1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8607
BELLSOUTH CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1533433
(State of Incorporation) (I.R.S. Employer
Identification Number)
1155 Peachtree Street, N. E., 30309-3610
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number 404 249-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
At October 31, 2000, 1,868,074,357 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 Financial
Condition and Results of Operations.......................... 16
3. Qualitative and Quantitative Disclosures about Market Risk ..... 29
Part II
6. Exhibits and Reports on Form 8-K ............................... 31
<PAGE>
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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 Nine Months
Ended September 30, Ended September 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Operating revenues:
Wireline communications:
Local service $ 2,747 $ 2,857 $ 8,113 $ 8,540
Network access 1,200 1,198 3,578 3,706
Long distance 158 133 461 399
Other wireline 310 370 845 1,012
Total wireline
communications 4,415 4,558 12,997 13,657
Domestic Wireless 815 942 2,355 2,714
International operations 575 709 1,701 2,031
Advertising and publishing 540 587 1,290 1,422
Other 77 107 200 318
Total operating revenues 6,422 6,903 18,543 20,142
Operating expenses:
Operational and support
expenses 3,541 3,665 10,153 10,798
Depreciation and amortization 1,207 1,301 3,475 3,759
Severance accrual - - - 78
Provision for asset impairment - - 320 -
Total operating expenses 4,748 4,966 13,948 14,635
Operating income 1,674 1,937 4,595 5,507
Interest expense 266 344 737 982
Gain (loss) on sale of operations 39 (14) 55 (14)
Net earnings (losses) of equity
affiliates (26) 10 (235) 163
Other income, net 15 35 188 164
Income before income taxes 1,436 1,624 3,866 4,838
Provision for income taxes 442 588 1,471 1,737
Net income $ 994 $ 1,036 $ 2,395 $ 3,101
Weighted-average common shares
outstanding:
Basic 1,885 1,871 1,903 1,878
Diluted 1,904 1,885 1,921 1,894
Dividends declared per common
share $ 0.19 $ 0.19 $ 0.57 $ 0.57
Earnings per share:
Basic $ 0.53 $ 0.55 $ 1.26 $ 1.65
Diluted $ 0.52 $ 0.55 $ 1.25 $ 1.64
</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>
December 31, September 30,
1999 2000
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,287 $ 1,176
Temporary cash investments 105 36
Accounts receivable, net
of allowance for
uncollectibles of
$312 and $389 5,177 5,268
Material and supplies 451 511
Other current assets 367 968
Total current assets 7,387 7,959
Investments and advances 6,097 7,002
Property, plant and equipment 61,009 64,560
Less: accumulated depreciation 36,378 38,673
Property, plant and
equipment, net 24,631 25,887
Deferred charges and other assets 1,564 1,853
Intangible assets, net 3,774 6,284
Total assets $ 43,453 $ 48,985
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year $ 7,653 $ 8,987
Accounts payable 1,961 2,021
Other current liabilities 3,781 4,093
Total current liablities 13,395 15,101
Long-term debt 9,113 11,036
Noncurrent liabilities:
Deferred income taxes 2,705 3,130
Unamortized investment tax credits 126 96
Other noncurrent liabilities 3,299 3,123
Total noncurrent liabilities 6,130 6,349
Shareholders' equity:
Common stock, $1 par value
(4,400 shares authorized;
1,883 and 1,866 shares
outstanding) 2,020 2,020
Paid-in capital 6,771 6,775
Retained earnings 11,456 13,421
Accumulated other comprehensive income (358) (58)
Shares held in trust and treasury (4,798) (5,452)
Guarantee of ESOP debt (276) (207)
Total shareholders' equity 14,815 16,499
Total liabilities and
shareholders' equity $ 43,453 $ 48,985
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1999 2000
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,395 $ 3,101
Adjustments to net income:
Depreciation and amortization 3,475 3,759
Severance accrual - 78
(Gain) loss on sale of operations (55) 14
Provision for asset impairment 320 -
Provision for uncollectibles 260 278
Net losses (earnings) of equity affiliates 235 (163)
Dividends received from equity affiliates 59 55
Recognition of foreign investment tax credits (120) -
Minority interests in income of subsidiaries 67 12
Deferred income taxes and investment tax credits (92) 150
Net change in:
Accounts receivable and other current assets (548) (529)
Accounts payable and other current liabilities 710 434
Deferred charges and other assets (391) (486)
Other liabilities and deferred credits 76 (138)
Other reconciling items, net 80 107
Net cash provided by operating activities 6,471 6,672
Cash Flows from Investing Activities:
Capital expenditures (4,456) (4,940)
Investments in and advances to equity affiliates (140) (497)
Acquisitions, net of cash acquired (3,791) (1,836)
Purchases of wireless licenses (123) (72)
Proceeds from sale of operations 215 29
Proceeds from disposition of short-term investments 144 372
Purchases of short-term investments (243) (311)
Proceeds from repayment of loans and advances 60 45
Other investing activities, net 80 60
Net cash used for investing activities (8,254) (7,150)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt 3,451 411
Proceeds from long-term debt 508 2,118
Repayments of long-term debt (205) (334)
Dividends paid (1,091) (1,072)
Purchase of treasury shares (3,032) (779)
Funds distributed to minority partners - (32)
Other financing activities, net 27 55
Net cash (used for) provided by financing activities (342) 367
Net (decrease) increase in cash and cash equivalents (2,125) (111)
Cash and cash equivalents at beginning of period 3,143 1,287
Cash and cash equivalents at end of period $ 1,018 $ 1,176
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 2000
Number of Shares Amount
Accum.
Shares Other Shares Guaran-
Held in Compre- Held in tee of
Common Trust and Common Paid-in Retained hensive Trust and ESOP
Stock Treasury Stock Capital Earnings Income Treasury Debt Total
(a) (a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 2,020 (138) $ 2,020 $ 6,771 $ 11,456 $ (358) $ (4,798) $ (276) $ 14,815
Net income - 3,101 3,101
Other comprehensive income, net of tax:
Foreign currency translation adjustment - 50 50
Net unrealized gains on securities - 259 259
Minimum pension liability adjustment - (9) (9)
Total comprehensive income (b) - 3,401
Dividends declared - (1,070) (1,070)
Share issuances for employee benefit plans - 3 (66) 125 59
Purchase of treasury stock - (19) (779) (779)
Tax benefit related to stock options - 4 4
ESOP activities and related tax benefit - 69 69
Balance at September 30, 2000 2,020 (154) $ 2,020 $ 6,775 $ 13,421 $ (58) $ (5,452) $ (207) $ 16,499
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of September 30, 2000, there were
approximately 36 shares held in trust and 118 shares held in treasury.
(b) Total comprehensive income for third quarter 2000 was $983.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
Number of Shares Amount
Accum.
Shares Other Shares Guaran-
Held in Compre- Held in tee of
Common Trust and Common Paid-in Retained hensive Trust and ESOP
Stock Treasury Stock Capital Earnings Income Treasury Debt 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 - 2,395 2,395
Other comprehensive income, net of tax:
Foreign currency translation adjustment - (145) (145)
Net unrealized losses on securities - (848) (848)
Total comprehensive income (b) - 1,402
Dividends declared - (1,079) (1,079)
Share issuances for employee benefit plans - 2 (38) 66 28
Purchase of treasury stock - (68) (3,032) (3,032)
Purchase of stock by grantor trust - (3) (3)
ESOP activities and related tax benefit - 10 29 39
Balance at September 30, 1999 2,020 (136) $ 2,020 $ 6,766 $ 10,767 $ (1,057) $ (4,721) $ (310) $ 13,465
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of September 30, 1999, there were
approximately 36 shares held in trust and 100 shares held in treasury.
(b) Total comprehensive income for third quarter 1999 was $115.
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 (SEC) rules that permit reduced
disclosure for interim periods. In our opinion, these statements include all
adjustments necessary for a fair presentation of the results of the interim
periods shown. All adjustments are of a normal recurring nature unless otherwise
disclosed. Revenues, expenses, assets and liabilities can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year. For a more
complete discussion of our significant accounting policies and other
information, you should read this report in conjunction with the consolidated
financial statements included in our latest annual report on Form 10-K and
previous quarterly reports on Form 10-Q.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
Note B - Recent Accounting Pronouncements
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 requires that revenues
and costs of revenues derived from services rendered at the beginning of a
contract or business relationship be deferred and recognized over the life of
the related contract or relationship. In June 2000, the SEC deferred the
required adoption date of the guidelines in SAB 101 to the fourth quarter of
2000. We do not expect the adoption of these guidelines to have a material
impact on our results of operations, financial position or cash flows.
Derivative Instruments and Hedging Activities
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". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now
for fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. This means that we must
adopt the standard, as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," no later than January 1, 2001. We do not expect the adoption
of this standard will have a material impact on results of operations, financial
position or cash flows.
Note C - Earnings Per Share
Basic earnings per share is computed on the weighted-average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted-average number of common shares outstanding plus net incremental
shares arising out of employee stock options and benefit plans. The following is
a reconciliation of the weighted-average share amounts (in millions) used in
calculating earnings per share:
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note C - Earnings Per Share (continued)
Third Quarter Year-to-Date
1999 2000 1999 2000
Basic common shares outstanding .........1,885 1,871 1,903 1,878
Incremental shares from stock options.......19 14 18 16
Diluted common shares outstanding .......1,904 1,885 1,921 1,894
The earnings amounts used for per-share calculations are the same for both the
basic and diluted methods.
Note D - Workforce Reduction
In February 2000, we announced that we would reduce our domestic general and
administrative staff by approximately 2,100 positions. These reductions are the
result of the streamlining of work processes in conjunction with our shift to a
more simplified management structure. As a result of these reductions, we
recorded a one-time charge of $78, or $48 after tax, for severance and
post-employment health benefits.
Note E - E-Plus Restructuring
In February 2000, we closed on a previously announced alliance with KPN Royal
Dutch Telecom. We utilized our right of first refusal which enabled KPN to
acquire a 77.5 percent interest in E-Plus and allows us the option after 18
months of converting our 22.5 percent interest in E-Plus into either 200 million
shares of KPN or shares representing at the time an estimated 33.3 percent
ownership interest in KPN's wireless subsidiary.
As a result of this transaction, we recognized income of $143, or $68 after tax.
The gain relates to a settlement payment from the selling shareholder regarding
a dispute over the terms of the E-Plus shareholder agreement governing the
provisions of the sale.
As part of this transaction, we also agreed to make up to $3 billion of loans
available to KPN to be used for further wireless investments in Europe and
received non-detachable warrants to purchase approximately 90 million additional
shares of KPN. We loaned approximately $412 to KPN during September 2000. KPN
applied the proceeds towards the purchase of new third generation wireless
licenses from the German government for use by our German operations. We also
guaranteed $1.35 billion in bank loans to our German operations, the proceeds of
which were also applied towards the purchase of the new licenses. The loan to
KPN is included in Other current assets in our consolidated balance sheet at
September 30, 2000.
Note F - Asset Impairment Loss
In June 1999, we executed a contract with Ericsson to replace infrastructure
equipment, including switches, base stations and software, in 14 wireless
markets in the southeastern United States. The new equipment is intended to
improve network performance and to lay the foundation for migration of the
network to Third Generation wireless (3G) and wireless Internet. We expect the
conversion to be substantially completed by December 2000.
The planned disposals of the existing infrastructure equipment require an
evaluation of asset impairment in accordance with SFAS 121. As a result, a
non-cash charge of $320, or $187 after tax, was recorded in the second quarter
of 1999 to write these assets down to their fair market value, which was
estimated as the expected future cash flows of these assets through the date of
disposal. We will continue to use the assets until the conversion process has
been completed and depreciate the remaining net book value over this period.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note G - Devaluation of Brazilian Currency
In mid January 1999, the Brazilian Government changed its monetary exchange
policy, extinguishing the exchange band through which it had managed the range
of the fluctuation of the Real in relation to the U.S. Dollar, allowing the
market to freely determine the exchange rate. As a consequence of this change,
the Real devalued significantly in relation to the U.S. Dollar in early 1999.
The devaluation and subsequent fluctuations in the exchange rate resulted in our
Brazilian wireless properties recording net currency losses related to net U.S.
Dollar-denominated liabilities. Our share of the foreign currency losses was $75
for third quarter 1999 and $355 for year-to-date 1999.
Note H - 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 "All 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>
----------------------------------------------------------------------------------------------------------------------------
Third Quarter % Year-to-Date %
----------------------------------------------------------------------------------------------------------------------------
1999 2000 Change 1999 2000 Change
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline communications
----------------------------------------------------------------------------------------------------------------------------
External revenues $ 4,415 $ 4,558 3.2 $ 12,997 $ 13,657 5.1
----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 66 87 31.8 233 245 5.2
----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 4,481 $ 4,645 3.7 $ 13,230 $ 13,902 5.1
----------------------------------------------------------------------------------------------------------------------------
Operating income $ 1,438 $ 1,564 8.8 $4,241 $4,705 10.9
----------------------------------------------------------------------------------------------------------------------------
Segment net income $ 817 $ 870 6.5 $2,399 $2,641 10.1
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Domestic wireless
----------------------------------------------------------------------------------------------------------------------------
External revenues $ 815 $ 942 15.6 $2,355 $2,714 15.2
----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 5 6 20.0 12 14 16.7
----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 820 $ 948 15.6 $2,367 $2,728 15.3
----------------------------------------------------------------------------------------------------------------------------
Operating income $ 71 $ 175 146.5 $ 260 $ 460 76.9
----------------------------------------------------------------------------------------------------------------------------
Net earnings (losses) of equity affiliates $ 36 $ 41 13.9 $ 108 $ 121 12.0
----------------------------------------------------------------------------------------------------------------------------
Segment net income $ 55 $ 118 114.5 $ 186 $ 305 64.0
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
International operations
----------------------------------------------------------------------------------------------------------------------------
External revenues $ 575 $ 709 23.3 $1,701 $2,031 19.4
----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 1 11 N/M* 1 32 N/M
----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 576 $ 720 25.0 $1,702 $2,063 21.2
----------------------------------------------------------------------------------------------------------------------------
Operating income $ 31 $ 13 (58.1) $ 152 $ 69 (54.6)
----------------------------------------------------------------------------------------------------------------------------
Net earnings (losses) of equity affiliates $ (3) $ (29) N/M $ 5 $ (41) N/M
----------------------------------------------------------------------------------------------------------------------------
Segment net income (loss) $ 9 $ (68) N/M $ 39 $ (72) N/M
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Advertising and publishing
----------------------------------------------------------------------------------------------------------------------------
External revenues $ 540 $ 587 8.7 $1,290 $1,422 10.2
----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 2 6 N/M 8 17 N/M
----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 542 $ 593 9.4 $1,298 $1,439 10.9
----------------------------------------------------------------------------------------------------------------------------
Operating income $ 259 $ 298 15.1 $ 561 $ 642 14.4
----------------------------------------------------------------------------------------------------------------------------
Net earnings (losses) of equity affiliates $ 1 $ (2) N/M $ (4) $ 2 N/M
----------------------------------------------------------------------------------------------------------------------------
Segment net income $ 160 $ 181 13.1 $ 342 $ 396 15.8
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Meaningful
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note H - Segment Information (continued)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Third Quarter % Year-to-Date %
----------------------------------------------------------------------------------------------------------------------
1999 2000 Change 1999 2000 Change
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
All other
----------------------------------------------------------------------------------------------------------------------
External revenues $ 77 $ 107 39.0 $ 200 $ 318 59.0
----------------------------------------------------------------------------------------------------------------------
Intersegment revenues 102 115 12.7 264 309 17.0
----------------------------------------------------------------------------------------------------------------------
Total revenues $ 179 $ 222 24.0 $ 464 $ 627 35.1
----------------------------------------------------------------------------------------------------------------------
Operating loss $ (72) $ (68) 5.6 $ (224) $ (197) 12.1
----------------------------------------------------------------------------------------------------------------------
Net earnings (losses) of equity affiliates $ 3 $ (3) N/M $ 3 $ (4) N/M
----------------------------------------------------------------------------------------------------------------------
Segment net loss $ (39) $ (45) (15.4) $ (155) $ (144) 7.1
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Reconciling items
----------------------------------------------------------------------------------------------------------------------
External revenues $ - $ - - $ - $ - -
----------------------------------------------------------------------------------------------------------------------
Intersegment revenues (176) (225) (27.8) (518) (617) (19.1)
----------------------------------------------------------------------------------------------------------------------
Total revenues $(176) $(225) (27.8) $ (518) $ (617) (19.1)
----------------------------------------------------------------------------------------------------------------------
Operating loss $ (53) $ (45) 15.1 $ (395) $ (172) 56.5
----------------------------------------------------------------------------------------------------------------------
Net earnings (losses) of equity affiliates $ (63) $ 3 N/M $ (347) $ 85 N/M
----------------------------------------------------------------------------------------------------------------------
Segment net loss $ (8) $ (20) N/M $ (416) $ (25) N/M
----------------------------------------------------------------------------------------------------------------------
Reconciliation to Consolidated Financial Information
----------------------------------------------------------------------------------------------------------------------
Operating Revenues
----------------------------------------------------------------------------------------------------------------------
Wireline communications $ 4,481 $ 4,645 3.7 $ 13,230 $ 13,902 5.1
----------------------------------------------------------------------------------------------------------------------
Domestic wireless 820 948 15.6 2,367 2,728 15.3
----------------------------------------------------------------------------------------------------------------------
International operations 576 720 25.0 1,702 2,063 21.2
----------------------------------------------------------------------------------------------------------------------
Advertising and publishing 542 593 9.4 1,298 1,439 10.9
----------------------------------------------------------------------------------------------------------------------
All other 179 222 24.0 464 627 35.1
----------------------------------------------------------------------------------------------------------------------
Total segments $ 6,598 $ 7,128 8.0 $ 19,061 $ 20,759 8.9
----------------------------------------------------------------------------------------------------------------------
Reconciling items $(176) $(225) (27.8) $ (518) $ (617) (19.1)
----------------------------------------------------------------------------------------------------------------------
Total consolidated $ 6,422 $ 6,903 7.5 $ 18,543 $ 20,142 8.6
----------------------------------------------------------------------------------------------------------------------
Net Income
----------------------------------------------------------------------------------------------------------------------
Wireline communications $ 817 $ 870 6.5 $2,399 $2,641 10.1
----------------------------------------------------------------------------------------------------------------------
Domestic wireless 55 118 114.5 186 305 64.0
----------------------------------------------------------------------------------------------------------------------
International operations 9 (68) N/M 39 (72) N/M
----------------------------------------------------------------------------------------------------------------------
Advertising and publishing 160 181 13.1 342 396 15.8
----------------------------------------------------------------------------------------------------------------------
All other (39) (45) (15.4) (155) (144) 7.1
----------------------------------------------------------------------------------------------------------------------
Total segments $ 1,002 $ 1,056 5.4 $2,811 $3,126 11.2
----------------------------------------------------------------------------------------------------------------------
Reconciling items $ (8) $ (20) N/M $ (416) $ (25) N/M
----------------------------------------------------------------------------------------------------------------------
Total consolidated $ 994 $ 1,036 4.2 $2,395 $3,101 29.5
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Note I - Investment Activity
Investment in Brazil
In May 2000, we completed the purchase of a combination of voting common stock
and American Depository Receipts representing nonvoting preferred stock of Tele
Centro Oeste Celular Participacoes SA, a Brazilian company, for a total purchase
price of approximately $240. Tele Centro Oeste provides cellular service in
central-west Brazil, including Brasilia, as well as northern Brazil. The common
stock portion of the investment represents 11.8% of the voting power of Tele
Centro Oeste. The combined investment in common and preferred stock represents
17.3% of the total capital of Tele Centro Oeste. This investment is accounted
for under the cost method, subject to the guidelines of available-for-sale
securities under SFAS 115.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note I - Investment Activity (continued)
Investment in Colombia
In June 2000, we acquired a 50.4% controlling equity interest in Celumovil S.A.
for a purchase price of approximately $399, funded by $299 of cash and a $100
note payable due December 2000. We have commenced cobranding Celumovil with the
BellSouth brand. Celumovil/BellSouth provides wireless service in the Eastern
region of Colombia, which includes the capital city of Bogota, and in the
Atlantic or coastal region.
In July 2000, Celumovil/BellSouth acquired 100% of Cocelco, a wireless operator
that since 1994 has been serving the Western region of Colombia, which includes
the cities of Medellin and Cali. This acquisition was funded by a $384 capital
contribution and a $30 shareholder loan from BellSouth. This transaction
increased BellSouth's ownership interest in Celumovil to approximately 66.0%.
In conjunction with these transactions, we have entered into a series of put and
call agreements whereby we can acquire, or be compelled to acquire, additional
shares of Celumovil from our primary partner in Celumovil, up to our partner's
entire interest, at or close to an appraised fair value between the second and
ninth anniversary of our June 2000 acquisition of our initial interest in
Celumovil. Our partner's first put option for up to a number of shares currently
equal to approximately 14% of Celumovil's outstanding stock is first exercisable
in June 2002. Our first call option for up to a number of shares currently equal
to approximately 9% of Celumovil's outstanding stock is first exercisable in
December 2003.
Acquisition of Additional Interest in Carolinas PCS Partnership
In September 2000, we acquired the remaining 44.2% interest in the Carolinas PCS
partnership bringing our ownership interest to 100%. The partnership provides
PCS service in North Carolina, South Carolina and Northeast Georgia. The
purchase price of $885 was funded through the issuance of commercial paper. The
PCS property and related debt was subsequently contributed to the wireless joint
venture with SBC Communications which is discussed in note Q.
Note J - Marketable Securities
We have investments in marketable securities, primarily common stocks, which are
accounted for under the cost method. These investments are comprised primarily
of a 5% equity interest in Qwest and are classified as available-for-sale under
SFAS 115. Under SFAS 115, available-for-sale securities are required to be
carried at their fair value, with unrealized gains and losses, net of income
taxes, recorded in accumulated other comprehensive income (loss) in our
statement of changes in shareholders' equity and comprehensive income. The fair
values of our investments in marketable securities are determined based on
market quotations. The table below shows certain summarized information related
to these investments at September 30:
Gross Gross
Unrealized Unrealized
1999 Cost gains losses Fair Value
Investment in Qwest ..$3,500 $ -- $ 1,309 $ 2,191
Other investments ..... 132 9 -- 141
Total ............$3,632 $ 9 $ 1,309 $ 2,332
Gross Gross
Unrealized Unrealized
2000 Cost gains losses Fair Value
Investment in Qwest ..$3,500 $ 65 $ -- $3,565
Other investments ..... 482 146 -- 628
Total ............$3,982 $ 211 $ -- $4,193
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note K - Sublease of Communications Towers
In June 1999, we signed a definitive agreement with Crown Castle International
Corporation 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. As of September 30, 2000 we have closed on 1,836
towers and received $604. Subleases of the remaining towers covered by the
agreement are expected to be closed throughout the remainder of 2000. We also
entered into a five-year, build-to-suit agreement with Crown covering up to 500
towers.
Under a similar agreement, Crown will sublease all unused space on 773 PCS
towers in exchange for $317 in cash. As of September 30, 2000, we have closed on
728 towers and received $298. Subleases of the remaining towers covered by the
agreement are expected to be closed throughout the remainder of 2000. In
connection with this agreement, we entered into an exclusive three-year,
build-to-suit agreement.
Note L - Summary Financial Information for Equity Investees
The following table displays the summary combined financial information of our
equity method businesses. These amounts are shown on a 100-percent basis.
Third Quarter % Year-to-Date %
1999 2000 Change 1999 2000 Change
Revenues ............ $1,363 $1,584 16.2 $3,822 $4,697 22.9
Operating income ..... $ 152 $ 80 (47.4) 293 364 24.2
Net income (loss) .... $(127) $(25) 80.3 $(735) $ 47 N/M
Note M - Debt Issuance
In February 2000 we issued $2 billion of long-term debt, consisting of $1
billion of Ten-year, 7 3/4% Notes and $1 billion of Thirty-year, 7 7/8%
Debentures. We received total proceeds of $1,974, which were used to retire
commercial paper.
Note N - Sale of Operations
In July 2000, we sold our ownership interests in mobile data operations in
Belgium, the Netherlands and the United Kingdom for total proceeds of $28. These
sales generated a pre-tax net loss of $14 and a $30 after-tax gain resulting
from tax benefits associated with the sale of the operations in the United
Kingdom.
In August 1999, we sold our 100% ownership interest in Honolulu Cellular for
total proceeds of $194. In April 1999, we sold our 100% interest in a wireless
property located in Dothan, Alabama for total proceeds of $21. The pretax gains
on these sales were $39, or $23 after tax, for Honolulu and $16, or $10 after
tax, for Dothan.
Note O - Contingencies
Litigation Matters
Reciprocal compensation.
Following the enactment of the Telecommunications Act of 1996, our telephone
company subsidiary, BellSouth Telecommunications, Inc. (BST), and various
competitive local exchange carriers entered into interconnection agreements
providing for, among other things, the payment of reciprocal compensation for
local calls initiated by the customers of one carrier that are completed on the
network of the other carrier. Numerous competitive local carriers have claimed
entitlement from BST for compensation associated with dial-up calls originating
on BST's network and connecting with Internet service providers served by the
competitive local carriers' networks. BST has maintained that dial-up calls to
Internet service providers are not local calls for which terminating
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note O - Contingencies (continued)
compensation is due under the interconnection agreements; however, the courts
and state regulatory commissions in BST's operating territory that have
considered the matter have, in most cases, ruled that BST is responsible for
paying reciprocal compensation on these calls. At September 30, 2000, the
exposure related to unrecorded amounts withheld from competitive local carriers
was approximately $280, including accrued interest. We have commenced
discussions with several competitive local carriers concerning settlement of
some claims, and agreements have been reached in certain circumstances.
Other reciprocal compensation issues.
In a related matter, a competitive local carrier was claiming terminating
compensation of approximately $165 for service arrangements that we did not
believe involved "traffic" under our interconnection agreements. We filed a
complaint with the state regulatory commission asking that agency to declare
that we did not owe reciprocal compensation for these arrangements. In March
2000, the state commission ruled in our favor finding that compensation was not
owed to the competitive local carrier. This matter is currently on appeal.
U.S. Electronics.
In October 1999, two of the Company's wholly-owned subsidiaries, BellSouth
Products, Inc. (BSP) and BST filed a complaint against U. S. Electronics, Inc.
(USE), in the United States District Court for the Northern District of Georgia.
The complaint alleges that USE, a distributor of residential telephone
equipment, breached its distributorship contract with BSP and violated the
Robinson-Patman Act. It also seeks a ruling invalidating certain exclusivity and
post-term non-competition covenants contained in the distributorship contract.
USE denied the material allegations of the complaint and filed counterclaims
against the Company, BSP, BST, and several other BellSouth entities, alleging
that the BellSouth companies are in breach of the distributorship contract. The
counterclaims seek an unspecified amount of damages as well as declaratory and
injunctive relief. The BellSouth companies denied the material allegations of
USE's counterclaims and filed a Motion for Judgment on the Pleadings seeking an
early ruling that the exclusivity and post-term non-competition provisions were
invalid and unenforceable as a matter of law. The court denied that motion in
August 2000. At the end of September 2000, BSP informed USE that, as a result of
USE's contractual violations and other factors, BSP would be unable to supply
USE with sufficient products for distribution until at least the third quarter
of 2001. On October 11, 2000, USE filed a Motion for a Preliminary Injunction,
seeking to require BSP to continue to supply USE with residential telephone
equipment for distribution. The BellSouth companies intend to pursue their
claims and defend against the counterclaims vigorously. Discovery has commenced.
At this early stage of the proceedings, the Company cannot predict the likely
outcome of the case.
Compliance Matters
Foreign Corrupt Practices Act.
The SEC is conducting an investigation that is focused on determining whether we
and one of our Latin American subsidiaries violated the Foreign Corrupt
Practices Act. We had previously engaged outside counsel to investigate this
matter, and they concluded that those activities did not violate the Act. More
recently and independent of these developments, our internal auditors, in the
ordinary course of conducting compliance reviews, identified issues concerning
accounting entries made by another of our Latin American businesses. Our
internal investigation of this matter is continuing. We have informed the SEC as
to this matter, and we expect the SEC to expand its investigation to encompass
it. We are cooperating with the SEC in its investigation, but we cannot predict
the duration or the outcome of the SEC's investigation or whether the scope of
the investigation will be expanded beyond the matters currently identified.
Regulatory Matters
South Carolina.
Beginning in 1996, we operated under a price regulation plan approved by the
South Carolina Public Service Commission under existing state laws. In April
1999, however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated under a new state
statute, adopted subsequent to the Commission's approval of the earlier plan.
The new statute allows telephone companies in
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note O - Contingencies (continued)
South Carolina to operate under price regulation without obtaining approval from
the Commission. The election became effective during August 1999. The South
Carolina Consumer Advocate petitioned the Commission seeking review of the level
of our earnings during the 1996-1998 period when we operated under the
subsequently invalidated price regulation plan. The Commission voted to dismiss
the petition in November 1999 and issued orders confirming the vote in February
and June of this year. In July, the Consumer Advocate appealed the Commission's
dismissal of the petition.
Note P - Tracking Stock
In October 2000, we filed with the SEC a definitive proxy statement relating to
a special shareholders' meeting to be held in December 2000 to approve
amendments to our charter. The amendments would permit us to issue our common
stock in series, of which our Board of Directors would initially designate two:
Latin America group stock, intended to reflect the separate performance of our
Latin American businesses, and BLS group stock, intended to reflect the separate
performance of all of our other businesses.
We have also filed a registration statement for the offering of shares of Latin
America group stock for sale to the public. The registration statement remains
subject to further review by the SEC. We plan a public offering of shares of
Latin America group stock to finance our expansion in Latin America. At the time
of a public offering, a number of shares of Latin America group stock will be
reserved for the BLS group or for issuance to the holders of BLS group stock. We
expect that we would distribute, as a dividend to the holders of BLS group
stock, the reserved shares of Latin America group stock within six to 12 months
following the public offering.
Our plans to create, issue and distribute Latin America group stock are subject
to a number of conditions, including shareholder approval, completion of the SEC
review process, market conditions and other factors. The implementation and
timing of these transactions are uncertain.
Note Q - Subsequent Events
Domestic Wireless Joint Venture
In October 2000, we combined substantially all of our domestic wireless
businesses with those of SBC Communications into a joint venture that comprises
the nation's second largest wireless company, with service in 42 of the top 50
U.S. markets. The venture, Cingular Wireless, covers a total population of 190
million people and serves more than 19.0 million customers, is owned 40% by
BellSouth and 60% by SBC Communications but is jointly controlled. The
investment in Cingular will be accounted for under the equity method;
accordingly, in the future, we will not consolidate Cingular's revenues and
expenses but will include our proportionate share of Cingular's earnings as
Earnings of Equity Affiliates in our consolidated income statement.
<PAGE>
BELLSOUTH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(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 Financial Condition and Results of Operations in
conjunction with our latest annual report on Form 10-K and previous quarterly
reports on Form 10-Q.
------------------------------------------------------------------------------
Consolidated Results of Operations
------------------------------------------------------------------------------
Key financial and operating data for third quarter 2000 and 1999 and the
respective year-to-date periods are as follows. All references to earnings per
share are on a diluted basis:
<TABLE>
<CAPTION>
------------------------ ----------- --- ------------------------- ----------
Third Quarter % Year-to-Date %
------------ ----------- --- ------------ ------------
1999 2000 Change 1999 2000 Change
------------ ----------- ----------- --- ------------ ------------ ----------
Results of operations:
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 6,422 $ 6,903 7.5 $18,543 $20,142 8.6
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Operating expenses 4,748 4,966 4.6 13,948 14,635 4.9
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Operating income 1,674 1,937 15.7 4,595 5,507 19.8
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Interest expense 266 344 29.3 737 982 33.2
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Net earnings (losses) of equity affiliates (26) 10 N/M* (235) 163 N/M
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Gain (loss) on sale of operations 39 (14) N/M 55 (14) N/M
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Other income, net 15 35 N/M 188 164 (12.8)
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Provision for income taxes 442 588 33.0 1,471 1,737 18.1
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Net income $ 994 $1,036 4.2 $2,395 $3,101 29.5
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
As Reported:
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Net income $ 994 $1,036 4.2 $ 2,395 $3,101 29.5
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Earnings per share $ .52 $ .55 5.8 $1.25 $ 1.64 31.2
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Normalized:
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Net income $ 951 $1,036 8.9 $ 2,819 $3,081 9.3
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Earnings per share $ .50 $ .55 10.0 $1.47 $ 1.63 10.9
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Cash flow data:
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Cash provided by operating activities $2,378 $1,874 (21.2) $6,471 $6,672 3.1
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Cash used for investing activities $(1,602) $(3,355) N/M $(8,254) $(7,150) 13.4
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Cash (used for) provided by financing $ (514) $1,137 N/M $ (342) $ 367 N/M
activities
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Other:
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Effective tax rate 30.8% 36.2% +540bps 38.0% 35.9% -210bps
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Average debt balances:
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Short-term debt $7,361 $7,002 (4.9) $ 5,804 $6,475 11.6
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Long-term debt $8,620 $10,914 26.6 $ 8,531 $10,617 24.4
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
Total average debt balance $15,981 $17,916 12.1 $14,335 $17,092 19.2
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
EBITDA(1) $2,881 $3,238 12.4 $ 8,390 $9,344 11.4
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
EBITDA margin(2) 44.9% 46.9% +200bps 45.2% 46.4% +120bps
---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ----------
</TABLE>
(1) EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, provision for asset impairment, severance
accrual, net earnings (losses) of equity affiliates 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.
(2) EBITDA margin is EBITDA divided by operating revenues.
* Not Meaningful
------------------------------------------------------------------------------
Overview of consolidated results of operations
------------------------------------------------------------------------------
On a comparative basis, results reflect 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 volume 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.
There were no normalizing items for the third quarter 2000.
Normalized results for year-to-date 2000 exclude the impacts of:
. Income related to the restructuring of our ownership interest in the German
wireless operator, E-Plus, which increased net income by $68, or $0.04 per
share. This gain is included in Net Earnings (Losses) of Equity Affiliates.
See note E to our consolidated interim financial statements for further
discussion of this matter; and
. Expense recorded as a result of our previously announced plan to reduce our
domestic general and administrative staff, which reduced net income by $48,
or $0.03 per share. See note D to our consolidated interim financial
statements for further discussion of this matter.
Normalized results for third quarter 1999 exclude the impacts of:
. The devaluation of the Brazilian Real. Our share of the foreign currency
losses in our Brazilian wireless properties reduced net income by $75, or
$0.04 per share, for the quarter and $355, or $0.18 per share, for the
year. These losses are included in Net Earnings (Losses) of Equity
Affiliates. See note G to our consolidated interim financial statements for
further discussion of this matter;
. The recognition of certain foreign investment tax credits generated in
prior years, which increased net income by $95, or $0.05 per share; and
. The gain on sale of our 100% ownership interest in Honolulu Cellular, which
increased net income by $23, or $0.01 per share.
In addition to the third quarter items, the year-to-date 1999 normalized results
exclude the impact of an asset impairment loss, which reduced net income by
$187, or $0.10 per share. See note F to our consolidated interim financial
statements for further discussion of this matter.
Operating Revenues
Operating revenues increased $481 during third quarter 2000 and $1,599 for the
year-to-date period. The increase reflects:
. growth in our wireline communications operations, spurred by demand for
digital and data services and calling features;
. growth from higher access, airtime and equipment sales in our domestic
wireless operations, driven by a 22.0% expansion in the customer base from
third quarter 1999 to third quarter 2000;
. higher revenues from our international operations resulting from 76.5%
growth in the customer bases of our current operations from third quarter
1999 to third quarter 2000 and the addition of new international wireless
operations in Colombia;
. the addition of and growth in our international directory publishing
businesses, volume growth and price increases in our domestic advertising
and publishing operations and increases in revenues from domestic
electronic media offerings; and
. growth in new lines of business.
Growth in wireline revenues was partially offset by the effects of rate
reductions related to access charge reform and competition in the long distance
market. Growth in international revenues attributable to customer growth was
partially offset by changes in foreign currency rates and decreases in average
monthly revenue per customer, resulting from penetration into lower usage market
segments and a growing percentage of customers selecting lower-volume prepaid
services. The average monthly revenue per international wireless customer
decreased 38.0% for the quarter and 41.8% for the year-to-date period.
Operating Expenses
Total operating expenses increased $218 during third quarter 2000 and $687
during the year-to-date period. Operating expenses for year-to-date 2000 include
a $78 severance accrual related to a previously announced plan to reduce our
domestic general and administrative staff. Year-to-date 1999 expenses included a
$320 charge to write down network equipment in the domestic wireless operations.
Excluding these items, total operating expenses increased $929 year-to-date.
Operational and support expenses increased $124 during the quarter and $645
year-to-date as a result of 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. Operational and support expenses of our international
operations were favorably impacted by the weakening of foreign currencies
against the U.S. Dollar. Depreciation and amortization increased $94 for the
quarter and $284 for the year-to-date period, primarily as a result of additions
of property, plant and equipment to support expansion of our wireline
communications and international wireless networks. Also included in the 2000
periods are $56 in expense from our recently acquired properties in Colombia.
Interest expense
Higher interest expense in both the quarterly and year-to-date periods is
attributable to higher average long-term debt balances resulting from borrowings
associated with the financing of our investments in Colombia and Brazil and
increases in interest rates. The increase in the year-to-date period is also
attributable to higher average long-term debt balances resulting from the
financing of our investment in Qwest.
Gain (loss) on sale of operations
In July 2000, we sold our ownership interests in mobile data operations in
Belgium, the Netherlands and the United Kingdom. These sales generated a pre-tax
net loss of $14. During third quarter 1999, we recognized a gain of $39 from the
sale of our ownership interest in Honolulu Cellular. During second quarter 1999,
we recognized a gain of $16 from the sale of a wireless property in Alabama.
Net earnings (losses) of equity affiliates
Earnings from our unconsolidated businesses increased $36 in third quarter 2000
and $398 on a year-to-date comparative basis. The year-to-date 2000 period
results include $68 in income related to the restructuring of our ownership
interest in our German wireless operations. See note E to our consolidated
interim financial statements for further discussion of this matter. The
quarter-to-date 1999 period includes $75 and the year-to-date 1999 period
includes $355 of foreign exchange losses related to our Brazilian properties.
See note G to our consolidated interim financial statements for further
discussion of this matter. Excluding the impact of these items, earnings
decreased $39 for the quarter-to-date period and $25 for the year-to-date
period. These results are addressed in the discussions for the Domestic
wireless, International operations and All other 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 $20 for the quarter is attributable to higher minority interest
income of $57 related to our less-than-100-percent owned subsidiaries and higher
interest income of $9. These increases are offset by decreased other
non-operational income, primarily gains from cellular property exchanges, and
increased foreign currency losses. The year-to-date decrease of $24 is primarily
attributable to $70 in higher foreign currency losses and decreased other
non-operational income, partially offset by lower minority interest expense.
Provision for income taxes
The provision for income taxes increased $146 quarter-over-quarter and $266 on a
year-to-date comparative basis. Our effective tax rate increased from 30.8% in
third quarter 1999 to 36.2% in third quarter 2000. Third quarter 1999 results
were significantly impacted by the recognition of foreign investment tax
credits, partially offset by foreign exchange losses at our Brazilian
operations. Excluding these items, our effective rate was 36.8% for third
quarter 1999 and 36.2% for third quarter 2000. The decrease in the effective tax
rate is due primarily to the recognition of tax incentives and tax benefits
generated by the sale of our international wireless data properties.
For the year-to-date period, the effective tax rate was 35.9% compared to 38.0%
in 1999. Year-to-date 2000 results were favorably impacted by additional income
related to the restructuring of our ownership in our German wireless operations.
Year-to-date 1999 results were unfavorably impacted by foreign currency losses
recorded at our unconsolidated Brazilian businesses, partially offset by the
recognition of foreign investment tax credits in third quarter 1999. Excluding
these and other special items, our effective rate was 37.6% for the 1999
year-to-date period and 36.5% for the 2000 year-to-date period. The decrease in
the effective rate for the year-to-date period is due to the recognition of tax
incentives, tax benefits generated by the sale of our international wireless
data properties and more favorable results from equity-method investees, which
are recorded net of tax benefits or expense.
-------------------------------------------------------------------------------
Results by Segment
-------------------------------------------------------------------------------
Our reportable segments reflect strategic business units that offer similar
products and services and/or serve similar customers. We have four reportable
operating segments:
. Wireline communications;
. Domestic wireless;
. International operations; and
. Advertising and publishing.
We have included the operations of all other businesses falling below the
reporting threshold in the "All other" segment. We evaluate the performance of
each business unit based on net income, exclusive of charges for use of
intellectual property rights and adjustments for special items that may arise.
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
earnings (losses) of equity affiliates line item.
Wireline Communications
Wireline communications includes local exchange, network access and intraLATA
long distance services provided by wireline transport to business and
residential customers in a nine-state region located in the southeastern U.S.
<TABLE>
<CAPTION>
-------------------------------------------- ------------------------- ----------- ----- -------------------------- -----------
Third Quarter % Year-to-Date %
------------------------- --------------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
Operating revenues:
Local service $ 2,747 $2,857 4.0 $8,113 $8,540 5.3
Network access 1,200 1,198 (0.2) 3,578 3,706 3.6
Long distance 158 133 (15.8) 461 399 (13.4)
Other wireline 310 370 19.4 845 1,012 19.8
Intersegment revenues 66 87 31.8 233 245 5.2
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Total operating revenues $4,481 $4,645 3.7 $13,230 $13,902 5.1
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Operating expenses $3,043 $3,081 1.2 $ 8,989 $9,197 2.3
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Operating income $1,438 $1,564 8.8 $ 4,241 $4,705 10.9
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Segment net income $ 817 $870 6.5 $ 2,399 $2,641 10.1
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Key Indicators
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Access line counts (000s):
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Switched access lines:
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Residential 16,889 17,228 2.0
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Business 7,282 7,165 (1.6)
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Other 269 255 (5.2)
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Total switched access lines 24,440 24,648 0.9
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Access line equivalents (1) 16,539 26,679 61.3
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Total equivalent access lines 40,979 51,327 25.3
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Access minutes of use (millions) 27,858 28,551 2.5 82,310 86,065 4.6
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Long distance messages (millions) 160 125 (21.9) 505 390 (22.8)
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Digital and data services revenues $ 667 $ 847 27.0 $ 1,919 $ 2,423 26.3
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
Calling feature revenues $ 491 $ 550 12.0 $ 1,412 $ 1,597 13.1
-------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- -----------
</TABLE>
(1) Access line equivalents represent a conversion of non-switched data circuits
to a switched access line basis and is presented for comparability purposes.
Equivalents are calculated by converting high-speed/high-capacity data circuits
to the equivalent of a switched access line based on transport capacity. While
the revenues generated by access line equivalents have a directional
relationship with these counts, growth rates cannot be compared on an equivalent
basis.
Operating Revenues
Local service
The increases in local service revenues of $110 for third quarter 2000 and $427
for the year-to-date period are attributable to strong demand for digital and
data services and calling features and growth in switched access lines.
We ended the third quarter with over 51 million total equivalent access lines,
an increase of 25.3% since September 30, 1999. Residential access lines rose
2.0% to 17,228,000, driven by economic growth in our nine-state region as well
as demand for secondary residence lines, which accounted for 55.6% of the growth
in residential access lines. We added 189,000 secondary residence lines since
September 30, 1999, extending the total to over 2.9 million lines and ending the
current period with a penetration rate of 20.5%. Business access lines,
including both switched access lines and data circuits, grew 42.1%, propelled by
expanding demand for our digital and data services. Switched business access
lines decreased 1.6% reflecting competition and the continued migration of new
and existing business customers to high-capacity data lines.
Revenues from optional calling features such as Caller ID, Call Waiting, Call
Return and voicemail service increased $59, or 12.0%, quarter-over-quarter and
$185, or 13.1%, on a year-to-date comparative basis. These increases were driven
by growth in calling feature usage through our Complete Choice(R) Package, a
one-price bundled offering of over 20 services.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $36 compared to third quarter 1999 and $130
compared to the first nine months of 1999.
Network access
Network access revenues remained relatively flat in the third quarter and
increased $128 for the first nine months of 2000 when compared to the same 1999
periods. Access minutes of use rose 2.5% to 28,551 million in third quarter 2000
from 27,858 million in third quarter 1999. For the year-to-date period, access
minutes of use grew 4.6% to 86,065 million in 2000 from 82,310 million 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.
Year-to-date 2000 growth in minutes was also positively impacted by the
additional day of activity resulting from the leap year.
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 data line offerings which are fixed-charge based rather than
minute-of-use based. Revenues from these dedicated circuit services grew
approximately $99 quarter-over-quarter and $236 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 net rate impacts that decreased
revenues by $88 compared to third quarter 1999 and by $221 compared to the first
nine months of 1999. These rate reductions are primarily related to the FCC's
access reform and productivity factor adjustments. The reductions were partially
offset by recoveries of local number portability costs in both 2000 periods.
Long distance
The $25 decrease for the quarter and $62 decrease for the year-to-date period
compared to the same 1999 periods are primarily attributable to a 21.9% decrease
in long distance message volumes compared to third quarter 1999 and 22.8%
compared to the first nine months of 1999. For the year-to-date period, the
decrease in revenues attributable to loss of message volumes was offset by a $30
revenue reduction in 1999 for a regulatory ruling related to compensation we
received from long distance carriers for interconnection to our public
payphones. Also offsetting the decreases were increased revenues from the
provision of digital and data services of $13 for the quarter and $27 for the
year-to-date period.
Competition and increased penetration of extended local area calling plans
continue to have an adverse impact on the number of customers who use our long
distance service and ultimately reduce our long distance message volumes and
revenues. We believe that competition will continue to adversely impact our
customer base, and ultimately our long distance message volumes and revenues,
until we are granted full long distance relief under the Telecommunications Act
of 1996.
Other wireline and intersegment revenues
Other wireline and intersegment revenues increased 21.5%, from $376 in third
quarter 1999 to $457 in third quarter 2000. For the year-to-date period, these
revenues increased 16.6%, from $1,078 in 1999 to $1,257 in 2000. Higher revenues
of $91 for the quarter and $269 for the year-to-date period, resulting primarily
from resale of paging products and services, sales of unbundled network
elements, collocation of competing carriers' equipment in our facilities, demand
for our Internet access offering, interconnection charges to wireless carriers
and proceeds from universal service funds, were offset by decreases in revenues
from sales of customer premises equipment. At September 30, 2000 we had 871,000
subscribers to our BellSouth Internet Service(R), an increase of 36.7% compared
to the same 1999 period. Increases in intersegment revenues of $21 for the
quarter and $12 for the year-to-date period primarily represent increased
business activity with our other operating segments.
Operating Expenses
Operational and support expenses
Operational and support expenses decreased $18, or 0.8%, for the third quarter
2000 and increased $50, or 0.8%, for the first nine months of 2000 when compared
to the same 1999 periods. The decrease for the quarter was attributable to
reductions in discretionary expenses and decreases in costs from sales of
customer premises equipment totaling $45. The decrease for the quarter was
further affected by $12 of lower pension and benefit costs attributable to
favorable pension plan investment returns. These decreases were partially offset
by increases in labor costs resulting from additions to network and customer
service personnel.
For the year-to-date period, the change was primarily attributable to increases
in labor costs and reciprocal compensation expense totaling $150. These
increases were partially offset by a $73 reduction in pension and benefit costs
attributable to favorable pension plan investment returns. The increase was
further offset by reductions in discretionary expenses and decreases in costs
from sales of customer premises equipment. Also contributing to these changes
were expenses related to new data initiatives, including high-speed Internet
access and optical fiber-based broadband services, and promotional expenses
related to expanding our Internet customer base.
Depreciation and amortization
Depreciation and amortization expense increased $56, or 6.5%, for third quarter
2000 and $158, or 6.2%, for the first nine months of 2000 when compared to the
same 1999 periods. The increases are primarily attributable to amortization of
capitalized internally developed software and depreciation resulting from higher
levels of net property, plant and equipment.
Domestic Wireless
Domestic wireless is comprised of cellular and personal communications service
(PCS) businesses principally within the southeastern U.S.
<TABLE>
<CAPTION>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues $815 $ 942 15.6 $2,355 $2,714 15.2
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues 5 6 20.0 12 14 16.7
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $820 $ 948 15.6 $2,367 $2,728 15.3
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $749 $ 773 3.2 $2,107 $2,268 7.6
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating income $ 71 $ 175 146.5 $ 260 $460 76.9
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $ 36 $ 41 13.9 $ 108 $121 12.0
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net income $ 55 $ 118 114.5 $ 186 $305 64.0
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Customers (a) 4,680 5,711 22.0
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Average monthly revenue per customer (a) $ 51 $ 51 -- $ 51 $ 51 --
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</TABLE>
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
Total operating revenues grew $128, or 15.6%, quarter-over-quarter and $361, or
15.3%, on a year-to-date basis when compared to the same 1999 periods. This
growth is attributable to higher airtime, access and equipment sales revenues
driven by a 22.0% increase in the customer base. Customer growth since 1999 has
been driven by advertising, enhanced volume pricing strategies such as one-rate
plans, rollover minute plans, bundled minutes at lower rates and prepaid calling
plans and competitive incentive programs such as discounted wireless handsets.
Average monthly usage by customers increased during third quarter 2000 and on a
year-to-date basis, and, when combined with the increase in total customers,
drove increases in total minutes of use. Average monthly revenue per customer
remained relatively flat, due primarily to declines in per-minute rates in
response to competition. The declines in average per-minute rates occurred as we
expanded our product offering and further penetrated lower-usage market
segments. We expect rates to continue decreasing as more customers opt for our
one-rate plans and other bundled-minute packages.
We expect competition to continue to intensify and pressure pricing in our
markets. We believe this will further stimulate customer growth and demand and
continue to increase usage as the overall market is expanded.
Operating Expenses
Operational and support expenses
Operational and support expenses increased $65, or 11.5%, during third quarter
2000 and $193, or 11.8%, on a year-to-date basis when compared to the same 1999
periods. These increases are due to higher customer acquisition costs, higher
network costs associated with network usage and costs related to new customer
promotions. Higher customer acquisition costs resulted from increases in net
customer additions of 125.5% for the quarter and 76.3% for the year-to-date
period. Network usage and the related expense have increased as a result of
customer and volume growth in established markets.
Depreciation and amortization
Depreciation and amortization decreased $41, or 22.5%, to $141 during third
quarter 2000 and decreased $32, or 6.7%, to $443 year-to-date compared to the
same 1999 periods. Depreciation expense in 2000 has been favorably impacted by a
lower asset base, resulting from our equipment exchange program initiated in
June 1999. See note F to our consolidated interim financial statements.
Net Earnings (Losses) of Equity Affiliates
Compared to the same 1999 periods, net earnings (losses) of unconsolidated
domestic wireless businesses increased $5, or 13.9%, for the quarter and $13, or
12.0%, for the year-to-date period. Higher earnings at our business in Los
Angeles were partially offset by decreases in earnings at other properties.
International Operations
International operations is comprised principally of our investments in wireless
businesses in eleven countries in Latin America as well as in Denmark, Germany,
India and Israel. Consolidated operations include our businesses in Argentina,
Chile, Colombia, Ecuador, Nicaragua, Peru and Venezuela. All other businesses
are accounted for under the equity method, and accordingly their results are
reported as Net earnings (losses) of equity affiliates.
<TABLE>
<CAPTION>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues $575 $ 709 23.3 $1,701 $2,031 19.4
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues 1 11 N/M 1 32 N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $576 $ 720 25.0 $1,702 $2,063 21.2
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $545 $ 707 29.7 $1,550 $1,994 28.6
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating income $ 31 $13 (58.1) $ 152 $ 69 (54.6)
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $ (3) $(29) N/M $ 5 $ (41) N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net income (loss) $ 9 $(68) N/M $ 39 $ (72) N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Customers (a) 3,777 6,668 76.5
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Average monthly revenue per customer (a) $ 50 $ 31 (38.0) $ 55 $ 32 (41.8)
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</TABLE>
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
The increases of $144 quarter-over-quarter and $361 year-to-date on a
comparative basis are primarily due to substantial growth in the customer bases
of our consolidated operations, which collectively have increased 76.5% since
September 30, 1999. Also contributing to these increases are the revenues from
our new Colombian wireless operations. Partially offsetting the impacts of
customer growth is declining monthly revenue per customer resulting from
continued expansion into lower-usage customer segments through offerings such as
prepaid cellular service and competitive pressures in certain countries. We now
offer prepaid cellular products to all of the countries we serve in Latin
America. Revenues from our operations in Nicaragua that were consolidated for
the first time in first quarter 2000 contributed $12 to the increase in third
quarter 2000 and $34 to the increase for 2000 year-to-date.
A stronger U.S. Dollar against foreign currencies has had a negative impact on
reported revenues. Absent changes in foreign currency exchange rates, reported
revenues would have increased $212 for the quarter and $602 for the year-to-date
period.
Operating Expenses
Operational and support expenses
For the 2000 periods, these expenses increased $108 compared to third quarter
1999 and $349 compared to the first nine months of 1999. These increases are
primarily the result of operational and customer acquisition costs associated
with growth in customer levels and expanded operations. Also contributing to
these increases are the expenses from our new Colombian wireless operations.
Since September 30, 1999, our existing operations have added almost 2.0 million
customers in Argentina, Chile and Venezuela. We have also added 900,000
customers through the acquisition and development of businesses in Colombia,
Ecuador, Nicaragua and Peru.
Operational and support expenses denominated in local currencies were favorably
impacted by the weakening of foreign currencies against the U.S. Dollar. Absent
changes in foreign currency exchange rates, reported operational and support
expenses would have increased $144 for the quarter and $497 for the year-to-date
period.
Depreciation and amortization
Depreciation expense increased $27 quarter-over-quarter and $58 on a
year-to-date comparative basis primarily due to higher gross depreciable plant
resulting from the continued investment in our wireless network infrastructure.
Amortization expense increased $27 quarter-over-quarter and $37 on a
year-to-date comparative basis as a result of growth in intangibles related to
our purchase of additional ownership interests in several Latin American
operations.
Net Earnings (Losses) of Equity Affiliates
Net earnings (losses) from our international equity affiliates decreased $26 to
$(29) in third quarter 2000 and $46 to $(41) during the first nine months of
2000. The decline in earnings from our unconsolidated international businesses
is due to lower operating results from our investments in Brazil and Germany.
Both of these businesses experienced significant increases in operational and
customer acquisition costs resulting from substantial growth in their customer
bases. In addition, the impact of foreign currency fluctuations in Brazil for
third quarter 2000 was a loss of $1 and year-to-date 2000 was a loss of $35.
Advertising and Publishing
Our advertising and publishing segment is comprised of companies in the U.S. and
Latin America that publish, print, sell advertising in and perform related
services concerning alphabetical and classified telephone directories and
electronic product offerings.
<TABLE>
<CAPTION>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues $540 $587 8.7 $1,290 $1,422 10.2
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues 2 6 N/M 8 17 N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $542 $593 9.4 $1,298 $1,439 10.9
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $283 $295 4.2 $ 737 $ 797 8.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating income $259 $298 15.1 $ 561 $ 642 14.4
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $ 1 $ (2) N/M $ (4) $ 2 N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net income $160 $181 13.1 $ 342 $ 396 15.8
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</TABLE>
Operating Results
External revenues increased $47 for third quarter 2000 and $132 for year-to-date
2000 when compared to the same 1999 periods. These increases are principally a
result of growth in revenues at our directory publishing operations in Peru and
Brazil totaling $17 for third quarter and $61 for the year-to-date period. The
growth is also attributable to volume growth and price increases in the domestic
operations, offset by the effects of shifts in directory production schedules.
Adjusted for book shifts, external revenues for this segment would have
increased by approximately 9.4% for the quarter and 10.7% for the year-to-date
period. Also contributing are increases of $9 for the quarter and $29 for the
year-to-date period in the revenues from our domestic electronic media
offerings.
Operational and support expenses increased $13 for third quarter 2000 and $55
for year-to-date 2000 when compared to the same 1999 periods. These increases
are primarily due to growth at our operations in Peru and Brazil totaling $7 for
the quarter and $62 for the year-to-date period. Also contributing to the
increases are costs of $8 for the quarter and $19 for the year-to-date period
associated with growth in electronic media offerings. These increases were
offset by lower costs of $2 for the quarter and $27 for the year-to-date period
in the domestic directory businesses due to the shift in directory production
schedules. Depreciation and amortization remained relatively flat during third
quarter 2000 and increased $5 on a year-to-date comparative basis due to the new
international publishing operations.
Net earnings (losses) of equity affiliates includes the results of our
investment in a Brazilian directory publisher.
All other
<TABLE>
<CAPTION>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues $ 77 $ 107 39.0 $200 $ 318 59.0
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues 102 115 12.7 264 309 17.0
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $ 179 $ 222 24.0 $464 $ 627 35.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $ 251 $ 290 15.5 $688 $ 824 19.8
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating loss $(72) $(68) 5.6 $(224) $(197) 12.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $ 3 $(3) N/M $ 3 $ (4) N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net loss $(39) $(45) (15.4) $(155) $ (144) 7.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</TABLE>
Operating Results
External revenues increased $30 for third quarter 2000 and $118 on a
year-to-date comparative basis, primarily driven by growth in revenues of $11
for the quarter and $55 for the year from the resale of long distance services
in markets outside of our wireline region, $4 for the quarter and $22 for the
year from interactive paging services and $5 for the quarter and $20 for the
year from wireless television offerings.
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 operational and support expenses of $26 for the quarter and $99 for
the year-to-date period. Depreciation and amortization has increased $13 on a
quarter-over-quarter basis and $37 on a year-to-date basis reflecting our
continuing investment of resources associated with the growth of these
businesses.
------------------------------------------------------------------------------
Financial Condition
------------------------------------------------------------------------------
Cash flows from operations are our primary source of funding for capital
requirements of existing operations, debt service and dividends. 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):
---------------------------------------------------------------------------
Year-to-Date Year-to-Date
1999 2000 Change
----------------------------------------------------
Operating activities... $ 6,471 $ 6,672 $ 201 3.1%
Investing activities... $(8,254) $(7,150) $1,104 13.4
Financing activities... $ (342) $ 367 $ 709 N/M
---------------------------------------------------------------------------
Net cash provided by operating activities
The increase in cash from operations between 1999 and 2000 primarily reflects
better working capital management and higher net income from operations due to
strong revenue growth. Operating cash flows also include cash proceeds of $92
for the 2000 period and $604 for the 1999 period associated with the sublease of
wireless communications towers to Crown Castle International.
Net cash used in investing activities
During the first nine months of 2000, we invested $4.9 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 high-speed Internet access and optical fiber-based broadband services.
Included in these expenditures for the first nine months of 2000 is
approximately $524 in costs related to the purchase and development of
internal-use software.
Also during the first nine months of 2000, we have paid approximately $1.8
billion to acquire new or additional interests in our domestic and international
wireless businesses. Included in this amount is $299 for our investment in
Celumovil (Colombia), $414 for the purchase of Cocelco (Colombia), $885 to buy
out our partners in the Carolinas DCS partnerships, and $240 for our investment
in Tele Centro Oeste (Brazil).
In addition to amounts paid for purchases, we advanced approximately $412 to our
partner in our German wireless operations which was used toward the purchase of
new third generation wireless licenses from the German government.
We funded these activities through the issuance of new debt, including
commercial paper and short term loans with banks.
Net cash provided (used) in financing activities
During first quarter 2000, we issued $2 billion of long-term debt. The proceeds
of $1,974 from this issuance were used to retire commercial paper borrowings.
Our debt to total capitalization ratio was 54.8% at September 30, 2000 compared
to 53.1% at December 31, 1999. The change is primarily a function of increases
in short-term debt driven by borrowings to finance acquisitions of new and
additional interests in wireless businesses and other investing activities.
At November 1, 2000, we had shelf registration statements on file with the SEC
under which $2.7 billion of debt securities could be publicly offered.
We repurchase our common stock from time to time when we consider it attractive
to do so based on stock prices. Reacquired shares are held as treasury shares
pending reissuance in employee benefit plans and for other purposes.
Market Risk
For a complete discussion of our market risks, you should refer to the caption
"Market Risk" in our 1999 Annual Report on Form 10-K. Our primary exposure to
market risks relates to unfavorable movements in interest rates and foreign
currency exchange rates. We do not anticipate any significant changes in our
objectives and strategies with respect to managing such exposures.
------------------------------------------------------------------------------
Operating Environment and Trends of the Business
------------------------------------------------------------------------------
Regulatory Developments
Our future operating and financial results will be substantially influenced by
developments in a number of federal and state regulatory proceedings. Adverse
results in these proceedings could materially affect our revenues, expenses and
ability to compete effectively against other telecommunications carriers.
Our intrastate prices are regulated under price regulation plans provided by
statute or approved by state public service commissions. Some plans are subject
to periodic review and may require renewal. The commissions reviewing these
plans may require price reductions and other concessions from us as conditions
to approving these plans.
In July 2000, the Kentucky Public Service Commission approved a new price
regulation plan. The new plan eliminates the 4% productivity factor contained in
the previous plan in return for the company's commitment to bring high speed
access services to certain rural areas. The level of company investment in rural
high speed access services is under review at the Commission. The plan also
permits the company to rebalance rates in a manner that will align residential
rates more closely to the cost of providing such service.
In July 2000, the Florida Public Service Commission commenced a proceeding to
determine whether we violated certain Commission rules regarding service
quality. Hearings originally scheduled for November 2000 are being moved to the
first half of 2001. Also in July 2000, the Commission determined that our change
in 1999 from a late charge based on a percentage of the amounts overdue to a
flat rate fee plus an interest charge violated the Florida price regulation
statute and voted that certain monies should be refunded. We protested the
decision, and hearings are scheduled for late 2001.
In October 2000, the Georgia Public Service Commission orally voted to approve,
with certain modifications, the Commission Staff's Recommendation with respect
to new company performance measures. These new performance measures will be used
as one means to assess our wholesale service quality to competitive local
exchange carriers. In its written decision, which has not been received, the
Commission is expected to adopt additional performance measurements that will
apply to our performance to our wholesale competitive local exchange carrier
customers. In addition, the Commission will adopt a Self Enforcement Plan. The
Enforcement Plan consists of three tiers. Under tier 1, we will be required to
pay remedial sums to individual competitive local exchange carriers if we fail
to meet certain performance criteria set by the Commission. Under tier 2, we
will pay additional sums directly to the State Treasury for failing to meet
certain performance metrics. Under tier 3, if we fail to meet certain
performance criteria, then we will suspend additional marketing and sales of
long distance services allowed by the Telecommunications Act of 1996. Our annual
liability under the Plan will be capped at 44% of net revenues in Georgia. The
decision also adopts other remedial measures for the filing of late or
incomplete performance reports, and a market penetration adjustment for new and
advanced services, which increases the amount of the payments where low volumes
of advanced or nascent services are involved. It is anticipated that the
Commission's written decision will be entered before year end. The Enforcement
Plan will go into effect 45 days after the Commission enters an order. When the
written decision is entered, we will have the opportunity to seek
reconsideration of the order, as necessary.
We are currently conducting third-party tests of our operations support systems
in Georgia and Florida and expect to file our Georgia long distance application
with the FCC when testing and verification of our performance data are complete
and all other legal requirements have been met. We do not know if the FCC will
require further changes in our interconnection and network element offerings and
operations support systems before it will approve our petition. These changes
could result in significant additional expenses and delays in obtaining full
long-distance relief in these states.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit vacated the FCC
methodology for pricing unbundled network elements and the methodology for
determining wholesale rates for retail services. The order also affirmed the
previous decision of the Eighth Circuit that vacated FCC rules that required
incumbent carriers to combine previously uncombined elements for requesting
carriers. The United States Supreme Court has been asked to review the decision
of the Eighth Circuit.
With respect to federal access charges, FCC policies strongly favor access
reform, whereby the historical subsidy for local service that is contained in
network access charges paid by long distance carriers is eliminated. In May
2000, the FCC implemented a comprehensive reform package that adjusted its price
cap, access charge and universal service rules for those price cap local
exchange carriers electing to adopt the new rules. The new rules are designed to
result in lower consumer prices for long distance service by reforming the way
in which access costs are recovered. The new rules, which we adopted during June
2000, reduced the access charges paid to us by other carriers, and at the same
time authorized an increase to the subscriber line charges paid by residential
and single-line business customers. The new rules also allow us to increase the
subscriber line charges each year through 2003, although any increase which we
request after July 2001 is subject to a cost review. We estimate that these
modifications will result in interstate price decreases of approximately $270 on
an annual basis.
We are involved in numerous legal proceedings associated with state and federal
regulatory matters, the disposition of which could materially impact our
operating results and prospects. See note O to our consolidated interim
financial statements.
International Operations
Our reporting currency is the U.S. Dollar. However, most of our revenues are
generated in the currencies of the countries in which we operate. In addition,
many of our operations and equity investees hold U.S. Dollar-denominated short-
and long-term debt. The currencies of many Latin American countries have
experienced substantial volatility and depreciation in the past. Declines in the
value of the local currencies in which we are paid relative to the U.S. Dollar
will cause revenues in U.S. Dollar terms to decrease and dollar-denominated
liabilities to increase. Where we consider it to be economically feasible, we
attempt to limit our exposure to exchange rate fluctuations by using foreign
currency forward exchange contracts or similar instruments as a vehicle for
hedging; however, a substantial amount of our exposures are unhedged.
The impact of a devaluation or depreciating currency on an entity depends on the
residual effect on the local economy and the ability of an entity to raise
prices and/or reduce expenses. Our ability to raise prices is limited in many
instances by government regulation of tariff rates and competitive constraints.
Due to our constantly changing currency exposure and the potential substantial
volatility of currency exchange rates, we cannot predict the effect of exchange
rate fluctuations on our business.
Economic, social and political conditions in Latin America are, in some
countries, unfavorable and volatile, which may impair our operations. These
conditions could make it difficult for us to continue development of our
business, generate revenues or achieve or sustain profitability. Historically,
recessions and volatility have been primarily caused by: mismanagement of
monetary, exchange rate and/or fiscal policies; currency devaluations;
significant governmental influence over many aspects of local economies;
political and economic instability; unexpected changes in regulatory
requirements; social unrest or violence; slow or negative economic growth;
imposition of trade barriers; and wage and price controls.
Most or all of these factors have occurred at various times in the last two
decades in our core Latin American markets. We have no control over these
matters. Economic conditions in Latin America are generally less attractive than
those in the U.S., and poor social, political and economic conditions may
inhibit use of our services which may adversely impact our business.
New Accounting Pronouncements
See note B to our consolidated interim financial statements.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See the caption labeled "Market Risk" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
-----------------------------------------------------------------------------
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, financial position and cash flows.
These statements are based on our assumptions and estimates and are subject to
risks and uncertainties. For these statements, we claim the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
Factors that could affect future operating results, financial position and cash
flows and could cause actual results to differ materially from those expressed
in the forward-looking statements are:
. a change in economic conditions in domestic or international markets where
we operate or have material investments, which would affect demand for our
services;
. a decrease in the growth rate of demand for the services which we offer;
. the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
. protracted delay in our entry into the interLATA long distance market;
. higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
. unanticipated higher capital spending from, or delays in, the deployment of
new technologies; and
. unsatisfactory results in regulatory actions including terms of
interconnection and unbundled network elements and resale rates.
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, and we do not intend, to
publicly release the results of any revisions to these forward-looking
statements to reflect events or circumstances after the date of this filing.
-----------------------------------------------------------------------------
PART II -- OTHER INFORMATION
-----------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4a No instrument which defines the rights of holders of our long- and
intermediate-term debt is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to
furnish a copy of any such instrument to the SEC upon request.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 2000.
(b) Reports on Form 8-K:
Date of Event Subject
July 20, 2000 BellSouth 2Q00 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 - Finance and Supply Chain Management
(Principal Accounting Officer)
November 3, 2000
<PAGE>
EXHIBIT INDEX
Exhibit
Number
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 2000.
