Form 11-K
Table of Contents


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 11-K

 

x    Annual Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2004

 

or

 

¨    Transition Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934

 

For the transition period from

                           to                            

  Commission file number  
1-8607

 

BellSouth Savings and

Security Plan

 

BellSouth Corporation

1155 Peachtree Street, N.E.

Atlanta, Georgia 30309-3610

 




Table of Contents

BELLSOUTH SAVINGS AND SECURITY PLAN

 

Table of Contents

 

     Page

Report of Independent Registered Public Accounting Firm    2

Statement of Net Assets Available for Benefits
as of December 31, 2004 

   3

Statement of Net Assets Available for Benefits
as of December 31, 2003

   4

Statement of Changes in Net Assets Available for Benefits
for the Year Ended December 31, 2004

   5

Statement of Changes in Net Assets Available for Benefits
for the Year Ended December 31, 2003

   6
Notes to Financial Statements    7
Signature Page    19

Supplemental Schedules*

Schedule of Assets (Held at End of Year)

   20

*  Other supplemental schedules required by Section 2520.103-10 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under ERISA have been omitted because they are not applicable.

Exhibit 23—Consent of Independent Registered Public Accounting Firm    21

 

1


Table of Contents

Report of Independent Registered Public Accounting Firm

 

To the Participants and Administrator of the

BellSouth Savings and Security Plan

 

In our opinion, the accompanying statements of net assets available for benefits and the related statements of changes in net assets available for benefits present fairly, in all material respects, the net assets available for benefits of the BellSouth Savings and Security Plan (the “Plan”) at December 31, 2004 and 2003, and the changes in net assets available for benefits for the years ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets (held at end of year) as of December 31, 2004 is presented for the purpose of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

 

PricewaterhouseCoopers LLP

Atlanta, Georgia

June 27, 2005

 

2


Table of Contents

BELLSOUTH  SAVINGS  AND  SECURITY  PLAN

 

STATEMENT  OF  NET  ASSETS  AVAILABLE FOR  BENEFITS

 

December  31,  2004

(In  Thousands)

 

    Investment
Funds


  Participant
Loans


   Total

      

ASSETS

                  

Share of Master Savings Trust net assets

  $ 2,210,940   $ —      $ 2,210,940
   

 

  

Total Investments

    2,210,940     —        2,210,940

Participant loans receivable

    —       31,452      31,452

Contributions receivable

    4,925     —        4,925

Other receivables—net

    1,469     1,241      2,710
   

 

  

Total Assets

    2,217,334     32,693      2,250,027
   

 

  

LIABILITIES

                  

Distributions payable

    723     —        723

Other payables—net

    7,815     —        7,815
   

 

  

Total Liabilities

    8,538     —        8,538
   

 

  

Net Assets Available for Benefits

  $ 2,208,796   $ 32,693    $ 2,241,489
   

 

  

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BELLSOUTH  SAVINGS  AND  SECURITY  PLAN

 

STATEMENT  OF  NET  ASSETS  AVAILABLE FOR  BENEFITS

 

December  31,  2003

(In  Thousands)

 

    Investment
Funds


  Participant
Loans


   Employee
Stock
Ownership
Plan


   Total

       Allocated

  

ASSETS

                         

Share of Master Savings Trust net assets

  $ 1,764,772   $ —      $ —      $ 1,764,772

Investment in BellSouth Savings and Security Employee Stock Ownership Plan Trust:

                         

Shares of BellSouth common stock allocated to participants

    —       —        468,907      468,907

Temporary cash investments

    —       —        757      757
   

 

  

  

Total Investments

    1,764,772     —        469,664      2,234,436

Participant loans receivable

    —       31,137      —        31,137

Contributions receivable

    2,855     —        —        2,855

Other receivables—net

    1,685     1,302      —        2,987
   

 

  

  

Total Assets

    1,769,312     32,439      469,664      2,271,415
   

 

  

  

LIABILITIES

                         

Distributions payable

    578     —        33      611

Other payables—net

    7,712     —        394      8,106
   

 

  

  

Total Liabilities

    8,290     —        427      8,717
   

 

  

  

Net Assets Available for Benefits

  $ 1,761,022   $ 32,439    $ 469,237    $ 2,262,698
   

 

  

  

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BELLSOUTH  SAVINGS  AND  SECURITY  PLAN

 

STATEMENT  OF  CHANGES  IN  NET  ASSETS  AVAILABLE  FOR  BENEFITS

 

Year  Ended  December  31,  2004

(In  Thousands)

 

     Investment
Funds


    Participant
Loans


    Employee Stock
Ownership Plan


    Total

 
       Allocated

   

Net Assets Available for Benefits, December 31, 2003

   $ 1,761,022     $ 32,439     $ 469,237     $ 2,262,698  
    


 


 


 


Employee contributions

     95,770       —         1,100       96,870  

Employer contributions

     37,121       —         —         37,121  

Transfer of participants' balances—net

     385,734       2,835       (424,878 )     (36,309 )
    


 


 


 


Total Contributions, Allocations and Transfers

     518,625       2,835       (423,778 )     97,682  

Share of Master Savings Trust investment activities

     165,653       —         —         165,653  

Net appreciation/(depreciation)
in investments

     —         —         (35,230 )     (35,230 )
    


 


 


 


Total additions

     684,278       2,835       (459,008 )     228,105  
    


 


 


 


Less: Distributions to participants

     (236,504 )     (2,581 )     (10,229 )     (249,314 )
    


 


 


 


Net Assets Available for Benefits, December 31, 2004

   $ 2,208,796     $ 32,693     $ —       $ 2,241,489  
    


 


 


 


 

 

 

The accompanying notes are an integral part of these financial statements

 

 

5


Table of Contents

BELLSOUTH  SAVINGS  AND  SECURITY  PLAN

 

STATEMENT  OF  CHANGES  IN  NET  ASSETS  AVAILABLE  FOR  BENEFITS

 

Year  Ended  December  31,  2003

(In  Thousands)

 

    

Investment
Funds


   

Participant
Loans


    Employee Stock
Ownership Plan


   

Total


 
       Allocated

    Unallocated

   

Net Assets Available for Benefits, December 31, 2002

   $ 1,578,642     $ 34,561     $ 461,201     $ 17,584     $ 2,091,988  
    


 


 


 


 


Employee contributions

     104,668       —         —         —         104,668  

Transfer of participants' balances—net

     47,230       580       (51,112 )     —         (3,302 )

Transfer of dividends to offset expenses

     —         —         —         (187 )     (187 )

Supplemental contributions

     —         —         96       21,665       21,761  

Allocation of shares to participants

     —         —         41,359       (41,359 )     —    

Transfer for loan repayment

     —         —         (4,881 )     4,881       —    
    


 


 


 


 


Total Contributions, Allocations and Transfers

     151,898       580       (14,538 )     (15,000 )     122,940  

Share of Master Savings Trust investment activities

     213,678       —         —         —         213,678  

Net appreciation/(depreciation)
in investments

     —         —         55,194       (453 )     54,741  
    


 


 


 


 


Total additions

     365,576       580       40,656       (15,453 )     391,359  
    


 


 


 


 


Less: Distributions to participants

     (183,196 )     (2,702 )     (32,620 )     —         (218,518 )

        Interest on notes payable

     —         —         —         (2,131 )     (2,131 )
    


 


 


 


 


Net Assets Available for Benefits, December 31, 2003

   $ 1,761,022     $ 32,439     $ 469,237     $ —       $ 2,262,698  
    


 


 


 


 


 

 

 

The accompanying notes are an integral part of these financial statements

 

 

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Table of Contents

BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS

 

(Dollars in Thousands, Except Per-Participant Amounts)

1.     Plan Description

 

General

 

The following description of the BellSouth Savings and Security Plan (the “Plan”) provides only general information. For additional information, participants should refer to the Plan Prospectus/Summary Plan Description, as supplemented (“SPD”). A copy of the SPD can be obtained either online through Benefits at your Fingertips or by calling the BellSouth Participant Service Center at 1-866-697-1006. In addition, copies of the Plan, trust agreement and other related documents which include details of the Plan can be obtained by writing to: Secretary, BellSouth Savings Plan Committee, Room 13C09, 1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610.

 

The Plan was established by BellSouth Corporation (“BellSouth”) to provide a convenient way for non-management employees to save for their retirement on a long-term basis and to acquire an ownership interest in BellSouth. The Plan consists of three parts: one is a profit sharing plan which includes a qualified cash or deferred arrangement and which is intended to qualify as such under Sections 401(a), 401(k) and 401(m) and related sections of the Internal Revenue Code of 1986, as amended (the “Code”); the second part is an Employee Stock Ownership Plan (“ESOP”) which is designed as a stock bonus plan to invest primarily in shares of BellSouth Common Stock and which is intended to qualify under Sections 401(a), 401(m) and 4975(e)(7) and related sections of the Code; and the third part is an employee stock ownership plan which is designed as a stock bonus plan to invest primarily in BellSouth shares held in the BellSouth Stock Fund and which is intended to qualify as such under Code sections 401(a), 401(k), 401(m) and 4975(e)(7) and related sections of the Code. As such, participants invested in the BellSouth Stock Fund may elect to have their quarterly dividends either reinvested in the fund or passed-through and paid to them outside the Plan in cash as taxable income. Effective March 15, 2002, participants in the Plan were able to diversify their past and future company match, previously held in the ESOP Allocated Shares Fund. Effective July 1, 2003, participants having shares in their Allocated ESOP fund were able to elect to have their quarterly dividends either reinvested in the fund or passed-through and paid to them outside the Plan in cash as taxable ordinary income. All regular full-time and part-time employees of participating BellSouth companies who are covered by a collective bargaining agreement and have completed at least one year of service are eligible to participate. The Plan is subject to the Employee Retirement Income Security Act of 1974, as amended. Effective March 31, 2004, the ESOP Allocated Shares were merged into the BellSouth Stock Fund and the quarterly dividend election with respect to the BellSouth Stock Fund was applied to the merged Allocated ESOP shares for dividends payable on or after April 1, 2004. Upon the ESOP allocated shares merger into the BellSouth Stock Fund, the Employee Stock Ownership Plan (“ESOP”) terminated.

 

Effective January 1, 2004, participants’ Basic Contributions receive matching contributions in cash, allocated to investment funds with the same elections used for employee deferrals.

 

Master Trust

 

For investment purposes, substantially all investable assets of the Plan are held in the BellSouth Master Savings Trust (“the Master Savings Trust”). The Master Savings Trust also holds the investable assets of the BellSouth Retirement Savings Plan (“BRSP”).

 

Investment Options

 

At December 31, 2004 and 2003, the Master Savings Trust’s investments were comprised of the following investment vehicles in relation to the Plan: BellSouth Stock Fund, Indexed Stock Fund, Interest Income Fund, Bond Fund, Balanced Fund and the following mutual funds: Fidelity Growth & Income Portfolio, Vanguard Growth Index—Institutional, DFA U.S. Small Cap Value II Fund, T. Rowe Price Mid-Cap Growth, DFA U.S. Large Cap Value II Fund and DFA International Value II Fund.

 

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Table of Contents

BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

1.    Plan Description—(continued)

 

Concentrations of Risk

 

At December 31, 2004 and 2003, the Plan’s assets were significantly concentrated in shares of BellSouth Common Stock, the value of which is subject to fluctuations related to corporate, industry and economic factors.

 

The Plan’s other investment options include a variety of stocks, bonds, fixed income securities, mutual funds and other investment securities. Investment securities subject participants to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for Benefits.

 

Vesting

 

Participant contributions vest immediately. Company matching contributions vest upon a participant’s completion of three years of service. One year of vesting service is earned upon a participant’s completion of 1,000 work hours during any calendar year.

 

Participant Loans

 

Participants may borrow from their accounts a minimum of $1,000 up to the lesser of $50,000 minus the highest outstanding loan principal balance over the previous twelve months or 50 percent of their before-tax account balances as defined by the Plan document and any amounts rolled over to the Plan from other qualified plans. Loan balances are secured by the assets allocated to the participants’ accounts and bear interest at various rates which ranged from 5.00% to 10.5% at December 31, 2004 and 2003. Principal and interest are paid ratably through periodic payroll deductions for active employees and by coupon for nonactive employees.

 

Service Providers

 

State Street Bank & Trust Company serves as the Trustee for the Master Savings Trust. Fidelity Investments, Inc. serves as the recordkeeper and service center for the Plan.

 

2.    Summary of Significant Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

 

With respect to the Statements of Net Assets Available for Benefits for the years presented, the allocated Share of Master Savings Trust Net Assets includes investments at fair value, accrued interest income, accrued dividends, receivables for investments sold, payables for investments purchased and accrued administrative expenses of the Master Savings Trust.

 

With respect to the Statements of Changes in Net Assets Available for Benefits for the years presented, the allocated Share of Master Savings Trust investment activities includes the sum of realized gains, net of realized losses, the net change in unrealized appreciation/(depreciation) of the fair value of the investments, interest income, dividends, investment manager fees and other administrative fees paid by the Master Savings Trust.

 

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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

3.    Contributions

 

Employee contributions to the Plan are recorded based upon authorized basic and supplemental contributions. The maximum basic contribution rate was $65 per week for 2004 and 2003. Participants may contribute up to the IRS limit of their eligible compensation to the Plan on a before-tax basis.

 

As discussed in Section 3 of the Plan document, participants may also rollover amounts into the Plan from other qualified plans.

 

During the 2003 plan year, the employing company made matching contributions to the Employee Stock Ownership Plan (ESOP), in respect of each participant’s authorized basic contribution. In the 2004 plan year, matching contributions were made in cash allocated to the funds invested in by the participant. The rate of the employing company matching contribution remains in effect for a twelve-month period from April 1 through March 31 and may vary by business unit. The employing company makes a matching contribution that is a percentage of the employee’s basic contribution. The ranges of matching contribution rates for the two years ended December 31, 2004 were as follows:

 

     2004

   2003

January-March

   50%    55%

April-December

   64%    50%

 

4.    Plan Expenses

 

Each participant in the Plan is charged a flat annual fee for Plan administrative expenses, including recordkeeping, trustee and other expenses considered reasonable by the Plan administrator. The fee is divided on a pro rata basis among each investment option of the participant. The per-participant fee is $36.00 for 2004 and 2003. Additional fees are charged to individual participants for various services provided by the Plan’s recordkeeper.

 

Investment manager fees are paid by the Master Savings Trust. The Plan’s share of investment manager fees included in allocated share of Trust investment activities in the Statements of Changes in Net Assets Available for Benefits for the years presented, were as follows:

 

     For the Year Ended
December 31,
(in 000’s)


         2004    

       2003    

BellSouth Stock Fund

   $ 142    $ 108

Indexed Stock Fund

     16      13

Interest Income Fund

     167      187

Balanced Fund

     44      31

Bond Fund

     92      143

Allocated ESOP

     11      34
    

  

     $ 472    $ 516
    

  

 

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Table of Contents

BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

4.    Plan Expenses—(continued)

 

 

Mutual funds are subject to mutual fund management fees which reduce the overall return of the respective mutual fund. These fees, expressed as percentages of fund assets, which were assessed against the mutual funds by their respective managers, were as follows:

 

 

     For the Year Ended
December 31,


 
     2004

    2003

 

Vanguard Growth Index-Institutional

   0.08 %   0.10 %

Fidelity Growth & Income Portfolio

   0.70 %   0.73 %

T. Rowe Price Mid-Cap Growth

   0.83 %   0.87 %

DFA U.S. Small Cap Value II Fund

   0.28 %   0.33 %

DFA International Value II Fund

   0.37 %   0.45 %

DFA U.S. Large Cap Value II Fund

   0.21 %   0.26 %

 

5.    Tax Status

 

The Plan was amended and restated effective July 1, 2001 to comply with the provisions of the GUST amendment to ERISA. The following acts are collectively referred to as the GUST amendment: the Retirement Protection Act of 1994, Uniformed Services Employment and Reemployment Rights Act of 1994, Small Business Job Protection Act of 1996, Taxpayer Relief Act of 1997, and the Internal Revenue Service Restructuring and Reform Act of 1998.

 

The Internal Revenue Service has determined and informed BellSouth by a favorable determination letter dated January 17, 2003 that the Plan and related Trust meet the requirements of Section 401(a) of the Code and are exempt from federal income taxes under Section 501(a) of the Code.

 

The federal income tax effects on participants with respect to the Plan are described in the SPD.

 

6.    Termination Priorities

 

BellSouth intends to continue the Plan indefinitely but reserves the right to terminate or amend it. In the event the Plan is terminated and if BellSouth or its subsidiaries sponsor another defined contribution plan, the participants may elect to have their account balances transferred to the other plan. If BellSouth or its subsidiaries do not sponsor such a plan, the participants would receive a lump-sum distribution of their account balances.

 

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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

7.    Interest in BellSouth Master Savings Trust

 

The assets of the Plan are held in the Master Savings Trust and are commingled with the assets of the BellSouth Retirement Savings Plan. The assets of the Master Savings Trust are allocated to the Plan based upon the total of each individual plan participant’s share of the Master Savings Trust’s net assets. The Plan’s allocated share of the total net assets of all investments in the Master Savings Trust was 30.87% at December 31, 2004 and 32.12% at December 31, 2003. The Plan’s allocated shares of the net assets of each fund in the Master Savings Trust at December 31, 2004 and 2003 were as follows:

 

     2004

    2003

 

BellSouth Stock Fund

   44.30 %   46.37 %

Indexed Stock Fund

   14.74 %   14.18 %

Interest Income Fund

   28.49 %   28.70 %

Vanguard Growth Index-Institutional

   31.14 %   30.01 %

Fidelity Growth & Income Portfolio

   29.33 %   28.44 %

Balanced Fund

   24.42 %   22.80 %

Bond Fund

   21.55 %   22.59 %

T. Rowe Price Mid-Cap Growth

   28.92 %   26.98 %

DFA U.S. Small Cap Value II Fund

   28.21 %   26.54 %

DFA International Value II Fund

   27.41 %   25.00 %

DFA U.S. Large Cap Value II Fund

   30.88 %   30.43 %

Other

   40.92 %   35.27 %

 

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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

7.    Interest in BellSouth Master Savings Trust—(continued)

 

The financial position of the Master Savings Trust at December 31, 2004 and 2003 was as follows:

 

Assets:    2004
(in 000’s)


    2003
(in 000’s)


 

Investments at value:

                

BellSouth Stock Fund:

                

BellSouth Common Stock

   $ 2,033,968 #   $ 1,429,358 #

Temporary cash investments

     7,874       2  

Distributable shares

           1,711  

Indexed Stock Fund:

                

Equity Index Fund

     844,700 #     816,154 #

Interest Income Fund:

                

General account investment contracts

           2,049  

Security backed investments

     1,913,683 #     1,863,616 #

Temporary cash investments

     40,195       41,340  

Vanguard Growth Index-Institutional

     213,528       209,713  

Fidelity Growth & Income Portfolio

     245,604       211,001  

Balanced Fund:

                

Equities

     138,100       118,653  

Fixed income securities

     1,499       1,247  

Temporary cash investments

     17,615       13,669  

Variation margin receivable/(payable)

     (55 )     (18 )

Bond Fund:

                

Fixed income securities

     211,055       240,038  

Equities

     1,133        

Temporary cash investments

     15,506       5,314  

T. Rowe Price Mid-Cap Growth

     427,526 #     294,249  

DFA U.S. Small Cap Value II Fund

     532,563 #     331,128  

DFA International Value II Fund

     212,297       79,714  

BrokerageLink Account:

                

Equities

     47,258       44,624  

Registered investment company

     35,629       28,672  

Fixed income securities

     66       168  

Temporary cash investments

     18,546       16,257  

DFA U.S. Large Cap Value II Fund

     213,722       118,822  

Other:

                

Temporary cash investments

     16,908       19,814  

Cash and cash equivalents

     1       4  

Dividends and interest income receivable

     8,977       8,210  

Receivable for investments sold

     2,506       7,651  
    


 


       7,200,404       5,903,160  

 

(Continued)

 

12


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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

7.    Interest in BellSouth Master Savings Trust—(continued)

 

     2004
(in 000’s)


   2003
(in 000’s)


 

Liabilities:

               

Payable for investments purchased

   $ 37,345    $ 25,450  

Other payables

     1,635      2,038  
    

  


Trust net assets (excluding ESOP Trusts)

     7,161,424      5,875,672  

Investment in ESOP Trusts:

               

BellSouth Common Stock allocated to participants

          1,043,840 #

Distributable shares

          1,131  

BellSouth Common Stock held for future allocation

          34,558  

Temporary cash investments

          957  
    

  


Trust net assets (including ESOP Trusts)

     7,161,424      6,956,158  
    

  


Total

   $ 7,161,424    $ 6,956,158  
    

  


Investments at cost

   $ 6,518,766    $ 6,470,147  
    

  



#   Represents an individual investment which is 5% or more of the Net Assets of the Master Savings Trust.

 

During 2003, distributions from the BellSouth Stock Fund and the BellSouth Management Savings and ESOP Trust and the BellSouth Savings and Security ESOP Trust (the ESOP Trusts) that were payable in shares of BellSouth Common Stock were separated from the “Shares of BellSouth Common Stock” and “Shares of BellSouth Common Stock allocated to participants” lines and reflected as “Distributable Shares.”

 

Valuation of Investments

 

Investment securities, other than debt securities, listed on either a national or foreign securities exchange or traded in the over-the-counter National Market System are generally valued each business day at the official closing price (typically the last reported sale price) on the exchange on which the security is primarily traded. If there are no current day sales, the securities are valued at their last quoted bid price. Other securities traded over-the-counter and not part of the National Market System arc valued at their last quoted bid price. Debt securities (other than certain short-term obligations) are valued each business day by an independent pricing service or broker approved by the Trustee. Master Trust investments in any investment companies, unit investment trusts or similar investment funds are valued daily at their closing net asset values (or unit value) per share. Any other securities for which market quotations are not readily available are valued at their fair value as determined in good faith by the Trustee. There are inherent limitations in any estimation technique and the amounts realized in a subsequent sale may differ from the amounts recorded and such differences may be material. Short term debt securities are valued at market value.

 

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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

7.    Interest in BellSouth Master Savings Trust—(continued)

 

The Master Savings Trust offers investment options to the participants through various managed accounts which are valued on a unitized basis, based on the underlying assets of each account. The managed accounts include the Interest Income Fund, the Balanced Fund, the Indexed Stock Fund and the Bond Fund.

 

Interest Income Fund

 

Assets in the Interest Income Fund include derivative financial instruments and temporary cash investments. The most significant of the derivatives, guaranteed investment contracts (“GICs”) including synthetic GIC’s, are used to offer a fixed interest rate of return over time, in which the principal and interest components can be accessed at book value. Synthetic GIC’s are actively managed collateralized portfolios which offer increased credit quality over traditional GIC’s.

 

  ·   Temporary Cash Investments—These are short-term money market investments, maturing in less than twelve months, that are necessary to meet daily liquidity needs.

 

  ·   General Account Investment Contracts—These contracts are also referred to as traditional investment contracts. An investment contract is termed “general account” when the assets committed to the contract are commingled with other general assets of the contract issuer. The contract issuer promises to return the invested principal plus a stated rate of interest upon maturity. The quality of the promise is a function of the financial condition of the contract issuer.

 

  ·   Security Backed Investments—These are generic terms which refer to investment contracts other than “traditional” general account investment contracts as defined above. These investments consist of a combination of marketable securities, owned directly by the Plan or as units of a separate account or trust owned by the Plan, and an investment contract that provides liquidity for eligible employee benefits at book value.

 

    Group Trust Investment Contracts—Group Trust refers to the INVESCO Group Trust for Retirement Benefit Plans. The INVESCO Group Trust contains a series of commingled investment funds, available only to INVESCO clients, constructed to provide a stable value portfolio with the beneficial elements of various fixed income management strategies. The Plan’s investment in any one of the various INVESCO Group Trust Funds is unitized and may be “wrapped” by an independent financial institution through the issuance of an investment contract.

 

    Separate Account Investment Contracts—An investment contract is termed “separate account” when the assets committed to the contract are segregated from the general assets of the contract issuer through the use of a specifically identifiable separate account. The separate account may be comprised of investments from one Plan or Trust, or comprised of investments from multiple qualified retirement Plans and Trusts. Though ownership of the assets held in a separate account is retained by the contract issuer, the assets are protected from liabilities arising from the contract issuers’ general operations. The investment performance of a separate account investment contract may be a function of the investment performance of the investments held in the separate account.

 

    Synthetic Investment Contract—The term “synthetic” investment contract is used to describe a variety of investment contracts under which a Plan retains ownership of the invested assets, or owns units of an account or trust which holds the invested assets. A “synthetic” investment contract, also referred to as a “wrap” contract, is negotiated with an independent financial institution. Under the terms of these investment contracts, the contract issuer ensures the Plan’s ability to pay eligible employee benefits at book value. The investment performance of a synthetic investment contract may be a function of the investment performance of the invested assets.

 

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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

7.    Interest in BellSouth Master Savings Trust—(continued)

 

The value of the Interest Income Fund reflected in these financial statements is based upon the principal invested and the interest credited. The fair value of the Interest Income Fund, by investment type, at December 31, 2004 and 2003 was as follows:

 

     December 31,
2004
(in 000’s)


    December 31,
2003
(in 000’s)


 

General account investment contracts

   $ —       $ 2,049  

Security backed investments:

                

Underlying assets

     1,954,898       1,934,804  

Wrapper contracts

     (41,215 )     (71,188 )
    


 


Total contracts

   $ 1,913,683     $ 1,865,665  
    


 


 

The contracts held by the Master Savings Trust in the Interest Income Fund are considered fully benefit-responsive in accordance with AICPA Statement of Position 94-4. The crediting interest rate was 4.51% at December 31, 2004 and 4.21% at December 31, 2003. The average yield was 4.41% in 2004 and 4.33% in 2003. Interest rates are reset on a semi-annual, quarterly or monthly basis to move the current book value of these investments toward the projected future market value over the life of the contract.

 

Balanced Fund

 

Assets in the Balanced Fund include investments in derivatives, consisting of highly liquid exchange traded equity and debt futures are used primarily to rebalance the fixed income/equity allocation of the Trust’s portfolio.

 

A futures contract is an agreement between two parties to buy and sell a financial instrument at a set price on a future date. Generally, upon entering into such a contract, the Master Trust is required to pledge to the broker an amount of cash or securities equal to the minimum “initial margin” requirements of the exchange. Pursuant to the contract, the Master Trust agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as “variation margin” and are recorded by the Master Trust as unrealized appreciation or depreciation. When the contract is closed the Master Trust records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risks arise from the possible inability of counter-parties to meet the terms of their contracts and from movements in currency values. Risks of entering into futures contracts include: (1) the risk that the price of the futures contracts may not move in the same direction as the price of the securities in the various markets; (2) the risk that there will be no liquid secondary market when the Master Trust attempts to enter into a closing position; (3) the risk that the Master Trust will lose an amount in excess of the

initial margin deposit. As of December 31, 2004 and 2003, open futures positions represented less than one percent of total investments. Open futures contracts as of December 31, 2004 and 2003 are as follows:

 

     2004

    2003

 

Description


   Expiration
Month


   Number
of
Contracts


    Unrealized
Appreciation/
(Depreciation)
(in 000’s)


    Expiration
Month


   Number
of
Contracts


    Unrealized
Appreciation/
(Depreciation)
(in 000’s)


 

S&P 500 Index Futures

   03/05    71     $ (37 )   03/04    (52 )   $ (37 )

U.S. Treasury Bonds Futures

   03/05    (49 )     (18 )   03/04    155       19  
               


            


Total

              $ (55 )              $ (18 )
               


            


 

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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

7.    Interest in BellSouth Master Savings Trust—(continued)

 

A United States Treasury Bill security with a market value of $1,499,000 is pledged as collateral for the aforementioned open futures contracts.

 

Indexed Stock Fund

 

Assets in the Indexed Stock Fund include investments in the large cap segment of the U.S. equity market to approximate the risk and return characteristics of the S&P 500 Index.

 

Bond Fund

 

Assets in the Bond Fund include a broad array of U.S. Treasury and U.S. Government agency, corporate and mortgage bonds. In addition, the Bond Fund is party to the following types of investment activities.

 

    Delayed Delivery Transactions—The Bond Fund may purchase or sell securities on a when-issued or delayed delivery basis. These transactions involve a commitment by the Bond Fund to purchase or sell securities for a predetermined price or yield, with payment and delivery taking place beyond the customary settlement period. When delayed delivery purchases are outstanding, the Bond Fund, or one of its sub-advisors, will set aside or earmark internally until the settlement date, liquid assets in an amount sufficient to meet the purchase price. When purchasing a security on a delayed delivery basis, the Bond Fund assumes the rights and risks of ownership, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. The Bond Fund may dispose of or renegotiate a delayed delivery transaction after it is entered into, and may sell when-issued securities before they are delivered, which may result in a capital gain or loss. As of December 31, 2004 and 2003, delayed delivery transactions represented less than one percent of total investments.

 

    Inflation Indexed Bonds—The Bond Fund may purchase inflation-indexed bonds which are fixed-income securities whose principal value is periodically adjusted to the rate of inflation. Over the life of the bond, interest will be paid based on a principal value adjusted for inflation. Any increase in the principal value is considered interest income, even though the Bond Fund will not receive the principal until sold or until maturity.

 

Securities Transactions and Investment Income

 

Security transactions are accounted for on the trade date. Securities purchased or sold on a when-issued or delayed delivery basis, if any, may be settled a month or more after the trade date. Realized gains and losses from security and currency transactions are determined on the basis of average cost. Dividend income is recognized on the ex-dividend date and interest income is recognized on the accrual basis. Corporate actions are recorded on the ex-date. Premiums and discounts on fixed income securities are amortized. Realized gains and losses as well as the current unrealized gains and losses of investments are recorded currently to income.

 

Investment activities of the Master Savings Trust are allocated to the Plan based upon the total of each individual Plan participant’s share of the Master Savings Trust investment activities during the period ended December 31, 2004 and 2003.

 

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BELLSOUTH SAVINGS AND SECURITY PLAN

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(Dollars in Thousands, Except Per-Participant Amounts)

7.    Interest in BellSouth Master Savings Trust—(continued)

 

The Master Savings Trust investment activities for the years ended December 31, 2004 and 2003 were as follows:

 

    

For the Year Ended
December 31,

(in 000’s)


 
     2004

    2003

 

Investment Activities:

                

Dividends on shares of BellSouth Common Stock and mutual funds

   $ 138,101     $ 109,342  

Interest Income Fund income

     82,433       80,253  

Other interest

     13,158       19,319  

Net change in unrealized appreciation/(depreciation) on investments

     175,092       762,799  

Net realized gain/(loss) on investments

     98,047       (48,488 )

Investment manager fees

     (1,643 )     (1,853 )

Other fees

     (4,110 )     (4,785 )
    


 


Net investment activities

   $ 501,078     $ 916,587  
    


 


 

During 2004 and 2003, the Trust’s investments (including gains and losses on investments bought and sold, as well as held during the year) appreciated in value by $175,092,000 and $762,799,000, respectively as follows:

 

    

For the Year Ended
December 31,

(in 000’s)


 
     2004

    2003

 

Common stock

   $ (93,444 )   $ 275,852  

Common collective trust

     75,125       198,452  

Registered investment company

     195,774       290,693  

US government securities

     (1,843 )     (3,362 )

Corporate bonds

     (259 )     1,614  

Mortgages and other

     (261 )     (450 )
    


 


     $ 175,092     $ 762,799  
    


 


 

8.    Commitments and Contingencies

 

In September and October 2002, three substantially identical class action lawsuits were filed in the United States District Court for the Northern District of Georgia against BellSouth, its directors, three of its senior officers, and other individuals, alleging violations of the Employee Retirement Income Security Act (“ERISA”). In January 2004, a fourth ERISA class action lawsuit was filed in the same court. All cases have been consolidated and an Amended Consolidated Complaint was filed on April 2, 2004. The plaintiffs, who seek to represent a putative class of participants and beneficiaries of BellSouth’s 401(k) plans (the “Plans”), allege in the Consolidated Complaint that Bellsouth and the individual defendants breached their fiduciary duties in violation of ERISA, by, among other things, (1) failing to provide accurate information to the Plans’ participants and beneficiaries; (2) failing to ensure that the Plans’ assets were invested properly; (3) failing to monitor the Plans’ fiduciaries; (4) failing to disregard Plan directives that the defendants knew or should have known were imprudent and (5) failing to avoid conflicts of interest by hiring independent fiduciaries to make investment

 

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Table of Contents

decisions. The plaintiffs are seeking an unspecified amount of damages, injunctive relief, attorneys’ fees and costs. Certain underlying factual allegations regarding BellSouth’s advertising and publishing subsidiary and its Latin American operation are substantially similar to the allegations in the putative securities class action captioned In re BellSouth Securities Litigation. At this time, the likely outcome of the cases cannot be predicted, nor can a reasonable estimate of loss, if any, be made.

 

9.    Subsequent Event

 

Effective January 1, 2005, BellSouth implemented a catch-up contribution feature which allowed eligible participants to contribute an additional $4,000 in 2005. This amount increases to $5,000 in 2006 after which it may be adjusted annually for inflation in $500 dollar increments.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the BellSouth Savings and Security Plan has duly caused this annual report to be signed by the undersigned thereunto duly authorized.

 

BellSouth Savings and Security Plan

By: BellSouth Corporation

 

By:    /s/    RAWDON W. MCARTHUR

                                                                                               

          Rawdon W. McArthur

          Chief Investment Officer

 

Date:    June 27, 2005

 

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BELLSOUTH CORPORATION

BELLSOUTH SAVINGS AND SECURITY PLAN

EIN# 58-1533433/PLAN#004

PLAN YEAR ENDING 12/31/2004

SUPPLEMENTAL SCHEDULE H,

LINE 41-SCHEDULE 1

 

BELLSOUTH SAVINGS AND SECURITY PLAN

SCHEDULE OF ASSETS HELD FOR INVESTMENT AT YEAR END

 

(A)    (B)    (C)    (D)    (E)
     Issuer    Description of Investment    Original Cost    Current Value

*

   Participant Loans    5.00% – 5.75%    $                  —    $31,451,964
                   

Total Participant Loans

                                 —    $31,451,964
                   

*   Represents a party in interest to the Plan

 

20