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 September 30, 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 October 31, 1999, 1,882,319,274 common shares were outstanding.
<PAGE>
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 ....................... 14
3. Qualitative and Quantitative Disclosures about Market Risk .. 27
Part II
6. Exhibits and Reports on Form 8-K ............................ 29
<PAGE>
- ------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Operating Revenues:
Wireline communications:
Local service ......................... $2,747 $2,542 $8,113 $7,458
Network access ........................ 1,200 1,147 3,578 3,458
Long distance ......................... 158 180 461 532
Other wireline ........................ 310 267 845 752
Total wireline communications ....... 4,415 4,136 12,997 12,200
Domestic wireless ........................ 815 702 2,355 2,018
International operations ................. 575 514 1,701 1,450
Advertising and publishing ............... 540 481 1,290 1,211
Other .................................... 77 32 200 76
Total Operating Revenues............... 6,422 5,865 18,543 16,955
Operating Expenses:
Operational and support expenses ......... 3,541 3,291 10,153 9,376
Depreciation and amortization ............ 1,170 1,111 3,426 3,228
Total Operating Expenses ............... 4,711 4,402 13,579 12,604
Operating Income ............................ 1,711 1,463 4,964 4,351
Interest Expense ............................ 266 218 737 611
Gain on Sale of Operations .................. 39 -- 55 155
Net Equity in Earnings (Losses) of
Unconsolidated Businesses ................ (26) 42 (235) 89
Other Income, net ........................... 12 31 170 130
Income Before Income Taxes .................. 1,470 1,318 4,217 4,114
Provision for Income Taxes .................. 455 504 1,607 1,590
Net Income ............................. $1,015 $ 814 $2,610 $2,524
Weighted-Average Common Shares
Outstanding:
Basic .................................... 1,885 1,965 1,903 1,975
Diluted .................................. 1,904 1,979 1,921 1,987
Dividends Declared Per Common Share ......... $ .19 $ .18 $ .57 $ .54
Earnings Per Share:
Basic .................................... $ .54 $ .41 $ 1.37 $ 1.28
Diluted .................................. $ .53 $ .41 $ 1.36 $ 1.27
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................... $ 878 $ 3,003
Temporary cash investments .................. 262 184
Accounts receivable, net of
allowance for uncollectibles
of $293 and $251 ................. 4,794 4,629
Material and supplies ....................... 468 431
Other current assets ........................ 539 459
Total Current Assets ...................... 6,941 8,706
Investments and Advances ..................... 4,863 2,861
Property, Plant and Equipment ................ 60,525 57,974
Less: accumulated depreciation ............... 36,005 34,034
Property, Plant and Equipment, net ........ 24,520 23,940
Deferred Charges and Other Assets ............ 1,876 1,028
Intangible Assets, net ....................... 3,719 2,875
Total Assets ................................. $41,919 $39,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year ............... $ 7,308 $3,454
Accounts payable ............................ 2,062 2,219
Other current liabilities ................... 4,244 3,477
Total Current Liabilities ................. 13,614 9,150
Long-Term Debt ............................... 8,786 8,715
Noncurrent Liabilities:
Deferred income taxes ....................... 2,649 2,512
Unamortized investment tax credits .......... 136 167
Other noncurrent liabilities ............... 3,054 2,756
Total Noncurrent Liabilities .............. 5,839 5,435
Shareholders' Equity:
Common stock, $1 par value
(4,400 shares authorized;
1,884 and 1,950
shares outstanding) ....................... 2,020 2,020
Paid-in capital ............................. 6,766 6,766
Retained earnings ........................... 10,982 9,479
Accumulated other comprehensive income ...... (1,057) (64)
Shares held in trust and treasury ........... (4,721) (1,752)
Guarantee of ESOP debt....................... (310) (339)
Total Shareholders' Equity ................ 13,680 16,110
Total Liabilities and Shareholders' Equity ... $41,919 $39,410
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ............................................................................ $2,610 $2,524
Adjustments to net income:
Depreciation and amortization ..................................................... 3,426 3,228
Provision for uncollectibles ..................................................... 260 230
Net equity in losses (earnings) of unconsolidated businesses ...................... 235 (89)
Minority interests in income of subsidiaries ...................................... 85 27
Deferred income taxes and unamortized investment tax credits ...................... 44 39
Gain on sale of operations ........................................................ (55) (155)
Recognition of foreign investment tax credits ..................................... (120) --
Dividends received from unconsolidated businesses.................................. 59 169
Net change in:
Accounts receivable and other current assets ...................................... (548) (153)
Accounts payable and other current liabilities .................................... 710 195
Deferred charges and other assets ................................................. (391) (235)
Other liabilities and deferred credits ............................................ 76 74
Other reconciling items, net .......................................................... 80 42
Net cash provided by operating activities ......................................... 6,471 5,896
Cash Flows from Investing Activities:
Capital expenditures .................................................................. (4,456) (3,744)
Investments in and advances to unconsolidated businesses .............................. (3,751) (566)
Purchases of licenses and other intangible assets ..................................... (296) (575)
Proceeds from sale of operations ...................................................... 215 155
Purchases of short-term investments ................................................... (243) (292)
Proceeds from disposition of short-term investments ................................... 144 98
Proceeds from repayment of loans and advances.......................................... 60 57
Other investing activities, net ....................................................... 73 126
Net cash used for investing activities ............................................ (8,254) (4,741)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt ........................................ 3,451 (127)
Proceeds from long-term debt .......................................................... 508 1,454
Repayments of long-term debt .......................................................... (205) (753)
Dividends paid ........................................................................ (1,091) (1,068)
Purchase of treasury shares ........................................................... (3,032) (888)
Other financing activities, net ....................................................... 27 46
Net cash used for financing activities ............................................ (342) (1,336)
Net Decrease in Cash and Cash Equivalents .............................................. (2,125) (181)
Cash and Cash Equivalents at Beginning of Period ....................................... 3,003 2,570
Cash and Cash Equivalents at End of Period ............................................. $ 878 $ 2,389
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
--------------------- -------------------------------------------------------------------
Number of Shares Amount
--------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accum.
Shares Other Shares Guaran-tee
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 ....................... 2,610 2,610
Other comprehensive income, net of tax:
Foreign currency
translation adjustments ....... (145) (145)
Net unrealized losses
on securities .. (848) (848)
Total comprehensive
income (b) .................... 1,617
Dividends declared ............... (1,079) (1,079)
Share issuances for
employee benefit plans ........ 2 (38) 66 28
Purchase of treasury
stock ........................ (68) (3,032) (3,032)
Purchase of stock by
grantor trust ................ (3) (3)
ESOP activities and
related tax benefit ........... 10 29 39
------ ------- ------- ------ ------ -------- --------- ------- ---------
Balance at September 30, 1999 .... 2,020 (136) $2,020 $6,766 $10,982 $(1,057) $(4,721) $(310) $13,680
</TABLE>
(a)......Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of September 30, 1999, there were
approximately 36 shares held in trust and 100 shares held in treasury.
(b) Total comprehensive income for third quarter 1999 was $136.
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
-------------------------------------------------------------------------------------
Number of Shares Amount
-------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accum.
Shares Other Shares Guaran-tee
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 ................................. 2,524 2,524
Other comprehensive income, net of tax:
Foreign currency translation adjustments . (38) (38)
Total comprehensive income (b).............. 2,486
Dividends declared ......................... (1,064) (1,064)
Share issuances for employee benefit plans . 1 (29) 68 39
Acquisition-related transactions ........... 1 92 33 125
Purchase of treasury stock ................. (14) (888) (888)
Purchase of stock by grantor trust ......... (1) (34) (34)
ESOP activities and related tax benefit .... 6 64 70
----- ----- -------- ------- ------- ------ --------- -------- --------
Balance at September 30, 1998 .............. 1,010 (31) $1,010 $7,777 $8,848 $ (2) $(1,396) $(338) $15,899
</TABLE>
(a)......Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of September 30, 1998, there were
approximately 18 shares held in trust and 13 shares held in treasury.
(b) Total comprehensive income for third quarter 1998 was $807.
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
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 and
previous quarterly reports on Form 10-Q.
Certain amounts within the prior year's information have been reclassified 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 caused an increase in earnings as a
result of the capitalization of costs that had previously been expensed. The
impacts on income before income taxes, net income and earnings per share were as
follows:
Third Quarter Year-to-Date
1999 1999
Income before income taxes ...... $ 123 $ 383
Net income ...................... $ 80 $ 240
Earnings per share .............. $ .04 $ .12
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:
Third Quarter Year-to-Date
1999 1998 1999 1998
Basic common
shares outstanding ... 1,885 1,965 1,903 1,975
Incremental shares
from stock options . 19 14 18 12
Diluted common shares
outstanding ..... 1,904 1,979 1,921 1,987
The earnings amounts used for per-share calculations are the same for both the
basic and diluted methods.
<PAGE>
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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Third Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
Wireline communications
External revenues ............. $4,415 $ 4,136 6.7 $ 12,997 $ 12,200 6.5
Intersegment revenues ......... 66 59 11.9 233 151 54.3
Total revenues .............. $4,481 $ 4,195 6.8 $ 13,230 $ 12,351 7.1
Operating income .............. $1,438 $ 1,145 25.6 $ 4,241 $ 3,547 19.6
Segment net income ............ $ 817 $ 667 22.5 $ 2,399 $ 1,994 20.3
Domestic wireless
External revenues ............. $ 815 $ 702 16.1 $ 2,355 $ 2,018 16.7
Intersegment revenues ......... 5 1 N/M* 12 5 N/M*
Total revenues .............. $ 820 $ 703 16.6 $ 2,367 $ 2,023 17.0
Operating income .............. $ 108 $ 104 3.8 $ 309 $ 289 6.9
Net equity in earnings
(losses) of
unconsolidated businesses .. $ 36 $ 42 (14.3) $ 108 $ 120 (10.0)
Segment net income ............ $ 76 $ 79 (3.8) $ 214 $ 222 (3.6)
International operations
External revenues ............. $ 575 $ 514 11.9 $ 1,701 $ 1,450 17.3
Intersegment revenues ......... 1 -- N/M 1 -- N/M
Total revenues .............. $ 576 $ 514 12.1 $ 1,702 $ 1,450 17.4
Operating income .............. $ 31 $ 42 (26.2) $ 152 $ 158 (3.8)
Net equity in earnings
(losses) of
unconsolidated businesses .. $ (3) $ 2 N/M $ 5 $ (33) N/M
Segment net income (loss) ..... $ 9 $ 5 80.0 $ 39 $ (22) N/M
Advertising and publishing
External revenues ............. $ 540 $ 481 12.3 $ 1,290 $ 1,211 6.5
Intersegment revenues ......... 2 -- N/M 8 -- N/M
Total revenues .............. $ 542 $ 481 12.7 $ 1,298 $ 1,211 7.2
Operating income .............. $ 259 $ 233 11.2 $ 561 $ 527 6.5
Net equity in earnings
(losses) of
unconsolidated businesses .. $ 1 $ -- N/M $ (4) $ -- N/M
Segment net income ............ $ 160 $ 143 11.9 $ 342 $ 331 3.3
</TABLE>
* Not Meaningful
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note D - Segment Information (continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Third Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
Other
External revenues ................$ 77 $ 32 140.6 $ 200 $ 76 163.2
Intersegment revenues ............ 102 58 75.9 264 165 60.0
Total revenues .................$ 179 $ 90 98.9 $ 464 $ 241 92.5
Operating loss ...................$ (72) $ (75) 4.0 $(224) $(215) (4.2)
Net equity in earnings
(losses) of
unconsolidated businesses......$ 3 $ (2) N/M $ 3 $ 2 50.0
Segment net loss .................$ (39) $ (50) 22.0 $(155) $(121) (28.1)
Reconciling items
Intersegment revenues ............$(176) $ (118) (49.2) $ (518) $ (321) (61.4)
Operating income (loss) ..........$ (53) $ 14 N/M $ (75) $ 45 N/M
Net equity in earnings
(losses) of
unconsolidated businesses
(Note G)........................$ (63) $ -- N/M $ (347) $ -- N/M
Segment net income (loss).........$ (8) $ (30) 73.3 $ (229) $ 120 N/M
</TABLE>
Note E - Investment in Qwest
In May 1999, we acquired a 10% equity interest in Qwest Communications
International Inc. through the purchase of 74,000,000 shares of common stock for
a total of $3.5 billion. The investment is accounted for under the cost method
of accounting. The stock purchase agreement included certain restrictions on our
ability to transfer these shares for a two-year period, with provisions for the
early termination of these restrictions under certain circumstances.
As a result of Qwest's proposed merger with US WEST, these transfer restrictions
have terminated. Accordingly, these securities are now classified as
available-for-sale under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that available-for-sale securities be carried at fair value
with changes in market value recorded as a separate component of shareholders'
equity. Unrealized losses at September 30, 1999 were $851 (net of a deferred tax
benefit of $458).
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note F - Marketable Securities
We have investments in marketable securities, primarily common stocks, which are
considered available-for-sale under SFAS 115. These investments have been
included in our balance sheet under the caption Investments and Advances. Under
SFAS 115, available-for-sale securities are required to be carried at their fair
value, with unrealized gains and losses (net of income taxes) recorded in
Accumulated Other Comprehensive Income (Loss) in our statement of changes in
shareholders' equity and comprehensive income. The fair values of our
investments in marketable securities are determined based on market quotations.
The table below shows certain summarized information related to these
investments at September 30, 1999:
Gross Gross
Unrealized Unrealized
Cost gains losses Fair Value
Investment in Qwest $3,500 $ -- $1,309 $2,191
Other investments .. 132 9 -- 141
Total ......... $3,632 $ 9 $1,309 $2,332
Note G - 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 and subsequent fluctuations
in the exchange rate resulted in our Brazilian wireless properties recording net
currency losses related to their net US Dollar-denominated liabilities. Our
share of the foreign currency losses was $75 for the third quarter and $355
year-to-date.
Note H - Issuance of Debt
In August 1999, we issued $517 of 7 3/8% bonds due August 1, 2039. The net
proceeds of $501 from this issuance were used to refinance a portion of the $2.5
billion in commercial paper borrowings associated with the financing of our
investment in Qwest.
Note I - Sublease of Communications Towers
In June 1999, we signed a definitive agreement with Crown Castle International,
Inc. for the sublease of all unused space on approximately 1,850 of our wireless
communications towers in exchange for $610 to be paid in a combination of cash
and Crown common stock. The transaction will occur in several phases that began
in second quarter 1999 and will continue through the remainder of 1999. We will
retain, outside of the leases, a portion of the towers for use in operating our
wireless network. Under the agreement, Crown will manage, maintain and remarket
the remaining space on the towers. We also entered into a five-year,
build-to-suit agreement with Crown covering up to 500 towers.
In a similar transaction, we signed a definitive agreement with Crown to
sublease through a master sublease agreement all unused space on 773 PCS towers
for which we will receive approximately $200. In addition, we have entered into
an exclusive three-year, build-to-suit agreement.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note J - Gain on Sale of Operations
In August 1999 we sold our 100% ownership interest in Honolulu Cellular for
total proceeds of $194. In April 1999, we sold our 100% interest in a wireless
property located in Dothan, Alabama for total proceeds of $21. The pretax gains
on these sales were $39 ($23 after tax) and $16 ($10 after tax), respectively.
In 1997, we sold our 20% interest in ITT World Directories to ITT Corporation.
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 K - Supplemental Cash Flow Information
Year-to-Date
1999 1998
Cash Paid For:
Income taxes .... $ 1,113 $ 1,285
Interest ........ $ 667 $ 572
Note L - 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.
Third Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
Revenues ......... $1,386 $1,042 33.0 $3,826 $2,589 47.8
Operating income .. $ 146 $ 85 71.8 $ 308 $ 118 161.0
Net loss .......... $ (143) $ (18) N/M $ (760) $ (3) N/M
Note M - 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 our position that dial-up calls to
ISPs are not local calls for which terminating compensation is due under the
interconnection agreements.
In February 1999, the 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, however, that it would not interfere with prior state
commissions' decisions regarding this matter. The courts and state regulatory
commissions in BST's operating territory that have considered the matter,
however, have generally ruled that such calls invoke the reciprocal compensation
obligation. We continue to believe that we have a good legal basis for our
position. At September 30, 1999, our exposure related to these disputed claims
was approximately $210, including accrued interest.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Other reciprocal compensation issues
In a related matter, at least one CLEC is claiming terminating compensation of
approximately $140 for service arrangements that we do not believe involves
traffic under BST's interconnection agreement. BST has filed a complaint with
the state regulatory commission asking that agency to declare that BST does not
owe reciprocal compensation for these arrangements. The CLEC has filed a
complaint with the state regulatory commission asking it to order BST to pay the
disputed amounts. Hearings on this matter were held in August 1999 and a
decision is pending. We believe that we have a good legal basis for our position
and, accordingly, no provision has been recorded for this claim in these
financial statements.
Note N - South Carolina Regulatory Matters
Beginning in 1996, BST operated under a price regulation plan approved by the
South Carolina Public Service Commission under existing state laws. In April
1999, however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, BST elected to be regulated under a new state
statute, adopted subsequent to the Commission's approval of the earlier plan.
The new statute allows telephone companies in South Carolina to operate under
price regulation without obtaining approval from the Commission. The election
became effective during August 1999.
The South Carolina Consumer Advocate petitioned the Commission seeking review of
the level of BST's earnings during the 1996-1998 period when it operated under
the subsequently invalidated price regulation plan. The Commission granted BST's
motion to dismiss the petition on November 4, 1999.
Note O - Foreign Investment Tax Credits
The reduction in our effective tax rate during third quarter 1999 was primarily
driven by the recognition of investment tax credits by one of our foreign
subsidiaries. The credits were claimed by the subsidiary but were denied by the
national taxing authority. A tax contingency reserve was established at that
time while the matter was under appeal. In September 1999, we received a
favorable ruling on our appeal leading to the recognition of the benefit.
<PAGE>
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 and
previous quarterly reports on Form 10-Q.
- ------------------------------------------------------------------------------
Consolidated Results of Operations
- ------------------------------------------------------------------------------
Key financial and operating data for third quarter 1999 and 1998, and the
respective year-to-date periods are as follows:
<TABLE>
<CAPTION>
Third Quarter % Year-to-Date %
----------- --------- ----------- -------------
1999 1998 Change 1999 1998 Change
----------- --------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $6,422 $5,865 9.5 $18,543 $ 16,955 9.4
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
Expenses $4,711 $4,402 7.0 $13,579 $ 12,604 7.7
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
EBITDA (a) $2,881 $2,574 11.9 $8,390 $7,579 10.4
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
EBITDA margin 44.9% 43.9% +100bps 45.2% 44.7% +50bps
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
Access line counts (000's):
- ------------------------------------------- --------- ----------
Switched access lines 24,440 23,869 2.4
- ------------------------------------------- --------- ----------
Access line equivalents(b) 18,349 13,470 36.2
- ------------------------------------------- --------- ----------
Total equivalent
access lines 42,789 37,339 14.6
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
Digital and data services
revenues $698 $ 534 30.7 $2,004 $ 1,493 34.2
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
Convenience feature revenues $481 $ 428 12.4 $1,381 $ 1,175 17.5
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
Access minutes of use
(millions) 27,858 26,438 5.4 82,310 77,760 5.9
- ------------------------------------------- --------- ---------- ---------- ------------- ----------
Proportionate wireless
customers (000's):
- ----------------------------------- ------- --------- ----------
Domestic(c).... 5,135 4,423 16.1
- ------------------------------------------- --------- ----------
International(d) 5,163 2,933 76.0
- ------------------------------------------- --------- ----------
</TABLE>
(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. We present EBITDA 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 we believe that EBITDA is an additional meaningful
measure of performance and liquidity. EBITDA does not represent cash flows
for the period, nor is it an alternative to operating income (loss) as an
indicator of operating performance. You should not consider it 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) Represents the approximate number of switched access lines that would be
functionally equal to non-switched, high-capacity digital and data circuits
in service.
(c) During fourth quarter 1998, we reorganized our Los Angeles and
Houston/Galveston cellular partnerships with AT&T. During the third quarter
of 1999, we sold our Honolulu Cellular operations. We have restated 1998
domestic wireless customers to reflect these changes and provide more
meaningful comparative information for existing operations.
(d) 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 more meaningful comparative
information for existing operations.
<PAGE>
- ------------------------------------------------------------------------------
Overview
- ------------------------------------------------------------------------------
Net income and earnings per share for third quarter and year-to-date 1999 and
1998 are as follows (all references to earnings per share are on a diluted
basis):
Third Quarter Year-to-Date
----------------- --------------------
% %
1999 1998 Change 1999 1998 Change
-------- -------- ------- -------- ----------- ---------
As Reported:
- ---------------------- -------- -------- ------- -------- ----------- ---------
Net income ..... $1,015 $ 814 24.7 $ 2,610 $ 2,524 3.4
- ---------------------- -------- -------- ------- -------- ----------- ---------
Earnings per share $ .53 $ .41 29.3 $ 1.36 $ 1.27 7.1
- ---------------------- -------- -------- ------- -------- ----------- ---------
Normalized:
- ---------------------- -------- -------- ------- -------- ----------- ---------
Net income ..... $972 $ 814 19.4 $ 2,847 $ 2,428 17.3
- ---------------------- -------- -------- ------- -------- ----------- ---------
Earnings per share $ .51 $ .41 24.4 $ 1.48 $ 1.22 21.3
- ---------------------- -------- -------- ------- -------- ----------- ---------
On a quarter-over-quarter and year-to-date comparative basis, results reflect
strong revenue growth in the core wireline business driven by digital and data
services revenues and significant increases in our international and domestic
wireless customer bases. Expense growth was driven by increased spending in the
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.
Normalized results for the 1999 periods exclude the impacts of:
* The devaluation of the Brazilian Real. Our share of the foreign currency
losses in our Brazilian wireless properties reduced net income by $75
($0.04 per share) and $355 ($0.18 per share), respectively, during the
quarterly and year-to-date periods (these losses are included in Net
Equity in Earnings (Losses) of Unconsolidated Businesses);
* The recognition of certain foreign investment tax credits generated in
prior years, which increased net income by $95 ($0.05 per share); and
* The gain on sale of our 100% ownership interest in Honolulu Cellular,
which increased net income by $23 ($0.01 per share).
Net income for the 1998 year-to-date period is normalized for the first quarter
1998 gain related to the sale of our investment in ITT World Directories of $96
($0.05 per share).
On January 1, 1999, we adopted a new accounting standard on capitalization of
internal-use software. The period-over-period impact of capitalizing software
costs under the new standard was a benefit of $80 ($0.04 per share) for third
quarter 1999 and a benefit of $240 ($0.12 per share) for year-to-date 1999.
- -------------------------------------------------------------------------------
Results by Segment
- -------------------------------------------------------------------------------
Our reportable segments reflect strategic business units that offer similar
products and services and/or serve similar 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 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 nonrecurring or nonoperational 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.
<PAGE>
- -------------------------------------------------------------------------------
Wireline Communications
- -------------------------------------------------------------------------------
Wireline communications includes local exchange, network access and intraLATA
long distance services to business and residential customers in a nine-state
region located in the southeastern US.
Third Quarter Year-to-Date %
------------------ % --------------------
1999 1998 Change 1999 1998 Change
- ------------------- --------- -------- -------- -------- ----------- ----------
Operating revenues:
Local service $2,747 $2,542 8.1 $8,113 $7,458 8.8
Network access 1,200 1,147 4.6 3,578 3,458 3.5
Long distance 158 180 (12.2) 461 532 (13.3)
Other wireline 310 267 16.1 845 752 12.4
Intersegment
revenues 66 59 11.9 233 151 54.3
- ------------------- --------- -------- -------- -------- ----------- ----------
Total
operating
revenues $4,481 $4,195 6.8 $13,230 $12,351 7.1
- ------------------- --------- -------- -------- -------- ----------- ----------
Operating expenses $3,043 $3,050 (0.2) $ 8,989 $ 8,804 2.1
- ------------------- --------- -------- -------- -------- ----------- ----------
Operating income $1,438 $1,145 25.6 $ 4,241 $ 3,547 19.6
- ------------------- --------- -------- -------- -------- ----------- ----------
Segment net income $ 817 $ 667 22.5 $ 2,399 $ 1,994 20.3
- ------------------- --------- -------- -------- -------- ----------- ----------
- ------------------- --------- -------- -------- -------- ----------- ----------
EBITDA $2,306 $1,992 15.8 $ 6,792 $ 6,056 12.2
- ------------------- --------- -------- -------- -------- ----------- ----------
EBITDA margin 51.5% 47.5% +400bps 51.3% 49.0% +230bps
- ------------------- --------- -------- -------- -------- ----------- ----------
Operating Revenues
Local service
The $205 and $655 increases in local service revenues for the 1999
quarter-to-date and year-to-date periods, respectively, are attributable to
growth in switched access lines and strong demand for digital and data services
and convenience features.
We ended the third quarter with over 42 million total equivalent access lines,
an increase of 14.6% since September 30, 1998. Residential access lines rose
3.4% to 16,889,000, driven by economic growth in our nine-state region as well
as demand for secondary residence lines for home office purposes, Internet
access and children's phones. We added 329,000 secondary residence lines since
September 30, 1998, extending the total to almost 2.5 million lines and
increasing the penetration rate to 17.3%. Business access lines, including both
switched access lines and data circuits, grew 23.6% propelled by expanding
demand for our digital and data services. Switched business access line growth
was flat reflecting 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
$53 (12.4%) quarter-over-quarter and $206 (17.5%) on a year-to-date comparative
basis. We continued to drive growth of convenience feature usage through our
Complete Choice(R) package, a one-price bundled offering of over 20 features.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $48 compared to third quarter 1998 and $139
compared to the first nine months of 1998. Also contributing to the increase in
revenues for the quarter and year-to-date periods were net rate impacts of $54
and $115, respectively. The rate impacts were primarily attributable to sharing
accruals recorded in the prior periods. The growth in local service revenues for
the 1999 periods was partially offset by declines in revenues from our public
payphone subsidiary.
Network access
Network access revenues grew $53 in third quarter and $120 for the first nine
months of 1999 when compared to the same 1998 periods, due largely to higher
demand. Access minutes of use rose 5.4% to 27,858 million in third quarter 1999
from 26,438 million in third quarter 1998. For the year-to-date period, access
minutes of use grew 5.9% from 77,760 in 1998 to 82,310 in 1999. 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
February 1999 introduction of 1+ dialing parity for intraLATA long distance
calls in all states in our wireline territory is also contributing to growth in
minutes.
<PAGE>
The growth rate in total minutes of use continues to be negatively impacted by
the trend of business customers migrating from traditional switched circuits to
higher capacity dedicated circuits which are fixed-charge based rather than
per-minute-of-use based. Revenues from these dedicated circuit services grew
approximately $35 quarter-over-quarter and $107 year-to-date on a comparative
basis as Internet service providers and high-capacity users increased their use
of our network. The growth rate in switched minutes of use has also been
negatively impacted by competition from CLECs whose traffic completely bypasses
our network.
Volume-related growth was largely offset by net rate impacts that decreased
revenues by $40 compared to third quarter 1998 and by $103 compared to the first
nine months of 1998. Rate reductions related to the FCC's productivity factor
adjustment and access reforms were partially offset by recoveries of local
number portability costs in both 1999 periods.
Long distance
The decrease for both the quarter and year-to-date periods compared to the same
1998 periods is primarily attributable to a decrease in long distance message
volumes (19.6% for the quarter and 16.0% for the year-to-date periods). The
decrease in the year-to-date period also includes the impact of a regulatory
ruling related to compensation we receive from long distance carriers for
interconnection to our public payphones. Partially offsetting these decreases
were increased revenues from the provision of digital and data services during
both 1999 periods 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
customers to choose a competing 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 increase in external revenues is attributable to higher revenues in the 1999
third quarter and year-to-date periods from sales of customer premises
equipment, resale of paging products and services, sales of unbundled network
elements, revenues from our Internet access offering and interconnection
revenues from wireless carriers. At September 30, 1999 we had 626,000
subscribers to our BellSouth.net (sm) service, an increase of 107% compared to
the same 1998 period. The increase in intersegment revenues in the 1999 periods
primarily represents increased business activity with our communications group
companies.
Operating Expenses
Operational and support expenses
Operational and support expenses decreased $28 (1.3)% for third quarter 1999 and
increased $143 (2.3%) for the first nine months of 1999 when compared to the
same periods in 1998. Adjusted for the impact of adopting the new rules on
software capitalization, expenses increased $97 (4.4%) quarter-over-quarter and
$506 (8.0%) on a year-to-date comparative basis.
For the quarter, the increase is attributable to increased costs in the
telephone operations associated with higher business volumes, increased spending
related to Year 2000 remediation and growth in reciprocal compensation expense
offset by lower labor-related costs.
For the year-to-date period, the increase was driven by higher labor costs,
primarily in customer service and network support functions, increased spending
related to Year 2000 remediation, growth in reciprocal compensation expense and
other increased costs in the telephone operations associated with higher
business volumes.
Also contributing to the increases for the quarter and year-to-date periods 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.
<PAGE>
We anticipate making ADSL service available in 30 markets this year, with an
addressable market of approximately 6 million access lines. We are deploying
IFITL in nearly all newly built neighborhoods and also expect to retrofit some
200,000 existing homes in Atlanta and Miami by the end of 1999.
Depreciation and amortization
Depreciation and amortization expense increased $21 (2.5%) for the quarter and
$42 (1.7%) year-to-date. The increase is primarily attributable to amortization
of capitalized internally developed software. While gross depreciable plant
increased by $2,537 (5.1%) since September 30, 1998, 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 US.
Third Quarter Year-to-Date
--------------- % ----------------- %
1999 1998 Change 1999 1998 Change
- ---------------------------- ------ ------ -------- -------- -------- --------
External revenues $ 815 $ 702 16.1 $2,355 $2,018 16.7
- ---------------------------- ------ ------ -------- -------- -------- --------
Intersegment revenues 5 1 N/M 12 5 N/M
- ---------------------------- ------ ------ -------- -------- -------- --------
Total
operating
revenues $ 820 $ 703 16.6 $2,367 $2,023 17.0
- ---------------------------- ------ ------ -------- -------- -------- --------
Operating expenses $ 712 $ 599 18.9 $2,058 $1,734 18.7
- ---------------------------- ------ ------ -------- -------- -------- --------
Operating income $ 108 $ 104 3.8 $309 $289 6.9
- ---------------------------- ------ ------ -------- -------- -------- --------
Net equity in earnings
(losses) of unconsolidated
businesses $36 $ 42 (14.3) $108 $120 (10.0)
- ---------------------------- ------ ------ -------- -------- -------- --------
Segment net income $76 $ 79 (3.8) $214 $222 (3.6)
- ---------------------------- ------ ------ -------- -------- -------- --------
EBITDA $ 253 $ 237 6.8 $735 $672 9.4
- ---------------------------- ------ ------ -------- -------- -------- --------
EBITDA margin 30.9% 33.7% -280bps 31.1% 33.2% -210bps
- ---------------------------- ------ ------ -------- -------- -------- --------
Customers (a) 4,680 4,191 11.7
- ---------------------------- ------ ------ --------
Average monthly revenue
per customer (a) $51 $52 (1.9) $51 $53 (3.8)
- ---------------------------- ------ ------ -------- -------- -------- --------
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
Revenue growth of $117 for the quarter and $344 year-to-date, compared to the
same 1998 periods, in the consolidated domestic wireless business is
attributable to higher airtime, access, and equipment sales revenues driven by
an 11.7% increase in the customer base. Adjusted for the sale of Honolulu
Cellular in August 1999, the customer growth rate was approximately 15%.
Advertising, enhanced volume pricing strategies (including bundled minutes at
lower rates and prepaid calling plans) and competitive incentive programs (such
as discounted wireless handsets) were key drivers of the customer growth.
Revenue growth is also attributable to the initiation of PCS service in 25 new
markets in the southeastern US over the past twelve months. Average monthly
revenue per customer in third quarter 1999 remained flat reflecting increased
usage offset by declines in per-minute rates. The decline in per-minute rates is
due to the increasingly competitive market environment.
We expect competition to intensify in our markets and continue to pressure
pricing. We believe this will further stimulate demand and continue to increase
usage as the overall market is expanded.
Operating Expenses
Operational and support expenses
These expenses increased $101 (21.7%) to $567 for the quarter and $281 (20.8%)
to $1,632 for the first nine months of 1999 compared to the same 1998 periods.
These increases resulted from greater customer acquisition costs primarily
associated with higher customer additions in the 1999 periods compared to 1998.
Average acquisition costs per customer, however, have benefited as we shift to
lower cost, direct sales channels. In our
<PAGE>
continuing effort to migrate our customer base from analog to digital service,
we have moved over 50% of our subscriber base to digital and have increased
digital minutes of use to over 60% of total network usage. Expenses related to
our new PCS markets also contributed to the increase. During 1999, we initiated
service in 25 BTAs in the southeastern US and will continue our build-out and
promotion of these markets throughout the remainder of 1999.
Depreciation and amortization
Depreciation and amortization increased $12 (9.0%) to $145 during third quarter
1999 and $43 (11.2%) to $426 year-to-date compared to the same 1998 periods. The
increase was primarily attributable to higher levels of property, plant and
equipment since September 30, 1998. The increased investment is the result of
the build-out 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
Compared to the same 1998 periods, 1999 equity in earnings (losses) of
unconsolidated domestic wireless businesses decreased $6 for the quarter and $12
for the year-to-date periods. These decreases are 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 that resulted from the reorganization of our ownership interests in
fourth quarter 1998.
- -------------------------------------------------------------------------------
International Operations
- -------------------------------------------------------------------------------
International operations is comprised principally of our investments in cellular
and PCS businesses in nine countries in Latin America as well as in Denmark,
Germany, India and Israel.
Third Quarter Year-to-Date
---------------- % ---------------- %
1999 1998 Change 1999 1998 Change
- ------------------------------ ------- ------ -------- ------- -------- -------
External revenues $575 $514 11.9 $1,701 $1,450 17.3
- ------------------------------ ------- ------ -------- ------- -------- -------
Intersegment revenues 1 -- N/M 1 -- N/M
- ------------------------------ ------- ------ -------- ------- -------- -------
Total operating
revenues $576 $514 12.1 $1,702 $1,450 17.4
- ------------------------------ ------- ------ -------- ------- -------- -------
Operating expenses $545 $472 15.5 $1,550 $1,292 20.0
- ------------------------------ ------- ------ -------- ------- -------- -------
Operating income $31 $42 (26.2) $152 $158 (3.8)
- ------------------------------ ------- ------ -------- ------- -------- -------
Net equity in earnings
(losses) of
unconsolidated businesses $ (3) $ 2 N/M $5 $(33) N/M
- ------------------------------ ------- ------ -------- ------- -------- -------
Segment net income (loss) $ 9 $ 5 80.0 $39 $(22) N/M
- ------------------------------ ------- ------ -------- ------- -------- -------
EBITDA $142 $ 138 2.9 $474 $405 17.0
- ------------------------------ ------- ------ -------- ------- -------- -------
EBITDA margin 24.7% 26.8% -210bps 27.8% 27.9% -10bps
- ------------------------------ ------- ------ -------- ------- -------- -------
Customers (a) 3,777 2,370 59.4
- ------------------------------ ------- ------ --------
Average monthly revenue
per customer (a) $50 $69 (27.5) $55 $71 (22.5)
- ------------------------------ ------- ------ -------- ------- -------- -------
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
<PAGE>
Operating Revenues
Consolidated revenues are from our operations in Venezuela, Argentina, Chile,
Ecuador and Peru and, in the prior year, New Zealand. The increases of $62
quarter-over-quarter and $252 year-to-date on a comparative basis are primarily
due to substantial growth in the customer bases of these operations, which
collectively have grown almost 60% since September 30, 1998. Partially
offsetting the impacts of customer growth is declining monthly revenue per
customer that is driven by continued expansion into lower-usage customer
segments through offerings such as prepaid cellular service as well as
competitive pressures in certain countries. During third quarter, we extended
prepaid cellular products to all nine of the countries we serve in Latin
America. Both the quarter-to-date and year-to-date periods are negatively
impacted by the absence of revenues from BellSouth New Zealand, which was sold
during fourth quarter 1998. Overall weakening of local currencies also impacted
revenue growth on a US Dollar basis.
Operating Expenses
Operational and support expenses
For the 1999 periods, these expenses increased $58 compared to third quarter
1998 and $183 compared to the first nine months of 1998. These increases are
primarily the result of operational and customer acquisition costs associated
with growth in customer levels and expanded operations. Offsetting the increases
were prior period expenses incurred by BellSouth New Zealand.
Depreciation and amortization
Depreciation expense increased $15 quarter-over-quarter and $75 on a
year-to-date comparative basis 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 was
relatively flat quarter-over-quarter but has increased $30 on a year-to-date
comparative basis as a result of growth in intangibles related to our purchase
of additional ownership interests in several Latin American operations early
last year.
Net Equity in Earnings (Losses) of Unconsolidated Businesses
Quarter-over-quarter, net equity in earnings (losses) from our unconsolidated
businesses were relatively flat. The improvement in equity in earnings (losses)
from our unconsolidated international businesses in the 1999 year-to-date period
is due to stronger results from our investments in Germany, Panama and
Nicaragua, all of which experienced substantial growth in their customer bases
compared to the same periods in 1998. Offsetting these improvements were
start-up losses related to our operations in Brazil, which were launched in May
1998. Improvements in the current year-to-date period were also offset by less
favorable results from our business in Denmark due to customer acquisition costs
associated with higher customer additions.
Our operations in Brazil continue to be affected by weakness in the local
economy while uncertainty surrounding government proposed economic reforms have
weakened the local currency in recent months. We expect that our earnings will
continue to be affected by foreign currency gains or losses associated with the
US Dollar-denominated debt issued by our Brazilian businesses.
<PAGE>
- -----------------------------------------------------------------------------
Advertising and Publishing
- -----------------------------------------------------------------------------
Our advertising and publishing segment is comprised of companies that publish,
print, sell advertising in and perform related services concerning alphabetical
and classified telephone directories and electronic product offerings.
Third Quarter Year-to-Date
----------------- % ----------------- %
1999 1998 Change 1999 1998 Change
- ---------------------------------- ------ ------- ------- -------- ---------
External revenues $540 $481 12.3 $1,290 $1,211 6.5
- ---------------------------------- ------ ------- ------- -------- ---------
Intersegment revenues 2 -- N/M 8 -- N/M
- ---------------------------------- ------ ------- ------- -------- ---------
Total operating revenues $542 $481 12.7 $1,298 $1,211 7.2
- ---------------------------------- ------ ------- ------- -------- ---------
Operating expenses $283 $248 14.1 $737 $684 7.7
- ---------------------------------- ------ -------------- -------- ---------
Operating income $259 $233 11.2 $561 $527 6.5
- ---------------------------------- ------ ------- ------- -------- ---------
Net equity in earnings
(losses) of
unconsolidated
businesses $ 1 $-- N/M $ (4) $ -- N/M
- ---------------------------------- ------ ------- ------- -------- --------
Segment net income $160 $143 11.9 $342 $331 3.3
- ---------------------------------- ------ ------- ------- -------- ---------
EBITDA $269 $239 12.6 $584 $545 7.2
- ---------------------------------- ------ ------- ------- -------- ---------
EBITDA margin 49.6% 49.7% -10bps 45.0% 45.0% --
- ---------------------------------- ------ ------- ------- -------- ---------
Operating Results
External revenues increased $59 for third quarter and $79 for year-to-date 1999
when compared to the same 1998 periods. These increases are principally a result
of revenues from our new international investments in directory publishers in
Peru and Brazil. The growth is also attributable to increased pricing and
volumes, offset by the effects of shifts in directory production schedules.
Adjusted for new businesses and book shifts, external revenues would have
increased by approximately 5.5% for the quarter and 3.6% for the year-to-date
period. To a lesser extent, the increased revenues of our electronic media
offerings also contributed.
Operational and support expenses increased $31 for third quarter and $48 for
year-to-date 1999, when compared to the same 1998 periods, due primarily to our
new international directory publishers' increases in advertising and other
marketing related costs. Depreciation and amortization was flat as there were no
significant increases in property, plant and equipment.
Net equity in earnings (losses) of unconsolidated businesses includes the
results of our new investment in a Brazilian directory publisher.
<PAGE>
- -------------------------------------------------------------------------------
Other
- -------------------------------------------------------------------------------
This segment is primarily comprised of our communications group companies --
including new business initiatives such as entertainment (cable and wireless
television), Internet access, wireless data and interLATA long distance. The
stand-alone revenues and expenses of our Internet access marketing company which
are included in this segment 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.
Third Quarter Year-to-Date
--------------- % --------------- %
1999 1998 Change 1999 1998 Change
- ------------------------- ------ ------- -------- -------- --------- --------
- ------------------------- ------ ------- -------- -------- --------- --------
External revenues $77 $32 140.6 $ 200 $ 76 163.2
- ------------------------- ------ ------- -------- -------- --------- --------
Intersegment revenues 102 58 75.9 264 165 60.0
- ------------------------- ------ ------- -------- -------- --------- --------
Total operating revenues $179 $90 98.9 $ 464 $ 241 92.5
- ------------------------- ------ ------- -------- -------- --------- --------
Operating expenses $251 $165 52.1 $ 688 $ 456 50.5
- ------------------------- ------ ------- -------- -------- --------- --------
Operating loss $(72) $(75) 4.0 $(224) $(215) (3.7)
- ------------------------- ------ ------- -------- -------- --------- --------
Net equity in earnings
(losses) of
unconsolidated
businesses $ 3 $(2) N/M $ 3 $ 2 50.0
- ------------------------- ------ ------- -------- -------- --------- --------
Segment net loss $(39) $(50) 22.0 $(155) $ (121) (28.1)
- ------------------------- ------ ------- -------- -------- --------- --------
- ------------------------- ------ ------- -------- -------- --------- --------
EBITDA $(37) $(47) 21.3 $(125) $(147) 15.0
- ------------------------- ------ ------- -------- -------- --------- --------
EBITDA margin (20.7%) (52.2%) N/M (26.9%) (61.4%) N/M
- ------------------------- ------ ------- -------- -------- --------- --------
Operating Results
External revenues were up $45 for third quarter and $124 for year-to-date 1999
when compared to the same 1998 periods. These increases were driven by growth in
revenues from interactive paging services, wireless television offerings and the
resale of interLATA long distance services in markets outside of our wireline
region. Since third quarter 1998, we have rolled out wireless 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
- -------------------------------------------------------------------------------
Third Quarter Year-to-Date
----------------- % ---------------- %
1999 1998 Change 1999 1998 Change
- -------------------------- -------- -------- ------- ------ ------- ---------
Interest Expense $266 $218 22.0 $737 $611 20.6
Gain on Sale of Operations 39 -- -- 55 155 N/M
Net Equity in Earnings
(Losses) of
Unconsolidated
Businesses (26) 42 N/M (235) 89 N/M
Other Income, net 12 31 (61.3) 170 130 30.8
Provision for Income Taxes 455 504 (9.7) 1,607 1,590 1.1
- -------------------------- -------- -------- ------- ------ ------- ---------
<PAGE>
Interest expense
Higher interest expense in 1999 is attributable to higher average debt balances
in the quarter and year-to-date periods relative to the 1998 periods and a
higher proportion of capitalized interest in the 1998 periods. The higher debt
balances in third quarter 1999 are the result of commercial paper borrowings
associated with the financing of our investment in Qwest. We also capitalized a
greater proportion of our interest in 1998 due to our start-up investments in
Brazil. Our average debt balances were as follows:
Third Quarter Year-to-Date
------------------ % ---------------------- %
1999 1998 Change 1999 1998 Change
- ------------------ -------- --------- --------- ---------- ----------- -------
Average short-term
debt balance $ 7,361 $ 2,973 147.6 $ 5,804 $ 3,289 76.5
- ------------------ -------- --------- --------- ---------- ----------- -------
Average long-term
debt balance $ 8,620 $ 8,743 (1.4) $ 8,531 $ 8,050 6.0
- ------------------ -------- --------- --------- ---------- ----------- -------
Total average
debt balance $15,981 $11,716 36.4 $14,335 $11,339 26.4
- ------------------ -------- --------- --------- ---------- ----------- -------
During August 1999, we refinanced $501 of commercial paper with the proceeds
from the issuance of 7 3/8% 40-year bonds. We plan to refinance additional
commercial paper when we believe conditions are favorable.
Gain on sale of operations
During third quarter 1999, we recognized a gain of $39 ($23 or $0.01 per share
after tax) from the sale of Honolulu Cellular. During second quarter 1999, we
recognized a gain of $16 ($10 after tax) from the sale of a wireless property in
Alabama. The 1998 year-to-date period includes a gain of $155 ($96 or $0.05 per
share after tax) from our receipt in first quarter 1998 of additional proceeds
related to the 1997 sale of our interest in ITT World Directories.
Net equity in earnings (losses) of unconsolidated businesses
Earnings from our unconsolidated businesses decreased $68 in the third quarter
and $324 in the year-to-date period when compared with the same 1998 periods.
The decreases were driven by foreign exchange losses of $75 and $355,
respectively, related to our Brazilian properties (see Note G to the
consolidated financial statements for further discussion of this matter).
Excluding the impact of these foreign exchange losses, quarter-over-quarter and
year-to-date earnings increased $7 and $31, respectively, when compared to the
same 1998 periods. These results are addressed in the discussions 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
decrease of $19 from third quarter 1998 is attributable to higher minority
interest expense related to our less-than-100-percent owned subsidiaries and
decreased interest income due to lower average cash balances. These decreases
were partially offset by miscellaneous nonoperating items.
For the year-to-date period, the increase of $40 over 1998 is attributable to
increases in other nonoperating items in the 1999 period. Partially offsetting
these increases were higher minority interest expense related to our
less-than-100-percent-owned subsidiaries, decreased interest income due to lower
average cash balances and lower net foreign exchange gains in our consolidated
international businesses.
Provision for income taxes
The provision for income taxes decreased $49 quarter-over-quarter and increased
$17 on a year-to-date comparative basis. The effective tax rate for third
quarter 1999 was 31.0% compared to 38.2% in third quarter 1998. The decrease is
due primarily to the recognition of foreign investment tax credits offset by
higher equity losses from unconsolidated businesses driven by foreign exchange
losses recorded at our Brazilian operations during third quarter 1999. Excluding
these items, our effective rate for third quarter 1999 was 36.8%. The effective
rate was further reduced by a change in the mix of income among taxing
jurisdictions.
For the year-to-date period, the effective tax rate was 38.1% compared to 38.6%
in 1998. The effective tax rate was significantly impacted by higher equity in
losses driven by foreign currency losses recorded at our unconsolidated
Brazilian businesses during the first and third quarters of 1999, as well as the
recognition of foreign investment tax credits in third quarter 1999. Excluding
the effect of these items, our effective rate for the 1999 year-to-date period
was 37.6%. The lower effective rate for the year-to-date period is due to a
change in the mix of income among taxing jurisdictions.
<PAGE>
- ------------------------------------------------------------------------------
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. $6,471 $5,896 $575 9.8%
Investing activities. $(8,254) $(4,741) $(3,513) (74.1)%
Financing activities. $(342) $(1,336) $994 74.4%
- --------------------- -------- --------- ------------ ----------
Net cash provided by operating activities
The increase in cash from operations primarily reflects higher EBITDA, partially
offset by an increase in working capital requirements and lower dividends from
our unconsolidated businesses. Operating cash flows for 1999 also include $493
in cash proceeds associated with the closings of our agreements to sublease
wireless communications towers to Crown. Additional closings are scheduled to be
completed throughout the remainder of 1999. These transactions are expected to
generate total cash proceeds in excess of $700.
Net cash used in investing activities
During the first nine months of 1999, we invested $4.5 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 the 1999 year-to-date period are
approximately $432 in costs related to the purchase and development of
internal-use software.
During second quarter 1999, our Argentine wireless communications company won
its bid to acquire additional PCS licenses. It will pay approximately $262 for
the licenses and anticipates investing an additional $600 to build out the areas
covered by these licenses.
During April 1999, we announced a new business agreement with Qwest that
included our purchasing a ten percent stake for $3.5 billion. This transaction
closed during May 1999. We initially funded this purchase by utilizing existing
cash reserves and issuing $2.5 billion in commercial paper, $501 of which we
have refinanced with 7 3/8% 40-year bonds.
Net cash used in financing activities
During the first nine months of 1999, we purchased 66 million shares as part of
a $3 billion repurchase plan announced in December 1998. Combined with 1998
repurchases under a previous plan, we have reduced our number of outstanding
shares by 74 million since September 30, 1998. We completed the December 1998
buyback plan during May 1999.
Our debt to total capitalization ratio was 54.0% at September 30, 1999 compared
to 43.0% at December 31, 1998. The increase is a function of increases in
short-term debt attributable to higher net borrowings of commercial paper and
the reduction in shareholders' equity, driven primarily by the effect of our
stock buyback program.
At November 4, 1999, we had shelf registration statements on file with the SEC
under which $4.7 billion of debt securities could be publicly offered.
<PAGE>
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. Our exposure to interest rate risk increased during
1999 due to the borrowing of $2.5 billion in commercial paper for our investment
in Qwest. We have refinanced $501 with fixed-rate debt and intend to refinance
additional commercial paper when we believe conditions are favorable. 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
FCC order on Unbundled Network Elements
In 1996, the FCC issued an order adopting rules governing interconnection and
related matters. In 1999 the U.S. Supreme Court remanded aspects of the rules to
the FCC for further consideration of the requirements in the Telecommunications
Act of 1996; those requirements specify that access to certain network elements
can be required only when necessary or when the failure to provide access would
impair the ability of the requesting carrier to provide services. On remand from
the Supreme Court, the FCC issued an order on November 5, 1999 adopting a
revised list of network elements that incumbent local exchange carriers (ILECs)
such as ourselves must make available to competitors.
The FCC's list, together with its regulations prohibiting ILECs from separating
currently combined elements, means that ILECs will be required to provide
certain combinations of network elements that competitors may substitute for
certain higher priced ILEC services. This substitution may lead to further
increases in competition for certain local exchange access services. The FCC
determined that it would not apply these new rules to allow the substitution of
certain network elements for special access services, and announced that it will
conduct a further inquiry into the use of network element combinations to
provide special access services.
The FCC's revised list does not, however, require ILECs to make network elements
used to provide advanced data services available to competitors, except in very
limited circumstances. This outcome removes a disincentive to ILEC investment in
these rapidly expanding services.
FCC announcement on universal service
On October 21, 1999 the FCC announced a new universal service mechanism for
non-rural carriers serving high-cost areas to ensure that customers in those
areas receive telephone service at affordable rates. BST expects to receive
support for service to residents in Alabama, Kentucky and Mississippi. Although
the FCC has not yet issued the formal order and thus the details are not known,
we do not believe the net financial effect of the new arrangement will be
material.
Reciprocal compensation. See Note M to the consolidated financial statements.
South Carolina regulatory matters. See Note N 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 US Dollar of the currency of a country where we generate revenues
and earnings may adversely impact our results, such as occurred in Brazil (see
Note G).
Any weakening of the US Dollar against foreign currencies could have an adverse
impact on cash flows if we are obligated to make significant
foreign-currency-denominated capital investments. Where we consider it to be
economically feasible, we attempt to mitigate the effect of foreign currency
fluctuations through the use of foreign currency hedging contracts.
<PAGE>
The impact of a devaluation or depreciating currency on an entity depends on the
residual effect on the local economy and the ability of an entity to raise
prices and/or reduce expenses. Additionally, the economies of most countries in
Latin America have significant economic and trade ties, and therefore an
economic crisis in one country could result in adverse impacts on others. 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, 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:
* Remaining implementation and testing could reveal the need for
additional unplanned remedial efforts and
* Third-party vendors and suppliers could fail to meet their stated
objectives, timetables or cost estimates.
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.
During 1997, we 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.
Our Year 2000 program is divided into six phases: planning; inventory; impact
analysis; conversion; testing; and implementation. Our progress within these
phases is based on the number of inventoried items that have been addressed and
covers those business processes that we consider "mission critical". Mission
critical applications include those that:
* directly affect delivery of primary services to our customers;
* directly affect our revenue recognition and collection; and
* would create noncompliance with any statutes or laws.
The three main areas of focus for our Year 2000 program are 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.
<PAGE>
As of September 1999, we have substantially completed the majority of our Year
2000 conversions, tests and implementations. We have completed all the work on
systems that make up our key business processes, and they have been tested in
our labs in a Year 2000 environment. All of our landline and wireless central
office switches have been remediated, tested and implemented into our production
environment. We have also completed 100% of the upgrades and replacements to the
equipment necessary for E9-1-1 services within our nine-state wireline region.
The applications scheduled to be completed after September 1999 are of low or no
impact to our customers and/or internal business operations and were therefore
specifically targeted for remediation after the more critical applications.
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 third parties.
During third quarter 1999, contingency plans were completed and tested.
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. At September 30, 1999, we have spent approximately $220 in external
costs towards Year 2000 compliance. We estimate the total external costs of our
compliance efforts will be approximately $265 over the life of the project.
Expected completion. We currently anticipate that the remaining applications
will be Year 2000 compliant in fourth quarter 1999. 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 (FASB) 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. During June 1999, the FASB postponed the required adoption date
until January 1, 2001. We plan to adopt SFAS No. 133 on January 1, 2001 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.
<PAGE>
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Cautionary Language Concerning Forward-Looking Statements
- -------------------------------------------------------------------------------
In addition to historical information, management's discussion and analysis
contains forward-looking statements regarding events and financial trends that
may affect our future operating results and financial position. 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:
* a change in economic conditions in domestic or international markets where
we operate or have material investments which would affect demand for our
services;
* the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
* further delay in our entry into the interLATA long distance market;
* higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
* unanticipated higher capital spending from the deployment of new
technologies;
* unsatisfactory results in regulatory actions including access reform,
universal service, terms of interconnection and unbundled network elements
and resale rates; and
* failure to satisfactorily identify and complete Year 2000 software and
hardware revisions by us and third parties.
This list of cautionary statements is not exhaustive. These and other
developments could cause our actual results to differ materially from those
forecast or implied in the forward-looking statements. You are cautioned not to
place undue reliance on these forward-looking statements, which are current only
as of the date of this filing. We 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.
<PAGE>
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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-7 Amendment dated September 13, 1999 to the BellSouth
Personal Retirement Account Pension Plan.
10ee Retirement Agreement dated October 27, 1999 for Jere A. Drummond.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1999.
(b) Reports on Form 8-K:
Date of Event Subject
July 20, 1999 BellSouth 2Q99 Earnings Release
<PAGE>
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)
November 9, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number
10q-7 Amendment dated September 13, 1999 to the BellSouth
Personal Retirement Account Pension Plan.
10ee Retirement Agreement dated October 27, 1999 for Jere A. Drummond.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1999.
AMENDMENT TO THE
BELLSOUTH PERSONAL RETIREMENT ACCOUNT PENSION PLAN
WHEREAS, BellSouth Corporation (the "Company") sponsors the BellSouth
Personal Retirement Account Pension Plan (the "Plan"), which was amended and
restated effective January 1, 1998, and subsequently amended from time to time;
WHEREAS, pursuant to Section 15.01 of the Plan, the BellSouth
Employees' Benefit Claim Review Committee (the "Committee") is authorized to
adopt nonmaterial amendments to the Plan;
WHEREAS, pursuant to Section 16.01 of the Plan, affiliates or
subsidiaries of the Company may adopt the Plan and related trust with the
consent of the Committee or its delegate;
WHEREAS, from time to time consent to the adoption of the Plan and
trust by affiliates and subsidiaries of the Company has been given by the
Company's benefits department with the approval of the Committee;
WHEREAS, the Committee desires to amend the Plan to expressly authorize
the Senior Officer for Human Resources of the Company to consent to the adoption
of the Plan by affiliates and subsidiaries and to memorialize the delegation by
the Senior Officer for Human Resources of the Company of the authority to
consent to such adoptions; and
WHEREAS, the Committee also desires to amend the Plan to revise the
rules regarding buying back into the Plan after a lump sum distribution has been
taken, to provide immediate vesting of account balances with respect to
employees of Honolulu Cellular Telephone Company who are terminating employment
incident to the Partnership Interest Purchase Agreement between BellSouth and
AT&T Wireless Services, and to exclude from future Plan participation L.M. Berry
Telemarketing Representatives (Job Code LLL081).
NOW, THEREFORE, the Committee hereby approves the following amendments
to the Plan:
1.
Amend Section 3 of the Plan by replacing Section 3.08(b)(i) with the
following:
(i) Cash Out or Deemed Cash Out. If the Eligible Employee has
received or is deemed to have received a lump sum
settlement of his entire accrued benefit, the initial
balance of his account shall be zero, except as follows:
(A) If the Eligible Employee is deemed to buy back
into the Plan pursuant to Paragraph 7.06, the
initial balance in his account shall be the
amount in his account at the time of the deemed
distribution, credited with interest from the
date of distribution until the date of
reemployment at the rate of 4 percent per year,
compounded annually, until December 31, 1997 and
thereafter at the Applicable Interest Rate,
compounded annually. If the deemed distribution
occurred with respect to a termination of
employment prior to January 1, 1998, that amount
shall be multiplied by the conversion factor set
forth on Appendix 1.
(B) If the Eligible Employee buys back into the Plan
pursuant to Paragraph 10.05, the initial balance
in his account shall be the amount in his account
at the time of the distribution, credited with
interest from the date of distribution until the
date of reemployment at the Applicable Interest
Rate, compounded annually, and, if the
distribution occurred with respect to a
termination of employment prior to January 1,
1998, multiplied by the conversion factor set
forth on Appendix 1.
2.
Amend Section 6 of the Plan by adding the following final sentence to
Section 6.02(a)(i):
Notwithstanding the foregoing, the benefit accruing to a
Participant after reemployment following a break in service shall be
determined without regard to this subparagraph 6.02(a)(i) unless (A)
the Participant's prior Net Credited Service is credited under the
bridging rules of Section 10.05, or (B) if such Participant received or
was deemed to receive a lump sum settlement of his entire accrued
benefit, such Participant restores his benefit pursuant to Paragraphs
7.06 or 10.05, if eligible.
3.
Amend Section 10 of the Plan by replacing the third paragraph of
Section 10.05 with the following:
Notwithstanding anything above to the contrary, if a
Participant receives a lump sum settlement pursuant to Paragraph 7.06
or Paragraph 7.08, the Participant's Net Credited Service and Vesting
Service Credit after he receives the lump sum settlement shall not
reflect (subject to their restoration as provided below) his Net
Credited Service and Vesting Service Credit prior to the settlement
date. The Participant's Net Credited Service and Vesting Service Credit
shall be restored if he is reemployed in accordance with the terms of a
court order, arbitration award or settlement agreement involving
litigation, arbitration, or other action relating to a prior
termination of employment, if and to the extent such order, award or
agreement requires such restoration; provided, if such Participant has
received a lump sum settlement, such service shall be restored only if,
within the period required under Section 411(a)(7) of the Code or such
longer period as may be specified in such order, award or agreement, he
repays to the Plan the amount distributed plus interest from the date
of distribution until the date of repayment at the lesser of (i) the
rate permitted under Code Section 411(c)(2)(C)(iii)(I), compounded
annually, or (ii) the Applicable Interest Rate for such period,
compounded annually. The Participant's Net Credited Service shall be
restored under the bridging rules in the preceding paragraph if he
receives a lump sum settlement award as a deferred vested pensioner.
4.
Amend Appendix D by substituting the term "Pension Service Credit" for
the term "term of employment" each place it appears in Appendix D.
5.
Amend Appendix D by adding the following final paragraph to the
definition of "Pension Service Credit" in Appendix D:
If a Participant experiences a break in service as defined in
Plan Section 10.05, his Pension Service Credit prior to the break in
service shall be restored pursuant to the bridging rules of Section
10.05 in the same manner as Net Credited Service, except that the last
sentence of the third paragraph of that Section (relating to the
restoration of Net Credited Service for a deferred vested pensioner who
receives a lump sum settlement) shall not apply to the restoration of
Pension Service Credit. Notwithstanding the general bridging rules of
Section 10.05, if a Participant receives a lump sum settlement pursuant
to Paragraph 7.06 or Paragraph 7.08, the Participant's Pension Service
Credit after he receives the lump sum settlement shall not reflect
(subject to restoration as provided below) his Pension Service Credit
prior to the settlement date. Pension Service Credit shall include any
period with respect to which a participant is reemployed in accordance
with the terms of a court order, arbitration award or settlement
agreement involving litigation, arbitration, or other action relating
to a prior termination of employment, if and to the extent such order,
award or agreement requires such restoration; provided, if such
Participant has received a lump sum settlement, his Pension Service
Credit shall be restored only if, within the period required under
Section 411(a)(7) of the Code or such longer term as may be specified
in such order, award or agreement, he repays to the Plan the amount
distributed plus interest as provided in Plan Section 10.05.
6.
Amend Schedule 2 of the Plan for L.M. Berry and Company by:
(A) Adding to Paragraph 1, immediately before the definition of
"Grandfathered Participant", the following:
"Eligible Employee" means (subsequent to December 31,1999) any Employee
described in Section 1.15, other than those L.M. Berry Employees who
are included in Job Code LLL081 (the "Telemarketing Representatives").
(B) Modifying Paragraph 4(c) to provide as follows:
Paragraph 2.02 shall be modified by deleting said paragraph in its
entirety and by substituting therefor the following:
2.02 Telemarketing Representatives. Any Employee who is a Telemarketing
Representative and who is a Participant as of December 31, 1999 shall
cease his active participation in the Plan as of the end of said day.
Also effective as of said date, each such Participant shall become
immediately 100% vested in his account under the Plan. No such
Participant shall again begin active participation in the Plan unless
and until he ceases to be employed as a Telemarketing Representative
and instead becomes employed in a classification included within the
meaning of "Eligible Employee".
(C) Modifying Paragraph 4 by adding, immediately after Paragraph 4(e),
the following:
(e-1)Paragraph 3.01 shall be modified by adding at the end thereof the
following:
Notwithstanding the foregoing terms of this Paragraph 3.01,
effective as of December 31, 1999, the accounts of Employees who are
Telemarketing Representatives shall become frozen as of said date such
that, after said date, only interest credits (as provided in Paragraph
3.04, as amended by this Schedule 2) shall be credited to their
accounts, and no additional basic service credits or any other type of
credits shall be credited thereto.
7.
Amend Section 16 of the Plan by deleting the first sentence of Section
16.01 and substituting therefor the following:
Any Affiliate or Subsidiary may, by action of its board of
directors or comparable governing body and with the consent of the
Senior Officer for Human Resources of BellSouth (or his delegate(s)),
adopt this Plan and the Pension Fund as a Participating Company on
behalf of such Affiliate or Subsidiary, or one or more divisions or
subdivisions thereof.
8.
Amend Section 16 of the Plan by deleting the first sentence of the
second paragraph of Section 16.01 and substituting therefor the following:
Such Participating Company may elect to modify the terms of
the Plan as such terms apply to the Participating Company and its
employees with the consent of the Senior Officer for Human Resources of
BellSouth (or his delegate(s)), and to the extent the terms of the Plan
are so modified, such modifications (a) shall be set out on Schedule 2
and (b) shall control as to such Participating Company.
9.
Amend Section 16 of the Plan by adding a new Section 16.04, as follows:
16.04 Actions by Claim Review Committee. For purposes of this
Section 16, the Claim Review Committee shall be deemed (i) to have
delegated to the BellSouth benefits department the authority to consent
to (A) Plan adoptions (including the modification of any Plan terms
pertinent thereto) by Affiliates, Subsidiaries and one or more
divisions or subdivisions thereof, and (B) Plan withdrawals (including
any restrictions thereon) by such entities and divisions; and (ii) to
have consented to any such adoption or withdrawal, if the BellSouth
benefits department takes any action whatsoever (such as, for example,
listing or removing such entity or division as participating in the
Plan, enrolling such entity's or division's eligible employees in the
Plan, or otherwise administering the Plan as if such entity or division
is participating in or removed from the Plan) to directly or indirectly
indicate the intent to consent to such entity's or division's adoption
of, or withdrawal from the Plan.
10.
Pursuant to Paragraphs 2.03, 15.01 and 16.03 of the Plan,
employees of Honolulu Cellular Telephone Company who participated in
the Plan and who are terminated as employees incident to the
Partnership Interest Purchase Agreement by and among Hawaii Cellular
Corporation, BellSouth Mobile Data, Inc., BellSouth Enterprises, Inc.,
AT&T Wireless Services of Hawaii, Inc., AT&T Wireless Services of
Hawaii LLC, and AT&T Wireless Services, Inc., dated April 8, 1999, will
become vested, if not already vested, in their accounts as of the
closing date of the transaction contemplated by the Partnership
Interest Purchase Agreement.
11.
Any other provision of the Plan not amended herein shall remain in full
force and effect.
The above amendments shall be effective as of September 13, 1999.
IN WITNESS WHEREOF, this Amendment has been executed by the duly
authorized representative of the Committee.
BELLSOUTH EMPLOYEES' BENEFIT
CLAIM REVIEW COMMITTEE
By: /s/ Richard D. Sibbernsen
Richard D. Sibbernsen, Chairman
AGREEMENT
THIS AGREEMENT is made this 27th day of October, 1999, by and between
BellSouth Corporation (the "Company") and Jere A. Drummond (the "Executive");
W I T N E S S E T H:
WHEREAS, the Executive is employed by the Company, or a subsidiary or
affiliate of the Company (each, a "BellSouth Company");
WHEREAS, the Executive and the Company entered into a retirement
agreement on January 6, 1995 (the "Prior Agreement") which requires the
Executive's retirement during the calendar year in which the Executive's
sixtieth (60th) birthday occurs;
WHEREAS, the Executive and the Company now desire to amend and restate
the Prior Agreement in its entirety to, among other things, extend the date of
the Executive's retirement; and
WHEREAS, the Executive now elects to retire under the terms and conditions
set forth in this Agreement;
NOW, THEREFORE, in consideration of the above premises and the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
1. Retirement Date. The Executive shall terminate employment and resign
from each position the Executive holds with the Company and any BellSouth
Company on a date (the "Retirement Date") on or before December 31, 2001. The
Retirement Date shall be such date as is mutually agreed to between the
Executive and the Company; provided, however, that either the Executive or the
Company may unilaterally select the Retirement Date by providing at least thirty
(30), but no more than sixty (60), days' advance notice to the other party of
the Retirement Date so selected.
2. Separation Allowance. As soon as is reasonably practicable after the
Executive's Retirement Date, the Company shall pay to the Executive as a
separation allowance a single lump-sum cash payment equal to the sum of (1)
twice the Executive's Base Salary in effect on the Retirement Date plus (2) the
standard award amount applicable to the Executive under the BellSouth
Corporation Officer Short Term Incentive Award Plan ("STIAP") for the year in
which his Retirement Date occurs, less withholdings, or so much of such sum as
shall not be the subject of a deferral agreement between the parties hereto. For
purposes of this Agreement, "Base Salary" shall refer to the gross annual base
salary payable to the Executive including the amount of any before-tax
contributions made by the Executive from such salary to the BellSouth Retirement
Savings Plan, any other qualified cash or deferred arrangement sponsored by the
Company or a BellSouth Company, or a successor to any such plan, as the case may
be, and the amount of any other deferrals of such salary under any nonqualified
deferred compensation plans maintained by the Company or a BellSouth Company.
3. Short Term Incentive Award. The Executive shall be entitled to an
award under the STIAP based on performance results for the year in which the
Executive's Retirement Date occurs, prorated to the Executive's Retirement Date.
The payment described in this Section 3 shall be subject to all other terms and
conditions of STIAP.
4. Supplemental Executive Retirement Plan. The Executive shall be
entitled to benefits under the BellSouth Corporation Supplemental Executive
Retirement Plan ("SERP") equal to the greater of (a) the benefits to which the
Executive would be entitled under SERP without regard to this Agreement, and (b)
the benefits to which the Executive would be entitled under SERP with the
following adjustments:
(i) the aggregate annual benefit being based on seventy
percent (70%) of Included Earnings (as such term is
defined in SERP) instead of the formula described in
section 4.4(a)(i) of SERP; and
(ii) the benefit so determined being reduced by the
retirement benefit (unreduced for survivor annuity)
payable to the Executive under any tax-qualified
defined benefit pension plan maintained by any prior
employer of the Executive, in addition to the
reductions described in section 4.4(a)(i) of SERP.
5. Stock Options. The Executive shall be entitled to a grant of
non-qualified stock options to purchase shares of Company stock under the
BellSouth Corporation Stock Plan, or its successor (the "Stock Plan"), as of the
day preceding Executive's Retirement Date, equal to the number of such options
granted to the Executive as part of the regular grant most recently preceding
his Retirement Date. The grant described in this Section 5 shall be subject to
all other terms and conditions of the Stock Plan.
6. Financial Counseling. The Executive shall be entitled to benefits
described in the BellSouth Corporation Financial Counseling Plan through his
sixty-seventh (67th) birthday, such benefits to be provided by the Company as if
eligibility therefor extended to such date under the terms of such plan.
Benefits described in this Section 6 shall be subject to all other terms and
conditions of the Financial Counseling Plan.
7. Company Automobile. The Executive may, at his election, purchase
from the Company (or BellSouth Company) any Company-owned automobile provided to
him for its wholesale price determined by the Company as of his Retirement Date,
if the Executive notifies the Company of his intention to do so within thirty
(30) days of his Retirement Date.
8. Death of Executive. If the Executive should die at any time prior to
retirement, the Company shall pay to the Executive's estate in a single lump sum
cash payment, less withholdings, the sum of:
(i) an amount equal to the separation allowance described in
Section 2 of this Agreement (substituting in Section 2 the date of the
Executive's death for the Retirement Date);
(ii) an amount equal to the STIAP award described in Section 3
of this Agreement (to the extent such amount is not otherwise payable
under STIAP); and
(iii) an amount equal to the value of the non-qualified stock
options to purchase shares of Company stock under the Stock Plan
granted to the Executive as part of the regular grant most recently
preceding his date of death. The parties to this Agreement agree that
such value shall be deemed to be the value ascribed to such options by
the Company in determining the amount of such regular option grant to
executives and other managers.
In addition, if the Executive should die at any time prior to
actually retiring on the Retirement Date, the Executive's surviving spouse, if
any, shall be entitled to a survivor annuity under the SERP based on the
enhanced SERP formula described in Section 4 of this Agreement.
9. Discharge and Waiver. Company's obligations under this Agreement,
and Executive's entitlement to the compensation and benefits described herein
(other than amounts payable in the event of the Executive's death as described
in Section 8), are expressly conditioned upon execution by Executive of a waiver
and release and agreement not to sue, in form and substance reasonably
acceptable to Company, pursuant to which Executive fully releases and forever
discharges Company and Affiliated Companies, and any employee, officer,
director, representative, agent, successor or assign of Company and Affiliated
Companies (both in their personal and official capacities), and all persons
acting by, through and under or in concert with any of them, from any and all
claims, demands, causes of action, remedies, obligations, costs and expenses of
whatever nature, whether under the common law, state law, federal law (including
but not limited to the Age Discrimination in Employment Act of 1967) or
otherwise, through the Retirement Date, including those arising from or in
connection with the terms and conditions of employment with the Company and any
BellSouth Company or the termination of that employment. This paragraph is not
intended to affect benefits to which Executive may be entitled under the
Consolidated Omnibus Budget Reconciliation Act (COBRA) or any pension or benefit
plan in which Executive is a participant.
10. Nondisparagement. Executive agrees that now and in the future he
will protect and preserve the Company's and Affiliated Companies' goodwill and
reputation in the industry and in the community, with customers and the public,
and will refrain from public or private comments or actions which are derogatory
or which may tend to disparage Company's or Affiliated Companies' reputations or
otherwise tend to injure Company or Affiliated Companies in their business or
public affairs.
11. Employment Rights. The Company and the Executive understand that
this Agreement constitutes a binding commitment to provide the benefits set
forth herein upon the Executive's retirement or death. The Agreement does not
constitute, and should not be construed as an employment contract. The Executive
acknowledges that he is and shall remain an employee at will who may be
terminated by the Company or a BellSouth Company for any reason and at any time
prior to the Retirement Date. Similarly, the Company acknowledges that the
Executive may resign for any reason at any time prior to his Retirement Date.
The Executive understands that he, like any other employee, has been and will be
subject to the Company's performance standards as well as its disciplinary
rules.
12. Severability. In the event one or more of the provisions of this
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any respect, the same shall not affect any other provisions of this
Agreement, but this Agreement shall be construed as if such invalid or illegal
or unenforceable provisions had never been contained herein.
13. Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto relating to the subject matter hereof. No amendment or
modification of this Agreement shall be valid or binding upon the parties unless
made in writing and signed by the parties hereto.
14. Responsibility; Binding Effect. The Company shall be responsible
for all payments and benefits described in this Agreement; provided that, if at
the Executive's Retirement Date, the Executive is not employed by the Company
but is employed by a BellSouth Company, such BellSouth Company shall be
responsible for all payments and benefits described in this Agreement and
thereafter all references in this Agreement to the "Company" shall be deemed to
be references to such BellSouth Company. This Agreement shall be binding upon
the parties hereto and their respective heirs, representatives, successors,
transferees and assigns.
15. Governing Law; Consultation with Counsel. This Agreement shall be
construed under and governed by the laws of the State of Georgia. Executive has
been advised to consult with an attorney, acknowledges having had ample
opportunity to do so and fully understands the binding effect of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
EXECUTIVE: COMPANY:
/s/ Jere A. Drummond By: /s/ F.D. Ackerman
Signature Signature
Chairman of the Board, President
Jere A. Drummond and Chief Executive Officer
Name Title
EXHIBIT 11
BellSouth Corporation
Computation of Earnings Per Share
For the Three Month Period Ended
September 30,
1999 1998
Basic Earnings Per Common Share:
Net Income $ 1,015 $ 814
Weighted average shares
Outstanding 1,885 1,965
Earnings Per Common Share $ .54 $ .41
For the Nine Month Period Ended
September 30,
1999 1998
Basic Earnings Per Common Share:
Net Income $ 2,610 $ 2,524
Weighted average shares
Outstanding 1,903 1,975
Earnings Per Common Share $ 1.37 $ 1.28
<PAGE>
EXHIBIT 11
BellSouth Corporation
Computation of Earnings Per Share (continued)
For the Three Month Period Ended
September 30,
1999 1998
Diluted Earnings Per Common Share:
Net Income $ 1,015 $ 814
Weighted average shares
Outstanding 1,885 1,965
Incremental shares from
Assumed exercise of
stock options and payment of
performance share awards 19 14
Total Shares 1,904 1,979
Earnings Per Common Share $ .53 $ .41
For the Nine Month Period Ended
September 30,
1999 1998
Diluted Earnings Per Common Share:
Net Income $ 2,610 $ 2,524
Weighted average shares
Outstanding 1,903 1,975
Incremental shares from
Assumed exercise of
stock options and payment of
performance share awards 18 12
Total Shares 1,921 1,987
Earnings Per Common Share $ 1.36 $ 1.27
EXHIBIT 12
BellSouth Corporation
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Nine Months
Ended September 30,
1999
1. Earnings
(a) Income from continuing
operations before deductions
for taxes and interest $ 4,954
(b) Portion of rental expense
representative of interest
factor 72
(c) Equity in losses from less-
than-50%-owned investments
(accounted for under the
equity method of accounting) 420
(d) Excess of earnings over distributions
of less-than-50%-owned investments
(accounted for under the equity method
of accounting) (56)
TOTAL $ 5,390
2. Fixed Charges
(a) Interest $ 761
(b) Portion of rental
expense representative
of interest factor 72
TOTAL $ 833
Ratio (1 divided by 2) 6.47
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 878
<SECURITIES> 262
<RECEIVABLES> 5,087
<ALLOWANCES> 293
<INVENTORY> 468
<CURRENT-ASSETS> 6,941
<PP&E> 60,525
<DEPRECIATION> 36,005
<TOTAL-ASSETS> 41,919
<CURRENT-LIABILITIES> 13,614
<BONDS> 8,786
0
0
<COMMON> 2,020
<OTHER-SE> 11,660
<TOTAL-LIABILITY-AND-EQUITY> 41,919
<SALES> 478
<TOTAL-REVENUES> 18,543
<CGS> 601
<TOTAL-COSTS> 9,170
<OTHER-EXPENSES> 4,409
<LOSS-PROVISION> 260
<INTEREST-EXPENSE> 737
<INCOME-PRETAX> 4,217
<INCOME-TAX> 1,607
<INCOME-CONTINUING> 2,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,610
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.36
</TABLE>
