SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2000, 1,874,100,602 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 28
Part II
4. Submission of Matters to a Vote of Security Holders 30
6. Exhibits and Reports on Form 8-K 30
<PAGE>
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PART I - FINANCIAL INFORMATION
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BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Operating revenues:
Wireline communications:
Local service $ 2,712 $ 2,862 $ 5,366 $ 5,683
Network access 1,187 1,245 2,378 2,508
Long distance 153 131 303 266
Other wireline 255 357 535 642
Total wireline
communications 4,307 4,595 8,582 9,099
Domestic Wireless 796 919 1,540 1,772
International operations 565 658 1,126 1,322
Advertising and publishing 407 471 750 835
Other 73 109 123 211
Total operating
revenues 6,148 6,752 12,121 13,239
Operating expenses:
Operational and support
expenses 3,359 3,565 6,612 7,133
Depreciation and amortization 1,155 1,240 2,268 2,458
Severance accrual - - - 78
Provision for asset
impairment 320 - 320 -
Total operating expenses 4,834 4,805 9,200 9,669
Operating income 1,314 1,947 2,921 3,570
Interest expense 245 332 471 638
Gain on sale of operations 16 - 16 -
Net earnings (losses) of equity
affiliates 57 22 (209) 153
Other income, net 114 46 173 129
Income before income taxes 1,256 1,683 2,430 3,214
Provision for income taxes 470 619 1,029 1,149
Net income $ 786 $ 1,064 $ 1,401 $ 2,065
Weighted-average common shares
outstanding:
Basic 1,891 1,882 1,912 1,881
Diluted 1,909 1,900 1,930 1,899
Dividends declared per common
share $ 0.19 $ 0.19 $ 0.38 $ 0.38
Earnings per share:
Basic $ 0.42 $ 0.57 $ 0.73 $ 1.10
Diluted $ 0.41 $ 0.56 $ 0.73 $ 1.09
</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, June 30,
1999 2000
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,287 $ 1,520
Temporary cash investments 105 27
Accounts receivable, net of
allowance for uncollectibles
of $312 and $316 5,177 4,990
Material and supplies 451 468
Other current assets 367 590
Total current assets 7,387 7,595
Investments and advances 6,097 7,456
Property, plant and equipment 61,009 63,269
Less: accumulated depreciation 36,378 37,972
Property, plant and equipment, net 24,631 25,297
Deferred charges and other assets 1,564 1,717
Intangible assets, net 3,774 4,023
Total assets $ 43,453 $ 46,088
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year $ 7,653 $ 6,108
Accounts payable 1,961 2,076
Other current liabilities 3,781 4,234
Total current liablities 13,395 12,418
Long-term debt 9,113 10,869
Noncurrent liabilities:
Deferred income taxes 2,705 2,963
Unamortized investment tax credits 126 106
Other noncurrent liabilities 3,299 3,230
Total noncurrent liabilities 6,130 6,299
Shareholders' equity:
Common stock, $1 par value
(4,400 shares authorized;
1,883 and 1,881
shares outstanding) 2,020 2,020
Paid-in capital 6,771 6,775
Retained earnings 11,456 12,746
Accumulated other comprehensive income (358) (5)
Shares held in trust and treasury (4,798) (4,832)
Guarantee of ESOP debt (276) (202)
Total shareholders' equity 14,815 16,502
Total liabilities and shareholders' equity $ 43,453 $ 46,088
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1999 2000
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,401 $ 2,065
Adjustments to net income:
Depreciation and amortization 2,268 2,458
Severance accrual - 78
Gain on sale of operations (16) -
Provision for asset impairment 320 -
Provision for uncollectibles 165 179
Net losses (earnings) of equity affiliates 209 (153)
Dividends received from equity affiliates 37 39
Minority interests in income of subsidiaries 20 22
Deferred income taxes and investment tax credits (7) 98
Net change in:
Accounts receivable and other current assets (208) (199)
Accounts payable and other current liabilities 332 641
Deferred charges and other assets (279) (337)
Other liabilities and deferred credits (81) (182)
Other reconciling items, net (68) 89
Net cash provided by operating activities 4,093 4,798
Cash Flows from Investing Activities:
Capital expenditures (2,885) (3,268)
Investments in and advances to equity affiliates (3,711) (582)
Purchases of licenses and other intangible assets (97) (73)
Proceeds from disposition of short-term investments 133 247
Purchases of short-term investments (271) (177)
Proceeds from repayment of loans and advances 50 14
Other investing activities, net 129 44
Net cash used for investing activities (6,652) (3,795)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt 4,049 (1,708)
Proceeds from long-term debt 6 2,083
Repayments of long-term debt (193) (335)
Dividends paid (733) (715)
Purchase of treasury shares (2,968) (148)
Other financing activities, net 11 53
Net cash used for financing activities 172 (770)
Net (decrease) increase in cash and cash equivalents (2,387) 233
Cash and cash equivalents at beginning of period 3,143 1,287
Cash and cash equivalents at end of period $ 756 $ 1,520
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000
-----------------------------------------------------------------------------------------
Number of Shares Amount
------------------ -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Balance at December 31, 1999 2,020 (138) $ 2,020 $ 6,771 $ 11,456 $ (358) $ (4,798) $ (276) $ 14,815
Net income 2,065 2,065
Other comprehensive income, net of tax:
Foreign currency translation adjustment 27 27
Net unrealized gains on securities 335 335
Minimum pension liability adjustment (9) (9)
---------
Total comprehensive income (b) 2,418
Dividends declared (715) (715)
Share issuances for employee benefit plans 2 (60) 114 54
Purchase of treasury stock (3) (148) (148)
Tax benefit related to stock options 4 4
ESOP activities and related tax benefit 74 74
-------- --------- -------- -------- --------- -------- --------- -------- ---------
Balance at June 30, 2000 2,020 (139) $ 2,020 $ 6,775 $ 12,746 $ (5) $ (4,832) $ (202) $ 16,502
======== ========= ======== ======== ========= ======== ========= ======== =========
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of June 30, 2000, there were approximately
36 shares held in trust and 103 shares held in treasury.
(b) Total comprehensive income for second quarter 2000 was $1,104.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
----------------------------------------------------------------------------------------
Number of Shares Amount
----------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Balance at December 31, 1998 2,020 (70) $ 2,020 $ 6,766 $ 9,479 $ (64) $ (1,752) $ (339) $ 16,110
Net income 1,401 1,401
Other comprehensive income, net of tax:
Foreign currency translation adjustment (114) (114)
---------
Total comprehensive income (b) 1,287
Dividends declared (720) (720)
Share issuances for employee benefit plans 1 (18) 33 15
Purchase of treasury stock (66) (2,965) (2,965)
Purchase of stock by grantor trust (3) (3)
ESOP activities and related tax benefit 3 33 36
------- -------- -------- -------- --------- -------- --------- ------- ---------
Balance at June 30, 1999 2,020 (135) $ 2,020 $ 6,766 $ 10,145 $ (178) $ (4,687) $ (306) $ 13,760
======= ======== ======== ======== ========= ======== ========= ======= =========
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of June 30, 1999, there were approximately
36 shares held in trust and 100 shares held in treasury.
(b) Total comprehensive income for second quarter 1999 was $830.
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 report 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 the
standard must be adopted by us 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:
Second Quarter Year-to-Date
1999 2000 1999 2000
Basic common shares outstanding 1,891 1,882 1,912 1,881
Incremental shares from stock options 18 18 18 18
Diluted common shares outstanding 1,909 1,900 1,930 1,899
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
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 that 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. We also have agreed to make up
to $3 billion of loans 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.
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.
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 by 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.
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 for the
first quarter of 1999 was $280.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
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>
Second Quarter % Year-to-Date %
1999 2000 Change 1999 2000 Change
<S> <C> <C> <C> <C> <C> <C>
Wireline communications
External revenues $4,307 $4,595 6.7 $8,582 $9,099 6.0
Intersegment revenues 119 86 (27.7) 167 158 (5.4)
Total revenues $4,426 $4,681 5.8 $8,749 $9,257 5.8
Operating income $1,390 $1,589 14.3 $2,803 $3,141 12.1
Segment net income $ 781 $ 908 16.3 $1,582 $1,771 11.9
Domestic wireless
External revenues $796 $919 15.5 $1,540 $1,772 15.1
Intersegment revenues 3 4 33.3 7 8 14.3
Total revenues $799 $923 15.5 $1,547 $1,780 15.1
Operating income $102 $193 89.2 $ 189 $ 285 50.8
Net earnings (losses)
of equity affiliates $ 41 $ 48 17.1 $ 72 $ 80 11.1
Segment net income $ 71 $127 78.9 $131 $187 42.7
International operations
External revenues $565 $658 16.5 $1,126 $1,322 17.4
Intersegment revenues -- 10 N/M* -- 21 N/M
Total revenues $565 $668 18.2 $1,126 $1,343 19.3
Operating income $ 70 $ 58 (17.1) $ 121 $ 56 (53.7)
Net earnings (losses)
of equity affiliates $ 21 $(29) N/M $ 8 $(12) N/M
Segment net income (loss) $ 50 $(18) N/M $ 30 $ (4) N/M
Advertising and publishing
External revenues $407 $471 15.7 $750 $835 11.3
Intersegment revenues 3 6 N/M 6 11 83.3
Total revenues $410 $477 16.3 $756 $846 11.9
Operating income $162 $199 22.8 $302 $344 13.9
Net earnings (losses)
of equity affiliates $ (4) $ 5 N/M $(5) $ 4 N/M
Segment net income $ 98 $125 27.6 $182 $215 18.1
All other
External revenues $ 73 $109 49.3 $ 123 $ 211 71.5
Intersegment revenues 92 106 15.2 162 194 19.8
Total revenues $165 $215 30.3 $ 285 $ 405 42.1
Operating loss $(68) $(64) (5.9) $(152) $(129) (15.1)
Net earnings (losses)
of equity affiliates $ (1) $ (1) -- $ -- $ (1) N/M
Segment net loss $(59) $(53) (10.2) $(116) $(99) (14.7)
</TABLE>
* Not Meaningful
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note H - Segment Information (continued)
<TABLE>
<CAPTION>
Second Quarter % Year-to-Date %
1999 2000 Change 1999 2000 Change
<S> <C> <C> <C> <C> <C> <C>
Reconciling items
External revenues $ -- $ -- N/M $ -- $ -- N/M
Intersegment revenues (217) (212) (2.3) (342) (392) 14.6
Total revenues $(217) $(212) (2.3) $(342) $(392) 14.6
Operating income $(342) $ (28) N/M $(342) $(127) (62.9)
Net earnings (losses)
of equity affiliates $ -- $ (1) N/M $(284) $ 82 N/M
Segment net loss $(155) $ (25) N/M $(408) $ (5) N/M
Reconciliation to Consolidated Financial Information
Operating Revenues
Wireline communications $4,426 $4,681 5.8 $8,749 $9,257 5.8
Domestic wireless 799 923 15.5 1,547 1,780 15.1
International operations 565 668 18.2 1,126 1,343 19.3
Advertising and publishing 410 477 16.3 756 846 11.9
All other 165 215 30.3 285 405 42.1
Total segments 6,365 6,964 9.4 12,463 13,631 9.4
Reconciling items (217) (212) (2.3) (342) (392) 14.6
Total consolidated $6,148 $6,752 9.8 $12,121 $13,239 9.2
Net Income
Wireline communications $781 $ 908 16.3 $1,582 $1,771 11.9
Domestic wireless 71 127 78.9 131 187 42.7
International operations 50 (18) N/M 30 (4) N/M
Advertising and publishing 98 125 27.6 182 215 18.1
All other (59) (53) (10.2) (116) (99) (14.7)
Total segments 941 1,089 15.7 1,809 2,070 14.4
Reconciling items (155) (25) N/M (408) (5) N/M
Total consolidated $ 786 $ 1,064 35.4 $1,401 $2,065 47.4
</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.,
a cellular operator in the Eastern and Atlantic regions in Colombia, 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 66.0%. See note Q -
Subsequent Events.
Proposed Domestic Wireless Transaction
In April 2000, we announced plans to combine substantially all of our domestic
wireless businesses with those of SBC Communications into a venture that will
comprise the nation's second largest wireless company. This venture, which will
cover a total population of 175 million people and serve more than 16.0 million
subscribers, will be owned 40% by BellSouth and 60% by SBC Communications but
will be jointly controlled. We expect to receive the required regulatory
approvals and close the transaction by the end of 2000.
One of our domestic partners has sued to enjoin the contribution of our interest
in the PCS property in North and South Carolina to the venture. We do not expect
this action to delay the closing of the venture.
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 June 30, 2000:
Gross Gross
Unrealized Unrealized
Cost gains losses Fair Value
Investment in Qwest $3,500 $ 200 $ -- $ 3,700
Other investments 458 167 (31) 594
Total $3,958 $ 367 $(31) $ 4,294
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 June 30, 2000 we have closed on 1,754
towers and received $577. Remaining towers covered by the agreement are expected
to be subleased 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 June 30, 2000, we have closed on 706
towers and received $290. Remaining towers covered by the agreement are expected
to be subleased throughout the remainder of 2000. In connection with this
agreement, we entered into an exclusive three-year, build-to-suit agreement.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
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.
Second Quarter % Year-to-Date %
1999 2000 Change 1999 2000 Change
Revenues $1,250 $1,598 27.8 $2,459 $3,113 26.6
Operating income $ 112 $ 173 54.5 $ 141 $ 284 N/M
Net income (loss) $ 41 $ 34 (17.1) $(608) $ 72 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 - Contingencies
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
compensation is due under the interconnection agreements.
In February 1999, the FCC issued a decision that such traffic does not terminate
at the Internet service provider and, therefore, is interstate in nature, rather
than local. The FCC stated, however, that it would not interfere with prior
state commissions' decisions regarding this matter. The courts and state
regulatory commissions in BST's operating territory that have considered the
matter have, in most cases, ruled that BST is responsible for paying reciprocal
compensation on these calls. BST has appealed the adverse decisions and
continues to believe that it has a good legal basis for its position that such
reciprocal compensation is not owed to the competitive local carriers. For those
cases where BST believes it is probable that it has incurred a liability, it has
recorded an estimate of the amount owed. At June 30, 2000, the exposure related
to unrecorded amounts withheld from competitive local carriers was approximately
$310, including accrued interest.
In March 2000, the United States Court of Appeals for the D.C. Circuit vacated
and remanded the FCC decision, concluding that the FCC had not adequately
explained its finding that Internet service provider traffic was interstate.
Based on statements made by the FCC since the court's decision, we do not
believe that this most recent court decision adversely affects the ultimate
outcome of pending state proceedings. Nonetheless, we have commenced discussions
with several competitive local carriers concerning settlement of some claims,
and agreements have been reached in certain circumstances.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note N - Contingencies (continued)
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.
Note O - Tracking Stock
In March 2000, we filed with the SEC a preliminary proxy statement relating to a
special shareholders' meeting 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. Both filings
remain subject to further review by the SEC.
We plan to authorize 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 completion of the SEC review process,
shareholder approval, market conditions and other factors.
Note P - Satellite Leases
In May 2000, we signed a long-term satellite service agreement with GE Americom,
a GE Capital company. As a result of this agreement, we are able to offer a
full-suite of digital home entertainment and interactive information services to
over 14 million households in our service territory. We plan to roll out service
in our top markets within the next year and expand throughout the southeast by
the first half of 2002.
Note Q - Subsequent Events
Through a purchase on the Bogota stock exchange in July 2000,
Celumovil/BellSouth acquired 100 percent of the shares of Cocelco, a wireless
communication services provider in the western region of Colombia.
This acquisition was funded by a $384 capital contribution and a $30 shareholder
loan from BellSouth, resulting in an increase in BellSouth's ownership interest
in Celumovil to 66.0%. The transaction creates the first nationwide mobile
cellular communications operator in Colombia.
<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
report on Form 10-Q.
-------------------------------------------------------------------------------
Consolidated Results of Operations
-------------------------------------------------------------------------------
Key financial and operating data for second 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>
----------------------- ------------ --- ------------------------- ------------
Second Quarter % Year-to-Date
----------- ----------- --- ------------ ------------ %
1999 2000 Change 1999 2000 Change
----------- ----------- ------------ --- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Results of operations:
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Operating revenues $6,148 $6,752 9.8 $12,121 $13,239 9.2
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Operating expenses 4,834 4,805 (0.6) 9,200 9,669 5.1
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Operating income 1,314 1,947 48.2 2,921 3,570 22.2
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Interest expense 245 332 35.5 471 638 35.5
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Net earnings (losses) of equity affiliates 57 22 N/M* (209) 153 N/M
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Gain on sale of operations 16 -- N/M 16 -- N/M
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Other income, net 114 46 N/M 173 129 (25.4)
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Provision for income taxes 470 619 31.7 1,029 1,149 11.7
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Net income $ 786 $1,064 35.4 $ 1,401 $ 2,065 47.4
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
As Reported:
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Net income $786 $1,064 35.4 $ 1,401 $ 2,065 47.4
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Earnings per share $ .41 $ .56 36.6 $ .73 $ 1.09 49.3
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Normalized:
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Net income $973 $1,064 9.4 $ 1,868 $ 2,045 9.5
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Earnings per share $ .51 $ .56 9.8 $ .97 $ 1.08 11.3
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Cash flow data:
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Cash provided by operating activities 2,451 2,448 -- 4,093 4,798 17.2
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Cash used for investing activities (5,194) (2,239) N/M (6,652) (3,795) N/M
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Cash provided by (used for) financing
activities 1,560 157 N/M 172 (770) N/M
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Other:
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Effective tax rate 37.4% 36.8% -60bps 42.3% 35.8% -650bps
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Average debt balances:
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Short-term debt $5,848 $5,607 (4.1) $5,025 $6,212 23.6
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Long-term debt $8,401 $11,029 31.3 $8,487 $10,469 23.4
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
Total average debt balance $14,249 $16,636 16.8 $13,512 $16,681 23.4
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
EBITDA(1) $2,789 $3,187 14.3 $ 5,509 $6,106 10.8
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
EBITDA margin(2) 45.4% 47.2% +180bps 45.5% 46.1% +60bps
-------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
</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
<PAGE>
-------------------------------------------------------------------------------
Overview of consolidated results of operations
-------------------------------------------------------------------------------
On a comparative basis, results reflect strong revenue growth in the core
wireline business driven by digital and data services revenues and significant
increases in our international and domestic wireless customer bases. Expense
growth was driven by 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 second 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 second quarter 1999 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.
In addition to the asset impairment during the second quarter, the year-to-date
1999 normalized results exclude the impact of the devaluation of the Brazilian
Real. Our share of the foreign currency losses in our Brazilian wireless
properties reduced net income by $280, or $0.15 per share. 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.
Operating Revenues
Operating revenues increased $604 during second quarter 2000 and $1,118 for the
year-to-date period. The increase reflects:
. growth in our wireline communications operations spurred by demand for
digital and data services and convenience features;
. growth from higher access, airtime and equipment sales in our domestic
wireless operations driven by a 16.0% expansion in the customer base from
second quarter 1999 to second quarter 2000;
. higher revenues from our international operations resulting from growth in
the customer bases of our current operations, which customer bases grew
72.7% from second quarter 1999 to second quarter 2000;
. the addition of new international directory publishing businesses since
first quarter 1999, volume growth and price increases in our domestic
advertising and publishing operations, and increases in revenues from
electronic media offerings; and
. growth in new lines of business.
Growth in wireline revenues was offset by the effects of rate impacts 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 driven by 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 38.6% for the
quarter and 37.3% for the year-to-date period.
Operating Expenses
Total operating expenses decreased $29 during second quarter 2000 and increased
$469 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. Second quarter and 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 $291 during second quarter and $711 year-to-date.
Operational and support expenses increased $206 during the quarter and $521
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 $85 for the
quarter and $190 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.
Interest expense
Higher interest expense in 2000 is attributable to higher average debt balances
resulting from borrowings associated with the financing of our investment in
Qwest and increases in interest rates.
Gain on sale of operations
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 decreased $35 in second quarter 2000
and increased $362 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 the
consolidated interim financial statements for further discussion of this matter.
The year-to-date 1999 period includes foreign exchange losses of $280 related to
our Brazilian properties. See note G to the consolidated interim financial
statements for further discussion of this matter. Excluding the impact of these
items, year-to-date 2000 earnings increased $14 when compared to the same 1999
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
decrease of $68 for the quarter is attributable to lower minority interest
income of $16 related to our less-than-100-percent owned subsidiaries and
decreased other non-operational income, primarily gains from cellular property
exchanges. The decrease for the quarter also included increased foreign currency
losses of $16. The year-to-date decrease of $44 is attributable to a $15
decrease in interest income and decreased other non-operational income.
Provision for income taxes
The provision for income taxes increased $149 quarter-over-quarter and $120 on a
year-to-date comparative basis. Our effective tax rate decreased from 37.4% in
second quarter 1999 to 36.8% in second quarter 2000. The decrease in the
effective tax rate is due primarily to the recognition of tax incentives and
more favorable results from equity-method investees, which are recorded net of
tax benefits or expense.
For the year-to-date period, the effective tax rate was 35.8% compared to 42.3%
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. Excluding these and other
special items, our effective rate was 38.1% for the 1999 year-to-date period and
36.6% 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 and more
favorable results from equity-method investees.
-------------------------------------------------------------------------------
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>
-------------------------------------------- ------------------------ ----------- ----- ------------------------ -----------
Second Quarter % Year-to-Date %
------------------------ ------------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
Operating revenues:
Local service $2,712 $2,862 5.5 $5,366 $5,683 5.9
Network access 1,187 1,245 4.9 2,378 2,508 5.5
Long distance 153 131 (14.4) 303 266 (12.2)
Other wireline 255 357 40.0 535 642 20.0
Intersegment revenues 119 86 (27.7) 167 158 (5.4)
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Total operating revenues $4,426 $4,681 5.8 $8,749 $9,257 5.8
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Operating expenses $3,036 $3,092 1.8 $5,946 $6,116 2.9
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Operating income $1,390 $1,589 14.3 $2,803 $3,141 12.1
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Segment net income $ 781 $ 908 16.3 $1,582 $1,771 11.9
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Key Indicators
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Access line counts (000s):
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Switched access lines:
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Residential 16,782 17,189 2.4
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Business 7,316 7,198 (1.6)
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Other 272 260 (4.4)
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Total switched access lines 24,370 24,647 1.1
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Access line equivalents (1) 15,605 23,649 51.5
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Total equivalent access lines 39,975 48,296 20.8
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Access minutes of use (millions) 27,627 28,798 4.2 54,452 57,514 5.6
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Long distance messages (millions) 168 129 (23.2) 345 265 (23.2)
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Digital and data services revenues $ 685 $869 26.9 $1,306 $1,680 28.6
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
Convenience feature revenues $ 477 $532 11.5 $ 921 $1,047 13.7
-------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
</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 $150 for second quarter 2000 and $317
for the year-to-date period are attributable to growth in switched access lines
and strong demand for digital and data services and convenience features.
We ended the second quarter with over 48 million total equivalent access lines,
an increase of 20.8% since June 30, 1999. Residential access lines rose 2.4% to
17,189,000, driven by economic growth in our nine-state region as well as demand
for secondary residence lines which accounted for 42.2% of the growth in
residential access lines. We added 172,000 secondary residence lines since June
30, 1999, extending the total to over 2.5 million lines and ending the current
period with a penetration rate of 17.1%. Business access lines, including both
switched access lines and data circuits, grew 34.6%, propelled by expanding
demand for our digital and data services. Switched business access lines
decreased 1.6% reflecting continued migration of new and existing business
customers to high-capacity data lines.
Revenues from optional convenience features such as Caller ID, Call Waiting,
Call Return and voicemail service increased $55, or 11.5%, quarter-over-quarter
and $126, or 13.7%, on a year-to-date comparative basis. These increases were
driven by growth in convenience 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 $45 compared to second quarter 1999 and $94
compared to the first six months of 1999.
Network access
Network access revenues grew $58 in the second quarter and $130 for the first
six months of 2000 when compared to the same 1999 periods, due largely to higher
demand. Access minutes of use rose 4.2% to 28,798 million in second quarter 2000
from 27,627 million in second quarter 1999. For the year-to-date period, access
minutes of use grew 5.6% to 57,514 million in 2000 from 54,452 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 $78 quarter-over-quarter and $137 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 $68 compared to second quarter 1999 and by $133 compared to the
first six 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 $22 decrease for the quarter and $37 decrease for the year-to-date period
compared to the same 1999 periods are primarily attributable to a 23.2% decrease
in long distance message volumes. 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 receive
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 $4 for the quarter and $11 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 18.4%, from $374 in second
quarter 1999 to $443 in second quarter 2000. For the year-to-date period, these
revenues increased 14.0%, from $702 in 1999 to $800 in 2000. Higher revenues of
$111 for the quarter and $178 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 June 30, 2000 we had 788,000
subscribers to our BellSouth Internet Service (sm), an increase of 39.4%
compared to the same 1999 period. Decreases in intersegment revenues of $33 for
the quarter and $9 for the year-to-date period primarily represent one-time
transactions with affiliates in the prior year.
Operating Expenses
Operational and support expenses
Operational and support expenses increased $2, or 0.1%, for second quarter 2000
and increased $68, or 1.6%, for the first six months of 2000 when compared to
the same 1999 periods. These increases were primarily attributable to reciprocal
compensation, volume-related increases in interconnection expense and higher
payments to FCC mandated universal access funds totaling $38 for the quarter and
$163 for the year-to-date period. These increases were offset by $38 for the
quarter and $61 for the year-to-date period for lower pension and benefit costs
attributable to favorable pension plan investment returns. The increases were
further offset by reductions of $18 for the quarter and $54 for the year-to-date
period in contract service expense and volume-driven costs from sales of
customer premises equipment and paging equipment.
Also contributing to the increase 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. We
have made high-speed Internet access available in 31 markets with an addressable
market of approximately 9 million access lines, and we plan to increase the
addressable market to 11.5 million access lines by the end of 2000. In January
2000, we began offering a self-install kit for high-speed Internet access in
seven cities and are planning to expand these offerings to additional areas in
the southeastern U.S. We are deploying optical fiber-based broadband products in
nearly all newly built neighborhoods and are also retrofitting some 200,000
existing homes in Atlanta and Miami.
Depreciation and amortization
Depreciation and amortization expense increased $54, or 6.4%, for second quarter
2000 and $102, or 6.1%, for the first six 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>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
External revenues $ 796 $ 919 15.5 $1,540 $1,772 15.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues 3 4 33.3 7 8 14.3
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $ 799 $ 923 15.5 $1,547 $1,780 15.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $ 697 $ 730 4.7 $1,358 $1,495 10.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating income $ 102 $ 193 89.2 $ 189 $ 285 50.8
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $ 41 $ 48 17.1 $ 72 $ 80 11.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net income $ 71 $ 127 78.9 $ 131 $ 187 42.7
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Customers (a) 4,724 5,482 16.0
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Average monthly revenue per customer (a) $ 51 $ 52 2.0 $ 51 $ 52 2.0
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</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 $124, or 15.5%, quarter-over-quarter and $233, or
15.1%, 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 16.0% increase in the customer base. Adjusted for the sale of
Honolulu Cellular in August 1999, the customer growth rate would have been
19.2%. Customer growth since 1999 has been driven by advertising, enhanced
volume pricing strategies such as one-rate 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 second
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 $44, or 8.1%, during second quarter
2000 and $128, or 12.0%, 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. Customer acquisition costs increased as a result of increases in net
customer additions of 91.8% for the quarter and 61.5% 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 $11, or 7.1%, to $144 during second
quarter 2000 and increased $9, or 3.1%, to $302 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.
Net Earnings (Losses) of Equity Affiliates
Compared to the same 1999 periods, second quarter 2000 and year-to-date 2000 net
earnings (losses) of unconsolidated domestic wireless businesses remained
relatively flat. Higher earnings at our business in Los Angeles were offset by
decreases in earnings at other properties.
International Operations
International operations is comprised principally of our investments in cellular
and PCS businesses in ten countries in Latin America as well as in Denmark,
Germany, India and Israel. Consolidated operations include our businesses in
Argentina, Chile, 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>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
External revenues $ 565 $ 658 16.5 $1,126 $1,322 17.4
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues -- 10 N/M -- 21 N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $ 565 $ 668 18.2 $1,126 $1,343 19.3
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $ 495 $ 610 23.2 $1,005 $1,287 28.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating income $ 70 $ 58 (17.1) $ 121 $ 56 (53.7)
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $ 21 $ (29) N/M $ 8 $(12) N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net income (loss) $ 50 $ (18) N/M $ 30 $ (4) N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Customers (a) 3,233 5,584 72.7
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Average monthly revenue per customer (a) $ 57 $ 35 (38.6) $ 59 $ 37 (37.3)
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</TABLE>
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
The increase of $103 quarter-over-quarter and $217 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 72.7% since June 30,
1999. Partially offsetting the impacts of customer growth is declining monthly
revenue per customer that is driven by continued expansion into lower-usage
customer segments through offerings such as prepaid cellular service 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 second quarter 2000 and $22 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 $184 for the quarter and $390 for the year-to-date
period.
Operating Expenses
Operational and support expenses
For the 2000 periods, these expenses increased $95 compared to second quarter
1999 and $241 compared to the first six months of 1999. These increases are
primarily the result of operational and customer acquisition costs associated
with growth in customer levels and expanded operations. Since June 30, 1999, our
existing operations have added almost 2.2 million customers in Argentina, Chile
and Venezuela. We have also added 200,000 customers through the acquisition and
development of businesses in 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 $142 for the quarter and $353 for the year-to-date
period.
Depreciation and amortization
Depreciation expense increased $15 quarter-over-quarter and $34 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 $5 quarter-over-quarter and $7 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 $50 to
$(29) in second quarter 2000 and $20 to $(12) during the first six months of
2000. The decline in our unconsolidated international businesses is due to lower
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 second quarter 2000 was a
loss of $29 and year-to-date 2000 was a loss of $19.
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>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
External revenues $ 407 $ 471 15.7 $ 750 $ 835 11.3
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues 3 6 N/M 6 11 83.3
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $ 410 $ 477 16.3 $ 756 $ 846 11.9
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $ 248 $ 278 12.1 $ 454 $ 502 10.6
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating income $ 162 $ 199 22.8 $ 302 $ 344 13.9
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $(4) $ 5 N/M $(5) $ 4 N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net income $ 98 $ 125 27.6 $ 182 $ 215 18.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</TABLE>
Operating Results
External revenues increased $64 for second quarter 2000 and $85 for year-to-date
2000 when compared to the same 1999 periods. These increases are principally a
result of revenues from our new directory publishing operations in Peru and
Brazil totaling $31 for second quarter and $45 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 15.9% for the quarter and 13.4% for the year-to-date
period. Also contributing are increases of $10 for the quarter and $20 for the
year-to-date period in the revenues from our electronic media offerings.
Operational and support expenses increased $28 for second quarter 2000 and $42
for year-to-date 2000 when compared to the same 1999 periods. These increases
are primarily due to our new operations in Peru and Brazil totaling $33 for the
quarter and $56 for the year-to-date period. Also contributing to the increases
are costs of $5 for the quarter and $11 for the year-to-date period associated
with growth in electronic media offerings. These increases were offset by lower
costs of $10 for the quarter and $25 for the year-to-date period in the domestic
directory businesses due to the shift in directory production schedules.
Depreciation and amortization increased by $2 for second quarter 2000 and $6 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>
-------------------------------------------------- ----------------------- ------------ ----- ----------------------- -----------
Second Quarter % Year-to-Date %
----------------------- -----------------------
1999 2000 Change 1999 2000 Change
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
External revenues $ 73 $ 109 49.3 $123 $211 71.5
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Intersegment revenues 92 106 15.2 162 194 19.8
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Total operating revenues $ 165 $ 215 30.3 $285 $405 42.1
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating expenses $ 233 $ 279 19.7 $437 $534 22.2
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating loss $(68) $(64) (5.9) $(152) $(129) (15.1)
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Net earnings (losses) of equity affiliates $(1) $(1) -- $ -- $ (1) N/M
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Segment net loss $ (59) $(53) (10.2) $(116) $ (99) (14.7)
-------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
</TABLE>
Operating Results
External revenues increased $36 for second quarter 2000 and $88 on a
year-to-date comparative basis, primarily driven by growth in revenues of $19
for the quarter and $44 for the year from the resale of long distance services
in markets outside of our wireline region, $8 for the quarter and $18 for the
year from interactive paging services and $7 for the quarter and $15 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 $32 for the quarter and $73 for
the year-to-date period. Depreciation and amortization has increased $14 on a
quarter-over-quarter basis and $24 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):
-------------------------------------------------------------------------------
1999 2000 Change
------------------------------------------------------
Operating activities $ 4,093 $4,798 $ 705 17.2 %
Investing activities $(6,652) $(3,795) $2,857 N/M
Financing activities $ 172 $(770) $ (942) 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 for 2000 also include $65 in cash
proceeds associated with the sublease of wireless communications towers to Crown
Castle International.
Net cash used in investing activities
During the first half of 2000, we invested $3.3 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 products. Included in these
expenditures for the first half of 2000 are approximately $360 in costs related
to the purchase and development of internal-use software.
The year-to-date 2000 amount paid for investments and advances of $582 primarily
consists of $240 paid to acquire our investment in Tele Centro Oeste and $299
paid for the acquisition of Celumovil.
Net cash 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 50.6% at June 30, 2000 compared to
53.1% at December 31, 1999. The decrease is a function of increases in
shareholders' equity, driven by income from operations and net unrealized gains
on securities.
At August 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, dividend reinvestment 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. These commissions generally may
require price reductions and other concessions from us as conditions to
approving these plans.
In North Carolina, we reached a joint stipulation with the North Carolina Public
Staff and AT&T regarding revisions to the price regulation plan, switched access
reductions, ADSL deployment and service quality issues. In July 2000, the North
Carolina Utilities Commission approved much of the Joint Stipulation, including
a one year extension of our price regulation plan, some reductions in intrastate
switched access charges, enhanced ADSL deployment and voluntary self-enforcing
penalties associated with service quality problems.
In July 2000, the Florida Public Service Commission (FPSC) commenced a
proceeding to determine whether we violated certain FPSC rules regarding service
quality. Hearings are currently scheduled for November 2000. Also in July 2000,
the FPSC 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 are considering whether to protest the decision.
On the federal level, the Federal Communications Commission (FCC) has
considerable authority to establish pricing, interconnection and other policies
that had once been considered within the exclusive jurisdiction of the state
public service commissions. We expect the FCC to accelerate the growth of local
service competition by aggressively utilizing such power.
We have been testing our operations support systems in Georgia and Florida and
expect to file our Georgia long distance application with the FCC by the end of
2000. 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. During December 1999, the FCC approved Bell Atlantic's
request to provide full long distance wireline service in New York state, making
it the first Bell System-affiliated company to obtain relief under the
Telecommunications Act of 1996 in any state. In June 2000, the FCC approved
SBC's long distance application for Texas, making it the second Bell
System-affiliated company to obtain authority to offer long distance services.
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.
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. During
first quarter 2000, a coalition of local and long distance providers, including
BellSouth, Bell Atlantic, GTE, SBC, AT&T and Sprint submitted a proposal
designed to result in lower consumer prices for long distance service by
reforming the way in which access costs are recovered. The proposal was a
comprehensive package that would adjust the FCC's price cap, access charge and
universal service rules for those price cap local exchange carriers electing to
adopt the proposal. After receiving public comment on this proposal, the FCC
approved most of the proposal in an order in May 2000.
Although one effect of the FCC's order will be to reduce access charges paid to
BellSouth by other carriers, we will be able to increase subscriber line charges
paid by residential and single-line business customers each year through 2003.
Any increases which we request after July 2001 are subject to a cost review.
During June 2000, we filed tariff modifications implementing the proposal. 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 N 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. 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
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 the
standard must be adopted by us no later than January 1, 2001. We do not expect
that the adoption of this standard will have a material impact on results of
operations, financial position or cash flows.
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;
. 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.
<PAGE>
-------------------------------------------------------------------------------
PART II -- OTHER INFORMATION
-------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
We have published the information called for by this item in our "Second Quarter
2000 Report to Shareholders" which was distributed to shareholders on or about
May 1, 2000. Shareholders can request a copy of this report by calling
Shareholder Services at 1-800-631-6001.
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 June 30, 2000.
(b) Reports on Form 8-K:
Date of Event Subject
April 20, 2000 BellSouth 1Q00 Earnings Release
April 10, 2000 Announcement of wireless joint venture with
SBC Communications.
<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/ Ronald M. Dykes
RONALD M. DYKES
Chief Financial Officer
(Principal Accounting Officer)
August 14, 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 June 30, 2000.