partially offsetting these decreases were increased revenues from the provision of digital and data services and independent company settlements occurring in first quarter 1999. Competition from alternative intraLATA long distance carriers and increased penetration of extended local area calling plans continue to have an adverse impact on our long distance message volumes. Effective February 1999, we implemented 1+ dialing parity for all states in our region, which allows our customers to choose an intraLATA long distance carrier without having to dial a special access code. We believe that competition in the intraLATA long distance market will continue to adversely impact long distance message volumes and revenues. Other wireline The $48 increase is attributable to higher revenues in first quarter 1999 from sales of customer premises equipment, revenues from our Internet access offering and interconnection revenues from wireless carriers. We ended the quarter with over 469,000 subscribers to our BellSouth.net (sm) service, an increase of 125% compared to first quarter 1998. Operating Expenses Operational and support expenses Operational and support expenses increased $106 (5.4%) for first quarter 1999 when compared to first quarter 1998. Adjusted for the impact of adopting the new rules on software capitalization, expenses increased $197 (10.0%). Increased labor costs, primarily in our customer service and network support functions, and other increased costs in the telephone operations associated with higher business volumes were the main contributors to the increase. Also contributing to the increase were expenses related to new data initiatives, including Asymmetric Digital Subscriber Line (ADSL) and integrated fiber-in-the-loop (IFITL), and promotional expenses related to expanding our Internet customer base. We anticipate making ADSL service available in 30 markets this year, with an addressable market of approximately 5.2 million access lines. We are currently deploying IFITL in nearly all newly built neighborhoods and some 200,000 homes in Atlanta and Miami. Depreciation and amortization Depreciation and amortization expense was relatively flat compared to the prior year, increasing $7 or 0.8%. While gross depreciable plant increased by $2,614 or 5.4% over the prior year, the overall composite depreciation rate was slightly lower, resulting in flat depreciation expense. - -------------------------------------------------------------------------------- Domestic Wireless - -------------------------------------------------------------------------------- Domestic wireless is comprised of cellular and personal communications service (PCS) businesses principally within the southeastern United States. - ------------------------------------------ ----------------------- ----------- First Quarter % 1999 1998 Change - ------------------------------------------ ----------- ----------- ----------- - ------------------------------------------ ----------- ----------- ----------- Operating revenues $748 $646 15.8 - ------------------------------------------ ----------- ----------- ----------- Operating expenses $661 $555 19.1 - ------------------------------------------ ----------- ----------- ----------- Operating income $87 $91 (4.4) - ------------------------------------------ ----------- ----------- ----------- Net equity in earnings (losses) of unconsolidated businesses $31 $35 (11.4) - ------------------------------------------ ----------- ----------- ----------- Segment net income $60 $69 (13.0) - ------------------------------------------ ----------- ----------- ----------- - ------------------------------------------ ----------- ----------- ----------- EBITDA $225 $214 5.1 - ------------------------------------------ ----------- ----------- ----------- EBITDA margin 30.1% 33.1% -300bps - ------------------------------------------ ----------- ----------- ----------- Operating Revenues Revenue growth of $102 in our consolidated domestic wireless business can be attributed to a 22.0% increase in the customer base since first quarter 1998, partially offset by a decline in average monthly revenue per customer. Advertising, enhanced volume pricing strategies (including bundled minutes at lower rates) and competitive incentive programs (such as discounted cellular handsets) were key drivers of the customer growth. The decrease in average monthly revenue per customer is due to rate reductions and discounts offered to customers in response to an increasingly competitive environment. We expect competition to intensify in our markets and continue to pressure pricing. This should, however, stimulate demand and lead to increased usage as the overall market is expanded. Operating Expenses Operational and support expenses These expenses increased $91 or 21.1% to $523 as a result of increased customer acquisition costs associated with higher customer additions in first quarter 1999 compared to first quarter 1998. We have continued our efforts to migrate our customer base from analog to digital service. We have moved over 40% of our subscriber base to digital and have increased digital minutes of use to over 50% of total network usage. The combination of higher customer additions and digital conversion negatively impacted the quarter-over-quarter margin comparison but will enable greater revenue growth and operational efficiency. Expenses related to our new PCS markets also contributed to the increase. Operational and support expenses have benefited from reduced customer acquisition costs as we shift to lower cost, direct sales channels. Depreciation and amortization Depreciation and amortization increased $15 or 12.2% to $138. The increase was primarily attributable to higher levels of property, plant and equipment since first quarter 1998. The increased investment is the result of the buildout of PCS markets, expansion of the network related to growth in the customer base and deployment of digital cellular across all of our consolidated markets. Net Equity in Earnings (Losses) of Unconsolidated Businesses Equity in earnings (losses) of unconsolidated domestic wireless businesses decreased $4 compared to first quarter 1998 principally due to lower earnings at our business in Los Angeles. Earnings were lower due to acquisition costs associated with higher customer additions and increased amortization expense which resulted from the reorganization of our ownership interests in fourth quarter 1998. This decrease was partially offset by stronger operating results at our other unconsolidated markets. - -------------------------------------------------------------------------------- International Operations - -------------------------------------------------------------------------------- International operations is comprised principally of our investments in cellular and PCS businesses in nine countries in Latin America as well as Denmark, Germany, India and Israel. - ------------------------------------------ ----------------------- ----------- First Quarter % 1999 1998 Change - ------------------------------------------ ----------- ----------- ----------- - ------------------------------------------ ----------- ----------- ----------- Operating revenues $561 $452 24.1 - ------------------------------------------ ----------- ----------- ----------- Operating expenses $510 $401 27.2 - ------------------------------------------ ----------- ----------- ----------- Operating income $51 $51 -- - ------------------------------------------ ----------- ----------- ----------- Net equity in earnings (losses) of unconsolidated businesses $(13) $(21) N/M - ------------------------------------------ ----------- ----------- ----------- Segment net loss $(20) $(5) N/M - ------------------------------------------ ----------- ----------- ----------- - ------------------------------------------ ----------- ----------- ----------- EBITDA $154 $121 27.3 - ------------------------------------------ ----------- ----------- ----------- EBITDA margin 27.5% 26.8% +70bps - ------------------------------------------ ----------- ----------- ----------- Operating Revenues Consolidated revenues are from our operations in Venezuela, Argentina, Chile, Ecuador and Peru and, in the prior year, New Zealand. The $109 increase since first quarter 1998 is primarily due to substantial growth in the customer bases of these operations, which collectively have grown over 61% to 2.9 million total customers at the end of first quarter 1999. Much of this growth is attributable to the continued success of prepaid calling programs in these operations. Partially offsetting the increase is the loss of revenues from BellSouth New Zealand, which was sold during fourth quarter 1998, and lower revenues in Chile due to intense price competition in that market. Overall weakening of local currencies also impacted revenue growth on a US Dollar basis. Operating Expenses Operational and support expenses The $76 increase is primarily the result of customer acquisition costs associated with significant increases in customer additions. The increase also reflects additional operational costs associated with higher customer levels and expanded operations. Offsetting this increase were prior period expenses incurred by BellSouth New Zealand. Depreciation and amortization Depreciation expense increased $18 due primarily to higher gross depreciable plant resulting from the continued investment in our wireless network infrastructure and digital conversion of our network in Venezuela. Amortization expense increased $15 as a result of increased intangibles related to our purchase of additional ownership interests in several Latin American operations as well as new wireless licenses. Net Equity in Earnings (Losses) of Unconsolidated Businesses The improvement in equity in earnings (losses) from our unconsolidated international businesses is due to stronger results from our investments in Germany, Panama, Nicaragua and Israel, all of which experienced substantial growth in their customer bases compared to first quarter 1998. Offsetting these improvements were start-up losses related to our operations in Brazil, which were launched in May 1998, and less favorable results from our business in Denmark due to customer acquisition costs associated with higher net customer additions. In Brazil, the economic situation resulted in weaker than expected growth during first quarter 1999. This is indicated by slower than expected growth in total customers. While the Brazilian Real has strengthened and begun to stabilize, the long-term impact on our operations is not known. - -------------------------------------------------------------------------------- Advertising and Publishing - -------------------------------------------------------------------------------- Our advertising and publishing business is comprised of companies that publish, print, sell advertising in, and perform related services concerning alphabetical and classified telephone directories and electronic product offerings. - ----------------------------------------- ----------------------- ----------- First Quarter % 1999 1998 Change - ----------------------------------------- ----------- ----------- ----------- - ----------------------------------------- ----------- ----------- ----------- Operating revenues $346 $338 2.4 - ----------------------------------------- ----------- ----------- ----------- Operating expenses $206 $201 2.5 - ----------------------------------------- ----------- ----------- ----------- Operating income $140 $137 2.2 - ----------------------------------------- ----------- ----------- ----------- Net equity in earnings (losses) of unconsolidated businesses $(1) $-- N/M - ----------------------------------------- ----------- ----------- ----------- Segment net income $84 $86 (2.3) - ----------------------------------------- ----------- ----------- ----------- - ----------------------------------------- ----------- ----------- ----------- EBITDA $146 $143 2.1 - ----------------------------------------- ----------- ----------- ----------- EBITDA margin 42.2% 42.3% -10bps - ----------------------------------------- ----------- ----------- ----------- Operating Results Operating revenues were up $8 principally as a result of increased pricing and volumes, offset by the effects of shifts in directory production schedules. Adjusted for book shifts, revenues would have increased by approximately 4.6%. Also contributing to the increased revenues are our electronic media offerings, but to a lesser extent. Operational and support expenses increased $5 due to higher salaries and wages and marketing expenses offset by lower production costs. Depreciation and amortization was flat as there were no appreciable increases in property, plant and equipment. Net equity in earnings (losses) of unconsolidated businesses includes the results of our new international investments in directory publishers in Peru and Brazil. We plan to continue exploring international growth opportunities that capitalize on existing directory core competencies. - -------------------------------------------------------------------------------- Other - -------------------------------------------------------------------------------- This segment is primarily comprised of our communications group companies - -- including new business initiatives such as entertainment (cable television), wireless data and plans for interLATA long distance. In addition, the stand-alone results of our Internet access marketing company are included in this segment. These revenues and expenses are eliminated in consolidation and reported as part of the wireline communications results. Also included are businesses whose primary purpose is to support our other operating segments. - ------------------------------------------ ----------------------- ------------- First Quarter % 1999 1998 Change - ------------------------------------------ ----------- ----------- ------------- - ------------------------------------------ ----------- ----------- ------------- Operating revenues $120 $72 66.7 - ------------------------------------------ ----------- ----------- ------------- Operating expenses $204 $136 50.0 - ------------------------------------------ ----------- ----------- ------------- Operating loss $(84) $(64) (31.3) - ------------------------------------------ ----------- ----------- ------------- Net equity in earnings (losses) of unconsolidated businesses $ 1 $(3) N/M - ------------------------------------------ ----------- ----------- ------------- Segment net loss $(57) $(40) (42.5) - ------------------------------------------ ----------- ----------- ------------- - ------------------------------------------ ----------- ----------- ------------- EBITDA $(53) $(42) (26.2) - ------------------------------------------ ----------- ----------- ------------- EBITDA margin (44.2%) (58.3%) N/M - ------------------------------------------ ----------- ----------- ------------- Operating Results External revenues nearly tripled to $50 from $18 since first quarter 1998, driven by growth in our communications group companies. Since first quarter 1998, we have rolled out cable television service in four new markets and introduced interactive paging service with nationwide coverage. Operating expenses reflect increased spending associated with new product and/or market introductions in all of these businesses. Higher headcount associated with customer support and installation functions also contributed to the increase in expenses. Depreciation and amortization has increased reflecting our continuing investment of resources associated with the growth of these businesses. - -------------------------------------------------------------------------------- Other Nonoperating Items - -------------------------------------------------------------------------------- - ------------------------------------------ ----------------------- ----------- First Quarter % 1999 1998 Change - ------------------------------------------ ----------- ----------- ----------- Interest Expense $226 $190 18.9 Gain on Sale of Operations - 155 N/M Net Equity in Earnings (Losses) of Unconsolidated Businesses (266) 11 N/M Other Income, net 59 17 N/M Provision for Income Taxes 559 555 0.7 - ------------------------------------------ ----------- ----------- ----------- Interest expense Higher interest expense is attributable to a higher proportion of capitalized interest in first quarter 1998 and higher average debt balances in first quarter 1999. We capitalized a greater proportion of our interest in 1998 due to our start-up investments in Brazil. Our average debt balances were as follows: - ----------------------------------------- ----------------------- ----------- First Quarter % 1999 1998 Change - ----------------------------------------- ----------- ----------- ----------- - ----------------------------------------- ----------- ----------- ----------- Average short-term debt balance $3,928 $3,506 12.0 - ----------------------------------------- ----------- ----------- ----------- Average long-term debt balance $8,847 $7,524 17.6 - ----------------------------------------- ----------- ----------- ----------- Total average debt balance $12,775 $11,030 15.8 - ----------------------------------------- ----------- ----------- ----------- We expect interest expense to increase beginning in second quarter 1999 as we plan to fund the announced investment in Qwest Communications with $2.5 billion of debt. Gain on sale of operations During first quarter 1998, we received additional proceeds from the prior sale of our interest in ITT World Directories resulting in a gain of $155 ($96 or $.05 per share after tax). Net equity in earnings (losses) of unconsolidated businesses The decrease was driven by foreign exchange losses of $280 related to our Brazilian properties (see Note E to the consolidated financial statements for further discussion of this matter). Excluding the impact of this event, the net results of our unconsolidated businesses remained relatively flat and are discussed in the results for the Domestic wireless and International operations segments. Other income, net Other income, net includes interest income, gains/losses on disposition of assets, foreign currency gains/losses and miscellaneous nonoperating income. The increase of $42 over the prior year is attributable to accruals recorded in the prior year and increases in other nonoperating income in first quarter 1999. Partially offsetting these increases were higher foreign exchange losses in our consolidated international businesses and decreased interest income due to lower average cash balances. Provision for income taxes The provision for income taxes was flat quarter-over-quarter. The effective rate for first quarter 1999 was 47.6% compared to 38.4% in first quarter 1998. The effective tax rate was significantly impacted by the foreign exchange losses recorded at our unconsolidated Brazilian businesses. Excluding the effect of these losses, our effective rate in first quarter 1999 was 38.4%, consistent with the prior year and in line with our expected rate for 1999. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- Cash flows from operations are our primary source of funding for capital requirements of existing operations, debt service, dividends and share repurchases. We also have ready access to capital markets in the event additional funding is necessary. While current liabilities exceed current assets, 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 needs of our business for the foreseeable future. Net cash provided by (used for): - ----------------------------- ----------- ------------- ------------------------ 1999 1998 Change Operating activities..... $ 1,642 $ 2,056 $(414) (20.1%) Investing activities..... $(1,478) $(1,593) $ 115 7.2% Financing activities..... $(1,388) $ (913) $(475) (52.0%) - ----------------------------- ----------- ------------- ------------ ----------- Net cash provided by operating activities The decrease in cash from operations primarily reflects an increase in working capital requirements offset by higher EBITDA. Net cash used in investing activities During first quarter 1999, we invested $1.4 billion for capital expenditures to support our wireline and wireless networks, to promote the introduction of new products and services and increase operating efficiency and productivity. Significant investments are also being made to support deployment of ADSL and fast packet switching technologies as well as our IFITL initiative. Included in these expenditures for first quarter 1999 are approximately $114 in costs related to internal-use software. During April 1999, we announced a new business agreement with Qwest Communications that includes our purchasing a ten percent stake for $3.5 billion. This transaction is expected to close during second quarter 1999. We intend to finance this investment with $2.5 billion of long-term debt. Our previously announced agreement to lease our wireless communications towers to Crown Castle International is expected to generate cash proceeds in excess of $400. This transaction is scheduled to close in phases throughout the remainder of 1999. First quarter 1998 includes $155 in proceeds related to the sale of our investment in ITT World Directories. Net cash used in financing activities During the first quarter of 1999, we purchased approximately 43 million shares as part of our $3 billion repurchase plan announced in December 1998. Combined with our 1998 repurchases, we have reduced our number of outstanding shares by 74 million since March 31, 1998. We expect to complete the buyback plan by the end of May 1999. Our debt to total capitalization ratio was 47.3% at March 31, 1999 compared to 43.0% at December 31, 1998. The increase is a function of the reduction in shareholders' equity, driven by the effect of our stock buyback program, and increases in short-term debt attributable to higher net borrowings of commercial paper. At May 6, 1999, we have shelf registration statements on file with the SEC under which $5.2 billion of debt securities could be publicly offered. Market Risk For a complete discussion of our market risks, you should refer to the caption "Market Risk" in our 1998 Annual Report on Form 10-K. Our primary exposure to market risks relates to unfavorable movements in interest rates and foreign currency exchange rates. There have been no additional material changes to the market risks described at December 31, 1998. Anticipated transactions Our exposure to market risk is expected to increase in second quarter 1999 related to financing our investment in Qwest Communications with new long-term debt. We do not anticipate any significant changes in our objectives and strategies with respect to managing such exposures. - -------------------------------------------------------------------------------- Operating Environment and Trends of the Business - -------------------------------------------------------------------------------- Regulatory Developments Reciprocal Compensation. See Note J to the consolidated financial statements. South Carolina Supreme Court Decision. See Note K to the consolidated financial statements. International Operations Fluctuations in foreign exchange rates Our equity investments in international wireless systems are viewed as long-term assets valued in the local currency, translated into US Dollars, and reported in our consolidated financial statements. Foreign currency exchange rate fluctuations may be material to results of operations. A significant weakening against the Dollar of the currency of a country where we generate revenues and earnings may adversely impact our results, such as occurred in Brazil during the first quarter. Any weakening of the Dollar against foreign currencies could have an adverse impact on cash flows if we are obligated to make significant foreign-currency-denominated capital investments. We attempt to mitigate the effect of certain foreign currency fluctuations through the use of foreign currency contracts. During January 1999, the government of Brazil allowed its currency to trade freely against other currencies. As a result, the Brazilian Real experienced devaluation against the US Dollar. The devaluation resulted in the entities recording exchange losses related to their net US Dollar-denominated liabilities. Our share of the foreign exchange rate losses for first quarter 1999 was $280. The impact of the devaluation on an operation depends on the devaluation's effect on the local economy and the ability of an operation to raise prices and/or reduce expenses. Additionally, the economies of other countries in Latin America could be adversely impacted by economic and monetary problems in Brazil. For instance, Ecuador recently experienced devaluation in its currency. The impact, however, was not material to our operations. The likelihood and extent of further devaluation and deteriorating economic conditions in Brazil or other Latin American countries experiencing similar conditions and the resulting impacts on our results of operations, financial position and cash flows is not known. Euro conversion In January 1999, certain member countries of the European Union established permanent, fixed conversion rates between their existing currencies and the European Union's common currency (the Euro). The Euro will be phased in over a transition period culminating on January 1, 2002 at which time all existing currencies will be withdrawn from circulation. We have investments in companies operating in Germany, Denmark, Belgium and the Netherlands, which are participating in the Euro conversion. We do not believe that the Euro conversion will have a material effect on these investments. Year 2000 Readiness Disclosure You should note that the following discussion about the Year 2000 includes certain forward-looking statements that are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those expressed in the forward-looking statements include, but are not limited to: o Our Year 2000 program is not complete; ongoing implementation and testing could reveal the need for additional unplanned remedial efforts; o Third party vendors and suppliers could fail to meet their stated objectives, timetables or cost estimates; and o Our timetable or cost estimates could be impacted by unforeseen shortages of skilled personnel. We have initiated a company-wide program to identify and address issues associated with the ability of our date-sensitive information, telephony and business systems and certain equipment to properly recognize the Year 2000 as a result of the century change on January 1, 2000. The program is also designed to assess the readiness of other entities with which we do business. Inability to reach substantial Year 2000 compliance in our systems and integral third party systems could result in interruption of telecommunications services, interruption or failure of our customer billing, operating and other information systems and failure of certain date-sensitive equipment. These failures could result in substantial claims by customers as well as loss of revenue due to service interruption, delays in our ability to bill our customers accurately and timely, and increased expenses associated with litigation, stabilization of operations following such failures or execution of contingency plans. Our Year 2000 program is being conducted by a management team that is coordinating efforts of internal resources as well as third party providers and vendors in identifying and making necessary changes to our systems hardware, software and date-sensitive equipment. The program also includes the international and domestic companies in which we hold an interest. Some of the changes that are necessary in our operations are being made as a part of ongoing systems upgrades. Our Year 2000 program has been divided into six phases: planning; inventory; impact analysis; conversion; testing; and implementation. We monitor our progress within these six phases based on the number of inventoried items that have been addressed. Management's target date for completion of all phases for most of our mission critical applications is July 1999. Mission critical applications include those that: o directly affect delivery of primary services to our customers; o directly affect our revenue recognition and collection; o would create noncompliance with any statutes or laws; and o would require significant costs to address in the event of noncompliance. We have identified three main areas of focus for our Year 2000 program: network components; information technology systems; and building and environmental systems. Each focus area includes the hardware, software, embedded chips, third party vendors and suppliers as well as third party networks that are associated with the identified systems. At March 31, 1999, the planning, inventory and impact analysis phases have been substantially completed and the conversion, testing and implementation phases are well under way. Our status for the conversion, testing and implementation phases is as follows: Network components - -------------------------------------------------- ------------------------- Overall Completion Percentage - -------------------------------------------------- ------------------------- Wireline Communications........................ 85% Other Domestic Operations...................... 35% International Operations....................... 85% - -------------------------------------------------- ------------------------- This focus area consists of the switches, transmission systems and associated software that comprise the core of our telephony systems including landline and wireless domestic and international services. Outside suppliers provide all hardware and most software that comprise our networks; these components are being remediated by those third party suppliers. Either we, our vendors and/or industry groups such as the Telco Year 2000 Forum are performing testing of these components for compliance. By the end of April 1999, our other domestic operations had increased the completion of its overall conversion, testing and implementation to approximately 65%. Progress in all areas is expected to continue throughout second quarter 1999. Information technology systems - -------------------------------------------------- ------------------------- Overall Completion Percentage - -------------------------------------------------- ------------------------- Wireline Communications........................ 70% Other Domestic Operations...................... 80% International Operations....................... 75% - -------------------------------------------------- ------------------------- This focus area consists of those systems that primarily support "customer care" operations such as order taking and billing. The software for these systems was developed by both us and vendors and is being remediated and tested by both. Building and environmental systems - -------------------------------------------------- ------------------------- Overall Completion Percentage - -------------------------------------------------- ------------------------- Wireline Communications........................ 40% Other Domestic Operations...................... 30% International Operations....................... 85% - -------------------------------------------------- ------------------------- This focus area includes various products and systems that are not used in support of network or customer care functions. Building and environmental systems are primarily provided by third parties and include building operations, office equipment, utilities, etc. Buildings are not considered fully converted, tested and implemented until every environmental component within the building is complete. The wireline communications segment has completed approximately 85% of the conversion and testing efforts for individual environmental components, and our other domestic operations have completed approximately 45% of their individual components. Contingency plans. We have developed numerous continuity plans for conducting our business operations in the event of crises including system outages and natural disasters. We have chartered a Year 2000 Business Contingency Planning project to ensure that contingency plans are developed and tested, and support infrastructures are in place. This effort is not limited to the risks posed by the potential Year 2000 failures of our networks, internal information systems or infrastructures, but also includes the potential secondary impact on us of Year 2000 failures, including potential systems failures of business partners and infrastructure service providers. Business impact assessments have been substantially completed, and the completion of contingency plan testing and sign-off is scheduled for third quarter 1999. Costs of project. Some of the costs associated with our Year 2000 compliance efforts were incurred in 1997 and 1998. We will incur the remainder during 1999 and 2000. You should note that costs are not incurred equally over all phases of the project, but increase over time. We anticipate that the conversion and testing phases will require an increase in spending over the earlier phases of the project. At March 31, 1999, we have spent approximately $123 in external costs towards Year 2000 compliance. We estimate the total external cost of our compliance efforts will be between $250 and $350 over the life of the project. We intend to continually reassess the estimated costs and status of Year 2000 remediation efforts. Expected completion. We currently anticipate that most of our mission critical applications will be Year 2000 compliant by July 1999. However, unforeseen circumstances such as those discussed previously could affect our current assessments. As a result, we are unable to determine the impact that any system interruption would have on our results of operations, financial position and cash flows. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." The standard requires that all derivative instruments be recognized as assets or liabilities and adjusted to fair value each period. We will adopt SFAS No. 133 on January 1, 2000 and are currently assessing the impact that adoption will have on our results of operations and financial position. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the caption labeled "Market Risk" in Management's Discussion and Analysis of Results of Operations and Financial Condition. - -------------------------------------------------------------------------------- Cautionary Language Concerning Forward-Looking Statements - -------------------------------------------------------------------------------- In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect our future operating results and financial position. Words such as "expect," "forecast," "intend," "plan," "will," "anticipates," "achieve," "initiatives" or similar expressions are intended to identify such forward-looking statements. 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. Factors that could affect future operating results and financial position 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 would affect demand for our services; o the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; o further delay in our entry into the interLATA long distance market; o higher than anticipated start-up costs or significant up-front investments associated with new business initiatives; o unanticipated higher capital spending from the deployment of new technologies; o unsatisfactory results in regulatory actions including access reform, universal service, terms of interconnection and unbundled network elements and resale rates; and o failure to satisfactorily identify and complete Year 2000 software and hardware revisions by us and entities with which we do business. These cautionary statements should not be construed as exhaustive. These and other developments could cause our actual results to differ materially from those forecast or implied in the aforementioned 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 have no obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing. - -------------------------------------------------------------------------------- PART II -- OTHER INFORMATION - -------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number 4a No instrument which defines the rights of holders of 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. 10q-2 Amendment dated March 22, 1999 to the BellSouth Personal Retirement Account Pension Plan. 10q-3 Amendment dated April 7, 1999 to the BellSouth Personal Retirement Account Pension Plan. 10z BellSouth Compensation Deferral Plan, as amended and restated effective September 28, 1998. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of March 31, 1999. (b) Reports on Form 8-K: Date of Event Subject January 20, 1999 BellSouth Recognizes Brazilian Currency Devaluation January 25, 1999 Fourth Quarter 1998 Earnings Release and 1999 Financial Projection March 30, 1999 Segment Reporting 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 and Controller (Principal Accounting Officer) May 10, 1999 EXHIBIT INDEX Exhibit Number 10q-2 Amendment dated March 22, 1999 to the BellSouth Personal Retirement Account Pension Plan. 10q-3 Amendment dated April 7, 1999 to the BellSouth Personal Retirement Account Pension Plan. 10z BellSouth Compensation Deferral Plan, as amended and restated effective September 28, 1998. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of March 31, 1999. EX-10 2 EXHIBIT 10Q-2 AMENDMENT TO THE BELLSOUTH PERSONAL RETIREMENT ACCOUNT PENSION PLAN This Amendment is made to the BellSouth Personal Retirement Account Pension Plan (the "Plan") which was amended and restated effective January 1, 1998. The Chairman of the BellSouth Employees' Benefit Claim Review Committee, acting under authority delegated by the Nominating and Compensation Committee of the Board of Directors of BellSouth Corporation, hereby amends the plan as follows: 1. Pursuant to Paragraphs 2.03, 15.01 and 16.03 of the Plan, non-represented employees of Bakersfield Cellular L.L.C. who participate in the Plan and who are terminated as employees incident to the Exchange Agreement by and among AT&T Wireless Services, Inc., Texas Cellular Telephone Company, L.P., BellSouth Cellular Corporation, and Bakersfield Cellular Telephone Company, dated November 3, 1998, will become vested, if not already vested, in their accounts as of the closing date of the transaction contemplated by the Exchange. The above amendment shall be effective as of the date this amendment is approved. Approved this 22nd day of March, 1999. EMPLOYEES' BENEFIT CLAIM REVIEW COMMITTEE: /s/ Richard D. Sibbernsen By: Richard D. Sibbernsen Chairman EX-10 3 EXHIBIT 10Q-3 AMENDMENT TO THE BELLSOUTH PERSONAL RETIREMENT ACCOUNT PENSION PLAN This Amendment is made to the BellSouth Personal Retirement Account Pension Plan (the "Plan") which was amended and restated effective January 1, 1998. The Chairman of the BellSouth Employees' Benefit Claim Review Committee, acting under authority delegated by the Nominating and Compensation Committee of the Board of Directors of BellSouth Corporation, hereby amends the plan as follows: 1. Pursuant to Paragraphs 15.01 and 16.03 of the Plan, individuals who become employees of Westel-Indianapolis Company pursunat to Section 5.7 of the Asset Purchase Agreement by and among BellSouth Cellular Corporation, Indiana 8, L.L.C., United States Cellular Corporation, and United States Cellular Operating Company, dated March 19, 1999, (the "Agreement") will be granted Net Credited Service, Vesting Service Credit and Vesting Eligibility Years for their service with United States Cellular Corporation and its affiliates prior the closing of the transaction contemplated by the Agreement. The above amendment shall be effective as of the date this amendment is approved. Approved this 7th day of April, 1999. EMPLOYEES' BENEFIT CLAIM REVIEW COMMITTEE: /s/ Richard D. Sibbernsen By: Richard D. Sibbernsen, Chairman EX-10 4 EXHIBIT 10Z BELLSOUTH COMPENSATION DEFERRAL PLAN (As Amended and Restated Effective September 28, 1998) BELLSOUTH COMPENSATION DEFERRAL PLAN TABLE OF CONTENTS BACKGROUND AND PURPOSE..........................1 ARTICLE I DEFINITIONS..........................2 1.1 "Account".............................2 1.2 "Affiliate"...........................2 1.3 "Annual Bonus"........................2 1.5 "Base Salary".........................2 1.6 "BellSouth"...........................2 1.7 "Beneficiary".........................2 1.8 "Board"...............................2 1.4 "Annual Bonus Election"...............2 1.9 "Business Day"........................2 1.10 "Code"................................3 1.11 "Company Stock".......................3 1.12 "Compensation"........................3 1.13 "Credited Interest Rate"..............3 1.14 "Deferral Contributions"..............3 1.15 "Deferral Election"...................3 1.16 "Effective Date"......................3 1.17 "Election Deadline"...................3 1.18 "Election Package"....................4 1.19 "Eligible Employee"...................4 1.20 "ERISA"...............................4 1.21 "Executive"...........................4 1.22 "Interest Income Option"..............4 1.23 "Interest Income Subaccount"..........4 1.24 "Investment Election".................4 1.25 "Investment Options"..................4 1.26 "Participant".........................5 1.27 "Participating Company"...............5 1.28 "Plan"................................5 1.29 "Plan Administrator"..................5 1.30 "Plan Year"...........................5 1.31 "Senior Manager"......................5 1.32 "Short Term Bonus Plan"...............5 1.33 "Stock Unit"..........................5 1.34 "Stock Unit Option"...................5 1.35 "Stock Unit Subaccount"...............5 1.36 "Valuation Date"......................6 ARTICLE II ELIGIBILITY AND PARTICIPATION.......7 2.1 Annual Participation..................7 2.2 Interim Plan Year Participation.......7 2.3 Election Procedures...................7 2.4 Cessation of Eligibility..............8 ARTICLE III PARTICIPANTS'ACCOUNTS; DEFERRAL CONTRIBUTIONS................9 3.1 Participants'Accounts...................................9 (a) Establishment of Accounts............................9 (b) Nature of Contributions and Accounts.................9 (c) Several Liabilities..................................9 (d) General Creditors....................................9 3.2 Deferral Contributions..................................9 (a) Effective Date......................................10 (b) Term................................................10 (c) Base Salary Deferral Election Amount................10 (d) Bonus Deferral Election Amount......................11 (e) Revocation..........................................11 (f) Crediting of Deferred Compensation..................11 3.3 Deferral Elections and Multiple Participating Companies.11 3.4 Termination Under Severance Arrangement...........................12 3.5 Vesting...........................................................12 ARTICLE IV DETERMINATION AND CREDITING OF INVESTMENT RETURN................13 4.1 General Investment Parameters.....................................13 4.2 Participant Direction of Deemed Investments.......................13 (a) Nature of Participant Direction................................13 (b) Investment of Contributions....................................13 (c) Investment of Existing Account Balances........................13 (d) Investment Subaccounts.........................................14 4.3 Stock Unit Option.................................................14 (a) Stock Unit Subaccount..........................................14 (b) Cash Dividends.................................................14 (c) Adjustments for Stock Dividends and Splits.....................14 4.4 InterestIncome Option.............................................15 (a) Interest Income Subaccount.....................................15 (b) Crediting of Deemed Interest...................................15 (i) Amount Invested................................................15 (ii) Determination of Amount...................................15 4.5 Good Faith Valuation Binding......................................15 4.6 Errors and Omissions in Accounts..................................15 ARTICLE V PAYMENT OF ACCOUNT BALANCES......................................16 5.1 Benefit Amounts...................................................16 (a) Benefit Entitlement............................................16 (b) Valuation of Benefit...........................................16 (c) Conversion of Stock Units into Dollars.........................16 5.2 Elections of Timing and Form......................................16 (a) Timing.........................................................16 (b) Form of Distribution...........................................16 (c) Multiple Selections............................................17 5.3 Benefit Payments to a Participant.................................17 (a) Timing.........................................................17 (b) Form of Distribution...........................................17 (c) Valuation of Single Sum Payments...............................17 (d) Valuation of Installment Payments..............................17 5.4 Death Benefits....................................................18 (a) General........................................................18 (b) Valuation......................................................18 5.5 Beneficiary Designation...........................................18 (a) General........................................................18 (b) No Designation or Designee Dead or Missing.....................18 (c) Death of Beneficiary...........................................19 5.6 Taxes.............................................................19 ARTICLE VI CLAIMS..........................................................20 6.1 Initial Claim.....................................................20 6.2 Appeal............................................................20 6.3 Satisfaction of Claims............................................20 ARTICLE VII SOURCE OF FUNDS................................................21 ARTICLE VIII PLAN ADMINISTRATION...........................................22 8.1 Action by the Plan Administrator..................................22 (a) Individual Administrator.......................................22 (b) Administrative Committee.......................................22 8.2 Rights and Duties of the Plan Administrator.......................22 8.3 Bond; Compensation................................................23 ARTICLE IX AMENDMENT AND TERMINATION.......................................24 9.1 Amendments........................................................24 9.2 Termination of Plan...............................................24 9.3 Limitation on Authority...........................................24 (a) Plan Amendments................................................24 (b) Plan Termination...............................................24 (c) Opinions of Counsel............................................25 ARTICLE X MISCELLANEOUS....................................................26 10.1 Taxation..........................................................26 10.2 Withholding.......................................................26 10.3 No Employment Contract............................................26 10.4 Headings..........................................................26 10.5 Gender and Number.................................................26 10.6 Assignment of Benefits............................................26 10.7 Legally Incompetent...............................................26 10.8 Entire Document...................................................26 10.9 Governing Law.....................................................26 BELLSOUTH COMPENSATION DEFERRAL PLAN Effective as of the 1st day of January, 1997, BellSouth Corporation ("BellSouth") established the BellSouth Compensation Deferral Plan (the "Plan"). The Plan is hereby amended and restated effective as of September 28, 1998. BACKGROUND AND PURPOSE A........Goal. BellSouth desires to provide its designated key management employees, and those of its affiliated companies that participate in the Plan, with an opportunity (i) to defer the receipt and income taxation of a portion of such employees' compensation; and (ii) to receive an investment return on those deferred amounts based on the return of BellSouth stock, an indexed rate of interest, or a combination of the two. B........Purpose. The purpose of the Plan is to set forth the terms and conditions pursuant to which these deferrals may be made and deemed invested and to describe the nature and extent of the employees' rights to their deferred amounts. C........Type of Plan. The Plan constitutes an unfunded, nonqualified deferred compensation plan that benefits certain designated employees who are within a select group of key management or highly compensated employees. Each Participating Company alone has the obligation to pay amounts payable under this Plan to its Plan Participants, and such payments are not an obligation of any other Participating Company. ARTICLE I DEFINITIONS For purposes of the Plan, each of the following terms, when used with an initial capital letter, shall have the meaning set forth below unless a different meaning plainly is required by the context. 1.1 "Account" shall mean, with respect to a Participant or Beneficiary, the total dollar amount or value evidenced by the last balance posted in accordance with the terms of the Plan to the account record established for such Participant or Beneficiary with respect to the Deferral Contributions of such Participant for any Plan Year. 1.2 "Affiliate" shall mean at any time any corporation, joint venture or partnership in which BellSouth owns directly or indirectly, (i) with respect to a corporation, stock possessing at least ten percent (10%) of the total combined voting power of all classes of stock in the corporation, or (ii) in the case of a joint venture or partnership, a ten percent (10%) or greater interest in the capital or profits of such joint venture or partnership. 1.3 "Annual Bonus" shall mean, with respect to each Eligible Employee for a specified Plan Year, such Eligible Employee's standard or base award amount to be earned under the applicable Short Term Bonus Plan for such Plan Year (and payable in the succeeding year). 1.4 "Base Salary" shall mean, with respect to each Eligible Employee for a specified Plan Year, the gross regular, periodic base salary paid or payable to the Eligible Employee during such Plan Year, including any of the Eligible Employee's own before-tax and after-tax contributions to, or deferrals under, any Code Section 401(k), Code Section 125, nonqualified deferred compensation or other employee benefit plan or program, maintained by a Participating Company from time to time, but excluding any contributions or benefits paid under any such plan or program by a Participating Company. 1.5 "BellSouth" shall mean BellSouth Corporation, a Georgia corporation. 1.6 "Beneficiary" shall mean, with respect to a Participant, the person(s) determined in accordance with Section 5.5 to receive any death benefits that may be payable under the Plan upon the death of the Participant. 1.7 "Board" shall mean the Board of Directors of BellSouth. 1.8 "Bonus Deferral Election" shall mean a written election form provided by the Plan Administrator on which an Executive may elect to defer a portion of such Executive's Annual Bonus. 1.9 "Business Day" shall mean each day on which the New York Stock Exchange operates and is open to the public for trading. 1.10 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.11 "Company Stock" shall mean the $1.00 par value per share voting common stock of BellSouth. 1.12 "Compensation" shall mean, for purposes of determining the maximum amount of Base Salary that a Participant may elect to defer under the Plan for any Plan Year, the total of such Participant's (i) annualized Base Salary rate, and (ii) Annual Bonus amount. For a Participant who is an Executive, such amount shall be determined as the rate or amount in effect or applicable on the date such Participant executes a Deferral Election. For a Participant who is a Senior Manager, such amount shall be determined as the rate or amount in effect or applicable on September 1 of the year in which the Participant executes a Deferral Election. For any Eligible Employee employed by a Participating Company whose compensation structure does not readily fit this definition, "Compensation" shall mean cash compensation as defined by the Plan Administrator. For purposes of determining the maximum amount of Annual Bonus that a Participant who is an Executive may elect to defer under the Plan for any Plan Year, "Compensation" shall mean the amount of Annual Bonus in effect or applicable on the date such Participant executes a Bonus Deferral Election. 1.13 "Credited Interest Rate" shall mean, for each Plan Year, the rate of return equal to Moody's Monthly Average of Yields of Aa Corporate Bonds, as published by Moody's Investors Service, Inc., for the month of July immediately preceding such Plan Year. If such rate (or any alternative rate described in this sentence) is at any time no longer available, the Plan Administrator shall designate an alternative rate which in the Plan Administrator's reasonable judgment is generally comparable to the rate described in the preceding sentence, and such alternative rate shall thereafter be the Credited Interest Rate. 1.14 "Deferral Contributions" shall mean, for each Plan Year, that portion of a Participant's Base Salary and Annual Bonus (if applicable) deferred under the Plan pursuant to Section 3.2. 1.15 "Deferral Election" shall mean a written election form provided by the Plan Administrator on which an Eligible Employee may elect to defer under the Plan a portion of such Eligible Employee's Base Salary. 1.16 "Effective Date" shall mean January 1, 1997. 1.17 "Election Deadline" shall mean: (a) For an individual who is eligible to participate in the Plan for an entire Plan Year and is employed by a Participating Company before the beginning of such Plan Year, the November 30 (or if November 30 is not a Business Day, the last Business Day immediately preceding November 30) immediately preceding the first day of such Plan Year. Notwithstanding the foregoing, with the approval of the Plan Administrator, "Election Deadline" may mean, with respect to such an Eligible Employee for a Plan Year, the December 31 (or if December 31 is not a Business Day, the last Business Day immediately preceding December 31) immediately preceding the first day of such Plan Year. (b) For an individual who becomes employed by a Participating Company as an Executive and Eligible Employee on or before October 1 of a Plan Year and who is eligible to participate in the Plan during the remainder of such Plan Year pursuant to Section 2.2, the date which is 30 days after the date the individual first becomes eligible to participate in the Plan. 1.18 "Election Package" shall mean a package consisting of (as applicable to an Eligible Employee) a Deferral Election, a Bonus Deferral Election, an Investment Election and such other forms and documents distributed to such Eligible Employee by the Plan Administrator for the purpose of allowing such Eligible Employee to elect to actively participate in the Plan for a Plan Year. 1.19 "Eligible Employee" shall mean, for each Plan Year, each management employee of a Participating Company who (i) is a member of a select group of highly compensated or key management employees, and (ii) is an Executive or a Senior Manager for the Plan Year, or is otherwise designated by the Plan Administrator as eligible to participate in the Plan for such Plan Year. 1.20 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.21 "Executive" shall mean an employee of a Participating Company who, for purposes of this Plan for a Plan Year, is designated by the Plan Administrator as a member of BellSouth's "executive compensation group." 1.22 "Interest Income Option" shall mean the Investment Option described in Section 4.4, pursuant to which a Participant's deemed investment earnings are determined on the basis of the Credited Interest Rate. 1.23 "Interest Income Subaccount" shall mean a bookkeeping subaccount reflecting that portion of a Participant's Account for each Plan Year which is deemed to be invested in the Interest Income Option. 1.24 "Investment Election" shall mean a written election in such form as is provided by the Plan Administrator on which an Eligible Employee may elect to have Deferral Contributions for a Plan Year (and all investment earnings attributable thereto) deemed invested in either the Stock Unit Option and/or the Interest Income Option. 1.25 "Investment Options" shall mean the Stock Unit Option and the Interest Income Option. 1.26 "Participant" shall mean any person participating in the Plan pursuant to the provisions of Article II. 1.27 "Participating Company" shall mean BellSouth and each Affiliate which, by action of its board of directors (or equivalent governing body), adopts the Plan as a Participating Company with the approval of the Plan Administrator. Such entities shall be listed on Exhibit A hereto, which shall be updated from time to time to reflect the addition of new Participating Companies, and the effective dates of their participation, and the deletion of any entities which are no longer Participating Companies. 1.28 "Plan" shall mean the BellSouth Compensation Deferral Plan, as contained herein and all amendments hereto. 1.29 "Plan Administrator" shall mean the Chief Executive Officer of BellSouth and any individual or committee the Chief Executive Officer designates to act on his or her behalf with respect to any or all of the Chief Executive Officer's responsibilities hereunder; provided, the Board may designate any other person or committee to serve in lieu of the Chief Executive Officer as the Plan Administrator with respect to any or all of the administrative responsibilities hereunder. 1.30 "Plan Year" shall mean the calendar year. 1.31 "Senior Manager" shall mean an employee of a Participating Company who, for purposes of this Plan for a Plan Year, is designated by the Plan Administrator as a "senior manager." 1.32 "Short Term Bonus Plan" shall mean, with respect to Eligible Employees who are Executives, the BellSouth Corporation Officer Short Term Incentive Award Plan or any successor plan and, with respect to Eligible Employees who are Senior Managers, the annual bonus plan(s) or program(s) in which one or more of such Senior Managers participate for a Plan Year, in all cases as determined by the Plan Administrator. 1.33 "Stock Unit" shall mean an accounting entry that represents an unsecured obligation of a Participating Company to pay to a Participant an amount which is based on the fair market value of one share of Company Stock as set forth herein. A Stock Unit shall not carry any voting, dividend or other similar rights and shall not constitute an option or any other right to acquire any equity securities of BellSouth. 1.34 "Stock Unit Option" shall mean the Investment Option described in Section 4.3, pursuant to which a Participant's deemed investment earnings are determined by the rate of return applicable to Stock Units. 1.35 "Stock Unit Subaccount" shall mean a bookkeeping subaccount reflecting that portion of a Participant's Account for each Plan Year which is deemed to be invested in the Stock Unit Option. 1.36 "Valuation Date" shall mean December 31 (or, if December 31 is not a Business Day, the last Business Day immediately preceding December 31), and each other day declared by the Plan Administrator to be a Valuation Date. ARTICLE II ELIGIBILITY AND PARTICIPATION 2.1 Annual Participation. Each individual who is an Eligible Employee as of the first day of a Plan Year and is employed by a Participating Company before the beginning of such Plan Year shall be eligible to defer a portion of such Eligible Employee's Base Salary and, in addition, for each such Eligible Employee who is an Executive, such Eligible Employee's Annual Bonus, and thereby to actively participate in the Plan for such Plan Year. Such individual's participation shall become effective as of the first day of such Plan Year, provided that the Eligible Employee properly and timely completes the election procedures described in Section 2.3. 2.2 Interim Plan Year Participation. Each individual who becomes employed by a Participating Company as an Executive and Eligible Employee on or before October 1 of a Plan Year, and who is not otherwise eligible to participate in the Plan during such Plan Year in accordance with Section 2.1, shall be immediately eligible upon commencement of such employment to make a Deferral Election and/or Bonus Deferral Election, and thereby to actively participate in the Plan, for the remainder of such Plan Year. Such individual's participation shall become effective as of the first day of the calendar month following the calendar month in which such Deferral Election and/or Bonus Deferral Election is made, provided that the Executive properly and timely completes the election procedures described in Section 2.3. 2.3 Election Procedures. (a) Executives. Each Eligible Employee who is an Executive may elect to defer a portion of such Eligible Employee's Base Salary and/or Annual Bonus, and thereby become an active Participant for a Plan Year (or, if Section 2.2 is applicable, for the remainder of such Plan Year), by delivering a completed Deferral Election and/or Bonus Deferral Election and an Investment Election to the Plan Administrator by the applicable Election Deadline for such Plan Year. Such an election shall be effective only if the individual is actively employed as an Eligible Employee at the time the individual delivers the completed Deferral Election and/or Bonus Deferral Election and Investment Election to the Plan Administrator. The Plan Administrator may also require the Eligible Employee to complete other forms and provide other data, as a condition of participation in the Plan. (b) Senior Managers. Each Eligible Employee who is a Senior Manager may elect to defer a portion of such Eligible Employee's Base Salary, and thereby become an active Participant for a Plan Year, by delivering a completed Deferral Election and an Investment Election to the Plan Administrator by the applicable Election Deadline for such Plan Year. Such an election shall be effective only if the individual is actively employed as an Eligible Employee at the time the individual delivers the completed Deferral Election and Investment Election to the Plan Administrator. The Plan Administrator may also require the Eligible Employee to complete other forms and provide other data, as a condition of participation in the Plan. 2.4 Cessation of Eligibility. An Eligible Employee's active participation in the Plan shall terminate, and the Eligible Employee shall not be eligible to make any additional Deferral Contributions, for any portion of a Plan Year following the date the Eligible Employee's employment with BellSouth and all Participating Companies terminates (unless such individual is reemployed as an Eligible Employee later in such Plan Year). In addition, an individual who actively participated in the Plan during prior Plan Years but who is not an Eligible Employee or does not complete the election procedures, for a subsequent Plan Year, shall cease active participation in the Plan for such subsequent Plan Year. If an individual's active participation in the Plan ends, such individual shall remain an inactive Participant in the Plan until the earlier of (i) the date the full amount of such individual's Accounts is distributed from the Plan, or (ii) the date the individual again becomes an Eligible Employee and recommences active participation in the Plan. During the period of time that an individual is an inactive Participant in the Plan, such individual's Accounts shall continue to be credited with earnings as provided in the Plan. ARTICLE III PARTICIPANTS' ACCOUNTS; DEFERRAL CONTRIBUTIONS 3.1 Participants' Accounts. (a) Establishment of Accounts. The Plan Administrator shall establish and maintain one or more Accounts on behalf of each Participant for each Plan Year for which the Participant makes Deferral Contributions. The Plan Administrator shall credit each Participant's Account with the Participant's Deferral Contributions for such Plan Year and earnings attributable thereto, and shall maintain such Account until the value thereof has been distributed to or on behalf of such Participant or his Beneficiary. (b) Nature of Contributions and Accounts. The amounts credited to a Participant's Accounts shall be represented solely by bookkeeping entries. Except as provided in Article VII, no monies or other assets shall actually be set aside for such Participant, and all payments to a Participant under the Plan shall be made from the general assets of the Participating Companies. (c) Several Liabilities. Each Participating Company shall be severally (and not jointly) liable for the payment of benefits under the Plan under Deferral Elections and Bonus Deferral Elections executed by Eligible Employees with, and while employed by, such Participating Company. (d) General Creditors. Any assets which may be acquired by a Participating Company in anticipation of its obligations under the Plan shall be part of the general assets of such Participating Company. A Participating Company's obligation to pay benefits under the Plan constitutes a mere promise of such Participating Company to pay such benefits, and a Participant or Beneficiary shall be and remain no more than an unsecured, general creditor of such Participating Company. 3.2 Deferral Contributions. Each Eligible Employee who is an Executive may irrevocably elect to have Deferral Contributions made on his or her behalf for a Plan Year (or, if Section 2.2 is applicable, for the remainder of such Plan Year), by completing in a timely manner a Deferral Election and/or Bonus Deferral Election and an Investment Election, and following other election procedures as provided in Section 2.3. Each Eligible Employee who is a Senior Manager may irrevocably elect to have Deferral Contributions made on his or her behalf for a Plan Year by completing in a timely manner a Deferral Election and an Investment Election, and following other election procedures as provided in Section 2.3. Subject to any modifications, additions or exceptions that the Plan Administrator, in its sole discretion, deems necessary, appropriate or helpful, the following terms shall apply to such Deferral Elections and Bonus Deferral Elections (if applicable): (a) Effective Date. (i) Base Salary Deferral Election. Subject to Section 3.2(a)(iii), a Deferral Election made by a Participant (whether the Participant is an Executive or Senior Manager) shall be effective beginning with the first regular, periodic paycheck paid (A) with respect to a Participant participating for the entire Plan Year, in such Plan Year, and (B) with respect to an Executive participating for a portion of a Plan Year in accordance with Section 2.2, in the calendar month following the calendar month in which the Participant makes his or her Deferral Election. (ii) Bonus Deferral Election. Subject to Section 3.2(a)(iii), a Bonus Deferral Election made by a Participant who is an Executive shall be effective (A) with respect to an Executive participating for the entire Plan Year, for the Annual Bonus earned during the Plan Year, and (B) with respect to an Executive participating for a portion of Plan Year in accordance with Section 2.2, for the Annual Bonus earned during such portion of the Plan Year. (iii) Other Requirements. To be effective, a Participant's Deferral Election and Bonus Deferral Election (if applicable) must be made by the Election Deadline. If an Eligible Employee fails to deliver a Deferral Election and a Bonus Deferral Election (if applicable), or to complete any of the other requisite election procedures for a Plan Year, in a timely manner, the Eligible Employee shall be deemed to have elected not to participate in the Plan for that Plan Year. (b) Term. Each Deferral Election for a Plan Year that is made by a Participant (whether the Participant is an Executive or Senior Manager) shall remain in effect with respect to the specified portion of all Base Salary paid or payable during such Plan Year (or, in the case of an Executive participating for a portion of the Plan Year in accordance with Section 2.2, with respect to the specified portion of all Base Salary paid or payable during the remainder of such Plan Year) but shall not apply to any subsequent Plan Year. Each Bonus Deferral Election for a Plan Year that is made by a Participant who is an Executive shall remain in effect with respect to the specified portion of Annual Bonus earned during such Plan Year (or, in the case of an Executive participating for a portion of the Plan Year in accordance with Section 2.2, for the specified portion of the Annual Bonus earned during the remainder of such Plan Year), but shall not apply to any subsequent Plan Year. (c) Base Salary Deferral Election Amount. Each Eligible Employee's Deferral Election shall specify a dollar amount, in increments of $1,000.00, of annual Base Salary to be deferred. The maximum amount of Base Salary that an Eligible Employee may defer for any Plan Year shall be as follows: (i) for an Eligible Employee who is a Senior Manager for the Plan Year, or otherwise designated by the Plan Administrator as eligible to participate in the Plan (and who is not an Executive for the Plan Year), 10% of the Eligible Employee's Compensation; and (ii) for an Eligible Employee who is an Executive for the Plan Year, 25% of the Eligible Employee's Compensation; in each case, rounded to the next highest thousand dollars. The total dollar amount shall be withheld from such Eligible Employee's regular, periodic paychecks of Base Salary in substantially equal installments throughout the Plan Year. Notwithstanding any provision of this Plan or a Deferral Election to the contrary, however, the amount withheld from any payment of Base Salary shall be reduced automatically, if necessary, so that it does not exceed the amount of such payment net of all withholding, allotments and deductions, other than any reduction pursuant to such Deferral Election. No amounts shall be withheld during any period an individual ceases to receive Base Salary as an actively employed Eligible Employee for any reason during the Plan Year except that, in the case of an individual on an approved paid leave of absence as an Eligible Employee (including a paid leave of absence under a short term disability plan of a Participating Company), amounts shall be withheld from such leave of absence payments and otherwise treated in the same manner as if such payments constituted Base Salary under the Plan. No adjustment shall be made in the amount to be withheld from any subsequent payment of Base Salary for a Plan Year to compensate for any missed or reduced withholding amounts above. (d) Bonus Deferral Election Amount. The Bonus Deferral Election of each Eligible Employee who is an Executive shall specify a whole percentage of such Executive's Annual Bonus to be deferred, not to exceed fifty percent (50%) and not less than five percent (5%). The maximum amount actually deferred under a Bonus Deferral Election for any Plan Year shall in no event exceed 100% of the bonus actually paid for such Plan Year to the Executive under the applicable Short Term Bonus Plan. (e) Revocation. Once made for a Plan Year, a Participant may not revoke a Deferral Election or Bonus Deferral Election for such Plan Year. (f) Crediting of Deferred Compensation The Plan Administrator shall credit to each Participant's Account for a Plan Year, as of the first day of such Plan Year (or, as of the effective date of participation of an Executive described in Section 2.2), the entire amount of the Participant's Deferral Contributions reflected in his or her Deferral Election for such Plan Year; provided, that the Participant's Account shall be automatically adjusted, retroactively to the first day of such Plan Year (or, if applicable, the effective date of participation of an Executive described in Section 2.2), to reflect the amount of Deferral Contributions actually made from Base Salary (or pursuant to Section 3.4, if applicable) during the Plan Year if for any reason the entire amount of the Participant's Deferral Contributions so reflected is not made. The Plan Administrator shall credit to the Account of each Participant who is an Executive and who makes a Bonus Deferral Election for a Plan Year, as of the first day of the year in which the Participant's annual bonus is actually paid for such Plan Year under the Short Term Bonus Plan, the entire amount actually deferred. 3.3 Deferral Elections and Multiple Participating Companies Any Deferral Election and/or Bonus Deferral Election which is timely executed and delivered to the Plan Administrator shall be effective to defer Base Salary and/or Annual Bonus (as applicable) earned by the Participant from the Participating Company employing such Participant at the time of the Participant's election or any other Participating Company employing such Participant during the Plan Year for which the Deferral Election and/or Bonus Deferral Election is effective. In particular, a Participant (i) who timely executes and delivers a Deferral Election and/or Bonus Deferral Election while employed by one Participating Company and subsequently transfers to another Participating Company, or (ii) who terminates employment and subsequently becomes employed by another Participating Company, shall have the Base Salary and/or Annual Bonus (as applicable) that is paid or payable to such Participant by both Participating Companies reduced under the terms of the Deferral Election and/or Bonus Deferral Election and the Plan as if the transfer or termination and reemployment had not occurred; provided that, as provided in Section 3.2(c), no amounts of Base Salary shall be withheld attributable to any portion of the Plan Year during which such Participant is not receiving Base Salary as an Eligible Employee of a Participating Company. 3.4 Termination Under Severance Arrangement. A Participant eligible to participate in a severance plan or arrangement sponsored by a Participating Company which provides for a lump-sum severance payment upon termination of employment may elect, on such form and at such time and in such manner as shall be prescribed by the Plan Administrator, to reduce the amount of a lump-sum severance payment to which the Participant may become entitled under such plan or arrangement in an amount not to exceed the dollar amount by which the Participant's Base Salary Deferral Contributions for the Plan Year in which such termination occurs would not have been made at the time of termination of employment, and the amount so elected shall for all purposes be treated as Deferral Contributions made under the Plan. 3.5 Vesting. A Participant shall at all times be fully vested in the Participant's Deferral Contributions and all investment earnings attributable thereto. ARTICLE IV DETERMINATION AND CREDITING OF INVESTMENT RETURN 4.1 General Investment Parameters. The rate of return credited to each Participant's Account shall be determined on the basis of the Investment Option(s) selected by the Participant. The terms of this selection process and the manner in which investment return is credited are set forth in this Article IV. 4.2 Participant Direction of Deemed Investments. Each Participant generally may direct the manner in which his or her Deferral Contributions for each Plan Year shall be deemed invested in and between the Stock Unit Option and/or the Interest Income Option, in accordance with the following terms: (a) Nature of Participant Direction. A Participant's election of the Stock Unit Option and/or Interest Income Option shall be for the sole purpose of determining the rate of return to be credited to such Participant's Account for such Plan Year, and shall not be treated or interpreted in any manner whatsoever as a requirement or direction to actually invest assets in Company Stock, an interest income fund or any other investment media. The Plan, as an unfunded, nonqualified deferred compensation plan, at no time shall have any actual investment of assets relative to the benefits or Accounts hereunder. (b) Investment of Contributions. In conjunction with completing a Deferral Election and/or Bonus Deferral Election for a Plan Year, an Eligible Employee shall complete an Investment Election prescribing the percentage of such Eligible Employee's Deferral Contributions for such Plan Year that will be deemed to be invested in the Stock Unit Option and/or the Interest Income Option; provided, such Investment Election shall specify one of the three alternatives, as follows: (i) 100% of the Deferral Contributions for such Plan Year shall be deemed invested in the Stock Unit Option; (ii) 100% of the Deferral Contributions for such Plan Year shall be deemed invested in the Interest Income Option; or (iii) 50% of the Deferral Contributions for such Plan Year shall be deemed invested in the Stock Unit Option, and 50% of the Deferral Contributions for such Plan Year shall be deemed invested in the Interest Income Option. (c) Investment of Existing Account Balances. A Participant may not make an Investment Election changing the percentage of an existing Account balance that will be deemed to be invested in the Stock Unit Option and/or the Interest Income Option. Once an Investment Election is made with respect to an Account, it shall continue to apply with respect to such Account until all amounts in such Account are distributed. (d) Investment Subaccounts. For the sole purpose of tracking a Participant's investment elections and calculating investment earnings attributable to a Participant's Account for a Plan Year pursuant to the terms of this Article IV, the Plan Administrator shall establish and maintain for such Participant for such Plan Year a Stock Unit Subaccount and an Interest Income Subaccount, as necessary, the total of which shall equal such Participant's Account for such Plan Year. 4.3 Stock Unit Option. (a) Stock Unit Subaccount. To the extent an Eligible Employee makes an Investment Election in accordance with Section 4.2 to have all or a portion of his or her Deferral Contributions for a Plan Year deemed to be invested in the Stock Unit Option, the Participant's Stock Unit Subaccount for such Plan Year shall be credited (subject to the adjustment described in subsection 3.2(f), if applicable), as of the first day of such Plan Year, with a number of Stock Units equal to the number of full and fractional shares of Company Stock that could have been purchased with such portion of the Eligible Employee's Deferral Contributions elected for such Plan Year at the average of the high and low sales prices of one share of Company Stock on the New York Stock Exchange for the last Business Day of each of the three calendar months immediately preceding the first day of such Plan Year. (b) Cash Dividends. As of each date on which BellSouth has paid a cash dividend on Company Stock, the number of Stock Units credited to a Participant's Stock Unit Subaccount for each Plan Year shall be increased by a number of additional Stock Units equal to the quotient of (i) the amount of dividends that would have been paid on the number of shares of Company Stock equivalent to the number of Stock Units credited to such subaccount as of such dividend payment date, divided by (ii) the average of the daily high and low sales prices of one share of Company Stock on the New York Stock Exchange for the period of five Business Days ending on such dividend payment date (or the period of five Business Days ending on the immediately preceding Business Day if such date was not a Business Day). (c) Adjustments. In the event of any change in outstanding shares of Company Stock, by reclassification, recapitalization, merger, consolidation, spinoff, combination, exchange of shares, stock split, reverse stock split or otherwise, or in the event of the payment of a stock dividend on Company Stock, or in the event of any other increase or decrease in the number of outstanding shares of Company Stock, other than the issuance of shares for value received by BellSouth or the redemption of shares for value, the Plan Administrator shall adjust the number and/or form of Stock Units in the manner it deems appropriate in its reasonable judgment to reflect such event, including substituting or adding publicly traded shares of companies other than the Company as a basis for determining Stock Units. The Plan Administrator similarly shall make such adjustments as it deems are appropriate in its reasonable judgment in the form, including the basis of measurement, of Stock Units in the event all shares of Company Stock cease for any reason to be outstanding or to be actively traded on the New York Stock Exchange. In the event the Plan Administrator determines in its reasonable judgment that it would not be possible to appropriately reflect an event under this paragraph (c) by adjusting the number and/or form of Stock Units, the Plan Administrator shall establish a special Valuation Date appropriate to such event for all Stock Unit Subaccounts and shall cause such subaccounts, as so valued, automatically to be converted into Interest Income Subaccounts, which thereafter shall be subject to Section 4.4. 4.4 Interest Income Option. (a) Interest Income Subaccount. To the extent that an Eligible Employee makes an Investment Election in accordance with Section 4.2 to have all or a portion of his or her Deferral Contributions for a Plan Year deemed to be invested in the Interest Income Option, the Participant's Interest Income Subaccount for such Plan Year shall be credited (subject to the adjustment described in subsection 3.2(f), if applicable), as of the first day of such Plan Year, with such portion of the Eligible Employee's Deferral Contributions elected for such Plan Year. (b) Crediting of Deemed Interest. As of each Valuation Date, the Plan Administrator shall credit a Participant's Interest Income Subaccounts with the amount of earnings applicable thereto for the period since the immediately preceding Valuation Date. Such crediting of earnings for each Interest Income Subaccount shall be effected, as follows: (i) Amount Invested. The Plan Administrator shall determine the amount of (A) in the case of an Interest Income Subaccount established in connection with a Deferral Election or Bonus Deferral Election for the Plan Year ending on such Valuation Date, such Participant's Deferral Contributions credited to such Participant's Interest Income Subaccount for such Plan Year; and (B) in the case of an Interest Income Subaccount for a prior Plan Year, the balance of such Participant's Interest Income Subaccount as of the immediately preceding Valuation Date, minus the amount distributed from such Participant's Interest Income Subaccount since the immediately preceding Valuation Date; and (ii) Determination of Amount. The Plan Administrator then shall apply the Credited Interest Rate for such Plan Year to such Participant's adjusted Interest Income Subaccount (as determined in subparagraph (i) hereof), and the total amount of investment earnings resulting therefrom shall be credited to such Participant's Interest Income Subaccount as of such Valuation Date. 4.5 Good Faith Valuation Binding. In determining the value of Accounts, the Plan Administrator shall exercise its best judgment, and all such determinations of value (in the absence of bad faith) shall be binding upon all Participants and their Beneficiaries. 4.6 Errors and Omissions in Accounts. If an error or omission is discovered in the Account of a Participant or in the amount of a Participant's Deferral Contributions, the Plan Administrator, in its sole discretion, shall cause appropriate, equitable adjustments to be made as soon as administratively practicable following the discovery of such error or omission. ARTICLE V PAYMENT OF ACCOUNT BALANCES 5.1 Benefit Amounts. (a) Benefit Entitlement. As the benefit under the Plan, each Participant (or Beneficiary) shall be entitled to receive the total amount of the Participant's Accounts, determined as of the most recent Valuation Date, and payable at such times and in such forms as described in this Article V. (b) Valuation of Benefit. For purposes hereof, each Account of a Participant as of any Valuation Date shall be equal to (i) the total amount of all of such Participant's Deferral Contributions credited thereto; plus (ii) all deemed investment earnings attributable thereto; minus (iii) the total amount of all benefit payments previously made therefrom. (c) Conversion of Stock Units into Dollars. For purposes of converting some or all of a Participant's Stock Units into a dollar amount in valuing the Participant's Accounts as of any Valuation Date, the value of each Stock Unit shall be equal to the average of the high and low sales prices of one share of Company Stock on the New York Stock Exchange for the last Business Day of each of the three calendar months ending on or immediately preceding such Valuation Date. 5.2 Elections of Timing and Form. In conjunction with, and at the time of, completing a Deferral Election and/or Bonus Deferral Election for each Plan Year, an Eligible Employee shall select the timing and form of the distribution that will apply to the Account for such Eligible Employee's Deferral Contributions (and deemed investment earnings attributable thereto) for such Plan Year. The terms applicable to this selection process are as follows: (a) Timing. For a Participant's Account for each Plan Year, such Participant may elect that distribution will be made or commence as of any January 1 following the Plan Year of deferral; provided, a Participant may not select a benefit payment or commencement date for such Account that is later than the twentieth January 1 following the end of the Plan Year of deferral. (b) Form of Distribution. For a Participant's Account for each Plan Year, such Participant may elect that distribution will be paid in one of the following forms: (i) a single lump-sum cash payment; or (ii) substantially equal annual installments (adjusted for investment earnings between payments in the manner described in Article IV) over a period of one (1) to ten (10) years; provided that the number of years so elected shall in no event exceed one (1) year for each full $1,000 of Deferral Contributions elected for such Plan Year. (c) Multiple Selections. An Eligible Employee may select a different benefit payment or commencement date and/or a different form of distribution with respect to his or her Account for each Plan Year. For ease of administration, the Plan Administrator may combine Accounts and subaccounts of a Participant to which the same benefit payment/commencement date and the same form of distribution apply. 5.3 Benefit Payments to a Participant. (a) Timing. A Participant shall receive or begin receiving a distribution of each of his or her Accounts as of the earlier of (i) the January 1 selected by such Participant with respect to each such Account pursuant to the terms of Section 5.2(a); or (ii) the January 1 immediately following the date that such Participant's employment with BellSouth and all Affiliates ends for any reason, unless the Participant returns to employment with BellSouth or one of the Affiliates before such January 1. An amount payable "as of" any January 1 shall be made as soon as practicable after such January 1 and, unless extenuating circumstances arise, no later than January 31. (b) Form of Distribution. A Participant shall receive or begin receiving a distribution of each of his or her Accounts in cash in the form selected by such Participant with respect to such Account pursuant to the terms of Section 5.2(b). (c) Valuation of Single Lump-Sum Payments. The amount of a Participant's single lump-sum distribution of any of his or her Accounts as of any applicable January 1 shall be equal to the value of such Account as of the Valuation Date immediately preceding the date on which such distribution is paid. (d) Valuation of Installment Payments. For purposes of determining the amount of any installment payment to be paid as of a January 1 from an Account, the following shall apply: (i) for any amount of such Account attributable to an Interest Income Subaccount as of the immediately preceding Valuation Date, such amount shall be divided by the number of remaining installments to be paid from such Account (including the current installment); and (ii) for any portion of such Account attributable to a Stock Unit Subaccount as of the immediately preceding Valuation Date, the total number of Stock Units constituting such portion shall be divided by the number of remaining installments to be paid from such Account (including the current installment), and the resulting number of Stock Units shall be converted into a dollar amount (pursuant to the terms of Section 5.1(c)) as of such Valuation Date. 5.4 Death Benefits. (a) General. If a Participant dies before receiving the entire amount of his or her benefit under the Plan, such Participant's Beneficiary shall receive distribution of amounts remaining in the Participant's Accounts in the form, as elected by the Participant on a Beneficiary designation form described in Section 5.5, of either: (i) a single lump-sum cash payment of the entire balance in the Participant's Accounts as of the January 1 immediately following the date of the Participant's death; or (ii) (A) for Accounts with respect to which distribution has not commenced under Section 5.2 at the time of the Participant's death, substantially equal annual installments (adjusted for investment earnings between payments in the manner described in Article IV) over a period of one (1) to ten (10) years, commencing as of the January 1 immediately following the Participant's death; and (B) for Accounts with respect to which distribution has commenced in the form of installments described in Section 5.2(b)(ii) at the time of the Participant's death, continuation of such installment payment schedule. An amount payable "as of" any January 1 shall be made as soon as practicable after such January 1 and, unless extenuating circumstances arise, no later than January 31. (b) Valuation. The valuation rules described in subsections 5.3(c) and 5.3(d) shall apply to payments described in this Section 5.4. 5.5 Beneficiary Designation. (a) General. A Participant shall designate a Beneficiary or Beneficiaries for all of his or her Accounts by completing the form prescribed for this purpose for the Plan by the Plan Administrator and submitting such form as instructed by the Plan Administrator. Once a Beneficiary designation is made, it shall continue to apply until and unless such Participant makes and submits a new Beneficiary designation form for this Plan. (b) No Designation or Designee Dead or Missing. In the event that: (i) a Participant dies without designating a Beneficiary; (ii) the Beneficiary designated by a Participant is not surviving or in existence when payments are to be made or commence to such designee under the Plan, and no contingent Beneficiary, surviving or in existence, has been designated; or (iii) the Beneficiary designated by a Participant cannot be located by the Plan Administrator within 1 year from the date benefit payments are to be made or commence to such designee; then, in any of such events, the Beneficiary of such Participant shall be the Participant's surviving spouse, if any can then be located, and if not, the estate of the Participant, and the entire balance in the Participant's Accounts shall be paid to such Beneficiary in the form of a single lump-sum cash payment described in Section 5.4(a)(i). (c) Death of Beneficiary. If a Beneficiary who survives the Participant, and to whom payment of Plan benefits commences, dies before complete distribution of the Participant's Accounts, the entire balance in such Accounts shall be paid to the estate of such Beneficiary in the form of a single lump-sum cash payment as of the January 1 immediately following such Beneficiary's death. An amount payable "as of" any January 1 shall be made as soon as practicable after such January 1 and, unless extenuating circumstances arise, no later than January 31. The valuation rules described in subsection 5.3(c) shall apply to any payments described in this subsection 5.5(c). 5.6 Taxes. If the whole or any part of any Participant's or Beneficiary's benefit hereunder shall become subject to any estate, inheritance, income, employment or other tax which a Participating Company shall be required to pay or withhold, the Participating Company shall have the full power and authority to withhold and pay such tax out of any monies or other property in its hand for the account of the Participant or Beneficiary whose interests hereunder are so affected. Prior to making any payment, the Participating Company may require such releases or other documents from any lawful taxing authority as it shall deem necessary. ARTICLE VI CLAIMS 6.1 Initial Claim. Claims for benefits under the Plan may be filed with the Plan Administrator on forms or in such other written documents, as the Plan Administrator may prescribe. The Plan Administrator shall furnish to the claimant written notice of the disposition of a claim within 90 days after the application therefor is filed. In the event the claim is denied, the notice of the disposition of the claim shall provide the specific reasons for the denial, citations of the pertinent provisions of the Plan, and, where appropriate, an explanation as to how the claimant can perfect the claim and/or submit the claim for review. 6.2 Appeal. Any Participant or Beneficiary who has been denied a benefit shall be entitled, upon request to the Plan Administrator, to appeal the denial of his or her claim. The claimant (or his or her duly authorized representative) may review pertinent documents related to the Plan and in the Plan Administrator's possession in order to prepare the appeal. The request for review, together with written statement of the claimant's position, must be filed with the Plan Administrator no later than 60 days after receipt of the written notification of denial of a claim provided for in Section 6.1. The Plan Administrator's decision shall be made within 60 days following the filing of the request for review. If unfavorable, the notice of the decision shall explain the reasons for denial and indicate the provisions of the Plan or other documents used to arrive at the decision. 6.3 Satisfaction of Claims. The payment of the benefits due under the Plan to a Participant or Beneficiary shall discharge the Participating Company's obligations under the Plan, and neither the Participant nor the Beneficiary shall have any further rights under the Plan upon receipt by the appropriate person of all benefits. In addition, (i) if any payment is made to a Participant or Beneficiary with respect to benefits described in the Plan from any source arranged by BellSouth or a Participating Company including, without limitation, any fund, trust, insurance arrangement, bond, security device, or any similar arrangement, such payment shall be deemed to be in full and complete satisfaction of the obligation of the Participating Company under the Plan to the extent of such payment as if such payment had been made directly by such Participating Company; and (ii) if any payment from a source described in clause (i) shall be made, in whole or in part, prior to the time payment would be made under the terms of the Plan, such payment shall be deemed to satisfy such Participating Company's obligation to pay Plan benefits beginning with the benefit which would next become payable under the Plan and continuing in the order in which benefits are so payable, until the payment from such other source is fully recovered. The Plan Administrator or such Participating Company, as a condition to making any payment, may require such Participant or Beneficiary to execute a receipt and release therefor in such form as shall be determined by the Plan Administrator or the Participating Company. If receipt and release is required but the Participant or Beneficiary (as applicable) does not provide such receipt and release in a timely enough manner to permit a timely distribution in accordance with the general timing of distribution provisions in the Plan, the payment of any affected distribution may be delayed until the Plan Administrator or the Participating Company receives a proper receipt and release. ARTICLE VII SOURCE OF FUNDS Each Participating Company shall provide the benefits described in the Plan from its general assets. However, to the extent that funds in one or more trusts, or other funding arrangement(s), allocable to the benefits payable under the Plan are available, such assets may be used to pay benefits under the Plan. If such assets are not sufficient or are not used to pay all benefits due under the Plan, then the appropriate Participating Company shall have the obligation, and the Participant or Beneficiary, who is due such benefits, shall look to such Participating Company to provide such benefits. No Participant or Beneficiary shall have any interest in the assets of any trust, or other funding arrangement, or in the general assets of the Participating Companies other than as a general, unsecured creditor. Accordingly, a Participating Company shall not grant a security interest in the assets held by the trust in favor of the Participants, Beneficiaries or any creditor. ARTICLE VIII PLAN ADMINISTRATION 8.1 Action by the Plan Administrator. (a) Individual Administrator. If the Plan Administrator is an individual, such individual shall act and record his or her actions in writing. Any matter concerning specifically such individual's own benefit or rights hereunder shall be determined by the Board or its designee. (b) Administrative Committee. If the Plan Administrator is a committee, action of the Plan Administrator may be taken with or without a meeting of committee members; provided, action shall be taken only upon the vote or other affirmative expression of a majority of the committee members qualified to vote with respect to such action. If a member of the committee is a Participant or Beneficiary, such member shall not participate in any decision which solely affects his or her own benefit under the Plan. For purposes of administering the Plan, the Plan Administrator shall choose a secretary who shall keep minutes of the committee's proceedings and all records and documents pertaining to the administration of the Plan. The secretary may execute any certificate or any other written direction on behalf of the Plan Administrator. 8.2 Rights and Duties of the Plan Administrator. The Plan Administrator shall administer the Plan and shall have all powers necessary to accomplish that purpose, including (but not limited to) the following: (a) to construe, interpret and administer the Plan; (b) to make determinations required by the Plan, and to maintain records regarding Participants' and Beneficiaries' benefits hereunder; (c) to compute and certify to Participating Companies the amount and kinds of benefits payable to Participants and Beneficiaries, and to determine the time and manner in which such benefits are to be paid; (d) to authorize all disbursements by a Participating Company pursuant to the Plan; (e) to maintain all the necessary records of the administration of the Plan; (f) to make and publish such rules and procedures for the regulation of the Plan as are not inconsistent with the terms hereof; (g) to delegate to other individuals or entities from time to time the performance of any of its duties or responsibilities hereunder; and (h) to hire agents, accountants, actuaries, consultants and legal counsel to assist in operating and administering the Plan. The Plan Administrator shall have the exclusive right to construe and interpret the Plan, to decide all questions of eligibility for benefits and to determine the amount of such benefits, and its decisions on such matters shall be final and conclusive on all parties. 8.3 Bond; Compensation. The Plan Administrator and (if applicable) its members shall serve as such without bond and without compensation for services hereunder. All expenses of the Plan Administrator shall be paid by the Participating Companies. ARTICLE IX AMENDMENT AND TERMINATION 9.1 Amendments. Subject to Section 9.3, the Board shall have the right, in its sole discretion, to amend the Plan in whole or in part at any time and from time to time. In addition, the Plan Administrator shall have the right, in its sole discretion, to amend the Plan at any time and from time to time so long as such amendment is not of a material nature. 9.2 Termination of Plan. Subject to Section 9.3, BellSouth reserves the right to discontinue and terminate the Plan at any time, for any reason. Any action to terminate the Plan shall be taken by the Board and such termination shall be binding on all Participating Companies, Participants and Beneficiaries. 9.3 Limitation on Authority. Except as otherwise provided in this Section 9.3, no contractual right created by and under any Deferral Election or Bonus Deferral Election made prior to the effective date of any amendment or termination shall be abrogated by any amendment or termination of the Plan, absent the express, written consent of the Participant who made the Deferral Election or Bonus Deferral Election. (a) Plan Amendments. The limitation on authority described in this Section 9.3 shall not apply to any amendment of the Plan which is reasonably necessary, in the opinion of counsel, (i) to preserve the intended income tax consequences of the Plan described in Section 10.1, (ii) to preserve the status of the Plan as an unfunded, nonqualified deferred compensation plan for the benefit of a select group of management or highly compensated employees and not subject to the requirements of Part 2, Part 3 and Part 4 of Title I of ERISA, or (iii) to guard against other material adverse impacts on Participants and Beneficiaries, and which, in the opinion of counsel, is drafted primarily to preserve such intended consequences, or status, or to guard against such adverse impacts. (b) Plan Termination. The limitation on authority described in this Section 9.3 shall not apply to any termination of the Plan as the result of a determination that, in the opinion of counsel, (i) Participants and Beneficiaries generally are subject to federal income taxation on Deferral Contributions or other amounts in Participant Accounts prior to the time of distribution of amounts under the Plan, or (ii) the Plan is generally subject to Part 2, Part 3 or Part 4 of Title I of ERISA, but in either case only if such termination is reasonably necessary, in the opinion of counsel, to guard against material adverse impacts on Participants and Beneficiaries, or BellSouth or Participating Companies. Upon such termination, the entire amount in each Participant's Accounts shall be distributed in a single lump-sum distribution as soon as practicable after the date on which the Plan is terminated. In such event, the Plan Administrator shall declare that the date of termination (or, if such day is not a Business Day, the last Business Day immediately preceding such day) shall be a Valuation Date and all distributions shall be made based on the value of the Accounts as of such Valuation Date. (c) Opinions of Counsel. In each case in which an opinion of counsel is contemplated in this Section 9.3, such opinion shall be in writing and delivered to the Board, rendered by a nationally recognized law firm selected or approved by the Board. ARTICLE X MISCELLANEOUS 10.1 Taxation. It is the intention of BellSouth that the benefits payable hereunder shall not be deductible by the Participating Companies nor taxable for federal income tax purposes to Participants or Beneficiaries until such benefits are paid by the Participating Company to such Participants or Beneficiaries. When such benefits are so paid, it is the intention of the Participating Companies that they shall be deductible by the Participating Companies under Code Section 162. 10.2 Withholding. All payments made to a Participant or Beneficiary hereunder shall be reduced by any applicable federal, state or local withholding or other taxes or charges as may be required under applicable law. 10.3 No Employment Contract. Nothing herein contained is intended to be nor shall be construed as constituting a contract or other arrangement between a Participating Company and any Participant to the effect that the Participant will be employed by the Participating Company or continue to be an employee for any specific period of time. 10.4 Headings. The headings of the various articles and sections in the Plan are solely for convenience and shall not be relied upon in construing any provisions hereof. Any reference to a section shall refer to a section of the Plan unless specified otherwise. 10.5 Gender and Number. Use of any gender in the Plan will be deemed to include all genders when appropriate, and use of the singular number will be deemed to include the plural when appropriate, and vice versa in each instance. 10.6 Assignment of Benefits. The right of a Participant or Beneficiary to receive payments under the Plan may not be anticipated, alienated, sold, assigned, transferred, pledged, encumbered, attached or garnished by creditors of such Participant or Beneficiary, except by will or by the laws of descent and distribution and then only to the extent permitted under the terms of the Plan. 10.7 Legally Incompetent. The Plan Administrator, in its sole discretion, may direct that payment be made to an incompetent or disabled person, for whatever reason, to the guardian of such person or to the person having custody of such person, without further liability on the part of a Participating Company for the amount of such payment to the person on whose account such payment is made. 10.8 Entire Document. This Plan document sets forth the entire Plan and all rights and limits. Except for a formal amendment hereto, no document shall modify the Plan or create any additional rights or benefits. 10.9 Governing Law. The Plan shall be construed, administered and governed in all respects in accordance with applicable federal law (including ERISA) and, to the extent not preempted by federal law, in accordance with the laws of the State of Georgia. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. EXHIBIT A Participating Companies (as of September 28, 1998) Participating Company Names Effective Date BellSouth Advertising and Publishing Corporation January 1, 1997 BellSouth Applied Technologies, Inc. January 1, 1997 BellSouth BSE, Inc. January 1, 1998 BellSouth Business Systems, Inc. January 1, 1997 BellSouth Cellular Corp. January 1, 1997 BellSouth Cellular National Marketing, Inc. January 1, 1997 BellSouth Communication Systems, Inc. January 1, 1997 BellSouth Corporation January 1, 1997 BellSouth D.C., Inc. January 1, 1997 BellSouth Entertainment, Inc. January 1, 1997 BellSouth Information Systems, Inc. (BIS) January 1, 1997 BellSouth Intellectual Property Management Corporation January 1, 1999 BellSouth International, Inc. January 1, 1997 BellSouth International Long Distance Services January 1, 1999 BellSouth International Wireless Services, Inc. January 1, 1999 BellSouth Long Distance, Inc. January 1, 1997 BellSouth MNS, Inc. January 1, 1999 BellSouth Mobile Data Services, Inc. January 1, 1997 BellSouth.net Inc. January 1, 1997 BellSouth Personal Communications, Inc. January 1, 1997 BellSouth Public Communications, Inc. January 1, 1998 BellSouth Resources, Inc. January 1, 1997 BellSouth Telecommunications, Inc. January 1, 1997 Honolulu Cellular Telephone Company January 1, 1999 Intelligent Media Ventures, Inc. January 1, 1997 L. M. Berry and Company January 1, 1997 Stevens Graphics, Inc. January 1, 1997 Sunlink Corporation January 1, 1997 Westel-Indianapolis Company January 1, 1998 EX-11 5 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 BellSouth Corporation Computation of Earnings Per Share For the Three Month Periods Ended March 31, 1999 1998 Basic Earnings Per Common Share: Net Income $ 615 $ 892 Weighted Average Shares Outstanding 1,932 1,983 Earnings Per Common Share $ .32 $ .45 EXHIBIT 11 BellSouth Corporation Computation of Earnings Per Share (continued) For the Three Month Periods Ended March 31, 1999 1998 Diluted Earnings Per Common Share: Net Income $ 615 $ 892 Weighted Average Shares Outstanding 1,932 1,983 Incremental shares from assumed exercise of stock options and payment of performance share awards 19 10 Total Shares 1,951 1,993 Earnings Per Common Share $ .32 $ .45 EX-12 6 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 BellSouth Corporation Computation Of Earnings To Fixed Charges (Dollars In Millions) For the Three Months Ended March 31, 1999 1. Earnings (a) Income from continuing operations before deductions for taxes and interest $ 1,400 (b) Portion of rental expense representative of interest factor 22 (c) Equity in losses from less-than-50%-owned investments (accounted for under the equity method of accounting) 328 (d) Excess of earnings over distributions of less-than-50%-owned investments (accounted for under the equity method of accounting) (25) TOTAL $ 1,725 2. Fixed Charges (a) Interest $ 233 (b) Portion of rental expense representative of interest factor 22 TOTAL $ 255 Ratio (1 divided by 2) 6.76 EX-27 7 FDS FOR FIRST QUARTER 1999
5 1,000,000 12-MOS DEC-31-1999 MAR-31-1999 1,779 209 4,696 246 426 7,390 58,944 34,874 38,175 9,925 8,406 0 0 2,020 12,382 38,175 115 5,973 188 2,878 1,488 84 226 1,174 559 615 0 0 0 615 0.32 0.32
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