SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1999, 1,885,383,506 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 ...................... 13
3. Qualitative and Quantitative Disclosures about Market Risk . 25
Part II
6. Exhibits and Reports on Form 8-K ........................... 27
<PAGE>
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating Revenues:
Wireline communications:
Local service ...................... $2,712 $2,502 $5,366 $4,916
Network access ..................... 1,187 1,160 2,378 2,311
Long distance ...................... 153 177 303 352
Other wireline ..................... 255 249 535 485
Total wireline communications .... 4,307 4,088 8,582 8,064
Domestic wireless ..................... 796 672 1,540 1,316
International operations .............. 565 484 1,126 936
Advertising and publishing ............ 407 394 750 730
Other ................................. 73 26 123 44
Total Operating Revenues............ 6,148 5,664 12,121 11,090
Operating Expenses:
Operational and support expenses ...... 3,359 3,156 6,612 6,085
Depreciation and amortization ......... 1,143 1,074 2,256 2,117
Total Operating Expenses ............ 4,502 4,230 8,868 8,202
Operating Income ......................... 1,646 1,434 3,253 2,888
Interest Expense ......................... 245 203 471 393
Gain on Sale of Operations ............... 16 -- 16 155
Net Equity in Earnings (Losses) of
Unconsolidated Businesses ............. 57 36 (209) 47
Other Income, net ........................ 99 82 158 99
Income Before Income Taxes ............... 1,573 1,349 2,747 2,796
Provision for Income Taxes ............... 593 531 1,152 1,086
Net Income .......................... $ 980 $ 818 $1,595 $1,710
Weighted-Average Common Shares
Outstanding (Note C):
Basic ................................. 1,891 1,978 1,912 1,980
Diluted ............................... 1,909 1,990 1,930 1,992
Dividends Declared Per Common Share ...... $ .19 $ .18 $ .38 $ .36
Earnings Per Share:
Basic ................................. $ .52 $ .41 $ .83 $ .86
Diluted ............................... $ .51 $ .41 $ .83 $ .86
</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>
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................ $ 573 $ 3,003
Temporary cash investments ............... 345 184
Accounts receivable, net of
allowance for uncollectibles of
$284 and $251 .......................... 4,583 4,629
Material and supplies .................... 476 431
Other current assets ..................... 497 459
Total Current Assets ................... 6,474 8,706
Investments and Advances .................. 6,267 2,861
Property, Plant and Equipment ............. 59,925 57,974
Less: accumulated depreciation ............ 35,609 34,034
Property, Plant and Equipment, net ..... 24,316 23,940
Deferred Charges and Other Assets ......... 1,176 1,028
Intangible Assets, net .................... 3,283 2,875
Total Assets .............................. $41,516 $39,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year ............ $7,693 $3,454
Accounts payable ......................... 2,030 2,219
Other current liabilities ................ 3,916 3,477
Total Current Liabilities .............. 13,639 9,150
Long-Term Debt ............................ 8,391 8,715
Noncurrent Liabilities:
Deferred income taxes .................... 2,662 2,512
Unamortized investment tax credits ....... 147 167
Other noncurrent liabilities ............ 2,723 2,756
Total Noncurrent Liabilities ........... 5,532 5,435
Shareholders' Equity:
Common stock, $1 par value (4,400 shares
authorized; 1,885 and 1,950
shares outstanding) ................... 2,020 2,020
Paid-in capital .......................... 6,766 6,766
Retained earnings ........................ 10,339 9,479
Accumulated other comprehensive income ... (178) (64)
Shares held in trust and treasury ........ (4,687) (1,752)
Guarantee of ESOP debt.................... (306) (339)
Total Shareholders' Equity ............. 13,954 16,110
Total Liabilities and Shareholders' Equity $41,516 $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 Six Months
Ended June 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ............................................................... $1,595 $1,710
Adjustments to net income:
Depreciation and amortization ........................................ 2,256 2,117
Gain on sale of operations ........................................... (16) (155)
Net equity in losses (earnings) of unconsolidated businesses ........ 209 (47)
Provision for uncollectibles ......................................... 165 153
Deferred income taxes and unamortized investment tax credits ......... 116 (7)
Dividends received from unconsolidated businesses..................... 37 109
Net change in:
Accounts receivable and other current assets ......................... (208) 259
Accounts payable and other current liabilities ....................... 332 (240)
Deferred charges and other assets .................................... (279) (216)
Other liabilities and deferred credits ............................... (46) 58
Other reconciling items, net ............................................. (68) (43)
Net cash provided by operating activities ............................ 4,093 3,698
Cash Flows from Investing Activities:
Capital expenditures .....................................................(2,885) (2,480)
Purchases of licenses and other intangible assets ........................ (97) (466)
Proceeds from sale of operations ......................................... 21 155
Proceeds from disposition of short-term investments ...................... 133 21
Purchases of short-term investments ...................................... (314) (98)
Investments in and advances to unconsolidated businesses .................(3,711) (474)
Proceeds from repayment of loans and advances............................. 50 43
Other investing activities, net .......................................... 108 23
Net cash used for investing activities ...............................(6,695) (3,276)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt ........................... 4,049 (379)
Proceeds from long-term debt ............................................. 6 1,453
Repayments of long-term debt ............................................. (193) (737)
Dividends paid ........................................................... (733) (714)
Purchase of treasury shares ..............................................(2,968) (452)
Other financing activities, net .......................................... 11 59
Net cash provided by (used for) financing activities ................. 172 (770)
Net Decrease in Cash and Cash Equivalents .................................(2,430) (348)
Cash and Cash Equivalents at Beginning of Period .......................... 3,003 2,570
Cash and Cash Equivalents at End of Period ................................ $ 573 $ 2,222
</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 Six Months Ended June 30, 1999
Number of Shares Amount
-------------------- --------------------------------------------------------------------------
Accum.
Shares Other Shares Guarantee
Held In Compre- Held In of ESOP
Common Trust and Common Paid-in Retained hensive Trust and Debt
Stock Treasury Stock Capital Earnings Income Treasury Total
(a) (a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1998 ...................... 2,020 (70) $2,020 $6,766 $9,479 $(64) $(1,752) $(339) $16,110
Net income ...................... 1,595 1,595
Other comprehensive income, net of tax:
Foreign currency
translation adjustment ....... (114) (114)
Total comprehensive income (b) .. 1,481
Dividends declared .............. (720) (720)
Share issuances for
employee benefit plans ........ 1 (18) 33 15
Purchase of treasury stock ...... (66) (2,965) (2,965)
Purchase of stock by grantor
trust ................ (3) (3)
ESOP activities and related
tax benefit ........... 3 33 36
----- ---- ------ ------ ------ --- ------ ------ -------
Balance at June 30, 1999 ........ 2,020 (135) $2,020 $6,766 $10,339 $(178) $(4,687) $(306) $13,954
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of June 30, 1999, there were approximately
35.7 shares held in trust and 99.6 shares held in treasury.
(b) Total comprehensive income for second quarter 1999 was $1,024.
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 Six Months Ended June 30, 1998
Number of Shares Amount
--------------------- ------------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1997 ...................... 1,010 (18) $1,010 $7,714 $7,382 $ 36 $(575) $(402) $15,165
Net income ...................... 1,710 1,710
Other comprehensive income, net of tax:
Foreign currency
translation adjustment ....... (31) (31)
Total comprehensive income (b)... 1,679
Dividends declared .............. (712) (712)
Share issuances for employee
benefit plans ........ 1 (23) 56 33
Acquisition-related
transactions .................. 1 92 33 125
Purchase of treasury stock ...... (8) (452) (452)
Purchase of stock by grantor
trust ................ (1) (30) (30)
ESOP activities and related
tax benefit ........... 3 32 35
----- ---- ------- ------ ------ --- ------ ------ -------
Balance at June 30, 1998 ........ 1,010 (25) $1,010 $7,783 $8,383 $ 5 $(968) $(370) $15,843
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of June 30, 1998, there were approximately
17.7 shares held in trust and 6.9 shares held in treasury.
(b) Total comprehensive income for second quarter 1998 was $783.
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 report on Form 10-Q.
Certain amounts have been reclassified within the prior year's information to
conform to the current year's presentation.
Note B - New Accounting Pronouncements
In the first quarter of 1999, we adopted a new accounting standard (SOP 98-1)
related to the capitalization of certain costs for internal-use software
development. Adoption of the new standard 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:
Second Quarter Year-to-Date
1999 1999
Income before income taxes ... $ 152 $ 260
Net income ................... $ 95 $ 160
Earnings per share ........... $0.05 $0.08
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:
Second Quarter Year-to-Date
1999 1998 1999 1998
Basic common shares outstanding ........ 1,891 1,978 1,912 1,980
Incremental shares from stock options .. 18 12 18 12
Diluted common shares outstanding ...... 1,909 1,990 1,930 1,992
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>
<CAPTION>
Second Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Wireline communications
External revenues .................... $4,307 $4,088 5.4 $8,582 $8,064 6.4
Intersegment revenues ................ 119 48 N/M* 167 92 N/M*
Total revenues ..................... $4,426 $4,136 7.0 $8,749 $8,156 7.3
Operating income ..................... $1,390 $1,179 17.9 $2,803 $2,402 16.7
Segment net income ................... $ 781 $ 644 21.3 $1,582 $1,327 19.2
Domestic wireless
External revenues .................... $ 796 $ 672 18.5 $1,540 $1,316 17.0
Intersegment revenues ................ 3 2 N/M 7 4 N/M
Total revenues ..................... $ 799 $ 674 18.5 $1,547 $1,320 17.2
Operating income ..................... $ 114 $ 94 21.3 $ 201 $ 185 8.6
Net equity in earnings (losses) of
unconsolidated businesses.......... $ 41 $ 43 (4.7) $ 72 $ 78 (7.7)
Segment net income ................... $ 78 $ 74 5.4 $ 138 $ 143 (3.5)
International operations
External revenues .................... $ 565 $ 484 16.7 $1,126 $ 936 20.3
Intersegment revenues ................ -- -- -- -- -- --
Total revenues ..................... $ 565 $ 484 16.7 $1,126 $ 936 20.3
Operating income ..................... $ 70 $ 65 7.7 $ 121 $ 116 4.3
Net equity in earnings (losses) of
unconsolidated businesses.......... $ 21 $ (14) N/M $ 8 $ (35) N/M
Segment net income (loss) ............ $ 50 $ (22) N/M $ 30 $ (27) N/M
Advertising and publishing
External revenues .................... $ 407 $ 394 3.3 $ 750 $ 730 2.7
Intersegment revenues ................ 3 (2) N/M 6 -- N/M
Total revenues ..................... $ 410 $ 392 4.6 $ 756 $ 730 3.6
Operating income ..................... $ 162 $ 157 3.2 $ 302 $ 294 2.7
Net equity in earnings (losses) of
unconsolidated businesses.......... $ (4) $ -- N/M $ (5) $ -- N/M
Segment net income ................... $ 98 $ 102 (3.9) $ 182 $ 188 (3.2)
</TABLE>
* Not Meaningful
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note D - Segment Information (continued)
<TABLE>
<CAPTION>
Second Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C>
Other
External revenues .................... $ 73 $ 26 N/M $ 123 $ 44 N/M
Intersegment revenues ................ 92 53 N/M 162 107 N/M
Total revenues ..................... $ 165 $ 79 N/M $ 285 $ 151 88.7
Operating loss ....................... $ (68) $ (76) 10.5 $(152) $(140) (8.6)
Net equity in earnings (losses) of
unconsolidated businesses.......... $ -- $ 7 N/M $ -- $ 4 N/M
Segment net loss ..................... $ (59) $ (31) (90.3) $(116) $ (71) (63.4)
Reconciling items
External revenues .................... $ -- $ -- -- $ -- $ -- --
Intersegment revenues ................ (217) (101) N/M (342) (203) N/M
Total revenues ..................... $ (217) $ (101) N/M $ (342) $ (203) N/M
Operating income ..................... $ (22) $ 15 N/M $(22) $ 31 N/M
Net equity in earnings (losses) of
unconsolidated businesses
(Note E)............................ $ -- $ -- -- $ (284) $ -- N/M
Segment net income (loss)............. $ 32 $ 51 (37.3) $ (221) $ 150 N/M
</TABLE>
Note E - Investment in Qwest
In May 1999, we acquired a 10% equity interest in Qwest Communications
International Inc. (Qwest) 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 includes certain
restrictions on our ability to transfer these shares for a two-year period.
Accordingly, these securities do not currently fall within the scope of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115).
The market value of the investment at June 30, 1999 was $2.45 billion. Based on
an evaluation of the facts and circumstances surrounding the decline in value,
we believe this represents a temporary condition and that the investment is not
impaired. Therefore, no reserve for loss has been recorded.
Note F - Devaluation of Brazilian Currency
We hold equity interests in two wireless communications operations in Brazil.
During January 1999, the government of Brazil allowed its currency to trade
freely against other currencies. As a result, the Brazilian Real experienced a
devaluation against the US Dollar. The devaluation resulted in our Brazilian
wireless properties recording exchange losses related to their net US
Dollar-denominated liabilities. Our share of the foreign exchange rate losses
associated with the devaluation recorded during the first quarter was $280.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note G - Sublease of Communications Towers
In June 1999, we signed a definitive agreement with Crown Castle International,
Inc. (Crown) 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. In addition, we entered into a
five-year, build-to-suit agreement with Crown covering up to 500 towers.
In a similar transaction, we announced in July 1999 a preliminary agreement with
Crown to sublease through a master sublease agreement all unused space on 773
personal communications service (PCS) towers for $317 in cash. In addition, we
have agreed to enter into a new exclusive three-year, build-to-suit agreement.
Note H - Gain on Sale of Operations
In 1997, we sold our 20% interest in ITT World Directories (ITTWD) to ITT
Corporation (ITT). The sale agreement contained provisions that called for
additional sales proceeds to be paid to us in the event that ITT subsequently
resold ITTWD above a certain price. As a result of ITT's subsequent sale of
ITTWD, we received additional proceeds that resulted in a pretax gain of $155
($96 after tax) in the first quarter of 1998.
In April 1999, we sold our 100% interest in a wireless property located in
Dothan, Alabama for total proceeds of $21. The pretax gain on the sale was $16
($10 after tax).
Note I - Supplemental Cash Flow Information
Year-to-Date
1999 1998
Cash Paid For:
Income taxes ..... $ 391 $ 881
Interest ......... $ 436 $ 383
Note J - 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.
Second Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
Revenues ........... $1,229 $ 852 44.2 $2,439 $ 1,567 55.6
Operating income .... $ 129 $ 65 98.5 $ 162 $ 131 23.7
Net income (loss) ... $ 320 $ 22 N/M $ (618) $ 16 N/M
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note K - 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. The courts and state regulatory commissions in BST's
operating territory that have considered the matter to date, however, have ruled
that such calls invoke the reciprocal compensation obligation.
In February 1999, the Federal Communications Commission (FCC) issued a decision
that such ISP traffic does not terminate at the ISP and, therefore, is
interstate in nature, rather than local. The FCC stated further that it would
not interfere with prior state commissions' decisions regarding this matter.
Because previous state regulatory decisions were based upon a view that Internet
access calls are "local" rather than interstate in nature, we have asked those
regulators to revisit their prior interpretations. BST has subsequently received
unfavorable rulings in Florida and Alabama but has appealed these decisions. We
believe that we have a good basis for our position. At June 30, 1999, our
exposure related to these disputed claims was approximately $140, including
accrued interest.
Other reciprocal compensation issues
In a related matter, we uncovered other service arrangements for which at least
one CLEC is claiming terminating compensation of approximately $115 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
hold a hearing regarding this arrangement and to declare that BST does not owe
reciprocal compensation for these minutes of use. The CLEC has filed a complaint
with the state regulatory commission asking it to order BST to pay the amounts
the CLEC claims it is owed. Hearings on this matter are scheduled for August
1999. We believe that we have a good basis for our position and, accordingly, no
provision has been recorded for this claim in these financial statements.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note L - South Carolina Regulatory Matters
Beginning in 1996, BST operated under a price regulation plan approved by the
South Carolina Public Service Commission (SCPSC) under existing state laws. In
April 1999, however, the South Carolina Supreme Court invalidated the SCPSC's
order approving this price regulation plan. In July 1999, BST elected to be
regulated under a new state statute, adopted subsequent to the SCPSC'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
SCPSC. The election will become effective August 13, 1999.
The South Carolina Consumer Advocate has petitioned the SCPSC seeking review of
the level of BST's earnings during the 1996-1998 period when it operated under
the previously invalidated price regulation plan. We have filed a motion seeking
to have that petition dismissed.
During the second quarter of 1999, BST settled several other challenges to its
earnings and rates in South Carolina. Under the terms of the settlement, it has
reduced access charges and other services (principally convenience features) by
an aggregate of $21 on an annual basis and will, as of January 2000, reduce
certain business and residence rates by one dollar per line, per month to remain
in effect for a minimum of five years.
Note M - Subsequent Event
On August 6, 1999, we issued $500 of 7 3/8% bonds due August 1, 2039. The
purpose of this issue was to refinance a portion of the $2.5 billion in
commercial paper borrowings associated with the initial financing of our
investment in Qwest.
<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 report on Form 10-Q.
- -------------------------------------------------------------------------------
Consolidated Results of Operations
- -------------------------------------------------------------------------------
Key financial and operating data for second quarter 1999 and 1998, and the
respective year-to-date periods are as follows:
<TABLE>
<CAPTION>
----------------------- ------------ -- ----------------------- ------------
Second Quarter % Year-to-Date %
----------- ----------- ----------- -----------
1999 1998 Change 1999 1998 Change
----------- ----------- ------------ -- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues. $6,148 $5,664 8.5 $12,121 $ 11,090 9.3
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ------------
Expenses. $4,502 $4,230 6.4 $ 8,868 $8,202 8.1
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ------------
EBITDA...(a) $2,789 $2,508 11.2 $ 5,509 $5,005 10.1
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ------------
EBITDA margin..... 45.4% 44.3% +110bps 45.5% 45.1 +40bps
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ------------
Access line counts (000's):
Switched access lines 24,370 23,660 3.0
Access line equivalents(b) 16,925 12,346 37.1
Total equivalent access lines 41,295 36,006 14.7
- ------------------------------------------------- ----------- ----------- ------------
Digital and data services revenues $ 615 $ 465 32.3 $ 1,170 $ 891 31.3
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ------------
Convenience feature revenues $ 466 $ 390 19.5 $ 900 $ 747 20.5
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ------------
Access minutes of use (millions) 27,627 26,240 5.3 54,452 51,322 6.1
- ----------------------------------------------------- ------- ----------- ------------ -- ----------- ----------- ------------
Proportionate wireless customers (000's):
Domestic(c).... 5,155 4,376 17.8
International(d) 4,475 2,317 93.1
- ------------------------------------------------- ----------- ----------- ------------
</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. We have restated 1998
domestic wireless customers to reflect this reorganization 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 second quarter and year-to-date 1999 and
1998 are as follows (all references to earnings per share are on a diluted
basis):
<TABLE>
<CAPTION>
----------------------- ----------- ----------------------- ------------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
As Reported:
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
Net income ..... $980 $ 818 19.8 $1,595 $ 1,710 (6.7)
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
Earnings per share $ .51 $ .41 24.4 $ .83 $ .86 (3.5)
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
Normalized:
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
Net income ..... $980 $ 818 19.8 $1,875 $ 1,614 16.2
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
Earnings per share $ .51 $ .41 24.4 $ .97 $ .81 19.8
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
</TABLE>
Quarter-over-quarter and on a 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.
Year-to-date 1999 reported results were greatly affected by the impacts of the
devaluation of the Brazilian Real in early January 1999. Our share of the
foreign exchange losses in our Brazilian wireless properties reduced
year-to-date net income by $280 or $.15 per share (included in Net Equity in
Earnings (Losses) of Unconsolidated Businesses). The year-to-date comparison is
also impacted by the first quarter 1998 gain related to the sale of our
investment in ITT World Directories of $96 or $.05 per share.
On January 1, 1999, we adopted a new accounting standard on capitalization of
internal-use software. The quarter-over-quarter impact of capitalizing software
costs under the new standard was a benefit of $95 or $.05 per share for second
quarter 1999 and a benefit of $160 or $.08 per share for year-to-date 1999.
- -------------------------------------------------------------------------------
Results by Segment
- -------------------------------------------------------------------------------
Our reportable segments reflect strategic business units that offer different
products and services and/or serve different customers. We have four reportable
operating segments: (1) Wireline communications; (2) Domestic wireless; (3)
International operations; and (4) Advertising and publishing. We have included
the operations of all other businesses falling below the reporting threshold in
the "Other" segment. We evaluate the performance of each strategic business unit
based on net income, exclusive of charges for use of intellectual property
rights and adjustments for special items that may arise. Intersegment revenues
and expenses are not eliminated. Special items are transactions or events that
are included in reported consolidated results but are excluded from segment
results due to their 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.
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Local service $2,712 $2,502 8.4 $5,366 $4,916 9.2
Network access 1,187 1,160 2.3 2,378 2,311 2.9
Long distance 153 177 (13.6) 303 352 (13.9)
Other wireline:
External 255 249 2.4 535 485 10.3
Intersegment 119 48 N/M 167 92 N/M
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Total operating revenues $4,426 $4,136 7.0 $8,749 $8,156 7.3
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating expenses $3,036 $2,957 2.7 $5,946 $5,754 3.3
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating income $1,390 $1,179 17.9 $2,803 $2,402 16.7
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Segment net income $ 781 $ 644 21.3 $1,582 $1,327 19.2
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA $2,240 $2,015 11.2 $4,486 $4,064 10.4
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA margin 50.6% 48.7% +190bps 51.3% 49.8% +150bps
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
Operating Revenues
Local service
The $210 and $450 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 second quarter with over 41 million total equivalent access lines,
an increase of 14.7% since June 30, 1998. Residential access lines rose 3.7% to
16,782,000, driven by economic growth in our nine-state region as well as demand
for additional residence lines for home office purposes, Internet access and
children's phones. We added 363,000 second lines since June 30, 1998, extending
the total to over 2.4 million lines and increasing the penetration rate to
17.0%. Business access lines, including both switched access lines and data
circuits, grew 24.0% propelled by expanding demand for our digital and data
services.
Revenues from optional convenience features such as custom calling features
(e.g., Caller ID, Call Waiting, Call Return) and MemoryCall(R) service increased
$76 (19.5%) quarter-over-quarter and $153 or 20.5% on a year-to-date comparative
basis. We continued to drive growth of convenience feature usage through our
Complete Choice package, a one-price bundled offering of over 20 features.
Increased penetration of extended local area calling plans also increased
revenues by approximately $48 compared to second quarter 1998 and $92 compared
to the first six months of 1998.
Network access
Network access revenues grew $27 in second quarter and $67 for the first six
months of 1999 when compared to the same 1998 periods, due largely to higher
demand. Access minutes of use rose 5.3% to 27,627 million in second quarter 1999
from 26,240 million in second quarter 1998. For the year-to-date period, access
minutes of use grew 6.1% from 51,322 in 1998 to 54,452 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 has also begun to contribute 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 $38 quarter-over-quarter and $72 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 competitive local exchange carriers
whose traffic completely bypasses our network.
Volume-related growth was largely offset by rate reductions related to the
Federal Communications Commission's productivity factor adjustment and access
reform that decreased revenues by $30 compared to second quarter 1998 and by $63
compared to the first six months of 1998.
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 (16.4% for the quarter- and 14.2% for the year-to-date periods). 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
second quarter and year-to-date periods from sales of customer premises
equipment, sales of unbundled network elements, revenues from our Internet
access offering and interconnection revenues from wireless carriers. We ended
the quarter with over 565,000 subscribers to our BellSouth.net (sm) service, an
increase of 125.1% 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 increased $65 or 3.1% for second quarter 1999
and $171 or 4.2% for the first six 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 $210 (9.9%) quarter-over-quarter and $409
(10.0%) on a year-to-date comparative basis.
Increased labor costs, primarily in customer service and network support
functions, growth in reciprocal compensation expense, increased spending related
to Year 2000 remediation and other increased costs in the telephone operations
associated with higher business volumes were the primary drivers. Also
contributing to the increase were expenses related to new data initiatives,
including Asymmetric Digital Subscriber Line (ADSL) and integrated
fiber-in-the-loop (IFITL), and promotional expenses related to expanding our
Internet customer base.
We anticipate making ADSL service available in 30 markets this year, with an
addressable market of approximately 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.
<PAGE>
Depreciation and amortization
Depreciation and amortization expense was relatively flat compared to the
corresponding prior year periods, increasing $14 or 1.7% for the quarter and $21
or 1.3% year-to-date. While gross depreciable plant increased by $2,690 or 5.5%
since June 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.
<TABLE>
<CAPTION>
- -------------------------------------------------- ------------------------ ----------- -- ------------------------ -----------
Second Quarter % Year-to-Date %
------------------------ ------------------------
1999 1998 Change 1999 1998 Change
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $799 $674 18.5 $1,547 $1,320 17.2
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Operating expenses $685 $580 18.1 $1,346 $1,135 18.6
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Operating income $114 $94 21.3 $201 $185 8.6
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Net equity in earnings (losses) of
unconsolidated businesses $41 $43 (4.7) $72 $78 (7.7)
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Segment net income $78 $74 5.4 $138 $143 (3.5)
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
EBITDA $257 $221 16.3 $482 $435 10.8
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
EBITDA margin 32.2% 32.8% -60bps 31.2% 33.0% -180bps
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Customers (a) 4,724 3,963 19.2
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Average monthly revenue per customer (a) $51 $51 -- $51 $53 (3.8)
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
</TABLE>
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
Revenue growth of $125 for the quarter and $227 year-to-date, compared to the
same 1998 periods, in the consolidated domestic wireless business can be
attributed to a 19.2% increase in the customer base since June 30, 1998.
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.
Average monthly revenue per customer in second 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 $89 or 19.7% to $542 for the quarter and $180 or 20.3%
to $1,065 for the first six months of 1999 compared to the same 1998 periods.
These increases resulted from greater customer acquisition costs 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 continuing effort to migrate our customer
base from analog to digital service, we have moved over 40% of our subscriber
base to digital and have increased digital minutes of use to over 50% of total
network usage. The combination of higher customer additions and digital
conversion negatively impacted the comparison of margins between 1999 and 1998
periods but will enable greater revenue growth and operational efficiency.
<PAGE>
Expenses related to our new PCS markets also contributed to the increase. During
second quarter 1999, we initiated service in several BTAs in Florida and
Mississippi and will continue our build-out of these markets throughout the
remainder of 1999.
Depreciation and amortization
Depreciation and amortization increased $16 or 12.6% to $143 during second
quarter 1999 and $31 or 12.4% to $281 year-to-date compared to the same 1998
periods. The increase was primarily attributable to higher levels of property,
plant and equipment since June 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 $2 for the quarter and $6
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. This decrease was partially offset by stronger operating
results at our other unconsolidated markets.
- -------------------------------------------------------------------------------
International Operations
- -------------------------------------------------------------------------------
International operations is comprised principally of our investments in cellular
and PCS businesses in nine countries in Latin America as well as in Denmark,
Germany, India and Israel.
<TABLE>
<CAPTION>
- --------------------------------------------------- --------------------- ----------- --- ----------------------- ------------
Second Quarter % Year-to-Date %
--------------------- -----------------------
1999 1998 Change 1999 1998 Change
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $565 $484 16.7 $1,126 $936 20.3
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Operating expenses $495 $419 18.1 $1,005 $820 22.6
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Operating income $70 $65 7.7 $121 $116 4.3
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Net equity in earnings (losses) of
unconsolidated businesses $21 $(14) N/M $ 8 $(35) N/M
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Segment net income (loss) $50 $(22) N/M $30 $(27) N/M
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
EBITDA $178 $146 21.9 $332 $267 24.3
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
EBITDA margin 31.5% 30.2% +130bps 29.5% 28.5% +100bps
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Customers (a) 3,233 2,058 57.1
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Average monthly revenue per customer (a) $57 $74 (23.0) $59 $74 (20.3)
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
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 $81
quarter-over-quarter and $190 year-to-date on a comparative basis are primarily
due to substantial growth in the customer bases of these operations, which
collectively have grown over 57% since June 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. 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.
<PAGE>
Operating Expenses
Operational and support expenses
For the 1999 periods, these expenses increased $49 compared to second quarter
1998 and $125 compared to the first six months of 1998. These increases are
primarily the result of customer acquisition costs associated with significant
increases in customer additions. The increases also reflect additional
operational costs associated with higher customer levels and expanded
operations. Offsetting the increases were prior period expenses incurred by
BellSouth New Zealand.
Depreciation and amortization
Depreciation expense increased $13 quarter-over-quarter and $31 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
increased $14 quarter-over-quarter and $29 on a year-to-date comparative basis
as a result of increased intangibles related to our purchase of additional
ownership interests in several Latin American operations.
Net Equity in Earnings (Losses) of Unconsolidated Businesses
The improvement in equity in earnings (losses) from our unconsolidated
international businesses in the 1999 periods 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.
Operations in Brazil have been affected by weaknesses in the local economy and
currency. While the government has proposed economic reforms and the Brazilian
Real has strengthened and begun to stabilize, the long-term impact on our
Brazilian operations is not known.
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
External revenues $407 $394 3.3 $750 $730 2.7
Intersegment revenues 3 (2) N/M 6 -- N/M
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Total operating revenues $410 $392 4.6 $756 $730 3.6
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating expenses $248 $235 5.5 $454 $436 4.1
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating income $162 $157 3.2 $302 $294 2.7
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Net equity in earnings (losses) of
unconsolidated businesses $ (4) $-- N/M $ (5) $ -- N/M
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Segment net income $98 $102 (3.9) $182 $188 (3.2)
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA $169 $163 3.7 $315 $306 2.9
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA margin 41.2% 41.6% -40bps 41.7% 41.9% -20bps
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
Operating Results
External revenues increased $13 for second quarter and $20 for year-to-date 1999
when compared to the same 1998 periods. These increases are principally a result
of increased pricing and volumes, offset by the effects of shifts in directory
production schedules. Adjusted for book shifts, external revenues would have
increased by
<PAGE>
approximately 5.0% 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 $13 for second quarter and $18 for
year-to-date 1999, when compared to the same 1998 periods, due primarily to
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 international investments in directory publishers in Peru and
Brazil. We plan to continue exploring international growth opportunities that
capitalize on existing directory core competencies.
- -------------------------------------------------------------------------------
Other
- -------------------------------------------------------------------------------
This segment is primarily comprised of our communications group companies --
including new business initiatives such as entertainment (cable 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.
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ------------- -- -------------------------- ----------
Second Quarter % Year-to-Date %
----------------------- --------------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
<S> <C> <C> <C> <C>
External revenues $ 73 $26 N/M $ 123 $ 44 N/M
Intersegment revenues 92 53 N/M 162 107 N/M
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
Total operating revenues $ 165 $79 N/M $ 285 $ 151 N/M
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
Operating expenses $233 $155 50.3 $ 437 $ 291 50.2
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
Operating loss $(68) $(76) 10.5 $(152) $(140) (8.6)
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
Net equity in earnings (losses) of
unconsolidated businesses $ -- $ 7 N/M $ -- $ 4 N/M
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
Segment net loss $(59) $(31) (90.3) $(116) $ (71) (63.4)
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
EBITDA $(35) $(53) 34.0 $(88) $(100) 12.0
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
EBITDA margin (21.2%) (67.1%) N/M (30.9%) (66.2%) N/M
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ ----------
</TABLE>
Operating Results
External revenues were up $47 for second quarter and $79 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 second 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.
<PAGE>
- -------------------------------------------------------------------------------
Other Nonoperating Items
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest Expense $245 $203 20.7 $471 $393 19.8
Gain on Sale of Operations 16 -- N/M 16 155 N/M
Net Equity in Earnings (Losses) of
Unconsolidated Businesses 57 36 58.3 (209) 47 N/M
Other Income, net 99 82 N/M 158 99 N/M
Provision for Income Taxes 593 531 11.7 1,152 1,086 6.1
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
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 second quarter 1999 are the result of commercial paper borrowings
associated with the interim financing of our investment in Qwest Communications
International Inc. (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:
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Average short-term debt balance $ 5,848 $ 3,390 72.5 $ 5,025 $ 3,448 45.7
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Average long-term debt balance $ 8,401 $ 7,883 6.6 $ 8,487 $ 7,703 10.2
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Total average debt balance $14,249 $11,273 26.4 $13,512 $11,151 21.2
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
We have refinanced $500 of commercial paper with a like amount of 7 3/8% 40-year
bonds. We plan to refinance an additional $2.0 billion of commercial paper when
we believe conditions are favorable.
Gain on sale of operations
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 $.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 increased $21 in the second quarter
and decreased $256 in the year-to-date period when compared with the same 1998
periods. The year-to-date decrease was driven by foreign exchange losses of $280
recorded in first quarter 1999 related to our Brazilian properties (see Note F
to the consolidated financial statements for further discussion of this matter).
Excluding the impact of this event, year-to-date earnings increased $24 when
compared to the same 1998 period. 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
increase of $17 over second quarter 1998 and $59 over the 1998 year-to-date
period is attributable to higher net foreign exchange gains in our consolidated
international businesses and increases in other nonoperating income in second
quarter 1999. Partially offsetting these increases were decreased interest
income due to lower average cash balances and higher minority interest expense
related to our less-than-100-percent-owned subsidiaries.
<PAGE>
Provision for income taxes
The provision for income taxes increased $62 quarter-over-quarter and $66 on a
year-to-date comparative basis. The effective tax rate for second quarter 1999
was 37.7% compared to 39.4% in second quarter 1998. The decrease in the
effective tax rate for second quarter 1999 is due primarily to improved results
in foreign equity-method subsidiaries which are recorded net of tax benefits or
expense. 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 41.9% compared to 38.8%
in 1998. The effective tax rate for the year-to-date period was significantly
impacted by the foreign exchange losses recorded at our unconsolidated Brazilian
businesses during first quarter 1999. Excluding the effect of these losses, our
effective rate for the 1999 year-to-date period was 38.1%. The lower effective
rate for the year-to-date period is due to the same factors as the decrease in
our quarterly effective rate.
- -------------------------------------------------------------------------------
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...... $4,093 $3,698 $395 10.7%
Investing activities...... $(6,695) $(3,276) $3,419 N/M
Financing activities...... $172 $(770) $942 N/M
- -------------------------- ---------- ------------ ----------- -------------
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.
Operating cash flows for 1999 also include $68 in cash proceeds associated with
the initial closing of our agreement to sublease wireless communications towers
to Crown Castle International, Inc. 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 half of 1999, we invested $2.9 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 first half of 1999 are approximately $280 in costs
related to the purchase and development of internal-use software.
Our Argentine wireless communications company recently 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. Our share of the capital required, based on our 65 percent ownership,
will be approximately $560 over the duration of the build-out period.
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, $500 of which we
have refinanced with 7 3/8% 40-year bonds. We intend to refinance an additional
$2.0 billion of commercial paper when we believe market conditions are
favorable.
<PAGE>
Net cash used in financing activities
During the first half 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 86 million since June 30, 1998. We completed the December 1998 buyback
plan during May 1999.
Our debt to total capitalization ratio was 53.5% at June 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 by the effect of our stock buyback
program.
At August 6, 1999, we had shelf registration statements on file with the SEC
under which $4.7 billion of debt securities could be publicly offered.
Market Risk
For a complete discussion of our market risks, you should refer to the caption
"Market Risk" in our 1998 Annual Report on Form 10-K. Our primary exposure to
market risks relates to unfavorable movements in interest rates and foreign
currency exchange rates. Our exposure to interest rate risk increased in second
quarter 1999 due to the borrowing of $2.5 billion in commercial paper for our
investment in Qwest. We have refinanced $500 with fixed-rate debt and intend to
refinance $2.0 billion of that commercial paper when we believe market
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
Reciprocal Compensation. See Note K to the consolidated financial statements.
South Carolina Regulatory Matters. See Note L 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 during
first quarter 1999.
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. We attempt to mitigate the
effect of certain foreign currency fluctuations through the use of foreign
currency hedging contracts.
During January 1999, the government of Brazil allowed its currency to trade
freely against other currencies. As a result, the Brazilian Real experienced
devaluation against the US Dollar. The devaluation resulted in our Brazilian
wireless properties recording exchange losses related to their net US
Dollar-denominated liabilities. Our share of the foreign exchange rate losses,
which was recorded during first quarter 1999, was $280.
The impact of the devaluation on an operation depends on the devaluation's
effect on the local economy and the ability of an operation to raise prices
and/or reduce expenses. Additionally, the economies of other countries in Latin
America could be adversely impacted by economic and monetary problems in Brazil.
For instance, Ecuador recently experienced devaluation in its currency. The
impact, however, was not material to our operations. The likelihood and extent
of further devaluation and deteriorating economic conditions in Brazil or other
Latin American countries experiencing similar conditions and the resulting
impacts on our results of operations, financial position and cash flows is not
known.
<PAGE>
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:
o Remaining implementation and testing could reveal the need for
additional unplanned remedial efforts and
o 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.
As of July 1999, we have 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.
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:
o directly affect delivery of primary services to our customers;
o directly affect our revenue recognition and collection; and
o would create noncompliance with any statutes or laws.
<PAGE>
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. We have completed the planning, inventory and impact
analysis phases and our completion status for the remaining phases is as
follows: Network components - 99%; Information technology systems - 95%; and
Building and environmental systems - 99%.
We will continue to monitor and track the conversion, testing and implementation
for all remaining mission-critical and non-mission-critical applications. Many
of the applications scheduled to be completed after July 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 business partners
and infrastructure service providers. Business impact assessments have been
substantially completed, and the completion of contingency plan testing and
sign-off is scheduled for third quarter 1999.
Costs of project. Some of the costs associated with our Year 2000 compliance
efforts were incurred in 1997 and 1998. We will incur the remainder during 1999
and 2000. At June 30, 1999, we have spent approximately $199 in external costs
towards Year 2000 compliance. We estimate the total external costs of our
compliance efforts will be approximately $300 over the life of the project.
Expected completion. We currently anticipate that the remaining applications
will be Year 2000 compliant between September and December 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>
- -------------------------------------------------------------------------------
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:
o a change in economic conditions in domestic or international markets where
we operate or have material investments which would affect demand for our
services;
o the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
o further delay in our entry into the interLATA long distance market;
o higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
o unanticipated higher capital spending from the deployment of new
technologies;
o unsatisfactory results in regulatory actions including access reform,
universal service, terms of interconnection and unbundled network elements
and resale rates; and
o failure to satisfactorily identify and complete Year 2000 software and
hardware revisions by us and entities with which we do business.
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>
- -------------------------------------------------------------------------------
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-4 Amendment dated May 6, 1999 to the BellSouth Personal
Retirement Account Pension Plan.
10q-5 Amendment dated May 6, 1999 to the BellSouth Personal
Retirement Account Pension Plan.
10q-6 Amendment dated May 7, 1999 to the BellSouth Personal
Retirement Account Pension Plan.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 1999.
(b) Reports on Form 8-K:
Date of Event Subject
April 19, 1999 BellSouth/Qwest agreement and 1Q99 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)
August 6, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number
10q-4 Amendment dated May 6, 1999 to the BellSouth Personal
Retirement Account Pension Plan.
10q-5 Amendment dated May 6, 1999 to the BellSouth Personal
Retirement Account Pension Plan.
10q-6 Amendment dated May 7, 1999 to the BellSouth Personal
Retirement Account Pension Plan.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 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
WHEREAS, L.M. Berry and Company adopted the Plan subject to certain
modifications described in Schedule 2 of the Plan; and
WHEREAS, the Executive Nominating and Compensation Committee (the
"Committee") of the Board of Directors of BellSouth Corporation, at its February
23, 1998, meeting adopted a resolution amending the Plan to provide an interest
credit rate for 1998 of 6.11% for all Plan participants; and
WHEREAS, the Committee authorized appropriate officers of the Company
to do such further acts and to execute such documents as may be necessary or
advisable to effectuate the purposes of such resolution; and
WHEREAS, the Company now desires to revise Schedule 2 of the Plan to
reflect such amendment;
NOW, THEREFORE, pursuant to the authority delegated by the Committee as
referred to above, the undersigned officer approves the following to reflect
such amendment of the Plan:
Amend Schedule 2 of the Plan for L.M. Berry and Company by adding at the
end of Paragraph 4(f) the following:
As of the last day of the Plan Year 1998, each Participant's
account shall be credited with interest at the rate of 6.11%,
under the terms of the Plan.
This Amendment shall be effective as of January 1, 1998.
By: /s/ Richard D. Sibbernsen
Richard D. Sibbernsen
Vice President - Human Resources
Date: 5/6/99
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
WHEREAS, the Executive Nominating and Compensation Committee (the
"Committee") of the Board of Directors of BellSouth Corporation, at its February
22, 1999, meeting adopted a resolution amending the Plan to provide an
additional credit for the 1999 Plan Year equal to 1% of each Plan participant's
1999 compensation; and
WHEREAS, the Committee authorized appropriate officers of the Company
to do such further acts and to execute such documents as may be necessary or
advisable to effectuate the purposes of such resolution; and
WHEREAS, the Company now desires to revise the Plan document to reflect
such amendment;
NOW, THEREFORE, pursuant to the authority delegated by the Committee as
referred to above, the undersigned officer approves the following to reflect
such amendment of the Plan:
Amend Section 3 of the Plan by adding the following sentence
at the end of Subparagraph 3.05(a):
The Board has approved an additional credit for the 1999 Plan
Year equal to the Participant's Compensation multiplied by one
percent, and this additional credit shall be credited to each
Participant's account as of the last day of such Plan Year.
This Amendment shall be effective as of January 1, 1999.
By: /s/ Richard D. Sibbernsen
Richard D. Sibbernsen
Vice President - Human Resources
Date: 5/6/99
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
WHEREAS, L.M. Berry and Company adopted the Plan subject to certain
modifications described in Schedule 2 of the Plan; and
WHEREAS, the Company now desires to amend Schedule 2 of the Plan; and
WHEREAS, pursuant to Section 15.01 of the Plan, the Employees' Benefit
Claim Review Committee (the "Committee") is authorized to adopt nonmaterial
amendments to the Plan;
NOW, THEREFORE, the Committee hereby approves the following amendment
of the Plan:
Amend Schedule 2 of the Plan for L.M. Berry and Company by adding at
the end of Paragraph 4(f) the following:
As of the last day of Plan Year 1999, each
Participant's account shall be credited with interest
at the rate of 5.25%, under the terms of the Plan.
This Amendment shall be effective as of January 1, 1999.
APPROVED this 7th day of May 1999.
EMPLOYEES' BENEFIT CLAIM REVIEW COMMITTEE
By: /s/ R. D. Sibbernsen
By: /s/ R. M. Dykes
By: /s/ Carl E. Swearingen
By: /s/ M. L. Feidler
EXHIBIT 11
BellSouth Corporation
Computation of Earnings Per Share
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
1999 1998 1999 1998
Basic Earnings Per
Common Share:
Net Income $ 980 $ 818 $ 1,595 $ 1,710
Weighted average
shares outstanding 1,891 1,978 1,912 1,980
Earnings
Per Common Share $ .52 $ .41 $ .83 $ .86
<PAGE>
EXHIBIT 11
BellSouth Corporation
Computation of Earnings Per Share (continued)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
1999 1998 1999 1998
Diluted Earnings
Per Common Share:
Net Income $ 980 $ 818 $ 1,595 $ 1,710
Weighted average shares
outstanding 1,891 1,978 1,912 1,980
Incremental shares from
assumed exercise of
stock options and payment of
performance share awards 18 12 18 12
Total Shares 1,909 1,990 1,930 1,992
Earnings Per Common Share $ .51 $ .41 $ .83 $ .86
EXHIBIT 12
BellSouth Corporation
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Six Months
Ended June 30,
1999
1. Earnings
(a) Income from continuing operations
before deductions for taxes and interest $ 3,218
(b) Portion of rental expense representative
of interest factor 46
(c) Equity in losses from less-than-50%-owned
investments (accounted for 342
under the equity method of accounting)
(d) Excess of earnings over distributions of
less-than-50%-owned investments
(accounted for under the equity method
of accounting) (64)
TOTAL $ 3,542
2. Fixed Charges
(a) Interest $ 485
(b) Portion of rental expense representative
of interest factor 46
TOTAL $ 531
Ratio (1 divided by 2) 6.67
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 573
<SECURITIES> 345
<RECEIVABLES> 4,867
<ALLOWANCES> 284
<INVENTORY> 476
<CURRENT-ASSETS> 6,474
<PP&E> 59,925
<DEPRECIATION> 35,609
<TOTAL-ASSETS> 41,516
<CURRENT-LIABILITIES> 13,639
<BONDS> 8,391
0
0
<COMMON> 2,020
<OTHER-SE> 11,934
<TOTAL-LIABILITY-AND-EQUITY> 41,516
<SALES> 222
<TOTAL-REVENUES> 12,121
<CGS> 371
<TOTAL-COSTS> 5,933
<OTHER-EXPENSES> 2,935
<LOSS-PROVISION> 165
<INTEREST-EXPENSE> 471
<INCOME-PRETAX> 2,747
<INCOME-TAX> 1,152
<INCOME-CONTINUING> 1,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,595
<EPS-BASIC> 0.83
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</TABLE>
