<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 2000
REGISTRATION NO. 333-33466
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
BELLSOUTH CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-1533433
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
---------------------
1155 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30309-3610
(404) 249-2000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
RAY E. WINBORNE
EXECUTIVE DIRECTOR -- CORPORATE ACCOUNTING
BELLSOUTH CORPORATION
1155 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30309-3610
(404) 249-3035
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
COPIES TO:
<TABLE>
<S> <C> <C>
RAYMOND W. WAGNER, ESQ. W. BENJAMIN BARKLEY, ESQ. CHARLES S. WHITMAN III, ESQ.
SIMPSON THACHER & BARTLETT KILPATRICK STOCKTON LLP RICHARD D. TRUESDELL, JR., ESQ.
425 LEXINGTON AVENUE 1100 PEACHTREE STREET, SUITE 2800 DAVIS POLK & WARDWELL
NEW YORK, NEW YORK 10017 ATLANTA, GEORGIA 30309 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ----------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to
buy these securities in any state where the offer or sale is not
permitted.
PROSPECTUS (Subject to Completion)
Issued June 8, 2000
Shares
BELLSOUTH LOGO
BellSouth Corporation
LATIN AMERICA GROUP COMMON STOCK
------------------------
BELLSOUTH CORPORATION IS OFFERING SHARES OF A NEW SERIES OF ITS COMMON STOCK
INTENDED TO REFLECT THE SEPARATE PERFORMANCE OF ITS LATIN AMERICAN BUSINESSES.
NO PUBLIC MARKET CURRENTLY EXISTS FOR LATIN AMERICA GROUP STOCK. WE ANTICIPATE
THAT THE PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER
SHARE.
------------------------
WE INTEND TO LIST LATIN AMERICA GROUP STOCK ON THE NEW YORK STOCK EXCHANGE UNDER
THE SYMBOL "BLS.L."
------------------------
INVESTING IN LATIN AMERICA GROUP STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 16.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS LATIN AMERICA GROUP
---------- ------------- -------------------
<S> <C> <C> <C>
Per Share............................................... $ $ $
Total................................................... $ $ $
</TABLE>
BellSouth has granted the underwriters the right to purchase up to an additional
shares of Latin America group stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of Latin America
group stock to purchasers on , 2000.
------------------------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
ABN AMRO ROTHSCHILD
a division of ABN AMRO Incorporated
BANC OF AMERICA SECURITIES LLC
J.P. MORGAN & CO.
, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 3
Risk Factors.......................... 16
Cautionary Language Concerning
Forward-Looking Statements.......... 37
Use of Proceeds....................... 38
Dividend Policy....................... 38
Selected Historical Combined Financial
and Operating Data of the Latin
America Group....................... 39
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of the Latin America
Group of BellSouth Corporation...... 41
Industry Overview..................... 67
Business of the Latin America Group... 71
Management of the Latin America
Group............................... 94
Selected Historical and Pro Forma
Consolidated Financial Data of
BellSouth Corporation............... 95
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of BellSouth
Corporation......................... 97
Description of the BLS Group.......... 123
Description of Capital Stock.......... 125
Relationship Between the Latin America
Group and the BLS Group............. 153
United States Federal Income Tax
Consequences........................ 158
Underwriters.......................... 161
Legal Matters......................... 163
Experts............................... 163
Where You Can Find More Information... 163
Information Incorporated by
Reference........................... 163
Index to Financial Statements......... F-1
</TABLE>
1
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(This page intentionally left blank)
<PAGE> 5
SUMMARY
You should read the following summary together with the more detailed
information regarding BellSouth, its Latin America group and Latin America group
stock included or incorporated by reference in this prospectus. You should also
read the combined financial statements of the Latin America group and the
related notes and the consolidated financial statements of BellSouth and the
related notes included in this prospectus.
This is an offering of Latin America group stock, a new series of our
common stock. Holders of Latin America group stock and holders of our other
series of common stock, called "BLS group stock" will be shareholders of a
single company, BellSouth. Latin America group stock and BLS group stock is a
type of common stock that is intended to reflect or "track" the separate
performance of groups of businesses. Latin America group stock is intended to
reflect the separate performance of our Latin America group, and BLS group stock
is intended to reflect the separate performance of our BLS group.
Investors purchasing shares of Latin America group stock in this offering
will not be purchasing stock in, and therefore will not have an ownership
interest in, any company other than BellSouth. Holders of Latin America group
stock will be subject to the benefits and risks associated with an investment in
BellSouth and all of its businesses, assets and liabilities. Financial effects
arising from our BLS group that affect BellSouth's consolidated results of
operations could, if significant, affect the results of operations or financial
condition of our Latin America group or the market price of Latin America group
stock. In addition, the market price of Latin America group stock could be
affected by events involving our BLS group or the performance of BLS group
stock.
LATIN AMERICA GROUP
BellSouth is the leading pan-regional provider of wireless
telecommunications services in Latin America. Over the past ten years, we have
rapidly grown our core wireless telephone services business in Latin America by
adding customers in existing licensed areas and extending our geographic
coverage. We currently have operations in Venezuela, Brazil, Argentina, Peru,
Chile, Panama, Ecuador, Uruguay and Nicaragua and plan to launch service in
Guatemala in third quarter 2000. We have also entered into agreements to buy a
majority interest in a wireless operator in Colombia. As of February 29, 2000,
our Latin American companies held licenses for territories with a total
population of approximately 176 million and provided wireless services to
approximately 7.3 million customers. We do not own 100% of each of these
companies; adjusting market and customer data to reflect this partial ownership,
our licensed service areas had a population of approximately 124 million and
provided wireless services to approximately 5.0 million customers, each as of
February 29, 2000.
Our goal is to become the leading pan-regional integrated communications
provider in Latin America by leveraging our existing wireless businesses. Our
Latin American companies have constructed and continue to enhance networks that
will allow them to offer a broad array of additional communications services
when and as permitted by local regulation. Using these networks, our operating
companies are increasingly offering additional communications services, such as
Internet access, wireless data services, long distance, data network services
and wireless payphones. We also provide advertising and directory publishing
services in Brazil and Peru. In addition, our network services business provides
a wholesale long distance voice, data access and transport and operates an
international roaming clearinghouse.
Latin America group stock is intended to reflect the separate performance
of our Latin America group, which includes the assets and liabilities shown in
the combined balance sheets of our Latin America group. We attributed these
assets and liabilities to our Latin America group in accordance with the group's
lines of business described in our tracking stock policy statement adopted by
our board of directors. This initial attribution is reflected in the November
30, 1999 combined balance sheets of our Latin America group included in this
prospectus.
Under our tracking stock policy statement, the companies in our Latin
America group may engage in any business activity in Latin America, which is
defined to include South America, Central America, Mexico and
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<PAGE> 6
the Caribbean area, excluding the territories and possessions of the United
States and the Commonwealth of Puerto Rico. The companies in our BLS group
generally may not provide telecommunications and related services and products
in Latin America, except for activities incidental or ancillary to their
businesses outside Latin America.
The major assets attributed to our Latin America group consist of:
- our interests in communications companies in ten Latin American
countries;
- our interests in directory advertising and publishing companies in Brazil
and Peru; and
- our international network services business.
We also attributed all the liabilities related to these assets to our Latin
America group. As BellSouth acquires interests in other Latin American
businesses, we currently intend to attribute those assets and any related
liabilities to our Latin America group in accordance with the tracking stock
policy statement. All net income and cash flows generated by the assets will be
attributed to our Latin America group and all net proceeds from any disposition
of these assets will also be attributed to our Latin America group.
For the fiscal year ended November 30, 1999, our Latin America group had,
on a combined basis in accordance with U.S. GAAP, operating revenues of $2.4
billion and a net loss of $316 million. For the three months ended February 29,
2000, our Latin America group had operating revenues of $695 million and a net
loss of $20 million.
COMPETITIVE STRENGTHS
We believe the following competitive strengths distinguish BellSouth's
Latin American operations from its competitors:
- established and rapidly growing base of customers;
- strong pan-regional presence;
- reputation for providing superior services;
- high-capacity digital backbone networks;
- established brands;
- experienced management teams; and
- strong relationship with companies in the BLS group.
BUSINESS STRATEGY
To achieve its goal of becoming the leading pan-regional integrated
communications provider in Latin America, the Latin America group will leverage
its competitive strengths and market position in wireless telecommunications by
pursuing the following strategies:
- continue to rapidly grow existing wireless operations;
- expand pan-regional coverage;
- broaden existing capabilities and service offerings;
- realize increased synergies among its existing operations; and
- pursue selective strategic transactions that complement its business
plan.
THE LATIN AMERICAN TELECOMMUNICATIONS OPPORTUNITY
Latin America is a large and attractive telecommunications market with a
population of almost 500 million and a combined gross domestic product, or GDP,
of approximately $1.7
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<PAGE> 7
trillion in 1999. Because penetration rates remain significantly below the
levels of more developed countries, we believe the Latin American
telecommunications industry has the potential to grow at a faster rate than the
global telecommunications industry overall.
According to industry sources, the Latin American telecommunications market
is expected to experience compounded annual growth in:
- total telecommunications revenues of approximately 16% from 1999 to 2004;
- wireless subscribers of approximately 28% from 1999 to 2004;
- wireless service revenues of approximately 21% from 1999 to 2004; and
- active Internet accounts of approximately 87% from 1997 to 2002.
As the leading pan-regional wireless telecommunications provider in Latin
America, we believe the Latin America group is well positioned to take advantage
of this rapid growth.
BLS GROUP
Our BLS group companies provide communications services in the U.S. and
internationally outside of Latin America to more than 39 million customers in
nine countries. Our BLS group had revenues of $22.9 billion in the fiscal year
ended December 31, 1999 and $5.8 billion in the three months ended March 31,
2000. At March 31, 2000, our BLS group companies had assets of more than $39
billion and employed almost 89,000 people.
We are the leading telephone service provider in the Southeastern U.S.,
serving substantial portions of the population within Alabama, Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.
We provide wireline voice and data communications services, including local
exchange, network access and long distance services. Our BLS group also includes
extensive wireless businesses in Denmark, Germany, Israel and India and in 12
U.S. states, including all states in which we provide wireline
telecommunications. Our BLS group also includes directory advertising and
publishing operations and video entertainment services in several areas in the
Southeastern U.S.
---------------------
BellSouth's principal executive offices are located at 1155 Peachtree
Street, N.E., Atlanta, Georgia 30309-3610. Our telephone number is (404)
249-2000. We maintain a web site on the Internet at www.bellsouth.com. The
contents of our web site are not a part of this prospectus.
5
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C> <C>
Shares of Latin America group stock offered.......... shares
Shares of Latin America group stock reserved for
issuance for the benefit of the BLS group or to the
holders of BLS group stock after this offering..... shares
--------------
Total...................................... shares
==============
Over-allotment option................................ shares
Use of proceeds...................................... We will receive net proceeds from this offering
of approximately $ billion. We intend to
use:
- $ billion to fund capital expenditures,
possible license bids and potential acquisitions
by companies in the Latin America group and
for their general purposes; and
- the remaining $240 million to repay
indebtedness owed to companies in the BLS group
by companies in the Latin America group, which
indebtedness was incurred in connection with
our acquisition of a minority interest in a
Brazilian wireless company.
Proposed NYSE symbol................................. BLS.L
</TABLE>
The shares of Latin America group stock outstanding after this offering do
not include shares of Latin America group stock that we reserved for
issuance under the Amended and Restated BellSouth Corporation Stock Plan. Unless
specifically stated otherwise, all information in this prospectus assumes no
exercise by the underwriters of the over-allotment option.
---------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Latin America group stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus speaks only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of Latin America group stock.
THE INTEREST OF THE BLS GROUP IN THE LATIN AMERICA GROUP AND
THE EXPECTED DISTRIBUTION
We have reserved shares of Latin America group stock and have
attributed those shares to the BLS group. Although not issued or outstanding,
the shares so reserved will be available for issuance for the benefit of the BLS
group or to the holders of BLS group stock. The shares of Latin America group
stock sold in this offering will be additional shares and will not reduce the
number of shares reserved for and attributed to the BLS group.
We expect to distribute to the holders of BLS group stock these reserved
shares within six to 12 months after the completion of this offering. Our
decision to make a distribution and the precise timing will depend on market
conditions and other factors that our board of directors considers relevant.
6
<PAGE> 9
LATIN AMERICA GROUP STOCK
Latin America group stock is intended to reflect the separate performance
of our Latin America group. Although we intend Latin America group stock to
reflect the separate performance of our Latin American businesses, the holders
of Latin America group stock will be shareholders of BellSouth.
TRACKING STOCK POLICY STATEMENT
The rights of holders of Latin America group stock will be governed by our
charter. In addition, our board of directors has adopted a tracking stock policy
statement relating to the ongoing relationship between the Latin America group
and the BLS group with respect to matters where holders of Latin America group
stock and BLS group stock may have potentially divergent interests. Our board of
directors may, acting in good faith and consistent with its fiduciary duties,
amend, modify or rescind our tracking stock policy statement, adopt additional
or other policies or make exceptions with respect to the application of these
policies, without shareholder approval. However, our board of directors has no
present intention to do so.
Our tracking stock policy statement provides that we will resolve all
material matters as to which the holders of Latin America group stock and the
holders of BLS group stock may have potentially divergent interests in a manner
that our board of directors or the finance/strategic planning committee of our
board of directors determines to be in the best interests of BellSouth. The best
interests of BellSouth may be different from the best interests of the holders
of Latin America group stock. The tracking stock policy statement provides that
fair consideration will be given to the potentially divergent interests and all
other relevant interests of the separate series of common stock of BellSouth.
Our tracking stock policy statement also provides that BellSouth will seek
to manage the Latin America group and the BLS group in a manner intended to
maximize the operations, unique assets and value of both groups, and with
complementary deployments of personnel, capital and facilities, with the
continuing goal of positioning BellSouth as a unified source of
telecommunications and related services and products.
Our tracking stock policy statement also requires that:
- commercial transactions between the groups in the ordinary course of
their businesses be on arm's-length terms;
- the transfer of assets and liabilities between groups not in the ordinary
course of their businesses be at fair value;
- the groups will generally provide telecommunications and related services
and products only in their respective geographic regions;
- corporate opportunities be allocated in the overall best interests of
BellSouth; and
- both groups be given access to BellSouth's names and marks and other
intellectual property.
DIVIDENDS
We do not expect to pay dividends for the foreseeable future on Latin
America group stock.
YOUR VOTING RIGHTS
Except in limited circumstances, the holders of Latin America group stock
will vote together with the holders of BLS group stock as a single voting group
on each matter on which holders of common stock are generally entitled to vote.
On all matters as to which both series of common stock will vote together
as a single voting group:
- each share of BLS group stock will have one vote; and
- each share of Latin America group stock will have less than one vote, one
vote or more than one vote.
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<PAGE> 10
The actual number of votes each share of Latin America group stock will
have will be calculated each time our shareholders vote and will be equal to the
quotient of the average market value of a share of Latin America group stock
during a 20-trading day period prior to each record date, divided by the average
market value of a share of BLS group stock during the same period. However, the
number of votes per share of Latin America group stock will be reduced if, as a
result of this calculation, the holders of Latin America group stock would hold
more than 35% of the total voting power of all outstanding shares of common
stock. In that event, the number of votes per share of Latin America group stock
will be recalculated so that all of the outstanding shares of Latin America
group stock represent only 35% of the total voting power of all outstanding
shares of common stock.
OUR RIGHT TO CONVERT SHARES OF LATIN AMERICA GROUP STOCK INTO SHARES OF BLS
GROUP STOCK
Our board of directors may, without shareholder approval, convert all
outstanding shares of Latin America group stock into shares of BLS group stock,
based on the average market values of the two series of common stock, at some or
no premium.
In the event of a conversion, the premium would be as follows:
- during the first year after the completion of this offering -- 20%;
- beginning on the first anniversary but before the second anniversary of
the completion of this offering -- 15%;
- beginning on the second anniversary of the completion of this offering
--10% or 0%, determined based on the average market capitalization of
Latin America group stock as a percentage of the average combined market
capitalization of the two series of common stock, as follows:
<TABLE>
<CAPTION>
AVERAGE CAPITALIZATION OF LATIN
AMERICA GROUP STOCK AS PERCENTAGE OF PREMIUM TO HOLDERS OF
AVERAGE COMBINED MARKET CAPITALIZATION LATIN AMERICA GROUP STOCK
-------------------------------------- -------------------------
<S> <C>
Less than 40% 10%
40% to less than 60% 0%
60% or more not convertible
</TABLE>
Beginning on the second anniversary of the completion of this offering, our
board of directors may, without shareholder approval, convert all outstanding
shares of BLS group stock into Latin America group stock, based on the average
market values of the two series of common stock, at some or no premium. In the
event of a conversion, the premium would be based on the average market
capitalization of BLS group stock as a percentage of the average combined market
capitalization of the two series of common stock as follows:
<TABLE>
<CAPTION>
AVERAGE CAPITALIZATION OF BLS
GROUP STOCK AS PERCENTAGE OF PREMIUM TO HOLDERS
AVERAGE COMBINED MARKET CAPITALIZATION OF BLS GROUP STOCK
-------------------------------------- ------------------
<S> <C>
Less than 40% 10%
40% to less than 60% 0%
60% or more not convertible
</TABLE>
Prior to the second anniversary of the completion of this offering, our board of
directors may not convert BLS group stock into Latin America group stock.
The average market values and average market capitalization of the series
of common stock to be converted and the series of common stock to be received
upon the conversion will be determined during the 20-trading day period ending
on the fifth trading day before we begin to mail the conversion notice.
If our board of directors creates additional series of common stock, our
board of directors can also convert, without shareholder approval, all
outstanding shares of Latin America group stock into one of those series. A
conversion of Latin America group stock into an additional series of common
stock would be subject to the same premium and market capitalization provisions
that would apply to a conversion of Latin America group stock into BLS group
stock.
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<PAGE> 11
Our board of directors may decide to convert Latin America group stock into
BLS group stock if, for example, having an equity structure comprised of Latin
America group stock and BLS group stock no longer assists greater market
recognition of Latin America group stock and BLS group stock or no longer
enhances strategic or financial flexibility.
If our board of directors chooses to exercise our conversion right as a
result of a more than insubstantial risk of adverse income tax developments
relating to Latin America group stock or BLS group stock, our board of directors
will convert your shares without any premium.
OUR RIGHT TO REDEEM SHARES OF LATIN AMERICA GROUP STOCK IN EXCHANGE FOR SHARES
OF COMMON STOCK OF OUR SUBSIDIARIES
Our board of directors will have the right at any time, without shareholder
approval, to redeem Latin America group stock for common stock of one or more of
our wholly-owned subsidiaries that holds all of the assets and liabilities
attributed to the Latin America group.
This redemption could be authorized by our board of directors at any time
if it determines that, under the facts and circumstances then existing, the
tracking stock structure is no longer in the best interests of BellSouth and a
spin-off of the assets attributed to the Latin America group in a company
separate from BellSouth is desirable.
YOUR RIGHTS IF WE SELL ALL OR SUBSTANTIALLY ALL OF THE ASSETS ATTRIBUTED TO THE
LATIN AMERICA GROUP
If we sell all or substantially all -- that is, at least 80% -- of the
assets attributed to the Latin America group, subject to some exceptions, our
board of directors will, without shareholder approval, elect to:
- distribute to the holders of Latin America group stock by special
dividend or redemption an amount equal to their proportionate interest in
net proceeds of the sale; or
- convert the outstanding shares of Latin America group stock into shares
of BLS group stock, based on the average market values of the two series
of common stock during a ten-trading day period after the sale, at a 10%
premium.
If we sell substantially all -- but not all -- of the assets attributed to
the Latin America group and we distribute the net proceeds by special dividend
or partial redemption, then at any time within two years after completing the
dividend or redemption, our board of directors will have the right to convert
the remaining outstanding shares of Latin America group stock into shares of BLS
group stock at a 10% premium or without any premium. The premium will be 10%
unless our board of directors would be entitled to convert without any premium
as described above under "Our right to convert shares of Latin America group
stock into shares of BLS group stock." In that event, there will be no premium.
To determine the conversion rate, we will value Latin America group stock and
BLS group stock based on their average market values during the 20-trading day
period before the conversion ending on the fifth trading day before the day we
begin to mail the conversion notice.
If our board of directors chooses to convert upon a sale of assets and our
board of directors has created additional series of common stock, our board of
directors can also convert, without shareholder approval, Latin America group
stock into one of those additional series of common stock. A conversion of Latin
America group stock into an additional series of common stock would be subject
to the same premium provisions that would apply to a conversion of Latin America
group stock into BLS group stock.
YOUR SHARE UPON A DISSOLUTION OF BELLSOUTH
Upon dissolution of BellSouth, after payment of the debts and other
liabilities of BellSouth and the full preferential amounts to which holders of
any preferred stock are entitled, the holders of Latin America group stock and
the holders of BLS group stock will be entitled to receive our assets remaining
for distribution to holders of common stock on a per share basis in proportion
to the liquidation units per share of that series.
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<PAGE> 12
Each share of Latin America group stock will have .25 of one liquidation
unit. Each share of BLS group stock will have one liquidation unit. In reaching
the determination that the liquidation rights of Latin America group stock and
BLS group stock should not vary depending on the market price of the two series
of stock, we took into consideration that the dissolution of BellSouth is
unlikely.
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SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
OF THE LATIN AMERICA GROUP
We derived the summary financial data presented below from the combined
financial statements and related notes of the Latin America group. The audited
combined financial statements of the Latin America group for each of the years
ended November 30, 1997, 1998 and 1999 and unaudited combined financial
statements of the Latin America group for the three months ended February 28,
1999 (first quarter 1999) and February 29, 2000 (first quarter 2000) are
included in this document. You should read the summary financial data together
with the audited combined financial statements of the Latin America group and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Latin America Group of BellSouth Corporation" included in this
document.
1999 results include the following items that affect comparability:
- foreign currency losses related to the devaluation of the Brazilian Real
which reduced net income by $308 million (these losses are included in
net earnings (losses) of equity affiliates); and
- the recognition of certain foreign investment tax credits generated in
prior years, which increased net income by $95 million.
First quarter 1999 results include foreign currency losses related to the
devaluation of the Brazilian Real, which reduced net income by $280 million.
The legal restriction on BellSouth's ownership of the Nicaraguan wireless
operations was lifted in December 1999, and we have determined to exercise our
prepaid option to increase our interest to an 89% controlling stake.
Accordingly, data for the Nicaraguan operations, which were previously reported
using the equity method, are now combined in the amounts shown below, beginning
in the first quarter of 2000.
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, -----------------------------
-------------------------- FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
---- ------ ------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Communications revenues................... $940 $1,907 $2,336 $ 565 $ 681
Advertising and directory publishing
revenues................................ -- -- 69 -- 14
---- ------ ------ ------ ------
Total operating revenues........... 940 1,907 2,405 565 695
---- ------ ------ ------ ------
Operating expenses:
Cost of services, products and
equipment............................... 344 607 867 196 278
Selling, general and administrative....... 455 766 982 212 303
Depreciation and amortization............. 140 338 450 104 126
---- ------ ------ ------ ------
Total operating expenses........... 939 1,711 2,299 512 707
---- ------ ------ ------ ------
Operating income............................ 1 196 106 53 (12)
Interest expense............................ 46 53 88 24 33
Other income (expense), net................. -- (1) (5) (8) 25
---- ------ ------ ------ ------
Income (loss) before income taxes........... (45) 142 13 21 (20)
Provision (benefit) for income taxes........ 1 103 (116) 24 (13)
---- ------ ------ ------ ------
Income (loss) before net earnings (losses)
of equity affiliates and minority
interests................................. (46) 39 129 (3) (7)
Net earnings (losses) of equity
affiliates................................ 14 (57) (354) (295) (6)
Minority interests in income of
subsidiaries.............................. 4 (50) (91) (16) (7)
---- ------ ------ ------ ------
Net loss.................................... $(28) $ (68) $ (316) $ (314) $ (20)
==== ====== ====== ====== ======
</TABLE>
---------------
After this offering, the consolidated financial statements of BellSouth
will present basic and diluted earnings per share for BLS group stock and Latin
America group stock using the two-class method. The two-class method is an
earnings formula that determines the earnings per share for BLS group stock and
Latin America group stock according to the participation rights in undistributed
earnings. The combined financial statements of the Latin America group will not
present earnings per share because the Latin America group stock is a series of
common stock of BellSouth and because the Latin America group is not a legal
entity with a capital structure.
(continued on next page)
11
<PAGE> 14
SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
OF THE LATIN AMERICA GROUP -- (CONTINUED)
The "combined" amounts under the caption "Operating Data" represent the
total customers, licensed population, billed minutes of use and average revenue
per user of the Latin American companies in Argentina, Chile, Ecuador, Peru and
Venezuela which are the businesses included in the combined financial statements
included elsewhere in this document. Data for the business in Nicaragua is
included beginning in the first quarter of 2000. Data for the businesses in
Brazil, Guatemala, Panama and Uruguay are not presented because we do not
combine the results of these non-controlled operations in the Latin America
group financial statements.
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, ---------------------------
------------------------------------ FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (dollars in millions):
Cash and cash equivalents..................... $ 177 $ 171 $ 287 $ 206 $ 309
Investment in equity affiliates............... 684 805 348 369 300
Licenses and other intangible assets, net..... 651 1,059 1,471 1,038 1,547
Total assets.................................. 3,098 4,171 4,674 3,875 4,823
Long-term debt, including current
maturities.................................. 436 678 638 700 700
Group net worth............................... 1,414 2,119 2,345 1,718 2,409
OPERATING DATA (in thousands, except as
noted):
Customers..................................... 1,624 2,598 4,230 2,949 5,096
Licensed population........................... 60,900 79,400 111,700 87,800 114,600
Billed minutes of use......................... 3,066,145 5,183,254 6,655,884 1,555,999 1,923,385
Average revenue per user (whole dollars)...... $ 84 $ 73 $ 52 $ 61 $ 39
OTHER (dollars in millions):
EBITDA........................................ $ 141 $ 534 $ 556 $ 157 $ 114
EBITDA margin................................. 15.0% 28.0% 23.1% 27.8% 16.4%
Cash flows from operating activities.......... $ 55 $ 476 $ 568 $ 99 $ 56
Cash used in investing activities............. (1,440) (1,387) (1,099) (192) (236)
Cash provided by financing activities......... 1,569 902 651 130 202
Capital expenditures.......................... 448 697 647 162 230
Investments and advances to equity
affiliates.................................. 679 248 77 27 3
</TABLE>
EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, net earnings (losses) of equity affiliates,
provision for asset impairment 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.
Average revenue per user is calculated by dividing average monthly revenue
by average customers. Average monthly revenue includes activation fees, access,
airtime, net roaming, long distance and value added services.
12
<PAGE> 15
SUMMARY SUPPLEMENTAL PROPORTIONATE AND TOTAL FINANCIAL AND
OPERATING DATA OF THE LATIN AMERICA GROUP
The following tables present supplemental information on a proportionate
and total basis. Proportionate and total presentations are not permitted under
U.S. GAAP and are not intended to replace the combined operating results
prepared and presented in accordance with U.S. GAAP. However, because the Latin
America group has significant interests in businesses that are not presented on
a combined basis and because it does not own 100% of all of its combined
operating companies, we believe that proportionate and total data facilitates an
understanding and assessment of the combined operating results and the scale of
the Latin America group's operating companies.
U.S. GAAP requires combination of entities controlled by the Latin America
group and the equity method of accounting for entities in which the Latin
America group has significant influence but not a controlling interest.
Proportionate presentation reflects the Latin America group's share of revenues
and expenses in both its combined and uncombined entities on a pro rata basis.
Proportionate results are calculated by multiplying the Latin America group's
ownership percentage in each operation by each operation's total operating
results, and, accordingly, should not be compared with U.S. GAAP combined
results of the Latin America group. The total presentation is an aggregation of
the total revenues and expenses of each entity in which the Latin America group
has an ownership interest, without regard to its level of ownership.
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, ---------------------------
------------------------------------ FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PROPORTIONATE
----------------------------------------------
INCOME STATEMENT AND CASH FLOW DATA (dollars
in millions):
Operating revenues............................ $ 839 $ 1,589 $ 2,342 $ 556 $ 667
EBITDA........................................ 142 382 485 129 109
Capital expenditures.......................... 377 832 654 198 212
OPERATING DATA (in thousands, except average
revenue per user):
Customers..................................... 1,074 2,234 4,227 2,738 5,006
Licensed population........................... 62,386 83,870 124,092 84,655 124,092
Billed minutes of use......................... 1,959,650 3,983,835 6,660,825 1,478,783 2,000,700
Average revenue per user...................... $ 85 $ 75 $ 51 $ 61 $ 39
BALANCE SHEET DATA (dollars in millions):
Cash and cash equivalents..................... $ 242 $ 264 $ 329 $ 202 $ 403
Licenses and other intangible assets, net..... 1,851 2,299 2,179 1,836 2,282
Long-term debt, including current
maturities.................................. 1,938 1,767 1,845 1,947 2,125
TOTAL
----------------------------------------------
INCOME STATEMENT AND CASH FLOW DATA (dollars
in millions):
Operating revenues............................ $ 1,339 $ 2,523 $ 3,425 $ 844 $ 966
EBITDA........................................ 251 635 762 190 178
Capital expenditures.......................... 648 1,527 951 315 264
OPERATING DATA (in thousands, except average
revenue per user):
Customers..................................... 1,686 3,499 6,237 4,141 7,349
Licensed population........................... 112,200 131,700 176,100 132,800 176,100
Billed minutes of use......................... 3,239,485 6,067,185 9,997,703 2,241,513 2,961,347
Average revenue per user...................... $ 85 $ 77 $ 51 $ 61 $ 39
BALANCE SHEET DATA (dollars in millions):
Cash and cash equivalents..................... $ 494 $ 437 $ 450 $ 282 $ 636
Licenses and other intangible assets, net..... 3,656 3,870 3,220 2,782 3,399
Long-term debt, including current
maturities.................................. 4,039 3,201 3,269 3,366 3,771
</TABLE>
13
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
OF BELLSOUTH CORPORATION
We derived the summary historical and pro forma consolidated financial data
presented below from our consolidated financial statements and related notes,
which include the Latin America group and the BLS group. Our audited
consolidated financial statements for each of the years ended December 31, 1997,
1998 and 1999 and unaudited consolidated financial statements for the three
months ended March 31, 1999 (first quarter 1999) and 2000 (first quarter 2000)
are included in this document. You should read the summary financial data
together with our audited and unaudited consolidated financial statements and
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations of BellSouth Corporation" included in this document.
Significant events affecting our historical earnings trends include the
following:
- 1995 results include charges for the discontinuance of Statement on Financial
Accounting Standards No. 71 and the refinancing of long-term debt issues,
which reduced net income by $2,796 million, or $1.41 per share. 1995 also
includes a work force reduction charge, which increased operating expense by
$1,082 million and reduced net income by $663 million, or $.33 per share.
- 1996 results include a gain from the sale of a paging business, which
increased net income by $344 million, or $.17 per share.
- 1997 results include gains resulting from the sale of our interests in Optus
Communications, ITT World Directories and Bellcore, which increased net income
by $352 million, or $.18 per share, $128 million, or $.06 per share, and $23
million, or $.01 per share. 1997 results also include the effect of a
regulatory settlement in South Carolina, which reduced operating revenues by
$72 million and net income by $47 million, or $.02 per share, as well as a
loss of $9 million incurred in connection with the early redemption of
long-term debt.
- 1998 results include net income of $110 million, or $.06 per share, from the
sale of BellSouth New Zealand, net income of $96 million, or $.05 per share
related to the receipt of additional proceeds from the sale of ITT World
Directories, and $62 million, or $.03 per share, of net income related to
contingent interest and prepayment penalties associated with the repayment of
a loan receivable.
- 1999 results include foreign currency losses related to the devaluation of the
Brazilian Real, which reduced net income by $308 million, or $.16 per share,
an asset impairment loss, which reduced net income by $187 million, or $.10
per share, the recognition of certain foreign investment tax credits generated
in prior years, which increased net income by $95 million, or $.05 per share
and a gain on the sale of Honolulu Cellular, which increased net income by $23
million, or $.01 per share.
- First quarter 1999 results include foreign currency losses related to the
devaluation of the Brazilian Real, which reduced net income by $280 million,
or $.14 per share.
- First quarter 2000 results include income related to the restructuring of
BellSouth's ownership interest in German wireless operator E-Plus, which
increased net income by $68 million, or $.04 per share, and expense recorded
as a result of an announced general and administrative staff reduction plan,
which decreased net income by $48 million, or $.03 per share.
(continued on next page)
14
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
OF BELLSOUTH CORPORATION -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues.............. $17,886 $19,040 $20,561 $23,123 $25,224 $ 5,973 $ 6,487
Operating expenses.............. 14,594 14,261 15,185 17,219 18,787 4,366 4,864
Operating income................ 3,292 4,779 5,376 5,904 6,437 1,607 1,623
Net income (loss)............... (1,232) 2,863 3,261 3,527 3,448 615 1,001
Operating income margin......... 18.4% 25.1% 26.1% 25.5% 25.5% 26.9% 25.0%
Historical Common Stock
Information
Diluted earnings (loss) per
share:
Before extraordinary losses... $ .79 $ 1.44 $ 1.64 $ 1.78 $ 1.80 $ .32 $ .53
After extraordinary losses.... (.62) 1.44 1.64 1.78 1.80 .32 .53
Diluted weighted-average shares
outstanding (millions)........ 1,989 1,992 1,989 1,984 1,916 1,951 1,898
Dividends declared per share.... $ .71 $ .72 $ .72 $ .73 $ .76 $ .19 $ .19
Pro Forma Common Stock
Information
Unaudited pro forma net loss per
share of Latin America group
stock......................... $ $
Unaudited pro forma earnings per
share of BLS group stock...... $ $
BALANCE SHEET DATA:
Total assets.................... 31,880 32,568 36,301 39,410 43,453 38,175 44,355
Long-term debt.................. 7,924 8,116 7,348 8,715 9,113 8,406 10,880
Shareholders' equity............ 11,825 13,249 15,165 16,110 14,815 14,402 15,697
OTHER:
Operating cash flow............. 5,443 5,863 7,039 7,741 8,199 1,642 2,350
</TABLE>
The unaudited pro forma information set forth above has been prepared
assuming that, on January 1, 1999:
- each share of our existing common stock was changed into one share of BLS
group stock; and
- shares of Latin America group stock were issued and outstanding,
consisting of shares that are to be issued in this offering and
shares reserved for and attributed to the BLS group that are
expected to be distributed to the holders of BLS group stock.
15
<PAGE> 18
RISK FACTORS
You should carefully consider the following risks and other information
contained in this prospectus before investing in Latin America group stock.
RISK FACTORS RELATING TO OUR TRACKING STOCK CAPITAL STRUCTURE
HOLDERS OF LATIN AMERICA GROUP STOCK AND BLS GROUP STOCK WILL BE SHAREHOLDERS OF
ONE COMPANY AND, AS A RESULT, WILL OWN A SECURITY THAT IS MORE COMPLEX THAN
TRADITIONAL COMMON STOCK
The holders of Latin America group stock and the holders of BLS group stock
will be shareholders of a single company, BellSouth. The Latin America group and
the BLS group will not be separate legal entities and as such cannot own assets
or enter into legally binding agreements. Shareholders will be subject to all of
the risks of an investment in BellSouth and all of its businesses, assets and
liabilities. The attribution of assets, liabilities and shareholders' equity to
the Latin America group or the BLS group will not affect ownership of our assets
or responsibility for our liabilities or those of our subsidiaries. The assets
we attribute to the Latin America group could be subject to the liabilities
attributed to the BLS group, even if those liabilities arise from lawsuits,
contracts or indebtedness that we attribute to the BLS group. If we are unable
to satisfy the liabilities attributed to the BLS group out of the assets we
attribute to it, we may be required to satisfy those liabilities with assets we
have attributed to the Latin America group. All of these factors highlight that
holders of Latin America group stock and BLS group stock own common stock of
BellSouth.
Tracking stocks, like Latin America group stock, are more complex than
traditional common stock. Many participants in the financial markets may not
fully understand the nature of tracking stocks and some incorrectly compare
tracking stock to common stock of companies that have been spun-off by their
former parents. Similar to traditional common stock, the rights of the holders
of Latin America group stock are governed by state law, our charter and our
by-laws. However, our board of directors has adopted a tracking stock policy
statement to assist it with respect to matters as to which the holders of Latin
America group stock and BLS group stock may have potentially divergent
interests. Although our board of directors generally may not amend the terms of
Latin America group stock or BLS group stock set forth in our charter without
shareholder approval, our board of directors may modify or rescind, or make
exceptions to, the tracking stock policy statement, without shareholder
approval.
THE MARKET PRICE OF LATIN AMERICA GROUP STOCK COULD BE AFFECTED BY FACTORS THAT
DO NOT AFFECT TRADITIONAL COMMON STOCK
THE COMPLEX NATURE OF THE TERMS OF THE LATIN AMERICA GROUP STOCK MAY
ADVERSELY AFFECT THE MARKET PRICE OF LATIN AMERICA GROUP STOCK
We cannot assure you that investors will value Latin America group stock as
we intend. The complex nature of the terms of Latin America group stock and the
potential difficulties investors may have in understanding these terms may
adversely affect the market price of Latin America group stock. Examples
include:
- the rights of our board of directors to convert Latin America group stock
into BLS group stock or vice versa, at some or no premium; and
- the discretion of our board of directors or the finance/strategic
planning committee to make determinations relating to a variety of
matters affecting the rights of the holders of the Latin America group
stock and the holders of BLS group stock, such as dividends and cash
management and allocation matters.
In addition, investors may discount the value of Latin America group stock
because it is part of a common enterprise rather than a stand-alone entity.
16
<PAGE> 19
THE TERMS OF LATIN AMERICA GROUP STOCK AS A WHOLE MAY NOT PRECISELY LINK
THE MARKET VALUE OF LATIN AMERICA GROUP STOCK WITH THE SEPARATE PERFORMANCE
OF THE LATIN AMERICA GROUP
Some of the terms of Latin America group stock in our charter are not
intended to link the market values of Latin America group stock with the
separate performance of the Latin America group. For example, the liquidation
rights of Latin America group stock are fixed at the time of issuance and may
not bear any relationship to market values of Latin America group stock and BLS
group stock. The absence of other terms -- for example, the lack of a formula
requiring the payment of dividends based on performance -- could make it less
likely that Latin America group stock will have market values precisely linked
to the separate performance of the Latin America group. Although we believe
other terms, particularly provisions for holders to receive cash or securities
with a value based on the value of the assets, should link the market value of
the Latin America group stock with the separate performance of the Latin America
group, we cannot assure you that the terms of Latin America group stock as a
whole will precisely link the market values of Latin America group stock with
the separate performance of the Latin America group.
THE MARKET PRICE OF LATIN AMERICA GROUP STOCK MAY BE ADVERSELY AFFECTED BY
THE PERFORMANCE OF BLS GROUP STOCK
Events such as announcements relating to earnings, new products or services
or acquisitions that the market does not receive favorably and thus adversely
affect the market price of BLS group stock may adversely affect the market price
of Latin America group stock. Because both series of stock are the stock of a
single company, BellSouth, an adverse market reaction to BLS group stock may, by
association, cause an adverse reaction to Latin America group stock. This could
occur even if the triggering event was not material to BellSouth as a whole.
FINANCIAL EFFECTS FROM THE BLS GROUP COULD ADVERSELY AFFECT THE LATIN AMERICA
GROUP
Financial effects arising from the BLS group that affect BellSouth's
consolidated results of operations or financial condition could, if significant,
affect the results of operations or financial condition of the Latin America
group. In addition, if BellSouth or any of its subsidiaries were to incur
significant indebtedness on behalf of the BLS group, including indebtedness
incurred or assumed in connection with an acquisition or investment, it could
affect the credit rating of BellSouth and its subsidiaries. This, in turn, could
increase the borrowing costs of the companies in the Latin America group and
BellSouth as a whole. Net losses of either the Latin America group or the BLS
group and dividends paid on shares of Latin America group stock or BLS group
stock will reduce the dividends we can pay on each series of common stock under
Georgia law. For these reasons, you should read our consolidated financial
information included in this prospectus with the Latin America group's combined
financial information included in this prospectus.
YOU WILL NOT HAVE SHAREHOLDER RIGHTS ASSOCIATED WITH TRADITIONAL COMMON STOCK
THERE WILL BE NO BOARD OF DIRECTORS THAT REPRESENTS SOLELY YOUR INTERESTS
The Latin America group will not have a separate board of directors to
represent solely the interests of the holders of Latin America group stock.
Consequently, there will be no board of directors that owes any separate duties
to the holders of Latin America group stock.
YOU MAY NOT HAVE ANY REMEDIES IF ANY ACTION BY DIRECTORS OR OFFICERS HAS AN
ADVERSE EFFECT ON LATIN AMERICA GROUP STOCK
You may not have any remedies if any action or decision of our directors or
officers has an adverse effect on the holders of Latin America group stock
compared to the holders of BLS group stock. Although we are not aware of any
Georgia court adjudicating such an action in the context of our anticipated
capital structure, recent cases in Delaware involving tracking stock have
indicated that decisions by directors or officers involving treatment of
tracking stock shareholders should be judged under the business judgment rule
unless self-interest is shown.
17
<PAGE> 20
The business judgment rule provides that a director or officer will be
deemed to have satisfied his or her fiduciary duties to BellSouth if that person
acts in a manner he or she believes in good faith to be in the best interests of
BellSouth as a whole, not of the Latin America group. As a result, in some
circumstances, our directors and officers may even be required to make a
decision that is adverse to the holders of Latin America group stock. A Georgia
court hearing a case involving such a challenge may decide in any such case to
apply principles of Georgia law different from the principles of Delaware law
that are discussed above, or may develop new principles of law.
YOU WILL HAVE SHAREHOLDER RIGHTS SPECIFIC TO THE LATIN AMERICA GROUP ONLY
IN LIMITED CIRCUMSTANCES
The holders of Latin America group stock generally will not have
shareholder rights specific to the Latin America group. For example:
- we will not hold separate shareholders meetings for the holders of Latin
America group stock; and
- the holders of Latin America group stock and the holders of BLS group
stock will vote together as a single voting group on most matters,
including any proposal to approve a sale of all or substantially all of
the assets of BellSouth.
You will only have the following rights with respect to the Latin America
group:
- a right to a special dividend, redemption or conversion if the sale of
all or substantially all of the assets attributed to the Latin America
group occurs; and
- a right to vote on matters as a separate voting group in the
circumstances described under "Description of Capital Stock -- Latin
America Group Stock -- Voting Rights."
OUR BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CONTROL TRANSFERS OF CASH, OTHER
ASSETS OR LIABILITIES BETWEEN THE LATIN AMERICA GROUP AND THE BLS GROUP
Under our tracking stock policy statement, which we describe in this
prospectus under "Relationship Between the Latin America Group and the BLS
Group," our board of directors may decide to transfer cash, other assets or
liabilities between groups, which may result in:
- a corresponding change in the number of reserved shares of Latin America
group stock attributed to the BLS group; or
- a loan, or repayment of a loan, from one group to the other group.
Any increase or decrease in the number of reserved shares of Latin America
group stock attributed to the BLS group resulting from a transfer of cash, other
assets or liabilities between the Latin America group and the BLS group would be
determined by reference to fair value of the asset or liability and the
then-current market value of Latin America group stock. Such an increase or
decrease could occur, however, at a time when such shares are considered under-
or over-valued. After there are no longer reserved shares of Latin America group
stock attributed to the BLS group, we could attribute to the Latin America group
reserved shares of BLS group stock. In that case, similar considerations would
apply to transfers made between the groups.
Under our tracking stock policy statement, the companies in the BLS group
may make loans to companies in the Latin America group at interest rates and on
other terms and conditions designed to reflect the interest rates, terms and
conditions that the Latin America group, assuming it were a legal entity, would
be able to obtain from third parties. Similarly, the companies in the Latin
America group may make loans to the companies in the BLS group at interest rates
and on other terms and conditions designed to reflect the interest rates, terms
and conditions that the BLS group, assuming it were a legal entity, would be
able to obtain from third parties. Our tracking stock policy statement
contemplates that loans from the companies in one group to the companies in the
other group will be made on this basis, regardless of the interest rates, terms
and conditions on which those funds may have been acquired. In addition, we
expect that interest rates paid to the
18
<PAGE> 21
companies in the Latin America group by the companies in the BLS group might be
lower than interest rates third parties might pay to the companies in the Latin
America group.
OUR BOARD OF DIRECTORS MAY CHANGE OR MAKE EXCEPTIONS TO OUR TRACKING STOCK
POLICY STATEMENT TO THE DETRIMENT OF THE LATIN AMERICA GROUP WITHOUT SHAREHOLDER
APPROVAL
Our board of directors has adopted the tracking stock policy statement to
assist our board of directors in resolving potentially divergent interests
between the Latin America group and the BLS group. Our board of directors may,
acting in good faith and consistent with its fiduciary duties, modify or
rescind, or make exceptions to, the policies set forth in our tracking stock
policy statement with respect to the allocation of corporate opportunities,
financing arrangements, shared corporate services, taxes, debt, interest and
other matters, or may adopt additional policies, without shareholder approval.
That our board of directors can modify or rescind, or make exceptions to, the
policies set forth in our tracking stock policy statement without shareholder
approval makes it riskier to be a holder of Latin America group stock or BLS
group stock than a holder of traditional common stock.
It is likely that our board of directors would amend our tracking stock
policy statement or adopt new policies if it decides to issue an additional
series of common stock. A decision to modify, rescind or make exceptions to
these policies or adopt additional policies, could have different effects on the
holders of Latin America group stock and the holders of BLS group stock or could
adversely affect the holders of Latin America group stock compared to the
holders of BLS group stock.
LIMITS EXIST ON THE VOTING POWER OF LATIN AMERICA GROUP STOCK
IN CIRCUMSTANCES WHERE HOLDERS OF LATIN AMERICA GROUP STOCK AND HOLDERS OF
BLS GROUP STOCK VOTE TOGETHER AS A SINGLE VOTING GROUP, HOLDERS OF LATIN
AMERICA GROUP STOCK WILL NOT BE ABLE TO CONTROL THE OUTCOME OF SHAREHOLDER
VOTING
BLS group stock will retain a substantial majority of the combined voting
power of Latin America group stock and BLS group stock because:
- the relative voting power per share of Latin America group stock and BLS
group stock is based on the relative average market values of outstanding
Latin America group stock and outstanding BLS group stock and we expect
that initially BLS group stock will have a substantially larger market
value than Latin America group stock; and
- the total voting power of all outstanding shares of Latin America group
stock is limited to 35% of the total voting power of all outstanding
shares of common stock, regardless of the market value of Latin America
group stock.
Except in limited circumstances requiring a vote of a single series voting as a
separate voting group, the holders of BLS group stock, to the extent they vote
the same way, could control the outcome of a vote -- even if the matter involves
a divergence from or conflict with the interests of the holders of Latin America
group stock and the holders of BLS group stock. These matters may include
mergers and other extraordinary transactions. As a result, the shareholders that
own only Latin America group stock may not have sufficient voting power to
protect their interests.
Further, the issuance of additional shares of BLS group stock will likely
dilute the voting power of the holders of Latin America group stock as a
separate group and increase the voting power of the holders of BLS group stock
as a separate group because of the number of additional shares of BLS group
stock outstanding.
YOU WILL NOT BE ENTITLED TO VOTE ON A SALE OF THE ASSETS ATTRIBUTED TO THE
LATIN AMERICA GROUP, EXCEPT IN LIMITED CIRCUMSTANCES
Georgia law requires shareholder approval only for a sale or other
disposition of all or substantially all of the assets of the entire company.
Because the assets attributed to the Latin America group represent less than
substantially all of the assets of BellSouth as a whole, our board of directors
could, without shareholder
19
<PAGE> 22
approval, approve sales and other dispositions of any amount, including all or
substantially all, of the assets attributed to the Latin America group. In
exercising its discretion, our board of directors is not required to select the
option that would result in the distribution with the highest value to the
holders of Latin America group stock.
In addition, under Georgia law, our board of directors could decline to
sell the assets attributed to the Latin America group, despite the request of a
majority of the holders of Latin America group stock.
IN CIRCUMSTANCES WHERE HOLDERS OF LATIN AMERICA GROUP STOCK WOULD HOLD MORE
THAN 35% OF THE TOTAL VOTING POWER OF ALL OUTSTANDING SHARES OF COMMON
STOCK, THE VOTING POWER OF EACH SHARE OF LATIN AMERICA GROUP STOCK WILL BE
REDUCED
The holders of Latin America group stock could hold more than 35% of the
total voting power of all outstanding shares of common stock as a result of:
- the issuance of additional shares of Latin America group stock;
- an increase in average market value of outstanding Latin America group
stock compared to BLS group stock;
- the repurchase of shares of BLS group stock; or
- a decrease in average market value of outstanding BLS group stock
compared to Latin America group stock.
In that event, the voting power of each share of Latin America group stock will
be reduced so that all outstanding shares of Latin America group stock represent
only 35% of the total voting power of all outstanding shares of common stock. As
a result of a reduction, the holders of Latin America group stock and the
holders of BLS group stock would hold voting power in BellSouth that is not
consistent with their relative economic interests in BellSouth.
Our plans to distribute to the holders of BLS group stock all of the shares
of Latin America group stock reserved for and attributed to the BLS group and to
issue additional shares of Latin America group stock for strategic investments,
in acquisitions, for purchases of interests of partners and other transactions
could cause reductions in the voting power of each share of Latin America group
stock.
POTENTIAL CONFLICTS OF INTEREST EXIST BETWEEN HOLDERS OF LATIN AMERICA GROUP
STOCK AND HOLDERS OF BLS GROUP STOCK THAT MAY BE DIFFICULT FOR OUR BOARD OF
DIRECTORS TO RESOLVE OR THAT MAY BE RESOLVED ADVERSELY TO LATIN AMERICA GROUP
STOCK
The existence of separate series of common stock could give rise to
occasions when the interests of the holders of Latin America group stock and the
holders of BLS group stock diverge, conflict or appear to diverge or conflict.
OPERATIONAL AND FINANCIAL DECISIONS COULD FAVOR THE BLS GROUP OVER THE
LATIN AMERICA GROUP
Our board of directors could from time to time, without shareholder
approval, make operational and financial decisions or implement policies that
affect disproportionately the businesses attributed to a group. These decisions
could include:
- allocation of financing opportunities in the public markets;
- allocation of business opportunities, resources and personnel; and
- transfers of funds, assets or liabilities between groups and other
inter-group transactions.
In each case, the opportunity, resources or personnel allocated, or funds,
assets or liabilities transferred, to the BLS group may be equally or more
suitable for the Latin America group. Furthermore, any such decision may benefit
the companies in the BLS group more than the companies in the Latin America
group. For example, the decision to borrow funds for the companies in the BLS
group may adversely affect the ability of the
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companies in the Latin America group to borrow funds sufficient to implement
their growth strategies or may increase the cost of those funds.
PROCEEDS FROM ANY SUBSEQUENT OFFERING OF LATIN AMERICA GROUP STOCK COULD BE
ATTRIBUTED TO THE BLS GROUP, TO THE EXTENT THERE ARE RESERVED SHARES OF
LATIN AMERICA GROUP STOCK ATTRIBUTED TO THE BLS GROUP, AT A TIME WHEN THE
LATIN AMERICA GROUP REQUIRES CAPITAL
The proceeds from this offering will be attributed to the Latin America
group. To the extent there are reserved shares of Latin America group stock
attributed to the BLS group, our board of directors could attribute the proceeds
from the offering of shares of Latin America group stock in any subsequent
offering to the BLS group. Any such decision to sell shares of Latin America
group stock for the account of the BLS group could disadvantage the Latin
America group because it could adversely affect its ability to obtain funds to
finance its growth strategies.
PROCEEDS OF A MERGER MAY BE ALLOCATED UNFAVORABLY
Because our charter does not specify how consideration to be received in a
merger involving BellSouth will be allocated between the holders of Latin
America group stock and the holders of BLS group stock, our board of directors
will make that determination. That determination could favor the holders of BLS
group stock at the expense of the holders of Latin America group stock.
OUR BOARD OF DIRECTORS MAY PAY MORE DIVIDENDS ON BLS GROUP STOCK THAN IF THE
BLS GROUP WERE A SEPARATE COMPANY
Subject to the limitations referred to below, our board of directors has
the authority to declare and pay dividends on Latin America group stock and BLS
group stock in any legal amount. Our board of directors could, in its sole
discretion, declare and pay dividends exclusively on Latin America group stock,
exclusively on BLS group stock, or on both, in equal or unequal amounts. Our
board of directors could pay more dividends on BLS group stock than would be
financially prudent if the BLS group were a stand-alone corporation.
HOLDERS OF LATIN AMERICA GROUP STOCK MAY BE ADVERSELY AFFECTED BY AN
OPTIONAL CONVERSION OF THE SERIES OF STOCK RELATED TO ONE GROUP INTO THE
SERIES OF STOCK RELATED TO THE OTHER GROUP
Our board of directors could, without shareholder approval:
- decide to convert shares of Latin America group stock into shares of BLS
group stock; or
- beginning on the second anniversary of the completion of this offering,
decide to convert shares of BLS group stock into shares of Latin America
group stock.
Because certain conversions would be at a premium and because our board of
directors could decide to effect a conversion at a time when either or both
series of common stock may be considered to be under- or over-valued, any
conversion may be disadvantageous to the holders of one series of common stock.
A conversion also would preclude the holders of Latin America group stock from
retaining their investment in a security that is intended to reflect the
separate performance of the Latin America group. A conversion at a premium would
also dilute the interests in BellSouth of the holders of the series of common
stock being issued in the conversion. A conversion also might give the holders
of Latin America group stock, if converted, a lesser premium than any premium
that might be paid by a third-party buyer of all or substantially all of the
assets of the Latin America group.
DECISIONS BY DIRECTORS AND OFFICERS THAT AFFECT MARKET VALUES COULD ADVERSELY
AFFECT VOTING AND CONVERSION RIGHTS
The number of shares of one series of common stock issuable upon the
conversion of the other series of common stock and the relative voting power per
share of each series of common stock will vary depending upon the relative
market values of Latin America group stock and BLS group stock. The market value
of either or both series of common stock could be adversely affected by market
reaction to decisions by our board of directors or our management that investors
perceive to affect differently one series of common stock compared to the other
series of common stock. These decisions could involve changes to our tracking
stock
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policy statement, transfers of assets and liabilities between groups,
allocations of corporate opportunities between groups or changes in dividend
policies.
OUR BOARD OF DIRECTORS MAY CAUSE A MANDATORY SEPARATION OF THE LATIN AMERICA
GROUP FROM BELLSOUTH
Our board of directors may, without shareholder approval, declare that all
outstanding shares of Latin America group stock will be exchanged for shares of
one or more wholly-owned subsidiaries of BellSouth that own all of the assets
and liabilities attributed to the Latin America group. Such an exchange would
result in the subsidiary or subsidiaries becoming independent of BellSouth and
the holders of Latin America group stock owning shares directly in that
subsidiary or those subsidiaries. If our board of directors chooses to exchange
shares of Latin America group stock, the market value of subsidiary shares
received in that exchange could be or become less than the market value of Latin
America group stock exchanged.
YOU MAY RECEIVE LESS CONSIDERATION UPON A SALE OF THE ASSETS ATTRIBUTED TO THE
LATIN AMERICA GROUP THAN IF THE LATIN AMERICA GROUP WERE A SEPARATE COMPANY
Our charter provides that if we sell all or substantially all of the assets
attributed to the Latin America group, our board of directors must, subject to
some exceptions:
- distribute to the holders of Latin America group stock by special
dividend or redemption an amount equal to their proportionate interest in
net proceeds of the sale; or
- convert the outstanding shares of Latin America group stock into shares
of BLS group stock, based on the average market values of the two series
of common stock during a ten-trading day period after the sale.
If the Latin America group were a separate, independent company and its
shares were acquired by another person, certain costs of that sale, including
corporate level taxes, might not be payable in connection with that acquisition.
As a result, shareholders of a separate, independent company might receive a
greater amount than the net proceeds that would be received by the holders of
Latin America group stock. In addition, we cannot assure you that the net
proceeds per share of Latin America group stock will be equal to or more than
the market value per share of Latin America group stock prior to or after
announcement of a sale.
IN THE EVENT OF A DISSOLUTION OF BELLSOUTH, HOLDERS OF LATIN AMERICA GROUP STOCK
WILL RECEIVE NO MORE THAN 20% OF THE PROCEEDS
In the event of a dissolution of BellSouth, the holders of Latin America
group stock will receive no more than 20% of the proceeds of the dissolution,
even if the value of the assets attributed to the Latin America group
constitutes more than 20% of all of the value of all of the assets of BellSouth.
PROVISIONS GOVERNING OUR COMMON STOCK COULD PREVENT A CHANGE IN CONTROL OF
BELLSOUTH AND THE PAYMENT OF A PREMIUM FOR SHARES
Our restated rights agreement could prevent you from profiting from an
increase in the market value of your shares as a result of a change in control
of BellSouth by delaying or preventing a change in control. In addition,
provisions of Georgia law, our charter and our by-laws may also deter hostile
takeover attempts.
IT WILL NOT BE POSSIBLE FOR A THIRD PARTY TO ACQUIRE THE LATIN AMERICA GROUP
WITHOUT BELLSOUTH'S CONSENT
If the Latin America group were a stand-alone entity, any person interested
in acquiring it without negotiation with our management could seek control of
the outstanding stock of that entity by means of a tender offer or proxy
contest. However, because the Latin America group is part of a single company, a
person interested in acquiring only the Latin America group without negotiation
with our management would be required to seek control of the voting power
represented by all of the outstanding capital stock of BellSouth entitled to
vote on that acquisition, including BLS group stock. This may discourage
potential interested bidders from seeking to acquire the Latin America group.
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IN THE FUTURE, WE MAY ISSUE ADDITIONAL SERIES OF COMMON STOCK, WITHOUT
SHAREHOLDER APPROVAL, INCLUDING BY REATTRIBUTING ASSETS AND LIABILITIES FROM THE
LATIN AMERICA GROUP TO A NEW GROUP
If we issue an additional series of common stock, we may establish a new
group to which that series of common stock relates by reattributing to it some
of the assets and liabilities from the Latin America group. If our board of
directors decides to reattribute assets and liabilities from the Latin America
group to a new group, the Latin America group would have an interest in the new
group representing the reattributed assets and liabilities, unless the new group
paid for those assets and liabilities with other consideration.
The issuance of an additional series of common stock will make our capital
structure and decisions relating to inter-group transactions and related matters
more complicated. In addition, our board of directors would likely amend our
tracking stock policy statement at that time to provide for the new group and
transactions between it and the Latin America group and the BLS group.
Latin America group stock could be convertible into any new series of
common stock at the same premiums it is convertible into BLS group stock. Also,
the terms of the new series of common stock could provide for convertibility
into Latin America group stock at premiums and on terms determined by our board
of directors, beginning on the second anniversary of the completion of this
offering.
In the event our board of directors decides to issue an additional series
of common stock, the risk factors discussed in this prospectus would then also
apply to the new series of common stock and the new groups created in relation
to Latin America group stock and BLS group stock.
CLINTON ADMINISTRATION PROPOSAL COULD HAVE ADVERSE TAX CONSEQUENCES FOR US OR
FOR HOLDERS OF LATIN AMERICA GROUP STOCK
The Clinton Administration proposed legislation in February 2000 dealing
with tracking stock such as Latin America group stock. This proposal would,
among other things, grant authority to the Secretary of the Treasury to treat
tracking stock as something other than stock or as stock of another entity. The
proposal also would treat the receipt of stock similar to Latin America group
stock in exchange for other stock in the corporation or in a distribution by the
issuing corporation as taxable to the shareholders. If this proposal is enacted,
it would have adverse tax consequences for us or for holders of Latin America
group stock. A similar proposal was made in 1999. Congress did not act on the
1999 proposal, and it is impossible to predict whether Congress will act upon
this proposal or any other proposal relating to tracking stock.
Our board of directors may, without shareholder approval, convert shares of
Latin America group stock into shares of BLS group stock and, beginning on the
second anniversary of the completion of this offering, shares of BLS group stock
into shares of Latin America group stock, if there is more than an insubstantial
risk of adverse income tax law developments. The proposal of the Clinton
Administration would be such an adverse development if it is implemented or
receives certain legislative action. Any conversion would be without any
premium.
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RISK FACTORS RELATING TO THIS OFFERING
THE STOCK PRICE OF LATIN AMERICA GROUP STOCK MAY BE VOLATILE
Prior to this offering, you could not buy or sell shares of Latin America
group stock. We cannot predict how active or volatile the trading market for
Latin America group stock will become. The market value of Latin America group
stock could be adversely affected by the expected distribution to the holders of
BLS group stock of all of the reserved shares of Latin America group stock
attributed to the BLS group during the period following the completion of this
offering and before the expected distribution. Until an orderly market develops
for Latin America group stock, trading prices of Latin America group stock may
fluctuate significantly.
In addition, the stock market has experienced significant price and volume
fluctuations and the market prices of stocks reflecting the financial
performance of operations in emerging markets like Latin America have been
particularly volatile. Therefore, the price at which Latin America group stock
trades after this offering is likely to be volatile and may fluctuate
substantially due to any of the following factors:
- variations in the quarterly operating results of the Latin America group
or its operating companies;
- changes in financial estimates or investment recommendations by
securities analysts relating to Latin America group stock;
- changes in market valuations of other telecommunications providers in
Latin America;
- announcements by the Latin America group or its competitors of
significant contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- additions or departures of key personnel;
- future sales, distributions or issuances of Latin America group stock;
- changes in investors' perceptions of investments relating to Latin
America;
- changes in investors' perceptions about tracking stock generally; and
- fluctuations in the stock market price and volume of traded shares
generally.
FUTURE SALES, DISTRIBUTIONS OR ISSUANCES OF LATIN AMERICA GROUP STOCK COULD
ADVERSELY AFFECT ITS MARKET PRICE AND THE LATIN AMERICA GROUP'S ACCESS TO
CAPITAL IN THE FUTURE
The market price of Latin America group stock could be materially adversely
affected by any sales, distributions or issuances of substantial amounts of
Latin America group stock in the public market, whether as a result of:
- the expected distribution to the holders of BLS group stock of
shares of Latin America group stock reserved for and attributed to the
BLS group, representing % of our equity attributed to the Latin America
group; or
- any issuances of Latin America group stock in acquisitions, for strategic
investments, for purchases of interests of partners or for other
transactions;
or the perception that these sales, distributions or issuances might occur. If
the market price of Latin America group stock is depressed as a result of these
factors, it could hurt the access to capital in the future of the companies in
the Latin America group.
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RISK FACTORS RELATING TO THE BUSINESSES OF THE LATIN AMERICA GROUP
WE COMPETE WITH AN INCREASING NUMBER OF TELECOMMUNICATIONS PROVIDERS IN MOST OF
OUR LATIN AMERICAN MARKETS. OUR FAILURE TO COMPETE EFFECTIVELY COULD RESULT IN
THE LOSS OF CURRENT AND POTENTIAL CUSTOMERS, REVENUES AND PROFITABILITY
Our Latin American operations are subject to significant competition,
typically from at least one other wireless provider, and increasingly from
multiple providers. Wireless providers compete on:
- price;
- call quality and reliability;
- services and features offered, including plans;
- coverage; and
- customer service.
COMPETITION CAN CAUSE DOWNWARD PRICE PRESSURE, WHICH COULD DECREASE OUR
PROFITABILITY
We anticipate that wireless service prices in Latin America will continue
to decline due to increased competition, particularly from new competitors. If
we are unable to compensate for declining prices by adding new customers and
increasing usage and through the offering of new services, the revenues and
profitability of our Latin American operations will decline. The cost of adding
new customers may continue to increase, decreasing our profitability even if
customer growth continues.
COMPETITION CAN INCREASE CUSTOMER CHURN, WHICH CAN IN TURN REDUCE REVENUES
AND PROFITS, SLOW CUSTOMER GROWTH AND INCREASE OUR MARKETING AND
DISTRIBUTION COSTS
The wireless industry is characterized by a high rate of customer
disconnection of services -- referred to as customer "churn" -- which is
increased by additional competition. Churn reduces our revenues and profits,
slows customer growth and increases marketing and customer acquisition costs.
Customer churn is the result of several factors, including:
- network coverage;
- network reliability;
- non-use of wireless handsets;
- affordability; and
- customer care concerns.
WE ANTICIPATE THAT COMPETITION IN LATIN AMERICA WILL INCREASE IN THE
FUTURE, THUS MAGNIFYING COMPETITIVE RISKS AND PRESSURES
We expect that competition in Latin America will intensify in the future,
both from new entrants and existing competitors. Increased competition will
accelerate downward price pressure and churn. Our competitors could:
- offer or provide increased handset subsidies;
- offer lower prices, more attractive plans or better service and features;
- provide free services, such as Internet access, to acquire market share;
- bundle more attractive offerings of wireline services and other services;
- deploy and expand their networks faster; and
- develop and deploy improved wireless technologies faster.
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WE MAY FACE DISADVANTAGES WHEN COMPETING AGAINST GOVERNMENT-OWNED OR
-AFFILIATED TELECOMMUNICATIONS COMPANIES AND WIRELINE MONOPOLY OPERATORS IN
LATIN AMERICA
In the Latin American markets where we compete against an incumbent
government-owned telecommunications company, or a company in which the
government retains a significant interest, we may be at a competitive
disadvantage. We may encounter obstacles and setbacks if Latin American
governments adopt policies favoring these competitors or otherwise afford them
preferential treatment. Government-owned or -affiliated competitors may have:
- close ties with national regulatory authorities;
- control over connections to local telephone lines; or
- the ability to subsidize competitive services with revenues generated
from services they provide on a monopoly basis.
To the extent government-owned wireline companies are privatized or join
with an established foreign telecommunications partner, competition from these
companies may increase due to infusions of capital and managerial and technical
talent. Such companies may also continue to enjoy the legacy of their pre-
privatization privileges.
In virtually every Latin American market, we compete against an incumbent
monopoly wireline company in the provision of certain services. In most of these
markets, the monopoly wireline provider is also a wireless operator competing
directly with our Latin American wireless operations. Often, the monopoly
provider enjoys competitive advantages similar to the advantages enjoyed by
government-owned and -affiliated providers described above. As a result, we may
be at a competitive disadvantage to monopoly providers offering a broader range
of bundled services, particularly as our companies seek to offer new
telecommunications services, such as domestic and international long distance
service. Our Latin American operations may be particularly susceptible to such
competition, as our principal pan-regional competitors in Latin America often
are affiliated with or have interests in incumbent wireline companies.
IF WE CANNOT CONTINUE TO SUCCESSFULLY BUILD OUR LATIN AMERICAN NETWORKS, OR
BUILD THEM ON A TIMELY AND COST-EFFECTIVE BASIS, OUR COMPETITIVE POSITION AND
REVENUES COULD BE ADVERSELY AFFECTED
If we cannot satisfactorily complete the planned build-out of our Latin
American wireless and fiber networks, or do so in a timely manner, we could lose
potential and current customers to competitors, and our revenues may
consequently suffer. As we continue to develop our networks, we must:
- obtain cell and switch sites;
- obtain rights of way, government approvals and permits for network
construction;
- complete radio frequency design for each developing market;
- design and install switching systems, radio systems, interconnection
facilities and operating support systems;
- expand and maintain customer care, network management and management and
administrative systems; and
- obtain additional radio spectrum.
We cannot guarantee you that we will be able to successfully execute these
tasks -- many of which are not under our control -- on a timely basis or at all.
Our ability to develop our Latin American networks is also affected by other
factors described in this section, including:
- the availability of capital;
- relations with capable suppliers and vendors;
- political or regulatory factors; and
- foreign currency fluctuations.
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IF OUR LATIN AMERICAN COMPANIES CANNOT MEET THEIR SUBSTANTIAL CAPITAL
REQUIREMENTS, NETWORK OPERATIONS AND EXPANSION, MARKETING AND OTHER OPERATIONS
WILL SUFFER
Operating, expanding and modernizing our Latin American wireless and fiber
networks, and the marketing and distribution of our related products and
services, requires substantial capital, which may be difficult to raise in
sufficient amounts on a timely basis, or at all. If our Latin American companies
fail to raise adequate capital in a timely fashion, we may not be able to
complete planned network construction, acquisitions or other strategies. Our
Latin American operations also require a significant amount of capital for:
- acquisition or construction of additional network capacity;
- license acquisitions;
- development of new services;
- development and implementation of planned wireless and wireline
technologies; and
- potential acquisitions of and investments in other communications
companies, or acquisitions of the interests of partners.
Historically, our Latin American companies have relied on assistance from
our BLS group companies to help satisfy their capital requirements, including an
aggregate of $2.6 billion in capital contributions in fiscal years 1997, 1998
and 1999. We are not obligated, however, to use resources from our BLS group to
provide financial or other support to our Latin American companies if they
cannot meet their own capital needs. If we decline to assist our Latin American
companies with resources from our BLS group at some time in the future,
particularly during an economic crisis in Latin America, any problems our Latin
America companies encounter in addressing a capital shortfall will be
aggravated. Moreover, if the partners in our Latin American companies are
unwilling to fund their pro rata share of our Latin American companies' capital
requirements, we may decide to contribute a disproportionate amount of debt or
equity to the company relative to our partners' ownership. However, we may
decide not to contribute at a disproportionate level, or at all, in which case
the company may not be able to meet its capital needs and its business may
suffer.
In addition, our Latin American companies may not be able to respond
quickly, or at all, to new, unexpected capital requirements, which could impede
their business and development. Some of the factors that could cause significant
unanticipated capital needs are:
- regulatory changes;
- engineering design and new technological changes;
- foreign currency fluctuation; and
- significant departures from the current business plan.
IF OUR LATIN AMERICAN COMPANIES INCUR ADDITIONAL DEBT TO MEET THEIR CAPITAL
NEEDS, OUR PROFITABILITY COULD BE NEGATIVELY AFFECTED
If the capital requirements of our Latin American operations increase
significantly, our Latin American companies may be obliged to raise capital
through more extensive borrowings or other external financing activities. We
cannot guarantee you that our Latin American companies will be able to arrange
any needed additional financing to fund their capital requirements on acceptable
terms, or at all.
Our Latin American companies often, where possible, borrow funds from
financing sources within Latin America. Because of historical political and
economic uncertainty in the region, indebtedness in Latin America typically
carries significantly higher interest rates and shorter maturities than
borrowings in the U.S. As a result, our Latin American companies will experience
higher borrowing costs, which will reduce profitability. Moreover, financing may
be more difficult to obtain on reasonable terms, or at all, in the markets that
need significant capital, such as those in which the Latin America group has
substantial network
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expansion to execute. If we loan funds otherwise allocated to our BLS group
companies to our Latin American companies, these borrowings would be made at
interest rates and on other terms and conditions designed to reflect the
interest rates and terms that the Latin America group would be able to obtain
from third parties, assuming it was a legal entity.
Increased indebtedness may have a number of negative effects on our Latin
American operations, including:
- increased difficulty in obtaining future financing;
- increased difficulty in claiming a foreign tax credit for U.S. federal
income tax purposes;
- allocation of increasing amounts of income to debt repayments; and
- restrictions on the Latin America group's capital resources or operations
imposed by lenders.
Additional capital may also be raised through future private or public
offerings of Latin America group stock. In that event, your ownership percentage
and voting power in BellSouth would be diluted.
IF WE CANNOT WORK IN A COOPERATIVE FASHION WITH OUR LATIN AMERICAN PARTNERS, WE
WILL BE UNABLE TO CARRY OUT OUR GROWTH STRATEGY
Our Latin American operations are mostly conducted through companies in
which we own a significant ownership interest. In some of these operations,
including in Venezuela, Brazil and Argentina, we do not have absolute control
over the operations of the venture, even where we own a majority of the venture.
Our particular governance rights vary from venture to venture, and often depend
upon the size of our investment relative to other investors and the preferences
or requirements of foreign governments that local owners hold an interest in
licensed telecommunications operators. As a result, we must generally obtain the
cooperation of our partners in order to implement and expand upon our Latin
American business strategies. For instance, approval of operating and capital
expenditure budgets and distributions to and capital contributions from partners
typically require the consent of our partners.
The refusal of any of these partners to approve funding or to fund their
pro rata share of capital contributions could force us to contribute on a
disproportionate basis in situations where the governing partnership agreement
does not allow a corresponding increase in our ownership percentage. We cannot
assure you that all of our relations with our partners will be harmonious and
successful, and disagreements with partners could impede the execution of our
Latin American strategy and work to the favor of our competitors.
IF CONSUMERS CHOOSE COMPETING WIRELESS TECHNOLOGIES OR IF OUR LATIN AMERICAN
COMPANIES CANNOT KEEP PACE WITH DEVELOPING WIRELESS TECHNOLOGIES, THEY WILL LOSE
CUSTOMERS
Our Latin American companies offer both analog and digital wireless service
in their markets. The companies' digital networks are outfitted with either Time
Division Multiple Access, or TDMA, or Code Division Multiple Access, or CDMA,
for their digital transmission technologies. However, other wireless service
providers have chosen the Global System for Mobile Communications, or GSM, as
their digital wireless technology. Although there is some ability to roam on
analog networks, the three digital transmission standards are not compatible
with one another. We cannot assure you that we have selected the ideal
combination of wireless technologies for our Latin American operations, or that
consumers will not ultimately prefer providers offering different technologies.
If consumers predominantly select other technologies, our investment in our
current networks in Latin America could be lost, in whole or in part, and our
revenues could sharply decline. Wireless service users may select providers with
other technologies for a host of reasons, including communication quality and
reliability, features, price and coverage area or popular perceptions relating
to these concerns.
The wireless communications industry is experiencing significant
technological change. Wireless service providers are in the process of selecting
the next generation of wireless technologies, which may be a combination of GSM
and either TDMA or CDMA. If the next generation technology that we select does
not gain widespread consumer acceptance, our Latin American companies could
suffer. Significant capital
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investments may not be recouped and revenues could drop as current and potential
customers opt for alternative providers and technologies. Also, alternative
technologies may develop for the provision of wireless services to customers
that may prove superior to those currently projected. We cannot assure you that
unforeseen technological developments will not render the services offered by
our Latin American companies unpopular with customers or obsolete.
IF WE ARE UNABLE TO OBTAIN OR MAINTAIN FAVORABLE ROAMING ARRANGEMENTS WITH
ACCEPTABLE WIRELESS PROVIDERS, WE MAY LOSE CUSTOMERS
In countries where our Latin American companies do not have nationwide
coverage, roaming is an important feature to some of their customers. To the
extent competitors have, or are perceived to have, better roaming features than
our Latin American companies, those businesses may lose customers to their
competitors. Our Latin American customers can access another provider's wireless
system only if our customers' handsets are compatible with the other provider's
system and the other provider allows them to roam on its network. We rely on
agreements to provide roaming capability to customers in Latin America, the
United States and elsewhere in areas that their networks do not serve. Some
competitors may have more extensive coverage through their own networks and be
less dependent on roaming arrangements. In addition, competitors may be able to
obtain roaming rates that are lower than rates obtained by our Latin American
companies, giving these competitors a pricing advantage. In addition, the
quality of service that a wireless provider delivers during a roaming call may
be inferior to the quality of service our Latin American companies provide, and
our customers may not be able to use the advanced features that they enjoy when
making calls on our Latin American networks.
Our Latin American companies are also dependent upon roaming agreements
with other providers as a source of revenues when the other providers' customers
roam in the companies' territories. If these roaming agreements were to
terminate, or if the other providers deploy incompatible technologies, revenues
would decrease.
OUR LATIN AMERICAN COMPANIES RELY ON A SMALL NUMBER OF KEY SUPPLIERS AND VENDORS
FOR EQUIPMENT AND SERVICES; IF THESE SUPPLIERS AND VENDORS EXPERIENCE PROBLEMS
OR FAILURES, OR SUPPLY OR SERVE OUR COMPETITORS BETTER, OUR LATIN AMERICAN
COMPANIES COULD HAVE A DIFFICULT TIME OBTAINING SUFFICIENT QUANTITIES OF
REQUIRED PRODUCTS AND SERVICES
Our Latin American companies depend on a small number of companies for key
products and services, such as customer equipment and network infrastructure. If
these suppliers experience interruptions or other problems delivering these
products on a timely basis, our Latin American operations could be hurt.
Similarly, interruptions in the supply of telecommunications equipment for the
networks of our Latin American companies could impede network development and
expansion. Our Latin American companies also rely on various companies to assist
them in designing and building these networks, and our growth strategy could be
hindered by poor performance by these vendors and contractors.
Our Latin American companies rely largely on Nokia, Ericsson, Motorola,
Gradient, Samsung and Philips Electronics to furnish, on a timely basis,
adequate quantities of wireless handsets that feature the latest technological
innovations favored by customers. If suppliers fail to develop and deliver
handsets that are on a par with or better than the handsets produced by
competitors' suppliers, current and potential customers may select those
competitors' wireless services and handsets instead of those of our Latin
American companies. Moreover, these suppliers also supply handsets to some of
our competitors in Latin America. To the extent these competitors have better
relationships with the same suppliers or are otherwise afforded preferential
treatment, they may obtain larger quantities of newer, more desirable handsets
more quickly than our Latin American companies.
In addition, the initial choice of a network infrastructure supplier by our
Latin American companies can, where the supplier's proprietary technology is an
integral component of the network, cause the companies to be effectively locked
into one or a few suppliers for key network components. Substituting suppliers
under those circumstances could require significant expenditures to change
network infrastructure. As a result, our
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companies have become reliant upon a limited number of network equipment
manufacturers, including Lucent, Nortel, Cisco and Corning. We cannot assure you
that we would be able to obtain satisfactory replacement suppliers or vendors on
economically attractive terms, on a timely basis or at all in the event it was
necessary to seek alternative suppliers and vendors for our Latin American
companies.
WE MAY NOT SUCCESSFULLY DEVELOP INTERNET SERVICES, WIRELESS DATA, DATA NETWORK
SERVICES OR OTHER NEW COMMUNICATIONS SERVICES IN LATIN AMERICA ON A TIMELY,
PROFITABLE BASIS OR AT ALL, WHICH COULD IMPEDE OUR GROWTH STRATEGY AND CAUSE THE
LOSS OF CAPITAL INVESTMENTS IN OUR LATIN AMERICAN COMPANIES
An element of our Latin American strategy is to provide new communications
services, including Internet services, wireless data and data network services.
We cannot assure you that these initiatives will be profitable. If they are not,
our Latin American growth strategy could be impaired and we could lose our
capital investments in these new services. These initiatives could fail for any
number of reasons, including insufficient capital resources or competitive
factors. In addition, our ability to introduce new services in Latin America
depends on whether and on what terms the new services are permitted by local
laws and regulations.
WE DO NOT KNOW IF OUR LATIN AMERICAN COMPANIES WILL BE ABLE TO SUCCESSFULLY
SELL SOME OF THESE NEW COMMUNICATIONS SERVICES BECAUSE MARKET DEMAND FOR
THEM IS UNPROVEN AND MAY NOT DEVELOP
Demand for some of these new communications services, like wireless data,
is unproven, and we cannot guarantee you that it will ever develop. We may incur
significant start-up and deployment costs to develop services for which there is
less demand than anticipated. In addition, even if there is significant demand,
it may be at price levels that do not allow an adequate return on investment.
BECAUSE THE TECHNOLOGY AND CONSUMER APPLICATIONS FOR SOME OF THESE NEW
COMMUNICATIONS SERVICES IS UNPROVEN AND IS STILL DEVELOPING, WE CANNOT
GUARANTEE YOU THAT THEY WILL BECOME WIDELY ACCEPTED
The ability of our Latin American companies to deploy and deliver some of
these new communications services relies, in many instances, on new and unproven
technology. This technology may not perform as expected, or compare favorably in
performance to competing technologies. Even if our technology is effective, our
Latin American companies may not be able to economically deliver these services,
particularly in comparison to competing technologies.
The success of these new services is also substantially dependent on the
development, manufacture and distribution of end-user devices and applications
that support the services. We cannot assure you that vendors and manufacturers
will successfully develop and build these devices and applications or offer them
to potential end-users at acceptable prices.
PROVIDING ADDITIONAL WIRELESS SERVICES WILL REQUIRE ADDITIONAL
TELECOMMUNICATIONS SPECTRUM, WHICH MAY BE DIFFICULT TO ACQUIRE
The ability of our Latin American companies to introduce new wireless
communications services will in many cases require the companies to acquire
additional radio spectrum to provide sufficient capacity. We cannot assure you,
however, that we will be able to acquire additional spectrum in our Latin
American markets at a reasonable cost, or at all. Our Latin American operations
may not be able to acquire new spectrum because of, for instance, regulatory
policies intended to promote competition by prohibiting a carrier holding a
license in a certain portion of the radio frequency spectrum from obtaining
another license covering the same territory in a different portion of the
spectrum.
ACQUIRING AND INTEGRATING NEW OPERATIONS AND SERVICES MAY BE COSTLY, DIFFICULT
AND TIME CONSUMING; IF WE FAIL AT THESE TASKS, WE MAY NOT BE ABLE TO EXPAND AND
IMPROVE OUR LATIN AMERICAN NETWORKS AND WE MAY LOSE CUSTOMERS AND REVENUES
We may expand and improve our Latin American operations through the
acquisition of new licenses, systems and telecommunications providers. We cannot
assure you that we can successfully complete needed acquisitions on acceptable
terms, or at all. Our failure to expand and improve our service and product
offerings
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through acquisitions may render us at a competitive disadvantage to other
telecommunications providers. Customers may choose these competitors over our
Latin American companies, leading to a loss of revenues.
We may encounter difficulties in integrating acquired operations and
technologies into our current operations and technologies. Remedial actions
could prove costly and time consuming and could divert management's attention
from other business matters.
REGULATION OF THE WIRELESS INDUSTRY MAY RESULT IN THE LOSS OF OUR LATIN AMERICAN
LICENSES, CONCESSIONS OR MARKETS OR AN INCREASE IN COMPETITION, COMPLIANCE COSTS
OR CAPITAL EXPENDITURES FOR NETWORK DEVELOPMENT
The licensing, construction, operation, sale, resale and interconnection
arrangements of wireless telecommunications systems in Latin America are
regulated to varying degrees by government authorities. Any of these authorities
having jurisdiction over our Latin American companies could adopt regulations or
take other actions that could adversely affect us. These actions could include
revocation of a license to offer wireless service in a market, failure to renew
such licenses or other actions. New regulations can also increase the costs of
regulatory compliance.
OUR LATIN AMERICAN OPERATIONS REQUIRE LICENSES, CONCESSIONS OR PERMITS FROM
GOVERNMENT AUTHORITIES, COMPLIANCE WITH WHICH CAN BE DIFFICULT AND COSTLY
Our Latin American companies require licenses or concessions from the
governments of the countries in which they operate. These licenses and
concessions outline the types of communications businesses permitted under each
license or concession. The duration of licenses or concessions with finite terms
range from five to 50 years, and although they generally are renewable upon
expiration, we cannot assure you that they will be renewed or that any renewal
will be on acceptable terms. The continued existence and terms of the companies'
licenses or concessions are subject to review by regulatory authorities in each
country and to interpretation, modification or termination by such authorities.
In addition, many of these concessions and licenses are revocable for public
policy reasons.
The construction, ownership and operation of our Latin American companies'
networks, the maintenance and renewal of their licenses and the pricing of their
services and related matters are subject to substantial regulation in each
country in which they operate. Regulation of our Latin American activities,
including the regulation of prices operators may charge for their services,
could have a material adverse effect on us by reducing profit margins,
increasing compliance costs or through other causes.
Our Latin American companies also typically require government permits,
including permits from local building and planning commissions for the
construction and operation of cell sites. Some of our Latin American companies
have not been able to obtain all required permits. Although we do not believe
such noncompliance would have a material adverse effect on our business as a
whole, we cannot assure you that there will not be claims or regulatory actions
relating to past or future noncompliance with these permitting requirements.
Our Latin American companies' wireless licenses or concessions typically
also require the operator to maintain minimum quality, service and coverage
criteria specified in the applicable license, and failure to comply with these
criteria can result in fines or revocation of licenses. We cannot assure you
that our Latin American companies will be able to fully comply with the terms of
these licenses.
DIFFICULT NETWORK BUILD-OUT SCHEDULES COULD CAUSE UNANTICIPATED EXPENSES,
THE LOSS OF OUR LATIN AMERICAN LICENSES OR OTHER PENALTIES
The rules of many of the government regulatory authorities having
jurisdiction over our Latin American companies require wireless licensees to
meet specified network build-out requirements and schedules. Failure to comply
with these requirements in a given license area could result in revocation or
forfeiture of the license for that area or the imposition of fines. Moreover,
the need to meet scheduled deadlines may cause us to expend more capital
resources than otherwise budgeted for a particular network build-out.
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THE POLICIES OF REGULATORY AUTHORITIES COULD INCREASE COMPETITION, WHICH
CAUSES DOWNWARD PRICE PRESSURE AND INCREASES CUSTOMER CHURN
The policies of many of the Latin American countries in which we operate
generally favor increasing competition in the communications industry.
Consequently, we expect competition in wireless service to increase in Latin
America, thus intensifying competitive risks and decreasing the revenues and
profitability of our Latin American companies by forcing down prices for
wireless services and increasing customer churn. For instance, regulatory
policies may provide that a carrier holding a license to provide wireless
service in a territory in a certain portion of the radio frequency spectrum may
have limited eligibility for a license covering the same territory in a
different portion of the spectrum. As more of the radio spectrum is made
available for wireless communications, regulatory authorities may adopt methods,
procedures or requirements that may have the effect of discriminating against a
BellSouth bid for a new radio spectrum license in favor of a new entrant.
UNPREDICTABLE REGULATORY SHIFTS, PARTICULARLY THOSE RELATING TO THE
COMMUNICATIONS INDUSTRY IN THE LATIN AMERICAN COUNTRIES IN WHICH WE OPERATE,
COULD IMPEDE OR STOP DEVELOPMENT OF THOSE MARKETS
Most Latin American countries are executing programs to deregulate and
privatize the provision of communications services, including wireless services.
However, these programs are still developing, and we cannot guarantee you that
changes in political administrations will not lead to the adoption of policies
concerning competition and privatization of communications services that may be
detrimental to our Latin American operations. Such restrictions, which may take
the form of a preference for local over foreign ownership of communications
licenses and assets, or government over private ownership, may make it
impossible for us to continue to develop our international communications
services. These restrictions could cause losses of revenues and capital
investments. Some restrictions currently exist, usually in the form of
percentage limits on our equity ownership in joint ventures in foreign markets.
In addition, many of these markets impose significant taxes on wireless services
in their countries.
WE MAY NOT BE ABLE TO COLLECT AMOUNTS DUE FROM OTHER COMMUNICATIONS CARRIERS
In most of our Latin American markets, the calling party pays for the
airtime on a call to a wireless number. For instance, if a caller places a call
over a landline to one of our Latin American wireless customers, the caller's
wireline communications provider collects the amounts due for wireless airtime
and pays them to our Latin American company. From time to time, our Latin
American companies have encountered difficulties collecting such amounts from
some communications companies. Some of these companies may also be our
competitors. If our Latin American companies cannot collect amounts due from
other communications providers on a timely basis, or at all, they could incur
material losses. Difficulties in collecting could also increase administrative
costs and risks from foreign exchange fluctuations.
GENERAL ECONOMIC AND POLITICAL CONDITIONS IN LATIN AMERICA POSE NUMEROUS RISKS
TO OUR LATIN AMERICAN OPERATIONS
The revenues of the businesses attributed to our Latin America group are
derived principally from operations in Latin America. Most countries in Latin
America where we operate have experienced political and social instability and
unfavorable economic trends in recent years. We have no control over these
matters. Volatility resulting from these matters may create uncertainty
regarding the operating climate of our Latin American companies and adversely
affect them. In addition, lower per capita income, socio-economic inequality and
negative economic growth may diminish our Latin American growth prospects.
Moreover, negative economic or political developments in one country in
Latin America, or even in other emerging markets such as Russia or Asia, can
lead to or exacerbate economic or political crises in Latin American markets.
Pressures on the local currencies in the countries in which our Latin American
companies operate are likely to hurt their customers, which can decrease their
revenues and expose them to foreign currency risk. Volatility in local
currencies and capital markets can also impair our Latin America group's
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ability to access international capital markets to raise capital, and may
depress the price of the Latin America group stock, regardless of the operating
performance of our Latin American companies.
Historically, weakness and volatility in local currencies and capital
markets has been caused by:
- changes in monetary, foreign exchange or fiscal policies;
- changes in policies with regard to foreign investment;
- significant government influence over many aspects of local economies;
- political instability;
- unexpected changes in regulatory requirements;
- social unrest;
- slow or negative economic growth;
- imposition of trade barriers;
- changes in wage and price controls; and
- price inflation in local currencies.
THE 1998-1999 LATIN AMERICAN INSTABILITY. Instability and volatility in
the world financial markets, which began with a crisis in Asia in 1998 and
spread to Russia, negatively affected most of the economies and financial
markets in Latin America in 1999. Latin American instability occurred
principally in Brazil, the region's most populous country and the world's tenth
largest economy. Excessive outflows of foreign currency reserves in 1998
pressured the Brazilian government in early 1999 to devalue the Brazilian Real
and abandon its policy of exchanging it for the U.S. Dollar within a fixed
range, instead permitting the Real to float freely against the U.S. Dollar. This
resulted in increased interest rates, market volatility and a decline in
investor confidence throughout the region. Effects of the instability are still
felt in Latin America.
BRAZIL. Throughout the 1980s and into the 1990s, the Brazilian economy
suffered from periods of extremely high rates of inflation and recession.
Historically, Brazil's currency has frequently depreciated in relation to the
U.S. Dollar. At the end of 1998, foreign exchange reserves in Brazil had
declined to approximately $40 billion from nearly $70 billion at the end of
August 1998. These outflows, which resulted from the Asian and Russian economic
crises (and the subsequent impact on perceptions of the risks of investments in
emerging market countries in general) and doubts concerning Brazil's willingness
to maintain the fixed exchange rate system, put pressure on the Brazilian Real.
The Brazilian government permitted the Real to float freely against the U.S.
Dollar in January 1999. Since that time, the Real has depreciated to a low of
R$2.17 = $1.00 on March 3, 1999. At June 1, 2000, the Real traded at a rate of
R$1.82 = $1.00. We cannot assure you that the Real will not again fluctuate
significantly relative to the U.S. Dollar. Because of Brazil's regional
significance, a continued downturn in Brazil's economy could further affect
other Latin American countries through the loss of investor confidence and
disruptions to intra-regional trade.
ARGENTINA. In the first nine months of 1999, Argentina suffered a
recession resulting primarily from the effects of the economic difficulties in
Brazil, Argentina's largest trading partner. In addition, Argentina experienced
a decline in investor confidence as a result of domestic political and economic
developments. In October 1999, the credit rating agency Moody's downgraded
Argentina's long-term foreign currency rating. The recession in Argentina has
likely adversely affected our Latin American businesses. In addition, we cannot
assure you that the Argentinean monetary authorities will continue to support
the existing 1:1 Argentinean Peso-to-U.S. Dollar exchange rate.
VENEZUELA. The Venezuelan government exercises significant control over
the Venezuelan economy. This control has included extensive regulation,
including foreign exchange and price controls. In the last 15 years, Venezuela
has experienced periods of recession or slow or negative growth, high inflation,
currency devaluations and limited availability of foreign exchange. Venezuela's
ongoing budget deficit, due in part to a general decline in international oil
prices in 1998 and the first half of 1999, has put pressure on the Venezuelan
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economy. Venezuela has experienced high levels of inflation during the past
decade. The general rate of inflation, as measured by the consumer price index,
was 103.2% in 1996, 37.6% in 1997 and 29.9% in 1998. The Venezuelan economy is
estimated to have declined by 7.6% in 1999.
In addition, Venezuela experienced a period of political uncertainty in
1999 as a result of the actions of a Constitutional Assembly that was elected to
propose a new constitution. This project is part of a program by Venezuela's
President, Mr. Hugo Chavez, to reform the Venezuelan political system. To date,
the Constitutional Assembly has declared constitutional emergencies and taken
steps to exert authority over and replace Venezuela's judiciary and Congress. In
December 1999, a new constitution was approved by national referendum and the
Venezuelan Congress was dissolved. Elections for President, a new unicameral
legislature, governorships and mayorships were scheduled for May 28, 2000, but
have now been indefinitely postponed. Mr. Chavez is running for reelection as
President. The heightened tensions between the executive branch and the
Constitutional Assembly, on the one hand, and the Venezuelan legislature, on the
other hand, and elements of the new constitution, have made investors reluctant
to invest funds in Venezuela. We cannot assure you that the implementation of a
new constitution will not have a material adverse effect on the Venezuelan
economy and on the business, results of operations and prospects of our
Venezuelan operations.
In December 1999, mudslides destroyed significant areas throughout the
northern coastal region of Venezuela. The impact of the natural disaster on the
Venezuelan economy has not yet been fully determined, although the Venezuelan
government has stated that it will take a minimum of two years to rebuild the
affected areas at an estimated cost of $1 billion.
COLOMBIA. We have recently entered into a definitive agreement to acquire
a 33.8% interest in an existing wireless communications company in Colombia. The
Colombian economy began experiencing a severe economic crisis in 1998. A
combination of low international oil prices, a decline in global lending to
emerging markets, a drop in domestic consumption and high interest rates
resulted in an economic recession, with unemployment over 20%. Colombia's gross
domestic product remained flat in 1999. In June 1999, Colombia's central bank
effectively devalued the Colombian Peso by widening the foreign exchange band.
In September 1999, the central bank discontinued the use of the foreign exchange
band and permitted the Colombian Peso to float freely against the U.S. Dollar.
In the third quarter of 1999, citing Colombia's macroeconomic imbalances and
rising levels of government debt, Moody's and Standard & Poor's downgraded the
country's credit rating to below investment grade.
Colombia has experienced periods of violence over the past four decades,
primarily from leftist guerrilla groups, right-wing paramilitary groups and
drug-related activities. In 1999, guerrilla offensives led the Colombian
government to effectively cede control of certain portions of the country to
guerrilla forces, order a curfew in certain regions of the country and place the
military on a heightened state of alert. These political conditions led Standard
& Poor's to downgrade Colombia's credit rating again in May 2000 and Colombia's
president recently abandoned his efforts to compel early congressional elections
in the face of political turmoil.
OTHER LATIN AMERICAN COUNTRIES. The other countries in Latin America in
which our Latin American companies operate generally have experienced similar
inflation and economic and political volatility in recent years.
We cannot assure you of fundamental improvements in macroeconomic and
political conditions in Latin America. Nor can we assure you that economic and
political difficulties in Latin America will cease, or that economic crises like
that which occurred in 1998-99 will not happen again. Such crises could
negatively impact our revenues and expenses, result in the loss of capital
investments and depress the market price of the Latin America group stock.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES COULD DIMINISH THE VALUE OF BELLSOUTH'S
INVESTMENT IN ITS LATIN AMERICAN OPERATIONS
The Latin America group's reporting currency is the U.S. Dollar. In most
cases, however, our Latin American customers are billed in local currencies. A
significant weakening against the U.S. Dollar of the currency of a country where
one of our Latin American companies generates revenues and net income may
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adversely impact its results. Any such weakening could also decrease cash flows
if the relevant company has significant costs or obligations denominated in
currencies other than the currency of the country in which it operates. Our
competitors who operate in a single currency or in a currency other than the
U.S. Dollar, which itself is likely to weaken against the U.S. Dollar, or who do
not operate in countries with as great a foreign exchange risk as we do are not
subject to the same level of foreign currency exchange risk as we are. As of
November 30, 1999, the most significant U.S. Dollar-denominated obligations
reflected in our Latin America group's combined balance sheet included short and
long-term debt issued by our Latin America companies in the amount of $860
million. In addition, our proportionate share of U.S. Dollar-denominated debt in
our Brazilian operations was approximately $1.0 billion at November 30, 1999.
Many of our Latin American companies are subject to price regulation by
government authorities and may not be permitted to adjust prices in response to
local inflation, including those that may result from an adverse change in the
exchange rate of the local currency with the U.S. Dollar. Even if permitted to
increase prices, our Latin American customers may not be willing or able to
absorb price increases. Nor can we guarantee you that any price increases that
are effected will compensate for all of the deterioration of the local currency
against the U.S. dollar. Latin American economies have experienced shortages in
foreign currency reserves and restrictions on the ability to expatriate local
earnings and convert local currencies into U.S. Dollars. These restrictions
could limit our ability to allocate excess cash flows efficiently among our
various companies.
A drop in the value of one country's currency may have negative effects in
another country. For example, in late 1994 and 1995, several Latin American
countries were adversely affected by the devaluation of the Mexican Peso. The
Asian and Russian economic crises of 1998 and 1999 had a negative effect on the
financial and foreign exchange markets of emerging market countries in general,
leading to increased pressures on local interest rates and currencies, including
in Argentina and Brazil. These pressures, in turn, have inhibited the ability of
companies operating in emerging markets to obtain necessary financing. Any
devaluation or depreciation of local currencies in the Latin American countries
where we operate, or restrictions on the expatriation of earnings or capital
from such countries, could negatively impact the results of our Latin American
companies, decrease sales, revenues and net income and could depress the market
price of the Latin America group stock.
WE MAY INCUR SIGNIFICANT COSTS FROM WIRELESS FRAUD
Our Latin American operations incur costs associated with the unauthorized
use of their wireless networks, particularly their analog cellular networks.
These costs include administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud also impacts
interconnection costs, capacity costs, administrative costs and payments to
other carriers for unbillable fraudulent roaming. Although we strive to combat
this problem through the deployment of anti-fraud technologies and other
measures, we cannot guarantee that these efforts will be effective or that fraud
will not result in material costs for us in the future.
Cloning, which is one form of wireless fraud, involves the use of scanners
and other electronic devices to illegally obtain telephone numbers and
electronic serial numbers during cellular transmission. These stolen telephone
and serial number combinations can be programmed into a cellular phone and used
to obtain improper access to cellular networks. Roaming fraud occurs when a
phone programmed with a number stolen from one of our Latin American customers
is used to place fraudulent calls from another carrier's market, resulting in a
roaming fee charged to our Latin American companies that cannot be collected
from the customer.
WE ARE SUBJECT TO THE FOREIGN CORRUPT PRACTICES ACT, AND COMPETE AGAINST
COMPANIES THAT ARE NOT SUBJECT TO THE ACT, WHICH MAY GIVE THEM A COMPETITIVE
ADVANTAGE. IN ADDITION, WE MAY FACE LIABILITY FOR THE ACTS OF OUR PARTNERS,
AGENTS OR OTHER INTERMEDIARIES, OVER WHICH WE MAY HAVE LITTLE OR NO CONTROL
As a U.S. company, we are subject to the Foreign Corrupt Practices Act,
which generally prohibits U.S. companies and their intermediaries from making
improper payments to foreign officials for the purpose of
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obtaining or keeping business. Many of our competitors in Latin America are not
subject to the Foreign Corrupt Practices Act. To the extent our Latin American
competitors can use improper payments to help secure licenses, concessions,
preferential treatment or other advantages, our Latin American companies may
suffer. Because our Latin American companies must deal with government officials
for licenses, concessions, permits and additional radio spectrum, they may be
affected by the Act more than companies that do not interact with Latin American
governments so frequently.
Although we have instituted a compliance program to comply with the Act, we
cannot assure you that this program and the other precautions we employ will
protect us against liability under the Act, particularly as a result of actions
which may in the past have been taken or which may be taken in the future by
agents and other intermediaries for whom we may have exposure under the Act.
Although the application of the law in this context is uncertain, it is possible
that we may be held responsible for actions taken by local partners even though
we may have little or no ability to control them. As our Latin American
companies are dependent on local partners over which we exercise little control,
we may be more susceptible to liability under the Act than companies not so
dependent on local partners. Any determination that we have violated the Act
could result in liabilities, litigation costs and injury to our reputation.
THE WIRELESS INDUSTRY MAY BE HARMED BY MEDIA REPORTS SUGGESTING THAT RADIO
FREQUENCY EMISSIONS CAUSE VARIOUS HEALTH PROBLEMS AND INTERFERE WITH VARIOUS
MEDICAL DEVICES
Media and other reports have suggested that radio frequency emissions from
wireless handsets and base stations can cause various health problems, including
cancer, and may interfere with electronic medical devices, including hearing
aids and pacemakers. If consumers harbor health concerns over radio frequency
emissions, they may be discouraged from using wireless handsets and regulators
may impose restrictions on the location of base stations. These concerns could
have an adverse effect on the wireless communications industry and possibly
expose wireless providers to litigation. We cannot assure you that further
research and studies will not demonstrate a link between the radio frequency
emissions of wireless handsets and base stations and these health concerns.
Furthermore, if such a link is demonstrated, we cannot assure you that
government authorities will not increase regulation of wireless handsets and
base stations as a result of these concerns or that wireless companies will not
be held liable for costs or damages associated with these concerns.
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CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. Forward-looking
statements do not relate strictly to historical or current facts.
Forward-looking statements may be identified by the use of forward-looking words
or phrases such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning. Forward-looking
statements are based on our current expectations and are subject to risks and
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for these forward-looking statements.
A number of important factors, including those risks and uncertainties
described under "Risk Factors," could affect future operating results and
financial position and cause actual results to differ materially from those
expressed in the forward-looking statements. These risks and uncertainties set
forth under "Risk Factors" are 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.
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USE OF PROCEEDS
Based on an assumed public offering price of $ per share (the
midpoint of the range of estimated public offering prices set forth on the cover
page of this prospectus), BellSouth will receive net proceeds from the sale of
Latin America group stock offered in this offering of approximately $
billion, or approximately $ billion if the underwriters exercise their
over-allotment option in full, after deducting the estimated underwriting
discounts and commissions and estimated expenses that are payable by us.
BellSouth will attribute the net proceeds from the offering to the Latin
America group. BellSouth intends to use $ billion for:
- capital expenditures to develop and expand existing operations in Latin
America;
- acquisitions of additional communications licenses in Latin America;
- acquisitions of interests in other Latin American communications
businesses; and
- general purposes of companies in the Latin America group; and
the remaining $240 million to repay indebtedness owed to companies in the BLS
group by companies in the Latin America group, which was incurred in connection
with our recent purchase of a minority interest in a Brazilian wireless company
that we attributed to the Latin America group. The indebtedness to be repaid is
due upon demand and bears interest at a rate of -% as of -, 2000.
Pending its use by the Latin America group, the net proceeds may be
invested in short-term securities or used to make short-term loans to companies
in the BLS group these loans would be made at interest rates and on other terms
and conditions designed to reflect the interest rates, terms and conditions that
the BLS group, assuming it were a legal entity, would be able to obtain from
third parties.
DIVIDEND POLICY
Because the companies in the Latin America group are expected to require
significant capital to finance their operations and fund their future growth, we
do not expect to pay any dividends on shares of Latin America group stock for
the foreseeable future. If and when our board of directors does determine to pay
any dividends on shares of Latin America group stock, this determination will be
based primarily on the results of operations, financial condition and capital
requirements of the companies in the Latin America group and of BellSouth as a
whole and such other factors as our board of directors considers relevant.
In making its dividend decisions regarding Latin America group stock, our
board of directors will rely on our consolidated financial statements and the
combined financial statements of the Latin America group.
Georgia law limits the amount of dividends that we can pay on all series of
common stock to funds legally available for distributions. Our charter further
limits the amount of dividends we can pay on Latin America group stock to the
lesser of funds legally available for distribution under Georgia law and the
available distributions amount for the Latin America group. The available
distribution amount for the Latin America group is the same amount that would be
legally available for the payment of dividends on Latin America group stock if
the Latin America group were a separate company under Georgia law.
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SELECTED HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
OF THE LATIN AMERICA GROUP
We derived the selected financial data presented below from the combined
financial statements and related notes of the Latin America group. The audited
combined financial statements of the Latin America group for each of the years
ended November 30, 1997, 1998 and 1999 and unaudited combined financial
statements of the Latin America group for the three months ended February 28,
1999 (first quarter 1999) and February 29, 2000 (first quarter 2000) are
included in this document. You should read the selected financial data together
with the audited combined financial statements of the Latin America group and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Latin America Group of BellSouth Corporation" included in this
document.
PricewaterhouseCoopers LLP, independent accountants, audited the combined
financial statements of the Latin America group for each of the years ended
November 30, 1997, 1998 and 1999.
1999 results include the following items that affect comparability:
- foreign currency losses related to the devaluation of the Brazilian Real
which reduced net income by $308 million (these losses are included in
net earnings (losses) of equity affiliates); and
- the recognition of certain foreign investment tax credits generated in
prior years, which increased net income by $95 million.
First quarter 1999 results include foreign currency losses related to the
devaluation of the Brazilian Real, which reduced net income by $280 million.
The legal restriction on BellSouth's ownership of the Nicaraguan wireless
operations was lifted in December 1999, and we have determined to exercise our
prepaid option to increase our interest to an 89% controlling stake.
Accordingly, data for the Nicaraguan operations, which were previously reported
using the equity method, are now combined in the amounts shown below, beginning
in the first quarter of 2000.
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, -----------------------------
-------------------------- FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
---- ------ ------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Communications revenues................... $940 $1,907 $2,336 $ 565 $ 681
Advertising and directory publishing
revenues................................ -- -- 69 -- 14
---- ------ ------ ------ ------
Total operating revenues........... 940 1,907 2,405 565 695
---- ------ ------ ------ ------
Operating expenses:
Cost of services, products and
equipment............................... 344 607 867 196 278
Selling, general and administrative....... 455 766 982 212 303
Depreciation and amortization............. 140 338 450 104 126
---- ------ ------ ------ ------
Total operating expenses........... 939 1,711 2,299 512 707
---- ------ ------ ------ ------
Operating income............................ 1 196 106 53 (12)
Interest expense............................ 46 53 88 24 33
Other income (expense), net................. -- (1) (5) (8) 25
---- ------ ------ ------ ------
Income (loss) before income taxes........... (45) 142 13 21 (20)
Provision (benefit) for income taxes........ 1 103 (116) 24 (13)
---- ------ ------ ------ ------
Income (loss) before net earnings (losses)
of equity affiliates and minority
interests................................. (46) 39 129 (3) (7)
Net earnings (losses) of equity
affiliates................................ 14 (57) (354) (295) (6)
Minority interests in income of
subsidiaries.............................. 4 (50) (91) (16) (7)
---- ------ ------ ------ ------
Net loss.................................... $(28) $ (68) $ (316) $ (314) $ (20)
==== ====== ====== ====== ======
</TABLE>
---------------
After this offering, the consolidated financial statements of BellSouth
will present basic and diluted earnings per share for BLS group stock and Latin
America group stock using the two-class method. The two-class method is an
earnings formula that determines the earnings per share for BLS group stock and
Latin America group stock according to the participation rights in undistributed
earnings. The combined financial statements of the Latin America group will not
present earnings per share because the Latin America group stock is a series of
common stock of BellSouth and because the Latin America group is not a legal
entity with a capital structure.
(continued on next page)
39
<PAGE> 42
SELECTED HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
OF THE LATIN AMERICA GROUP -- (CONTINUED)
The "combined" amounts under the caption "Operating Data" represent the
total customers, licensed population, billed minutes of use and average revenue
per user of the Latin American companies in Argentina, Chile, Ecuador, Peru and
Venezuela which are the businesses included in the combined financial statements
included elsewhere in this document. Data for the business in Nicaragua is
included beginning in the first quarter of 2000. Data for the businesses in
Brazil, Guatemala, Panama and Uruguay are not presented because we do not
combine the results of these non-controlled operations in the Latin America
group financial statements.
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, ---------------------------
------------------------------------ FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (dollars in millions):
Cash and cash equivalents..................... $ 177 $ 171 $ 287 $ 206 $ 309
Investment in equity affiliates............... 684 805 348 369 300
Licenses and other intangible assets, net..... 651 1,059 1,471 1,038 1,547
Total assets.................................. 3,098 4,171 4,674 3,875 4,823
Long-term debt, including current
maturities.................................. 436 678 638 700 700
Group net worth............................... 1,414 2,119 2,345 1,718 2,409
OPERATING DATA (in thousands, except as
noted):
Customers..................................... 1,624 2,598 4,230 2,949 5,096
Licensed population........................... 60,900 79,400 111,700 87,800 114,600
Billed minutes of use......................... 3,066,145 5,183,254 6,655,884 1,555,999 1,923,385
Average revenue per user (whole dollars)...... $ 84 $ 73 $ 52 $ 61 $ 39
OTHER (dollars in millions):
EBITDA........................................ 141 534 556 157 114
EBITDA margin................................. 15.0% 28.0% 23.1% 27.8% 16.4%
Cash flows from operating activities.......... $ 55 $ 476 $ 568 $ 99 $ 56
Cash used in investing activities............. (1,440) (1,387) (1,099) (192) (236)
Cash provided by financing activities......... 1,569 902 651 130 202
Capital expenditures.......................... 448 697 647 162 230
Investments and advances to equity
affiliates.................................. 679 248 77 27 3
</TABLE>
EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, net earnings (losses) of equity affiliates,
provision for asset impairment 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.
Average revenue per user is calculated by dividing average monthly revenue
by average customers. Average monthly revenue includes activation fees, access,
airtime, net roaming, long distance and value added services.
40
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION
Investors should read the following discussion together with the combined
financial statements of the Latin America group and the related notes, and our
consolidated financial statements and the related notes, included in this
document.
OVERVIEW
From a financial reporting standpoint, we have separated the Latin America
group, which consists of our Latin American businesses, from the BLS group,
which consists of all of our other businesses. Latin America group stock is
intended to track the separate performance of the Latin America group. BLS group
stock is intended to track the separate performance of the BLS group.
The Latin America group stock is designed to reflect the separate economic
performance of the Latin America group, which includes the assets and
liabilities shown in the combined balance sheets of the Latin America group
appearing elsewhere in this document. We attributed these assets and liabilities
to the Latin America group in accordance with the group's lines of business as
set forth in the tracking stock policy statement adopted by BellSouth's board of
directors. This initial attribution is reflected in the November 30, 1999
combined balance sheets of the Latin America group included elsewhere in this
document. Under the tracking stock policy statement, the Latin America group may
engage in any business activity in Latin America, which is defined to include
South America, Central America, Mexico and the Caribbean area, excluding the
territories and possessions of the United States and the Commonwealth of Puerto
Rico. The BLS group generally may not provide telecommunications and related
services and products in Latin America, except for activities incidental or
ancillary to its businesses outside Latin America.
The major assets attributed to the Latin America group stock are
BellSouth's interests in communication companies in ten Latin American
countries. Information about the principal Latin American local operating
companies in which we have interests in is set forth below:
<TABLE>
<CAPTION>
COUNTRY BRAND LOCAL OPERATING COMPANY BELLSOUTH INTEREST
------- ----- ----------------------- ------------------
<S> <C> <C> <C>
Argentina Movicom/BellSouth Compania de Radiocomunicaciones Moviles S.A..... 65.0%
Brazil BCP BCP, S.A........................................ 44.5
BSE, S.A........................................ 46.8
Chile BellSouth Chile BellSouth Communicaciones S.A. y Cia S.C.A...... 100.0
BellSouth Chile S.A............................. 100.0
Ecuador BellSouth Ecuador Otecel S.A...................................... 89.4
Guatemala BellSouth Guatemala BellSouth Guatemala Cia S.C.A................... 60.0
Nicaragua BellSouth Nicaragua Telefonia Celular de Nicaragua, S.A............. 49.0
Panama BellSouth Panama BSC de Panama, S.A.............................. 43.7
Peru BellSouth Peru BellSouth Peru, S.A............................. 96.8
Uruguay Movicom/BellSouth Abiatar, S.A.................................... 46.0
Venezuela Telcel Telcel Celular, C.A............................. 78.2
</TABLE>
We also have an agreement to acquire a controlling interest in a company
providing wireless communications in Colombia.
41
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
We have also attributed to the Latin America group BellSouth's interests in
directory publishing companies in Brazil and Peru, a network services business
providing wholesale communications services and an international roaming
clearinghouse.
<TABLE>
<CAPTION>
LOCATION OPERATING COMPANY BUSINESS BELLSOUTH INTEREST
-------- ----------------- -------- ------------------
<S> <C> <C> <C>
Brazil Listel-Listas Telefonicas S.A. Directory Publishing 100.0%
Brazil OESP Midia Ltda. Directory Publishing 40.0
Peru BellSouth Advertising &
Publishing Peru S.R.L. Directory Publishing 100.0
Atlanta, Georgia BellSouth International
Wireless Services, Inc. Roaming Clearinghouse 100.0
Atlanta, Georgia BellSouth Access Wholesale Communications 100.0
Atlanta, Georgia BellSouth International, Inc. Headquarters Function 100.0
</TABLE>
All liabilities of the local operating companies in the tables above have
also been attributed to the Latin America group.
As BellSouth acquires interests in other Latin American businesses, we
currently intend that those assets, and any related liabilities, will be
attributed to the Latin America group in accordance with the tracking stock
policy statement. All net income and cash flows generated by the assets
attributed to the Latin America group and all net proceeds from the disposition
of these assets will also be attributed to the Latin America group.
Although we sometimes refer to these assets and liabilities as those of the
Latin America group, Latin America group is not a separate legal entity. Rather,
all of the assets of the Latin America group are owned by BellSouth and holders
of the Latin America group stock will be shareholders of BellSouth and subject
to all of the risks of an investment in BellSouth and all of its businesses,
assets and liabilities.
The attribution to the Latin America group of assets, liabilities, equity,
revenue and expenses, except shared corporate services, reflected in BellSouth's
financial statements is based on specific identification of those companies
listed above which are consolidated in accordance with generally accepted
accounting principles in the consolidated financial statements of BellSouth.
Equity investments of BellSouth that operate in Latin America have also been
attributed to the Latin America group. Less than one percent of the Latin
America group's general, administrative and selling expenses are allocated to
the Latin America group as part of BellSouth's shared corporate expenses. These
expenses are allocated to the Latin America group in accordance with the
tracking stock policy statement.
We intend, for so long as the Latin America group stock remains
outstanding, to include in filings by BellSouth under the Securities Exchange
Act of 1934, as amended, the combined financial statements of the Latin America
group. These combined financial statements will be prepared in accordance with
generally accepted accounting principles, and in the case of annual financial
statements, will be audited. These combined financial statements are not legally
required under current law or SEC regulations.
PRESENTATION
The combined financial statements of the Latin America group reflect a
fiscal year ending November 30 to facilitate timely reporting of the
consolidated financial results of BellSouth. In accordance with generally
accepted accounting principles, the Latin America group financial statements
combine the revenues and expenses of controlled subsidiaries. We use the equity
method of accounting to record the operating results of entities over which we
exercise significant influence, but do not have a controlling interest.
42
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
The following table summarizes BellSouth's equity ownership percentages in
its Latin American operations as of the end of the period and the accounting
method for its investments, by country:
<TABLE>
<CAPTION>
AS OF NOVEMBER 30,
--------------------- AS OF
1997 1998 1999 FEBRUARY 29, 2000
----- ----- ----- -----------------
<S> <C> <C> <C> <C>
COMBINED OPERATIONS:
Communications:
Argentina.................................... 65.0% 65.0% 65.0% 65.0%
Venezuela.................................... 57.3 78.2 78.2 78.2
Peru......................................... 59.0 59.0 96.8 96.8
Chile........................................ 100.0 100.0 100.0 100.0
Ecuador...................................... 61.2 89.4 89.4 89.4
Nicaragua.................................... -- -- -- 49.0
Advertising and directory publishing:
Brazil -- Listel-Listas Telefonicas.......... -- -- 100.0 100.0
Peru......................................... 59.0 100.0 100.0 100.0
EQUITY AFFILIATES:
Communications:
Brazil -- Northeast.......................... 42.5% 46.8% 46.8% 46.8%
Brazil -- Sao Paulo.......................... 41.0 44.5 44.5 44.5
Uruguay...................................... 46.0 46.0 46.0 46.0
Panama....................................... 42.0 42.0 43.7 43.7
Nicaragua.................................... 49.0 49.0 49.0 --
Guatemala.................................... -- -- 60.0 60.0
Advertising and directory publishing:
Brazil -- OESP Midia Ltda.................... -- -- 40.0 40.0
</TABLE>
After a change of law in Nicaragua in December 1999, BellSouth determined
to increase its 49% ownership interest to an 89% controlling stake in the
Nicaraguan wireless operations. Accordingly, in first quarter 2000, the results
of the Nicaraguan operations, which were previously reported under the equity
method, were changed to the consolidation method.
BellSouth's investment in Guatemala is accounted for under the equity
method due to the existence of significant minority rights that limit its
ability to exercise unilateral control over the operation.
SEGMENT REPORTING
We classify the operations in the Latin America group into two business
segments: Communications and Advertising and Directory Publishing.
- The Communications segment includes operations which provide wireless
service in Argentina, Brazil, Chile, Ecuador, Nicaragua, Panama, Peru,
Uruguay and Venezuela. We anticipate that operations in Guatemala will
commence in the third quarter of 2000. In addition to the
country-specific wireless operations, the communications segment includes
operations which provide wholesale long distance, data access and
transport and operates an international roaming clearinghouse. BellSouth
has also announced an agreement to purchase a stake in a wireless
operation in Colombia.
- The Advertising and Directory Publishing segment includes two separate
directory publishing companies in Brazil and one company in Peru. In
addition to print products, the operations in Brazil are currently
marketing Internet-based directory services and e-commerce applications.
43
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
OPERATING IN EMERGING ECONOMIES
In late 1998, the international financial crisis triggered by the turmoil
in Asia and Russia affected the economies of countries in South America. Falling
earnings from commodity exports and high interest rates resulting from efforts
to defend currencies sent Brazil, Argentina, Chile, Colombia, Ecuador and
Venezuela into recessions. Brazil's currency devaluation in January 1999
exacerbated the problems, especially for Argentina, a major trading partner.
Ecuador's inability to meet its debt obligations further shook investor
confidence in the region. Peru narrowly avoided recession because of government
spending related to the recovery from the effects of El Nino but domestic demand
was stagnant. The economies of Central America grew modestly throughout 1999.
Strong economic recoveries are underway in Peru and Chile and economic
indicators have turned positive for Argentina and Brazil. In Brazil, the
recession helped to avoid the high inflation that normally accompanies
devaluation, though the threat of mild inflation has kept interest rates high.
Colombia and Venezuela have been bolstered by higher oil prices, but those
economies are not yet showing signs of recovery. Ecuador also experienced
significant economic and political difficulties, including a 40% devaluation in
its currency.
Despite severe economic recession in several countries in which we operate,
our Latin America group's operating companies were able to grow their customer
bases and revenues significantly during 1999. There is no assurance, however,
that in the future similar conditions will not have material adverse effects on
the Latin America group's business, results of operations or financial condition
or the market price of the Latin America group stock. Although we believe that
the geographic diversification of our Latin American businesses provides some
protection against economic downturns in any single country, the results of
operations and business prospects are influenced by the overall financial,
social, political and economic conditions in Latin America.
Generally, our Latin American operating companies generate revenues that
are paid in their local currency. However, at least a portion of the operating
expenses and liabilities of most of these operating companies are denominated in
U.S. Dollars. As a result, a significant devaluation of the local currency
against the U.S. Dollar could result in a significant increase in the relevant
operating company's operating expenses and a material adverse effect on the
results of operations of the Latin America group. In addition to this ongoing
increase in operating expenses, to the extent an operating company has
liabilities, such as debt or other obligations or contracts with equipment
suppliers, denominated in U.S. Dollars, any such devaluation will result in an
accounting charge based on the increase in such dollar-denominated liabilities
and obligations when converted into the local currency used in the financial
statements of such operating company. Fluctuations in currency exchange rates
also result in adjustments to investments in its combined entities and equity
affiliates, which could negatively impact the carrying value of our ownership
interests in our operating companies. In 1999, Brazil and Ecuador experienced
significant devaluations of their local currency and such devaluations may occur
again in the future in these or other markets.
OPERATING REVENUES AND EXPENSES
Operating revenues include wireless service revenues, equipment sales, long
distance, advertising and directory publishing and other.
- Wireless service revenues consist primarily of charges for incoming and
outgoing airtime use, monthly network access fees, activation services,
long distance, value-added services and net roaming charges.
- Equipment sales consist of revenues from sales of wireless handsets and
accessories. Equipment sales are ancillary to the provision of wireless
service. Wireless handsets are sold at subsidized prices, which are often
at or below cost, as an incentive for new customers to subscribe to
wireless service. These
44
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
subsidies range from 0% to 100%, and are heavily dependent on market
conditions in each individual market within a particular country.
- Long distance represents revenues from a fixed-line national and
international long distance business in Chile. The operations in
Argentina, Peru and Ecuador recently received licenses to provide
fixed-line long distance services.
- Advertising and directory publishing revenues consist of revenues
generated from the sale of directory advertising and publishing and
electronic distribution of directory advertising.
- All other revenues consists of revenues associated with wholesale long
distance voice, data access and transport and an international roaming
clearinghouse operation, Internet access and other miscellaneous
revenues.
Wireless providers have two basic types of customers: postpaid and prepaid.
Postpaid customers incur a fixed access charge and incur charges for airtime
used, roaming, long distance and value-added services for which the customer is
billed on a monthly basis. Prepaid customers purchase calling cards in various
denominations entitling them to airtime without fixed monthly charges for
access, fixed-term contracts or the need for credit reference checks. Revenue
associated with the sale of prepaid calling cards is deferred and recognized as
the airtime is utilized or when the unused balances on calling cards expire.
Operating expenses include cost of services, products and equipment,
selling, general and administrative expenses and depreciation and amortization
expenses.
- Cost of services, products and equipment consist primarily of:
-- cellular network operating costs;
-- interconnection fees assessed by wireline and wireless providers;
-- royalties paid to government entities;
-- leased transport capacity;
-- cost of materials; and
-- the cost of equipment and accessories sold.
Interconnection costs have fixed and variable components. The fixed
component of interconnection costs consists of monthly flat-rate fees for
facilities leased from local exchange carriers. The variable component of
interconnection costs, which fluctuates in relation to the level of
wireless calls, consists of per-minute use fees charged by wireline and
wireless providers for wireless calls terminating on their networks.
- Selling, general and administrative expenses consist primarily of costs
associated with sales and marketing activities, customer service and
general and administrative functions. This line item also includes an
allocation of BellSouth's shared corporate services costs.
- Depreciation and amortization charges consist primarily of depreciation
recorded for our Latin American wireless networks and equipment and
amortization of intangibles such as wireless license costs, customer
lists, goodwill and capitalized software.
Customer acquisition costs, which primarily consist of the cost of handsets
and sales commissions, are recognized in the period that a wireless provider
acquires a new customer. Accordingly, in periods of high customer growth,
significant operational and support expenses precede the recognition of the
associated revenue.
45
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
We expect significant growth in prepaid customers in all Latin American
markets as a result of customer demand, our marketing plans and our intent to
expand customer growth in the mass consumer market segment. Although overall
usage and revenues are growing, deeper penetration into the mass market has a
negative impact on average minutes of use, and therefore operating revenues per
customer, because these customers generally use fewer minutes. However, as
prepaid represents a higher percentage of this segment, the decline in average
usage per customer is offset to a large degree by higher per-minute prices,
minimal bad debt, lower acquisition costs, no billing expense generally and
lower customer service expenses.
FOREIGN CURRENCY
We report the Latin America group financial statements in U.S. Dollars. The
combined companies and equity affiliates record transactions in local
currencies. Consequently, fluctuations in currency exchange rates between the
U.S. Dollar and the applicable local currency will affect the Latin America
group's results of operations as well as the value of our ownership interests in
the combined companies and equity affiliates included in the group. In general,
weakening of local currencies against the U.S. Dollar reduces the revenues,
expenses, and net income or loss that a Latin American subsidiary reports on a
U.S. Dollar basis. In addition, the U.S. Dollar value of our equity interest in
the Latin American operation is reduced.
The following table presents the average exchange rates for local
currencies to the U.S. Dollar in the countries in Latin America where we
operate. In some instances, our Latin American companies are able to mitigate
unfavorable changes in exchange rates by instituting rate increases for their
services or indexing their prices to the U.S. Dollar. As shown below, foreign
currencies have weakened against the U.S. Dollar in all cases except Argentina
and Panama where the exchange rate is pegged to the U.S. Dollar.
<TABLE>
<CAPTION>
FIRST FIRST
QUARTER QUARTER 1998 VS. 1997 1999 VS. 1998
1997 1998 1999 1999 2000 % DEPRECIATION % DEPRECIATION
-------- -------- --------- ------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Argentinean Peso.............. .9995 .9995 .9995 .9995 .9995 -- --
Brazilian Real................ 1.072 1.153 1.762 1.540 1.807 (7.1)% (34.6)%
Chilean Peso.................. 417.972 457.446 503.358 480.51 523.573 (8.6) (9.1)
Ecuadorian Sucre.............. 3,931.9 5,263.0 10,819.3 7,178.8 22,688.8 (25.3) (51.3)
Guatemalan Quetzal............ 6.008 6.350 7.307 6.863 7.783 (5.4) (13.1)
Nicaraguan Cordoba Oro........ 9.36 10.48 11.71 11.25 12.349 (10.7) (10.5)
Panamanian Balboa............. 1.00 1.00 1.00 1.00 1.00 -- --
Peruvian Nuevo Sol............ 2.653 2.895 3.354 3.263 3.483 (8.4) (13.7)
Uruguayan Peso................ 9.333 10.403 11.271 10.888 11.660 (10.3) (7.7)
Venezuelan Bolivar............ 486.296 542.273 599.287 570.710 651.337 (10.3) (9.5)
<CAPTION>
FIRST QUARTER
2000 VS. 1999
% DEPRECIATION
--------------
<S> <C>
Argentinean Peso.............. --
Brazilian Real................ (14.8)%
Chilean Peso.................. (8.3)
Ecuadorian Sucre.............. (68.4)
Guatemalan Quetzal............ (11.8)
Nicaraguan Cordoba Oro........ (8.9)
Panamanian Balboa............. --
Peruvian Nuevo Sol............ (6.3)
Uruguayan Peso................ (6.6)
Venezuelan Bolivar............ (12.4)
</TABLE>
46
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
COMBINED RESULTS OF OPERATIONS
The following table sets forth income statement data for the Latin America
group for the three years ended November 30, 1997, 1998 and 1999 and the three
months ended February 28, 1999 (first quarter 1999) and February 29, 2000 (first
quarter 2000). The table also includes unaudited pro forma income statement data
that reflects the 1997 results adjusted for our September 1997 acquisition of a
controlling interest in our wireless operation in Venezuela. Subsequent to
gaining a controlling interest, we began combining the operating results and
cash flows of the Venezuelan operations. Prior to the acquisition, the results
of this operation were reflected in net earnings of equity affiliates at our
ownership interest. Although the unaudited pro forma 1997 presentation is not in
accordance with generally accepted accounting principles, we believe it presents
the most meaningful basis of comparison. The unaudited pro forma financial
information presented below may not necessarily reflect the results of
operations that would have occurred had the acquisition been completed on
December 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------- FIRST QUARTER
ACTUAL PRO FORMA ACTUAL -------------
1997 1997(1) 1998 1999 1999 2000
------- --------- ------- ------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Communications revenues.................. $ 940 $1,270 $ 1,907 $ 2,336 $ 565 $ 681
Advertising and directory publishing
revenues............................... -- -- -- 69 -- 14
------- ------ ------- ------- ----- -----
Total operating revenues....... 940 1,270 1,907 2,405 565 695
------- ------ ------- ------- ----- -----
Cost of services, products and
equipment.............................. 344 418 607 867 196 278
Selling, general and administrative...... 455 568 766 982 212 303
Depreciation and amortization............ 140 214 338 450 104 126
------- ------ ------- ------- ----- -----
Operating income......................... 1 70 196 106 53 (12)
Interest expense......................... 46 51 53 88 24 33
Other income (expense), net.............. -- 1 (1) (5) (8) 25
Provision (benefit) for income taxes..... 1 13 103 (116) 24 (13)
Net earnings (losses) of equity
affiliates............................. 14 (16) (57) (354) (295) (6)
Minority interests....................... 4 (24) (50) (91) (16) (7)
------- ------ ------- ------- ----- -----
Net loss................................. $ (28) $ (33) $ (68) $ (316) $(314) $ (20)
======= ====== ======= ======= ===== =====
CASH FLOW DATA:
Cash provided by operating activities.... $ 55 N/M* $ 476 $ 568 $ 99 $ 56
Cash used for investing activities....... (1,440) N/M (1,387) (1,099) (192) (236)
Cash provided by financing activities.... 1,569 N/M 902 651 130 202
Capital expenditures..................... $ 448 $ 572 $ 697 $ 647 $ 162 $ 230
OTHER:
EBITDA(2)................................ 141 284 534 556 157 114
EBITDA margin(3)......................... 15.0% 22.4% 28.0% 23.1% 27.8% 16.4%
</TABLE>
---------------
* Not meaningful.
(1) The Venezuela acquisition gave rise to different bases of accounting for the
period after the acquisition as compared to the period prior to the
acquisition. The above unaudited pro forma amounts assume that the
acquisition took place on December 1, 1996; therefore amortization of
intangible assets and net loss have been increased by $8 million and $5
million, respectively, for the year ended November 30, 1997.
(2) EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, net earnings (losses) of equity affiliates
and other income, net. EBITDA is presented because it is a widely accepted
financial indicator used by certain investors and analysts to analyze and
compare companies on
47
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
the basis of operating performance and because management believes 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 the Latin America
group's financial performance. The 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.
(3) EBITDA margin is EBITDA divided by total operating revenues.
COMMUNICATIONS SEGMENT
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------ FIRST QUARTER
PRO FORMA ACTUAL ----------------
1997 1998 1999 1999 2000
--------- ------- -------- ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Wireless service revenues................... $ 1,152 $ 1,784 $ 2,084 $ 516 $ 575
Equipment sales............................. 58 47 133 27 56
Long distance............................... 29 27 22 6 5
Other revenues.............................. 31 49 97 16 45
------- ------- -------- ------- ------
Total communications operating revenues..... 1,270 1,907 2,336 565 681
Cost of services, products and equipment.... 418 601 833 196 271
Selling, general and administrative......... 568 766 944 212 287
Depreciation and amortization............... 214 338 446 104 124
------- ------- -------- ------- ------
Operating income............................ 70 202 113 53 (1)
Interest expense............................ 51 53 87 24 33
Other income (expense), net................. 1 (1) (3) (8) 25
Provision (benefit) for income taxes........ 13 105 (116) 24 (7)
Net losses of equity affiliates............. (16) (57) (349) (294) (6)
Minority interests.......................... (24) (50) (91) (16) (7)
------- ------- -------- ------- ------
Segment net loss............................ $ (33) $ (64) $ (301) $ (313) $ (15)
======= ======= ======== ======= ======
Capital expenditures........................ $ 572 $ 697 $ 646 $ 162 $ 230
OPERATING DATA: (in thousands, except as
noted)
Customers at end of period(1)
Venezuela................................. 697 1,168 2,219 1,393 2,834
Argentina................................. 629 885 1,171 942 1,286
Other..................................... 298 545 840 614 976
------- ------- -------- ------- ------
1,624 2,598 4,230 2,949 5,096
======= ======= ======== ======= ======
Average revenue per user(2)................. $ 84 $ 73 $ 52 $ 61 $ 39
</TABLE>
---------------
(1) Represents the total customers, licensed area population, billed minutes of
use and average revenue per user of the Latin America group's operating
companies in Argentina, Chile, Ecuador, Peru and Venezuela, which are the
businesses included in the combined financial statements included elsewhere
in this proxy statement. First quarter 2000 amounts also include data for
the Nicaraguan operations, which was combined beginning in that period. Data
for the businesses in Brazil, Guatemala, Panama and
48
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
Uruguay is not presented because we do not combine the results of these
operations in our financial statements.
(2) Average revenue per user is calculated by dividing average monthly revenue
by average customers. Average monthly revenue includes activation fees,
access, airtime, roaming (net), long distance and value-added services.
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
OPERATING REVENUES
<TABLE>
<CAPTION>
1999 2000 $ CHANGE % CHANGE
---- ---- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela............................. $273 $348 $ 75 27.5%
Argentina............................. 191 203 12 6.3%
Other................................. 101 130 29 28.7%
---- ---- ----
Total operating revenues.... $565 $681 $116 20.5%
==== ==== ====
</TABLE>
Total operating revenues increased $116 million, or 20.5%, from $565
million to $681 million. A stronger U.S. Dollar against the Latin American
currencies had a negative impact on reported revenues. Absent changes in foreign
currency exchange rates, reported revenues would have increased $208 million, or
36.8%.
WIRELESS SERVICE REVENUES. Wireless service revenues increased $59
million, or 11.4%, from $516 million to $575 million. Venezuela accounted for
$52 million, or 88.1%, of the increase. The increase was principally related to
customer growth. From February 28, 1999 to February 29, 2000, Venezuela grew its
customer base by 103.5%.
While customer growth was strong in Venezuela, the impact on revenues was
partially offset by declining usage per customer as a result of depressed
economic conditions and deeper penetration into the mass-market consumer
segment. Our business in Venezuela has increased its penetration in the mass
market through its prepaid cellular offerings.
Chile accounted for $20 million of the increase in revenues. Customer
growth of 80.7% from 223,000 to 403,000 was offset by a 7.2% decline in average
revenue per minute. The decline in average revenue per minute resulted from
intense competition in the market.
In Argentina, revenues decreased $6 million due to declines of 15.1% in
average usage per customer and 12.5% in average airtime and access rates per
customer. Also contributing to the decline were decreases in roamer revenues
attributable to competition. The decline was partially offset by customer growth
of 36.5% from 942,000 to 1,286,000.
Revenues in Peru decreased $10 million due to a 40.3% decline in average
usage per customer. The decline is primarily a result of lower incoming minutes
caused by difficult local economic conditions. The decline was partially offset
by customer growth of 23.2% from 259,000 to 319,000.
Revenues in Ecuador decreased $6 million as a result of the 68.4% average
decline of the Ecuadorian Sucre against the U.S. Dollar and related turbulent
economic and political conditions. Customer growth of 53.8% and a related
increase in billed minutes of use of 4.3% partially offset the impact of
negative economic conditions on revenues.
Wireless revenues increased $9 million as a result of the combination of
the Nicaraguan operations beginning in first quarter 2000.
49
<PAGE> 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
EQUIPMENT SALES. Revenues from equipment sales increased $29 million, or
107.4%, from $27 million to $56 million. The increase was almost entirely
attributable to the Venezuelan operations and was driven by a 111.3% increase in
gross customer additions.
LONG DISTANCE. Long distance revenues are derived primarily from the
provision of fixed long distance services in Chile. These revenues declined $1
million, or 16.7%, from $6 million in 1999 to $5 million in 2000 as a result of
changes in long distance rates in response to competition.
OTHER. Other revenues increased $29 million, or 181.3%, from $16 million
to $45 million. The increase is primarily attributable to revenues from
wholesale long distance voice, data access and transport as well as revenues
from the new long distance operations in Argentina.
OPERATIONAL AND SUPPORT EXPENSES
<TABLE>
<CAPTION>
1999 2000 $ CHANGE % CHANGE
---- ---- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela.............................. $172 $256 $ 84 48.8%
Argentina.............................. 130 164 34 26.2%
Other.................................. 106 138 32 30.2%
---- ---- ----
Total operational and support
expenses................... $408 $558 $150 36.8%
==== ==== ====
</TABLE>
Operational and support expenses include the cost of services, products and
equipment and selling, general and administrative expenses. Cash operating
expenses increased $150 million, or 36.8%, from $408 million to $558 million.
The most significant contributors to the increase were operations in Venezuela,
with an increase of $84 million, and operations in Argentina, with an increase
of $34 million.
Cost of services, products and equipment increased $75 million, or 38.3%,
from $196 million to $271 million. The primary factors driving the change were:
- An increase of $44 million in cost of equipment sold which resulted from
an increase in the number of handsets and other equipment sold to meet
the demand of higher gross prepaid customer additions. Of the gross
prepaid customer additions, 77.5% were related to new prepaid customers
in Venezuela. The increase in the cost of equipment sold was partially
offset by a 10.1% decrease in the average cost of equipment per customer
addition resulting from lower cost of handsets.
- Cost of services and products accounted for the remaining $31 million of
the increase. This increase was primarily related to higher volumes of
traffic on the network in Venezuela and Argentina, resulting from
customer growth, costs associated with continued expansion of our Latin
American businesses' wireless coverage areas and networks and expenses
related to the wholesale long distance and roaming businesses.
Selling, general and administrative costs increased $75 million, or 35.4%,
from $212 million to $287 million. Of the increase, $68 million was related to
sales and marketing expenses associated with the 94.8% increase in gross
customer additions. General and administrative expenses increased $7 million,
primarily related to growth in all markets.
Included in selling, general and administrative expenses was an allocation
of BellSouth's shared corporate services costs that amounted to $15 million for
first quarter 2000 and $13 million for first quarter 1999. These charges related
to certain selling, general and administrative services and shared services
provided on a centralized basis.
50
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
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 $215 million, or 52.7%.
EBITDA
<TABLE>
<CAPTION>
1999 2000 $ CHANGE % CHANGE
---- ---- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela............................................. $101 $ 92 $ (9) (8.9)%
Argentina............................................. 62 39 (23) (37.1)%
Other................................................. (6) (8) (2) 33.3%
---- ---- ----
Total EBITDA................................ $157 $123 $(34) (21.7)%
==== ==== ====
</TABLE>
EBITDA decreased $34 million, or 21.7%, from $157 million to $123 million.
Higher acquisition costs related to the 94.8% increase in gross customer
additions, the impact of start-up costs resulting from our entry into long
distance business in Argentina and costs associated with the expansion of the
wireless coverage areas in Peru, Chile and Argentina were the primary drivers of
the decrease. Operational and support expenses related to these initiatives were
$20 million in first quarter 2000 and $2 million in first quarter 1999.
Offsetting these factors were higher revenues and increased economies of scale
associated with a larger customer base.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $20 million, or 19.2%, from
$104 million to $124 million. Depreciation expense increased $16 million due
primarily to the increased capital expenditures made by the operating companies
for wireless equipment necessary to expand the network and infrastructure in
order to support continued growth. Amortization expense increased $4 million in
first quarter 2000 as a result of higher intangible assets. These intangibles
arose primarily from purchases of additional ownership interests in Peru and
Venezuela.
INTEREST EXPENSE
Interest expense increased $9 million, or 37.5%, from $24 million to $33
million. This increase primarily reflected imputed interest related to the
purchase of a new wireless license in Argentina. The remaining increase was
attributable to higher average debt balances offset by a decrease in average
interest rates from 8.4% in first quarter 1999 to 7.8% in first quarter 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income, gains/losses on
disposition of assets, foreign currency gains/losses and miscellaneous
nonoperating income. Other income improved $33 million from ($8) million in
first quarter 1999 to $25 million in first quarter 2000. Higher net foreign
currency gains in Chile was the primary contributor.
51
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
PROVISION (BENEFIT) FOR INCOME TAXES
The benefit for income taxes for first quarter 2000 was $7 million compared
to a provision of $24 million in 1999, a $31 million decrease in the provision.
Items that influenced the tax provision (benefit) included in the Latin
America group financial statements included:
- Decreases in operating income before taxes between first quarter 1999 and
first quarter 2000.
- Adjustments to deferred income taxes resulting in a $6 million benefit in
Argentina in first quarter 2000.
- A one-time transactional tax of $9 million incurred in Venezuela in first
quarter 1999.
NET LOSSES OF EQUITY AFFILIATES
Net losses of equity affiliates improved $288 million from a loss of $294
million to a loss of $6 million, primarily as a result of losses incurred in
1999 surrounding the devaluation of the Brazilian Real against the U.S. Dollar
and the resulting impact of the local economy. Net earnings of other equity
affiliates for first quarter 2000 was flat when compared to first quarter 1999.
A summary of the factors affecting Brazil's operating results were as
follows:
- Revenues were flat with the operations reporting $228 million in both
periods. The January 1999 devaluation and subsequent depreciation of the
Brazilian Real against the U.S. Dollar had a significant impact on
revenues. On a local currency basis, revenues increased R$90 million, or
27.8%, from R$324 million to R$414 million. Airtime and access revenues
increased R$114, driven by 92.6% growth in customers partially offset by
total billed minutes of use growing at a lower rate due to declining
usage per customer. The decrease in average usage and rates reflects
further penetration into lower usage market segments primarily due to the
popularity of prepaid offerings. Airtime and access revenues also
benefited from increases in net roamer revenues of R$13 million.
Equipment revenues decreased R$15 million reflecting lower pricing on
handsets due to promotional activity and lower average costs of handsets.
- EBITDA increased $30 million on a U.S. Dollar basis. On a local currency
basis, EBITDA increased R$51 million from R$21 million to R$72 million,
driven by growth in revenues. The growth was partially offset by
volume-driven increases in network expense and cost of goods sold as well
as higher general and administrative expense resulting from increased
operations.
- Interest expense on a U.S. Dollar basis decreased $6 million as a result
of changes in foreign currency exchange rates. On a local currency basis,
interest expense increased R$14 million, or 12.0%, from R$117 million to
R$131 million due primarily to higher average borrowings.
- Depreciation and amortization decreased $8 million on a U.S. Dollar
basis, R$1 million on a functional currency basis. Increases in
depreciation attributable to additions of network equipment were offset
by the effect of a one-time adjustment to amortization expense which
occurred in first quarter 1999 related to a change in the estimated life
of wireless licenses.
Brazilian Real-denominated operating expenses reported in U.S. Dollars were
favorably impacted by the devaluation of the Brazilian Real.
Our operations in Brazil continue to be affected by weakness in the local
economy. Operational revenues have been negatively impacted as the weakened
currency has caused average revenue per user to decline. In
52
<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
addition, we expect that our earnings will continue to be affected by foreign
currency gains or losses associated with the U.S. Dollar-denominated debt issued
by our Brazilian businesses.
MINORITY INTERESTS
Deductions for minority interests' share in income decreased by $9 million
during first quarter 2000, primarily related to operations in Argentina and
Venezuela. The decreases were attributable to lower income before minority
interests during first quarter 2000 as compared to first quarter 1999.
YEAR ENDED NOVEMBER 30, 1999 COMPARED TO YEAR ENDED NOVEMBER 30, 1998
OPERATING REVENUES
<TABLE>
<CAPTION>
1998 1999 $ CHANGE % CHANGE
------ ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela.................................................. $ 806 $1,109 $303 37.6%
Argentina.................................................. 721 799 78 10.8%
Other...................................................... 380 428 48 12.6%
------ ------ ----
Total operating revenues......................... $1,907 $2,336 $429 22.5%
====== ====== ====
</TABLE>
Total operating revenues increased $429 million, or 22.5%, from $1,907
million to $2,336 million. A stronger U.S. Dollar against the Latin American
currencies had a negative impact on revenues. Absent changes in foreign currency
exchange rates, reported revenues would have increased $667 million, or 35.0%.
WIRELESS SERVICE REVENUES. Wireless service revenues increased $300
million, or 16.8%, from $1,784 million to $2,084 million. Our business in
Venezuela accounted for $213 million, or 71.0%, of the increase and our business
in Argentina accounted for $71 million, or 23.7%. These increases were
principally related to customer growth. Despite economic recessions in both
countries during 1999, our business in Venezuela grew its customer base by
90.0%, and our business in Argentina grew its customer base by 32.3%.
While customer growth was strong in Venezuela and Argentina, the impact on
revenues was partially offset by total billed minutes of use growing at a lower
rate due to declining usage per customer. Usage increased at a lower rate as
compared to customer growth as a result of depressed economic conditions and
deeper penetration into the mass-market consumer segment. The Latin American
businesses have increased their penetration in the mass market through prepaid
cellular offerings.
Our business in Chile accounted for $19 million of the increase in
revenues. Customer growth of 83.3% from 192,000 to 352,000 was offset by a 40.0%
decline in average revenue per minute. The decline in average revenue per minute
resulted from intense competition in the market.
Revenues in Peru decreased $2 million due to a 28.6% decline in average
usage per customer. The decline relates primarily to lower incoming minutes
resulting from difficult local economic conditions. The decline was partially
offset by customer growth of 26.9% from 238,000 to 302,000.
Revenues in Ecuador were flat for the period as a result of the 51.3%
average decline of the Ecuadorian Sucre against the U.S. Dollar and related
turbulent economic and political conditions. Customer growth of 61.4% and a
related increase in billed minutes of use of 28.6% partially offset the impact
of negative economic conditions on revenues.
EQUIPMENT SALES. Revenues from equipment sales increased $86 million, or
183.0%, from $47 million to $133 million. The increase was almost entirely
attributable to the Venezuelan operations. The increase in Venezuela is
attributable to a 117.4% increase in gross customer additions and a 175.5%
increase in average
53
<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
equipment revenue per customer. The increase in average equipment revenue per
customer is directly related to the increase in prepaid customers, who generally
pay higher prices for equipment.
LONG DISTANCE. Long distance revenues are derived primarily from the
provision of fixed long distance services in Chile. These revenues declined $5
million, or 18.5%, from $27 million in 1998 to $22 million in 1999 as a result
of changes in long distance rates in response to competition.
OTHER. Other revenues increased $48 million, or 98.0%, from $49 million to
$97 million. The increase is primarily attributable to revenues from wholesale
long distance voice, data access and transport and Internet access.
OPERATIONAL AND SUPPORT EXPENSES
<TABLE>
<CAPTION>
1998 1999 $ CHANGE % CHANGE
------ ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela.................................................. $ 433 $ 734 $301 69.5%
Argentina.................................................. 518 565 47 9.1%
Other...................................................... 416 478 62 14.9%
------ ------ ----
Total operational and support expenses........... $1,367 $1,777 $410 30.0%
====== ====== ====
</TABLE>
Operational and support expenses include the cost of services, products and
equipment and selling, general and administrative expenses. Operational and
support expenses increased $410 million, or 30.0%, from $1,367 million to $1,777
million. The most significant contributors to the increase were operations in
Venezuela, with an increase of $301 million, and operations in Argentina, with
an increase of $47 million.
Cost of services, products and equipment increased $232 million, or 38.6%,
from $601 million to $833 million. The primary factors driving the change were
as follows:
- An increase of $86 million in cost of equipment sold which resulted from
an increase in the number of handsets and other equipment sold to meet
the demand of higher gross prepaid customer additions. Of the gross
prepaid customer additions, 79.7% were related to new prepaid customers
in Venezuela. The increase in the cost of equipment sold was partially
offset by a 9.0% decrease in the average cost of equipment per customer
addition resulting from lower cost of handsets.
- Cost of services and products accounted for the remaining $146 million of
the increase. This increase was primarily related to higher volumes of
traffic on the network in Venezuela and Argentina, resulting from
customer growth, costs associated with continued expansion of our Latin
American wireless coverage areas and networks and expenses related to the
wholesale long distance and roaming businesses.
Selling, general and administrative costs increased $178 million, or 23.2%,
from $766 million to $944 million. Of the increase, $96 million was related to
sales and marketing expenses associated with the 68.1% increase in gross
customer additions. Customer service expenses increased $50 million as a result
of the expansion of operations to meet customer growth. Venezuela and Argentina
accounted for the principal portion of the increase in these expenses. General
and administrative expenses increased $32 million, primarily related to growth
in all markets.
Included in selling, general and administrative expenses was an allocation
of BellSouth's shared corporate services costs that amounted to $62 million for
1999 and $47 million for 1998. These charges related to certain selling, general
and administrative services and shared services provided on a centralized basis.
54
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
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 $585 million, or 42.8%.
EBITDA
<TABLE>
<CAPTION>
1998 1999 $ CHANGE % CHANGE
---- ---- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela................................................... $373 $374 $ 1 0.3%
Argentina................................................... 203 234 31 15.3%
Other....................................................... (36) (49) (13) 36.1%
---- ---- ----
Total EBITDA...................................... $540 $559 $ 19 3.5%
==== ==== ====
</TABLE>
EBITDA increased $19 million, or 3.5%, from $540 million to $559 million.
Higher revenues and increased economies of scale associated with the customer
base had a positive effect on EBITDA. Higher acquisition costs related to the
68.1% increase in gross customer additions, the impact of start-up costs
resulting from our entry into long distance business in Argentina and costs
associated with the expansion of our businesses' wireless coverage areas in
Peru, Chile and Argentina all served as offsets. Operational and support
expenses related to these initiatives in 1999 were approximately $41 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $108 million, or 32.0%,
from $338 million to $446 million. Depreciation expense increased $78 million
due primarily to the increased capital expenditures made by the operating
companies for wireless equipment necessary to expand the network and
infrastructure in order to support continued growth. This included amounts
expended for the conversion of Venezuela's network to CDMA technology.
Amortization expense increased $30 million in 1999 as a result of higher
intangible assets. These intangibles arose primarily from purchases of
additional ownership interests in Peru and Venezuela.
INTEREST EXPENSE
Interest expense increased $34 million, or 64.2%, from $53 million to $87
million. This increase reflected the capitalization in 1998 of interest related
to start-up operations in Brazil. Average borrowings remained flat when compared
to 1998. The average interest rate on our Latin American businesses' combined
indebtedness was 8.2%, compared to 8.3% in 1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income, gains/losses on
disposition of assets, foreign currency gains/losses and miscellaneous
nonoperating income. Other income was flat. The 1999 period included higher net
foreign currency losses, primarily in Chile and Ecuador. The 1998 period
included a $25 million asset impairment loss taken in Peru.
PROVISION (BENEFIT) FOR INCOME TAXES
The benefit for income taxes for 1999 was $116 million compared to a
provision of $105 million in 1998, a $221 million decrease in the provision.
Of the decrease in the provision, $167 million was related to the
recognition of investment tax credits in Venezuela. Of the $167 million, $72
million was earned during 1999 and $95 million was earned during previous years.
In years preceding 1999, our Venezuelan business had established a reserve for
investment tax
55
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
credits due to assessments from and court actions by the Venezuelan tax
authorities. However, based on a favorable ruling by a Venezuelan court, which
is being appealed, this reserve was reversed in 1999.
Other items that influenced the tax provision (benefit) in the Latin
America group financial statements included:
- Valuation allowances of $16 million recorded for tax losses incurred in
Chile, Ecuador and Peru during 1999. Factors considered in establishing
the valuation allowances include the maturity of the businesses, the
carryforward period, as well as other factors.
- Differences between the U.S. tax rate of 35.0% and the statutory tax
rates of the five combined operating companies included in the Latin
America group's combined financial statements during 1999 were
approximately $20 million.
- Changes in foreign country tax laws in reaction to changing economic
conditions.
NET LOSSES OF EQUITY AFFILIATES
Net losses of equity affiliates increased by $292 million from $57 million
to $349 million, primarily as a result of factors surrounding the devaluation of
the Brazilian Real against the U.S. Dollar and the resulting impact on the local
economy. A summary of the factors affecting Brazil's results were as follows:
- Foreign currency losses on U.S. Dollar-denominated debt caused by the
January 1999 devaluation of the Brazilian Real resulted in pretax losses
of $1,132 million.
- Revenues increased $313 million, or 64.8%, from $483 million to $796
million, due to 122.0% growth in customers and full-year accounting for
Brazil in 1999 as compared with six months in 1998 from the date of
initiation of service. The devaluation of the Real had a negative impact
on revenues reported in U.S. Dollars.
- EBITDA increased $75 million, or 166.7%, from $45 million to $120 million
as a result of growth in revenues and the increased economies of scale
resulting from the operation transitioning from its start-up phase in
1998 to being fully operational in 1999. This was partially offset by the
acquisition costs associated with 1.3 million gross customer additions.
- Interest expense increased $136 million, primarily as a result of higher
average debt balances in 1999 and the fact that a portion of interest
expense was capitalized in 1998 during the build-out of the network.
- Depreciation and amortization expense increased $100 million as a result
of higher investment in depreciable plant and equipment and the fact that
1998 represented only a half year of operations for Brazil from the date
of initiation of service.
Brazilian Real-denominated operating expenses reported in U.S. Dollars were
favorably impacted by the devaluation of the Brazilian Real.
Our operations in Brazil continue to be affected by weakness in the local
economy. Operational revenues have been negatively impacted as the weakened
currency has caused average revenue per user to decline. In addition, we expect
that our earnings will continue to be affected by foreign currency gains or
losses associated with the U.S. Dollar-denominated debt issued by our Brazilian
businesses.
Net earnings of other equity affiliates increased to $27 million from $9
million in the prior year. The improvement relates to better performance in each
of these operations resulting from increased revenues and economies of scale
associated with larger customer bases.
56
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
MINORITY INTERESTS
Deductions for minority interests' share in income increased by $41 million
during 1999 primarily related to operations in Venezuela and Peru. The increase
in Venezuela was attributable to higher income before minority interests during
1999. Peru had minority interest benefits in 1998 related to net losses from
operations. In 1999, the Latin America group retained 100.0% of the losses of
the Peru operation because the minority partner's capital account had been
depleted.
YEAR ENDED NOVEMBER 30, 1998 COMPARED TO UNAUDITED PRO FORMA YEAR ENDED NOVEMBER
30, 1997
OPERATING REVENUES
<TABLE>
<CAPTION>
PRO FORMA
1997 1998 $ CHANGE % CHANGE
--------- ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela................................................ $ 452 $ 806 $354 78.3%
Argentina................................................ 555 721 166 29.9%
Other.................................................... 263 380 117 44.5%
------ ------ ----
Total operating revenues....................... $1,270 $1,907 $637 50.2%
====== ====== ====
</TABLE>
Total operating revenues increased $637 million, or 50.2%, from $1,270
million to $1,907 million. A stronger U.S. Dollar against the Latin American
currencies had a negative impact as reported revenues would have increased $788
million, or 62.0%.
WIRELESS SERVICE REVENUES. Wireless service revenues increased $632
million, or 54.9%, from $1,152 million to $1,784 million. Our operations in
Venezuela accounted for $336 million of the increase, and our operations in
Argentina accounted for $176 million. The other combined entities had net
increases of $120 million. These increases were principally related to customer
growth and related billed minutes of use. We increased our Latin American
customer base by 60.0% from 1,624,000 to 2,598,000 and increased total billed
minutes of use by 69.0%.
Our operations in Chile accounted for a $15 million decrease in revenues.
Competitive pressures, including significantly lower pricing, offset customer
growth of 37.1% from 140,000 to 192,000 and billed minutes of use which
increased 46.2%.
EQUIPMENT SALES. Revenues from equipment sales decreased $11 million, or
19.0%, from $58 million to $47 million. The decrease was attributable to a 42.2%
decline in average equipment revenue per customer addition. Higher equipment
discounts were offered to customers in connection with efforts to increase
penetration into high-usage, postpaid market segments. The impact of these
discounts was offset by a 39.6% increase in gross customer additions.
LONG DISTANCE. Long distance revenues declined $2 million as a result of
changes in long distance rates in response to competition.
OTHER. Other revenues increased $18 million, or 58.1%, from $31 million to
$49 million. The increase was primarily attributable to higher revenues from
Internet service offerings in Venezuela.
57
<PAGE> 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
OPERATIONAL AND SUPPORT EXPENSES
<TABLE>
<CAPTION>
PRO FORMA
1997 1998 $ CHANGE % CHANGE
--------- ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela................................................ $262 $ 433 $171 65.3%
Argentina................................................ 431 518 87 20.2%
Other.................................................... 293 416 123 42.0%
---- ------ ----
Total operational and support expenses......... $986 $1,367 $381 38.6%
==== ====== ====
</TABLE>
Operational and support expenses increased $381 million, or 38.6%, from
$986 million to $1,367 million. The main contributors to the increase were the
results in our business in Venezuela with an increase of $171 million and the
business in Argentina with an increase of $87 million. The other combined
entities increased $123 million.
Cost of services, products and equipment increased $183 million, or 43.8%,
from $418 million to $601 million. The primary factors driving the change were
as follows:
- An increase in cost of services and products of $139 million, primarily
related to interconnect charges related to higher volumes of traffic on
the networks in Venezuela and Argentina and costs associated with
continued expansion of our Latin American wireless coverage areas and
networks; and
- An increase of $44 million in cost of equipment sold, which resulted from
an increase in the number of handsets and other equipment sold to meet
the demand of higher gross customer additions. Of the gross customer
additions, 60% were related to new customers in Venezuela and 25% were
related to new customers in Peru.
Selling, general and administrative expenses increased $198 million, or
34.9%, from $568 million to $766 million. The increase was due to several
factors including:
- An increase of $55 million in sales and marketing expenses associated
with the 39.6% increase in gross customer additions. Our operations in
Venezuela and Peru accounted for the principal portion of the increase in
these expenses;
- An increase in customer service expenses of $27 million as a result of
the expansion of operations to meet customer growth; and
- An increase in general and administrative expenses of $116 million,
primarily related to higher bad debt expense and other costs associated
with the expansion of all businesses.
Included in selling, general and administrative expenses was an allocation
of the Latin America group's share of BellSouth's corporate costs that amounted
to $47 million for 1998 and $28 million for pro forma 1997. These charges
related to certain selling, general and administrative services and shared
services provided on a centralized basis.
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 $483 million, or 50.0%.
58
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
EBITDA
<TABLE>
<CAPTION>
PRO FORMA
1997 1998 $ CHANGE % CHANGE
--------- ---- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela.................................................. $191 $373 $182 95.3%
Argentina.................................................. 123 203 80 65.0%
Other...................................................... (30) (36) (6) 20.0%
---- ---- ----
Total EBITDA..................................... $284 $540 $256 90.1%
==== ==== ====
</TABLE>
EBITDA increased $256 million, or 90.1%, from $284 million to $540 million.
Our operation in Venezuela accounted for $182 million of the increase and our
operation in Argentina accounted for $80 million. Higher revenues and improved
economies of scale associated with a larger customer base had a positive impact
on EBITDA. The impact of significant competitive pressures experienced in Chile
resulted in a decrease in its EBITDA of $46 million, partially offsetting the
increases from Venezuela and Argentina.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $124 million, or 57.9%,
from $214 million to $338 million. Depreciation expense increased $89 million,
due primarily to the increased capital expenditures made by the operating
companies for wireless equipment necessary to expand the network and
infrastructure in order to support continued growth. Amortization expense
increased $35 million in 1998 as a result of higher intangible assets. These
intangibles arose from acquisitions in Ecuador and Peru as well as purchases of
additional ownership interest in the Venezuela operations.
INTEREST EXPENSE
Interest expense increased $2 million, or 3.9%, from $51 million to $53
million. Average borrowings increased significantly during 1998 related to
funding the digital conversion of the network in Venezuela and the continued
build-out of the network in Argentina. These increases were offset by the
capitalization of interest expense related to the start-up operations in Brazil.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income, gains/losses on
disposition of assets, foreign currency gains/losses and miscellaneous
nonoperating income. Other income, net decreased $2 million, related to a $25
million asset impairment loss in Peru and offset by interest income and foreign
currency gains.
PROVISION FOR INCOME TAXES
The provision for income taxes for 1998 was $105 million compared to $13
million in 1997, a $92 million increase. The increased provision for income
taxes was related to increases in earnings in Argentina and Venezuela.
Other items that influenced the tax provision in the Latin America group
financial statements included:
- Valuation allowances of $22 million recorded for tax losses incurred in
Chile, Ecuador and Peru during 1999. Factors considered in establishing
the valuation allowances include the maturity of the businesses, the
carryforward period, as well as other factors.
- Differences between the U.S. tax rate of 35.0% and the statutory tax
rates of the five combined operating companies of the Latin America group
during 1998 were approximately $12 million.
- Changes in foreign country tax laws in reaction to changing economic
conditions.
59
<PAGE> 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
NET LOSSES OF EQUITY AFFILIATES
Net losses of equity affiliates increased by $41 million, from $16 million
to $57 million. This was primarily due to increased losses in the Brazilian
operations, our share of which was $66 million. This increase was offset by
improvements in each of the other equity affiliates resulting from increased
revenues and economies of scale associated with higher customer bases.
Increased losses in Brazil occurred because operations were in the
development stage in 1997, incurring only pre-operating expenses, while 1998
reflected costs incurred to initiate service in mid-1998.
MINORITY INTERESTS
Deductions for minority interests' share in income increased by $26 million
during 1998, due primarily to the absence of a benefit in Peru of $18 million as
a result of the minority partner's capital account having been exhausted near
the end of the year. Also contributing to the increase during 1998 were improved
earnings at the Venezuelan operations.
ADVERTISING AND DIRECTORY PUBLISHING SEGMENT
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, FIRST QUARTER
------------- -------------
1998 1999 1999 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Advertising and directory publishing revenues............... $-- $ 69 $-- $ 14
Cost of services, products and equipment.................... 6 34 -- 7
Selling, general and administrative......................... -- 38 -- 16
Depreciation and amortization............................... -- 4 -- 2
--- ---- --- -----
Operating loss.............................................. (6) (7) -- (11)
Interest expense............................................ -- 1 -- --
Other income (expense), net................................. -- (2) -- 1
Benefit for income taxes.................................... (2) -- -- (6)
Net losses of equity affiliates............................. -- (5) (1) (1)
--- ---- --- -----
Segment net loss............................................ $(4) $(15) $(1) $ (5)
=== ==== === =====
</TABLE>
YEAR ENDED NOVEMBER 30, 1999 COMPARED TO YEAR ENDED NOVEMBER 30, 1998 AND FIRST
QUARTER 2000 COMPARED TO FIRST QUARTER 1999
The change in operating revenues and expenses related to the operations of
Listel-Listas Telefonicas, which we acquired during mid-1999. Net losses of
equity affiliates represented our share of losses reported by OESP Midia Ltda.
60
<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
SUPPLEMENTAL QUARTERLY INFORMATION
The following table sets forth certain unaudited quarterly combined
statements of operations data for each of the four quarters in the period ended
November 30, 1999. In the opinion of management, this unaudited information has
been prepared on a basis consistent with the audited combined financial
statements of the Latin America group included in this document and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth therein when read in conjunction with
the combined financial statements and related notes thereto. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1999
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total operating revenues............................... $ 565 $578 $620 $642 $2,405
EBITDA................................................. 157 173 141 85 556
Net income (loss)...................................... (314) 5 8 (15) (316)
</TABLE>
Net income in the first quarter of 1999 in Brazil was negatively impacted
by the devaluation of the Brazilian Real. Foreign currency losses on U.S.
Dollar-denominated liabilities, primarily long-term debt, were approximately
$280 million in the first quarter.
The decline in EBITDA and net income in the fourth quarter is the result of
a significant increase in gross customer additions. Customer acquisition costs
are recognized during the period the customer initiates service.
LIQUIDITY AND CAPITAL RESOURCES
Cash infusions from the companies in the BLS group and, to an increasing
degree, cash flows from operations have been the primary sources of funding for
capital requirements of existing Latin American operations and debt service. The
companies in the BLS group are not obligated, however, to loan funds attributed
to the BLS group to the companies in the Latin American group if the companies
in the Latin America group cannot meet their own capital needs. Each of the
companies in the Latin America group has used third-party sources of debt
financing. While current liabilities exceed current assets, their sources of
funds 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 the
companies in the Latin American group for the foreseeable future.
Decisions regarding the investment of surplus cash, the issuance and
retirement of debt, and the issuance and repurchase of common and preferred
stock will continue to be made by BellSouth headquarters on behalf of the
groups. The companies in the Latin America group will manage all day-to-day
flows of disbursements and receipts and will maintain cash balances at the local
level to enable the execution of those transactions.
Loans from the companies in the BLS group to companies in the Latin America
group will be made at interest rates and on other terms and conditions designed
to reflect the interest rates and other terms and conditions that the Latin
America group would be able to obtain from third parties, assuming it were a
legal entity. Loans from the companies in the Latin America group to the
companies in the BLS group will be made at interest rates and on other terms and
conditions designed to reflect the interest rates and other terms and conditions
that the BLS group, assuming it were a legal entity, would be able to obtain
from third parties. This
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
policy contemplates that loans will be made on this basis, regardless of the
interest rates and other terms and conditions on which those funds may actually
have been acquired from third parties.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, FIRST QUARTER
--------------------------- -------------
1997 1998 1999 1999 2000
------- ------- ------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED FOR):
Operating activities....................................... $ 55 $ 476 $ 568 $ 99 $ 56
Investing activities....................................... (1,440) (1,387) (1,099) (192) (236)
Financing activities....................................... 1,569 902 651 130 202
</TABLE>
The following discussion relates only to the combined operations, which
include our wireless operations in Argentina, Chile, Ecuador, Peru, Venezuela,
our Latin American wholesale long distance voice, data access and transport and
international roaming clearinghouse businesses and the Brazilian and Peruvian
advertising and directory publishing companies. First quarter 2000 results also
include the operations in Nicaragua, which were combined beginning in 2000.
NET CASH PROVIDED BY OPERATING ACTIVITIES
The decrease in cash from operations from first quarter 1999 to first
quarter 2000 reflects growth in operating expenses and higher working capital
needs associated primarily with the development of new wireless license areas
and new lines of business.
For the years ended November 30, 1998 and 1999, the increase in cash from
operations over the prior year primarily reflects better working capital
management. The increase also reflects the growth in revenues exceeding growth
in operating expenses.
NET CASH USED IN INVESTING ACTIVITIES
We invested $230 million in the first quarter of 2000 and $647 million
during all of 1999 for capital expenditures to expand, support and improve our
wireless networks, promote the introduction of new products and services and
increase operating efficiency and productivity.
During 1999, we acquired a 100% interest in Listel-Listas Telefonicas and
increased our ownership interests in our Peruvian and Venezuelan wireless
operations. Total cash paid (net of cash acquired) during 1999 related to the
purchases was $199 million. The Latin America group also paid $23 million in
cash for the purchase of a 40.0% interest in OESP Midia Ltda.
Also during 1999, we won bids to acquire additional wireless licenses in
Argentina and Chile. The total cash paid related to these purchases was $68
million in the first quarter of 2000 and $123 million during all of 1999. We
will pay additional amounts approximating $80 million during the remainder of
2000 and $80 million in 2001 for the purchases of these licenses.
In addition to expenditures for license acquisitions, we project capital
expenditures of approximately $600 million for 2000. A majority of the
expenditures will be to expand, enhance and modernize the wireless networks.
Also included in the projection are $230 million in Argentina and $50 million in
Chile for the buildout of networks in newly acquired licensed areas.
In addition to the $600 million of projected capital expenditures for our
combined Latin American operations, our Brazilian operations expect to make
approximately $430 million in capital expenditures during 2000.
BellSouth expects to fund these expenditures from cash generated by
operations and, to the extent necessary, from capital infusions from owners or
external financing sources including the net proceeds of the
62
<PAGE> 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
planned public offering. The amount and timing of capital expenditures will be
within the discretion of management of the Latin America group, and it is
ultimately up to the boards of directors of the local operating companies and of
BellSouth to decide how to finance these expenditures.
NET CASH USED IN FINANCING ACTIVITIES
During 1999 and 1998, the companies in the Latin America group reduced the
amounts generated by financing activities. The reductions were primarily a
function of substantial increases in operating cash flows, which are discussed
above. The 1999 amounts generated by financing activities of $651 million
consisted of $665 million of equity infusions reduced by the net effects of debt
payments and proceeds. These financing amounts, in addition to the $568 million
of amounts provided by operating activity, funded $1,099 million of investing
activity.
Amounts provided by financing activities increased from $130 million in
first quarter 1999 to $202 million in first quarter 2000 as a result of
long-term borrowings at the Chilean operations to finance the purchase of a new
wireless license.
We may from time to time repurchase shares of the Latin America group stock
in the open market to fund option exercises or for other purposes. We expect
these transactions to be accounted for in the financial statements of the Latin
America group.
FINANCIAL CONDITION
The Latin America group's debt to total capitalization ratio was 29.8% at
February 29, 2000 compared to 27.6% at November 30, 1999. The increase is a
result of borrowings of both short- and long-term debt to fund purchases of
wireless licenses and buildout of new wireless license areas.
The Latin America group's proportional ratio of debt to total
capitalization was 46.9% at February 29, 2000. This ratio is calculated based on
our equity ownership in the various Latin American operating companies and
equity affiliates multiplied by the short- and long-term debt balances of those
entities. The substantial difference in the ratio as compared to the GAAP debt
ratio is primarily a result of the debt issued by the Brazilian operations.
Cash balances on a combined basis were $287 million as of November 30, 1999
and $309 million as of February 29, 2000.
Committed credit lines aggregated $930 million with various banks.
Borrowings under the committed credit lines totaled $587 million at November 30,
1999 and $556 million at November 30, 1998. We also maintain uncommitted lines
of credit for our Latin American businesses aggregating $530 million. Borrowings
under the uncommitted lines of credit totaled $149 million at November 30, 1999
and $45 million at November 30, 1998. There are no significant commitment fees
or requirements for compensating balances associated with any lines of credit.
INFLATION
Inflation has had and may continue to have negative effects on the
economies and securities markets of emerging market countries and has had
negative effects on the Latin America group's operating companies and equity
affiliates. In general, inflation impacts companies in two ways. First, an
entity may not be able to increase prices at the same rate as increases in
operating costs and secondly, the government may introduce programs to slow
economic growth to reduce inflation that lead to a decrease in demand for
products and services as the economy slows. The Latin American companies, where
permitted and subject to competitive pressures, intend to increase prices to
mitigate for the effects of inflation. However, in those jurisdictions
63
<PAGE> 66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
where prices are regulated or specified in the wireless license, the operating
companies may not be able to successfully mitigate the impact of inflation on
their operations.
During 1999, the Brazilian operations experienced negative impacts of
inflation as their license agreements require fixed pricing that prevented the
operating company from immediately raising prices to offset increasing costs. In
addition, demand slowed due to recession, which resulted from the government's
actions to minimize inflation.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to variable-rate long-term debt. For a description of long-term debt, see note I
to the combined financial statements of the Latin America group. The general
level of LIBOR rates affects the interest expense that we recognize on our
variable-rate debt.
FOREIGN EXCHANGE MARKET RISK
A significant portion of the long-term debt held by our Latin American
businesses is denominated in U.S. Dollars and is therefore subject to the
effects of currency fluctuations and may affect reported earnings and losses. A
significant change in the value of the U.S. Dollar against the various foreign
currencies could result in a significant increase in foreign currency losses. As
of November 30, 1999, short- and long-term debt issued by our combined Latin
American businesses denominated in U.S. Dollars amounted to $860 million. In
addition, our proportionate share of U.S. Dollar-denominated debt in the
Brazilian operations was approximately $1.0 billion at November 30, 1999.
Businesses in the Latin America group are subject to risk from changes in
foreign exchange rates for operations that use a foreign currency as their
functional currency and are translated into U.S. Dollars. Such changes result in
cumulative translation adjustments which are included in Latin America group net
worth. The Latin American businesses have translation exposure to various
foreign currencies with the most significant being the Brazilian Real.
Operations in countries with hyperinflationary economies consider the U.S.
Dollar the functional currency and reflect translation gains and losses in the
determination of net income.
HEDGING POLICY
Foreign exchange operating exposures that arise in the ordinary course of
business may be managed using a variety of hedging techniques. Typically, our
Latin American businesses hedge against foreign exchange or other operating
exposures through "natural hedges" by borrowing in local currencies to the
extent that such loans are available and economically attractive. Under no
circumstances are foreign exchange based derivatives contracts used without an
underlying business purpose even if a gain might be expected to result.
64
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
RISK SENSITIVITY
The following table provides information, by maturity date, about interest
rate sensitive financial instruments applicable to the Latin America group,
which consist of fixed- and variable-rate debt obligations. Fair values for the
majority of its long-term debt obligations are based on quotes from sources that
we consider reliable.
<TABLE>
<CAPTION>
TOTAL
RECORDED FAIR
2000 2001 2002 2003 2004 THEREAFTER AMOUNT VALUE
----- ------ ----- ----- ---- ---------- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Fixed rate debt....... $ 301 $ 20 $ 2 $ 1 $-- $ 367 $691 $569
Average interest
rate................ 7.73% 21.82% 7.61% 7.61% -- 5.59%
Variable rate debt.... $ 2 $ 202 $ -- $ -- $-- $ -- $204 $204
Average interest
rate................ 7.82% 7.82% -- -- -- --
</TABLE>
At November 30, 1999, an entity within the Latin America group was a party
to interest rate swaps with a notional amount totalling $30 million. Under the
agreement, the entity pays fixed rates denominated in Venezuelan Bolivars and
receives fixed rates denominated in U.S. Dollars averaging 8.0%. The swaps are
subject to periodic settlement and mature in February 2001. Because the
instruments were entered into at the end of the period, the recorded amount
equaled the fair value.
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. The guidelines in SAB 101 must be
adopted during the second quarter 2000. We do not expect the adoption of these
guidelines to have a material impact on our results of operations and financial
position.
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. For
the companies in the Latin America group, this means that the standard must be
adopted no later than December 1, 2000. We do not expect the adoption of this
standard to have a material impact on our results of operations, financial
position or cash flows.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
SUBSEQUENT EVENTS
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. The total
purchase price was approximately $240 million. Tele Centro Oeste provides
cellular service in central-west Brazil, including Brasilia, as well as in
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.
In May 2000, we announced an agreement to acquire a 33.8% controlling
equity interest in Celumovil S.A., a cellular operator in the Eastern and
Atlantic regions in Colombia, for a purchase price of approximately $295
million. Celumovil is a leading provider of wireless telecommunications services
in Colombia with approximately 466,000 subscribers as of February 2000.
Celumovil's concession areas include the Eastern and Atlantic regions, covering
a combined population of approximately 26 million and six of the 10 largest
cities in Colombia, including Bogota.
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<PAGE> 69
INDUSTRY OVERVIEW
The global telecommunications industry is undergoing rapid change, fueled
by:
- privatization;
- increased competition;
- expansion of wireless services;
- growth of the Internet;
- increased use of data-intensive applications; and
- deployment of high-bandwidth digital networks.
From 1991 to 1999, worldwide wireless revenues grew at a compound annual
rate of 36.7% and total telecommunications revenues grew at a rate of 12.6%. The
Latin American telecommunications industry has participated in these global
trends, with wireless revenues growing at a compound annual rate of 63.5%, and
total telecommunications revenues growing at a rate of 13.6%, over the same
period. Moreover, given that penetration rates remain significantly below the
levels of more developed countries, we believe the Latin American
telecommunications industry has the potential to grow at a faster rate than the
global telecommunications industry overall. As the leading pan-regional wireless
telecommunications provider in Latin America, we believe we are well positioned
to take advantage of this rapid growth.
THE LATIN AMERICAN TELECOMMUNICATIONS OPPORTUNITY
Overview
With a population of almost 500 million and a combined gross domestic
product, or GDP, of approximately $1.7 trillion in 1999, Latin America is a
large and attractive telecommunications market. According to industry sources,
the Latin American telecommunications market is expected to experience
compounded annual growth in:
- total telecommunications revenues of approximately 16% from 1999 to
2004(1);
- wireless subscribers of approximately 28% from 1999 to 2004(2);
- wireless service revenues of approximately 21% from 1999 to 2004(2); and
- active Internet accounts of approximately 87% from 1997 to 2002(1).
---------------
(1) The Yankee Group.
(2) Pyramid Research.
The following table shows, for the ten Latin American countries in which we
operate or are licensed to operate, wireline and wireless penetration and
population for 1999. Wireline and wireless penetration for the United States and
Western Europe is given for 1999. Population for the United States and Western
Europe, and all Internet penetration information is given for 1998.
SELECTED TELECOMMUNICATIONS PENETRATION
<TABLE>
<CAPTION>
WIRELINE WIRELESS INTERNET
COUNTRY POPULATION(1) PENETRATION(1) PENETRATION(1) PENETRATION(2)
------- ------------- -------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
United States.............................. 272.1 66.1% 31.3% 22.1%
Western Europe............................. 387.3 53.2 24.2 9.5
Brazil..................................... 163.8 15.4 8.9 0.8
Argentina.................................. 35.8 20.7 12.2 0.6
Peru....................................... 25.2 6.5 4.0 0.5
Venezuela.................................. 23.2 11.3 14.3 0.6
Chile...................................... 15.1 22.7 14.7 0.4
Ecuador.................................... 12.4 7.3 3.6 0.1
</TABLE>
67
<PAGE> 70
<TABLE>
<CAPTION>
WIRELINE WIRELESS INTERNET
COUNTRY POPULATION(1) PENETRATION(1) PENETRATION(1) PENETRATION(2)
------- ------------- -------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Guatemala.................................. 11.9 5.4 1.8 0.2
Nicaragua.................................. 4.9 3.2 1.4 N/A
Uruguay.................................... 3.3 27.5 9.9 N/A
Panama..................................... 2.8 16.9 12.3 N/A
</TABLE>
---------------
(1) Source for Latin American information: Pyramid Research; source for United
States and Western Europe information: International Telecommunications
Union.
(2) Source for Latin American Information: The Yankee Group; source for United
States and Western Europe information: International Telecommunications
Union.
Penetration rates above and elsewhere in this document represent the number
of subscribers in any given territory expressed as a percentage of the total
population in that territory.
The Latin American Wireless Opportunity
Due to historical underinvestment in fixed-line infrastructure, the quality
of fixed-line telecommunications services in Latin America remains poor relative
to the United States and Western Europe, and customers often have experienced
long waiting periods for the installation of telephone lines and service. Low
levels of wireline penetration have presented an opportunity for wireless
service providers to satisfy the substantial unmet demand for telecommunications
services in many parts of Latin America, contributing to rapid initial growth.
Continued growth of wireless services is expected to result from increased
penetration and usage as service costs decline, wireless network coverage and
capacity expands and service functionality increases. As wireless providers
acquire customers and build their own high-capacity networks, they are
positioned to provide a broader array of wireless services, such as Internet
access, e-mail and other data applications like short messaging service.
Since its introduction in Latin America in the 1980s, wireless service has
experienced significant growth. For example, wireless providers experienced
compound annual growth rates of approximately 56% for revenues and 77% for
subscribers from 1996 through 1998 in Latin America. As illustrated in the
following chart, industry sources expect that growth will continue:
LATIN AMERICAN WIRELESS MARKET GROWTH PROJECTIONS
<TABLE>
<CAPTION>
GROWTH
1999 2000E 2001E 2002E 2003E 2004E RATE
----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total service revenues (in billions).......... $13.5 $20.7 $25.1 $29.2 $32.4 $35.0 21.0%
Average subscribers (in millions)............. 29.0 45.5 60.4 74.2 86.4 97.7 27.5%
End-of-period penetration..................... 8.1% 11.1% 14.0% 16.3% 18.5% 20.3% 20.2%
</TABLE>
---------------
Source: Pyramid Research.
The Latin American Internet and Data Opportunity
The Yankee Group estimates that data traffic will account for over 50% of
global wireless traffic by 2005. The data market in Latin America has
historically been constrained by prohibitive pricing and inadequate local and
international network infrastructure. Deregulation, increased competition and
the deployment of modern networks are resulting in increased availability of
data services, lower prices and greater end-user demand. Wireless operations in
Latin America are positioned to capitalize on this demand.
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Key contributors to growth in the Internet and data markets within Latin
America include the improving telecommunications infrastructure, the development
of local content and the increasing penetration of Internet-capable devices. As
illustrated in the following chart, the Yankee Group expects that growth, based
on the number of Internet accounts, will continue:
LATIN AMERICAN INTERNET MARKET GROWTH PROJECTIONS
<TABLE>
<CAPTION>
GROWTH
1997 1998 1999E 2000E 2001E 2002E RATE
---- ---- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Internet accounts (in millions).................. 1.1 2.5 3.8 6.6 13.2 26.4 87.4%
Penetration...................................... 0.3% 0.6% 0.8% 1.4% 2.8% 5.4% 83.5%
</TABLE>
In the corporate market, demand is increasing for high speed corporate
enterprise networks, local area and wide area networks and Internet
protocol-based virtual private networks. The migration to flexible and efficient
data transport technologies is facilitating the shift from narrowband to
broadband applications. This development of broadband networks throughout Latin
America is expected to significantly reduce the cost of carrying Internet and
data traffic.
INDUSTRY TRENDS
Growth in the Latin American telecommunications industry, and particularly
wireless telecommunications, has been shaped by a number of underlying trends
that are likely to cause this growth to continue.
- MARKET LIBERALIZATION. Privatization and demonopolization of the Latin
American telecommunications market have resulted in increased competition
for substantially all telecommunications products and services.
Governments within the region are increasingly demonstrating a
pro-competition approach to the market, as evidenced by the upcoming PCS
spectrum auctions announced in Brazil, Colombia, El Salvador and
Honduras, and the anticipated opening of the markets for basic
telecommunications services, such as local access and long distance, in
such countries as Venezuela and Argentina. Further, the countries
representing the six largest telecommunications markets in Latin America
are each signatories to the World Trade Organization Agreement on Basic
Telecommunication Services, which mandates liberalization. Competition
has facilitated the availability of advanced telecommunications services
and generally reduced prices, which has in turn increased demand.
- EXPANDING PENETRATION. The number of wireless subscribers and wireless
penetration levels have steadily increased in Latin America. For example,
the number of wireless subscribers in Latin America increased from 6.4
million at year end 1996 to 38.0 million at year end 1999 as penetration
increased from 1.4% to 8.1%. Penetration is expected to increase to 20.3%
by 2004. Increased penetration allows wireless providers to distribute
the fixed costs of a wireless network over a greater number of users,
thereby increasing network utilization rates and reducing the unit cost
of providing wireless service. As the cost of wireless service has
declined, it has become an affordable service for a significantly larger
percentage of the Latin American population and has increased both
minutes of use and revenues.
- DIGITAL TECHNOLOGY LOWERS COSTS AND INCREASES UTILITY AND
FUNCTIONALITY. Latin American telecommunications providers are
increasingly employing digital technology in their networks. Digital
wireless systems achieve greater capacity and lower network costs per
subscriber than analog systems. Digital wireless systems offer:
-- improved call privacy and security;
-- extended battery life;
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<PAGE> 72
-- more robust data transmission features; and
-- value-added services.
Wireless service providers are also investing in network technologies
designed to facilitate wireless Internet and data services. The combination of
lower unit costs, increased functionality and expanded wireless Internet and
data services should produce continuing growth of total wireless communications
services revenues.
- PREPAID PLANS EXPAND ADDRESSABLE MARKET. Most wireless communications
service providers in Latin America offer prepaid service plans. Prepaid
customers typically purchase calling cards that are available in various
denominations. Prepaid service plans expand the addressable market by
making it easier to initiate subscription for wireless service, and offer
benefits both for customers and service providers. From a customer
perspective -- and particularly for customers without ready access to
credit -- prepaid service is attractive as it does not require any
fixed-term contract, monthly fee or credit reference check. Prepaid
service also offers a number of benefits for wireless system operators,
including:
-- reduced bad debt exposure;
-- higher per minute charges;
-- lower customer acquisition costs; and
-- lower billing expenses.
- CALLING PARTY PAYS BILLING SYSTEM INCREASES WIRELESS SERVICE
USAGE. Regulators in most Latin American markets have mandated a
"calling party pays" system, under which wireless service charges
associated with a call are billed to the person that initiates the call.
In Latin America, calling party pays programs increase wireless service
usage, as subscribers tend to leave on their wireless handsets and
encourage others to call them on their wireless phones, as they do not
pay for inbound calls.
We believe the combination of prepaid service plans and the calling party
pays system are two significant factors driving increased wireless penetration
and overall usage in Latin America. With this combination, prepaid customers can
enjoy the convenience of receiving calls to a mobile handset without having to
pay fixed monthly charges.
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BUSINESS OF THE LATIN AMERICA GROUP
OVERVIEW
BellSouth is the leading pan-regional provider of wireless
telecommunications services in Latin America. Over the past ten years, we have
rapidly grown our core wireless telephone services businesses in Latin America
by adding customers in existing licensed areas, extending our geographic
coverage in our existing countries of operation and expanding into additional
Latin American countries. We currently have operations in Venezuela, Brazil,
Argentina, Peru, Chile, Panama, Ecuador, Uruguay and Nicaragua, are planning to
launch service in Guatemala in the third quarter of 2000 and have entered into a
definitive agreement to buy a controlling interest in a wireless company in
Colombia later this year. As of February 29, 2000, our Latin American companies
held licenses for territories with a total population of approximately 176
million and provided wireless services to approximately 7.3 million customers.
We do not own 100% of each these companies; adjusting market and customer data
to reflect this partial ownership, our licensed areas had a population of
approximately 124 million and provided wireless services to approximately 5.0
million customers, each as of February 29, 2000.
Our goal is to become the leading pan-regional integrated communications
provider in Latin America by leveraging our existing wireless business. We have
constructed and continue to enhance networks that will allow our Latin American
companies to offer a broad array of additional communications services when and
as permitted by local regulation. Using these networks, our Latin American
companies are increasingly offering additional communications services, such as:
- Internet access;
- wireless data services;
- long distance;
- data network services; and
- wireless pay phones.
We also provide advertising and directory publishing services in Brazil and
Peru. In addition, our Latin American network services business provides
wholesale long distance voice, data access and transport and operates an
international roaming clearinghouse.
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<PAGE> 74
The table below sets forth a summary overview of BellSouth's Latin American
companies (on a total basis, as if each company were wholly-owned by BellSouth).
The figures in the table below do not include BellSouth's approximately 17%
equity interest in Tele Centro Oeste Celular Participacoes S.A., a Brazilian
cellular company which provides wireless services to approximately one million
customers in the central-west and northern regions of Brazil. The table below
also does not reflect BellSouth's approximately 34% equity interest in Celumovil
S.A., a cellular service provider in Colombia. While BellSouth has signed an
agreement to purchase this interest and assume managerial control of the
operation, the transaction is not expected to be completed until mid-2000.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1999
BELLSOUTH ----------------------------------
START-UP OWNERSHIP LICENSED WIRELESS
COUNTRY AREA DATE INTEREST POPULATION CUSTOMERS REVENUE EBITDA
------- ---------------------- -------- --------- ------------- -------------- -------- ------
(IN MILLIONS) (IN THOUSANDS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS:
Argentina........... Buenos Aires 11/89 65.0% 13.4 1,171 $ 799.5 $234.0(1)
22.4 -- -- --
Rest of Country mid-2000 65.0
Brazil.............. Metro Sao Paulo 5/98 44.5 18.1 1,291 692.8 155.4
26.6 440 103.0 (35.7)
Northeast Region 6/98 46.8
Chile............... Santiago, Valparaiso 3/89 100.0 7.5 339 139.4 (4.8)(1)
7.6 13 -- --
Rest of Country 12/99 100.0
Ecuador............. Nationwide 11/93 89.4 12.4 186 85.4 22.2
Guatemala........... Nationwide mid-2000 60.0 11.9 -- -- --
Nicaragua........... Managua,
2.9 39 31.1 11.6
Pacific Coast 11/93 49.0(2)
Panama.............. Nationwide 6/96 43.7 2.8 120 107.9 56.2
Peru................ Lima 6/90 96.8 7.3 295 152.1 24.3
17.9 7 0.7 (5.5)
Rest of Country 8/99 96.8
Uruguay............. Coastal Corridor 11/91 46.0 2.1 116 80.0 34.9
Venezuela........... Nationwide 11/91 78.2 23.2 2,219 1,108.8 374.4
----- ----- -------- ------
Communications
subtotal:....... 176.1 6,236 3,300.7 867.0
ADVERTISING AND
DIRECTORY
PUBLISHING.......... 73.7 (19.9)
-------- ------
OTHER................ 50.2 (85.2)
-------- ------
TOTAL (100% OF
OPERATING
COMPANIES)........ $3,424.6 $761.9
======== ======
<CAPTION>
QUARTER ENDED
FEBRUARY 29, 2000
---------------------------------
WIRELESS
COUNTRY CUSTOMERS REVENUE EBITDA
------- -------------- ------- ------
(IN THOUSANDS) (IN MILLIONS)
<S> <C> <C> <C>
COMMUNICATIONS:
Argentina........... 1,286 $202.6 $ 38.6(1)
-- -- --
Brazil.............. 1,390 171.8 50.2
581 40.6 (9.5)
Chile............... 376 47.0 9.0(1)
27 -- --
Ecuador............. 203 17.5 6.2
Guatemala........... -- -- --
Nicaragua...........
51 10.6 3.5
Panama.............. 141 29.4 16.6
Peru................ 309 32.1 2.4
10 0.6 (1.3)
Uruguay............. 141 23.5 11.0
Venezuela........... 2,834 347.8 91.8
----- ------ ------
Communications
subtotal:....... 7,349 923.5 218.5
ADVERTISING AND
DIRECTORY
PUBLISHING.......... 20.4 (13.0)
------ ------
OTHER................ 22.4 (27.2)
------ ------
TOTAL (100% OF
OPERATING
COMPANIES)........ $966.3 $178.3
====== ======
</TABLE>
---------------
(1) Includes development costs associated with new operations in the rest of the
country and long distance service.
(2) BellSouth also has a prepaid option to acquire an additional 40% interest
which BellSouth has decided to exercise.
For fiscal year 1999, our Latin American companies in aggregate generated
total revenues of $3.4 billion and EBITDA of $762 million. EBITDA represents
income before net interest expense, income taxes, depreciation and amortization,
net earnings (losses) of companies we account for on the equity method,
provision for asset impairment and other income, net. For the three months ended
February 29, 2000, the companies in aggregate generated total revenues of $966
million and EBITDA of $178 million. As of February 29, 2000, BellSouth's
proportionate share of each of its Latin American companies' debt amounted to
$2.1 billion.
The financial data presented above represents the total operating results
of each of the companies included in our Latin America group. This presentation
is not permitted under, and is not intended to replace the combined operating
results prepared and presented in accordance with, generally accepted accounting
principles in the United States. However, since our Latin America group includes
significant interests in wireless businesses that are not presented on a
combined basis, we believe that this data facilitates a more detailed
understanding and assessment of the combined operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation of the Latin America Group of BellSouth
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Corporation" and our Latin America group's combined financial statements and
related notes appearing elsewhere in this document.
COMPETITIVE STRENGTHS
We believe the following competitive strengths distinguish our Latin
American operations from our competitors:
- ESTABLISHED AND RAPIDLY GROWING BASE OF CUSTOMERS. Through our early
entry into Latin America and successful growth, we have built a large and
rapidly growing customer base. As of February 29, 2000, our Latin
American companies served an aggregate of 7.3 million customers. During
fiscal year 1999, the companies grew their customer base by 2.7 million
customers, an increase of 78.3% to 6.2 million. In the three months ended
February 29, 2000, the customer base grew by an additional 1.1 million
customers. We believe this large customer base provides us with key
advantages in Latin America, including facilitating strategic partnering
arrangements, economies of scale sufficient to roll out new wireless
services profitably and a platform for entering new lines of business,
such as Internet and data services.
- STRONG PAN-REGIONAL PRESENCE. We are one of a few wireless
telecommunications providers with a pan-regional presence in Latin
America and our geographic coverage is the largest in the region. We
believe our experience and proven success in establishing, growing and
operating wireless businesses in multiple markets within the region allow
us to better anticipate future market trends and the needs of our
customers. We are well positioned to increasingly offer our services on a
pan-regional basis where permitted by local regulation. For example, we
are currently deploying a pan-regional satellite and fiber based network
to interconnect each of our Latin American companies and support voice,
Internet and data services.
- REPUTATION FOR PROVIDING SUPERIOR SERVICES. We believe we offer our
Latin American customers the highest quality telecommunications services
and customer care available within our markets and that we have developed
a strong reputation for doing so. As competition in the industry grows,
we believe our reputation in Latin America for superior customer service
will continue to enable us to attract and retain high-quality customers
without competing primarily on the basis of price. Our Latin America
operations benefit from the customer service expertise of the BLS group
companies, which have won 11 J.D. Power & Associates awards for superior
customer service in the last four years.
- HIGH-CAPACITY DIGITAL BACKBONE NETWORKS. We operate our own
high-capacity digital networks in major Latin American markets. We
believe these backbone networks enable our companies to provide
high-quality service, reduce interconnection costs and increase call
completion rates. In addition, these backbone networks facilitate the
offering of value-added wireless services, which may not be supported by
another carrier's network. Moreover, we believe these established
high-capacity networks will reduce costs and time to market in rolling
out new Internet, data and voice services.
- ESTABLISHED BRANDS. The brands established by BellSouth and our Latin
American companies are among the best known brands in their markets, and
are closely associated with high-quality wireless services in those
markets. As competition in the wireless communications industry
intensifies, we believe the power of our strong brands will play an
increasingly important role in consumers' purchasing decisions. Further,
as BellSouth expands its geographic coverage in Latin America and offers
new services, we believe the strength of these brands will assist us in
successfully and rapidly penetrating these markets.
- EXPERIENCED MANAGEMENT TEAMS. BellSouth has been providing high-quality
wireless services in Latin America since 1989 and has developed
experienced management teams at the country level, which are supported by
its U.S.-based corporate management team. On average, the general manager
of each of our Latin American companies has approximately nine years of
experience in the communications industry.
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- STRONG RELATIONSHIP WITH COMPANIES IN OUR BLS GROUP. We expect companies
in our Latin America group to continue benefiting from its relationship
with companies in our BLS group. Such benefits include:
-- access to managerial resources, including world class expertise and
experience in all areas of telecommunications services;
-- ability to leverage combined purchasing power; and
-- enhanced ability to access capital.
BUSINESS STRATEGY
To achieve our goal of becoming the leading pan-regional integrated
communications provider in Latin America, BellSouth will leverage its
competitive strengths and market position in wireless telecommunications by
pursuing the following strategies:
- CONTINUE TO RAPIDLY GROW EXISTING WIRELESS OPERATIONS. We believe there
are considerable opportunities for long-term growth of our wireless
telecommunications businesses in our existing Latin American markets. For
example, our operation in Venezuela increased its customer base by over
one million customers, or almost 90%, in 1999, its eighth year of
operation. Pyramid Research estimates that the number of wireless
subscribers in Latin America will approximately triple over the next five
years. With its established brands and reputation for quality customer
service, BellSouth is well positioned to benefit from this expected
subscriber growth. And, in order to derive greater revenues from existing
customers, we plan to offer a variety of value-added services in our
Latin American markets, including wireless Internet and other wireless
data applications.
- EXPAND PAN-REGIONAL COVERAGE. We seek to further develop our position as
the leading pan-regional wireless telecommunications provider in Latin
America through expansion into new geographic markets. We plan to expand
our geographic coverage by bidding for new licenses and by pursuing
selective acquisitions of existing service providers, both in countries
in which we currently operate and in new countries.
-- In-country expansion opportunities. We intend to expand the wireless
coverage area of our Latin American companies within selected countries
in which we currently operate but lack a nationwide presence. In the
last two years for example, we acquired licenses for the remainder of
Argentina, Chile and Peru to give our companies a nationwide presence
in each of those markets, expanding our licensed territories to include
an additional 47 million people. Other attractive in-country expansion
opportunities include Brazil and Uruguay, which together comprise a
population of over 120 million outside our existing licensed areas. In
May 2000, we acquired a minority interest in Tele Centro Oeste, an
additional cellular company operating in central-west and northern
Brazil.
-- New-country expansion opportunities. We will also focus on expanding
our operations into selected Latin American countries in which we are
not currently operating. We will primarily focus on establishing
operations in countries of strategic importance to our pan-regional
operations, such as El Salvador, Honduras and Costa Rica. We will also
consider entry into other countries, such as Mexico, Bolivia, Paraguay
and Caribbean countries, when it is economically attractive to do so.
In May 2000, for example, we entered into a definitive agreement to
acquire a 33.8% controlling interest in Celumovil S.A., a Colombian
wireless service provider.
- BROADEN EXISTING CAPABILITIES AND SERVICE OFFERINGS. We believe our
existing Latin American networks and operations provide us with a strong
platform from which to offer a broad array of communications services. We
are building on this platform in two fundamental respects:
-- In our larger markets, such as Venezuela, Argentina and Peru, our
companies are augmenting their access to customers, especially large
corporate customers and multiple-family residences, with various "last
mile" technologies, including wireless broadband local access networks.
Where justified by traffic volume, our companies intend to provide
broadband access through fiber optic
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cable. High bandwidth local access technologies will position them to
offer advanced data services with high growth potential, such as
Internet access and data network services.
-- We are in the process of deploying, via owned or leased capacity, an
international network to interconnect our Latin American companies'
networks and provide direct connectivity within Latin America and to
and from North America and Europe. This network will enable our
companies to offer international long distance services, Internet
access and transport and end-to-end managed data services.
- REALIZE INCREASED SYNERGIES AMONG OUR EXISTING OPERATIONS. We believe we
can utilize the collective assets and expertise of our Latin American
companies to realize synergies unavailable to many of our competitors.
Existing efforts to realize such synergies include:
-- leveraging the collective purchasing power of all of BellSouth's Latin
American companies;
-- sharing information, ideas and experience among the companies through a
best practices program; and
-- centrally managing our properties in Panama, Guatemala and Nicaragua.
- PURSUE SELECTIVE STRATEGIC TRANSACTIONS THAT COMPLEMENT OUR BUSINESS
PLAN. We believe that, as in Europe and the U.S., the Latin American
telecommunications industry will experience increased consolidation, with
single-market providers combining or aligning with pan-regional
operators. We will carefully evaluate opportunities for selective
strategic acquisitions that cost-effectively either accelerate or
implement our Latin American business strategy. Such acquisitions may
expand our Latin American license areas, enhance our service capabilities
or increase economies of scale. We will also consider opportunities to
increase our ownership in selected markets in Latin America by acquiring
the interests of our partners.
COMMUNICATIONS SERVICES
BellSouth's Latin American companies offer a variety of communication
services in their respective markets. The table below sets forth the primary
services currently offered in each market:
<TABLE>
<CAPTION>
COMMUNICATIONS SERVICES
----------------------------------------------------------------
DATA ADVERTISING
MOBILE WIRELESS INTERNET NETWORK LONG WIRELESS AND DIRECTORY
COUNTRY WIRELESS DATA SERVICE SERVICES DISTANCE PAYPHONES PUBLISHING
------- -------- -------- -------- -------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Argentina...................... X X X X X
Brazil......................... X X X
Chile.......................... X X X
Ecuador........................ X X X X
Guatemala (third quarter
2000)........................ X X
Nicaragua...................... X X
Panama......................... X X
Peru........................... X X X X X X
Uruguay........................ X X
Venezuela...................... X X X X X
</TABLE>
Other services offered in selected markets include web hosting, vehicle
location services and, to the extent permitted by law, local access service.
MOBILE WIRELESS
Mobile wireless telecommunication is BellSouth's primary business in Latin
America and we offer this service in all of our Latin American markets. Mobile
wireless includes cellular, personal communications service, or PCS, and
enhanced specialized mobile radio systems. The primary technical distinction
between cellular, PCS and enhanced specialized mobile radio is that they operate
at different radio frequencies.
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However, each is capable of providing two-way voice and data communication
between handheld and vehicle-mounted radio telephones and, through
interconnection with other networks, two-way communication with fixed-line
devices. Our Latin American companies offer wireless service using cellular
frequencies in all of their current countries of operation. In addition,
wireless services using PCS and enhanced specialized mobile radio frequencies
are offered in Argentina, and the license recently obtained in Guatemala is for
PCS frequencies. Digital service at PCS frequencies is also being implemented in
Uruguay to supplement an existing analog network.
We believe that, from a customer's perspective, any significant difference
in features and functionality of the three systems results from the handset
capabilities and network infrastructure deployed in a particular system, rather
than any difference in the properties of the particular radio frequencies. For
example, all three systems are capable of providing value-added services and
roaming.
VALUE-ADDED SERVICES. Our Latin American digital wireless networks allow a
number of advanced services and features to be offered with wireless service,
including:
- voice mail;
- caller ID;
- call forwarding;
- call waiting; and
- three-way calling.
These services increase the utility of our mobile wireless service to
customers and typically increase usage and service revenues.
ROAMING. Intra-country roaming is available in several markets where our
Latin American companies do not have full geographic coverage, such as Brazil
and Uruguay. These services are facilitated through agreements with other
intra-country wireless operators to permit customers to use their wireless
handsets outside of their provider's geographic territory. Our Latin American
companies offer automatic wireless international roaming services to and from
many areas of Latin America and North America as well as selected destinations
in Asia. These services are provided pursuant to agreements with other wireless
service providers. Northbound roaming from Latin America to North America and
intra-Latin America roaming was initiated in early 1999. Southbound roaming,
which allows customers of BellSouth's U.S. wireless operations, and customers of
other carriers which have entered into roaming agreements with our Latin
American companies, to roam in Latin America, is currently available between
North America and Sao Paulo, Brazil; Argentina; Chile; Colombia; El Salvador;
Guatemala; Nicaragua; Panama; Peru; Uruguay and areas in the Caribbean. We
intend to continue to expand roaming service both within and outside of Latin
America. Roaming revenues are not currently significant.
WIRELESS INTERNET AND DATA
Wireless Internet and data applications and new broadband services
represent opportunities for new revenue streams and enhanced customer retention.
We currently offer wireless data services, such as short messaging service, in a
number of Latin American markets. Short messaging service allows a wireless
handset to send, receive and store short alphanumeric messages and pages. In
addition, we plan widespread deployment of wireless Internet service and
currently offer this service in Argentina. Wireless Internet service allows
access to specially designed websites directly from a wireless handset or
personal digital assistant. We intend to leverage our large Latin American
customer base to provide web-based value-added services, including browsing,
electronic scheduling, information services, e-commerce and more.
INTERNET SERVICE
We have launched Internet service in Argentina, Chile, Panama, Uruguay and
Venezuela. We offer dial-up Internet access and support dedicated lines to serve
residential and business customers. We plan to offer
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Internet service in all markets when and as permitted by local regulation. In
addition to providing access to the Internet, we also intend to offer
value-added Internet services. Services such as web hosting, web sites and
e-commerce applications will be offered either independently or through
alliances with strategic partners. Our company in Venezuela is currently
offering these services.
DATA NETWORK SERVICES AND PRIVATE NETWORKS
Data network services include dedicated Internet access, leased lines, and
data transmission services. Private networks connect the various buildings and
offices of corporate customers with one another and with the service provider's
backbone network using a combination of microwave transceivers and fiber optic
cables. Currently, data network services and private networks are provided in
Argentina, Venezuela and Peru. The variety and quality of network services
available to customers is augmented by the pan-regional satellite and fiber
based network we are currently deploying in Latin America. As the Latin American
countries in which we have operations liberalize their telecommunications laws,
we plan to provide data network and private network services in additional
markets.
DOMESTIC AND INTERNATIONAL LONG DISTANCE
BellSouth provides both domestic and international long distance services
in several major markets in Latin America, including Argentina, Chile and Peru.
We intend to offer both domestic and international long distance service in each
of our other Latin American markets when and as permitted by local regulation.
Domestic long distance traffic will be carried over the backbone networks of our
Latin American companies. To support international long distance service, we are
deploying a pan-regional satellite and fiber based network. This network
interconnects with other Latin American and international carriers and will
interconnect with the backbone networks of each of our companies, to the extent
they are permitted by local law to originate and terminate international long
distance traffic.
ADVERTISING AND DIRECTORY PUBLISHING
BellSouth is one of the largest publishers of classified and yellow page
directories in Latin America. Our companies in Brazil and Peru publish over 130
titles annually and also offer electronic advertising services. Revenues are
principally derived from sales of advertising in directories and from telephone
companies paying for listing services. In addition to print products, these
operations offer Internet-based directory services and e-commerce applications.
We plan to develop our advertising and publishing business in existing markets,
build upon our Latin American Internet-based advertising and directory
businesses and evaluate opportunities to expand this business into new
geographic markets.
LOCAL ACCESS SERVICES
When and as permitted by law, we are beginning to offer local fixed access
service through various "last mile" access technologies, including wireless
broadband local access in some Latin American markets. Where justified by
traffic volume, we intend to provide broadband access through fiber optic cable.
Such high bandwidth local access technologies connect customers to the backbone
networks of our companies and allow for the provision of Internet and high-speed
data services as well as traditional voice services. Currently, local access
service is provided in Argentina and Peru, and in Venezuela for data services
only. A number of Latin American markets have announced plans to liberalize
local service provision, including Venezuela and Brazil.
INTERACTIVE AND BASIC PAGING
Interactive paging provides two-way radio transmission of text messages,
such as e-mail, between handheld devices, computers and similar appliances.
Basic paging provides one-way transmission of brief alphanumeric messages, such
as a telephone number, to a handheld device from a telephone or computer.
Information services, including stock quotes, news headlines and sports scores,
are also supported by interactive and basic paging. We currently offer
interactive paging in Venezuela.
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HANDSETS AND ACCESSORIES
We sell wireless handsets and other communication devices such as pagers.
Our handsets are manufactured by major equipment manufacturers, including Nokia,
Ericsson and Motorola. While handset sales can generate significant revenues,
such sales are typically made at or below cost as part of a package that
includes subscription for wireless service. We also offer a variety of handset
accessories, such as chargers, headsets, hands-free kits for vehicles, belt
clips, faceplates and batteries. Unlike prices for handsets, we do not typically
subsidize prices for accessories.
INTERNATIONAL ROAMING CLEARINGHOUSE
BellSouth's Latin American network services division is the leading
provider of automatic roaming services in Latin America. The network services
division provides a suite of services to facilitate automatic international
roaming using its intelligent signaling network to provide connectivity to
wireless carriers in South, Central and North America, the Caribbean and
selected markets in Asia. It also provides fraud management services and
services that facilitate the provision of customer care and technical support to
customers roaming outside the network operator's territory. The network services
division also operates an international roaming clearinghouse for our BLS
group's U.S. wireless companies. Although the automatic roaming services and
clearinghouse businesses are not sources of significant revenues, they do
support roaming arrangements between carriers and allow for settlement of
inter-carrier payments, which is necessary to permit wireless users to roam in
the region.
NETWORKS AND TECHNOLOGY
NETWORKS
Each of our Latin American companies operates a network utilizing either
cellular or higher PCS radio frequencies to support its core wireless telephone
services. The basic architecture of existing wireless networks includes cell
site radio base stations, switching machines and fixed telecommunications
facilities. The cell site base stations contain the radio transmitters and
receivers. These are strategically placed to ensure that the service area
specified by customer demand and government requirements is covered with radio
signals of sufficient strength to provide high-quality service. Switching
machines serve as the control and interconnect medium of the system. All cell
sites connect to a switching machine that controls the interaction between cell
sites. When a customer moves from an area served by one cell site to another,
the switch controls the handoff of service between cell sites. The switch also
controls and establishes the interconnection with other networks. Fixed
communications facilities connect the cell sites to the switches, and the
switches to other communications networks. These facilities can be comprised of
any suitable transmission medium, including microwave radio, fiber optic cable
and copper cable. Microwave is typically used to provide the fixed network for
most new cellular or PCS systems. Subsequently, as traffic within the network
increases, microwave can be supplemented or replaced with fiber optic cable to
improve the capacity and reliability of the connection. Fixed telecommunications
facilities can be constructed and owned by the wireless company or leased from
either the local telephone company or a competing carrier.
BellSouth's Latin American companies interconnect with both wireline and
other wireless operators in their markets. Carriers charge one another for calls
that are carried over their networks, and typically the further a carrier must
carry a call over its network, the higher the interconnection charge. Carriers
consequently have an incentive to carry as much of their own traffic as possible
and to interconnect with other carriers at numerous points to minimize the
interconnection and carriage charges from other carriers. Our companies'
high-capacity backbone networks reduce interconnection costs, increase call
completion rates and enable them to offer value-added services. Our operations
in markets such as Argentina, Chile, Ecuador, Panama, Peru and Venezuela have
significantly reduced interconnection fees and reliance on competitors' networks
and, we believe, increased customer service quality.
While our networks are built to support our core wireless services, the
existence of the networks enables us to offer other services. As our companies
develop into fully integrated communications providers, in many cases they
already have in place a high-capacity network to support additional services and
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telecommunications traffic. Where such a network is in place, offering
high-speed data and local calling only requires that we build a "last mile"
connection -- that is, a connection from the nearest point on the network to the
customer. For our existing Latin American wireless customers, cellular or PCS
wireless telecommunications provides the last mile for voice and narrowband data
applications. To provide broadband services, we intend to supplement this "last
mile" solution with other technologies, including "fixed wireless" technologies
such as Local Multipoint Distribution System or third generation cellular
technology currently under development. Where justified by traffic volume, we
intend to provide broadband access through fiber optic cable.
As part of our plans to interconnect our Latin American networks with each
other and with North America and Europe, we have begun deploying an
international network over satellite and fiber optic facilities. This network
provides us with the capacity to offer international long distance services and
global Internet connectivity. The network consists of satellite-based
connectivity provided via leased transponder capacity on the Intelsat, SatMex-5
and Solidaridad-2 satellites. To access these satellites, we utilize earth
station facilities located in Argentina, Venezuela, Peru, Chile, Ecuador and the
United States. The network also provides high-capacity connectivity directly to
North America on several submarine cable systems, including Americas I, PanAm
and Maya-1. These submarine systems are connected to our carrier-grade,
international gateway switches located in Santiago, Chile and Florida.
Connectivity to Europe is then provided via capacity on the TAT-14 and AC-1
submarine systems, which are linked to our carrier-grade, international gateway
switches in New Jersey and London. Our rights to those submarine systems have
been attributed to the Latin America group. Finally, the network is monitored
and managed on an end-to-end basis from a single network operations center based
in Atlanta, Georgia.
TECHNOLOGY
Wireless carriers in Latin America typically choose from among four signal
transmission technologies for cellular frequency communications -- two analog
and two digital. The earlier analog standards include Advanced Mobile Phone
Service, or AMPS, and narrowband AMPS, or N-AMPS. The digital signal
transmission technologies include Time Division Multiple Access, or TDMA, and
Code Division Multiple Access, or CDMA. Wireless carriers offering service at
higher PCS frequencies all use a digital transmission technology. Digital
technologies offer more capacity and lower network costs per subscriber than the
older analog technologies and allow carriers to offer more value-added services.
The two different digital standards are incompatible with each other. TDMA and
CDMA handsets typically include AMPS transceivers to facilitate roaming into
areas where the digital technology of the subscriber's home system is not
available. A third digital cellular technology that is commonly deployed in
Europe and some other parts of the world is Global System for Mobile
Communications, or GSM. Our most recent competitors in the Venezuelan wireless
service market have deployed GSM technology.
We have deployed digital technologies in all of our current Latin American
markets except for Uruguay, where CDMA digital service at PCS frequencies is
expected to supplement the existing analog network by the end of the year. We
are also installing an all-digital CDMA network using PCS frequencies in our
newest operation in Guatemala. We use either TDMA or CDMA in our Latin American
operations, selecting the type of digital technology for each particular market
that optimizes the combination of cost, quality and capacity available at the
time. We do not believe the choice of digital transmission technology, whether
TDMA or CDMA, plays any role in the decision by a material number of potential
customers in our Latin American markets when selecting a wireless service
provider. However, while roaming capability is available, whether through
utilization of AMPS technology or the digital network of a competitor, the lack
of a common digital technology across all of our Latin American companies means
that customers will not presently be able to roam onto the digital networks of
all of our other Latin American companies.
OVERVIEW OF COUNTRY OPERATIONS
BellSouth owns all or a substantial interest in each of its Latin American
companies. Our largest operations by revenue are in Venezuela, Brazil and
Argentina. We also have operations in Chile, Ecuador,
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Nicaragua, Panama, Peru and Uruguay, and anticipate commencing operations during
the third quarter of 2000 in Guatemala. We expect to finalize our Colombian
acquisition later this year.
We typically play a lead role in the management and direction of our Latin
American companies. In some cases, the ownership structure of these companies
reflects government requirements that local owners hold an interest in the
companies' telecommunications licenses. When entering new markets in Latin
America, we typically seek to build strong relationships with one or more local
partners who are more familiar with the country's business and political
environment.
In structuring its investments, BellSouth exercises operating influence
through board representation, the right to appoint certain key members of
management and consent rights with respect to significant matters, including
amounts of capital contributions. In addition, we try to assure our ability to
maintain a position of influence in the venture, if not outright control, by
obtaining rights of first refusal on future sales of our partners' interests and
on equity issuances by the venture. The particular governance rights vary from
venture to venture, and often are dependent upon the size of our investment
relative to other investors. Under the governing documents for some of these
ventures, certain key matters such as the approval of business plans and
decisions as to the timing and amount of cash distributions require the consent
of our partners. We will likely enter into similar arrangements to pursue
additional opportunities in Latin America.
In many of their markets in Latin America, BellSouth's companies compete
directly with affiliates of Telefonica and Telecom Italia. Telefonica currently
owns interests in wireless or wireline telecommunications companies operating in
eight countries in Latin America, and Telecom Italia operates in six countries
in Latin America. In addition, a Telefonica subsidiary operates one of the
largest Internet service providers in Latin America. Both of these companies are
implementing a pan-regional strategy in Latin America.
VENEZUELA
BellSouth conducts its Venezuelan operations through its 78.2% interest in
Telcel, which operates a nationwide wireless network. Telcel commenced
operations in 1991. Telcel is the leading wireless provider in Venezuela and
also offers a wide variety of communications services, including Internet access
and data network services. The Telcel brand is widely recognized in Venezuela.
In early 2000, a limited co-branding campaign was initiated, introducing the
BellSouth brand alongside Telcel. We plan to gradually increase co-branding
activities during the year and expect the Telcel/BellSouth brand to be widely
used by early 2001.
Telcel's customer base grew to over 2.2 million wireless customers in 1999,
its eighth year of operation. This represented an increase of approximately 90%
over 1998 despite a decline in GDP of almost 8% in 1999. Telcel's customer base
grew by an additional 615,000 customers in the three months ended February 29,
2000. As of February 29, 2000, Telcel's wireless network had coverage of over
90% of the Venezuelan population. Telcel has successfully grown its core
wireless telephone business and leveraged its operations and customer base to
offer an expanding array of communications services. The company operates one of
the leading Internet service providers in Venezuela, providing dial-up service
to over 87,500 customers and dedicated data links for approximately 100
corporate accounts at February 29, 2000. Telcel also maintains an Internet
website and launched the first Internet shopping mall in Venezuela. In November
1999, Telcel introduced a two-way interactive paging service that allows
customers to receive e-mail on mobile handheld devices and to send messages to a
variety of communications devices, including fax machines, computers and pagers.
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The following table shows several key statistics concerning Telcel's
operations for the fiscal years ended November 30, 1997, 1998 and 1999 and the
quarters ended February 28, 1999 and February 29, 2000, and nationwide wireless
penetration and GDP growth for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
QUARTER ENDED
FISCAL YEAR ENDED NOVEMBER 30, ---------------------------
------------------------------- FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
------- ------- --------- ------------ ------------
(DOLLARS IN MILLIONS; CUSTOMERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Company:
Revenue................................. $452.4 $806.2 $1,108.8 $272.8 $ 347.8
EBITDA.................................. $190.8 $373.4 $ 374.4 $101.0 $ 91.8
Licensed Population..................... 21.9 22.7 23.2 23.2 23.2
Telcel Wireless Customers............... 697 1,168 2,219 1,393 2,834
As Adjusted for BellSouth's Equity
Interest:
Revenue................................. $247.3 $556.2 $ 866.6 $213.2 $ 271.8
EBITDA.................................. $104.1 $257.4 $ 292.6 $ 78.9 $ 71.8
Licensed Population..................... 12.6 17.7 18.1 18.1 18.1
Telcel Wireless Customers............... 400 913 1,734 1,088 2,215
Penetration (all carriers)(1)............. 4.6% 8.0% 14.3%
GDP Growth(2)............................. 5.9% (0.7)% (7.6)%
</TABLE>
---------------
(1) Source: Pyramid Research.
(2) Source: International Monetary Fund.
MARKET DEMOGRAPHICS. Venezuela represents one of the largest markets in
Latin America, with a population of approximately 23.2 million as of 1999. Over
90% of the population resides in cities. In 1999, wireline penetration was
approximately 11.3% and wireless penetration was approximately 14.3%.
BUSINESS OPPORTUNITY. In order to improve its existing services and be
able to expand its service offerings, Telcel upgraded its wireless network to
CDMA digital technology in 1999. The improved capacity of the digital service,
which uses existing licensed spectrum, together with Telcel's established brand
and the promotion of prepaid plans, allowed it to increase customers by 90% in
1999. Moreover, the improved functionality of the new digital handsets allows
Telcel to offer a wider array of value-added services, including short messaging
service and other data applications. We believe these value-added services will
improve customer retention and produce additional service revenues.
In building out its wireless network, Telcel installed a technologically
advanced network and deployed it further into the interior of Venezuela than its
competitors. Its high-capacity backbone network, which was recently upgraded to
fiber optic cable for several major links, allows it to carry its wireless
customers' traffic economically. The backbone network, augmented by microwave
and fiber optic local access technologies, supports a variety of services,
including data network services and dedicated high-speed Internet access. Telcel
plans to provide a full suite of telecommunications services, including local
and long distance voice services following the opening of these markets to
competition, which is scheduled to occur in November 2000. Telcel is testing
several local access technologies, including wireless broadband local access
network, to provide a "last mile" local access solution.
SALES AND MARKETING. Telcel concentrates its marketing efforts on serving
the needs of the corporate and mass markets. For corporate customers, Telcel has
a dedicated sales force to meet their needs for wireless, Internet and data
services. For the mass market, Telcel provides a variety of services to meet
customers' needs. Telcel seeks to make its products valuable and convenient to
customers. With over 1,000 authorized agents, 40 service centers and 20,000
prepaid card distribution points, Telcel has a wide presence in Venezuela.
Telcel maintains a high corporate profile with strong community ties, and
consumers identify the Telcel brand as prestigious, innovative and
technologically advanced. The company frequently launches special promotions
using radio, billboards and newspapers to generate awareness and attention to
its brand.
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MANAGEMENT TEAM. Telcel has assembled a strong management team to help it
execute its business strategy. At January 2000, Telcel had approximately 2,600
employees. Telcel's senior management team includes:
Oswaldo Cisneros, Chairman and Chief Executive Officer. Mr. Cisneros
has served as Telcel's Chairman and Chief Executive Officer since 1991.
Previously, Mr. Cisneros served as President of Pepsi Cola's Venezuelan
operations, President of Central Azucarero Portuguesa, President of the
Produvisa Glass Manufacturing Company and President of Coca-Cola Venezuela.
Enrique Garcia, Executive President and Chief Operating Officer. Mr.
Garcia has served as Telcel's Executive President and Chief Operating
Officer since 1996, and has been with Telcel in various capacities since
1992. Prior to joining Telcel, Mr. Garcia was employed with Cellular One of
Puerto Rico, Unisys, Coopers & Lybrand and Pepsi Cola. Mr. Garcia has more
than 28 years of experience in telecommunications, information technology,
general management, marketing and finance.
Ricardo Mata, Executive Vice President, Administration and
Finance. Mr. Mata has served as Telcel's Executive Vice President for
Administration and Finance since 1997. Prior to joining Telcel, Mr. Mata
was the Corporate Finance Vice-President for Oficina Central de Asesoria y
Ayuda Tecnica C.A. with responsibilities for Pepsi Cola's Venezuelan
operations, Produvisa Glass Manufacturing Company and Central Azucarero
Portuguesa.
Gustavo Enrique Reyes Reverol, Technology and Information Vice
President. Mr. Reyes has served as Telcel's Technology and Information
Vice President since 1993 and has been with Telcel in various capacities
since 1992. Mr. Reyes previously worked for 15 years in management of the
construction of the Itaipu Hydroelectric Power Plant.
STRATEGIC PARTNERS. Telcel's other major shareholder is Argenta Finance,
which is controlled by Telcel's Chairman, Mr. Oswaldo Cisneros. Argenta holds an
indirect 21% interest in Telcel. Argenta has the right to require BellSouth to
purchase, and BellSouth has the right to require Argenta to sell to BellSouth,
approximately half of Argenta's interest in Telcel, if Argenta is unable to sell
its interest in a public offering. If BellSouth exercises its right to purchase
the interest, BellSouth would purchase it at between 100% and 120% of its
appraised fair value. If Argenta elects to require BellSouth to purchase the
interest, BellSouth would do so at between 80% and 100% of its appraised fair
value.
COMPETITION. Telcel's principal competitor is CANTV's wireless subsidiary,
Movilnet. CANTV is partially owned by GTE Corporation. CANTV also competes with
Telcel in the data network services and Internet service businesses. In 1997,
the Venezuelan government awarded regional licenses to three new entrants to
provide wireless service, which collectively comprise a nationwide coverage
area. The three new entrants each deployed the same digital technology and are
entitled to provide wireless service in the metropolitan areas within their
respective regions, after meeting rural area coverage requirements. At least one
of these new entrants is already adding customers in metropolitan areas. The
Venezuelan government has also announced plans to award new nationwide wireless
licenses in the future.
REGULATORY ENVIRONMENT. Since 1991, telecommunications in Venezuela have
been regulated by CONATEL, an agency under the Ministry of Infrastructure,
formerly the Ministry of Transportation and Communications. CONATEL coordinates
and approves expansion, modernization and improvement of Venezuela's
telecommunications system. CONATEL also monitors Telcel's compliance with its
various concessions and is responsible for establishing the range of prices
Telcel can charge for its services, including usage, activation and service
charges. Venezuela is scheduled to open its telecommunications market to full
competition in November 2000.
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CONCESSIONS. Telcel holds four nationwide concessions from CONATEL and the
Ministry of Infrastructure, as set forth below:
<TABLE>
<CAPTION>
INITIAL TERM
GRANTED EXPIRES
------- ------------
<S> <C> <C>
Cellular service............................................ 1991 2011
Value Added Services, including Internet service............ 1995 2005
Private networks............................................ 1993 2003
Wireless data............................................... 1994 2014
</TABLE>
Telcel's cellular concession imposes network build-out requirements and
quality standards, subjects Telcel to rate range regulation by CONATEL and
imposes a special tax on Telcel, which reached in 1996 its maximum level of 10%
of Telcel's gross income from services offered under the concession. The
concession may be extended for additional 20-year terms if Telcel complies with
its obligations under the concession and agrees to any new conditions which the
Ministry of Infrastructure may establish in view of the national public
interest. Additionally, the concession currently prohibits Telcel from competing
directly with CANTV in providing landline local, domestic long
distance -- except for its own wireless customers -- and international long
distance telephone service.
Telcel's other concessions may each be extended for an additional 10- or
20-year period, provided Telcel has complied with all conditions of the
particular concession. In determining whether to agree to the extension of any
of the other concessions, CONATEL will take the national public interest into
account.
BRAZIL
BellSouth and its Brazilian partners operate two wireless
telecommunications companies in Brazil under the BCP brand name. In 1997, BCP
purchased cellular concessions for metropolitan Sao Paulo, as well as six
Northeastern states for $2.4 billion and $497 million, respectively. BellSouth
owns 44.5% of the Sao Paulo operations and 46.8% of the Northeast operations.
BCP began providing TDMA digital cellular service in metropolitan Sao Paulo in
May 1998 and in the Northeast in June 1998. After a rapid build-out of its
network, BCP signed up nearly one million customers by calendar year end 1998,
and had in excess of 1.9 million customers at February 29, 2000. BCP has quickly
distinguished itself as the premium provider of cellular services in its
territories. The following table shows several key statistics concerning BCP's
metropolitan Sao Paulo and Northeast operations for the fiscal years ended
November 30, 1997, 1998 and 1999 and the quarters ended February 28, 1999 and
February 29, 2000, and nationwide wireless penetration and GDP growth in Brazil
for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
QUARTER ENDED
FISCAL YEAR ENDED NOVEMBER 30, ---------------------------
-------------------------------- FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(DOLLARS IN MILLIONS; CUSTOMERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Company:
Revenue................................... -- $482.6 $795.8 $211.2 $212.4
EBITDA.................................... $(56.5) $ 44.7 $119.7 $ 10.6 $ 40.7
Licensed Population....................... 44.3 44.6 44.7 44.7 44.7
BCP Wireless Customers.................... -- 780 1,731 1,023 1,971
As Adjusted for BellSouth's Equity Interest:
Revenue................................... $ -- $200.1 $356.3 $ 94.4 $ 95.4
EBITDA.................................... $(25.1) $ 17.9 $ 52.4 $ 4.6 $ 17.8
Licensed Population....................... 18.6 20.5 20.5 20.5 20.5
BCP Wireless Customers.................... -- 350 780 459 890
Penetration (all carriers)(1)............... 2.9% 4.5% 8.9%
GDP Growth(2)............................... 3.7% 0.1% (1.0)%
</TABLE>
---------------
(1) Source: Pyramid Research.
(2) Source: International Monetary Fund.
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On May 12, 2000, BellSouth completed its acquisition of a minority interest
in an additional cellular company operating in Brazil. BellSouth acquired common
and preferred stock in Tele Centro Oeste Celular Participacoes SA for a total
purchase price of approximately $240 million. Tele Centro Oeste provides
wireless services to approximately one million customers in the central-west and
northern regions of Brazil. Its licensed service area includes approximately 65%
of the Brazilian land mass and includes a population of approximately 28
million. 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.
We also operate two advertising and publishing companies in Brazil. Listel,
a wholly-owned subsidiary of BellSouth, is one of Brazil's largest yellow pages
companies and publishes directories which cover approximately 85% of Brazil,
including Sao Paulo state. OESP Midia Direta, in which BellSouth has a 40%
interest, publishes directories in the city of Sao Paulo and the state of Rio de
Janeiro, as well as a national business-to-business directory. Both companies
also sell Internet-based directory and advertising products and services.
MARKET DEMOGRAPHICS. Brazil is the most populous country in Latin America,
with approximately 163.8 million people, and is the tenth largest economy in the
world. As the largest Latin American market based on size, population and GDP,
we believe Brazil provides the region's best telecommunications opportunities.
Wireline penetration in Brazil in 1999 was approximately 15.4% while wireless
penetration was approximately 8.9%.
With a total population of more than 18.1 million, metropolitan Sao Paulo
is viewed as one of the most attractive wireless markets in Latin America. The
metropolitan Sao Paulo region served by BCP is one of the most affluent urban
regions in Latin America and includes 25 communities with populations of more
than 100,000 people. The Northeast region is populated by approximately 26.6
million people and has more than 24 communities with populations of more than
100,000 people, including Recife and Fortaleza, Brazil's fifth and eighth
largest cities.
BUSINESS OPPORTUNITY. Opportunities for growth in BCP's cellular business
in both the Sao Paulo metropolitan area and the Northeast are significant,
particularly in light of relatively low landline and wireless penetration in
these areas. BCP believes that it is well positioned to take advantage of the
growth opportunities in these regions due to its extensive customer base,
reputation for superior service and strong brand.
As a result of its reputation for customer service and its robust wireless
network, BCP expects to be in a position to offer additional services to its
customer base, including Internet and data services such as e-mail, information
services and electronic commerce applications. BCP has also put in place an
advanced information technology system designed to allow it to launch products
and services quickly and efficiently. BCP was the first operator in Brazil to
offer automatic roaming to the United States, the first to offer roaming for
prepaid customers and the first nonincumbent operator to offer short messaging
service. BCP received a license in June 1999 that will permit it to provide data
network services to the corporate market, and eventually to offer fixed data and
voice services to key corporate users.
PCS frequencies are not currently used in Brazil for wireless service
because the government has not issued any PCS licenses. The Brazilian government
has indicated that it intends to auction PCS licenses across Brazil in 2000 or
2001. BCP may participate in these auctions, if permitted by Brazilian
government rules that may be implemented to govern the auction process,
potentially providing an opportunity for BCP to expand its coverage area or to
acquire additional radio spectrum in its current territories. When adopted, the
auction rules may prohibit bidders who own cellular licenses covering licensed
territories that overlap new PCS territories from purchasing licenses in the
overlapping territories, and may also impose other restrictions of which we are
not yet aware. In addition, Brazil is obligated by international treaty to open
all of its telecommunications market segments to competition over the next four
years. BCP may consider expanding its coverage area by pursuing selective
strategic acquisitions of other wireless operators.
SALES AND MARKETING. BCP pursues a marketing strategy that emphasizes the
quality and reliability of its cellular services and product differentiation
under the BCP brand name. BCP markets its services and
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products both through its own direct sales force of sales representatives and
its network of independent distributors. BCP has approximately 1,000 points of
sale in its metropolitan Sao Paulo and Northeast markets, including over 30
BCP-owned retail stores. BCP also has over 5,000 sales points for its prepaid
cards. In 1999, BCP began to actively promote the availability of prepaid
wireless services to encourage subscription by broader demographic segments not
previously targeted. In the Sao Paulo metropolitan area, prepaid service was
launched in May 1999 and is adding an average of more than 1,500 customers per
day.
MANAGEMENT TEAM. BCP has assembled a strong management team to help it
execute its business strategy. As of January 2000, BCP had almost 2,700
employees. BCP's senior management team includes:
Roberto Peon, President and Chief Executive Officer. Mr. Peon has
served as BCP's President and Chief Executive Officer since August 1997 and
has over 22 years experience in the telecommunications industry. Prior to
1997, he served as President -- Latin America for BellSouth International
where he was responsible for operations in five countries, as well as new
business development in Brazil. Prior to joining BellSouth International,
Mr. Peon worked for InteCom Inc. and Contel Cellular Inc.
Michel Levy, Regional Vice President. Mr. Levy has served as Regional
Vice President for BCP's metropolitan Sao Paulo and Northeast operations
since 1997. Prior to joining BCP, Mr. Levy founded a computer start-up and
was employed at Motorola-International Networks Division and LH of Brazil
Ltd.
Carlos Boschetti, Chief Technical Officer. Mr. Boschetti joined BCP
in 1999. Prior to that, he served as Information Technology and Process
Director for Volkswagen of Brazil. Mr. Boschetti previously was employed by
Mercedes-Benz of Brazil.
George Edward Hill III, Vice President, Engineering and Technical
Operations. Mr. Hill has served as Vice President of Engineering and
Technical Operations since July 1997. Prior to that, Mr. Hill was employed
in various technology positions at BellSouth International. Mr. Hill has
over 18 years experience in telecommunications, including 13 years of
experience in cellular communications in more than ten countries.
STRATEGIC PARTNERS. BellSouth's primary partner in Brazil is Grupo Safra,
one of the largest conglomerates in Brazil, with interests in banking, pulp and
paper, agriculture and telecommunications. Grupo Safra owns the same percentages
of the BCP operating companies as BellSouth. Splice Telecommunicacoes, one of
BCP's minority partners, has the right to acquire an additional 4.1% non-voting
equity interest from each of BellSouth and Grupo Safra. Splice controls Tele
Centro Oeste.
COMPETITION. Brazil's wireless industry is currently structured as a
duopoly, with one incumbent and one nonincumbent wireless service provider
licensed in each of ten regions. The incumbent companies are the successor
companies of the 1998 privatization and breakup of the former state-owned
telecommunications monopoly, Telebras. The nonincumbent service providers,
including BCP, received their licenses in auctions in 1997 and 1998.
BCP's principal competitor in its Sao Paulo market is Telesp Celular, the
incumbent service provider whose service territory includes all of Sao Paulo
state, both the metropolitan and interior areas. Telesp Celular is an affiliate
of Portugal Telecom. Telefonica, BellSouth's most significant pan-regional
competitor in Latin America, also owns an interest in Telesp Celular. In the
northeast region of Brazil, BCP's principal competitor is Tele Nordeste Celular,
another successor of the Telebras breakup. Tele Nordeste is an affiliate of
Telecom Italia, another major pan-regional competitor.
Beyond BCP's direct in-region competitors, there are currently over a dozen
other wireless companies operating in the other regions in Brazil. Several of
these companies are affiliates of either Telefonica or Telecom Italia. While not
currently direct competitors to BCP, these companies could become competitors
should they successfully bid for any of the new PCS licenses expected to be
auctioned in BCP's regions, or should BCP successfully bid for PCS licenses in
their regions. After the PCS auctions, BCP is likely to face additional wireless
competitors in its markets. Our principal competition in the directory
publishing business in Brazil is Ebid.
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REGULATORY ENVIRONMENT. In conjunction with the breakup and privatization
of the Telebras monopoly, Brazil officially opened its cellular mobile telephone
service industry to private enterprise. Starting in 1997, ten cellular licenses
covering all of Brazil were auctioned to wireless operators to compete against
the eight incumbent providers that emerged from the Telebras breakup and were
subsequently auctioned to private enterprises. In July 1997, Brazil revised its
telecommunications code to affirm Brazil's commitment to privatize the Telebras
system, promote competition among service providers and establish an independent
regulatory agency, ANATEL, to regulate its telecommunications industry. ANATEL
issues licenses for both wireless and wireline operators. It also mandates
specific targets for delivering telephone services to the Brazilian population,
including current mandates intended to increase penetration to 20% by 2005.
ANATEL has the authority to grant concessions and licenses for public
telecommunications services.
CONCESSIONS. BCP holds cellular concessions for the Sao Paulo and
Northeastern territories that were granted in 1997 and expire in 2012. The
concessions are generally renewable for 15-year periods. Among other provisions,
the concessions prescribe network build-out schedules and quality standards,
establish price caps and set forth termination provisions. The cellular
concessions allow BCP to adjust prices for inflation once a year. Concession
provisions that guaranteed BCP exclusive territories for its wireless services
(other than from the incumbent competitors) expired on December 31, 1999.
Consequently, ANATEL is expected to grant new concessions in BCP's markets. In
1999, BCP was granted a nationwide concession to provide domestic and
international data network services to corporations, encompassing voice, data
and video.
ARGENTINA
BellSouth conducts business in Argentina through a 65% interest in Movicom,
a consortium that launched Argentina's first cellular network in 1989. Beginning
in 1999, the operations were co-branded under the Movicom/BellSouth name.
Movicom/BellSouth is a leading wireless telecommunications services provider in
Argentina. As of February 29, 2000, Movicom/BellSouth served almost 1.3 million
wireless customers, representing an increase of approximately 36% since February
28, 1999. From 1996 through 1999, Movicom/BellSouth's customer base grew at a
compound annual growth rate of almost 70%.
Movicom/BellSouth acquired the rights to provide wireless service in
metropolitan Buenos Aires, Argentina in 1988 from the Argentinean government
based on its technical competence and without the requirement of a license fee.
Movicom/BellSouth recently acquired three PCS licenses that will permit it to
extend wireless service nationwide, for which it committed to pay approximately
$263 million in license fees, and a basic telephone service license that allows
it to provide local and long distance services. PCS service is currently offered
in Buenos Aires and service outside of Buenos Aires is expected to launch this
year using digital transmission technology to cover all major cities in
Argentina by mid-2001. In addition to wireless voice services using both analog
and CDMA digital cellular, PCS and enhanced specialized mobile radio
frequencies, Movicom/BellSouth offers long distance, data network services,
Internet, wireless data, and paging.
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The following table shows several key statistics concerning
Movicom/BellSouth's operations for the fiscal years ended November 30, 1997,
1998 and 1999 and the quarters ended February 28, 1999 and February 29, 2000,
and nationwide wireless penetration and GDP growth in Argentina for 1997, 1998
and 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
NOVEMBER 30, -----------------------------
------------------------ FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
------ ------ ------ ------------- -------------
(DOLLARS IN MILLIONS; CUSTOMERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Company:
Revenue.............................. $554.5 $721.2 $799.5 $191.5 $202.6
EBITDA............................... $123.0 $203.3 $234.0 $ 61.9 $ 38.6
Licensed Population.................. 13.1 13.1 35.8 13.5 35.8
Movicom Wireless Customers........... 629 885 1,171 942 1,286
As Adjusted for BellSouth's Equity
Interest:
Revenue.............................. $342.3 $468.8 $519.7 $124.5 $131.7
EBITDA............................... $ 75.5 $132.1 $152.1 $ 40.2 $ 25.1
Licensed Population.................. 8.5 8.5 23.3 8.8 23.3
Movicom Wireless Customers........... 409 575 761 613 836
Penetration (all carriers)(1).......... 5.7% 7.5% 12.2%
GDP Growth(2).......................... 8.1% 3.9% (3.0)%
</TABLE>
---------------
(1) Source: Pyramid Research.
(2) Source: International Monetary Fund.
MARKET DEMOGRAPHICS. Argentina is one of Latin America's largest countries
with a population of approximately 36 million people. Argentina is also one of
its largest economies with an estimated 1999 GDP of $308 billion. We believe
Argentina represents a highly attractive telecommunications opportunity due to
its relatively low wireline penetration of 20.7% and wireless penetration of
12.2% as of 1999. The Buenos Aires metropolitan area, our primary existing
service area, is one of the most affluent urban areas in all of Latin America.
BUSINESS OPPORTUNITY. The launch of Movicom/BellSouth's PCS service later
this year in the Argentinean interior represents a substantial opportunity to
grow the Latin America group's mobile customer base in Argentina. Moreover, with
both landline and wireless penetration remaining relatively low, opportunities
for growth are present throughout Argentina. In addition to customer growth,
Movicom/BellSouth will continue to deploy value-added services including voice
mail, call waiting, conference calling, handset warranties, fax, e-mail, call
transfer and caller ID. We believe value-added services increase revenue per
customer and promote customer loyalty.
We believe Movicom/BellSouth's strong market position, well-known brand and
reputation for high-quality service position the company well to market new
lines of business to its customers. To capitalize on this opportunity,
Movicom/BellSouth launched an Internet service provider and, during the third
quarter of 1999, a data transmission operation. Additionally, Movicom/BellSouth
is exploring opportunities to facilitate e-commerce transactions and provide
call center solutions for corporate customers. Finally, with Argentina opening
its local and long-distance markets to competition, we intend to begin marketing
these services as well. Accordingly, in 1999, a subsidiary of Movicom/BellSouth
obtained a license to offer local basic telephone service as well as domestic
and international long distance services.
SALES AND MARKETING. Movicom/BellSouth focuses its sales and marketing
efforts on corporate accounts and high use customers, but has also had success
penetrating the mass market with the introduction of prepaid cellular products
and the calling party pays billing system. Movicom/BellSouth markets its
services through direct and indirect sales agents, including some of the largest
retail outlets in Buenos Aires. At December 31, 1999, Movicom/BellSouth had 11
service and sales centers, a direct sales force of 216 salespersons and
approximately 1,950 third party distribution points, including retail stores and
sales agents.
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Movicom/BellSouth focuses its advertising efforts on maintaining its
positive corporate image and brand name. By taking advantage of its early entry
into the Buenos Aires market, it has established its market position as the
premium cellular service provider in Buenos Aires. As part of the Latin America
group's regional branding strategy, Movicom/BellSouth in 1999 commenced a new
series of ads introducing the co-brand with the message "la nueva comunicacion
tiene nombre y apellido -- Movicom/BellSouth" ("the new communication has a
first and last name -- Movicom/BellSouth"). The campaign unites the two brands
as one provider with the capability to offer a broader range of
telecommunications services including: wireless telecommunications; residential,
local and long distance services; and Internet access service and data
transmission. The advertisements are designed to raise consumer awareness of the
companies' strong relationship and "one-stop shopping" service benefits.
MANAGEMENT TEAM. Movicom/BellSouth has assembled a strong management team
to help it execute its business strategy. At January 2000, Movicom/BellSouth had
approximately 2,300 employees. A significant number of Movicom/BellSouth's
senior management team have been with the company for over ten years.
Movicom/BellSouth's senior management team includes:
Mauricio Elias Wior, President and Chief Executive Officer. Mr. Wior
has served as President and Chief Executive Officer of Movicom/BellSouth
since 1991 and has over 18 years experience in the telecommunications
sector. Mr. Wior also serves as the President, Latin America -- South
overseeing BellSouth's operations in Argentina, Chile, Peru, Ecuador and
Uruguay. Mr. Wior began his career with Movicom/BellSouth as its Chief
Financial Officer. Prior to joining BellSouth, he served as the Director of
Finance for Motorola Israel Ltd. Mr. Wior is the President of ALACEL, the
Latin American Cellular Association.
Federico R.C. Rava, General Director and Chief Operating Officer. Mr.
Rava has served as Movicom/BellSouth's General Director and Chief Operating
Officer since 1997 and has been employed with the company since 1989.
Horacio G. Goldenberg, Technology Executive Director. Mr. Goldenberg
has served as Movicom/BellSouth's Technology Executive Director since he
commenced employment with Movicom/BellSouth in 1988.
Ernesto D. Gardelliano, Chief Financial Officer. Mr. Gardelliano has
served as Movicom/BellSouth's Chief Financial Officer since 1997 and has
been employed by the company since 1993. Prior to that, he served as
Auditing Manager at the accounting firm of Coopers & Lybrand/Harteneck,
Lopez y Cia.
STRATEGIC PARTNERS. BellSouth's primary partner in Movicom/BellSouth is
Motorola, which holds a 25% interest. In addition, BGH, an Argentinean
telecommunications equipment provider, holds a 10% interest.
COMPETITION. Movicom/BellSouth competes with many telecommunications
providers throughout Argentina, most of which are affiliated with
well-capitalized international telecommunications companies. Its principal
competitor is Telefonica Argentina, which in turn is an affiliate of Telefonica,
our principal pan-regional competitor. Telefonica Argentina offers wireless
services in the Buenos Aires metropolitan area and the Southern region of
Argentina. Recently, Telefonica Argentina was granted a license to offer PCS
services in the Northern region of the country. We expect that Telefonica
Argentina will begin offering service in the new concession area this year.
Telefonica Argentina competes with Movicom/BellSouth in most of its other lines
of businesses, including Internet and data services.
Another significant competitor is Telecom Argentina, which is owned by a
consortium controlled by France Telecom and Telecom Italia, another significant
pan-regional competitor of the Latin America group. Telecom Argentina offers
wireless services in the Buenos Aires metropolitan area and the Northern region
of Argentina. Recently, Telecom Argentina was granted a license to offer PCS
services in the Southern region of the country. Telecom Argentina is expected to
begin offering service in the new concession area this year. Telecom Argentina
competes with Movicom/BellSouth in most of its other lines of businesses.
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CTI has become the fourth nationwide wireless operator, with its new PCS
license for the Buenos Aires metropolitan area. CTI is expected to begin
offering service in the new concession area this year. Movicom/BellSouth will be
competing against CTI and the two former wireline monopolists, Telefonica
Argentina and Telecom Argentina, in providing basic telephone service pursuant
to its new license. By the end of the year, it is anticipated that the market
for domestic and international long distance will be opened to additional
competitors.
Movicom/BellSouth also competes to a more limited degree with providers of
enhanced specialized mobile radio systems. This wireless service is being
offered by Movicom/BellSouth and Nextel Argentina.
REGULATORY ENVIRONMENT. Argentina dissolved the Entel monopoly in 1990,
transferring basic wireline telephone services for the Southern and Northern
regions of the country to Telefonica Argentina and Telecom Argentina,
respectively. Those companies no longer have exclusive rights to the provision
of basic telephone service. While ultimate supervision of the telecommunications
industry is the responsibility of the Secretariat of Communications, general
oversight and supervision is the province of the National Communications
Commission, a regulatory agency created in 1997. The National Communications
Commission, among other powers, supervises compliance with licenses, approves
changes to mandatory goals and service requirements and grants new licenses.
CONCESSIONS. Movicom/BellSouth holds various licenses to provide the
following services. The years of grant of the licenses are shown
parenthetically.
<TABLE>
<S> <C>
- cellular service (1988 and 1995) - PCS service (1999)
- basic telephone service (1999) - paging (1994)
- enhanced specialized mobile radio (1994) - Value Added Services, including
Internet (1995)
</TABLE>
The terms of the licenses are indefinite. All of the licenses are
nationwide, except for Movicom/BellSouth's cellular service license which covers
only the Buenos Aires metropolitan area. The basic telephone service license was
granted to an over-90% owned subsidiary of Movicom/BellSouth in March 1999, and
permits the offering of local fixed telephone service and national and
international long distance and data service commencing in November 1999. That
license provides for a review of Movicom/BellSouth's compliance with license
conditions in five years. Movicom/BellSouth's licenses generally address issues
such as network build-out requirements and quality standards.
CHILE
BellSouth, through its wholly-owned subsidiary, BellSouth Chile, offers
wireless communications to Chile's total population of approximately 15.1
million people. BellSouth Chile began providing wireless service in Chile in
1989 in the region that includes Santiago, Valparaiso and the resort area of
Vina del Mar and their surrounding areas. The company acquired a license in
February 1999 that allowed it to expand its wireless service in Chile nationwide
and double its potential customer base. BellSouth Chile has also operated a long
distance network in Chile since 1995, and was the first of BellSouth's Latin
American companies to offer international long distance. BellSouth Chile also
offers Internet access services.
BellSouth Chile offers its TDMA-based wireless services in the Santiago
area pursuant to a license expiring in 2032. Its wireless license for the rest
of Chile and its licenses for national and international long distance and
Internet services have no expiration dates. Chile's telecommunications market
was one of the first in Latin America to privatize, starting in 1989. BellSouth
Chile's principal competitors are CTC Startel, an affiliate of Telefonica, and
Entel, in which Telecom Italia has an interest.
Although Chile's GDP contracted 0.4% in 1999, BellSouth Chile's customer
base increased from 192,000 to 352,000, an increase of 83%. Its customer base
increased an additional 51,000 customers in the three months ended February 29,
2000. Penetration in the Chilean wireless market was approximately 14.7% in
1999. Wireline penetration in 1999 was approximately 22.7%.
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PERU
In January 1997, BellSouth entered Peru with the acquisition of a 59%
interest in Tele 2000, a Peruvian wireless service provider which commenced
operations in 1990. BellSouth has since increased its ownership position in Tele
2000 to 96.8%. BellSouth markets services in Peru under the BellSouth brand.
BellSouth Peru holds a cellular license covering a population of
approximately 7.3 million in metropolitan Lima and portions of western Peru, and
launched service during the third quarter of 1999 under a separate cellular
license covering Peru's remaining population of 17.9 million, giving it a
nationwide license. Cellular service is provided using a TDMA-based network.
BellSouth Peru is actively taking steps to become an integrated communications
provider in Peru. The company obtained concessions for local telephone service
in the Lima area in June 1999, and for domestic and international long distance
services in January 1999. BellSouth Peru also holds concessions to offer public
telephone and data services. In addition, BellSouth owns a company that
publishes telephone directories and offers Internet-based advertising and
directory products in Peru.
The telecommunications industry in Peru has been liberalized since 1998.
BellSouth Peru's licenses expire on various dates from 2011 until 2020, with its
Lima area and interior cellular licenses expiring in 2011 and 2018,
respectively. The company's primary wireless competitor is Moviline, and the
incumbent wireline operator and major competing directory publisher is
Telefonica de Peru, both Telefonica affiliates.
GDP growth in Peru was 3.0% in 1999. In that year, BellSouth Peru's
customer base increased from 238,000 to 302,000, a 27% increase. Its customer
base increased an additional 17,000 customers in the three months ended February
29, 2000. Wireless penetration in 1999 was approximately 4.0% and wireline
penetration was approximately 6.5%.
PANAMA
In 1996, a consortium led by BellSouth won a nationwide license to build
and operate Panama's first cellular telephone network. BellSouth Panama, in
which BellSouth holds a 43.7% interest, operates a fully digital TDMA-based
network that launched service in June 1996. BellSouth Panama also holds
concessions for data and Internet services, and in 1999 launched its Internet
service provider business. Its cellular concession expires in 2016 and its
various other concessions expire in 2018. Liberalization of telecommunications
in Panama is expected in 2003. BellSouth Panama's principal competitor is Cable
& Wireless Movil, jointly owned by the Panamanian government and Cable &
Wireless.
Panama has a population of approximately 2.8 million people. GDP grew 3.3%
in 1999. Panama's wireline penetration in 1999 was approximately 16.9% while
wireless penetration was approximately 12.3%. BellSouth Panama more than doubled
its customer base in 1999, from 52,000 to 120,000. Its customer base increased
an additional 21,000 customers in the three months ended February 29, 2000.
ECUADOR
In 1997, BellSouth acquired a majority interest in a nationwide wireless
telephone company that had been operating since 1994, and in July 1998,
increased its stake in BellSouth Ecuador to 89.4%. Since 1997, the company has
tripled its number of wireless customers. BellSouth Ecuador's network provides
both analog and TDMA digital cellular service to all of the country's main
cities. BellSouth Ecuador's license, which expires in 2008, also permits it to
provide domestic and international long distance service to its cellular
customers. Local and wireline long distance telephone service is monopolized by
two regional operators. BellSouth Ecuador competes with Conacel, currently the
only other cellular operator in Ecuador.
Ecuador has a population of approximately 12.4 million. Although Ecuador's
GDP contracted 7.0% in 1999, BellSouth Ecuador's customer base increased from
115,000 to 186,000, a 62% increase. Its customer base increased an additional
17,000 customers in the three months ended February 29, 2000. Wireline
penetration was approximately 7.3% and wireless penetration was about 3.6% in
1999.
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URUGUAY
BellSouth commenced operations in Uruguay in 1991 through its 46% interest
in Movicom/BellSouth. Movicom/BellSouth provides wireless service to Montevideo
and to the Southern zone of Uruguay, which includes the resort center of Punta
del Este. These areas cover a market of 2.1 million of the country's total
population of 3.3 million. Movicom/BellSouth derives revenue from the high
volumes of roaming traffic between Uruguay and Argentina and benefits from a
close affiliation with BellSouth's Argentinean operations with which it shares a
common brand name. Movicom/BellSouth is in the process of supplementing its
existing analog cellular network with a CDMA-based digital network providing
service over PCS frequencies. The digital PCS network is expected to be in
operation by the end of 2000.
Movicom/BellSouth's cellular license expires in 2006, and can be renewed
for an additional five-year period, provided Movicom/BellSouth complies with the
terms of its license. Basic telephone services are provided by a state-owned
monopoly, although services such as wireless broadband local access networks and
public phones, in addition to cellular service, may be granted to private
companies. Movicom/BellSouth's competition in Uruguay is Ancel, which is owned
by the government.
Although Uruguay's GDP contracted approximately 2% in 1999,
Movicom/BellSouth's customer base more than doubled from 52,000 to 116,000. Its
customer base increased an additional 25,000 customers in the three months ended
February 29, 2000. Wireline penetration was approximately 27.5% and wireless
penetration was about 9.9% in 1999.
NICARAGUA
In 1997, BellSouth acquired 49% of an existing cellular operator in
Nicaragua, and an option to acquire an additional 40% interest, which BellSouth
has decided to exercise. BellSouth's partner has an option to purchase 8% of
BellSouth Nicaragua. With a license covering the capital city of Managua and the
Pacific coastal region, the company's licensed area covers a population of 2.9
million and is Nicaragua's only wireless telephone company. Since the
acquisition, the Latin America group rebranded the company under the BellSouth
name and replaced the legacy analog network with an all-digital TDMA system. A
state-owned company holds the monopoly over basic telephone service, although it
is scheduled to be privatized in 2000.
Nicaragua has a population of 4.9 million. GDP grew 6.0% in 1999. Wireline
penetration was approximately 3.2% in 1999 and wireless penetration was about
1.4%. BellSouth Nicaragua increased its customer base from 16,000 to 39,000 in
1999, a 144% increase. Its customer base increased an additional 12,000
customers in the three months ended February 29, 2000.
GUATEMALA
BellSouth led a partnership that submitted the winning bid at auction for a
license to provide wireless service to Guatemala in October 1999, and currently
holds a 60% interest in the partnership. The company expects to begin providing
wireless service with an all-digital CDMA system by the third quarter of 2000
under the BellSouth brand. BellSouth Guatemala obtained 60 megahertz of radio
spectrum, a range which will be adequate to build a high capacity network and
facilitate the offering of data networks services, Internet, data and other
advanced services. Guatemala's telecommunications market was liberalized in
1998. BellSouth Guatemala will face competition from the incumbent
government-owned wireless operator and two other wireless service providers,
including an affiliate of Telefonica. Guatemala has a population of
approximately 11.9 million and GDP growth in 1999 was approximately 3.9%. Its
telecommunications markets are open to competition. Wireless penetration was
approximately 1.8% and landline penetration was approximately 5.4% in 1999.
COLOMBIA
In May 2000, BellSouth entered into an agreement to acquire, for
approximately $295 million, a controlling 33.8% interest in Celumovil S.A., a
Colombian wireless service provider which commenced operations in 1994.
BellSouth has also agreed to a series of related put and call agreements whereby
it could
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acquire, or could be required to acquire, an additional 49.9% of the company at
or close to fair market value between the second and ninth anniversary of the
closing of the initial purchase. The initial purchase is expected to close in
mid-2000.
Upon the initial acquisition of a 33.8% interest in Celumovil, BellSouth
will be entitled to designate the chief executive officer of Celumovil, and will
also have the right to elect a majority plus one of the members of its board of
directors.
Celumovil holds cellular licenses for the Eastern and Atlantic regions of
Colombia, an area which includes six of the ten largest cities in Colombia,
including Bogota, and contains 26 million people. Cellular service is provided
using a TDMA-based network. The company also holds value-added services
licenses.
Celumovil's cellular licenses expire in 2004, with one renewal to 2014. In
the Atlantic region, Celumovil competes with CelCarib, a subsidiary of Millicom
International. In the Eastern region, Celumovil competes with Comcel, a
subsidiary of Bell Canada International. The Colombian government has announced
its intention to sell new PCS licenses for each of the three regions (Western,
Eastern and Atlantic). Under the government's current proposal, only one license
will be issued for each region with a second license not to be auctioned for at
least three years following the first auction. The Colombian Congress has yet to
approve the PCS license sale. If approved, the first PCS licenses could be
awarded by the end of 2000.
Colombia's GDP was flat in 1999. At February 2000, Celumovil had 466,000
customers. Wireless penetration in 1999 was approximately 4.6% and wireline
penetration was approximately 17.8%.
PATENTS AND TRADEMARKS
BellSouth has numerous trademarks registered throughout the world. We
consider many of our trademarks to be valuable assets, particularly the
BellSouth brand name and logo. Our Latin American companies are entitled to use
the BellSouth brand on a royalty-free basis. Our Latin American companies will
be permitted to operate under the BellSouth mark and other BellSouth-owned marks
for appropriate business activities in their capacities as indirect subsidiaries
or joint ventures of BellSouth. Use of the marks is authorized under a license
agreement with each company. These agreements require the companies to cooperate
with BellSouth's corporate branding strategy, policies, graphic standards,
advertising policies and quality control. They also prohibit sublicensing
without BellSouth approval.
BellSouth, through an intellectual property subsidiary, owns numerous
patents in the United States and foreign countries. The foreign patents are
counterparts of our U.S. patents. Rights under these patents will be made
available to our Latin American companies under license agreements on terms to
be determined. BellSouth's intellectual property management subsidiary manages
these patents, but does not currently manage any patents owned by BellSouth's
Latin American companies. The companies own, manage and license any patents that
they hold, but may use the services of BellSouth's intellectual property
management subsidiary when needed.
Our Latin America group and BLS group may collaborate to achieve enterprise
objectives with respect to the licensing or sale of patents and other
intellectual property to third parties. Any fees obtained through the sale or
licensing of such intellectual property will be principally allocated to the
group that paid to develop the intellectual property sold or licensed. If such
intellectual property was not predominantly developed by any one group, then any
fees obtained through such sales or licensing will be allocated using the same
general allocation as BellSouth's overhead expenses. We do not consider any
individual patents used in the business of our BLS group to be material to our
Latin America group's operations.
EMPLOYEES
At January 2000, BellSouth's Latin American companies employed
approximately 11,900 individuals in their operations, substantially all of whom
are located outside of the United States in Central and South America. BellSouth
employed approximately 300 of the total at its headquarters in Atlanta, Georgia,
who are allocated to our Latin America group.
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LEGAL PROCEEDINGS
BellSouth's Latin American companies are involved in various legal
proceedings arising in the ordinary course of business. While it is not possible
to determine the ultimate disposition of each of these proceedings, we believe
the outcome of such proceedings, individually and in the aggregate, will not
have a material adverse effect on our Latin America group's financial condition
or results of operations.
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MANAGEMENT OF THE LATIN AMERICA GROUP
The following table sets forth the names, ages and positions of the
BellSouth employees who will manage the Latin America group effective as of the
creation of the Latin America group stock.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles C. Miller III.............................. 47 President
Mark E. Droege..................................... 46 Chief Financial Officer
Roberto Peon....................................... 50 President -- Brazil
Mauricio Wior...................................... 43 President, Latin America -- South
George Daniel Smith................................ 53 Executive Vice President, Latin
America -- North
J. Alberto Gonzalez-Pita........................... 45 Vice President, Secretary and General
Counsel
</TABLE>
The following summarizes the prior work experience of the management of the
Latin America group, including their current positions with BellSouth or its
affiliates.
Charles C. Miller III. Mr. Miller has served as President of BellSouth
International since January 1995. Prior to that, Mr. Miller was Vice
President -- Strategic Planning and Development of BellSouth Corporation. Prior
to that, Mr. Miller served as Vice President -- Corporate Development of
BellSouth Enterprises and Director -- Strategic Transactions of BellSouth
Enterprises.
Mark E. Droege. Mr. Droege has served as Vice President -- Financial
Management and Treasurer for BellSouth Corporation since 1996. Prior to that,
Mr. Droege served as Executive Director -- Financial and Business Planning for
BellSouth Corporation. Since joining BellSouth in 1986, Mr. Droege has held
positions including President -- BellSouth Interactive Media Services, Chief
Financial Officer of Dataserv and Director of Investor Relations for BellSouth
Corporation.
Roberto Peon. Mr. Peon has served as President -- Brazil Operations of
BellSouth International since 1994 and President and Chief Executive Officer of
BCP since 1997. Prior to that, Mr. Peon served with BellSouth International for
ten years in positions such as President -- Latin America and Executive
Director -- Business Development. Mr. Peon has over 22 years experience in the
telecommunications industry.
Mauricio Wior. Mr. Wior has served as President, Latin America -- South of
BellSouth International since 1995 and Chief Executive Officer of
Movicom/BellSouth since 1991. Prior to that, he served as Movicom/BellSouth's
General Manager and Chief Financial Officer. Prior to joining Movicom/BellSouth,
Mr. Wior served as Director of Finance of Motorola Israel, Ltd.
George Daniel Smith. Mr. Smith has served as Vice President of Latin
America -- North of BellSouth International since 1998. Prior to that, Mr. Smith
served as Vice President -- Sales of Marketing of BellSouth Cellular Corp. from
1996 to 1998. Mr. Smith has over 15 years of experience in the cellular
industry.
J. Alberto Gonzalez-Pita. Mr. Gonzalez-Pita has served as Vice President
and Group Counsel -- International of BellSouth Corporation since 1999. Prior to
that, he was an executive partner at White & Case, an international law firm,
where he was chair of the Privatization and Latin America Practice Groups.
For a period of time and from time to time, these and other management
employees assigned to our Latin America group will have responsibilities with
respect to our other international operations.
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SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
OF BELLSOUTH CORPORATION
We derived the selected historical and pro forma consolidated financial
data presented below from our consolidated financial statements and related
notes, which include the BLS group and the Latin America group. Our audited
consolidated financial statements for each of the years ended December 31, 1997,
1998 and 1999 and unaudited consolidated financial statements for the three
months ended March 31, 1999 (first quarter 1999) and 2000 (first quarter 2000)
are included in this document. You should read the selected financial data
together with our audited and unaudited consolidated financial statements and
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations of BellSouth Corporation" included in this document.
PricewaterhouseCoopers LLP, independent accountants, audited our
consolidated financial statements for each of the years in the five-year period
ended December 31, 1999.
Significant events affecting our historical earnings trends include the
following:
- 1995 results include charges for the discontinuance of Statement on Financial
Accounting Standards No. 71 and the refinancing of long-term debt issues,
which reduced net income by $2,796 million, or $1.41 per share. 1995 also
includes a work force reduction charge, which increased operating expense by
$1,082 million and reduced net income by $663 million, or $.33 per share.
- 1996 results include a gain from the sale of a paging business, which
increased net income by $344 million, or $.17 per share.
- 1997 results include gains resulting from the sale of our interests in Optus
Communications, ITT World Directories and Bellcore, which increased net income
by $352 million, or $.18 per share, $128 million, or $.06 per share, and $23
million, or $.01 per share. 1997 results also include the effect of a
regulatory settlement in South Carolina, which reduced operating revenues by
$72 million and net income by $47 million, or $.02 per share, as well as a
loss of $9 million incurred in connection with the early redemption of
long-term debt.
- 1998 results include net income of $110 million, or $.06 per share, from the
sale of BellSouth New Zealand, net income of $96 million, or $.05 per share
related to the receipt of additional proceeds from the sale of ITT World
Directories, and $62 million, or $.03 per share, of net income related to
contingent interest and prepayment penalties associated with the repayment of
a loan receivable.
- 1999 results include foreign currency losses related to the devaluation of the
Brazilian Real, which reduced net income by $308 million, or $.16 per share,
an asset impairment loss, which reduced net income by $187 million, or $.10
per share, the recognition of certain foreign investment tax credits generated
in prior years, which increased net income by $95 million, or $.05 per share
and a gain on the sale of Honolulu Cellular, which increased net income by $23
million, or $.01 per share.
- First quarter 1999 results include foreign currency losses related to the
devaluation of the Brazilian Real, which reduced net income by $280 million,
or $.14 per share.
- First quarter 2000 results include income related to the restructuring of
BellSouth's ownership interest in German wireless operator E-Plus, which
increased net income by $68 million, or $.04 per share, and expense recorded
as a result of an announced general and administrative staff reduction plan,
which decreased net income by $48 million, or $.03 per share.
(continued on next page)
95
<PAGE> 98
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
OF BELLSOUTH CORPORATION -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues.............. $17,886 $19,040 $20,561 $23,123 $25,224 $ 5,973 $ 6,487
Operating expenses.............. 14,594 14,261 15,185 17,219 18,787 4,366 4,864
Operating income................ 3,292 4,779 5,376 5,904 6,437 1,607 1,623
Net income (loss)............... (1,232) 2,863 3,261 3,527 3,448 615 1,001
Operating income margin......... 18.4% 25.1% 26.1% 25.5% 25.5% 26.9% 25.0%
Historical Common Stock
Information
Diluted earnings (loss) per
share:
Before extraordinary losses... $ .79 $ 1.44 $ 1.64 $ 1.78 $ 1.80 $ .32 $ .53
After extraordinary losses.... (.62) 1.44 1.64 1.78 1.80 .32 .53
Diluted weighted-average shares
outstanding (millions)........ 1,989 1,992 1,989 1,984 1,916 1,951 1,898
Dividends declared per share.... $ .71 $ .72 $ .72 $ .73 $ .76 $ .19 $ .19
Pro Forma Common Stock
Information
Unaudited pro forma net loss per
share of Latin America group
stock......................... $ $
Unaudited pro forma earnings per
share of BLS group stock...... $ $
BALANCE SHEET DATA:
Total assets.................... 31,880 32,568 36,301 39,410 43,453 38,175 44,355
Long-term debt.................. 7,924 8,116 7,348 8,715 9,113 8,406 10,880
Shareholders' equity............ 11,825 13,249 15,165 16,110 14,815 14,402 15,697
OTHER:
Operating cash flow............. 5,443 5,863 7,039 7,741 8,199 1,642 2,350
</TABLE>
The unaudited pro forma information set forth above has been prepared
assuming that, on January 1, 1999:
- each share of our existing common stock was changed into one share of BLS
group stock; and
- shares of Latin America group stock were issued and outstanding,
consisting of shares that are to be issued in this offering and
shares reserved for and attributed to the BLS group that are
expected to be distributed to the holders of BLS group stock.
96
<PAGE> 99
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION
Investors should read the following discussion together with the combined
financial statements of the Latin America group and the related notes, and our
consolidated financial statements and the related notes included in this
document.
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.
CONSOLIDATED RESULTS OF OPERATIONS
Key selected financial and operating data for the three years ended
December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999
(first quarter 1999) and 2000 (first quarter 2000) are as follows. All
references to earnings per share are on a diluted basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, FIRST QUARTER
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues............................... $20,561 $23,123 $25,224 $ 5,973 $ 6,487
Operating expenses............................... 15,185 17,219 18,787 $ 4,366 $ 4,864
Operating income................................. 5,376 5,904 6,437 1,607 1,623
Interest expense................................. 761 837 1,030 226 306
Net earnings (losses) of equity affiliates....... (242) 92 (169) (266) 131
Gain on sale of operations....................... 787 335 55 -- --
Other income, net................................ 261 257 195 59 83
Provision for income taxes....................... 2,151 2,224 2,040 559 530
Extraordinary loss............................... (9) -- -- -- --
------- ------- ------- ------- -------
Net income............................. $ 3,261 $ 3,527 $ 3,448 $ 615 $ 1,001
======= ======= ======= ======= =======
As Reported:
Net income..................................... $ 3,261 $ 3,527 $ 3,448 $ 615 $ 1,001
Earnings per share............................. $ 1.64 $ 1.78 $ 1.80 $ .32 $ .53
Normalized:
Net income..................................... $ 2,814 $ 3,259 $ 3,825 $ 895 $ 981
Earnings per share............................. $ 1.41 $ 1.64 $ 2.00 $ .46 $ .52
</TABLE>
97
<PAGE> 100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, FIRST QUARTER
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Cash provided by operating activities............ 7,039 7,741 8,199 1,642 2,350
Cash used for investing activities............... (4,949) (5,487) (9,888) (1,458) (1,556)
Cash used for financing activities............... (698) (1,681) (167) (1,388) (927)
OTHER:
Effective tax rate............................... 39.7% 38.7% 37.2% 47.6% 34.6%
Average short-term debt.......................... $ 2,123 $ 3,239 $ 6,182 $ 4,203 $ 6,817
Average long-term debt........................... 7,822 8,220 8,599 8,572 9,909
------- ------- ------- ------- -------
Total average debt..................... $ 9,945 $11,459 $14,781 $12,775 $16,726
------- ------- ------- ------- -------
EBITDA(1)........................................ 9,340 10,261 11,428 2,720 2,919
EBITDA margin(2)................................. 45.4% 44.4% 45.3% 45.5% 45.0%
</TABLE>
---------------
(1) EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, net earnings (losses) of equity affiliates,
provision for asset impairment 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.
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
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.
Normalized results for 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
million, or $0.04 per share. This gain is included in Net earnings
(losses) of equity affiliates. See Note L to BellSouth's 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 million, or $0.03 per share. See Note K to BellSouth's
consolidated interim financial statements for further discussion of this
matter.
98
<PAGE> 101
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
Normalized results for first quarter 1999 excludes 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 million, or $0.14
per share. This loss is included in Net earnings (losses) of equity affiliates.
OPERATING REVENUES
Operating revenues increased $514 million during first quarter 2000. 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 15.8% expansion in the customer base from
first quarter 1999 to first quarter 2000;
- significantly higher international revenues resulting from growth in the
customer bases of our current operations, which customer bases grew 72.8%
from first quarter 1999 to first 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 a 36.1% decrease in average monthly revenue per customer driven by
penetration into lower usage market segments.
OPERATING EXPENSES
Total operating expenses increased $498 million. Operational and support
expenses increased $315 million 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. Depreciation and
amortization increased $105 million primarily as a result of additions of
property, plant and equipment to support expansion of our domestic and
international wireless networks. Operating expenses for first quarter 2000 also
include a $78 million severance accrual related to a previously announced plan
to reduce BellSouth's domestic general and administrative staff.
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.
NET EARNINGS (LOSSES) OF EQUITY AFFILIATES
Earnings from our equity affiliates increased $397 million in first quarter
2000 compared to first quarter 1999. First quarter 2000 results include $68
million in income related to the restructuring of our ownership interest in our
German wireless operations. First quarter 1999 includes foreign exchange losses
of $280 million related to our Brazilian properties. Excluding the impact of
these items, first quarter 2000 earnings increased $49 million when compared to
first quarter 1999. These results are addressed in the discussions for the
Domestic wireless, International operations and All other segments.
99
<PAGE> 102
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
OTHER INCOME, NET
Other income, net includes interest income, gains/losses on disposition of
assets, foreign currency gains/ losses and miscellaneous nonoperating income.
The increase of $24 million is attributable to $16 million of increased foreign
currency gains, primarily in Chile, and $14 million of higher minority interest
income related to our less-than-100-percent owned subsidiaries. These increases
were partially offset by a $12 million decrease in interest income.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased $29 million. The decrease in the
effective tax rate is due primarily to more favorable results at foreign
equity-method subsidiaries which are recorded net of tax benefits or expense.
First quarter 2000 results were favorably impacted by additional income related
to the restructuring of our ownership in our German wireless operations. First
quarter 1999 results were unfavorably impacted by foreign currency losses
recorded at our unconsolidated Brazilian businesses. Excluding these items, our
effective rate was 36.3% for first quarter 2000 and 38.4% for first quarter
1999.
OVERVIEW OF RESULTS BY SEGMENT --
WIRELINE COMMUNICATIONS
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------- %
1999 2000 CHANGE
--------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues:
Local service............................................. $ 2,654 $ 2,821 6.3
Network access............................................ 1,191 1,263 6.0
Long distance............................................. 150 135 (10.0)
Other wireline............................................ 280 285 1.8
Intersegment revenues..................................... 48 72 50.0
Total operating revenues.......................... $ 4,323 $ 4,576 5.9
Operating expenses.......................................... $ 2,910 $ 3,024 3.9
Operating income............................................ $ 1,413 $ 1,552 9.8
Segment net income.......................................... $ 801 $ 863 7.7
KEY INDICATORS:
Access line counts (000s):
Switched access lines
Residential............................................ 16,764 17,234 2.8
Business............................................... 7,325 7,230 (1.3)
Other.................................................. 272 262 (3.7)
------- -------
Total switched access lines....................... 24,361 24,726 1.5
------- -------
Access line equivalents(1)................................ 14,586 20,917 43.4
------- -------
Total equivalent access lines..................... 38,947 45,643 17.2
======= =======
Access minutes of use (millions)............................ 26,825 28,716 7.0
Long distance messages (millions)........................... 177 136 (23.2)
Digital and data services revenues.......................... $ 597 $ 767 28.5
Convenience feature revenues................................ $ 444 $ 515 16.0
</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/
100
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 $167 million increase in local service revenues is
attributable to growth in switched access lines and strong demand for digital
and data services and convenience features.
We ended the first quarter with over 45 million total equivalent access
lines, an increase of 17.2% since March 31, 1999. Residential access lines rose
2.8% to 17,234,000, driven by economic growth in our nine-state region as well
as demand for secondary residence lines which accounted for 47.9% of the growth
in residential access lines. We added 225,000 secondary residence lines since
March 31, 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 28.5%, propelled by
expanding demand for our digital and data services. Switched business access
lines decreased 1.3%, reflecting continued migration of new and existing
business customers to high-capacity data lines.
Revenues from optional convenience features such as custom calling features
(e.g., Caller ID, Call Waiting, Call Return) and MemoryCall(R) service increased
$71 million, or 16.0%, when compared to first quarter 1999. These increases were
driven by growth in convenience feature usage through our Complete Choice(R)
Package, a one-price bundled offering of over 20 features.
Increased penetration of extended local area calling plans also increased
local service revenues by approximately $49 million compared to first quarter
1999.
NETWORK ACCESS. Network access revenues grew $72 million in the first
quarter due largely to higher demand. Access minutes of use rose 7.0% to 28,716
million in first quarter 2000 from 26,825 million in first quarter 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.
First quarter 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
per-minute-of-use based. Revenues from these dedicated circuit services grew
approximately $59 million 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 $65 million compared to first quarter 1999. These rate reductions
are primarily related to the FCC's access reform and productivity factor
adjustment. The reductions were partially offset by recoveries of local number
portability costs.
LONG DISTANCE. The $15 million decrease is primarily attributable to a
23.2% decrease in long distance message volumes since first quarter 1999. The
decrease in revenues attributable to loss of message volumes was offset by a $30
million revenue reduction in 1999 of a regulatory ruling related to compensation
we receive from long distance carriers for interconnection to our public
payphones. Also offsetting the decreases were $7 million of increased revenues
from the provision of digital and data services.
Competition and increased penetration of extended local area calling plans
continues to have an adverse impact on the number of customers who use our long
distance service and ultimately reduces our long distance
101
<PAGE> 104
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
message volumes. We believe that competition will continue to adversely impact
our customer base, and ultimately our long distance message volumes and
revenues.
OTHER WIRELINE AND INTERSEGMENT REVENUES. Other wireline and intersegment
revenues increased 8.8%, from $328 million in first quarter 1999 to $357 million
in first quarter 2000. Higher revenues of $49 million 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 and interconnection charges to wireless carriers were
offset by decreases in revenues from sales of customer premises equipment. At
March 31, 2000 we had 735,000 subscribers to our BellSouth Internet Service(sm),
an increase of 56.7% compared to the same 1999 period. The $24 million increase
in intersegment revenues primarily represents increased business activity with
our other operating segments.
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. Operational and support expenses
increased $66 million, or 3.2%, for first quarter 2000 when compared to the
first quarter 1999. Increases of $125 million were attributable to accruals
related to reciprocal compensation, volume-related increases in interconnection
expense and higher payments to FCC mandated universal access funds. These
increases were offset by reductions totalling $59 in contract service expense
and volume-driven costs from sales of customer premises equipment and paging
equipment. The decreases also included lower pension and benefit costs
attributable to favorable pension plan investment returns.
Also included in the increases were expenses related to new data
initiatives, including high-speed Internet access and optical fiber-based
broadband services, and promotional expenses related to expanding our Internet
customer base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $48 million, or 5.8% for first quarter 2000. The increase is primarily
attributable to amortization of capitalized internally developed software and
depreciation resulting from higher levels of net property, plant and equipment.
DOMESTIC WIRELESS
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------- %
1999 2000 CHANGE
--------- --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues........................................... $ 744 $ 853 14.7
Intersegment revenues....................................... 4 4 --
Total operating revenues.......................... $ 748 $ 857 14.6
Operating expenses.......................................... $ 661 $ 765 15.7
Operating income............................................ $ 87 $ 92 5.7
Net earnings (losses) of equity affiliates.................. $ 31 $ 32 3.2
Segment net income.......................................... $ 60 $ 60 --
Customers(1)................................................ 4,486 5,196 15.8
Average revenue per user(1)................................. $ 51 $ 51 --
</TABLE>
---------------
(1) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
OPERATING REVENUES
Total operating revenues grew $109 million, or 14.6%, compared to the same
1999 period, which is attributable to higher airtime, access, and equipment
sales revenues driven by a 15.8% increase in the
102
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
customer base. Adjusted for the sale of Honolulu Cellular in August 1999, the
customer growth rate would have been 19.1%. Advertising, enhanced volume pricing
strategies (including one-rate plans, bundled minutes at lower rates and prepaid
calling plans) and competitive incentive programs (such as discounted wireless
handsets) were key drivers of the customer growth. Revenue growth is also
attributable to the initiation of PCS service in 10 new markets in the
southeastern U.S. over the past twelve months. Average monthly usage by
customers increased during first quarter 2000, 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, and 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 demand and continue to increase
usage as the overall market is expanded.
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. Operational and support expenses
increased $84 million, or 16.1%, during first quarter 2000 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 a 34.3% increase in customer additions from first
quarter 1999 to first quarter 2000. Network usage and the related expense have
increased as a result of customer and volume growth in established markets and
the initiation of service in 10 PCS markets over the past 12 months.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $20
million, or 14.5%, to $158 million during first quarter 2000. The increase was
primarily attributable to the additions of property, plant and equipment since
March 31, 1999. These additions were primarily attributable to the build-out of
PCS markets and expansion of the network related to growth in the customer base.
The increase is also attributable to accelerated depreciation on network
equipment that is being replaced over an 18 month period from June 1999 through
December 2000.
NET EARNINGS (LOSSES) OF EQUITY AFFILIATES
Compared to first quarter 1999, first quarter 2000 net earnings (losses) of
domestic wireless equity affiliates remained relatively flat. Higher earnings at
our business in Los Angeles were offset by decreases in earnings at other
properties.
103
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
INTERNATIONAL OPERATIONS
<TABLE>
<CAPTION>
FIRST QUARTER
--------------------- %
1999 2000 CHANGE
--------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues........................................... $ 561 $ 664 18.4
Intersegment revenues....................................... -- 11 N/M*
Total operating revenues.......................... $ 561 $ 675 20.3
Operating expenses.......................................... $ 510 $ 677 32.7
Operating income (loss)..................................... $ 51 $ (2) N/M
Net earnings (losses) of equity affiliates.................. $ (13) $ 17 N/M
Segment net income (loss)................................... $ (20) $ 14 N/M
Customers(1)................................................ 2,949 5,096 72.8
Average monthly revenue per customer(1)..................... $ 61 $ 39 (36.1)
</TABLE>
---------------
(*)Not Meaningful
(1) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
OPERATING REVENUES
The increase of $114 million is primarily due to substantial growth in the
customer bases of our consolidated operations, which collectively have grown
almost 72.8% since March 31, 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.
Overall weakening of local currencies also impacted revenue growth on a U.S.
Dollar basis. The current period also includes $10 million of revenues from our
operations in Nicaragua that were consolidated for the first time in first
quarter 2000.
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. For first quarter 2000, these expenses
increased $146 million compared to first quarter 1999. This increase is
primarily the result of operational and customer acquisition costs associated
with growth in customer levels and expanded operations. Since March 31, 1999,
our existing operations have added almost 2.0 million customers in Argentina,
Chile and Venezuela. We have also added 182,000 customers through the
acquisition and development of businesses in Ecuador, Nicaragua and Peru.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $19 million
due primarily to higher gross depreciable plant resulting from the continued
investment in our wireless network infrastructure. Amortization expense
increased $2 million 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 equity affiliates improved $30 million to
$17 million in first quarter 2000. The improvement in these businesses is due to
stronger results from our investments in Brazil and Germany. Both of these
businesses experienced substantial growth in their customer bases. Net earnings
(losses) of equity affiliates for the international operations segment for 2000
excludes $68 million in income related to the restructuring of our ownership
interest in our German wireless operations. Net earnings (losses) of equity
affiliates for the international operations segment for 1999 exclude $280
million in foreign currency losses
104
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
related to the devaluation of the Brazilian Real in January 1999. The impact of
foreign currency fluctuations in Brazil for first quarter 2000 was not
significant.
Our operations in Brazil continue to be affected by weakness in the local
economy. Operational revenues have been negatively impacted as the weakened
currency has caused average revenue per user to decline. In addition, we expect
that our earnings will continue to be affected by foreign currency gains or
losses associated with the U.S. Dollar-denominated debt issued by our Brazilian
businesses.
ADVERTISING AND PUBLISHING
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------- %
1999 2000 CHANGE
-------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues....................................... $ 343 $ 364 6.1
Intersegment revenues................................... 3 5 66.7
Total operating revenues...................... $ 346 $ 369 6.6
Operating expenses...................................... $ 206 $ 224 8.7
Operating income........................................ $ 140 $ 145 3.6
Net earnings (losses) of equity affiliates.............. $ (1) $ (1) --
Segment net income...................................... $ 84 $ 90 7.1
EBITDA.................................................. $ 146 $ 155 6.2
EBITDA margin........................................... 42.2% 42.0% -20bps
</TABLE>
OPERATING RESULTS
External revenues increased $21 million for first quarter 2000, principally
as a result of $14 million of revenues from our new directory publishing
operations in Peru and Brazil. Also contributing are increases of $10 million in
the revenues from our electronic media offerings. Growth in the domestic
operations attributable to volume growth and price increases were offset by the
effects of shifts in directory production schedules. Adjusted for book shifts,
external revenues for this segment would have increased by approximately 10.6%
for the quarter.
Operational and support expenses increased $14 million for first quarter
2000, due primarily to $23 million in expense from our new operations in Brazil
and $6 million in costs associated with growth in electronic media offerings.
These increases were offset by a $15 million reduction in costs in the domestic
directory businesses due to the shift in directory production schedules.
Depreciation and amortization increased by $4 million due to the new
international publishing operations.
Net earnings (losses) of equity affiliates includes the results of our
investment in a Brazilian directory publisher.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
ALL OTHER
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------- %
1999 2000 CHANGE
-------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues......................................... $ 50 $ 102 N/M
Intersegment revenues..................................... 70 88 25.7
Total operating revenues........................ $ 120 $ 190 58.3
Operating expenses........................................ $ 204 $ 244 19.6
Operating loss............................................ $ (84) $ (54) (35.7)
Net earnings (losses) of equity affiliates................ $ 1 $ -- N/M
Segment net income........................................ $ (57) $ (39) (31.6)
EBITDA.................................................... $ (53) $ (24) (54.7)
EBITDA margin............................................. (44.2)% (12.6)% N/M
</TABLE>
OPERATING RESULTS
External revenues increased $52 million for first quarter 2000 driven by
growth in revenues of $25 million from the resale of long distance services in
markets outside of our wireline region, $9 million from interactive paging
services and $8 million 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 $28 million increase in operational and support expenses. Depreciation and
amortization has increased $12 million reflecting our continuing investment of
resources associated with the growth of these businesses.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 AND YEAR
ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
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 increased spending in the core wireline business for
customer service and network support functions, volume-driven increases at our
international and domestic wireless businesses and expenses for development and
promotion of new business initiatives, including high-speed data and Internet
service offerings.
Normalized results for 1999 exclude the impacts of:
- The devaluation of the Brazilian Real. Our share of the foreign currency
losses in our Brazilian wireless properties reduced net income by $308
million, or $0.16 per share. These losses are included in Net earnings
(losses) of equity affiliates;
- An asset impairment loss, which reduced net income by $187 million, or
$0.10 per share;
- The recognition of certain foreign investment tax credits generated in
prior years, which increased net income by $95 million, or $0.05 per
share; and
- The gain on sale of our 100% ownership interest in Honolulu Cellular,
which increased net income by $23 million, or $0.01 per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
Normalized results for 1998 exclude the impacts of:
- A gain from the sale of our 65% interest in BellSouth New Zealand of $110
million, or $0.06 per share;
- A gain from the receipt of additional proceeds related to the sale of our
investment in ITT World Directories of $96 million, or $0.05 per share;
and
- Contingent interest and prepayment penalties associated with the
repayment of a loan, which increased net income by $62 million, or $0.03
per share.
Normalized results for 1997 exclude the impacts of:
- Gains on the sales of our investments in Optus Communications, ITT World
Directories and Bellcore, which increased net income by $352 million, or
$0.18 per share, $128 million, or $0.06 per share, and $23 million, or
$0.01 per share;
- The effect of a regulatory settlement in South Carolina, which reduced
net income by $47 million, or $0.02 per share; and
- Losses of $9 million incurred in connection with the early redemption of
long-term debt.
On January 1, 1999, we adopted a new accounting standard on capitalization
of internal-use software. The impact of capitalizing software costs under the
new standard was a benefit of $285 million, or $0.15 per share, for 1999
compared to 1998.
OPERATING REVENUES
Operating revenues increased $2,101 million during 1999 and $2,562 million
during 1998. These increases reflect:
- 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 expansion in the customer base of 13.1% in
1999 and 17.4% in 1998;
- significantly higher international revenues resulting from growth in the
customer bases of 62.8% in 1999 and 67.1% in 1998. The 1998 increase also
reflects the consolidation of several international operations that had
previously been accounted for under the equity method.
- the addition of new international directory publishing businesses during
1999 as well as volume growth and price increases in our domestic
advertising and publishing operations; 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.
During 1999, growth in international revenues attributable to customer growth
was partially offset by a 25.7% decrease in average monthly revenue per customer
driven by penetration into lower usage market segments.
OPERATING EXPENSES
Total operating expenses increased $1,568 million during 1999 and $2,034
million during 1998. Operational and support expenses increased $934 million
during 1999 and $1,641 million during 1998 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
Depreciation and amortization increased $314 in 1999 and $393 in 1998 primarily
as a result of additions of property, plant and equipment to support expansion
of our domestic and international wireless networks.
Expenses in 1999 also included a $320 million charge to write down network
equipment in the domestic wireless operations.
The 1999 increase was offset by the adoption of a new accounting standard
on capitalization of internal-use software. The impact of capitalizing software
costs under the new standard was a reduction in expenses of $452 million
compared to 1998.
The 1998 increase in both line items also reflects the consolidation of
several international operations that had previously been accounted for under
the equity method. If these operations had been consolidated in all periods
presented, operating expenses would have increased $1,501 million during 1998.
INTEREST EXPENSE
Interest expense increased $193 million in 1999 and $76 million in 1998.
The 1999 increase is attributable to higher average debt balances resulting from
commercial paper borrowings associated with the financing of our investment in
Qwest and a higher proportion of capitalized interest in 1998. The increase in
1998 expense reflects the consolidation of several international operations that
had previously been accounted for under the equity method and a greater
proportion of capitalized interest due to our start-up investments in Brazil.
GAIN ON SALE OF OPERATIONS
Gains for 1999 include $39 million from the sale of our 100% ownership
interest in Honolulu Cellular and $16 million from the sale of a wireless
property in Alabama. Gains for 1998 include $180 million from the sale of our
65% interest in BellSouth New Zealand and $155 million from the receipt of
additional proceeds related to the sale of our investment in ITT World
Directories. Gains for 1997 include $578 million from the sale of our investment
in Optus Communications and $209 million from the sale of our investment in ITT
World Directories.
NET EARNINGS (LOSSES) OF EQUITY AFFILIATES
Earnings from our equity affiliates decreased $261 million in 1999 and
increased $334 million during 1998. The decrease in 1999 was driven by foreign
exchange losses of $308 million related to our Brazilian properties. See Note C
to BellSouth's consolidated financial statements for further discussion of this
matter. Excluding the impact of these foreign exchange losses, earnings
increased $47 million in 1999. The 1999 and 1998 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 $62 million in 1999 is attributable to a $67 million reduction in
interest income due to lower average cash balances and $23 million of higher
minority interest expense related to our less-than-100-percent owned
subsidiaries. These decreases were partially offset by miscellaneous
nonoperating items. The decrease of $4 million in 1998 includes an increase of
$34 million in nonoperating items during 1998. The 1997 period included a $38
million gain from the sale of our investment in Bellcore, a research and
development company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
PROVISION FOR INCOME TAXES
The decrease in the 1999 effective tax rate was driven by the recognition
of foreign investment tax credits, and a change in the mix of income among
taxing jurisdictions. These decreases were offset by less favorable results at
foreign equity-method subsidiaries which are recorded net of tax benefits or
expense. These results were significantly impacted by foreign currency losses
recorded at our unconsolidated Brazilian businesses during 1999.
The decrease in the 1998 effective tax rate was attributable to improved
results in our foreign equity-method subsidiaries and a change in the mix of
income among taxing jurisdictions. The decreases were partially offset by a
reduction in the benefit from investment tax credits.
OVERVIEW OF RESULTS BY SEGMENT --
WIRELINE COMMUNICATIONS
Wireline communications includes local exchange, network access and 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>
PERCENT CHANGE
-------------------
1998 VS. 1999 VS.
1997 1998 1999 1997 1998
------- ------- ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues:
Local service.................................. $ 9,017 $10,033 $10,887 11.3 8.5
Network access................................. 4,483 4,632 4,761 3.3 2.8
Long distance.................................. 734 713 608 (2.9) (14.7)
Other wireline................................. 944 1,023 1,198 8.4 17.1
Intersegment revenues.......................... 168 221 318 31.5 43.9
Total operating revenues............... 15,346 16,622 17,772 8.3 6.9
Operating expenses............................... 11,158 11,751 11,944 5.3 1.6
Operating income................................. 4,188 4,871 5,828 16.3 19.6
Segment net income............................... $ 2,314 $ 2,751 $ 3,315 18.9 20.5
KEY INDICATORS:
Access line counts (000's):
Switched access lines:
Residential................................. 15,841 16,457 16,958 3.9 3.0
Business.................................... 7,088 7,294 7,254 2.9 (0.5)
Other....................................... 272 274 265 0.7 (3.3)
------- ------- -------
Total switched access lines............ 23,201 24,025 24,477 3.6 1.9
------- ------- -------
Access line equivalents(1)..................... 10,801 14,744 20,375 36.5 38.2
------- ------- -------
Total equivalent access lines.......... 34,002 38,769 44,852 14.0 15.7
======= ======= =======
Access minutes of use (millions)................. 97,106 104,373 110,088 7.5 5.5
Long distance messages (millions)................ 894 784 644 (12.3) (17.9)
Digital and data services revenues............... $ 1,437 $ 2,041 $ 2,687 42.0 31.6
Convenience feature revenues..................... $ 1,364 $ 1,636 $ 1,911 19.9 16.8
</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-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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. Local service revenues increased $854 million during 1999
and $1,016 million during 1998, attributable to growth in switched access lines
and strong demand for digital and data services and convenience features.
Total equivalent access lines increased 15.7% during 1999 and 14.0% during
1998. Residential access lines rose 3.0% during 1999 and 3.9% during 1998,
driven by economic growth in our nine-state region as well as demand for
secondary residence lines. Secondary residence lines are used for home office
purposes, Internet access and children's phones, and accounted for 51.1% of the
growth in residential access lines during 1999 and 49.8% during 1998. Business
access lines, including both switched access lines and data circuits, grew 25.4%
during 1999 and 23.2% during 1998, propelled by expanding demand for our digital
and data services. Switched business access lines grew 2.9% during 1998 but
decreased 0.5% during 1999 as an increasing number of new and existing business
customers migrated to our high-speed/high-capacity data line offerings.
Revenues from optional convenience features such as Caller ID, Call
Waiting, Call Return and voice mail service increased $275 million, or 16.8%,
during 1999 and $272 million, or 19.9%, during 1998. These increases were driven
by growth in convenience feature usage through our Complete Choice package, a
one-price bundled offering of over 20 features. The 1999 increase also includes
the effect of positive rate impacts on revenues from these features.
Increased penetration of extended local area calling plans also increased
local service revenues by approximately $182 million during 1999 and $213
million during 1998. Also contributing to the increases in revenues were net
rate impacts of $163 million in 1999 and $161 million in 1998. The 1999 rate
impacts were attributable to sharing accruals recorded in 1998 as well as
positive rate adjustments in 1999 on convenience features, directory assistance
and inside wire service. The rate impacts during 1998 were primarily
attributable to sharing accruals and cellular interconnection rate reductions
recorded in 1997.
NETWORK ACCESS. Network access revenues grew $129 million in 1999 and $149
million in 1998, due largely to higher demand. Access minutes of use rose 5.5%
and 7.5% during the same periods. Increases in switched access lines and
promotional activities by long distance carriers continued to be the primary
drivers of the increase in minutes of use. The introduction of 1+ dialing parity
for long distance calls in all states in our wireline territory also contributed
to growth in minutes.
The growth rate in total minutes of use continued 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
per-minute-of-use based. Revenues from these data services grew approximately
$155 million in 1999 and $148 million in 1998 as Internet service providers and
high-capacity users increased their use of our network. The growth rate in
switched minutes of use was also negatively impacted by competition from
carriers whose traffic completely bypasses our network.
Volume-related growth was largely offset by net rate impacts that decreased
revenues by $158 million in 1999 and $122 million in 1998. These reductions are
primarily related to the FCC's access reforms and productivity factor
adjustment. The reductions were partially offset by recoveries of local number
portability costs in 1999.
LONG DISTANCE. The decreases during 1999 and 1998 were primarily
attributable to decreases in long distance message volumes of 17.9% in 1999 and
12.3% in 1998. Partially offsetting these decreases were
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
increased revenues of $21 million in 1999 and $13 million in 1998 from the
provision of digital and data services.
Also included in long distance are revenues which we received from long
distance carriers for interconnection to our public payphones. These revenues
increased $42 million from 1997 to 1998 following the 1997 deregulation of
payphone services but decreased $53 million in 1999 as a result of a regulatory
ruling on the rates charged to the long distance carriers.
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 reduces our long distance message volumes.
Effective February 1999, we implemented 1+ dialing parity in the last of the
nine states in our region, which allows customers to choose a competing carrier
without having to dial a special access code.
OTHER WIRELINE AND INTERSEGMENT REVENUES. The $175 million increase in
external revenues in 1999 is attributable to higher revenues of $201 million
resulting primarily from sales of customer premises equipment, 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 and interconnection charges to wireless carriers. The increases were
reduced by $26 million, primarily from decreases in revenues from enhanced
consumer white page listings.
The $79 million increase in external revenues in 1998 was driven primarily
by $65 million of increases in charges for billing and collection services,
demand for our Internet access offering, and sales of unbundled network
elements.
The increase in intersegment revenues in both 1999 and 1998 primarily
represents increased business activity with our other operating segments.
We increased subscribers to our Internet service 82% during 1999 and ended
the year with over 680,000 subscribers. We expect continued strong growth
associated with our alliance with MyWay.com, an Internet web site operated by
CMGI.
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. Operational and support expenses
increased $163 million, or 1.9%, during 1999 and $562 million, or 7.2%, during
1998. The 1999 increase was impacted favorably by the adoption of new rules on
software capitalization; excluding the impact of adoption, 1999 expenses would
have increased $576 million or 6.9%, when compared to 1998.
Increases in 1999 were attributable to $551 million of labor costs driven
by the addition of employees in customer service and network support functions
and increases in salary and wage rates, $100 million of costs from sales of
customer premises equipment and paging equipment and other increased expenses
associated with higher business volumes. These increases were offset by $84
million of reductions in overtime expense in customer service and network
functions and $78 million of lower pension and benefit costs attributable to
favorable pension plan investment returns. Also included in the 1999 increases
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.
The 1998 increase was driven by several factors, including: $458 million in
labor costs in the telephone operations; growth of $164 million in expenses at
unregulated subsidiaries associated with higher business volumes; and payments
to the Universal Service Fund totalling $132 million. The increase in labor
costs was primarily attributable to contract service expense associated with the
outsourcing of engineering and information technology functions in late 1997, as
well as higher overtime expense in customer service and network support
functions. These increases were partially offset by lower pension and benefit
costs totalling $183 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $30 million during 1999 and $31 million during 1998. The 1999 increase
is primarily attributable to amortization of capitalized internally developed
software. While gross depreciable plant increased 4.6% during 1999 and 5.0%
during 1998, the overall composite depreciation rate has declined, resulting in
flat depreciation expense.
DOMESTIC WIRELESS
Domestic wireless is comprised of cellular and personal communications
service, or PCS, businesses principally within the Southeastern U.S.
<TABLE>
<CAPTION>
PERCENT CHANGE
-------------------
1998 VS. 1999 VS.
1997 1998 1999(1) 1997 1998
------ ------ ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total operating revenues.......................... $2,589 $2,730 $3,204 5.4 17.4
Operating expenses................................ 2,177 2,356 2,876 8.2 22.1
Operating income.................................. 412 374 328 (9.2) (12.3)
Net earnings (losses) of equity affiliates........ 164 165 144 0.6 (12.7)
Segment net income................................ 333 283 234 (15.0) (17.3)
Customers(2)...................................... 3,680 4,320 4,887 17.4 13.1
Average monthly revenue per customer(2)........... $ 55 $ 52 $ 51 (5.5) (1.9)
</TABLE>
---------------
(1) 1999 results exclude the impact of an asset impairment loss described in
Note D to BellSouth's consolidated financial statements. 1999 results also
exclude gains from the sale of wireless properties in Honolulu and Dothan
described in Note B to BellSouth's consolidated financial statements.
(2) The amounts shown are for our consolidated properties and do not include
customer data for our equity affiliates.
OPERATING REVENUES
Total operating revenues grew $474 million, or 17.4%, during 1999 and $141
million, or 5.4%, during 1998. These increases are attributable to higher
airtime, access and equipment sales revenues driven by a 13.1% and 17.4%
increase in the customer base during 1999 and 1998. Adjusted for the sale of
Honolulu Cellular in August 1999, customer growth would have been 16.4% for 1999
and 17.8% for 1998. Customer growth in both years 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. The revenue growth in both years
is also attributable to the initiation of PCS service in 26 new markets in the
Southeastern U.S. since 1997. Average monthly usage by customers increased
during 1999 and 1998, and, when combined with the increase in total customers,
drove increases in total minutes of use in both years. Average monthly revenue
per customer remained relatively flat during 1999 after decreasing during 1998,
due primarily to declines in per-minute rates. The declines in average
per-minute rates occurred as we expanded our product offerings and further
penetrated lower-usage market segments, and 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 demand and continue to increase
usage as the overall market is expanded.
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. Operational and support expenses
increased $377 million, or 20.5%, during 1999 and $112 million, or 6.5%, during
1998. These increases result from the addition of employees, higher sales and
marketing expenses in response to competition, higher equipment costs
attributable to the conversion to digital network platforms and higher network
costs associated with network usage. Employee
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
additions were driven by customer service and network support personnel
associated with the initiation of service in 26 PCS markets since 1997. Higher
equipment costs were attributable to the cost of digital handsets, which
typically cost one-third more than analog handsets.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$143 million, or 27.9%, during 1999 and $67 million, or 15.0%, during 1998. The
increase was primarily attributable to the additions of property, plant and
equipment totaling $550 million in 1999 and $692 million in 1998. These
additions were primarily attributable to the build-out of PCS markets, expansion
of the network related to growth in the customer base and deployment of digital
cellular across all of our consolidated markets. The 1999 increase was also
attributable to accelerated depreciation on network equipment that is being
replaced over an 18 month period from June 1999 through December 2000.
NET EARNINGS (LOSSES) OF EQUITY AFFILIATES
Net equity in earnings (losses) of domestic wireless equity affiliates
decreased $21 million in 1999 and increased $1 million in 1998. The 1999
decrease was principally due to lower earnings at our business in Los Angeles,
attributable to higher acquisition costs associated with customer additions and
increased amortization expense that resulted from the reorganization of our
ownership interests in fourth quarter 1998.
INTERNATIONAL OPERATIONS
International operations is comprised principally of our investments in
wireless 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, Peru and Venezuela. The 1998 and 1997 period results
also include the results of BellSouth New Zealand, which was sold in fourth
quarter 1998. 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>
PERCENT CHANGE
-------------------
1998 VS. 1999 VS.
1997 1998 1999(1) 1997 1998
------ ------ ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total operating revenues....................... $ 948 $1,995 $2,291 110.4 14.8
Operating expenses............................. 884 1,761 2,173 99.2 23.4
Operating income............................... 64 234 118 N/M (49.6)
Net earnings (losses) of equity affiliates..... (220) (69) (2) N/M N/M
Segment net income (loss)...................... (187) (62) (4) N/M N/M
Customers(2)................................... 1,555 2,598 4,230 67.1 62.8
Average monthly revenue per customer(2)........ $ 67 $ 70 $ 52 4.5 (25.7)
</TABLE>
---------------
(1) 1999 results exclude impact of the Brazil devaluation which is discussed in
Note C to BellSouth's consolidated financial statements.
(2) The amounts shown are for our consolidated properties and do not include
customer data for our equity affiliates.
OPERATING REVENUES
Revenue growth in 1999 was negatively affected by the absence of revenues
from BellSouth New Zealand, which was sold in fourth quarter 1998. Revenue
growth in 1998 was positively affected by the first-time consolidation of
several Latin American operations which had previously been accounted for under
the equity method. If all periods were adjusted to exclude the effects of these
changes, revenues would have
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
increased approximately 21.2% in 1999 and 49.9% in 1998. These increases were
primarily due to substantial growth in the customer bases of our current
operations, which grew 62.8% in 1999 and 67.1% in 1998.
Offsetting the impacts of customer growth in both periods were overall
weakening of local currencies. If foreign exchange rates had remained constant,
operating revenues would have been 7% to 10% higher in both 1999 and 1998. We
mitigated a portion of this decline through increases in rates. Also
contributing were declining monthly revenue per customer that is driven by
continued expansion into lower-usage customer segments through offerings such as
prepaid cellular service as well as competitive pressures in certain countries.
During 1999, we extended prepaid cellular products to all of the countries we
serve in Latin America.
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. Operational and support expenses
increased $327 million, or 23.3%, in 1999 and $646 million, or 85.2%, in 1998.
Adjusted for the first-time consolidation of several Latin American operations
and the sale of BellSouth New Zealand, expenses increased $395 million, or
29.6%, in 1999 and $376 million, or 39.2%, in 1998. These increases are
primarily the result of operational and customer acquisition costs associated
with growth in customer levels and expanded operations. Since 1997, our existing
operations have added 2.3 million customers in Argentina, Chile and Venezuela.
We have also added 500,000 customers through the acquisition and development of
businesses in Peru and Ecuador.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $64 million
in 1999 and $166 million in 1998. Adjusted for first-time consolidation of
several Latin American operations and the sale of BellSouth New Zealand,
depreciation and amortization increased $108 million, or 32.3%, in 1999 and $154
million, or 85.6%, in 1998. These increases are due primarily to higher gross
depreciable plant resulting from the continued investment in our wireless
network infrastructure. Amortization expense increased $21 million during 1999
and $65 million during 1998 as a result of growth in intangibles related to our
purchase of additional ownership interests in several Latin American operations
in late 1997 and early 1998.
NET EARNINGS (LOSSES) OF EQUITY AFFILIATES
Net earnings (losses) of equity affiliates for the international operations
segment exclude $308 million in foreign currency losses related to the
devaluation of the Brazilian Real in January 1999. Net equity in earnings
(losses) from our equity affiliates improved $67 million to ($2) million in 1999
and $151 million to ($69) million in 1998. 1998 earnings, when adjusted to
exclude the effect of first-time consolidations and sale of businesses, improved
$92 million over 1997. The improvement in equity in earnings (losses) from our
unconsolidated international businesses in both years was due to stronger
results from our investment in Germany and, for 1999, Panama and Nicaragua. All
of these businesses experienced substantial growth in their customer bases
during the 1998-1999 period. Offsetting these improvements were losses related
to our operations in Brazil; these losses were attributable to costs associated
with the start-up of operations during 1998 and economic weakness in the region
during 1999.
Our operations in Brazil continue to be affected by weakness in the local
economy. Operational revenues have been negatively impacted as the weakened
currency has caused average revenue per user to decline. In addition, we expect
that our earnings will continue to be affected by foreign currency gains or
losses associated with the U.S. Dollar-denominated debt issued by our Brazilian
businesses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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>
PERCENT CHANGE
-------------------
1998 VS. 1999 VS.
1997 1998 1999 1997 1998
------ ------ ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating revenues:
External revenues............................. $1,837 $1,891 $2,010 2.9 6.3
Intersegment revenues......................... 7 -- 18 N/M N/M
Total operating revenues.............. 1,844 1,891 2,028 2.5 7.2
Operating expenses.............................. 989 1,042 1,127 5.4 8.2
Operating income................................ 855 849 901 (0.7) 6.1
Segment net income.............................. 543 530 556 (2.4) 4.9
</TABLE>
OPERATING RESULTS
External revenues increased $119 million during 1999 and $54 million during
1998. The 1999 increase was principally a result of $69 million in revenues from
our new directory publishing operations in Peru and Brazil. The increases for
1998 and, to a lesser extent, 1999 were driven by volume growth and price
increases in the domestic operations. Increases in revenues of $14 million in
1999 and $3 million in 1998 from our electronic media offerings also
contributed.
Operational and support expenses increased $79 million in 1999 and $50
million in 1998. The 1999 increase was driven by the addition of the new
international operations which totalled $71 million. The 1998 increase was due
primarily to increases in salaries and wages driven by business volumes,
increases in charges from other operating segments, and technology
implementation. Depreciation and amortization remained relatively flat in 1999
and 1998.
ALL OTHER
This segment is primarily comprised of new business initiatives such as
entertainment (cable and wireless television), Internet access, wireless data
and long distance. The stand-alone revenues and expenses of our Internet access
marketing company which are included in this segment are eliminated in
consolidation and reported as part of the wireline communications results.
<TABLE>
<CAPTION>
PERCENT CHANGE
-------------------
1998 VS. 1999 VS.
1997 1998 1999 1997 1998
----- ----- ----- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
External revenues................................... $ 17 $ 113 $ 280 N/M 147.8
Intersegment revenues............................... 185 227 371 22.7 63.4
Total operating revenues.................. 202 340 651 68.3 91.5
Operating expenses.................................. 345 700 971 102.9 38.7
Operating loss...................................... (143) (360) (320) (151.7) 11.1
Net earnings (losses) of equity affiliates.......... (197) -- (1) N/M N/M
Segment net loss.................................... (182) (210) (215) (15.4) (2.4)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
OPERATING RESULTS
External revenues increased $167 million in 1999 and $96 million in 1998.
The increases in 1999 were driven by growth in revenues of $27 million from
interactive paging services, $59 million from the resale of long distance
services in markets outside of our wireline region and $31 million from wireless
television offerings. The increases in 1998 were attributable to growth of $52
million from interactive paging services, $29 million from long distance
services, and $14 million from wireless television offerings. Since 1998, we
have rolled out wireless television service in four new markets and introduced
interactive paging service with nationwide coverage.
Operating expenses for 1999 and 1998 primarily reflect increased spending
associated with new product and/or market introductions in all of these
businesses. Higher headcount associated with customer support and installation
functions also contributed to the increase in expenses. Depreciation and
amortization increased $48 million in 1999 and $61 million in 1998 reflecting
our continuing investment of resources associated with the growth of these
businesses.
Net earnings (losses) of equity affiliates for 1997 was primarily comprised
of the results of our wireless data operations, which were consolidated
beginning in 1998.
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.
<TABLE>
<CAPTION>
FIRST QUARTER
-----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED FOR):
Operating activities................. $ 7,039 $ 7,741 $ 8,199 $ 1,642 $ 2,350
Investing activities................. $(4,949) $(5,487) $(9,888) $(1,458) $(1,556)
Financing activities................. $ (698) $(1,681) $ (167) $(1,388) $ (927)
</TABLE>
NET CASH PROVIDED BY OPERATING ACTIVITIES
The increase in cash from operations between first quarter 1999 and first
quarter 2000 primarily reflects decreases in working capital requirements and
increases in revenues, offset by increases in operating expenses. Operating cash
flows for 2000 also include $31 million in cash proceeds associated with the
closings of our agreements to sublease wireless communications towers to Crown
Castle International.
The increase in cash from operations between 1998 and 1999 primarily
reflects higher operating revenues, partially offset by an increase in operating
expenses and working capital requirements and lower dividends from our equity
affiliates. Operating cash flows for 1999 also include $630 million in cash
proceeds associated with the closings of our agreements to sublease wireless
communications towers to Crown. Additional closings are scheduled to occur in
2000.
Operating expenses were favorably impacted by the adoption of SOP 98-1 in
1999. Offsetting this impact were increased spending to support growth in our
core wireline business, substantial increases in the wireless customer base and
new initiatives such as Internet, wireless data, long distance and video.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
NET CASH USED IN INVESTING ACTIVITIES
During the first three months of 2000, we invested $1.6 billion for capital
expenditures. Included in these expenditures for first quarter 2000 are
approximately $155 million in costs related to the purchase and development of
internal-use software.
During 1999, we invested $6.2 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 services and optical fiber-based broadband products. Included in these
expenditures for 1999 are approximately $550 million in costs related to the
purchase and development of internal-use software.
During 1999, we announced a new business agreement with Qwest
Communications that included our purchasing a ten percent stake for $3.5
billion. This transaction closed during May 1999. We initially funded this
purchase by utilizing existing cash reserves and issuing $2.5 billion in
commercial paper.
During 1999, our Argentine wireless communications company won its $260
million bid to acquire additional PCS licenses. It has paid $104 million and
will pay an additional $156 million for the licenses. The Company anticipates
investing an additional $600 million to build out the areas covered by these
licenses.
Also during 1999, we acquired an additional wireless license in Chile which
will expand our service area to the entire country. We will pay approximately
$90 million for the license, and anticipate investing an additional $80 million
to build out the areas covered by the license.
As part of the reorganization of ownership interests in our German wireless
operations, we have agreed to make up to $3 billion of loans to KPN Royal Dutch
Telecom to be used for further wireless investments in Europe. See Note S to
BellSouth's consolidated financial statements.
NET CASH USED IN FINANCING ACTIVITIES
During first quarter 2000, we issued $2 billion of long-term debt. The
proceeds of $1,974 million from this issuance were used to retire commercial
paper borrowings.
Our debt to total capitalization ratio was 51.0% at March 31, 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.
During 1999, we purchased 66 million shares as part of a $3 billion
repurchase plan announced in December 1998. Combined with 1998 repurchases under
a previous plan, we have reduced our number of outstanding shares by
approximately 101 million since December 31, 1997. We completed the December
1998 buyback plan during May 1999.
Our debt to total capitalization ratio was 53.1% at December 31, 1999
compared to 43.0% at December 31, 1998. The increase is a function of increases
in short-term debt attributable to higher net borrowings of commercial paper and
the reduction in shareholders' equity, driven primarily by the effect of our
stock buyback program.
At May 23, 2000, we have shelf registration statements on file with the SEC
under which $2.7 billion of debt securities could be publicly offered.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes and foreign currency
exchange rate fluctuations. To manage this exposure, we employ
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
risk management strategies including the use of derivatives such as interest
rate swap agreements, foreign currency forwards and currency swap agreements. We
do not hold derivatives for trading purposes.
INTEREST RATE RISK
Our objective in managing interest rate risk is to maintain a balance of
fixed and variable rate debt that will lower our overall borrowing costs within
reasonable risk parameters. Interest rate swaps are used to convert a portion of
our debt portfolio from a variable rate to a fixed rate or from a fixed rate to
a variable rate.
FOREIGN EXCHANGE RISK
Our objective in managing foreign exchange risk is to protect against cash
flow and earnings volatility resulting from changes in foreign exchange rates.
Short-term foreign currency transactions and commitments expose us to changes in
foreign exchange rates. We occasionally enter into forward contracts and similar
instruments to mitigate the potential impacts of such risks.
Our equity investments in Brazil hold U.S. Dollar-denominated liabilities
and recognize foreign currency gains or losses when converting those liabilities
into local currency. Our proportionate share of these liabilities was $1.0
billion at December 31, 1999. The equity income related to these investments is
subject to fluctuations in the U.S. Dollar/Brazilian Real exchange rate. See
"-- Operating Environment and Trends of the Business -- International
Operations."
We are subject to risk from changes in foreign exchange rates for our
international operations which use a foreign currency as their functional
currency and are translated to U.S. Dollars. Such changes result in cumulative
translation adjustments which are included in shareholders' equity. We have
translation exposure to various foreign currencies with the most significant
being the Brazilian Real and the German Mark. Operations in countries with
hyperinflationary economies consider the U.S. Dollar the functional currency and
reflect translation gains and losses in the determination of net income.
RISK SENSITIVITY
Our use of derivative financial instruments is designed to mitigate foreign
currency and interest rate risks, although to some extent they expose us to
credit risks. The credit risks associated with these instruments are controlled
through the evaluation and continual monitoring of the creditworthiness of the
counterparties. In the event that a counterparty fails to meet the terms of a
contract or agreement, our exposure is limited to the current value at that time
of the currency rate or interest rate differential and not the full notional or
contract amount. Such contracts and agreements have been executed with
creditworthy financial institutions, and as such, we consider the risk of
nonperformance to be remote.
The following table provides information, by maturity date, about our
interest rate sensitive financial instruments, which consist of fixed and
variable rate debt obligations. Fair values for the majority of our long-term
debt obligations are based on quotes from dealers.
<TABLE>
<CAPTION>
TOTAL
RECORDED
2000 2001 2002 2003 2004 THEREAFTER AMOUNT FAIR VALUE
------ ---- ---- ---- ---- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed rate debt.............. $7,641 $203 $320 $646 $317 $7,086 $16,213 $15,463
Average interest rate........ 6.00% 8.49% 7.66% 6.51% 6.22% 6.71%
Variable rate debt........... $ 4 $236 $ 68 $115 $164 $ 4 $ 591 $ 591
Average interest rate........ 7.26% 7.62% 6.44% 6.43% 6.20% 6.92%
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
REGULATORY DEVELOPMENTS
Our future operations 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.
Federal policies being implemented by the FCC 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. Unless compensatory
changes are adopted, such as universal service fund contribution mandates, our
revenues from this source, which constituted approximately 6% of our revenues
during 1999, are at risk. In addition, other aspects of access charge regulation
and universal service fund contribution requirements that are applicable to
local service carriers such as BellSouth Telecommunications are also under
consideration and could result in greater expense levels or reduced revenues.
During first quarter 2000, a coalition of local and long distance
providers, including BellSouth, Bell Atlantic, GTE, SBC Communications, 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 is 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. In May 2000, the FCC approved this
proposal in substantially the same form. As a result our rates for access
charges, and the revenues which we derive from access charges, will be reduced.
We are currently assessing the extent of the financial impact of this order.
The 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 petitioned the FCC for permission under the 1996 Act to offer full
long distance services in South Carolina and Louisiana. The FCC has denied these
petitions. We have been testing our operations support systems in Georgia and
expect to file with the FCC during the summer of 2000. We do not know if the FCC
will require further changes in our network interconnection elements and
operating systems before it will approve such petitions. These changes could
result in significant additional expenses and promote local service competition.
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 a condition to
approving these plans.
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 P to BellSouth's consolidated
financial statements.
COMPETITION
There are many competitive forces that impact our businesses. The 1996 Act
removed the regulatory barriers to local service competition in the wireline
market and required incumbent carriers such as us to open our networks to other
carriers. In the wireless market, the auction of PCS licenses has created as
many as six new wireless competitors in domestic markets in addition to
resellers, and the deregulation of international communications markets has
introduced new global competitors to nearly all of our international businesses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
We expect local service competition to steadily increase, particularly with
respect to business customers. While competition for local service revenues
could adversely affect our results of operations, opening of local markets can
favorably impact qualification to offer full in-region long distance wireline
services.
The presence of multiple aggressive competitors in our domestic and
international wireless markets makes it more difficult to attract new customers
and retain existing ones. Furthermore, while we do not compete primarily on the
basis of price, low prices offered by competitors attempting to obtain market
share have pressured us to reduce prices and develop pricing plans attractive to
lower usage customers. These trends are expected to continue and could adversely
affect our results of operations in the future.
We plan to compete through aggressive marketing, competitive pricing,
bundled services and technical innovation. We will offer consumers a full range
of services -- local, long distance, Internet access, wireless and more -- while
remaining committed to our high level of customer service and value.
TECHNOLOGY
We are continually upgrading our networks with high speed/high capacity
digital and optical technologies, making them capable of delivering a full
complement of voice and data services. This modernization of the network is
critical to our success in providing the data connectivity demanded by customers
and to compete with fiber networks being constructed or currently utilized by
start-ups and cable companies. This effort will require investment of
significant amounts of capital in the future.
Digital wireless technology is rapidly evolving and the development of a
common roaming platform for digital wireless technologies could result in more
intense competition and have an adverse effect on our results of operations.
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 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,
volatility has 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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.
YEAR 2000 DISCLOSURE
In 1997, we initiated a company-wide program to ensure that our
date-sensitive information, telephony and business systems, and other certain
equipment would properly recognize the Year 2000 as a result of the century
change on January 1, 2000. The program focused on the hardware, software,
embedded chips, third-party vendors and suppliers as well as third-party
networks that were associated with the identified systems. We substantially
completed the program during third quarter 1999 and our systems did not
experience any significant disruptions as a result of the century change. In
total, we have spent approximately $240 million in external costs on this
program through December 31, 1999 and do not expect to incur any significant
additional costs related to Year 2000 compliance subsequent to 1999.
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. The guidelines
in SAB 101 must be adopted during the second quarter of 2000. We do not expect
the adoption of these guidelines to have a material impact on our results of
operations and financial position.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY. In June 1998, the Financial
Accounting Standards Board issued 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. 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 to have a material impact on results of
operations, financial position or cash flows.
SUBSEQUENT EVENTS
PROPOSED DOMESTIC WIRELESS TRANSACTION. In April 2000, we signed a
definitive agreement with SBC Communications Inc. to create a national wireless
business comprised of substantially all of both companies' U.S. wireless assets.
The new joint venture will serve approximately 16.2 million subscribers and
cover a geographical area with a population of 175 million. Assuming that all of
the assets are contributed as provided for in the agreement, the venture will be
40% owned by BellSouth and 60% owned by SBC Communications. We will share joint
and equal control of the venture.
The joint venture will be a separately managed company capable of making
acquisitions and bidding on new or re-auctioned wireless frequencies. It may
issue debt and stock to the public to generate additional cash to fund expansion
and product development efforts. The agreement is subject to numerous
conditions, including regulatory approvals, and we expect the closing of the
venture to occur by the end of 2000.
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 Participaoes SA, a
Brazilian company. The total purchase price was approximately $240 million. Tele
Centro Oeste provides cellular service in central-west Brazil, including
Brasilia, as well as northern Brazil. The
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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.
INVESTMENT IN COLOMBIA. In May 2000, we announced an agreement to acquire
a 33.8% controlling equity interest in Celumovil S.A., a cellular operator in
the Eastern and Atlantic regions in Colombia, for a purchase price of
approximately $295 million. Celumovil is a leading provider of wireless
telecommunications services in Colombia with approximately 466,000 subscribers
as of February 2000. Celumovil's concession areas include the Eastern and
Atlantic regions, covering a combined population of approximately 26 million and
six of the 10 largest cities in Colombia, including Bogota.
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DESCRIPTION OF THE BLS GROUP
The primary lines of business within the BLS group include all of our
operations outside of Latin America, including its domestic wireline and
wireless communications businesses, non-Latin American international operations
and its non-Latin American advertising and publishing operations.
WIRELINE COMMUNICATIONS
We are the predominant wireline telephone service provider in the
Southeastern U.S., serving substantial portions of the population within
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina and Tennessee. We provide wireline voice and data communications
services, including local exchange, network access and limited long distance
services. We also offer other wireline services, including:
- billing and collection services;
- customer premises equipment sales and maintenance services;
- provision of separate network elements to competitors;
- Internet access service; and
- interconnection to unaffiliated wireline and wireless carriers.
Wireline communications operations provided 76% of the total operating
revenues of the BLS group in 1999 and 77% in the three months ended March 31,
2000.
DOMESTIC WIRELESS
We are one of the largest wireless communications providers in the U.S.,
with operations primarily in our wireline service territory. We own subsidiaries
and interests in joint ventures that operate extensive wireless systems in 12
states, encompassing a total population served of approximately 79 million. Our
proportionate share of this population, based on the percentage of our ownership
interests in those systems, is approximately 59 million. This extensive wireless
operation includes some of the top wireless markets in the country, including
Los Angeles, Houston, Miami-Fort Lauderdale, Atlanta and Tampa-St. Petersburg.
In April 2000, we announced plans to combine substantially all of our
domestic wireless businesses with those of SBC Communications Inc. into a
venture that will comprise the nation's second largest wireless company, with
service in 40 of the top 50 U.S. markets. This venture, which will cover a total
population of 175 million people and serve 16.2 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.
Domestic wireless operations provided 14% of the total operating revenues
of the BLS group in 1999 and 15% in the three months ended March 31, 2000.
ADVERTISING AND DIRECTORY PUBLISHING
We own a group of companies that publish, print, sell advertising in and
perform related services concerning alphabetical and classified telephone
directories in both paper and electronic formats. Advertising and publishing
revenues are derived primarily from sales of directory advertising. We own one
of the leading telephone directory publishing businesses in the United States.
Our publishing operations provided 8% of the total revenues of the BLS
group in 1999 and 6% in the three months ended March 31, 2000.
ALL OTHER
We own interests in joint ventures that provide wireless communications in
Denmark, Germany, Israel, and India. At March 31, 2000, these licenses covered a
population of approximately 98.8 million people and
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provided wireless service to a total of approximately 6.5 million international
customers. Proportionate population covered by these systems was approximately
24.5 million persons at March 31, 2000. Our proportionate share of those
customers was approximately 1.8 million customers.
We own interests in wireless data communications networks worldwide that
cover a service area of approximately 200 million people and enable wireless
data applications for interactive paging, corporate transactions, access to
information and messaging. We also develop and manage video systems in certain
areas within our Southeastern markets. Programming content for the cable systems
is provided primarily by americast(R), a joint venture partnership of which we
are a part owner.
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DESCRIPTION OF CAPITAL STOCK
We have summarized below the material terms of our capital stock and
material provisions of our charter, as it is to be amended by articles of
amendment which were considered at a special meeting of our shareholders on
, 2000, and our by-laws. As used in this prospectus, the
term "charter" means our charter, including those amendments and additional
articles of amendment that our board of directors intends to adopt after our
shareholders adopt those amendments. We encourage you to read our charter, both
articles of amendment, our by-laws and our restated rights agreement, all of
which we have filed as exhibits to the registration statement of which this
prospectus is a part.
The following summary refers to the inter-group interest in the Latin
America group that we have attributed to the BLS group and the related
outstanding interest fraction.
- The inter-group interest in the Latin America group is the portion of the
equity attributed to the Latin America group we attribute to the BLS
group and that is represented by shares of Latin America group stock that
can be issued for the account of the BLS group or distributed to holders
of BLS group stock.
- The outstanding interest fraction indicates the portion of our equity
attributed to the Latin America group that is represented by shares of
Latin America group stock that are issued and outstanding. It is
calculated by dividing the number of outstanding shares of Latin America
group stock issued to the public by the sum of the number of outstanding
shares of Latin America group stock issued to the public plus the number
of shares of Latin America group stock then reserved for and attributed
to the BLS group.
The outstanding interest fraction will equal one, and the inter-group interest
will equal zero, at any time that there are no shares of Latin America group
stock then reserved for and attributed to the BLS group.
The number of reserved shares of Latin America group stock representing the
BLS group's inter-group interest and the outstanding interest fraction may
change in the future if we take specified actions, including:
- issue additional shares of Latin America group stock;
- pay share dividends on Latin America group stock in Latin America group
stock;
- repurchase Latin America group stock; or
- transfer cash, other assets or liabilities between the Latin America
group and the BLS group.
These actions, and the effect that they would have on the holders of Latin
America group stock, are described further in "-- Latin America Group
Stock -- Inter-Group Interest."
OUR LATIN AMERICA GROUP AND OUR BLS GROUP
Our Latin America group will consist of all of our Latin American
businesses, and our BLS group will consist of all of our other businesses -- our
wireline telephone business, our domestic wireless business, our directory
advertising and publishing business outside of Latin America and our
international businesses in Europe and Asia. The businesses of the Latin America
group are described beginning on page 71, and the businesses of the BLS group
are described beginning on page 123. Each group is a collection of businesses
and neither is a separate legal entity. Neither group can issue securities or
incur obligations; those powers can only be exercised by BellSouth or one of the
companies in the groups. Latin America group stock and BLS group stock are both
common stocks of BellSouth and not of either group.
ACTIONS BY OUR BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL;
NO SEPARATE BOARDS OF DIRECTORS FOR THE LATIN AMERICA GROUP
Under our charter, the board of directors of BellSouth will be able to take
actions with respect to the Latin America group and Latin America group stock
without shareholder approval so long as those actions are taken on the terms and
conditions set forth in our charter. The Latin America group will not have a
separate board of directors to represent solely the interests of holders of
Latin America group stock. As described under
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<PAGE> 128
"-- Voting Rights," the holders of Latin America group stock and the holders of
BLS group stock will generally vote together as a single voting group on all
matters on which holders of common stock are entitled to vote. This includes the
election of directors of BellSouth.
If we decide to take other actions with respect to Latin America group
stock or the Latin America group that is not on the terms and conditions in our
charter, we would be required to obtain shareholder approval of an amendment to
our charter. In instances listed under "-- Voting Rights," approval of such an
amendment would require both the approval of the holders of Latin America group
stock, BLS group stock and any additional series of common stock that is
subsequently created and entitled to vote, voting together as a single voting
group, and the approval of the holders of any series of common stock affected by
an amendment, voting as a separate voting group.
The actions that our board of directors may take without shareholder
approval, discussed in more detail below, include decisions to:
- issue additional shares of Latin America group stock and BLS group stock
and issue additional series of common stock so long as those additional
shares are authorized shares under our charter;
- pay dividends on a series of common stock, subject to the limitations set
forth in the charter;
- convert one series of common stock into another series on the terms set
forth in the charter;
- redeem Latin America group stock in exchange for stock of one or more
wholly-owned subsidiaries holding all of the assets and liabilities
attributed to the Latin America group;
- dispose of assets attributed to the Latin America group;
- if we dispose of all or substantially all of the assets attributed to the
Latin America group, pay a special dividend on, or redeem shares of,
Latin America group stock or convert shares of Latin America group stock
into shares of another series; or
- take actions that require an increase or decrease in the number of shares
of Latin America group stock that we have reserved for and attributed to
the BLS group.
AUTHORIZED AND OUTSTANDING SHARES OF COMMON STOCK
OUR NEW CAPITAL STRUCTURE
Our shareholders have adopted articles of amendment permitting us to issue
common stock in series. These articles of amendment authorize us to issue 8.75
billion shares of stock as follows:
- 8.65 billion shares of common stock in series, par value $1 per share;
and
- 100 million shares of first preferred stock in series, par value $1 per
share.
Of the 8.65 billion shares of common stock, our board of directors will
initially designate prior to the completion of this offering:
- 6.4 billion shares as "BellSouth Corporation -- BLS Group Common Stock,"
and
- 2.25 billion shares as "BellSouth Corporation -- Latin America Group
Common Stock."
Of the 100 million shares of first preferred stock, our board of directors
will initially designate:
- ten million shares as "Series C First Preferred Stock;" and
- ten million shares as "Series D First Preferred Stock" in connection with
our restated rights agreement.
The restated rights agreement will be effective upon the completion of this
offering.
The articles of amendment also will change each outstanding share of our
existing common stock into one share of BLS group stock effective upon the
creation of BLS group stock, which will occur at the time of the completion of
this offering.
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<PAGE> 129
ISSUANCES OF COMMON STOCK WITHOUT SHAREHOLDER APPROVAL
After the completion of this offering, our board of directors may issue the
authorized but unissued shares of Latin America group stock and BLS group stock
from time to time for any proper corporate purposes. Our board of directors also
may decide to authorize the issuance of shares of one or more series of common
stock relating to an additional business group as described below, in addition
to Latin America group stock and BLS group stock. Our board of directors has the
authority under our charter to issue additional shares of Latin America group
stock or BLS group stock or shares of an additional series of common stock
without shareholder approval, except as may be required by Georgia law or the
rules of any stock exchange on which any series of outstanding common stock may
then be listed.
If our board of directors decides to issue an additional series of common
stock, BellSouth may establish a new group to which such new series of common
stock relates either by attributing to it newly acquired assets or by
reattributing to it some of the assets and liabilities from one or more of the
Latin America group, the BLS group and any previously created additional group.
If our board of directors decides to reattribute assets and liabilities from an
existing group to a new group, the group or groups to which those assets and
liabilities were previously attributed would initially have an inter-group
interest in the new group representing the reattributed assets and liabilities,
unless the new group paid for those assets and liabilities with other
consideration. Currently, our board of directors does not have any plan to issue
any additional series of common stock.
Our board of directors may at any time increase the number of shares in any
series of common stock so long as the number of shares in all series of common
stock immediately after the increase does not exceed the total number of shares
of common stock authorized by our charter in effect at that time. Our board of
directors also may decrease the number of shares in any series of common stock
that it has previously designated, but not below the number of shares of that
series then outstanding.
ATTRIBUTION OF PROCEEDS OF ISSUANCES OF COMMON STOCK
If we issue shares of Latin America group stock for cash or other property,
such as in an acquisition, the proceeds of that sale, including property
acquired in an acquisition, will be attributed to the Latin America group or
other groups in respect of which Latin America group stock has been issued. One
exception to this principle is that so long as there are reserved shares of
Latin America group stock attributed to the BLS group, our board of directors
will decide at the time of the issuance whether any portion of the proceeds
should be attributed to the BLS group. If it makes a determination to so
attribute all or a portion of the proceeds, then the number of those reserved
shares would be reduced by the number of shares sold for those proceeds.
127
<PAGE> 130
LATIN AMERICA GROUP STOCK
DIVIDENDS
Our charter provides that dividends on Latin America group stock will be
limited to the lesser of:
- the funds of BellSouth legally available for distribution under Georgia
law; and
- the Latin America group available distribution amount, which is the same
amount that would be legally available for the payment of dividends on
Latin America group stock if the Latin America group were a separate
company under Georgia law.
The Latin America group available distribution amount is calculated by
multiplying:
- the outstanding interest fraction with respect to Latin America group
stock
times
- the lesser of:
- any amount in excess of the minimum amount necessary to pay debts
attributed to the Latin America group as they become due in the usual
course of business; and
- the total assets attributed to the Latin America group less the sum of
the total liabilities attributed to the Latin America group plus the
amount that would be needed to satisfy the preferential rights upon
dissolution of shares of stock, if any, attributed to the Latin America
group that are superior to Latin America group stock.
Under Georgia law, the amount of funds of BellSouth legally available for
distributions is determined on the basis of our entire company, and not only the
respective groups. As a result, the amount of our legally available funds will
reflect the amount of:
- any net losses of each group, including any additional groups that are
subsequently created;
- any distributions on Latin America group stock, BLS group stock, any
additional series of common stock that is subsequently created or any
preferred stock; and
- any repurchases of Latin America group stock, BLS group stock, any
additional series of common stock that is subsequently created or any
preferred stock.
Payment of dividends on Latin America group stock also may be restricted by
loan agreements, indentures and other agreements or obligations entered into by
BellSouth from time to time.
If there are shares of Latin America group stock reserved for and
attributed to the BLS group at the time of any dividend on the outstanding
shares of Latin America group stock, we will credit to the BLS group, and charge
against the Latin America group, an amount that would be payable if the reserved
shares were outstanding shares.
VOTING RIGHTS
The holders of Latin America group stock and the holders of BLS group
stock, as well as the holders of any additional series of common stock that is
subsequently created and entitled to vote, will be entitled to vote on any
matter on which our shareholders are, by Georgia law, by stock exchange rules or
by the provisions of our charter or our by-laws or as determined by our board of
directors, entitled to vote.
The holders of Latin America group stock and the holders of BLS group
stock, as well as the holders of any additional series of common stock that is
subsequently created and entitled to vote, will vote together as a single voting
group on each matter on which holders of common stock are generally entitled to
vote, except as described below.
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<PAGE> 131
On all matters as to which all series of common stock will vote together as
a single voting group:
- each share of Latin America group stock will have a number of votes equal
to the average market value of one share of Latin America group stock
divided by the average market value of one share of BLS group stock. We
will calculate the average market values during the 20-day trading period
ending on the tenth trading day prior to the record date for determining
the holders entitled to vote. As a result of this calculation, each share
of Latin America group stock may have more than, less than or exactly one
vote per share.
However, the number of votes per share of Latin America group stock will
be reduced if this calculation results in the holders of Latin America
group stock holding more than 35% of the total voting power of all
outstanding shares of common stock. In that event, the number of votes per
share will be recalculated so that all of the outstanding shares of Latin
America group stock represent only 35% of the total voting power of all
outstanding shares of common stock. The 35% limitation on the total voting
power of all outstanding shares of common stock will be eliminated if the
outstanding shares of BLS group stock are converted into shares of Latin
America group stock; and
- each share of BLS group stock will have one vote.
If we issue additional series of common stock, each share of each
additional series of common stock will have a number of votes as our board of
directors determines at the time of issuance. The additional series of common
stock could have a fixed or variable vote per share, including a fraction of one
vote, or could be non-voting. Shares representing a group's inter-group interest
in another group will not have any voting rights.
Accordingly, the relative per share voting rights of Latin America group
stock, BLS group stock and any additional series of common stock that is
subsequently created and entitled to a number of votes per share based on market
values will fluctuate depending on changes in the relative market values of
shares of the series of common stock.
BLS group stock will retain a substantial majority of the total voting
power of BellSouth because:
- we expect that initially the total market value of the outstanding shares
of BLS group stock will be substantially greater than the total market
value of the outstanding shares of Latin America group stock; and
- the total voting power of all of the outstanding shares of Latin America
group stock is limited to 35% of the total voting power of all
outstanding shares of common stock, regardless of the market value of
Latin America group stock.
We will set forth the number of outstanding shares of Latin America group
stock, BLS group stock and any additional series of common stock in our annual
report on Form 10-K and our quarterly reports on Form 10-Q filed under the
Securities Exchange Act of 1934. We will disclose in any proxy statement for a
shareholders' meeting the number of outstanding shares and per share voting
rights of Latin America group stock, BLS group stock and any additional series
of common stock.
If shares of only Latin America group stock are outstanding, each share
will have one vote. If Latin America group stock is entitled to vote as a
separate voting group with respect to any matter, each share of that series
will, for purpose of such vote, have one vote on such matter.
The holders of Latin America group stock and the holders of BLS group stock
will not have any rights to vote separately as a voting group on any matter
coming before our shareholders, except in the limited circumstances provided
under Georgia law described below or by stock exchange rules, our charter or our
by-laws. Our board of directors could also decide, in its sole discretion, to
condition the taking of any action upon the approval of a series of common
stock, voting as a separate voting group.
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<PAGE> 132
The holders of the outstanding shares of a series are entitled to vote as a
separate voting group on a proposed amendment to our charter if the amendment
would:
- effect an exchange or reclassification of all or part of the shares of
the series into shares of another series;
- effect an exchange or reclassification, or create the right of exchange,
of all or part of the shares of another series into shares of the series;
- change the designation, rights, preferences or limitations of all or part
of the shares of the series;
- change the shares of all or part of the series into a different number of
shares of the same series;
- create a new series of shares having rights or preferences with respect
to distributions or to dissolution that are prior, superior or
substantially equal to the shares of the series;
- increase the rights, preferences or number of authorized shares of any
series that, after giving effect to the amendment, have rights or
preferences with respect to distributions or to dissolution that are
prior, superior or substantially equal to the shares of the series; or
- cancel, redeem or repurchase all or part of the shares of the series.
The holders of the shares of a series are not entitled, however, to vote as a
separate voting group or otherwise on an amendment to our charter adopted by our
board of directors to create an additional series of common stock out of
authorized but unissued common stock, as permitted by our charter, or to
increase or decrease the number of authorized shares in an existing series, even
if the amendment would have an effect identified in the preceding sentence. In
addition, if the holders of shares of a series would otherwise be entitled to
vote as a separate voting group on a proposed charter amendment, but the
amendment would affect one or more other series of common stock in the same or a
substantially similar way, the holders of all the affected series would vote
together on the amendment as a single voting group.
The following illustration demonstrates the calculation of the number of
votes to which each share of Latin America group stock would be entitled on all
matters on which the holders of Latin America group stock and the holders of BLS
group stock vote together as a single voting group. The illustration assumes
facts so that the average market values calculation does not result in the
holders of Latin America group stock holding more than 35% of the total voting
power of all outstanding shares of common stock and therefore a reduction in the
voting power of each share of Latin America group stock is not required.
If:
- 200 million shares of Latin America group stock and 2 billion shares of
BLS group stock were outstanding;
- the average market value for the 20-trading day valuation period for
Latin America group stock was $25 per share; and
- the average market value for the 20-trading day valuation period for BLS
group stock was $50 per share;
then each share of BLS group stock would have one vote and each share of Latin
America group stock would have .5 votes based on the following calculation:
<TABLE>
<S> <C> <C> <C> <C>
average market value of
Latin America group stock $25 per share .5 votes per share of
--------------------------------- = --------------------- = Latin America group stock
average market value of $50 per share
BLS group stock
</TABLE>
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<PAGE> 133
As a result, the shares of Latin America group stock would represent 100 million
votes, which would equal 4.76% of our total voting power, and the shares of BLS
group stock would represent 2 billion votes, which would equal 95.24% of our
total voting power. These amounts are calculated as follows:
<TABLE>
<S> <C> <C> <C> <C>
.5 votes per share 200 million outstanding 100 million votes for
of Latin America X shares of Latin = Latin America group stock
group stock America group stock
1 vote per share X 2 billion shares of = 2 billion votes for
of BLS group stock BLS group stock BLS group stock
</TABLE>
<TABLE>
<S> <C> <C>
100 million votes for
Latin America group stock 4.76% of total voting power held by Latin
------------------------------------------ = America group stock
100 million votes for
Latin America group stock +
2 billion votes for BLS group stock
2 billion votes
for BLS group stock 95.24% of total voting power held by BLS
------------------------------------------ = group stock
100 million votes for
Latin America group stock +
2 billion votes for BLS group stock
</TABLE>
The following illustration demonstrates the calculation of the number of
votes to which each share of Latin America group stock would be entitled on all
matters on which the holders of BLS group stock and the holders of Latin America
group stock vote together as a single voting group. This illustration assumes
facts so that the average market values calculation does result in the holders
of Latin America group stock holding more than 35% of the total voting power of
all outstanding shares of common stock and therefore a reduction in the voting
power of each share of Latin America group stock is required.
If:
- 800 million shares of Latin America group stock and 2 billion shares of
BLS group stock were outstanding;
- the average market value for the 20-trading day valuation period for
Latin America group stock was $100 per share; and
- the average market value for the 20-trading day valuation period for BLS
group stock was $50 per share;
then each share of BLS group stock would have one vote and each share of Latin
America group stock would have 1.346 votes based on the following series of
calculations:
<TABLE>
<C> <C> <C> <S> <C>
average market value of
Latin America group stock $100 per share 2 votes per share of
--------------------------------- = -------------- = Latin America group
average market value of $50 per share stock
BLS group stock
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
2 votes per share of 800 million outstanding
Latin America X shares of Latin America = 1.6 billion votes for
group stock group stock Latin America group stock
</TABLE>
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<PAGE> 134
<TABLE>
<S> <C> <C>
1.6 billion votes for
Latin America group stock Latin America group stock would hold
------------------------------------------ = 44.44% of total voting power of common
1.6 billion votes for stock
Latin America group stock +
2 billion votes for BLS group stock
</TABLE>
Because the total voting power of Latin America group stock would exceed
the 35% limitation, we would calculate the maximum number of votes to which the
holders of Latin America group stock are entitled in total by using this
formula:
<TABLE>
<S> <C> <C>
x 35% of total voting power
--------------- = of common stock
x + y
</TABLE>
where:
x = the maximum number of votes to which the holders of
outstanding shares of Latin America group stock are entitled
as a group; and
y = the number of votes to which the holders of the outstanding
shares of BLS group stock are entitled as a group, based on
one vote per share.
Applied to the foregoing facts, this formula results in the following:
<TABLE>
<S> <C> <C>
x
------------- = .35
x + 2 billion
x = .35 (x + 2 billion)
x = .35x + 700 million
x - .35x = 700 million
.65x = 700 million
x = 1,076,923,077 votes for
Latin America group stock
</TABLE>
We then calculate the maximum number of votes per share of Latin America
group stock as follows:
<TABLE>
<S> <C> <C> <C> <C>
x 1,076,923,077 1.346 votes per share
------------------------------- = ------------- = of Latin America group stock
the number of shares of Latin 800,000,000
America group stock outstanding
</TABLE>
CONVERSION AND REDEMPTION
CONVERSION OF LATIN AMERICA GROUP STOCK AT OUR OPTION AT ANY TIME
CONVERSION OF LATIN AMERICA GROUP STOCK INTO BLS GROUP STOCK. Our board of
directors may at any time, without shareholder approval, convert each share of
Latin America group stock into a number of shares of BLS group stock equal to a
percentage, set forth below under "-- Conversion Ratios," of the ratio of the
average market value of one share of Latin America group stock to the average
market value of one share of BLS group stock.
However, after the second anniversary of the completion of this offering,
our board of directors may effect a conversion of Latin America group stock into
BLS group stock only if the average market capitalization of
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<PAGE> 135
Latin America group stock is less than 60% of the average combined market
capitalization of Latin America group stock and BLS group stock.
CONVERSION RATIOS. The percentage of the ratio of the average market
values will be:
- during the first year after the completion of this offering -- 120%;
- beginning on the first anniversary but before the second anniversary of
the completion of the offering -- 115%;
- beginning on the second anniversary of the completion of this offering:
-- 110% if the average market capitalization of Latin America group
stock is less than 40% of the average combined market capitalization
of Latin America group stock and BLS group stock; and
-- 100% if the average market capitalization of Latin America group
stock is 40% or more, but less than 60%, of the average combined
market capitalization of Latin America group stock and BLS group
stock.
CALCULATION PERIODS. We will calculate the average market values and
average market capitalizations during the 20-trading day period ending on the
fifth trading day prior to the date we begin to mail the conversion notice to
holders.
CONVERSION OF BLS GROUP STOCK INTO LATIN AMERICA GROUP STOCK. Beginning on
the second anniversary of the completion of this offering, our board of
directors may, without shareholder approval, convert each share of BLS group
stock into a number of shares of Latin America group stock equal to a
percentage, set forth above under "-- Conversion Ratios," of the ratio of the
average market value of one share of BLS group stock to the average market value
of one share of Latin America group stock at either a 10% premium or without any
premium. A conversion of BLS group stock into Latin America group stock would be
subject to the same premium provisions set forth above under "-- Conversion
Ratios" that would apply to a conversion of Latin America group stock into BLS
group stock.
However, our board of directors may effect a conversion of BLS group stock
into Latin America group stock only if the average market capitalization of BLS
group stock is less than 60% of the average combined market capitalization of
BLS group stock and Latin America group stock.
CONVERSION OF LATIN AMERICA GROUP STOCK INTO ADDITIONAL SERIES OF COMMON
STOCK. If our board of directors has issued one or more additional series of
common stock, our board of directors may, without shareholder approval, convert
each share of Latin America group stock into a number of shares of an additional
series of common stock equal to a percentage of the ratio of the average market
value of one share of Latin America group stock to the average market value of
one share of the additional series of common stock. A conversion of Latin
America group stock into an additional series of common stock would be subject
to the same premium and market capitalization provisions that would apply to a
conversion of Latin America group stock into BLS group stock.
TAX EVENT. If at any time there is more than an insubstantial risk of the
adverse income tax consequences described below, the percentage of the ratio of
the average market values will be 100%. This means that the holders of Latin
America group stock will not receive any premium in a conversion that is
effected under such circumstances.
Our board of directors may exercise our conversion rights at any time
without a premium if we receive an opinion of our tax counsel to the effect
that, as a result of any amendment to, clarification of, or change or proposed
change in, the laws, or interpretation or application of the laws, of the United
States or any political subdivision or taxing authority of or in the United
States, including:
- the enactment of any legislation;
- the publication of any judicial or regulatory decision, determination or
pronouncement; or
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<PAGE> 136
- any announced proposed change in law by an applicable legislative
committee or the chairperson of an applicable legislative committee,
regardless of whether the amendment, clarification, change or proposed change is
issued to or in connection with a proceeding involving us and regardless of
whether the amendment, clarification, change or proposed change is subject to
appeal, there is more than an insubstantial risk that:
- for tax purposes, any issuance of Latin America group stock or BLS group
stock would be treated as a sale or other taxable disposition by us or
any of our subsidiaries of any of the assets, operations or relevant
subsidiaries to which Latin America group stock or BLS group stock
relates;
- the issuance or existence of Latin America group stock or BLS group stock
would subject us, our subsidiaries or affiliates, or our or their
successors or shareholders to tax or other adverse tax consequences; or
- for tax purposes, either Latin America group stock or BLS group stock is
not, or at any time in the future will not be, treated solely as common
stock of BellSouth.
For purposes of rendering this opinion, tax counsel will assume that any
legislative or administrative proposals will be adopted or enacted as proposed.
PURPOSES OF OPTIONAL CONVERSION PROVISIONS; SHAREHOLDER
CONSIDERATIONS. These provisions allow us the flexibility to recapitalize Latin
America group stock and BLS group stock into one series of common stock that
would, after the recapitalization, represent an equity interest in the combined
businesses of the Latin America group and the BLS group. The optional conversion
could be exercised at any future time if our board of directors determines that,
under particular facts and circumstances then existing, an equity structure
including these two series of common stock was no longer in the best interests
of BellSouth. Our board of directors may make this determination if, for
example, this equity structure no longer assists greater market recognition of
Latin America group stock and BLS group stock or is no longer necessary to
enhance our strategic or financial flexibility. A conversion could be exercised,
however, at a time that is disadvantageous to the holders of Latin America group
stock.
Conversion would be based upon the relative market values of Latin America
group stock and BLS group stock. Many factors could affect the market values of
Latin America group stock or BLS group stock, including our results of
operations and those of each of the groups, trading volume and general economic
and market conditions. Market values also could be affected by decisions by our
board of directors or our management that investors perceive to affect
differently the series of stock related to one group compared to the series of
stock related to the other group. These decisions could include changes to our
tracking stock policies, transfers of assets and liabilities between groups,
allocations of corporate opportunities and financing resources between the
groups and changes in dividend policies.
The following illustration demonstrates the calculation of the number of
shares issuable upon conversion of Latin America group stock into shares of BLS
group stock at our option during the third year after the completion of this
offering.
If:
- there is not more than an insubstantial risk of adverse income tax
consequences;
- 200 million shares of Latin America group stock and 2 billion shares of
BLS group stock were outstanding immediately prior to the conversion;
- the average market value of one share of Latin America group stock over
the 20-trading day valuation period was $25 per share;
- the average market value of one share of BLS group stock over the
20-trading day valuation period was $50 per share; and
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<PAGE> 137
- the average market capitalization of the outstanding Latin America group
stock during the 20-trading day valuation period is less than 40% of the
combined average market capitalization of Latin America group stock and
BLS group stock during the same period;
then each share of Latin America group stock could be converted into .55 shares
of BLS group stock based on the following calculation:
<TABLE>
<S> <C> <C> <C> <C>
average market value of
Latin America group stock
110% X --------------------------------- =
average market value of
BLS group stock
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
$25 per share
1.1 X --------------------------------- = .55 shares
$50 per share
</TABLE>
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
Our board of directors may at any time, without shareholder approval,
redeem on a pro rata basis all of the outstanding shares of Latin America group
stock in exchange for shares of the common stock of one or more of our
wholly-owned subsidiaries that own all of the assets and liabilities attributed
to the Latin America group.
These provisions are intended to give us increased flexibility with respect
to spinning-off the assets and liabilities attributed to the Latin America group
by transferring all of the assets and liabilities attributed to the Latin
America group to one or more wholly-owned subsidiaries. As a result of this
redemption, the holders of Latin America group stock and the holders of BLS
group stock would hold securities of separate legal entities operating in
distinct lines of business. We currently do not have any intention of
spinning-off the assets and liabilities attributed to the Latin America group;
however, this redemption could be authorized by our board of directors at any
time in the future if it determines that, under the facts and circumstances then
existing, an equity structure comprised of Latin America group stock and BLS
group stock is no longer in the best interests of BellSouth and a spin-off of
the assets attributed to the Latin America group to a company separate from
BellSouth is desirable.
If at the time of this redemption of Latin America group stock the BLS
group has reserved shares of Latin America group stock attributed to it, the
number of shares of those subsidiaries that we will exchange for all of the
outstanding shares of Latin America group stock in such redemption will be equal
to the product of:
- the outstanding interest fraction; and
- the number of shares of common stock of each subsidiary that will be
outstanding immediately after the redemption.
We will retain the balance of the shares of those subsidiaries for the BLS group
or distribute them to the holders of BLS group stock. A similar result will
occur if at the time of any redemption of BLS group stock, the Latin America
group stock has attributed to it reserved shares of BLS group stock.
If there are no longer any shares of Latin America group stock reserved for
and attributed to the BLS group and there are shares of BLS group stock reserved
for and attributed to the Latin America group, at the time of any redemption of
Latin America group stock, we will distribute, in addition to shares of one of
more wholly-owned subsidiaries that own all of the assets and liabilities
attributed to the Latin America group, a number of shares of BLS group stock
equal to the number of shares of BLS group stock reserved for and attributed to
the Latin America group to either the holders of Latin America group stock or
one or more of those Latin America group subsidiaries. A similar result will
occur if at the time of any redemption of BLS group stock, the BLS group has
attributed to it reserved shares of Latin America group stock.
We may redeem shares of Latin America group stock for subsidiary stock only
if we have funds legally available for distribution under Georgia law.
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The following illustration demonstrates the application of the provisions
with respect to a redemption of all Latin America group stock in exchange for
shares of the common stock of one of our wholly-owned subsidiaries that owns all
of the assets and liabilities attributed to the Latin America group.
If:
- 200 million shares of Latin America group stock and 2 billion shares of
BLS group stock were outstanding;
- the BLS group has an 80% inter-group interest in the Latin America group,
resulting in a 20% outstanding interest fraction; and
- 400 million shares of common stock of that Latin America group subsidiary
will be outstanding immediately after the redemption;
then we will exchange 80 million shares of common stock of that Latin America
group subsidiary for Latin America group stock based on the following
calculation:
<TABLE>
<S> <C> <C> <C>
the number of shares of common stock of that
outstanding X Latin America group subsidiary that will be =
interest fraction outstanding immediately after the redemption
</TABLE>
<TABLE>
<C> <C> <C> <C> <S>
.2 X 400 million = 80 million shares
</TABLE>
As a result of the BLS group's 80% inter-group interest, we will retain the
remaining 320 million shares of common stock of that Latin America group
subsidiary for the BLS group or distribute them to the holders of BLS group
stock.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF STOCK IF DISPOSITION OF THE
ASSETS ATTRIBUTED TO THE LATIN AMERICA GROUP OCCURS
If we dispose of all or substantially all -- that is, at least 80% -- of
the properties and assets attributed to the Latin America group in a transaction
or series of related transactions, our board of directors is required to take
action that returns the value of the net proceeds of those assets to the holders
of Latin America group stock. That action could take the form of a special
dividend, a redemption of shares or a conversion into another series of common
stock. There are exceptions, however, to this requirement that are described
below under "-- Exceptions to the Mandatory Dividend, Redemption and Conversion
Requirement if a Disposition Occurs."
If no exception applies, our board of directors will elect, without
shareholder approval, to do one of the following:
- pay a special dividend to the holders of Latin America group stock in
cash and/or securities or other property having a fair value equal to the
product of:
-- the outstanding interest fraction related to that stock; and
-- the net proceeds of the disposition;
- if the disposition involves:
- all of the properties and assets, redeem all outstanding shares of Latin
America group stock in exchange for cash and/or securities or other
property having a fair value equal to the product of:
-- the outstanding interest fraction related to that stock; and
-- the net proceeds of the disposition;
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<PAGE> 139
- substantially all -- but not all -- of the properties and assets, redeem
a number of whole shares of Latin America group stock in exchange for
cash and/or securities or other property having a fair value equal to
the product of:
-- the outstanding interest fraction related to that stock; and
-- the net proceeds of the disposition;
the number of shares so redeemed will have in the aggregate an average
market value, during the period of ten consecutive trading days beginning
on the 51st trading day following the disposition date, closest to the
product of:
-- the outstanding interest fraction related to that stock; and
-- the net proceeds of the disposition; or
- convert each outstanding share of Latin America group stock into a number
of shares of BLS group stock equal to 110% of the ratio of the average
market value of one share of Latin America group stock to the average
market value of one share of BLS group stock. We will calculate the
average market values during the ten-trading day period beginning on the
51st trading day following the disposition date. Alternatively, if our
board of directors has issued one or more additional series of common
stock, our board of directors may convert each share of Latin America
group stock into a number of shares of an additional series of common
stock. The same premium provisions would apply.
If the BLS group has an inter-group interest in the Latin America group at
the time of any special dividend on or redemption of Latin America group stock,
we will credit to the BLS group, and charge against the Latin America group, an
amount that would be payable if the reserved shares of Latin America group stock
were outstanding shares.
If the BLS group no longer has an inter-group interest in the Latin America
group and we have attributed an inter-group interest in the BLS group to the
Latin America group at the time of any special dividend on or redemption of BLS
group stock, we will credit to the Latin America group, and charge against the
BLS group, an amount that would be payable if the reserved shares of BLS group
stock were outstanding shares.
We may only pay a special dividend or redeem shares of Latin America group
stock if we have funds for distributions under Georgia law and the amount to be
paid to holders is less than or equal to the Latin America group available
distribution amount. We will pay the special dividend or complete the redemption
or conversion on or prior to the 120th trading day following the disposition
date.
For purposes of determining whether a disposition has occurred,
"substantially all of the properties and assets" attributed to the Latin America
group means a portion of the properties and assets that represents at least 80%
of the then fair value of the properties and assets attributed to the Latin
America group.
The "net proceeds" of a disposition means an amount equal to what remains
of the gross proceeds of the disposition after any payment of, or reasonable
provision is made as determined by our board of directors for:
- any taxes we estimate will be payable by us, or which we estimate would
have been payable but for the utilization of tax benefits attributable to
another group, in respect of the disposition or in respect of any
resulting dividend or redemption;
- any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses; and
- any liabilities attributed to the Latin America group, including, without
limitation:
- any liabilities for deferred taxes;
- any indemnity or guarantee obligations incurred in connection with the
disposition or otherwise;
- any liabilities for future purchase price adjustments; and
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<PAGE> 140
- any preferential amounts plus any accumulated and unpaid dividends in
respect of any preferred stock attributed to the Latin America group.
We may elect to pay the special dividend or redemption price either in:
- the same form as the proceeds of the disposition were received; or
- any other combination of cash, securities or other property that our
board of directors or, in the case of securities that have not been
publicly traded for a period of at least 15 months, an independent
investment banking firm, determines will have a total market value of not
less than the fair value of the net proceeds.
The factors our board of directors will consider when it is required to
choose among paying a special dividend, redeeming shares or converting shares of
Latin America group stock into BLS group stock will depend upon all of the facts
and circumstances at the time. If we dispose of all or substantially all of the
properties and assets attributed to the Latin America group, we probably would
redeem the shares of Latin America group stock or exercise our conversion option
because the scope or scale of the remaining properties and assets attributed to
the group would likely not provide a reasonable basis for a tracking stock for
the Latin America group. We may wish to convert Latin America group stock into
BLS group stock, even at the applicable premium, if it was then desirable for us
to retain the proceeds of the sale for our remaining businesses. However, the
likely taxability of an asset sale and dividend or redemption at both the
corporate and shareholder levels makes it very unlikely that we would dispose of
any substantial amount of properties or assets in this manner.
The following illustration demonstrates the application of the provisions
requiring a mandatory special dividend, redemption or conversion if a
disposition of the assets of the Latin America group occurs.
If:
- 200 million shares of Latin America group stock and 2 billion shares of
BLS group stock were outstanding;
- the BLS group has an 80% inter-group interest in the Latin America group,
resulting in a 20% outstanding interest fraction;
- the net proceeds of the sale of substantially all -- but not all -- of
the assets attributed to the Latin America group equals $22 billion;
- the average market value of Latin America group stock during the
ten-trading day valuation period was $25 per share; and
- the average market value of BLS group stock during the ten-trading day
valuation period was $50 per share;
then we could do any one of the following:
(1) pay a special dividend to the holders of Latin America group stock equal to:
<TABLE>
<S> <C> <C> <C> <C>
outstanding interest net proceeds
fraction X --------------------------------- =
number of outstanding shares
of Latin America group stock
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
$22 billion
.2 X --------------------------------- = $22 per share
200 million shares
</TABLE>
As a result of the BLS group's 80% inter-group interest, we will credit to
the BLS group, and charge against the Latin America group, $17.6 billion
(.8 X $22 billion).
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<PAGE> 141
(2) redeem for $25 per share a number of shares of Latin America group stock
equal to:
<TABLE>
<S> <C> <C> <C> <C>
outstanding interest net proceeds
fraction X --------------------------------- =
average market value of
Latin America group stock
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
$22 billion
.2 X --------------------------------- = 176 million shares
$25 per share
</TABLE>
At the same time, as a result of the BLS group's 80% inter-group interest,
we will effectively treat as redeemed 704 million shares issuable with
respect to the BLS group's inter-group interest in the Latin America group
for $25 per share by crediting to the BLS group, and charging against the
Latin America group, $17.6 billion.
(3) convert each outstanding share of Latin America group stock into a number of
shares of BLS group stock equal to:
<TABLE>
<S> <C> <C> <C> <C>
average market value of
Latin America group stock
110% X --------------------------------- =
average market value of
BLS group stock
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
$25 per share
1.1 X --------------------------------- = .55 shares
$50 per share
</TABLE>
If we dispose of substantially all -- but not all -- of the properties and
assets attributed to the Latin America group, our board of directors may, prior
to the second anniversary of the payment of a special dividend or redemption
following the disposition, convert each outstanding share of Latin America group
stock into a number of shares of BLS group stock equal to 110% of the ratio of
the average market value of one share of Latin America group stock to the
average market value of one share of BLS group stock. Following the second
anniversary of the completion of this offering, the number of shares to be
received as a result of a conversion will equal 100% of the applicable ratio if
we would be entitled to convert without any premium pursuant to the optional
conversion provisions described under "-- Conversion of Latin America Group
Stock at Our Option at Any Time;" otherwise, the number of shares to be received
will continue to equal 110% of the applicable ratio. We will calculate the ratio
of average market values during a 20-trading day valuation period ending on the
fifth trading day prior to the date we begin to mail the conversion notice to
holders. After the disposition of substantially all of the properties and assets
attributed to the Latin America group, the market value of Latin America group
stock will decrease to reflect the sale and subsequent special dividend or
redemption and thus will only reflect the value of the remaining assets.
Alternatively, if our board of directors has issued one or more additional
series of common stock, our board of directors may convert each share of Latin
America group stock into a number of shares of an additional series of common
stock. A conversion of Latin America group stock into an additional series of
common stock would be subject to the same premium provisions that would apply to
a conversion of Latin America group stock into BLS group stock.
The following illustration demonstrates the calculation of the number of
shares issuable upon conversion of Latin America group stock into shares of BLS
group stock within two years after a special dividend following a disposition of
substantially all of the assets attributed to the Latin America group.
If:
- 200 million shares of Latin America group stock and 2 billion shares of
BLS group stock were outstanding;
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<PAGE> 142
- the BLS group has an 80% inter-group interest in the Latin America group,
resulting in a 20% outstanding interest fraction;
- the average market value of Latin America group stock during the
20-trading day valuation period was $5 per share; and
- the average market value of BLS group stock during the 20-trading day
valuation period was $50 per share;
then each share of Latin America group stock could be converted into .11 shares
of BLS group stock based on the following calculation:
<TABLE>
<S> <C> <C> <C> <C>
average market value of
Latin America group stock
110% X --------------------------------- =
average market value of
BLS group stock
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
$5 per share
1.1 X --------------------------------- = .11 shares
$50 per share
</TABLE>
EXCEPTIONS TO THE MANDATORY DIVIDEND, REDEMPTION OR CONVERSION REQUIREMENT
IF A DISPOSITION OCCURS. We are not required to take any of the above actions
for any disposition of all or substantially all of the properties and assets
attributed to the Latin America group in a transaction or series of related
transactions that results in our receiving for those properties and assets
primarily equity securities of any entity that:
- acquires those properties or assets or succeeds to the business conducted
with those properties or assets or that controls such acquirer or
successor; and
- is primarily engaged or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by the
Latin America group prior to the disposition, as determined by our board
of directors.
The purpose of this exception is to enable us technically to "dispose" of
properties or assets of the Latin America group to other entities engaged or
proposing to engage in businesses similar or complementary to those of the Latin
America group without requiring a special dividend on, or a redemption or
conversion of, Latin America group stock, so long as we receive an equity
interest in that entity. We are not required to control that entity, whether by
ownership or contract provisions.
In addition, we are not required to effect a special dividend, redemption
or conversion if a disposition is:
- of all or substantially all of our properties and assets in one
transaction or a series of related transactions in connection with our
dissolution and the distribution of our assets to shareholders;
- on a pro rata basis, such as in a spin-off, to the holders of all
outstanding shares of Latin America group stock and, to the extent that
the BLS group has an inter-group interest in the Latin America group, the
BLS group;
- made to any person or entity controlled by us, as determined by our board
of directors; or
- a disposition conditioned upon the affirmative vote of a majority of the
votes entitled to be cast by the holders of Latin America group stock,
voting as a separate voting group.
NOTICES IF DISPOSITION OF THE ASSETS ATTRIBUTED TO THE LATIN AMERICA GROUP
OCCURS. Not later than the 45th trading day after the disposition date, we will
announce publicly by press release:
- the net proceeds of the disposition;
- the number of shares outstanding of Latin America group stock;
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<PAGE> 143
- the number of shares of Latin America group stock into or for which
convertible securities are then convertible, exchangeable or exercisable
and the conversion, exchange or exercise price of those convertible
securities; and
- if applicable, the outstanding interest fraction on the date of the
notice.
Not earlier than the 61st trading day and not later than the 65th trading
day after the disposition date, we will announce publicly by press release
whether we will pay a special dividend or redeem shares of Latin America group
stock with the net proceeds of the disposition or convert the shares of Latin
America group stock into another series of common stock.
We will mail to each holder of Latin America group stock the additional
notices and other information required by our charter.
DISPOSITION OF LESS THAN SUBSTANTIALLY ALL OF THE ASSETS. If we dispose of
less than substantially all -- that is, less than 80% -- of the properties and
assets attributed to the Latin America group in a transaction or series of
transactions, we will attribute the proceeds to the Latin America group. We will
use those proceeds:
- in the business of the Latin America group;
- for distribution to the holders of Latin America group stock; or
- to buy back shares of Latin America group stock in the open market.
We may use those proceeds in the business of the BLS group only if we
reattribute to the Latin America group consideration with an equivalent fair
value.
SELECTION OF SHARES FOR REDEMPTION
If fewer than all of the outstanding shares of Latin America group stock
are to be redeemed, we will redeem those shares proportionately from among the
holders of outstanding shares of Latin America group stock or by such other
method as may be determined by our board of directors to be equitable.
FRACTIONAL INTERESTS; TRANSFER TAXES
We will not be required to issue fractional shares of any capital stock or
any fractional securities to any holder of Latin America group stock upon any
conversion, redemption, dividend or other distribution described above. If a
fraction is not issued to a holder, we will pay cash instead of that fraction.
We will pay all documentary, stamp or similar issue or transfer taxes that
may be payable in respect of the issue or delivery of any shares of capital
stock and/or other securities to the holders of record on redemption or
conversion of shares.
LIQUIDATION RIGHTS
Under our charter, in the event of our dissolution, the holders of Latin
America group stock, the holders of BLS group stock and the holders of any
additional series of common stock that is subsequently created will be entitled
to receive our assets on a per share basis in proportion to the liquidation
units per share of such series. However, holders of Latin America group stock,
BLS group stock and any additional series of common stock will be entitled to
receive our assets only after payment or provision for payment of the debts and
other liabilities of BellSouth and full preferential amounts to which holders of
any preferred stock are entitled.
The liquidation rights of the series of common stock will be as follows:
- each outstanding share of Latin America group stock will have .25 of one
liquidation unit; and
- each outstanding share of BLS group stock will have one liquidation unit.
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<PAGE> 144
If we issue additional series of common stock, each share of each
additional series of common stock will have a number of liquidation units as our
board of directors determines at the time of issuance. These liquidation units
could also be equal to a fraction of one liquidation unit.
The number of liquidation units to which each share of Latin America group
stock is entitled will not be changed without the approval of the holders of
each series of common stock voting as a separate voting group, except in the
limited circumstances described below. As a result, the liquidation rights of
the holders of the respective series of common stock may not bear any
relationship to the relative market values, the relative voting rights of the
series of common stock or the value of the assets attributed to the groups.
No holder of Latin America group stock will have any special right to
receive specific assets attributed to the Latin America group and no holder of
BLS group stock will have any special right to receive specific assets
attributed to the BLS group in the case of our dissolution.
If we subdivide or combine the outstanding shares of a series of common
stock or declare a dividend or other distribution of shares of a series of
common stock to holders of that series of common stock, the number of
liquidation units of the other series of common stock will be appropriately
adjusted. This adjustment will be made by our board of directors to avoid any
dilution in the relative liquidation rights of any series of common stock.
Neither a merger or share exchange of BellSouth into or with any other
corporation, nor any sale, lease, exchange or other disposition of all or
substantially all of our assets, will, alone, cause the dissolution of
BellSouth, for purposes of these liquidation rights provisions.
INTER-GROUP INTEREST
Prior to the completion of this offering, BellSouth attributed to the BLS
group a 100% interest in the Latin America group. In this prospectus we
sometimes refer to that interest as an "inter-group interest." The number of
shares of Latin America group stock that, if issued, would initially represent
that 100% inter-group interest equals . That number of shares was
determined based on:
- the estimated value of our equity attributed to the Latin America group
as if it were a separate company; and
- the initial offering price of Latin America group stock.
Because the shares of Latin America group stock being sold in this offering
are "new" shares (that is, shares not included in the inter-group interest in
the Latin America group we attributed to the BLS group), the number of shares of
Latin America group stock representing 100% of the equity of BellSouth
attributed to the Latin America group will increase. The shares issued in
this offering will represent approximately % of our equity attributed to
our Latin America group and cause the number of shares representing 100% of our
equity attributed to our Latin America group to increase to .
The shares of Latin America group stock that we reserved for and
attributed to the BLS group, as determined above, is the number of shares we can
issue for the benefit of the BLS group or distribute to holders of BLS group
stock. Until these reserved shares of Latin America group stock are issued, they
are not outstanding shares of Latin America group stock and are not entitled to
vote. The outstanding interest fraction indicates the portion of our equity
attributed to the Latin America group that is represented by shares of Latin
America group stock held by the public. It is calculated by dividing the number
of outstanding shares of Latin America group stock issued to the public by the
sum of the number of outstanding shares of Latin America group stock issued to
the public plus the number of shares of Latin America group stock then reserved
for and attributed to the BLS group. The outstanding interest fraction will
equal one, and the inter-group interest will equal zero, at any time that there
are no shares of Latin America group stock then reserved for and attributed to
the BLS group. Immediately after this offering, the outstanding interest
fraction will equal %.
At any time we attribute an inter-group interest in the Latin America group
to the BLS group, the outstanding interest fraction will be used, in effect, to
allocate to the BLS group any dividend or redemption payment made to the holders
of Latin America group stock.
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<PAGE> 145
The following illustration demonstrates the calculation of the outstanding
interest fraction.
If:
- 100 million shares of Latin America group stock were outstanding as a
result of the public offering; and
- 400 million shares of Latin America group stock were included in the BLS
group's inter-group interest in the Latin America group (that is, we
attribute to the BLS group a 80% inter-group interest in the Latin
America group);
then the outstanding interest fraction with respect to Latin America group stock
would equal .20 based on the following calculation:
<TABLE>
<S> <C> <C>
number of shares of
Latin America group stock outstanding
---------------------------------------
number of shares of =
Latin America group stock outstanding +
number of shares of
Latin America group stock
then attributed to the BLS group
100 million shares
--------------------------------------- = .20
100 million shares + 400 million shares
</TABLE>
The number of shares of Latin America group stock reserved for and
attributed to the BLS group will be increased, without shareholder approval, to
reflect:
- share dividends of Latin America group stock to holders of Latin America
group stock;
- reclassifications of Latin America group stock resulting in a greater
number of shares of Latin America group stock outstanding;
- purchases of Latin America group stock with assets attributed to the BLS
group;
- transfers to the Latin America group of assets attributed to the BLS
group; and
- transfers to the BLS group of liabilities attributed to the Latin America
group.
The number of shares of Latin America group stock reserved for and
attributed to the BLS group will be decreased, without shareholder approval, to
reflect:
- sales of Latin America group stock for the account of the BLS group;
- share dividends of Latin America group stock to holders of BLS group
stock;
- the issuance of Latin America group stock when convertible securities are
converted if that Latin America group stock was included in the BLS
group's inter-group interest;
- the issuance of Latin America group stock when securities convertible
into Latin America group stock and issued as a distribution to holders of
BLS group stock are converted;
- reclassifications of Latin America group stock resulting in a smaller
number of shares of Latin America group stock outstanding;
- transfers to the BLS group of assets attributed to the Latin America
group; and
- transfers to the Latin America group of liabilities attributed to the BLS
group.
Our board of directors could, without shareholder approval, also increase
or decrease the number of shares of Latin America group stock reserved for and
attributed to the BLS group under other circumstances
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<PAGE> 146
as our board of directors determines appropriate to reflect the economic
substance of any other event or circumstance.
Any group may have an inter-group interest in any other group, unless our
board of directors determines otherwise at the time of issuance. However, no
group can have an inter-group interest in any other group if the two groups
would then have an interest in each other.
DETERMINATIONS BY THE BOARD OF DIRECTORS
Any determinations made in good faith by our board of directors with
respect to a series of common stock will be final and binding on all of our
shareholders.
PREEMPTIVE RIGHTS
The holders of Latin America group stock will not have any preemptive
rights.
BLS GROUP STOCK
DIVIDENDS
Our charter provides that dividends on BLS group stock will be limited to
the lesser of:
- the funds of BellSouth legally available for distribution under Georgia
law; and
- the BLS group available distribution amount.
The BLS group available distribution amount will be calculated in a manner
similar to the manner in which the Latin America group available distribution
amount is calculated.
If the BLS group's inter-group interest in the Latin America group has been
eliminated and the Latin America group has acquired an inter-group interest in
the BLS group, at the time of any dividend on the outstanding shares of BLS
group stock, we will credit to the Latin America group, and charge against the
BLS group, an amount that would be payable if the shares included in the Latin
America group's inter-group interest in the BLS group were outstanding shares.
CONVERSION AND REDEMPTION
BLS group stock is subject to the conversion and redemption provisions
described under "-- Latin America Group Stock -- Conversion and Redemption." BLS
group stock is not convertible into Latin America group stock prior to the
second anniversary of the completion of this offering.
VOTING RIGHTS
The holders of BLS group stock have the voting rights described under
"-- Latin America Group Stock -- Voting Rights."
LIQUIDATION RIGHTS
In the event of our dissolution, the holders of BLS group stock are
entitled to receive funds as described under "-- Latin America Group
Stock -- Liquidation Rights."
INTER-GROUP INTEREST
The BLS group's inter-group interest in the Latin America group, and the
limitations on the Latin America group's ability to acquire an inter-group
interest in the BLS group, are described under "-- Latin America Group
Stock -- Inter-Group Interest."
PREEMPTIVE RIGHTS
The holders of BLS group stock will not have any preemptive rights.
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<PAGE> 147
ADDITIONAL SERIES OF COMMON STOCK
Our board of directors may decide to authorize the issuance of shares of
one or more series of common stock in addition to Latin America group stock and
BLS group stock. Our board of directors has the authority under our charter to
issue additional series of common stock without shareholder approval, unless
shareholder approval is required by Georgia law or the rules of any stock
exchange on which any series of outstanding common stock may then be listed. Our
board of directors does not currently have any plan to issue any additional
series of common stock.
If our board of directors decides to issue an additional series of common
stock, BellSouth may establish a new group to which such new series of common
stock relates either by attributing to it newly acquired assets or by
reattributing to it some of the assets and liabilities from any one or more of
the Latin America group, the BLS group or any previously created additional
group. If our board of directors decides to reattribute assets and liabilities
from an existing group to a new group, the group or groups to which those assets
and liabilities were previously attributed would have an inter-group interest in
the new group representing the reattributed assets and liabilities, unless the
new group fair value paid for those assets and liabilities with other
consideration.
At the time of issuance of any additional series of common stock, our board
of directors will determine the dividend, voting and liquidation rights and
conversion, redemption and other provisions applicable to that additional series
of common stock. Any additional series of common stock issued may be convertible
into either Latin America group stock or BLS group stock on such terms as may be
determined by our board of directors.
Our board of directors also may determine at the time of issuance of any
additional series of common stock that the additional group may acquire an
inter-group interest in either the Latin America group or the BLS group, or
both. Similarly, our board of directors may provide for the Latin America group
or the BLS group, or both, to acquire an inter-group interest in the additional
group.
PREFERRED STOCK
Our charter will authorize our board of directors to provide for the
issuance of first preferred stock in one or more series, without shareholder
approval. Our board of directors can determine the voting powers, preferences,
designations, rights, qualifications, limitations and restrictions of each
series. Prior to the issuance of each series of first preferred stock, our board
of directors may determine the following provisions of that series:
- the designation of the series and the number of shares offered;
- the dividend rate, the dates on which dividends will be payable and the
date from which dividends will be accumulated;
- whether the shares of the particular series can be redeemed, and, if so,
the redemption price and the terms and conditions of redemption;
- the amount per share payable in the event of dissolution;
- any purchase, retirement or sinking fund provisions;
- the terms and conditions, if any, on which shares may be converted;
- whether the shares have voting rights and the extent of any such voting
rights, including, without limitation, the right to elect directors; and
- any other preferences, rights, restrictions and qualifications of shares
of such series permitted by law and our charter.
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<PAGE> 148
RANK
Any series of first preferred stock will rank senior to all series of
common stock with respect to dividend rights and liquidation rights.
DIVIDEND RIGHTS
Dividends on the first preferred stock will be cumulative.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any equal securities unless full dividends have been
paid or set apart for payment on the first preferred stock. If full dividends
are not paid, the first preferred stock will share distribution pro rata with
the securities ranking equally. No dividends may be declared or paid or funds
set apart for the payment of dividends on any junior securities unless full
cumulative dividends for all dividend periods terminating on or prior to the
date of the declaration or payment have been paid or declared and a sum
sufficient for the payment set apart for payment on the first preferred stock.
LIQUIDATION RIGHTS
If we dissolve BellSouth, either voluntarily or involuntarily, the holders
of each series of first preferred stock will be entitled to receive, after we
pay our debts and other liabilities and after we provide for liquidating
distributions to holders of securities senior to such series of first preferred
stock, and before we make any liquidating distributions to holders of securities
junior to such series of first preferred stock liquidating distributions in the
amount described in the resolutions creating the series of first preferred
stock, plus an amount equal to accrued and unpaid dividends for all dividend
periods prior to that point in time.
If the amounts payable with respect to such series of first preferred stock
and any other securities equal with such series are not paid in full, the
holders of such series of first preferred stock and the securities equal with
such series will share proportionately in the distribution of our assets in
proportion to the full liquidation preferences to which they are entitled. After
the holders of such series of first preferred stock are paid in full, they will
have no right or claim to any of our remaining assets.
RESTATED RIGHTS AGREEMENT
Our board of directors has determined that, effective upon our completion
of this offering, BellSouth will amend and restate our current rights agreement
to contain provisions reflecting our new equity structure. Under the restated
rights agreement:
- each share of Latin America group stock will have associated with it a
right to purchase a "unit" of one ten-thousandth of a share of our newly
designated Series D first preferred stock at a purchase price of $200,
subject to adjustment; and
- each outstanding share of BLS group stock will have associated with it a
right to purchase a "unit" of one ten-thousandth of a share of our newly
designated Series C first preferred stock at a purchase price of $200,
subject to adjustment.
A holder of a Series D unit would be entitled to rights substantially
similar to those of a holder of a share of Latin America group stock. Similarly,
a holder of a Series C unit would be entitled to rights substantially similar to
those of a holder of a share of BLS group stock.
The purpose of the rights agreement is to:
- give our board of directors the opportunity to negotiate with any persons
seeking to obtain control of BellSouth;
- deter acquisitions of voting control of BellSouth, or of any series of
our common stock, without assurance of fair and equal treatment of all of
our shareholders or all holders of that series of common stock, as
applicable; and
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- prevent a person from acquiring in the market a sufficient amount of
BellSouth voting power, or a sufficient number of shares of a series of
our common stock, to be in a position to block an action sought to be
taken by our shareholders or by the holders of that series of common
stock, as applicable.
The exercise of the rights would cause substantial dilution to a person
attempting to acquire BellSouth on terms not approved by our board of directors
and therefore would significantly increase the price that person would have to
pay to complete the acquisition. The rights agreement may deter a potential
hostile acquisition.
Until a "distribution date" occurs, the Latin America group rights and the
BLS group rights:
- will not be exercisable; and
- will be represented by the same certificate that represents the shares
with which the rights are associated and will trade together with those
shares.
Following a "distribution date," the rights would become exercisable and we
would issue separate certificates representing the rights, which would trade
separately from Latin America group stock and BLS group stock.
A "distribution date" would occur upon the earlier of:
- the first day on which a person publicly announces that the person has
become an "acquiring person," or on which we publicly announce that a
person has become an "acquiring person;" or
- the tenth day, or a later day determined by our board of directors, after
a person, alone or together with a group, commences or announces its
intention to commence a tender or exchange offer that, if successful,
would result in a person, alone or together with a group, becoming an
"acquiring person."
Under the restated rights agreement, a person becomes an "acquiring person"
if the person, alone or together with a group, acquires beneficial ownership of:
- 20% or more of the outstanding shares of Latin America group stock;
- 20% or more of the outstanding shares of BLS group stock; or
- 10% or more of the total voting power of all of our common stock.
For these purposes, the voting power of a person or group will be determined at
any time and from time to time as if the day on which the determination is made
is the record date for a vote of shareholders.
If any person becomes an acquiring person:
- each holder of a Latin America group right, other than the acquiring
person, will be entitled to purchase, at the purchase price, a number of
Series D units having a market value two times the purchase price; and
- each holder of a BLS group right, other than the acquiring person, will
be entitled to purchase, at the purchase price, a number of Series C
units having a market value two times the purchase price.
For these purposes, we will assume that each Series D unit has the same market
value as a share of Latin America group stock and each Series C unit has the
same market value as a share of BLS group stock.
If a person becomes an acquiring person, our board of directors may, at its
option, exchange the Latin America group rights and the BLS group rights, other
than rights owned by the acquiring person, at an exchange ratio of two Series D
units for each Latin America group right and an exchange ratio of two Series C
units for each BLS group right.
If, following a public announcement that a person has become an acquiring
person:
- BellSouth merges or enters into any similar business combination
transaction and BellSouth is not the surviving corporation;
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- another entity merges or enters into any similar transaction with
BellSouth and all or part of our common stock is converted or exchanged
for other securities, cash or property; or
- 30% or more of our assets or earning power is sold or transferred;
each holder of a Latin America group right and each holder of a BLS group right
will be entitled to purchase, at the purchase price, a number of shares of
common stock of the surviving entity in any merger or other business
combination, or of the purchaser in any sale or transfer of assets or earning
power, having a market value two times the purchase price.
The Latin America group rights and the BLS group rights will expire on
December 11, 2009, unless we extend or terminate them.
At any time until a public announcement that a person has become an
acquiring person, our board of directors may redeem all of the Latin America
group rights and the BLS group rights at a redemption price of $.01 per right.
On the redemption date, the rights will expire and the only entitlement of the
holders of rights will be to receive the redemption price.
A holder of Latin America group rights or BLS group rights will not, as
such, have any rights as a shareholder of BellSouth, including rights to vote or
receive dividends.
At any time prior to the public announcement that a person has become an
acquiring person, we may, without the approval of any holders of rights,
supplement or amend any provision of the restated rights agreement in any
manner, whether or not such supplement or amendment is or would be adverse to
any holders of the rights. From and after the public announcement that a person
has become an acquiring person, we may, without the approval of any holders of
rights, supplement or amend the restated rights agreement only:
- to cure any ambiguity;
- to correct or supplement any provision that may be defective or
inconsistent; or
- in any manner that we may deem necessary or desirable and which does not
adversely affect the interests of the holders of rights, other than an
acquiring person.
The restated rights agreement will contain provisions designed to prevent
the inadvertent triggering of the rights.
We have filed a copy of the form of the restated rights agreement with the
SEC as an exhibit to the registration statement of which this prospectus is a
part.
ANTI-TAKEOVER PROVISIONS OF GEORGIA LAW, OUR CHARTER AND BY-LAWS AND OUR
RESTATED RIGHTS AGREEMENT
The following discussion concerns material provisions of Georgia law, our
charter, our by-laws and our restated rights agreement that could be viewed as
having the effect of discouraging an attempt to obtain control of BellSouth.
BUSINESS COMBINATIONS
The Georgia legislature has enacted legislation which generally prohibits a
corporation which has adopted a by-law electing to be covered thereby, which
BellSouth has done, from engaging in any "business combination" with an
"interested shareholder" for a period of five years from the date such person
becomes an interested shareholder, unless the interested shareholder:
- prior to becoming an interested shareholder, obtained the approval of our
board of directors for either the business combination or the transaction
which resulted in the shareholder becoming an interested shareholder;
- becomes the owner of at least 90% of the outstanding voting stock of the
corporation in the same transaction in which the interested shareholder
became an interested shareholder, excluding for
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purposes of determining the number of shares outstanding those shares
owned by officers, directors, subsidiaries and certain employee stock
plans of the corporation; or
- subsequent to the acquisition of 10% or more of the outstanding voting
stock of the corporation, acquires additional shares resulting in
ownership of at least 90% of the outstanding voting stock of the
corporation and obtains approval of the business combination by the
holders of a majority of the shares of voting stock of the corporation,
other than those shares held by an interested shareholder, officers,
directors, subsidiaries and certain employee stock plans of the
corporation.
The term "business combination" refers to a merger, consolidation or other
specified corporate transaction. The term "interested shareholder" refers to a
10% shareholder or an affiliate of the corporation which was a 10% shareholder
at any time within the preceding two years.
BellSouth's "business combinations" by-law may be repealed only by an
affirmative vote of two-thirds of the continuing directors and a majority of the
votes entitled to be cast by the shareholders, other than interested
shareholders, and shall not be effective until 18 months after that shareholder
vote. The Georgia statute provides that a Georgia corporation which has thus
repealed such a by-law may not thereafter readopt that by-law.
FAIR PRICE PROVISIONS
The "fair price" provisions contained in the Georgia statute and our
charter require, generally, in connection with a merger or similar transaction
between BellSouth and an "interested shareholder," the unanimous approval of
BellSouth's directors not affiliated with the interested shareholder or the
affirmative vote of two-thirds of these directors and a majority of the
outstanding shares held by disinterested shareholders, unless:
- within the past three years the interested shareholder has not increased
its shareholdings by more than 1% in any 12-month period; or
- all shareholders receive at least the same consideration for their shares
as the interested shareholder previously paid.
For purposes of the fair price provisions, the term "interested
shareholder" refers to the interested shareholder, as defined under the business
combinations provisions, which is a party to, or an affiliate which is a party
to, the business combination in question.
The fair price provisions may be revised or rescinded only upon the
affirmative vote of at least two-thirds of the directors not affiliated with an
interested shareholder and a majority of the outstanding shares held by
disinterested shareholders.
AUTHORIZED SHARES OF STOCK
Our charter provides that we may from time to time issue shares of common
and first preferred stock in one or more series, the terms of which will be
determined by our board of directors. Our charter authorizes 100 million shares
of first preferred stock, of which ten million shares will have been designated
as "Series C First Preferred Stock" and ten million shares of "Series D First
Preferred Stock." The shares of Series C first preferred stock and Series D
first preferred stock will have been reserved for issuance in connection with
our restated shareholder rights agreement. We will not solicit approval of our
shareholders for issuance of common and first preferred stock unless our board
of directors believes that approval is advisable or is required by stock
exchange rules or Georgia law.
The existence of authorized, unissued and unreserved common and first
preferred stock could enable our board of directors to issue shares to persons
friendly to current management, which could render more difficult, or
discourage, an attempt to obtain control of BellSouth by means of a merger,
tender offer, proxy contest or otherwise, and protect the continuity of our
management. These additional shares also could be used to dilute the share
ownership of persons seeking to obtain control of BellSouth.
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SHAREHOLDER NOMINATIONS AND PROPOSALS
Our by-laws provide that any shareholder may present a nomination for a
directorship or a proposal at an annual meeting of shareholders only if advance
notice of such nomination or proposal has been delivered to BellSouth not less
than 75 days or more than 120 days prior to the date which is 12 months after
the annual meeting of shareholders held in the prior year.
The foregoing notices must describe:
- as to each nominee for director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election
of directors;
- as to any proposal, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at
the meeting and his or her material interest in the proposal, if any;
- personal information regarding the shareholder giving the notice; and
- the number of shares owned by the shareholder.
These procedural requirements could have the effect of delaying or preventing
the submission of matters proposed by any shareholder to a vote of the
shareholders.
STAGGERED BOARD
Our board of directors is divided into three classes of directors serving
staggered three-year terms. Each class consists of, as nearly as possible,
one-third of the total number of directors.
The classification of directors makes it more difficult for shareholders to
change the composition of our board of directors. At least two annual meetings
of shareholders, instead of one, generally will be required to change the
majority of our board of directors. The classification provisions of our by-laws
could discourage a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to obtain control of BellSouth.
CHANGE IN THE NUMBER OF DIRECTORS
Our by-laws provide that the number of directors may be increased or
decreased either by:
- the affirmative vote of a majority of our board of directors; or
- the affirmative vote of at least 75% of the voting power of all shares
entitled to vote generally in the election of directors, voting as a
separate voting group;
provided that such number may not be less than nine.
These requirements make it more difficult for shareholders to change the
composition of our board of directors.
REMOVAL OF DIRECTORS
Our by-laws provide that any director or all directors may be removed from
office at any time only for cause and only by the affirmative vote of the
holders of at least 75% of the voting power of all shares entitled to vote in
the election of directors, voting together as a single voting group.
These requirements make it more difficult for shareholders to change the
composition of our board of directors.
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FILLING VACANCIES
Our by-laws provide that any vacancy on our board of directors that occurs
by reason of the removal of a director may be filled:
- by our shareholders; or
- if authorized by our shareholders, by the remaining directors.
Any other vacancy that occurs, including any vacancy arising by reason of
an increase in the number of directors, may only be filled:
- by the affirmative vote of a majority of the remaining directors, though
less than a quorum; or
- if the vacancy is not so filled or if no director remains, by our
shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS
Our by-laws provide we must call a special meeting of the shareholders if
called by our board of directors or our chief executive officer, or upon the
written request to our chief executive officer or our secretary signed by the
holders of at least 75% of the outstanding shares entitled to vote at the
proposed special meeting.
The written request must describe:
- a brief description of the purpose of the proposed meeting and the
business to be brought before the meeting and material interest, if any,
in the proposal of the shareholders requesting the special meeting;
- if the shareholders requesting the special meeting propose to nominate
one or more nominees for director, all information relating to such
person or persons that is required to be disclosed in solicitations of
proxies for election of directors;
- personal information regarding the shareholder giving the notice;
- the number of shares owned by the shareholder; and
- the shareholders' intent, if any, to solicit proxies from our
shareholders.
These procedural requirements could have the effect of delaying or preventing a
request by shareholders for a special meeting.
RESTRICTIONS ON AMENDMENTS OF OUR BY-LAWS
Amendments to our by-laws may be approved by a majority of our board of
directors. However, the shareholders may prescribe that any by-law or by-laws
adopted by them shall not be altered, amended or repealed by our board of
directors.
Amendments to our by-laws also may be approved by the affirmative vote of
the holders of a majority of the shares entitled to vote generally in the
election of directors, voting together as a single voting group. However, the
affirmative vote of the holders of at least 75% of the voting power of all
shares entitled to vote generally in the election of directors, voting together
as a single voting group, is required to amend or repeal any provision of our
by-laws relating to:
- the number of members of our board of directors;
- the classification of our board of directors;
- the removal of directors; and
- the amendment of the by-law providing for super-majority voting with
respect to the number of members of our board of directors, the
classification of our board of directors and the removal of directors.
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OUR RESTATED RIGHTS AGREEMENT
As described under "-- Restated Rights Agreement," in the event that a
person or group acquires, without approval of our board of directors, 20% or
more of the shares of Latin America group stock, 20% or more of the shares of
BLS group stock or shares of common stock having more than 10% or more of the
total voting power of BellSouth, our restated rights agreement will permit all
other shareholders to acquire additional shares, or equivalent units, of
BellSouth or of an acquiring company at a substantial discount.
STOCK TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. will act as the stock transfer
agent and registrar for both Latin America group stock and BLS group stock.
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RELATIONSHIP BETWEEN THE LATIN AMERICA GROUP
AND THE BLS GROUP
Our board of directors has adopted a policy statement regarding Latin
America group and BLS group matters. We encourage you to read the policy
statement, which we have filed as an exhibit to the registration statement of
which this prospectus is a part.
GENERAL POLICY
Our policy statement provides that all material matters as to which the
holders of Latin America group stock and the holders of BLS group stock may have
potentially divergent interests will be resolved in a manner that our board of
directors or the finance/strategic planning committee of our board of directors
determines to be in the best interests of BellSouth, after giving fair
consideration to the potentially divergent interests and all other relevant
interests of the separate series of common stock of BellSouth. Under our policy
statement, a process of fair dealing will govern the relationship between the
companies in the Latin America group and the companies in the BLS group and the
means by which the terms of any material transaction between the companies in
the two groups will be determined.
AMENDMENT AND MODIFICATION OF THE POLICY STATEMENT
Our board of directors may, without shareholder approval, amend, modify or
rescind the policies set forth in our policy statement, including any resolution
implementing the provisions of our policy statement. Our board of directors also
may, without shareholder approval, adopt additional or other policies or make
exceptions with respect to the application of the policies described in our
policy statement in connection with particular facts and circumstances, all as
our board of directors may determine in the best interests of BellSouth as a
whole consistent with its fiduciary duties.
THE FINANCE/STRATEGIC PLANNING COMMITTEE
Our policy statement provides that the finance/strategic planning committee
will exercise the power, authority and responsibility that our board of
directors delegates to it with respect to Latin America group stock and BLS
group stock. Our board of directors initially will authorize the
finance/strategic planning committee to interpret, make determinations under and
oversee the implementation of our policies set forth in our policy statement.
In making determinations in connection with the policies set forth in our
tracking stock policy statement, the members of the finance/strategic planning
committee will act in the best interests of BellSouth.
The members of the finance/strategic planning committee are J. Hyatt Brown,
Chairperson; Armando M. Codina; James P. Kelly; and William S. Stavropoulos, all
of whom are independent non-employee directors of BellSouth.
SCOPE OF THE BUSINESS OF THE GROUPS; COMPETITION
Our policy statement provides that the Latin America group may engage in
any business activity in South America, Central America, Mexico and the
Caribbean area, not including the territories and possessions of the United
States and the Commonwealth of Puerto Rico. Our policy statement defines this
geographic area as "Latin America." The Latin America group business activities
are limited to Latin America, except as described below.
We expect that the companies in the Latin America group initially will
principally provide telecommunications and related services and products. These
include:
- all wireless and wireline and related services, which include voice,
video and data, whether local or long distance;
- Internet related services; and
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- the provision of advertising and directory publishing products and
services, including The Real Yellow Pages(R) or white pages directories,
whether in paper or electronic format.
Our policy statement provides that the companies in the BLS group may
engage in any business activity, except for the provision of telecommunications
and related services and products in Latin America, except as described below.
The companies in the Latin America group and the companies in the BLS group
may each provide, within the geographic region of the other group,
telecommunications or related services or products that are incidental or
ancillary to the provision of telecommunications or related services or products
in their geographic region and may establish facilities related to such products
and services within the geographic region of the other group. For example, the
companies in the Latin America group may establish facilities outside Latin
America at which they hand off traffic to the companies in the BLS group or a
third party. Similarly, the companies in the BLS group may establish facilities
inside Latin America at which they hand off traffic to the companies in the
Latin America group or a third party. In addition, our telecommunications
switches in New Jersey and London, England have been attributed to the Latin
America group. The companies in the BLS group also use these switches and
compensate the companies in the Latin America group for their use.
Our policy statement permits commercially reasonable contracts or other
arrangements between the companies in the Latin America group and the companies
in the BLS group for sales agency, resale, traffic termination, clearinghouse
services, network interconnection or any other arrangement with respect to the
businesses conducted by either the companies in the Latin America group or the
companies in the BLS group.
CORPORATE OPPORTUNITIES
Our policy statement provides that our board of directors will allocate any
business opportunities and operations, any acquired assets and businesses and
any assumed liabilities between the Latin America group and BLS group, in whole
or in part, in a manner it considers to be in the best interests of BellSouth as
contemplated by the other provisions of our policy statement. If a business
opportunity or operation, an acquired asset or business, or an assumed liability
would be suitable to be undertaken by or allocated to either group, our board of
directors will allocate it using its business judgment or in accordance with
procedures that our board of directors adopts from time to time to ensure that
decisions will be made in the best interests of BellSouth. Any allocation of
this type may involve the consideration of a number of factors that our board of
directors determines to be relevant, including, without limitation:
- whether the business opportunity or operation, the acquired asset or
business, or the assumed liability is principally within or related to
the existing scope of one group's business, as described under "-- Scope
of the Businesses of the Groups; Competition;" and
- whether one group is better positioned to undertake or have allocated to
it that business opportunity or operation, acquired asset or business or
assumed liability.
RELATIONSHIP BETWEEN THE LATIN AMERICA GROUP AND THE BLS GROUP
Our policy statement provides that BellSouth will manage the companies in
the Latin America group and the companies in the BLS group in a manner intended
to maximize the operations, unique assets and value of both groups, and with
complementary deployment of personnel, capital and facilities, with the
continuing goal of positioning BellSouth as a unified source of
telecommunications and related services and products.
COMMERCIAL INTER-GROUP TRANSACTIONS
All material transactions in the ordinary course of business between the
companies in the Latin America group and the companies in the BLS group are
intended, to the extent practicable, to be on terms consistent with those that
would be applicable to arm's-length dealings, taking into account a number of
factors, including quality, availability, volume and pricing.
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TRANSFERS OF OTHER ASSETS AND LIABILITIES
Our board of directors may, without shareholder approval, reallocate assets
and liabilities between the Latin America group and the BLS group not in the
ordinary course of their respective businesses. Our board of directors may do
so, for example, if we acquire a company whose business activities relate to
both those of the Latin America group and the BLS group and we issue only one
series of stock as consideration for this acquisition. In the event, our board
of directors would likely reallocate assets and liabilities between the two
groups in accordance with "-- Scope of the Business of the Groups; Competition."
If our board of directors so reallocates assets and liabilities, it will do so
by:
- increasing or decreasing, as applicable, a group's inter-group interest
in the other group;
- reallocating other assets, including cash, or liabilities from the group
receiving the assets or transferring the liabilities; or
- creating or reducing inter-group debt.
In each case, we will reallocate an amount equivalent to the fair value of the
assets or liabilities. Our board of directors will approve any creation of, or
increase or decrease in, an inter-group interest.
CASH MANAGEMENT
Decisions regarding the investment of surplus cash, the issuance and
retirement of debts and the issuance and repurchase of common and preferred
stock will continue to be made by BellSouth corporate headquarters on behalf of
the groups. The companies in the Latin America group will manage all day-to-day
disbursements and receipts and will maintain cash balances at the local level to
enable the execution of those transactions.
FINANCING ARRANGEMENTS
Loans from the companies in the BLS group to the companies in the Latin
America group will be made at interest rates and on other terms and conditions
designed to reflect the interest rates and other terms and conditions that the
Latin America group would be able to obtain from third parties, assuming it were
a legal entity. Loans from the companies in the Latin America group to the
companies in the BLS group will be made at interest rates and on other terms and
conditions designed to reflect the interest rates and other terms and conditions
that the BLS group would be able to obtain from third parties, assuming it were
a legal entity. This policy contemplates that loans will be made on this basis,
regardless of the interest rates and other terms and conditions on which those
funds may actually have been acquired from third parties, assuming it were a
legal entity.
INTELLECTUAL PROPERTY
The companies in the BLS group will manage, on a centralized basis, the
intellectual property of BellSouth attributed to the Latin America group and the
intellectual property of BellSouth attributed to the BLS group. The companies in
the Latin America group will manage the intellectual property attributed to it
that is owned by the companies in the Latin America group.
The companies in the Latin America group and the companies in the BLS group
will have the right to use the intellectual property attributed to the other for
appropriate business activities. Other than know-how, the companies in the BLS
group do not use any significant intellectual property of BellSouth attributed
to the Latin America group. The companies in the Latin America group do use in
their businesses some of the intellectual property of BellSouth that is
attributed to the BLS group. This intellectual property includes the BellSouth
and The Real Yellow Pages(R) names and marks.
Use of these names and marks is authorized under a license agreement
between BellSouth and each company in which BellSouth has sufficient control
over both the use of these names and marks and the quality
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of the goods and services sold under these names and marks so that it can
protect the value of these names and marks. BellSouth establishes sufficient
control by:
- maintaining majority equity ownership;
- maintaining a majority of the members of the board of directors of the
company;
- participating in or selecting the senior management of the company;
- providing technical consulting services; or
- through some combination of the foregoing.
Each license agreement requires the company to comply with BellSouth's corporate
brand strategy, policies, graphics standards, advertising policies, quality
control and restrictions on certain activities relating to the brand, including
a prohibition on licensing and sublicensing without BellSouth's approval.
Any fees obtained through the sale or licensing of intellectual property
will be principally allocated to the group whose entities paid to develop the
intellectual property being sold or licensed. Alternatively, if the intellectual
property being sold or licensed was jointly developed by the companies in the
Latin America group and the companies in the BLS group and the companies in the
Latin America group and the companies in the BLS group agree to allocate fees
obtained in proportion to the development costs incurred by the companies in
each group, then any fees obtained through the sale or licensing will be so
allocated. If the intellectual property being sold or licensed was not
predominantly developed by either the companies in the Latin America group or
the companies in the BLS group or was jointly developed by the companies in the
Latin America group and the companies in the BLS group but the companies in the
Latin America group and the companies in the BLS group do not agree to allocate
fees obtained in proportion to costs incurred, then any fees obtained through
the sale or licensing will be allocated using the same allocation as overhead
expenses, as described under "-- Financial Reporting; Allocation Matters."
DIVIDEND POLICY
Our policy statement provides that, subject to the limitations on dividends
set forth in our charter and to the limitations of Georgia law, the holders of
Latin America group stock and the holders of BLS group stock will be entitled to
receive dividends on that stock when, as and if our board of directors
authorizes and declares dividends on that stock.
Because the companies in the Latin America group are expected to require
significant capital commitments to finance their operations and fund their
future growth, our policy statement provides that BellSouth does not expect to
pay any dividends on shares of Latin America group stock. If and when our board
of directors determines to pay any dividends on shares of Latin America group
stock, our policy statement provides that that determination will be based
primarily on the result of operations, financial condition and capital
requirements of the companies in the Latin America group and of BellSouth as a
whole and other factors as our board of directors considers relevant.
The payment of dividends on BLS group stock will be a business decision
that our board of directors makes from time to time based upon factors similar
to those that we describe above with respect to the payment of dividends on
Latin America group stock.
FINANCIAL REPORTING; ALLOCATION MATTERS
Our policy statement provides that BellSouth will prepare and include in
its filings with the SEC consolidated financial statements of BellSouth and
combined financial statements of the Latin America group for so long as Latin
America group stock is outstanding. In addition, prior to the expected
distribution to the holders of BLS group stock of all of the shares of Latin
America group stock reserved for and attributed to the BLS group, we will
provide condensed consolidating financial statements of BellSouth that include
the BLS group and the Latin America group. The financial information provided
for each group will include allocated portions of our debt, interest, shared
corporate services and taxes.
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In addition to allocating debt and interest as described above under
"-- Relationship Between the Latin America Group and the BLS Group -- Financing
Arrangements" and assets and liabilities as described above under
"-- Relationship Between the Latin America Group and the BLS Group -- Transfers
of Other Assets and Liabilities," our policy statement provides that shared
corporate services and taxes will be allocated as follows:
SHARED CORPORATE SERVICES
BellSouth will directly charge specifically identified costs for shared
corporate services to the Latin America group and the BLS group based upon their
use of those services. Where determinations based on use alone are not
practical, BellSouth will use other methods and criteria that BellSouth's
management believes are fair and provide a reasonable allocation of the cost of
shared corporate services used by the groups. Shared corporate services include
executive management, sponsorships, human resources, legal, accounting and
auditing, tax, treasury, strategic planning, media and investor relations and
corporate technology.
TAXES
Depending on the tax laws of the respective jurisdictions, income taxes,
including any adjustments to income taxes, will be calculated on either a
separate, consolidated, combined or unitary basis. Income tax provisions and
related tax payments or refunds determined on a consolidated, combined or
unitary basis will be allocated between the Latin America group and the BLS
group based on their respective contributions, positive or negative, to the
consolidated, combined or unitary tax liability. Cumulative net tax benefits
that cannot be used by the group generating those benefits but that can be used
on a consolidated, combined or unitary basis will be credited on a current basis
to the group that generated the benefit.
157
<PAGE> 160
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Simpson Thacher & Bartlett, our counsel, the following is
an accurate discussion of the material U.S. federal income tax consequences of
the ownership of Latin America group stock. This discussion is based on the
Internal Revenue Code of 1986, as amended, Treasury regulations, published
positions of the Internal Revenue Service and court decisions now in effect, all
of which are subject to change. In particular, Congress could enact legislation
affecting the treatment of stock with characteristics similar to Latin America
group stock, or the Treasury could issue regulations that change current law.
Any future legislation or regulations could apply retroactively to the offering
of Latin America group stock.
This discussion deals only with Latin America group stock held as a capital
asset. This discussion does not represent a detailed description of the U.S.
federal income tax consequences applicable to you if you are subject to special
treatment under the U.S. federal income tax laws (including if you are a dealer
in securities or currencies, a financial institution, an insurance company, a
tax-exempt organization, a person holding the Latin America group stock as part
of a hedging, integrated or conversion transaction, constructive sale or
straddle, a trader in securities that has elected the mark-to-market method of
accounting for your securities or a U.S. person whose "functional currency" is
not the U.S. dollar). YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH REGARD TO THE
APPLICATION TO YOU OF THE U.S. FEDERAL INCOME TAX LAWS, AS WELL AS TO THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS TO WHICH YOU
MAY BE SUBJECT.
In the opinion of, our counsel, Simpson Thacher & Bartlett, for U.S.
federal income tax purposes, Latin America group stock will be considered our
common stock. Accordingly, for federal income tax purposes, we believe neither
you nor we will recognize any income, gain or loss as a result of the issuance
of Latin America group stock.
No ruling has been sought from the IRS. The IRS has announced that it will
not issue advance rulings on the classification of an instrument whose dividend
rights are determined by reference to the earnings of a segregated portion of
the issuing corporation's assets, including assets held by a subsidiary. In
addition, there are no court decisions or other authorities bearing directly on
the classification of instruments with characteristics similar to those of Latin
America group stock. It is possible, therefore, that the IRS could assert that
the issuance of Latin America group stock could result in taxation to us.
The Clinton Administration proposed legislation in February 2000 dealing
with tracking stock such as Latin America group stock. Such proposal would,
among other things, grant authority to the Secretary of the Treasury to treat
tracking stock as something other than stock or as stock of another entity. The
proposal also would treat the receipt of stock similar to Latin America group
stock in exchange for other stock in the corporation or in a distribution by the
issuing corporation as taxable to the shareholders. If this proposal is enacted,
it could have adverse tax consequences for you or us. Specifically, if the
proposal is enacted, you could be taxed at ordinary income rates on the receipt
of Latin America group stock or BLS group stock distributed by us as a dividend
or BLS group stock distributed by us in exchange for your Latin American group
stock. A similar proposal was made in 1999. Congress did not act on the 1999
proposal, and it is impossible to predict whether Congress will act upon this
proposal or any other proposal relating to tracking stock.
We may convert Latin America group stock or BLS group stock into shares of
the other series without any premium if there is more than an insubstantial risk
of adverse U.S. federal income tax developments. The proposal of the Clinton
Administration would be such an adverse development if it is implemented or
receives certain legislative action. Depending on the form of the proposal, we
may be able to avoid the adverse tax consequences to you and to us by converting
the Latin America group stock or BLS group stock in a timely manner. In
determining whether to exercise our right to convert the Latin America group
stock or BLS group stock, we would consider several factors including the tax
consequences to you and to us and the extent of any grandfather provisions
contained in the proposed legislation. Unless the proposal contained adequate
grandfather provisions, it likely that we would exercise our right to convert if
there were more than an insubstantial risk of adverse U.S. federal income tax
consequences.
158
<PAGE> 161
U.S. TAX CONSEQUENCES TO FOREIGN HOLDERS
The following is a discussion of the material U.S. federal income and
estate tax consequences of the ownership and disposition of Latin America group
stock to foreign holders. This discussion does not deal with all aspects of U.S.
income and estate taxation and does not deal with foreign, state and local tax
consequences that may be relevant to foreign holders in light of their personal
circumstances. Special rules may apply to certain foreign holders, such as
"controlled foreign corporations," "passive foreign investment companies,"
"foreign personal holding companies" and corporations that accumulate earnings
to avoid federal income tax, that are subject to special treatment under the
Internal Revenue Code. Furthermore, this discussion is based on the Internal
Revenue Code, Treasury regulations, published positions of the IRS and court
decisions now in effect, all of which are subject to change. Each prospective
foreign holder should consult its own tax advisor with regard to the application
of the federal income tax laws, as well as to the applicability and effect of
any state, local or foreign tax laws to which it may be subject.
As used in this section, a "foreign holder" means, for U.S. federal income
tax purpose, a person or entity other than:
- a citizen, resident or certain former citizen of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision of the United States;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust that:
-- is subject to the supervision of a court within the United States and
the control of one or more U.S. persons; or
-- has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
DIVIDENDS
Except as discussed below, any dividend paid to a foreign holder will be
subject to United States withholding tax either at a rate of 30% of the gross
amount of the dividend or at a lesser applicable treaty rate. However, dividends
that are effectively connected with the conduct of a trade or business in the
United States and, where a tax treaty applies, that are attributable to a U.S.
permanent establishment are not subject to the withholding tax but instead are
subject to U.S. federal income tax on a net income basis at applicable graduated
individual or corporate rates.
Certain certification and disclosure requirements must be complied with in
order to be exempt from withholding under the effectively connected income
exemption. Any effectively connected dividends received by a foreign corporation
may, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or a lesser applicable treaty rate.
Through December 31, 2000, dividends paid to an address outside the United
States are presumed to be paid to a resident of that country, unless the payor
has knowledge to the contrary, for purposes of the withholding tax discussed
above and, under the current interpretation of the U.S. Treasury regulations,
for purposes of determining the applicability of a tax treaty rate. However,
under U.S. Treasury regulations, if you wish to claim the benefit of an
applicable treaty rate and avoid backup withholding, as discussed below, for
dividends paid after December 31, 2000, you will be required to satisfy
applicable certification and other requirements.
If you are eligible for a reduced treaty rate of U.S. withholding tax
pursuant to an income tax treaty, you may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the IRS.
159
<PAGE> 162
GAIN ON DISPOSITION OF COMMON STOCK
If you are a foreign holder, you will not be subject to U.S. federal income
tax with respect to gain recognized on a sale or other disposition of Latin
America group stock unless:
- the gain is effectively connected with a trade or business in the United
States and, where a tax treaty provides, the gain is attributable to a
U.S. permanent establishment;
- if you are an individual and hold Latin America group stock as a capital
asset, you are present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other
conditions are met; or
- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes.
We believe we are not, and do not anticipate becoming, a "United States
real property holding corporation" for United States federal income tax
purposes. If we were to become a U.S. real property holding corporation, so long
as Latin America group stock is regularly traded on an established securities
market, you would be subject to federal income tax on any gain from the sale or
other disposition of such stock only if you actually or constructively owned,
during the five-year period preceding such disposition, more than 5% of Latin
America group stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We must report annually to the IRS and to you the amount of dividends paid
to you and the tax withheld with respect to these dividends, regardless of
whether withholding was required. Copies of the information returns reporting
the dividends and withholding may also be made available to the tax authorities
in the country in which you reside under the provisions of an applicable income
tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to you at an address outside the United States, unless
the payor has knowledge that you are a U.S. person. Under the final regulations
effective December 31, 2000, however, you will be subject to backup withholding
unless applicable certification requirements are met.
Payment of the proceeds of a sale of Latin America group stock within the
United States or conducted through certain U.S. related financial intermediaries
is subject to both backup withholding and information reporting unless you
certify under penalties of perjury that you are a foreign holder, and the payor
does not have actual knowledge that you are a U.S. person, or you otherwise
establish an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
ESTATE TAX
Common stock held or deemed to be held by an individual foreign holder at
the time of death will be included in that holder's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
160
<PAGE> 163
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Lehman Brothers
Inc., Credit Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, ABN AMRO Incorporated, Banc of America Securities LLC and
J.P. Morgan Securities Inc. are acting as representatives, have severally agreed
to purchase, and we have agreed to sell to them, severally, the number of shares
of Latin America group stock indicated below. Lehman Brothers Inc. is a
structural advisor.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Goldman, Sachs & Co.........................................
Lehman Brothers Inc.........................................
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
ABN AMRO Incorporated.......................................
Banc of America Securities LLC..............................
J.P. Morgan Securities Inc..................................
---------
Total.............................................
=========
</TABLE>
The underwriters are offering the shares of Latin America group stock
subject to their acceptance of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of Latin America group stock
offered by this prospectus are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The underwriters are obligated
to take and pay for all of the shares of Latin America group stock offered by
this prospectus, if any are purchased. However, the underwriters are not
required to take or pay for the shares covered by the underwriters'
over-allotment option described below.
The underwriters initially propose to offer part of the shares of Latin
America group stock directly to the public at the public offering price set
forth on the cover page of this prospectus and part to certain dealers at a
price that represents a concession not in excess of $ a share under the
public offering price. Any underwriter may allow, and such dealers may reallow,
a concession not in excess of $ a share to other underwriters or to certain
dealers. After the initial offering of the shares of Latin America group stock,
the offering price and other selling terms may from time to time be changed by
the representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of Latin America group stock at the public offering price
listed on the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Latin America group stock offered by this prospectus. To the extent
the option is exercised, each underwriter will become obligated, subject to
certain conditions, to purchase the same percentage of the additional shares of
Latin America group stock as the number listed next to the underwriter's name in
the preceding table bears to the total number of shares of Latin America group
stock listed next to the names of all underwriters in the preceding table. If
the underwriters' option is exercised in full, the total price to public would
be $ , the total underwriting discounts and commissions would be $ and
total proceeds to the Latin America group would be $ .
We intend to list Latin America group stock on the New York Stock Exchange
under the trading symbol "BLS.L."
161
<PAGE> 164
We have agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the underwriters, we will not, during the period
ending days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of Latin America group stock or any
securities convertible into or exercisable or exchangeable for Latin
America group stock other than BLS group stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of Latin
America group stock,
whether any such transaction described above is to be settled by delivery of
Latin America group stock or such other securities, in cash or otherwise. The
restrictions described in this paragraph do not apply to:
- the sale to the underwriters of the shares of Latin America group stock
under the underwriting agreement;
- issuances by us of shares of Latin America group stock in connection
with acquisitions of businesses, assets or securities from a third party
so long as the third party agrees not to sell stock acquired in the
transaction for a period of days after the date of this prospectus;
or
- issuances of shares of Latin America group stock or options to purchase
shares of Latin America group stock pursuant to our restated stock plan,
which will be effective upon the completion of this offering, and
consistent with past practices.
In order to facilitate the offering of Latin America group stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of Latin America group stock. Specifically, the underwriters
may over-allot in connection with the offering, creating a short position in
Latin America group stock for the underwriters' account. In addition, to cover
over-allotments or to stabilize the price of Latin America group stock, the
underwriters may bid for, and purchase, shares of Latin America group stock in
the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing Latin America
group stock in the offering, if the syndicate repurchases previously distributed
Latin America group stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of Latin America group stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
From time to time, certain of the underwriters have provided, and continue
to provide, investment banking services to BellSouth.
BellSouth and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for Latin America
group stock. The public offering price will be determined by negotiations
between BellSouth and the representatives. Among the factors considered in
determining the public offering price will be:
- the future prospects of BellSouth's Latin American businesses and the
telecommunications industry in general;
- sales, earnings and certain other financial and operating information of
BellSouth and its Latin American businesses in recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of BellSouth and its Latin
American businesses.
162
<PAGE> 165
The estimated public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
Kilpatrick Stockton LLP, Atlanta, Georgia, has rendered an opinion
concerning the validity of the issuance of the shares of Latin America group
stock offered by this prospectus for us. Simpson Thacher & Bartlett, New York,
New York, will render an opinion concerning certain legal matters for us. Davis
Polk & Wardwell, New York, New York, will render an opinion concerning certain
legal matters for the underwriters.
EXPERTS
The consolidated financial statements of BellSouth Corporation as of
December 31, 1998 and 1999 and for each of the fiscal years in the three-year
period ended December 31, 1999 and the combined financial statements of the
Latin America group as of November 30, 1998 and 1999, and for each of the fiscal
years in the three-year period ended November 30, 1999 included in this
prospectus have been so incorporated by reference or included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on their
authority as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may inspect and copy such material at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the SEC's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. You may also obtain copies of such
material from the SEC at prescribed rates by writing to the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our filings are also available to the public from the SEC's web site at
www.sec.gov.
Our existing common stock is, and the Latin America group stock will be,
listed on the New York Stock Exchange. You may inspect reports and other
information concerning us at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to provide information about our business and other
important information to you by "incorporating by reference" the information we
file with the SEC. This means that we can disclose the information to you by
referring in this prospectus to the documents we file with the SEC. Under the
SEC's regulations, any statement contained in a document incorporated by
reference in this prospectus is automatically updated and superseded by any
information contained in this prospectus, or in any subsequently filed document
of the types described below.
163
<PAGE> 166
We incorporate into this prospectus by reference the following documents
filed by us with the SEC, each of which should be considered an important part
of this prospectus:
<TABLE>
<CAPTION>
SEC FILING (FILE NO. 1-8607) DATE OF FILING
---------------------------- ---------------------------------
<S> <C>
Annual Report on Form 10-K for the year ended
December 31, 1999......................................... March 2, 2000
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000............................................ May 5, 2000
Current Reports on Form 8-K................................. January 24, 2000,
February 9, 2000,
February 15, 2000,
April 10, 2000 and
April 20, 2000
All subsequent documents filed by us under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act.................... After the date of this prospectus
</TABLE>
Any person, including any beneficial owner, to whom this prospectus is
delivered may obtain documents incorporated by reference in, but not delivered
with, this prospectus by requesting them at no cost, by writing or telephoning
us at the following address or telephone number:
BellSouth Corporation
1155 Peachtree Street, N.E.
Atlanta, Georgia 30309-3610
Attention: Office of the Controller
Phone: (800) 969-2372
We will not provide exhibits to a document unless they are specifically
incorporated by reference in that document.
164
<PAGE> 167
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
LATIN AMERICA GROUP
For the years ended November 30, 1997, 1998 and 1999
Report of Independent Accountants........................... F-2
Combined Statements of Operations for the years ended
November 30, 1997, 1998 and 1999.......................... F-3
Combined Balance Sheets as of November 30, 1998 and 1999.... F-4
Combined Statements of Cash Flows for the years ended
November 30, 1997, 1998 and 1999.......................... F-5
Combined Statements of Group Net Worth and Comprehensive
Income for the years ended November 30, 1997, 1998 and
1999...................................................... F-6
Notes to Combined Financial Statements...................... F-7
For the three months ended February 28, 1999 and February
29, 2000
Combined Statements of Operations for the three months ended
February 28, 1999 and February 29, 2000................... F-28
Combined Balance Sheets as of November 30, 1999 and February
29, 2000.................................................. F-29
Combined Statements of Cash Flows for the three months ended
February 28, 1999 and February 29, 2000................... F-30
Combined Statements of Group Net Worth and Comprehensive
Income for the three months ended February 28, 1999 and
February 29, 2000......................................... F-31
Notes to Combined Financial Statements...................... F-32
BELLSOUTH CORPORATION
For the years ended December 31, 1997, 1998 and 1999
Report of Independent Accountants........................... F-35
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999.......................... F-36
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-37
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-38
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the years ended December 31,
1997, 1998 and 1999....................................... F-39
Notes to Consolidated Financial Statements.................. F-40
For the three months ended March 31, 1999 and 2000
Consolidated Statements of Income for the three months ended
March 31, 1999 and 2000................................... F-72
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000............................................ F-73
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 2000............................. F-74
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the three months ended March 31,
1999 and 2000............................................. F-75
Notes to Consolidated Financial Statements.................. F-76
</TABLE>
F-1
<PAGE> 168
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of BellSouth Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, cash flows and group net worth and
comprehensive income present fairly, in all material respects, the financial
position of the Latin America group of BellSouth Corporation at November 30,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended November 30, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the management of BellSouth Corporation;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As described in Note B, these combined financial statements have been
derived from the consolidated financial statements and accounting records of
BellSouth Corporation and its subsidiaries and reflect certain assumptions and
allocations. The financial position, results of operations and cash flows of the
Latin America group could differ from those that would have resulted had the
Latin America group operated autonomously or as an entity independent of
BellSouth Corporation. As more fully discussed in Note B, the combined financial
statements of the Latin America group should be read in conjunction with the
audited consolidated financial statements of BellSouth Corporation.
As discussed in Note B to the combined financial statements, in 1999 the
Latin America group adopted AICPA Statement of Position 98-1 and changed its
method of accounting for internal-use software development costs.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 28, 2000 (except for Note S, as to
which the date is May 25, 2000)
F-2
<PAGE> 169
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
----------------------
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Operating revenues.......................................... $940 $1,907 $2,405
---- ------ ------
Operating expenses:
Cost of services, products and equipment.................. 344 607 867
Selling, general and administrative....................... 455 766 982
Depreciation and amortization............................. 140 338 450
---- ------ ------
Total operating expenses.......................... 939 1,711 2,299
---- ------ ------
Operating income............................................ 1 196 106
Interest expense............................................ 46 53 88
Other income (expense), net................................. -- (1) (5)
---- ------ ------
Income (loss) before income taxes........................... (45) 142 13
Provision (benefit) for income taxes........................ 1 103 (116)
---- ------ ------
Income (loss) before net earnings (losses) of equity
affiliates and minority interests......................... (46) 39 129
Net earnings (losses) of equity affiliates.................. 14 (57) (354)
Minority interests.......................................... 4 (50) (91)
---- ------ ------
Net loss.......................................... $(28) $ (68) $ (316)
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 170
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 171 $ 287
Temporary cash investments................................ 19 66
Accounts receivable, net of allowance for uncollectibles
of $97 and $99......................................... 382 503
Inventory................................................. 45 56
Other current assets...................................... 141 122
------ ------
Total current assets................................... 758 1,034
------ ------
Investments and advances.................................... 806 374
Property, plant and equipment, net.......................... 1,454 1,723
Deferred charges and other assets........................... 94 72
Intangible assets, net...................................... 1,059 1,471
------ ------
Total assets...................................... $4,171 $4,674
====== ======
LIABILITIES AND GROUP NET WORTH
Current liabilities:
External debt maturing within one year.................... $ 315 $ 280
Intercompany debt maturing within one year................ 77 23
Accounts payable.......................................... 254 322
Other current liabilities................................. 258 472
------ ------
Total current liabilities.............................. 904 1,097
------ ------
Long-term debt:
External long-term debt................................... 447 475
Intercompany long-term debt............................... 117 117
------ ------
Total long-term debt................................... 564 592
------ ------
Noncurrent liabilities:
Deferred income taxes..................................... 298 151
Other noncurrent liabilities.............................. 64 174
------ ------
Total noncurrent liabilities........................... 362 325
------ ------
Minority interests.......................................... 222 315
Group net worth:
Attributed capital........................................ 2,341 3,059
Retained deficit.......................................... (134) (450)
Accumulated other comprehensive income.................... (88) (264)
------ ------
Total group net worth.................................. 2,119 2,345
------ ------
Total liabilities and group net worth............. $4,171 $4,674
====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 171
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (28) $ (68) $ (316)
Adjustments to net loss:
Depreciation and amortization............................. 140 338 450
Provision for uncollectibles.............................. 46 68 68
Net losses (earnings) of equity affiliates................ (14) 57 354
Foreign currency exchange losses.......................... 3 1 10
Minority interests in income (losses) of subsidiaries..... (4) 50 91
Deferred income taxes and investment tax credits.......... (3) 140 (59)
Provision for asset impairment............................ -- 25 --
Net change in:
Accounts receivable and other current assets.............. (194) (165) (175)
Accounts payable and other current liabilities............ 138 120 69
Deferred charges and other assets......................... 2 (43) 27
Other liabilities and deferred credits.................... (42) (28) 44
Other reconciling items, net................................ 11 (19) 5
------- ------- -------
Net cash provided by operating activities......... 55 476 568
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (448) (697) (647)
Acquisitions, net of cash acquired.......................... (309) (402) (199)
Investments in and advances to equity affiliates............ (679) (248) (77)
Purchases of wireless licenses.............................. -- (31) (123)
Other investing activities, net............................. (4) (9) (53)
------- ------- -------
Net cash used for investing activities............ (1,440) (1,387) (1,099)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt............................... 464 206 29
Repayments of short-term debt............................... (143) (487) (59)
Proceeds from long-term debt................................ 233 388 43
Repayments of long-term debt................................ (50) (56) (27)
Funds attributed from the BLS group......................... 1,065 851 665
------- ------- -------
Net cash provided by financing activities......... 1,569 902 651
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (10) 3 (4)
Net increase (decrease) in cash and cash equivalents........ 174 (6) 116
Cash and cash equivalents at beginning of period............ 3 177 171
------- ------- -------
Cash and cash equivalents at end of period.................. $ 177 $ 171 $ 287
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 172
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF GROUP NET WORTH AND
COMPREHENSIVE INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ATTRIBUTED RETAINED COMPREHENSIVE
CAPITAL DEFICIT INCOME TOTAL
---------- -------- ------------- ------
<S> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1996........................... $ 425 $ (38) $ (7) $ 380
Net loss............................................... (28) (28)
Other comprehensive income, net of tax:
Foreign currency translation adjustments............. (3) (3)
------
Total comprehensive income............................. (31)
Funds attributed from the BLS group.................... 1,065 1,065
------ ----- ----- ------
BALANCE AT NOVEMBER 30, 1997........................... $1,490 $ (66) $ (10) $1,414
------ ----- ----- ------
Net loss............................................... (68) (68)
Other comprehensive income, net of tax:
Foreign currency translation adjustment.............. (78) (78)
------
Total comprehensive income............................. (146)
Funds attributed from the BLS group.................... 851 851
------ ----- ----- ------
BALANCE AT NOVEMBER 30, 1998........................... $2,341 $(134) $ (88) $2,119
------ ----- ----- ------
Net loss............................................... (316) (316)
Other comprehensive income, net of tax:
Foreign currency translation adjustment.............. (176) (176)
------
Total comprehensive income............................. (492)
Conversion of note payable to equity................... 53 53
Funds attributed from the BLS group.................... 665 665
------ ----- ----- ------
BALANCE AT NOVEMBER 30, 1999........................... $3,059 $(450) $(264) $2,345
====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 173
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
A. ORGANIZATION
BellSouth Corporation ("BellSouth" or the "Company") is an international
communications company providing wireline telecommunications, wireless
communications, cable and digital TV, advertising and publishing and Internet
and data services to nearly 45 million customers in 19 countries worldwide. The
Company is headquartered in Atlanta, Georgia.
The Board of Directors has approved a proposal (the "Tracking Stock
Proposal") that would result in the creation of two series of common stock
intended to reflect separately the performances of the Company's Latin American
businesses and its domestic and other international businesses. The Company's
Latin American businesses are referred to as the "Latin America group," the
other businesses as the "BLS group" and both groups collectively as the
"groups." The Company plans a public offering of shares of Latin America group
stock, all of the proceeds of which will be allocated to the Latin America
group. Immediately prior to the completion of that public offering, the BLS
group will hold an "inter-group interest" in the Latin America group, which
represents 100% of the equity of the Company attributed to the Latin America
group.
The Latin America group stock is designed to reflect the separate
performance of the Latin America group, which includes the assets and
liabilities shown in the combined balance sheets of the Latin America group
appearing elsewhere in this prospectus. The Company attributed these assets and
liabilities to the Latin America group in accordance with the group's lines of
business as set forth in the policy statement adopted by BellSouth's Board of
Directors. This initial attribution is reflected in the November 30, 1999
combined balance sheets of the Latin America group. Under the policy statement,
the Latin America group may engage in any business activity in Latin America,
which is defined to include South America, Central America, Mexico and the
Caribbean area, excluding the territories and possessions of the United States
and the Commonwealth of Puerto Rico. The BLS group generally may not provide
telecommunications and related services and products in Latin America, except
for activities incidental or ancillary to its businesses outside Latin America.
The major assets attributed to the Latin America group stock are
BellSouth's interests in communications companies in ten Latin American
countries. Information about the principal Latin American local operating
companies in which the Company has interests is set forth below:
<TABLE>
<CAPTION>
COUNTRY BRAND LOCAL OPERATING COMPANY BELLSOUTH INTEREST
------- ----- ----------------------- ------------------
<S> <C> <C> <C>
Argentina Movicom/BellSouth Compania de Radiocomunicaciones Moviles S.A...... 65.0%
Brazil BCP BCP, S.A......................................... 44.5
BSE, S.A......................................... 46.8
Chile BellSouth Chile BellSouth Communicaciones S.A.................... 100.0
BellSouth Chile S.A.............................. 100.0
Ecuador BellSouth Ecuador Otecel S.A....................................... 89.4
Guatemala BellSouth Guatemala BellSouth Guatemala y Cia S.C.A.................. 60.0
Nicaragua BellSouth Nicaragua Telefonia Celular de Nicaragua, S.A.............. 49.0
Panama BellSouth Panama BSC de Panama, S.A............................... 43.7
Peru BellSouth Peru BellSouth Peru, S.A.............................. 96.8
Uruguay Movicom/BellSouth Abiatar, S.A..................................... 46.0
Venezuela Telcel Telcel Celular, C.A.............................. 78.2
</TABLE>
At November 30, 1999, BellSouth had an option to acquire an additional
40.0% interest in the Nicaraguan operations. After a change in law in Nicaragua
in December 1999, BellSouth elected to exercise this option.
F-7
<PAGE> 174
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
BellSouth also has an agreement to acquire a controlling interest in a
company providing wireless communications in Colombia.
The Company has also attributed to the Latin America group BellSouth's
interests in directory publishing companies in Brazil and Peru, and a network
services business providing wholesale communications services and an
international roaming clearinghouse.
<TABLE>
<CAPTION>
LOCATION OPERATING COMPANY BUSINESS BELLSOUTH INTEREST
-------- ----------------- -------- ------------------
<S> <C> <C> <C>
Brazil Listel-Listas Telefonicas S.A. Directory Publishing 100.0%
Brazil OESP Midia Ltda. Directory Publishing 40.0
Peru BellSouth Advertising &
Publishing Peru S.R.L. Directory Publishing 100.0
Atlanta, Georgia BellSouth International
Wireless Services, Inc. Roaming Clearinghouse 100.0
Atlanta, Georgia BellSouth Access Wholesale Communications 100.0
Atlanta, Georgia BellSouth International, Inc. Headquarters 100.0
</TABLE>
All liabilities of the local operating companies in the tables above have
also been attributed to the Latin America group.
As BellSouth acquires interests in other Latin American businesses, we
currently intend that those assets, and any related liabilities, will be
attributed to the Latin America group. All net income and cash flows generated
by the assets attributed to the Latin America group and all net proceeds from
the disposition of these assets will also be attributed to the Latin America
group.
Although we sometimes refer to these assets and liabilities as the Latin
America group, the Latin America group is not a separate legal entity. Rather,
all of the assets of the Latin America group are owned by BellSouth and holders
of the Latin America group stock will be shareholders of BellSouth and subject
to all of the risks of an investment in BellSouth and all of its businesses,
assets and liabilities in accordance with the policy statement.
The attribution to the Latin America group of assets, liabilities, equity
revenue and expenses, except shared corporate services, reflected in BellSouth's
financial statements is based on specific identification of those companies
listed above which are consolidated in accordance with generally accepted
accounting principles in the consolidated financial statements of BellSouth.
Equity investments of BellSouth that operate in Latin America have also been
attributed to the Latin America group. Less than one percent of the Latin
America group's general, administrative and selling expenses are allocated to
the Latin America group as part of BellSouth's shared corporate expenses. These
expenses are allocated to the Latin America group in accordance with the
tracking stock policy statement.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF COMBINATION AND PRESENTATION
For financial reporting purposes, BellSouth has attributed all of its
consolidated assets, liabilities, shareholders' equity, revenues, expenses and
cash flows to either the Latin America group or the BLS group. BellSouth's
capital contributions for purchase business combinations and initial investments
in joint ventures and partnerships that BellSouth attributed to the Latin
America group have been treated as investing activities of the Latin America
group. Financing activities include cash attributed from BellSouth and debt
incurred by the operating companies of the Latin America group. The financial
statements of the operating companies comprising the Latin America group reflect
a fiscal year ending November 30 to facilitate timely reporting of
F-8
<PAGE> 175
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
the Company's consolidated financial results. The separate group combined
financial statements give effect to the intergroup allocation policies described
in Note C. The financial position, results of operations and cash flows of the
groups could differ from those that would have resulted had the groups operated
autonomously or as an entity independent of BellSouth. The combined financial
statements for each group were prepared on a basis that management believes is
reasonable and appropriate and include:
- The combined historical balance sheets, results of operations and cash
flows for each of the groups, with all significant intragroup
transactions and balances eliminated.
- In the case of the BLS group's financial statements, corporate assets and
liabilities of the Company and related transactions identified with the
BLS group, including allocated portions of the Company's debt and
selling, general and administrative costs.
- In the case of the Latin America group's financial statements, allocated
portions of the Company's selling, general and administrative costs.
Intergroup sales between the businesses of each of the groups have not been
eliminated in the groups' financial statements.
The Latin America group combined financial statements provide shareholders
with financial information about operations of the businesses within the Latin
America group operations. Investors in BLS group stock and Latin America group
stock are BellSouth shareholders and are subject to benefits and risks related
to all of BellSouth's businesses, assets and liabilities. The Company retains
ownership and control of the assets and operations of each group, other than
minority interests. Financial effects arising from one group that affect
BellSouth's consolidated results of operations or financial condition could, if
significant, affect the results of operations or financial position of the other
group or the market price of the other group's stock. In addition, net losses of
either group and dividends paid on shares of Latin America group stock or BLS
group stock will reduce the Company's funds legally available for dividends on
both groups' stock. As a result, the Company's consolidated financial statements
should be read along with the Latin America group combined financial statements.
BellSouth directly charges specifically identified costs for shared
corporate services to the Latin America group and the BLS group based upon use
of those services and, where not practically determinable, by other allocation
methods. While we believe these allocations are reasonable, they are not
necessarily indicative of, and it is not practical for us to estimate, the
levels of expenses that would have resulted had the Latin America group been
operating as an independent company. However, we believe that the level of
expenses would not have been materially different if these services had been
provided by third parties. The provision of services and other matters between
the Latin America group businesses and the BLS group businesses will be in
accordance with arrangements which are described in "Relationship Between the
BLS group and the Latin America group." These arrangements were not in place
during the periods presented. Nevertheless, in order to prepare combined
financial statements that include charges and benefits of the types provided for
under these arrangements, the financial statements for all periods included in
this prospectus reflect charges and benefits that would have applied if these
inter-group arrangements had been in effect during the periods presented.
USE OF ESTIMATES
These financial statements have been prepared in accordance with generally
accepted accounting principles. Such financial statements include estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the amounts of revenues and
expenses. Actual results could differ from those estimates.
F-9
<PAGE> 176
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less are considered to be cash equivalents. Investments with an original
maturity of over three months to one year are not considered cash equivalents
and are included as temporary cash investments in the combined balance sheets.
Interest income on cash equivalents, temporary cash investments and other
interest-bearing instruments was $14 in 1999, $8 in 1998 and $2 in 1997.
INVENTORIES
Inventories, which consist principally of handsets and accessories, are
stated at the lower of cost (primarily average cost method) or replacement
value. Any losses on the sales of handsets are recognized at the time of sale.
PROPERTY, PLANT AND EQUIPMENT
The investment in property, plant and equipment is stated at original cost.
The cost of property, plant and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Gains or losses on
disposal of depreciable property, plant and equipment are recognized in the year
of disposition as an element of other income (expense), net.
CAPITALIZED INTEREST
The Company capitalizes interest costs related to the construction of
significant additions to property, plant, and equipment and with the
acquisitions of licenses until the assets are placed into service. These costs
are amortized over the related assets' estimated useful lives. Capitalized
interest was $5 for 1999, $37 for 1998 and none for 1997.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. It is
reasonably possible that these assets could become impaired as a result of
technological or other industry changes. For assets the Company intends to hold
for use, if the total of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset. For assets the Company
intends to dispose of, a loss is recognized for the amount that the estimated
fair value, less costs to sell, is less than the carrying value of the assets.
WIRELESS LICENSES
The Latin America group's operating companies hold cellular and PCS
licenses issued by various government authorities. Licenses acquired are
generally stated at estimated fair value as of the date of acquisition and
amortized using the straight-line method over periods of benefit not to exceed
40 years. The licenses generally have provisions for renewal upon expiration.
INTANGIBLE ASSETS
Intangible assets consist of the excess consideration paid over the fair
value of net tangible assets acquired in business combinations accounted for
under the purchase method and include goodwill and customer lists. These assets
are being amortized using the straight-line and accelerated methods over periods
of benefit. Such
F-10
<PAGE> 177
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
periods do not exceed 40 years. The carrying value of these assets is
periodically reviewed to determine whether such intangibles are fully
recoverable from projected net cash flows of the related business unit.
INTERNAL USE SOFTWARE
Effective December 1, 1998, BellSouth adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires the capitalization of costs associated
with software development for internal use. Adoption of the new standard
resulted in an increase in earnings as a result of the capitalization of certain
costs that had previously been expensed. The impacts were $18 on income before
taxes and $15 on net loss.
FOREIGN CURRENCY
Assets and liabilities of entities with a functional currency other than
U.S. Dollars are translated into U.S. Dollars at exchange rates in effect at the
end of the reporting period. Revenues and expenses are translated into U.S.
Dollars at the average rates that prevailed during the period. The resulting net
translation gains and losses are reported as foreign currency translation
adjustments to group net worth component of other accumulated comprehensive
income.
Other operations consider the U.S. Dollar the functional currency
(generally those in countries with hyperinflationary economies). The monetary
assets and liabilities of these operations are re-measured into U.S. Dollars at
the exchange rate in effect at the balance sheet date. Revenues, expenses, gains
and losses are translated at the average exchange rate for the period, and
non-monetary assets and liabilities are translated at historical rates.
Resulting re-measurement gains or losses are recognized in the results of
operations.
DERIVATIVE FINANCIAL INSTRUMENTS
BellSouth generally enters into derivative financial instruments only for
hedging purposes. Deferral accounting is applied when the derivative reduces the
risk of the underlying hedged item effectively as a result of high inverse
correlation with the value of the underlying exposure. If a derivative
instrument either initially fails or later ceases to meet the criteria for
deferral or settlement accounting, any subsequent gains or losses are recognized
currently in income.
REVENUE RECOGNITION
Wireless service revenues arise mainly from the provision of access to the
cellular network (network access fees), usage of the cellular network (incoming
and outgoing airtime and long distance revenues), activation services, net
roaming and value-added services. Access revenue is recognized as earned.
Airtime (including net roaming) and long distance revenues are recognized when
the services are rendered. Equipment sales and other services revenues are
recognized when the products are delivered and accepted by customers and when
services are provided. Revenue associated with the sale of prepaid calling cards
is deferred and recognized as the airtime is utilized or when the prepaid
balances expire. Advertising and publishing revenues and related directory costs
are recognized upon publication of directories. Allowances for
uncollectible-billed services are adjusted monthly. The provision for such
uncollectible accounts was $68 for 1999, $68 for 1998 and $46 for 1997.
MAINTENANCE AND REPAIRS
The cost of maintenance and repairs of plant and equipment, including the
cost of replacing minor items not resulting in substantial betterments, is
charged to operating expense.
F-11
<PAGE> 178
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
ADVERTISING
BellSouth expenses advertising costs as they are incurred. The group's
total advertising expense was $87 in 1999, $68 in 1998 and $54 in 1997.
INCOME TAXES
The Latin America group businesses record deferred income taxes based on
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and their tax bases. Net deferred tax assets are
evaluated to determine if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Valuation allowances have been recorded to reduce the deferred tax
asset to the amount that is more likely than not to be realized.
EARNINGS PER SHARE
After the public issuance of Latin America group stock, the consolidated
financial statements of BellSouth will present basic and diluted earnings per
share for BLS group stock and Latin America group stock using the two-class
method. The two-class method is an earnings formula that determines the earnings
per share for BLS group stock and Latin America group stock according to
participation rights in undistributed earnings. The combined financial
statements of the Latin America group will not present earnings per share
because Latin America group stock is a series of common stock of BellSouth and
the Latin America group is not a legal entity with a capital structure.
Basic earnings per share for the BLS group stock will be calculated by
dividing BLS group earnings (including its inter-group interest in the Latin
America group earnings) by the weighted average number of shares of BLS group
stock outstanding. Diluted earnings per share will be calculated similarly,
except that it will include the dilutive effect of the assumed exercise of
securities, including the effects of shares issuable under BellSouth's incentive
plans, exclusive of options granted for Latin America group stock.
Basic earnings per share for the Latin America group stock will be computed
by dividing the product of (i) net income for the period times (ii) the
"outstanding interest fraction", by the weighted-average number of shares of
Latin America group stock outstanding. The outstanding interest fraction is the
portion of BellSouth's equity attributed to the Latin America group that is
represented by shares of Latin America group stock that are issued and
outstanding. Diluted earnings per share for the Latin America group stock will
be computed by dividing the product of (i) net income for the period times (ii)
the outstanding interest fraction by the weighted-average number of shares of
Latin America group stock outstanding, including the dilutive effect of Latin
America group stock equivalents.
C. INTERGROUP ALLOCATION POLICIES
The Board of Directors has adopted a tracking stock policy statement, which
includes the following policies. These policies may be modified or rescinded,
exceptions may be made with respect to the application of these policies, or
additional policies may be adopted at any time without approval of the
shareholders.
GROUP FINANCING
Loans from companies in the BLS group to companies in the Latin America
group are made at interest rates and on other terms and conditions designed to
reflect the interest rates and other terms and conditions that the Latin America
group would be able to obtain from third parties, assuming it were a legal
entity. Loans from companies in the Latin America group to companies in the BLS
group are made at interest rates and on other terms and conditions designed to
reflect the interest rates and other terms and conditions that the BLS
F-12
<PAGE> 179
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
group would be able to obtain from third parties, assuming it were a legal
entity. Under this policy, loans are made on this basis, regardless of the
interest rates and other terms and conditions on which those funds may actually
have been acquired from third parties.
SHARED CORPORATE SERVICES
BellSouth directly charges specifically identified costs for shared
corporate services to the Latin America group and the BLS group based upon use
of those services. Where determinations based on use alone are not practical,
BellSouth uses other allocation methods and criteria, based on revenues,
expenses, net assets or income that BellSouth's management believes are fair and
provide a reasonable allocation of the cost of shared corporate services used by
the groups. Shared corporate services include executive management,
sponsorships, human resources, legal, accounting and auditing, tax, treasury,
strategic planning, media and investor relations and corporate technology.
INCOME TAXES
Depending on the tax laws of the respective jurisdictions, income taxes,
including any adjustments thereto, have been calculated on either a separate,
consolidated, combined or unitary basis. Income tax provisions and related tax
payments or refunds determined on a consolidated, combined or unitary basis have
been allocated between the groups based on respective contributions (positive or
negative) to the consolidated, combined, or unitary tax liability. Cumulative
net tax benefits that were not used by the group generating those benefits but
that were used on a consolidated, combined, or unitary basis were credited on a
current basis to the group whose operations generated the benefit.
TRANSFERS OF OTHER ASSETS AND LIABILITIES
We may reallocate assets and liabilities between the BLS group and the
Latin America group not in the ordinary course of their respective businesses
by:
- increasing or decreasing, as applicable, a group's inter-group interest
in the other group;
- reallocating other assets, including cash, or liabilities from the group
receiving the assets or transferring the liabilities; or
- creating or reducing inter-group debt.
In each case, we will reallocate an amount equivalent to the fair value of the
assets or liabilities. Our board of directors will approve any creation of, or
increase or decrease in, an inter-group interest.
CASH MANAGEMENT
Decisions regarding the investment of surplus cash, the issuance and
retirement of debt, and the issuance and repurchase of common and preferred
stock will continue to be made by BellSouth headquarters on behalf of the
groups. The Latin America group's operating companies will manage all day-to-day
flows of disbursements and receipts and will maintain cash balances at the local
level to enable the execution of those transactions.
D. PARTNERSHIPS, ACQUISITIONS AND DIVESTITURES
BellSouth completed various transactions to further its strategy of
expanding its wireless coverage area in Central and South America. A summary of
significant transactions during 1999, 1998 and 1997 follows:
F-13
<PAGE> 180
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
1999
BellSouth raised its ownership interest in the Peruvian communications
company, Tele2000, now known as BellSouth Peru, through a series of transactions
totaling $238. This increased its ownership from 59.0% to 96.8%. Because
Tele2000's liabilities exceeded its assets, the excess of purchase price over
net assets acquired was $238.
BellSouth invested $20 for a 60.0% non-controlling stake in a Guatemalan
operation that in 1999 won a nationwide license to provide wireless
communications service within Guatemala.
BellSouth acquired an additional 1.7% of the operations in Panama from a
minority partner for $4.
BellSouth acquired stakes in two directory publishers in Brazil. It paid
$23 for a 40.0% interest in OESP Midia Ltda. and $115 for 100.0% of
Listel-Listas Telefonicas. The excess of the purchase price over the fair value
of the assets acquired in these transactions was $122.
1998
During 1998, BellSouth acquired additional ownership stakes in three of its
existing operations. These included the acquisition of an additional 20.9%
interest in Venezuela for $337; an additional 28.2% interest in Ecuador for $65;
an additional 3.5% interest in Brazil Sao Paulo and a 4.3% interest in Brazil
Northeast for a total of $73. The interests were acquired from BellSouth's
existing partners in each case. The excess of the purchase price over the fair
value of the assets acquired in these transactions was $366.
1997
In September 1997, BellSouth acquired an additional 7% interest and gained
a controlling seat on the board of directors of its wireless operation in
Venezuela. BellSouth paid $60 in cash and established a payable of approximately
$29 to be paid at a later date. The acquisition was accounted for as a purchase
and, accordingly, the operating results of Venezuela were included in the Latin
America group's combined financial statements since the date of acquisition. The
excess of the purchase price over the net assets acquired was approximately $45.
The results of this operation were reflected in equity in earnings at
BellSouth's ownership interest prior to the step acquisition.
The following unaudited pro forma information presents the results of
operations of Venezuela as if the acquisition had occurred at December 1, 1996:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Operating revenues.......................................... $1,270
Net loss.................................................... $ (33)
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of the above date.
Other transactions in 1997
In early 1997, BellSouth acquired interests in three new entities. These
included a 59.0% interest in Tele2000, a Peruvian communications company now
known as BellSouth Peru, for $136 in cash; a 61.2% ownership interest in Otecel,
one of two nationwide cellular companies in Ecuador, for $155 in cash; and a
49.0% interest in Nicacel, a Nicaraguan wireless carrier, and an option to
acquire an additional 40% interest,
F-14
<PAGE> 181
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
for $36 in cash. Because the acquisitions took place near the beginning of the
year, the operations of these entities prior to combination did not have a
material effect on the combined results of operations for 1997.
BellSouth also increased its ownership by 7.7% in Movicom/BellSouth, an
Argentine wireless company, for $30.
BellSouth invested approximately $600 for noncontrolling stakes in two
Brazilian ventures that won licenses to provide cellular services in Sao Paulo
and the northeastern Brazilian states of Alagoas, Ceara, Paraiba, Pernambuco,
Piaui and Rio Grande do Norte.
In all transactions, the excess of the respective purchase price over the
net assets acquired was allocated to customer lists, wireless licenses or
goodwill. The excess consideration paid over net assets acquired, along with
other intangible assets, is being amortized using either straight-line or
accelerated methods over periods of benefit which do not exceed 40 years.
E. INVESTMENTS AND ADVANCES
BellSouth holds investments in seven international partnerships and
ventures that are accounted for under the equity method. Investments and
advances as of November 30 consist of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Investments in equity affiliates............................ $805 $348
Advances to equity affiliates............................... 1 26
---- ----
Total investments and advances.................... $806 $374
==== ====
</TABLE>
Ownership in equity affiliates at November 30 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Abiatar (Uruguay)........................................... 46.0% 46.0%
BellSouth Guatemala(1)...................................... -- 60.0%
BellSouth Nicaragua(2)...................................... 49.0% 49.0%
BellSouth Panama............................................ 42.0% 43.7%
BCP - Sao Paulo (Brazil).................................... 44.5% 44.5%
BSE - Northeast (Brazil).................................... 46.8% 46.8%
OESP Midia Direta (Brazil).................................. -- 40.0%
</TABLE>
---------------
(1) This investment is accounted for under the equity method due to the
existence of significant minority rights that limit BellSouth's ability to
exercise unilateral control over the operation.
(2) After a change in law in Nicaragua in December 1999, BellSouth elected to
exercise an existing fully paid option to purchase an additional 40%.
The following table is a rollforward of BellSouth's investments in equity
affiliates included in the Latin America group:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Beginning of year........................................... $684 $805
Additional investments...................................... 248 54
Equity in net losses........................................ (57) (354)
Currency translation adjustments............................ (70) (157)
---- ----
End of year................................................. $805 $348
==== ====
</TABLE>
F-15
<PAGE> 182
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
The currency translation adjustment primarily reflects the effect of
exchange rate fluctuations on the Company's investments in Brazil.
At November 30, 1999 and 1998, the carrying value of investments accounted
for under the equity method exceeded the Company's share of the underlying net
assets by approximately $107 and $46. Amortization of excess carrying value of
$7 in 1999, $3 in 1998 and $2 in 1997 is reflected as a component of Net
earnings (losses) of equity affiliates in the accompanying combined statements
of operations.
The Company's investments in Brazil have cumulative net operating losses,
or NOLs, of approximately $1,271. No valuation allowance has been established
against the deferred tax asset due to the unlimited carryforward period for NOLs
in Brazil.
Advances to affiliates represent short-term loans to equity investees.
These advances bear interest at market rates.
SUMMARY FINANCIAL INFORMATION OF EQUITY INVESTEES
A summary of combined financial information as reported by the Latin
America group's equity investees is set forth below:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET INFORMATION 1998 1999
----------------------------------- ------ ------
<S> <C> <C>
Current assets.............................................. $ 475 $ 361
Noncurrent assets........................................... 3,720 2,864
Current liabilities......................................... 399 624
Noncurrent liabilities...................................... 2,114 2,040
Net equity.................................................. 1,682 561
</TABLE>
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENT INFORMATION 1997 1998 1999
-------------------------------------- ---- ----- ------
<S> <C> <C> <C>
Revenues.................................................... $ 69 $ 619 $1,020
Operating (loss) income..................................... (22) 10 10
Net loss.................................................... (14) (143) (789)
</TABLE>
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 Brazilian Real in relation to the U.S. Dollar,
allowing the market to freely determine the exchange rate. As a consequence of
this change, the Brazilian Real devalued significantly in relation to the U.S.
Dollar in early 1999. The devaluation and subsequent fluctuations in the
exchange rate resulted in the Brazilian wireless properties recording net
currency losses related to their net U.S. Dollar-denominated liabilities.
BellSouth's share of the foreign currency losses was $308 for 1999.
F-16
<PAGE> 183
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at November 30:
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE
LIVES 1998 1999
----------- ------ -------
(IN YEARS)
<S> <C> <C> <C>
Wireless plant and equipment.............................. 3-10 $1,253 $ 1,608
Operating and other equipment............................. 3-10 527 696
Buildings and building improvements....................... 10-30 163 207
Furniture and fixtures.................................... 3-10 79 81
Land...................................................... -- 19 21
Construction in progress.................................. -- 196 209
Less: accumulated depreciation............................ (783) (1,099)
------ -------
Property, plant and equipment, net...................... $1,454 $ 1,723
====== =======
</TABLE>
G. INTANGIBLE ASSETS
Intangible assets are summarized as follows at November 30:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZABLE
LIVES 1998 1999
------------ ------ ------
(IN YEARS)
<S> <C> <C> <C>
Licenses and concessions.................................. 10-40 $ 528 $ 870
Goodwill.................................................. 15-40 483 624
Customer lists............................................ 3-6 233 249
Capitalized software...................................... 3-5 18 41
Less: accumulated amortization............................ (203) (313)
------ ------
Intangible assets, net.................................. $1,059 $1,471
====== ======
</TABLE>
Amortization expense relating to intangible assets was $115 for 1999, $81
for 1998 and $37 for 1997. The increase in licenses and concessions in 1999 was
attributable primarily to purchases in Argentina and Peru to expand the wireless
coverage area in those countries. Goodwill increased as a result of the
investments in the directory publishers in Brazil and the acquisition of
additional interest in the business in Peru.
H. OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at November 30:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Accrued taxes............................................... $125 $162
Accrual for network equipment received...................... 55 137
License payable............................................. -- 78
Salaries and wages payable.................................. 30 44
Advance billings and deposits............................... 17 25
Other....................................................... 31 26
---- ----
Other current liabilities................................. $258 $472
==== ====
</TABLE>
F-17
<PAGE> 184
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
I. DEBT
DEBT MATURING WITHIN ONE YEAR
Debt maturing within one year is summarized as follows at November 30:
<TABLE>
<CAPTION>
1998 1999
------ ----
<S> <C> <C>
Short-term credit facilities, denominated in U.S. Dollars;
Interest rates ranging from 5.79% to 26.5%
Argentina................................................. $ 1 $ 28
Ecuador................................................... 51 53
Peru...................................................... 184 167
Short-term credit facilities, denominated in local
currencies; Local interest rates ranging from 6.50% to
38.0%
Chile..................................................... 29 9
Venezuela................................................. 13 --
Current maturities of external long-term debt............... 37 23
Current maturities of intercompany long-term debt........... 77 23
------ ----
Total debt maturing within one year............... $ 392 $303
====== ====
Weighted-average interest rate at end of period:
Short-term credit facilities................................ 11.93% 7.41%
</TABLE>
Committed credit lines aggregated to $930 with various banks. Borrowings
under the committed credit lines totaled $587 at November 30, 1999 and $556 at
November 30, 1998. The companies in the Latin America group also maintain
uncommitted lines of credit aggregating to $530. At November 30, 1999,
borrowings under the uncommitted lines of credit totaled $149 and $45 at
November 30, 1998. There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
LONG-TERM DEBT
Long-term debt is summarized below. Interest rates and maturities in the
table below are for the amounts outstanding at November 30, 1999:
<TABLE>
<CAPTION>
CONTRACTUAL
INTEREST RATES MATURITIES 1998 1999
-------------- ----------- ---- ----
<S> <C> <C> <C> <C>
External debt:
Argentina............................... 9.25% 2000 - 2008 $150 $153
Chile................................... 5.73% - 6.65% 2000 - 2005 100 100
Ecuador................................. 7.61% - 11.36% 2000 - 2003 15 13
Peru.................................... 5.79% - 11.54% 2000 - 2001 19 12
Venezuela............................... 7.19% - 23.00% 2001 200 220
Intercompany debt:
Argentina............................... LIBOR 2005 117 117
Ecuador................................. 10.00% 2000 77 23
---- ----
678 638
Current maturities of external debt....... (37) (23)
Current maturities of intercompany debt... (77) (23)
---- ----
Total long-term debt............ $564 $592
==== ====
</TABLE>
F-18
<PAGE> 185
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
Maturities of long-term debt outstanding (principal amounts) at November
30, 1999 are summarized below:
<TABLE>
<CAPTION>
MATURITIES
----------
<S> <C>
2000........................................................ $ 46
2001........................................................ 222
2002........................................................ 2
2003........................................................ 1
2004........................................................ --
Thereafter.................................................. 367
----
Total............................................. $638
====
</TABLE>
These instruments contain certain covenants requiring certain financial
ratios, limiting the incurrence of additional indebtedness and capital
expenditures, and restricting the ability to pay dividends.
J. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are summarized as follows at November 30:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
License payable............................................. $-- $ 79
Deferred credits............................................ 36 33
Payable to related party.................................... -- 25
Compensation related........................................ 10 12
Other....................................................... 18 25
--- ----
Other noncurrent liabilities.............................. $64 $174
=== ====
</TABLE>
K. STOCK COMPENSATION PLANS
The Board of Directors has approved the proposed amendment of the BellSouth
Corporation Stock Plan (the "Stock Plan"), subject to shareholder approval. The
Stock Plan authorizes grants of stock options, stock appreciation rights,
restricted stock awards, performance shares, stock payments and dividend
equivalent rights with respect to BLS group stock and Latin America group stock.
Executives and key employees will be granted awards for both BLS group stock and
Latin America group stock. With respect to management in the BLS group, a
preponderance of awards will be made for BLS group stock, and, with respect to
management in the Latin America group, a preponderance of awards will be made
for Latin America group stock. In addition, nonemployee directors will be
granted awards for both BLS group stock and Latin America group stock. The Board
of Directors believes that permitting incentive awards to be made to
participants with respect to the series of common stock weighted toward the
separate performance of the group's business in which the participants work and,
in certain cases the other group, is in the best interests of BellSouth.
BellSouth's existing stock compensation plans which offer benefits in the
form of, or based on the performance of, the existing common stock will be
affected by the tracking stock proposal.
1999 STOCK COMPENSATION PLANS
At December 31, 1999, BellSouth has stock options outstanding under several
stock-based compensation plans. The BellSouth Corporation Stock Plan (the
"Existing Stock Plan") provides for grants to key
F-19
<PAGE> 186
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
employees of stock options and various other stock-based awards. One share of
BellSouth common stock is the underlying security for any award. The aggregate
number of shares of BellSouth common stock which may be granted under the
Existing Stock Plan in any calendar year cannot exceed one percent of the shares
outstanding at the time of grant. Prior to adoption of the Existing Stock Plan,
stock options were granted under the BellSouth Corporation Stock Option Plan.
Stock options granted under both plans entitle an optionee to purchase shares of
BellSouth common stock within prescribed periods at a price either equal to, or
in excess of, the fair market value on the date of grant. Options granted under
these plans generally become exercisable at the end of three to five years and
have a term of 10 years.
The following table summarizes the activity for stock options outstanding:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at January 1................... 37,142,784 45,122,812 59,202,910
Options granted.................................... 12,507,766 17,963,592 15,385,731
Options exercised.................................. (4,001,490) (2,784,312) (1,839,933)
Options forfeited.................................. (526,248) (1,099,182) (1,049,627)
---------- ---------- ----------
Options outstanding at December 31................. 45,122,812 59,202,910 71,699,081
========== ========== ==========
Weighted -- average option prices per common share:
Outstanding at January 1........................... $17.06 $18.67 $22.77
Granted at fair market value....................... $22.23 $31.95 $45.51
Exercised.......................................... $14.69 $15.35 $15.74
Forfeited.......................................... $20.02 $23.47 $30.22
Outstanding at December 31......................... $18.67 $22.77 $27.73
Weighted -- average fair value of options granted
at fair market value during the year............. $ 4.38 $ 7.22 $11.19
Options exercisable at December 31................. 12,065,032 14,733,210 19,114,773
Shares available for grant at December 31.......... 19,835,596 19,504,179 18,825,466
</TABLE>
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ----- ----
<S> <C> <C> <C>
Expected life (years)....................................... 5 5 5
Dividend yield.............................................. 3.24% 2.40% 1.67%
Expected volatility......................................... 19.0 21.0 23.0
Risk-free interest rate..................................... 6.22 5.42 4.82
</TABLE>
F-20
<PAGE> 187
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------- ---------------------
AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
EXERCISE PRICE RANGE OPTIONS LIFE(A) PRICE OPTIONS PRICE
-------------------- ---------- ------- -------- ---------- --------
(MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C>
$12.10 - 15.08 12.5 3.88 $14.28 8.7 $14.08
15.13 - 21.28 14.4 5.63 20.33 5.5 20.01
21.38 - 29.22 12.6 7.10 22.28 2.7 21.96
30.91 - 37.92 15.5 8.11 31.06 1.6 31.02
39.41 - 49.41 16.7 9.27 45.12 0.6 45.26
---- ---- ------ ---- ------
$12.10 - 49.41 71.7 6.97 $27.73 19.1 $19.33
==== ==== ====== ==== ======
</TABLE>
---------------
(a) Average contractual life remaining in years.
OTHER
BellSouth applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations in
accounting for its stock-based compensation plans and discloses the pro forma
effects of the plans on net income and earnings per share as provided by SFAS
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
expense has been recognized for the stock option plans and employee stock
purchase plans, as all options have been issued at fair market value. Since
Latin America group stock was not part of the capital structure of BellSouth for
the periods presented, there were no stock options outstanding. Therefore, the
pro forma effect of Latin America group stock options on the accompanying
historical combined financial statements is not presented.
L. EMPLOYEE BENEFIT PLANS
PENSION PLANS
BellSouth maintains a noncontributory defined benefit pension plan that
covers selected domestic employees in companies in the Latin America group. The
plan is a cash balance plan, which provides pension benefits determined by a
combination of compensation-based service and additional credits and individual
account-based interest credits. Pension plan assets are administered by
BellSouth and are principally invested in equity and fixed income securities.
Funding of the plan is determined in accordance with statutory funding
requirements. Pension expense allocated to the Latin America group was $.8 in
1999, $.8 in 1998 and $.2 in 1997.
BellSouth also maintains a nonqualified supplemental retirement plan that
covers certain executives in companies in the Latin America group. Expense
related to this plan allocated to the Latin America group was $.7 in 1999, $.8
in 1998 and $.4 in 1997.
RETIREE HEALTH AND LIFE PLANS
BellSouth provides certain health care and life insurance benefits to
selective domestic employees in companies in the Latin America group who retire
and satisfy certain service and age requirements. The postretirement benefit
expense allocated to companies in the Latin America group was not material for
1999, 1998 or 1997.
F-21
<PAGE> 188
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
DEFINED CONTRIBUTION PLANS
BellSouth provides a 401(k) savings plan for most domestic employees of
companies in the Latin America group. A portion of employees' eligible
contributions to the Savings Plans is matched by BellSouth at rates determined
annually by the Board of Directors. BellSouth contributions allocated to
companies in the Latin America group were not material for 1999, 1998 or 1997.
M. INCOME TAXES
The combined balance sheets reflect the anticipated tax impact of future
taxable income or deductions implicit in the combined balance sheets in the form
of temporary differences. These temporary differences reflect the difference
between the basis in assets and liabilities as measured in the Latin America
group financial statements and as measured by tax laws using enacted tax rates.
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Federal
Current................................................... $(10) $ (5) $ (32)
Foreign
Current................................................... 22 34 47
Deferred, net............................................. (3) 45 36
Investment credits........................................ (8) 29 (167)
---- ---- -----
Total provision (benefit) for income taxes........ $ 1 $103 $(116)
==== ==== =====
</TABLE>
Temporary differences that gave rise to deferred tax assets and
(liabilities) at November 30 were as follows:
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Allowance for uncollectibles................................ $ 15 $ 15
Venezuelan telecommunications tax........................... 20 26
Other....................................................... -- 14
Net operating loss carryforwards............................ 49 61
----- -----
Deferred tax assets......................................... 84 116
Valuation allowance......................................... (49) (55)
----- -----
Net deferred tax assets..................................... 35 61
----- -----
Licenses.................................................... (139) (147)
Customer lists.............................................. (54) (36)
Capitalized interest........................................ (13) (12)
Venezuelan ITC reserve...................................... (95) --
Property related............................................ (19) (17)
Other....................................................... (13) --
----- -----
Deferred tax liabilities.................................... (333) (212)
----- -----
Net deferred tax asset (liability).......................... $(298) $(151)
===== =====
</TABLE>
F-22
<PAGE> 189
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
Although there can be no assurances, management believes that it is more
likely than not that it will generate future taxable income sufficient to fully
realize future benefits from net deferred tax assets of $61 at November 30,
1999.
At November 30, 1999, the Latin America group had cumulative net operating
loss carryforwards and related deferred tax assets and valuation allowances as
follows:
<TABLE>
<CAPTION>
RELATED RELATED
NOL IN DEFERRED TAX VALUATION
COUNTRY U.S.$ ASSET ALLOWANCE CARRYFORWARD PERIOD
------- ---------- ------------ --------- --------------------------
<S> <C> <C> <C> <C>
Chile..................... $74 $11 $ 5 Unlimited
Ecuador................... 92 23 23 5 years; carryforwards
expire between 2000 and 2005
Peru...................... 89 27 27 4 years; carryforward
period begins in first subsequent
profitable year
</TABLE>
A reconciliation of the federal statutory income tax provision to the
effective tax provision follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. $(16) $ 50 $ 5
Foreign tax rate differential............................... (3) 12 20
Foreign investment tax credits.............................. (8) 29 (167)
Valuation allowances established............................ 24 22 16
Other items, net............................................ 4 (10) 10
---- ---- -----
Reported provision (benefit)................................ $ 1 $103 $(116)
==== ==== =====
</TABLE>
At November 30, 1999, the deferred tax liability related to approximately
$600 cumulative unrepatriated earnings on combined foreign subsidiaries and
equity investments in unconsolidated businesses was excluded from recognition
under Statement of Financial Accounting Standards No. 109 (SFAS 109) because
such earnings are intended to be reinvested indefinitely. The determination of
the deferred tax liability is not practicable at this time.
FOREIGN TAX CREDITS
During 1998, the Latin America group's operation in Venezuela (Telcel) was
notified by the local taxing authority that its claims for investment tax
credits taken in 1995, 1996 and 1997 had been disallowed. The tax assessments
were appealed before the Sixth Upper Court in Tax Matters and in August 1999 the
Court ruled in favor of Telcel; the taxing authority appealed the decision. As a
result of the favorable outcome, and since there are sufficient grounds to
believe that the government authorities will disregard the appeal, the credits
were recognized in income in 1999.
N. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Income taxes............................................. $35 $40 $42
=== === ===
Interest................................................. $46 $53 $89
=== === ===
</TABLE>
F-23
<PAGE> 190
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
In 1997, BellSouth began combining the Venezuelan operations that had
previously been accounted for under the equity method. The combination resulted
in an increase in assets of $382 (net of decreases of $262 in investments and
advances) and corresponding increases in liabilities.
O. SEGMENT INFORMATION
Under the provisions of SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," the Latin America group operates in two
segments: communications and advertising and directory publishing. All material
operating units qualify for aggregation under SFAS 131 due to their similar
economic characteristics, nature of products and services, procurement and
distribution processes and identical customer base.
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
COMMUNICATIONS:
Operating revenues.......................................... $ 940 $1,907 $2,336
Depreciation and amortization............................... 140 338 446
Operating income............................................ 1 202 113
Interest expense............................................ 46 53 87
Net earnings (losses) of equity affiliates.................. 14 (57) (349)
Provision (benefit) for income taxes........................ 1 105 (116)
Segment net loss............................................ $ (28) $ (64) $ (301)
Segment assets.............................................. $3,098 $4,136 $4,483
Equity method investments................................... $ 684 $ 805 $ 323
Capital expenditures........................................ $ 448 $ 697 $ 646
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
ADVERTISING AND DIRECTORY PUBLISHING:
Operating revenues.......................................... $ -- $ -- $ 69
Depreciation and amortization............................... -- -- 4
Operating loss.............................................. -- (6) (7)
Interest expense............................................ -- -- 1
Net losses of equity affiliates............................. -- -- (5)
Benefit for income taxes.................................... -- (2) --
Segment net loss............................................ $ -- $ (4) $ (15)
Segment assets.............................................. $ -- $ 35 $ 191
Equity method investments................................... $ -- $ -- $ 25
Capital expenditures........................................ $ -- $ -- $ 1
</TABLE>
F-24
<PAGE> 191
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
GEOGRAPHIC INFORMATION
For geographic reporting, revenues are attributed to the geographic
location in which the customer is located. Long-lived assets consist primarily
of wireless licenses and property, plant and equipment and are attributed to the
geographic location in which they are located. Many of the Company's investments
are accounted for under the equity method of accounting and, therefore,
operating revenues and expenses of these investments as well as their long-lived
assets are not reflected in the combined financial statements.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED NOVEMBER 30,
----------------------
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Revenues:
Argentina................................................. $555 $ 721 $ 799
Venezuela................................................. 122 806 1,109
Other foreign............................................. 263 380 497
---- ------ ------
Total............................................. $940 $1,907 $2,405
==== ====== ======
Long-lived assets:
Argentina................................................. $ 559 $ 881
Venezuela................................................. 1,112 1,171
Other foreign............................................. 1,742 1,588
------ ------
Total............................................. $3,413 $3,640
====== ======
</TABLE>
P. FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, temporary cash
investments, bank loans and commercial paper approximate fair value due to the
short-term nature of these instruments. Fair value estimates for long-term debt
are based on quotes from dealers. Since judgment is required to develop the
estimates, the estimated amounts presented herein may not be indicative of the
amounts that the Latin America group could realize in a current market exchange.
At November 30, 1999 and 1998, the recorded amount of the long-term debt in
the combined financial statements of the Latin America group was $638 and $678.
The estimated fair value of the long-term debt was $773 for 1999 and $714 for
1998.
INTEREST RATE SWAPS
BellSouth occasionally enters into interest rate swap agreements to
exchange fixed and variable rate interest payment obligations without the
exchange of the underlying principal amounts. At November 30, 1999, an entity
within the Latin America group was a party to interest rate swaps with a
notional amount totalling $30. Under the agreement, the entity pays fixed rates
denominated in Venezuelan Bolivars and receives fixed rates denominated in U.S.
Dollars averaging 8%. The swaps are subject to periodic settlement and mature in
February 2001. Because the instruments were entered into at the end of the
period, the recorded amount equals the fair value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Latin America group
businesses to concentrations of credit risk consist principally of trade
accounts receivable. The Latin America group derives the majority of its
operating revenues from individuals, businesses and government-owned fixed
telephony companies (due to
F-25
<PAGE> 192
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
Calling Party Pays). The Latin America group's allowance for doubtful accounts
is based upon management's estimates and past experience.
Q. COMMITMENTS AND CONTINGENCIES
LEASES
The Latin America group businesses have entered into operating leases for
facilities and equipment used in operations. Rental expense under operating
leases was $20 in 1999, $16 in 1998 and $12 in 1997. Capital leases currently in
effect are not significant.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at November 30, 1999:
<TABLE>
<CAPTION>
MINIMUM
RENTALS
-------
<S> <C>
2000........................................................ $21
2001........................................................ 19
2002........................................................ 16
2003........................................................ 12
2004........................................................ 11
Thereafter.................................................. 8
---
Total............................................. $87
===
</TABLE>
PURCHASE COMMITMENTS
In July 1998, the Venezuelan operation entered into an agreement with a
major network vendor for the purchase, installation and maintenance of CDMA
digital technology network equipment. The term of this agreement is three years,
renewable for equal and consecutive one-year periods, subject to agreement
between the parties. The initial total investment is estimated at approximately
$200. During 1999, firm purchase orders for approximately $119 were placed under
the terms of the agreement.
OTHER CLAIMS
BellSouth is subject to claims arising in the ordinary course of business
of the Latin America group involving allegations of personal injury, breach of
contract, anti-competitive conduct, employment law issues, regulatory matters
and other actions.
While complete assurance cannot be given as to the outcome of any legal
claims, the group believes that any financial impact would not be material to
its results of operations, financial position or cash flows.
R. RELATED PARTY TRANSACTIONS
As discussed in Note B, the companies in the BLS group have provided
necessary working capital requirements through intercompany debt and cash
contributions to the Latin America group companies. These amounts are reflected
in the accompanying combined balance sheets as intercompany debt due to the BLS
group.
<TABLE>
<CAPTION>
RATE 1998 1999
----- ---- ----
<S> <C> <C> <C>
Argentina........................................ LIBOR $117 $117
Ecuador.......................................... 10.0% 77 23
---- ----
$194 $140
==== ====
</TABLE>
F-26
<PAGE> 193
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
Intergroup interest on these loans was $14 in 1999, $10 in 1998 and $3 in
1997.
Included in selling, general and administrative expenses are allocations to
the Latin America group for its share of BellSouth's shared corporate services.
These amounts totalled $62 for 1999, $47 for 1998 and $28 for 1997.
The companies in the Latin America group have charged the BLS group for
various services provided to its European and Asian operations, including
marketing, network engineering and information technology consulting, totalling
$25 in 1999, $24 in 1998 and $21 in 1997. These amounts have been recorded as
revenue or netted against selling, general and administrative expenses in the
accompanying combined statements of operations. Additionally, the Latin America
group has recognized revenue in 1999 of $22 related to the provision of long
distance and certain wireless administration services to the BLS group's
domestic and European operations.
The companies in the Latin America group recorded charges of $205 in 1999,
$187 in 1998 and $203 in 1997 from minority shareholders for network and
equipment for resale to customers.
S. SUBSEQUENT EVENTS
In December 1999, BellSouth acquired an additional wireless license in
Chile that will expand its service area to the entire country. BellSouth paid
approximately $85 for the license.
In December 1999, the Nicaraguan regulations which restricted a foreign
controlling ownership interest in an operation domiciled in that country were
lifted. As a result, BellSouth will be able to exercise its existing, fully paid
option to purchase an additional 40% ownership interest.
In the first week of January 2000, the Ecuadorian government declared a
national emergency and the Ecuadorian Sucre devalued approximately 40.0% against
the U.S. Dollar. The effect on the Latin America Group is yet to be determined.
On January 21, 2000, Ecuador suffered a military coup, which ousted Mr. Jamil
Mahuad, the constitutionally-elected President of Ecuador, from office. The
military junta was disbanded shortly thereafter, with power being ceded to Mr.
Gustavo Noboa, who was formerly Vice President under Mr. Mahuad.
In May 2000, BellSouth 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.
In May 2000, we announced an agreement to acquire a 33.8% controlling
equity interest in Celumovil S.A., a cellular operator in the Eastern and
Atlantic regions in Colombia, for a purchase price of approximately $295
million. Celumovil is a leading provider of wireless telecommunications services
in Colombia with approximately 466,000 subscribers as of February 2000.
Celumovil's concession areas include the Eastern and Atlantic regions, covering
a combined population of approximately 26 million and six of the 10 largest
cities in Colombia, including Bogota.
F-27
<PAGE> 194
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
FEBRUARY 28, FEBRUARY 29,
1999 2000
------------ ------------
<S> <C> <C>
Operating revenues.......................................... $ 565 $695
----- ----
Operating expenses:
Cost of services, products and equipment.................. 196 278
Selling, general and administrative....................... 212 303
Depreciation and amortization............................. 104 126
----- ----
Total operating expenses.......................... 512 707
----- ----
Operating income (loss)..................................... 53 (12)
Interest expense............................................ 24 33
Other income (expense), net................................. (8) 25
----- ----
Income (loss) before income taxes........................... 21 (20)
Provision (benefit) for income taxes........................ 24 (13)
----- ----
Income (loss) before net earnings (losses) of equity
affiliates and minority interests......................... (3) (7)
Net earnings (losses) of equity affiliates.................. (295) (6)
Minority interests.......................................... (16) (7)
----- ----
Net loss.......................................... $(314) $(20)
===== ====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-28
<PAGE> 195
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 29,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 287 $ 309
Temporary cash investments................................ 66 --
Accounts receivable, net of allowance for uncollectibles
of $99 and $101........................................ 503 543
Inventory................................................. 56 48
Other current assets...................................... 122 117
------ ------
Total current assets................................... 1,034 1,017
------ ------
Investments and advances.................................... 374 330
Property, plant and equipment............................... 2,822 3,047
Less: accumulated depreciation.............................. 1,099 1,199
------ ------
Property, plant and equipment, net.......................... 1,723 1,848
------ ------
Deferred charges and other assets........................... 72 81
Intangible assets, net...................................... 1,471 1,547
------ ------
Total assets...................................... $4,674 $4,823
====== ======
LIABILITIES AND GROUP NET WORTH
Current liabilities:
External debt maturing within one year.................... $ 280 $ 564
Intercompany debt maturing within one year................ 23 23
Accounts payable.......................................... 322 408
Other current liabilities................................. 472 379
------ ------
Total current liabilities.............................. 1,097 1,374
------ ------
Long-term debt:
External long-term debt................................... 475 318
Intercompany long-term debt............................... 117 120
------ ------
Total long-term debt................................... 592 438
------ ------
Noncurrent liabilities:
Deferred income taxes..................................... 151 127
Other noncurrent liabilities.............................. 174 184
------ ------
Total noncurrent liabilities........................... 325 311
------ ------
Minority interests.......................................... 315 291
Group net worth:
Attributed capital........................................ 3,059 3,127
Retained deficit.......................................... (450) (470)
Accumulated other comprehensive income.................... (264) (248)
------ ------
Total group net worth.................................. 2,345 2,409
------ ------
Total liabilities and group net worth............. $4,674 $4,823
====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-29
<PAGE> 196
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
FEBRUARY 28, FEBRUARY 29,
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(314) $ (20)
Adjustments to net loss:
Depreciation and amortization............................. 104 126
Provision for uncollectibles.............................. 16 16
Net losses of equity affiliates........................... 295 6
Foreign currency exchange (gains) losses.................. 12 (13)
Minority interests in income (losses) of subsidiaries..... 16 7
Deferred income taxes and investment tax credits.......... 5 5
Net change in:
Accounts receivable and other current assets.............. (53) (28)
Accounts payable and other current liabilities............ (10) (37)
Deferred charges and other assets......................... (1) (7)
Other liabilities and deferred credits.................... 25 (2)
Other reconciling items, net................................ 4 3
----- -----
Net cash provided by operating activities......... 99 56
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (162) (230)
Investments in and advances to equity affiliates............ (27) (3)
Purchases of wireless licenses.............................. -- (68)
Other investing activities, net............................. (3) 65
----- -----
Net cash used for investing activities............ (192) (236)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt............................... 35 75
Repayments of short-term debt............................... (3) (3)
Proceeds from long-term debt................................ 26 72
Repayments of long-term debt................................ (13) (10)
Funds attributed from the BLS group......................... 85 68
----- -----
Net cash provided by financing activities......... 130 202
----- -----
Effect of exchange rate changes on cash and cash
equivalents............................................... (2) --
Net increase in cash and cash equivalents................... 35 22
Cash and cash equivalents at beginning of
period.......................................... 171 287
----- -----
Cash and cash equivalents at end of period.................. $ 206 $ 309
===== =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE> 197
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF GROUP NET WORTH
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
For the three months ended February 29, 2000
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ATTRIBUTED RETAINED COMPREHENSIVE
CAPITAL DEFICIT INCOME TOTAL
---------- -------- ------------- ------
<S> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1999........................... $3,059 $(450) $(264) $2,345
------ ----- ----- ------
Net loss............................................... (20) (20)
Other comprehensive income, net of tax:
Foreign currency translation adjustment.............. 16 16
------
Total comprehensive income............................. (4)
Funds attributed from the BLS group.................... 68 68
------ ----- ----- ------
BALANCE AT FEBRUARY 29, 2000........................... $3,127 $(470) $(248) $2,409
====== ===== ===== ======
</TABLE>
For the three months ended February 28, 1999
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ATTRIBUTED RETAINED COMPREHENSIVE
CAPITAL DEFICIT INCOME TOTAL
---------- -------- ------------- ------
<S> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1998........................... $2,341 $(134) $ (88) $2,119
------ ----- ----- ------
Net loss............................................... (314) (314)
Other comprehensive income, net of tax:
Foreign currency translation adjustment.............. (172) (172)
------
Total comprehensive income............................. (486)
Funds attributed from the BLS group.................... 85 85
------ ----- ----- ------
BALANCE AT FEBRUARY 28, 1999........................... $2,426 $(448) $(260) $1,718
====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements
F-31
<PAGE> 198
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
A. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited combined financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. In management's 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 the Latin America group's significant accounting policies
and other information, you should read this report in conjunction with the
audited combined financial statements included in this prospectus.
B. CONSOLIDATION OF NICARAGUAN OPERATIONS
After a change in law in Nicaragua in December 1999, BellSouth elected to
increase its 49% ownership interest to an 89% controlling stake. Accordingly, in
first quarter 2000, the results of the Nicaraguan operations that were
previously reported under the equity method were changed to the consolidation
method. The combination resulted in an increase in assets of $23, net of
decreases of $54 in investments and advances, and corresponding increases in
liabilities.
C. SUMMARY FINANCIAL INFORMATION OF EQUITY INVESTEES
A summary of combined financial information as reported by BellSouth's
equity investees included in the Latin America group is set forth below:
<TABLE>
<CAPTION>
FIRST QUARTER
--------------
CONDENSED INCOME STATEMENT INFORMATION 1999 2000
-------------------------------------- ------ -----
<S> <C> <C>
Revenues.................................................... $ 280 $288
Operating (loss) income..................................... (22) 14
Net loss.................................................... (652) (15)
</TABLE>
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 Brazilian Real in relation to the U.S. Dollar,
allowing the market to freely determine the exchange rate. As a consequence of
this change, the Brazilian Real devalued significantly in relation to the U.S.
Dollar in early 1999. The devaluation and subsequent fluctuations in the
exchange rate resulted in the Brazilian wireless properties recording net
currency losses related to their net U.S. Dollar-denominated liabilities.
BellSouth's share of the foreign currency losses for the first quarter of 1999
was $280.
D. PARTNERSHIPS, ACQUISITIONS AND DIVESTITURES
BellSouth completed various transactions to further its strategy of
expanding its wireless coverage area in Central and South America. A summary of
significant transactions since first quarter 1999 follows:
BellSouth raised its ownership interest in the Peruvian communications
company, Tele2000, now known as BellSouth Peru, through a series of transactions
totaling $238. This increased its ownership from 59.0% to 96.8%. Because
Tele2000's liabilities exceeded its assets, the excess of purchase price over
net assets acquired was $238.
F-32
<PAGE> 199
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
BellSouth invested $20 for a 60.0% non-controlling stake in a Guatemalan
operation that in 1999 won a nationwide license to provide wireless
communications service within Guatemala.
BellSouth acquired an additional 1.7% of the operations in Panama from a
minority partner for $4.
BellSouth acquired stakes in two directory publishers in Brazil. It paid
$23 for a 40.0% interest in OESP Midia Direta and $115 for 100.0% of
Listel-Listas Telefonicas. The excess of the purchase price over the fair value
of the assets acquired in these transactions was $122.
E. SEGMENT INFORMATION
Under the provisions of SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," the Latin America group operates in two
segments: communications and advertising and directory publishing. All material
operating units qualify for aggregation under SFAS 131 due to their similar
economic characteristics, nature of products and services, procurement and
distribution processes and identical customer base.
<TABLE>
<CAPTION>
FIRST QUARTER
---------------
1999 2000
------ ------
<S> <C> <C>
COMMUNICATIONS:
Operating revenues.......................................... $ 565 $ 681
Depreciation and amortization............................... 104 124
Operating income (loss)..................................... 53 (1)
Interest expense............................................ 24 33
Net losses of equity affiliates............................. (294) (6)
Provision (benefit) for income taxes........................ 24 (7)
Segment net loss............................................ $ (313) $ (15)
ADVERTISING AND DIRECTORY PUBLISHING:
Operating revenues.......................................... $ -- $ 14
Depreciation and amortization............................... -- 2
Operating loss.............................................. -- (11)
Interest expense............................................ -- --
Net losses of equity affiliates............................. (1) (1)
Benefit for income taxes.................................... -- (6)
Segment net loss............................................ $ (1) $ (5)
</TABLE>
F. FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, temporary cash
investments, bank loans and commercial paper approximate fair value due to the
short-term nature of these instruments. Fair value estimates for long-term debt
are based on quotes from dealers. Since judgment is required to develop the
estimates, the estimated amounts presented herein may not be indicative of the
amounts that the companies in the Latin America group could realize in a current
market exchange.
G. RELATED PARTY TRANSACTIONS
Included in selling, general and administrative expenses are allocations to
the Latin America group for its share of BellSouth's shared corporate services.
These amounts totalled $15 for first quarter 2000 and $13 for first quarter
1999.
F-33
<PAGE> 200
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
The Latin America group has charged the BLS group for providing various
services to its European and Asian operations, including marketing, network
engineering and information technology consulting, totaling $6 in first quarter
2000 and $4 in first quarter 1999. These amounts have been recorded as revenue
or netted against selling, general and administrative expenses in the
accompanying combined statements of operations. Additionally, the Latin America
group has recognized revenue of $11 in first quarter 2000 related to the
provision of long distance and certain wireless administration services to the
BLS group's domestic and European operations.
The Latin America group recorded charges of $52 in first quarter 2000 and
$32 in first quarter 1999 from minority shareholders for network and equipment
for resale to customers.
H. DEVALUATION OF ECUADORAN CURRENCY
In the first week of January 2000, the Ecuadorian government declared a
national emergency and the Ecuadorian Sucre devalued approximately 40.0% against
the U.S. Dollar. The effect on the Latin America group is yet to be determined.
On January 21, 2000, Ecuador suffered a military coup, which ousted Mr. Jamil
Mahuad, the constitutionally-elected President of Ecuador, from office. The
military junta was disbanded shortly thereafter, with power being ceded to Mr.
Gustavo Noboa, who was formerly Vice President under Mr. Mahuad.
I. PURCHASE OF CHILEAN WIRELESS LICENSE
In December 1999, BellSouth acquired an additional wireless license in
Chile that will expand its service area to the entire country. BellSouth paid
approximately $85 for the license.
J. SUBSEQUENT EVENT
In May 2000, BellSouth 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.
Also in May 2000, BellSouth announced an agreement to acquire a 33.8%
controlling equity interest in Celumovil S.A. a cellular operator in the Eastern
and Atlantic regions in Colombia, for a purchase price of approximately $295
million. Celumovil is a leading provider of wireless telecommunications services
in Colombia with approximately 466,000 subscribers as of February 2000.
Celumovil's concession areas include the Eastern and Atlantic regions, covering
a combined population of approximately 26 million and six of the 10 largest
cities in Colombia, including Bogota.
F-34
<PAGE> 201
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
BellSouth Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and shareholders' equity
and comprehensive income present fairly, in all material respects, the financial
position of BellSouth Corporation and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note A to the consolidated financial statements, in 1999
BellSouth Corporation adopted AICPA Statement of Position 98-1 and changed its
method of accounting for internal-use software development costs.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 3, 2000 (except for Note S, as to
which the date is May 25, 2000)
F-35
<PAGE> 202
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Operating revenues:
Wireline communications:
Local service.......................................... $ 9,017 $10,033 $10,887
Network access......................................... 4,483 4,632 4,761
Long distance.......................................... 734 713 608
Other wireline......................................... 944 1,023 1,198
------- ------- -------
Total wireline communications..................... 15,178 16,401 17,454
Domestic wireless......................................... 2,581 2,723 3,191
International operations.................................. 948 1,995 2,289
Advertising and publishing................................ 1,837 1,891 2,010
Other..................................................... 17 113 280
------- ------- -------
Total operating revenues.......................... 20,561 23,123 25,224
------- ------- -------
Operating expenses:
Operational and support expenses.......................... 11,221 12,862 13,796
Depreciation and amortization............................. 3,964 4,357 4,671
Provision for asset impairment............................ -- -- 320
------- ------- -------
Total operating expenses.......................... 15,185 17,219 18,787
------- ------- -------
Operating income............................................ 5,376 5,904 6,437
Interest expense............................................ 761 837 1,030
Gain on sale of operations.................................. 787 335 55
Net earnings (losses) of equity affiliates.................. (242) 92 (169)
Other income, net........................................... 261 257 195
------- ------- -------
Income before income taxes.................................. 5,421 5,751 5,488
Provision for income taxes.................................. 2,151 2,224 2,040
------- ------- -------
Income before extraordinary losses.......................... 3,270 3,527 3,448
Extraordinary loss on early extinguishment of debt, net of
tax....................................................... (9) -- --
------- ------- -------
Net income........................................ $ 3,261 $ 3,527 $ 3,448
======= ======= =======
Weighted-average shares of common stock outstanding:
Basic.................................................. 1,984 1,970 1,898
Diluted................................................ 1,989 1,984 1,916
Earnings per share of common stock:
Basic.................................................. $ 1.64 $ 1.79 $ 1.82
Diluted................................................ $ 1.64 $ 1.78 $ 1.80
Dividends declared per share of common stock................ $ .72 $ .73 $ .76
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE> 203
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,143 $ 1,287
Temporary cash investments................................ 44 105
Accounts receivable, net of allowance for uncollectibles
of $251 and $312....................................... 4,629 5,177
Material and supplies..................................... 431 451
Other current assets...................................... 459 367
------- -------
Total current assets................................... 8,706 7,387
------- -------
Investments and advances.................................... 2,861 6,097
Property, plant and equipment, net.......................... 23,940 24,631
Deferred charges and other assets........................... 1,028 1,564
Intangible assets, net...................................... 2,875 3,774
------- -------
Total assets...................................... $39,410 $43,453
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year............................. $ 3,454 $ 7,653
Accounts payable.......................................... 2,219 1,961
Other current liabilities................................. 3,477 3,781
------- -------
Total current liabilities.............................. 9,150 13,395
------- -------
Long-term debt.............................................. 8,715 9,113
------- -------
Noncurrent liabilities:
Deferred income taxes..................................... 2,512 2,705
Unamortized investment tax credits........................ 167 126
Other noncurrent liabilities.............................. 2,756 3,299
------- -------
Total noncurrent liabilities........................... 5,435 6,130
------- -------
Shareholders' equity:
Common stock, $1 par value (4,400 shares authorized; 1,950
and 1,883 shares outstanding).......................... 2,020 2,020
Paid-in capital........................................... 6,766 6,771
Retained earnings......................................... 9,479 11,456
Accumulated other comprehensive income.................... (64) (358)
Shares held in trust and treasury......................... (1,752) (4,798)
Guarantee of ESOP debt.................................... (339) (276)
------- -------
Total shareholders' equity............................. 16,110 14,815
------- -------
Total liabilities and shareholders' equity........ $39,410 $43,453
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE> 204
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 3,261 $ 3,527 $ 3,448
Adjustments to net income:
Depreciation and amortization............................. 3,964 4,357 4,671
Provision for asset impairment............................ -- -- 320
Provision for uncollectibles.............................. 304 334 365
Pension income............................................ (164) (259) (421)
Net losses (earnings) of equity affiliates................ 242 (92) 169
Dividends received from equity affiliates................. 198 174 97
Minority interests in income of subsidiaries.............. 34 33 57
Deferred income taxes and investment tax credits.......... 243 304 (54)
Gain on sale of operations................................ (787) (335) (55)
Additional income from settlement of loans................ -- (102) --
Extraordinary loss on early extinguishment of debt........ 15 -- --
Net change in:
Accounts receivable and other current assets.............. (742) (458) (860)
Accounts payable and other current liabilities............ 580 300 49
Deferred charges and other assets......................... (125) 1 (86)
Other liabilities and deferred credits.................... 53 (58) 316
Other reconciling items, net................................ (37) 15 183
------- ------- -------
Net cash provided by operating activities......... 7,039 7,741 8,199
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (4,858) (5,212) (6,200)
Investments in and advances to equity affiliates............ (1,083) (637) (3,799)
Purchases of licenses and other intangible assets........... (328) (559) (240)
Proceeds from sale of operations............................ 1,000 410 215
Purchases of short-term investments......................... (233) (236) (143)
Proceeds from disposition of short-term investments......... 267 210 59
Proceeds from repayment of loans and advances............... 59 432 83
Other investing activities, net............................. 227 105 137
------- ------- -------
Net cash used for investing activities............ (4,949) (5,487) (9,888)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of short-term debt.............. 879 (71) 4,070
Proceeds from long-term debt................................ 645 1,752 522
Repayments of long-term debt................................ (692) (782) (217)
Dividends paid.............................................. (1,428) (1,420) (1,449)
Purchase of treasury shares................................. (157) (1,261) (3,120)
Other financing activities, net............................. 55 101 27
------- ------- -------
Net cash used for financing activities............ (698) (1,681) (167)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 1,392 573 (1,856)
Cash and cash equivalents at beginning of period............ 1,178 2,570 3,143
------- ------- -------
Cash and cash equivalents at end of period.................. $ 2,570 $ 3,143 $ 1,287
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE> 205
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNT
------------------ ------------------------------------------------------------------------------
SHARES ACCUMULATED SHARES
HELD IN OTHER HELD IN GUARANTEE
COMMON TRUST AND COMMON PAID-IN RETAINED COMPREHENSIVE TRUST AND OF ESOP
STOCK TREASURY STOCK CAPITAL EARNINGS INCOME TREASURY DEBT TOTAL
------ --------- ------- ------- -------- ------------- --------- --------- -------
(A) (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996...................... 1,009 (18) $1,009 $ 7,672 $ 5,541 $ 25 $ (532) $(466) $13,249
Net income.................. 3,261 3,261
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustments............. 11 11
-------
Total comprehensive
income.................... 3,272
Dividends declared.......... (1,428) (1,428)
Share issuance for employee
benefit plans............. 2 (25) 85 60
Share issuance by grantor
trust..................... 1 (1) 1 59 (60) --
Acquisition -- related
transactions.............. 2 8 89 97
Purchase of treasury
stock..................... (3) (157) (157)
ESOP activities and related
tax benefit............... 8 64 72
----- ---- ------ ------- ------- ----- ------- ----- -------
BALANCE AT DECEMBER 31,
1997...................... 1,010 (18) $1,010 $ 7,714 $ 7,382 $ 36 $ (575) $(402) $15,165
----- ---- ------ ------- ------- ----- ------- ----- -------
Two-for-one stock split
(Note I).................. 1,010 (19) 1,010 (1,010) --
Net income.................. 3,527 3,527
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustment.............. (100) (100)
-------
Total comprehensive
income.................... 3,427
Dividends declared.......... (1,435) (1,435)
Share issuance for employee
benefit plans............. 3 (36) (2) 89 51
Acquisition -- related
transactions.............. 1 92 33 125
Purchase of treasury
stock..................... (36) (1,261) (1,261)
Purchase of stock by grantor
trusts.................... (1) (38) (38)
Tax benefit related to stock
options................... 6 6
ESOP activities and related
tax benefit............... 7 63 70
----- ---- ------ ------- ------- ----- ------- ----- -------
BALANCE AT DECEMBER 31,
1998...................... 2,020 (70) $2,020 $ 6,766 $ 9,479 $ (64) $(1,752) $(339) $16,110
----- ---- ------ ------- ------- ----- ------- ----- -------
Net income.................. 3,448 3,448
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustment.............. (134) (134)
Net unrealized losses on
securities.............. (115) (115)
Minimum pension liability
adjustment.............. (45) (45)
-------
Total comprehensive
income.................... 3,154
Dividends declared.......... (1,436) (1,436)
Share issuances for employee
benefit plans............. 2 (45) 77 32
Purchase of treasury
stock..................... (70) (3,120) (3,120)
Purchase of stock by grantor
trust..................... (3) (3)
Tax benefit related to stock
options................... 5 5
ESOP activities and related
tax benefit............... 10 63 73
----- ---- ------ ------- ------- ----- ------- ----- -------
BALANCE AT DECEMBER 31,
1999...................... 2,020 (138) $2,020 $ 6,771 $11,456 $(358) $(4,798) $(276) $14,815
===== ==== ====== ======= ======= ===== ======= ===== =======
</TABLE>
---------------
(a) Trust and treasury shares are not considered to be outstanding for financial
reporting purposes. As of December 31, 1999, there were approximately 36
shares held in trust and 102 shares held in treasury.
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 206
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
A. ACCOUNTING POLICIES
In this report, BellSouth Corporation and it subsidiaries are referred to
as "we" or "BellSouth".
ORGANIZATION
We are an international telecommunications company headquartered in
Atlanta, Georgia. For management purposes, our operations are organized into
four reportable segments: wireline communications; domestic wireless;
international operations; advertising and publishing; and an "all other"
segment.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of BellSouth's
wholly-owned subsidiaries and subsidiaries in which we have a controlling
financial interest. Investments in businesses which we do not control, but have
the ability to exercise significant influence over operations and financial
policies, are accounted for using the equity method. We report our results on a
calendar-year basis, except for our domestic wireless and international
operations which we report on a one-month lag basis. All significant
intercompany transactions and accounts have been eliminated. Certain amounts in
the prior period consolidated financial statements have been reclassified to
conform to the current year's presentation.
USE OF ESTIMATES
Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such financial statements include
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the amounts of
revenues and expenses. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Investments with an original
maturity of over three months to one year are not considered cash equivalents
and are included as temporary cash investments in the consolidated balance
sheets. Interest income on cash equivalents, temporary cash investments and
other interest-bearing instruments was $144 for 1999, $313 for 1998 and $193 for
1997.
MATERIAL AND SUPPLIES
New and reusable material is carried in inventory, principally at average
original cost, except that specific costs are used in the case of large
individual items. Nonreusable material is carried at estimated salvage value.
PROPERTY, PLANT AND EQUIPMENT
The investment in property, plant and equipment is stated at original cost.
For plant dedicated to providing regulated telecommunications services,
depreciation is based on the composite group remaining life method of
depreciation and straight-line composite rates determined on the basis of equal
life groups of certain categories of telephone plant acquired in a given year.
When depreciable telephone plant is disposed of, the original cost less net
salvage value is charged to accumulated depreciation. The cost of other
property, plant and equipment is depreciated using either straight-line or
accelerated methods over the estimated useful lives of the assets. Gains or
losses on disposal of other depreciable property, plant and equipment are
recognized in the year of disposition as an element of other income, net.
F-40
<PAGE> 207
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INTANGIBLE ASSETS
Intangible assets consist primarily of the excess consideration paid over
the fair value of net tangible assets acquired in business combinations, and
include amounts allocated to acquired licenses and customer lists. These assets
are being amortized using the straight-line and accelerated methods over periods
of benefit that do not exceed 40 years. Intangible assets also include amounts
capitalized for computer software costs, which are amortized over periods of
benefit of 3 to 5 years.
The carrying value of intangible assets is periodically reviewed to
determine whether such intangibles are fully recoverable from projected net cash
flows of the related business unit. Amortization of such intangibles was $273
for 1999, $135 for 1998 and $58 for 1997.
FOREIGN CURRENCY
Assets and liabilities of foreign subsidiaries and equity investees with a
functional currency other than U.S. Dollars are translated into U.S. Dollars at
exchange rates in effect at the end of the reporting period. Foreign entity
revenues and expenses are translated into U.S. Dollars at the average rates that
prevailed during the period. The resulting net translation gains and losses are
reported as foreign currency translation adjustments in shareholders' equity as
a component of other accumulated comprehensive income. Operations in countries
with hyperinflationary economies consider the U.S. Dollar the functional
currency.
Exchange gains and losses on transactions and equity investments
denominated in a currency other than their functional currency are generally
included in results of operations as incurred unless the transactions are hedged
(see "Derivative Financial Instruments" below).
DERIVATIVE FINANCIAL INSTRUMENTS
We generally enter into derivative financial instruments only for hedging
purposes. Deferral accounting is applied when the derivative reduces the risk of
the underlying hedged item effectively as a result of high inverse correlation
with the value of the underlying exposure. If a derivative instrument either
initially fails or later ceases to meet the criteria for deferral or settlement
accounting, any subsequent gains or losses are recognized currently in income.
REVENUE RECOGNITION
Revenues are recognized when earned. Certain revenues derived from local
telephone and wireless services are billed monthly in advance and are recognized
the following month when services are provided. Print advertising and publishing
revenues and related directory costs are recognized upon publication of
directories. Revenues derived from other telecommunications services,
principally network access, long distance and wireless airtime usage, are
recognized monthly as services are provided. Allowances for uncollectible billed
services are adjusted monthly. The provision for such uncollectible accounts was
$365 for 1999, $334 for 1998 and $304 for 1997.
MAINTENANCE AND REPAIRS
The cost of maintenance and repairs of plant, including the cost of
replacing minor items not resulting in substantial betterments, is charged to
operating expenses.
ADVERTISING
We expense advertising costs as they are incurred. Our total advertising
expense was $539 for 1999, $509 for 1998 and $395 for 1997.
F-41
<PAGE> 208
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME TAXES
The consolidated balance sheets reflect deferred tax balances associated
with the anticipated tax impact of future income or deductions implicit in the
consolidated balance sheets in the form of temporary differences. Temporary
differences primarily result from the use of accelerated methods and shorter
lives in computing depreciation for tax purposes.
For financial reporting purposes, we are amortizing deferred investment tax
credits earned prior to the 1986 repeal of the investment tax credit and also
some transitional credits earned after the repeal. The credits are being
amortized as a reduction to the provision for income taxes over the estimated
useful lives of the assets to which the credits relate.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted-average number
of common shares outstanding during each year. 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:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Basic common shares outstanding............................. 1,984 1,970 1,898
Incremental shares from stock options....................... 5 14 18
----- ----- -----
Diluted common shares outstanding........................... 1,989 1,984 1,916
===== ===== =====
</TABLE>
The earnings amounts used for per-share calculations are the same for both
the basic and diluted methods.
ADOPTION OF NEW ACCOUNTING STANDARD
In the first quarter of 1999, we adopted a new accounting standard (SOP
98-1) related to the capitalization of certain costs for internal-use software
development. Adoption of the new standard caused an increase in earnings as a
result of the capitalization of costs that had previously been expensed. The
impacts on income before income taxes, net income and earnings per share were as
follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Income before income taxes.................................. $452
====
Net income.................................................. $285
====
Earnings per share.......................................... $.15
====
</TABLE>
The adoption also changed the classification of these expenditures in the
consolidated statements of cash flows from operating to investing activities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued 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
F-42
<PAGE> 209
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
this standard was delayed via the issuance of SFAS No. 137. 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.
B. PARTNERSHIPS, ACQUISITIONS AND DIVESTITURES
We have completed various transactions to further our strategy of expanding
our core operations and divested of interests that no longer meet our strategic
objectives. A summary of significant transactions follows:
DOMESTIC WIRELESS
Our domestic wireless equity method investments consist primarily of
noncontrolling interests in partnerships serving the Los Angeles and
Houston/Galveston Metropolitan Service Areas. In 1998, we contributed our
interests in these partnerships into a new joint venture with AT&T. AT&T
contributed its ownership interests and $1,000 into the joint venture. Our
ownership shares changed from 60.0% to 44.4% for Los Angeles, from 43.6% to
44.4% for Houston and from 36.6% to 38.8% for Galveston. As a result of the
reorganization, our proportionate share of the net assets of the new venture
exceeded our aggregate book investment balance. The related excess totaled $408
at December 31, 1999 and $422 at December 31, 1998, and is being amortized into
income using the straight-line method over a period of approximately 30 years.
INTERNATIONAL OPERATIONS
1999
We invested $20 in a venture in Guatemala that won rights to three PCS
licenses which cover a substantial portion of the country.
We also raised our ownership interest in our Peruvian communications
company through a series of transactions totalling $238, increasing our
ownership from 59% to 97%.
1998
We purchased additional ownership interests in existing wireless operations
in Venezuela, Brazil and Ecuador for approximately $475.
1997
In early 1997, we acquired a 59% interest in Tele2000, a Peruvian
communications company, for approximately $136 in cash. We also acquired a 61%
stake in one of two nationwide wireless telephone companies in Ecuador for $155
in cash. We invested approximately $600 for noncontrolling stakes in two
Brazilian ventures that won licenses to provide cellular services in Sao Paulo
and six northeastern Brazilian states.
In September 1997, we acquired an additional 7% interest and gained a
controlling seat on the Board of Directors of our wireless operation in
Venezuela. Accordingly, we began consolidating the operating results and cash
flows after the step acquisition.
In all transactions, the excess of the respective purchase price over the
net book value of the assets acquired was allocated to customer lists, wireless
licenses or goodwill. The excess consideration paid over net
F-43
<PAGE> 210
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
assets acquired, along with other intangible assets, is being amortized using
either straight-line or accelerated methods over periods of benefit, which do
not exceed 40 years.
ADVERTISING AND PUBLISHING
During 1999, we acquired a non-controlling 40% interest in OESP Midia
Ltda., a directory publishing business in Brazil for approximately $23. This
investment is accounted for using the equity method. In addition, we acquired
100% of Listel-Listas Telefonicas, a directory publishing business in Brazil,
for total consideration of approximately $115. This business is accounted for
using the consolidation method.
For both transactions, the excess of the respective purchase price over the
net book value of the assets acquired was assigned to goodwill, and is being
amortized over 15 years using the straight-line method.
WIRELESS DATA
Prior to 1998, we were partners with RAM Broadcasting Corporation in an
entity that owned and operated wireless data communications networks in the
U.S., the UK and various other countries. During 1998, we purchased the issued
and outstanding stock of RAM. As a result of the transaction, we hold a 90%
interest in the U.S. operations and a 100% interest in the UK operations.
Accordingly, these operations were consolidated at December 31, 1998.
DIVESTITURES
1999
We sold our 100% interest in Honolulu Cellular to AT&T for total proceeds
of $194. The pretax gain on the sale was $39, or $23 after tax.
We sold our 100% interest in a wireless property located in Dothan, Alabama
for total proceeds of $21. The pretax gain on the sale was $16, or $10 after
tax.
1998
We sold our 65% ownership interest in BellSouth New Zealand to Vodafone
Group Plc for total proceeds of $254. The pretax gain on the sale was $180, or
$110 after tax.
1997
We sold a 24.5% interest in Optus Communications to Cable and Wireless, a
UK telecommunications company. The pretax gain on the sale was $578, or $352
after tax.
We sold a 20% interest in ITT World Directories (ITTWD) to ITT Corporation
(ITT) for total proceeds of $265. The pretax gain on such sale was $209, or $128
after tax. The sale agreement contained certain provisions that called for
additional sales proceeds to be paid to us in the event that ITT subsequently
resold ITTWD above a certain price. As a result of ITT's subsequent sale of
ITTWD, we received additional proceeds that resulted in a pretax gain of $155,
or $96 after tax, in the first quarter of 1998.
We sold our 14.3% interest in Bell Communications Research, Inc. for total
proceeds of $65. The pretax gain on the sale, included as a component of other
income, net, was $38, or $23 after tax.
F-44
<PAGE> 211
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
C. INVESTMENTS AND ADVANCES
We hold investments in various domestic and international partnerships and
ventures which are accounted for under the equity method. We also hold
investments in equity securities which are accounted for under the cost method.
Investments and advances at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Investments accounted for under the equity method........... $2,148 $1,938
Investments accounted for under the cost method............. 7 3,469
Advances to and notes receivable from affiliates............ 706 690
------ ------
Investments and Advances.................................... $2,861 $6,097
====== ======
</TABLE>
EQUITY METHOD INVESTMENTS
Ownership in equity investments at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
AB Cellular (US)(1)......................................... 44.4% 44.4%
Abiatar (Uruguay)........................................... 46.0% 46.0%
BellSouth Guatemala(2)...................................... -- 60.0%
BellSouth Nicaragua(3)...................................... 49.0% 49.0%
BellSouth Panama............................................ 42.0% 43.7%
BCP -- Sao Paulo (Brazil)................................... 44.5% 44.5%
BSE -- Northeast (Brazil)................................... 46.8% 46.8%
Cellcom (Israel)............................................ 34.8% 34.8%
E-Plus (Germany)............................................ 22.5% 22.5%
OESP Midia.................................................. -- 40.0%
Sonofon (Denmark)........................................... 46.5% 46.5%
Skycell (India)............................................. 24.5% 24.5%
</TABLE>
---------------
(1) AB Cellular consists of our interest in a joint venture that owns and
controls cellular partnerships serving the Los Angeles, Houston and
Galveston metropolitan service areas. We share voting control of AB Cellular
with AT&T wireless.
(2) This investment is accounted for under the equity method due to the
existence of significant minority rights that limit our ability to exercise
unilateral control over the operation.
(3) We have an option to purchase an additional 40% subject to foreign ownership
rules.
SUMMARY FINANCIAL INFORMATION OF EQUITY INVESTEES
A summary of combined financial information as reported by our equity
investees is set forth below:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Balance Sheet Information:
Current assets.............................................. $1,355 $2,619
Noncurrent assets........................................... 7,004 8,595
Current liabilities......................................... 1,424 1,505
Noncurrent liabilities...................................... 6,009 6,130
</TABLE>
F-45
<PAGE> 212
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Income Statement Information:
Revenues.................................................... $2,734 $3,786 $5,398
Operating Income............................................ 6 165 450
Net Loss.................................................... (321) (116) (767)
</TABLE>
Brazil Devaluation
In mid January 1999, the Brazilian Government changed its foreign 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 their net
US Dollar-denominated liabilities. Our share of the foreign currency losses was
$308 for 1999.
COST METHOD INVESTMENTS
We have investments in marketable securities, primarily common stocks,
which are accounted for under the cost method. These investments are comprised
primarily of a 10% equity interest in Qwest Communications International Inc.
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 December
31, 1999:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ----------- ----------- ------
<S> <C> <C> <C> <C>
Investment in Qwest.............................. $3,500 $ -- $318 $3,182
Other investments................................ 157 130 -- 287
------ ---- ---- ------
Total............................................ $3,657 $130 $318 $3,469
====== ==== ==== ======
</TABLE>
We held no significant investments in marketable securities at December 31,
1998.
ADVANCES AND NOTES RECEIVABLE
In addition to our equity investments, we have made advances to our
partnerships in Brazil and Israel. These advances bear interest varying at rates
based on LIBOR, mature between 2004 and 2006, and totaled $433 at December 31,
1999 and $437 at December 31, 1998.
We have noncontrolling financial interests ranging from 70% to 80% in the
CSL Ventures and 1155 Peachtree Associates real estate partnerships. We have
notes receivable from and advances to these partnerships totaling $161 at
December 31, 1999 and 1998. The notes bear interest at rates ranging from 6.31%
to 7.88% while the advances bear interest at the federal funds rate plus .30%.
Principal amounts outstanding at December 31, 1999 are due and payable to us
between November 14, 2001 and January 15, 2038. The instruments require periodic
payments of interest and are collateralized by various real estate holdings.
F-46
<PAGE> 213
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
From 1993 to 1998, we had a credit agreement with Prime South Diversified,
Inc. to provide up to $250 in financing. During 1998, Prime sold certain
investments which collateralized the loan. As specified in the loan agreement,
we were repaid the full principal balance as well as amounts for contingent
interest, prepayment penalties and regular interest. As a result, in 1998, we
recorded additional income of $102, or $62 after tax, for the amount related to
the proceeds from contingent interest and prepayment penalties.
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE
LIVES
(IN YEARS) 1998 1999
----------- ------- -------
<S> <C> <C> <C>
Outside plant............................................ 12-20 $22,496 $23,325
Central office equipment................................. 8-10 20,056 21,302
Operating and other equipment............................ 5-15 6,262 6,676
Building and building improvements....................... 25-45 4,485 4,866
Furniture and fixtures................................... 10-15 3,089 2,995
Station equipment........................................ 6 563 606
Land..................................................... -- 207 226
Plant under construction................................. -- 816 1,013
------- -------
57,974 61,009
Less: Accumulated depreciation........................... 34,034 36,378
------- -------
Property, Plant and Equipment, net....................... $23,940 $24,631
======= =======
</TABLE>
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 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 discounting 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.
F-47
<PAGE> 214
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
E. INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZABLE
LIVES 1998 1999
----------- ------ ------
(IN YEARS)
<S> <C> <C> <C>
Licenses and concessions.................................... 10-40 $2,046 $2,431
Goodwill.................................................... 15-40 887 1,044
Customer lists.............................................. 3-6 266 291
Capitalized software........................................ 3-5 138 748
Less: Accumulated amortization.............................. (462) (740)
------ ------
Intangible Assets, net...................................... $2,875 $3,774
====== ======
</TABLE>
F. OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Advanced billing and customer deposits...................... $ 754 $ 944
Taxes accrued............................................... 645 772
Salaries and wages payable.................................. 351 383
Interest and rents accrued.................................. 340 379
Dividends payable........................................... 379 364
Compensated absences........................................ 254 263
Deferred taxes.............................................. 207 193
Other....................................................... 547 483
------ ------
Other Current Liabilities................................... $3,477 $3,781
====== ======
</TABLE>
G. DEBT
DEBT MATURING WITHIN ONE YEAR
Debt maturing within one year is summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Short-term notes payable:
Bank loans.................................................. $ 765 $ 258
Commercial paper............................................ 2,378 6,896
Current maturities of long-term debt........................ 311 499
------ ------
Debt maturing within one year............................... $3,454 $7,653
====== ======
Weighted-average interest rate at end of period:
Bank loans.................................................. 7.85% 7.41%
Commercial Paper............................................ 5.30% 5.90%
</TABLE>
We have committed credit lines aggregating $3,141 with various banks.
Borrowings under the committed credit lines totaled $587 at December 31, 1999
and $634 at December 31, 1998. We also maintain uncommitted lines of credit
aggregating $580. Borrowings under the uncommitted lines of credit totaled $149
at December 31, 1999 and $45 at December 31, 1998. There are no significant
commitment fees or requirements for compensating balances associated with any
lines of credit.
F-48
<PAGE> 215
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
LONG-TERM DEBT
Long-term debt, summarized below, consists primarily of debentures and
notes issued by BellSouth Telecommunications (BST). Debt issued by BellSouth
Capital Funding Corporation (Capital Funding) is used to finance the businesses
of BellSouth Enterprises and the unregulated subsidiaries of BST. We have
guaranteed Capital Funding's debt securities. Interest rates and maturities in
the table below are for the amounts outstanding at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
BellSouth Telecommunications, Inc.
4.38% - 6% 2000 - 2045.......................... $1,495 $1,495
6.13% - 7% 2000 - 2033.......................... 3,219 3,207
7.5% - 8.25% 2032 - 2035.......................... 1,150 1,150
6.65% - 7% 2095.......................... 654 665
------ ------
6,518 6,517
BellSouth Capital Funding Corporation
5.38% - 7.38% 2002 - 2039.......................... 969 1,317
7.12% 2097........................ 500 500
Guarantee of ESOP debt 9.13% - 9.19%...................... 467 391
Other..................................................... 602 933
Unamortized discount, net of premium...................... (30) (46)
------ ------
9,026 9,612
Current maturities.......................................... (311) (499)
------ ------
Long-term debt.............................................. $8,715 $9,113
====== ======
</TABLE>
Maturities of long-term debt outstanding, in principal amounts, at December
31, 1999 are summarized below. Maturities after the year 2004 include $500
principal amount of 6.65% Debentures due in 2095. At December 31, 1999, such
debentures had an accreted book value of $165.
<TABLE>
<S> <C>
Maturities
2000........................................................ $ 499
2001........................................................ 439
2002........................................................ 388
2003........................................................ 761
2004........................................................ 481
Thereafter.................................................. 7,425
------
Total............................................. $9,993
======
</TABLE>
In 1998, BST issued $500 of 6% Reset Put Securities (REPS) due June 15,
2012. REPS are a debt instrument with embedded put and call option features. The
REPS are subject to mandatory redemption from the existing holders on June 15,
2002 through either (i) the exercise by the callholder of its right to purchase
the REPS or (ii) the repurchase of the REPS by BST. If the call option is
exercised, the callholder will, based on BST's then current credit spreads,
determine the interest to be paid on the REPS.
At December 31, 1999, we had shelf registration statements on file with the
Securities and Exchange Commission under which $4.7 billion of debt securities
could be publicly offered.
F-49
<PAGE> 216
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
H. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Deferred credits............................................ $ 151 $ 798
Postretirement benefits other than pensions (Note J)........ 792 697
Compensation related........................................ 544 625
Minority interests.......................................... 451 391
Accrued pension cost (Note J)............................... 470 296
Postemployment benefits..................................... 243 286
Other....................................................... 105 206
------ ------
Other noncurrent liabilities................................ $2,756 $3,299
====== ======
</TABLE>
Deferred credits are primarily comprised of deferred rental revenue
generated by the sublease of our wireless communications towers. For more
information, see Note Q.
I. SHAREHOLDERS' EQUITY
STOCK SPLIT
In November 1998, our Board of Directors approved a two-for-one stock split
effected in the form of a stock dividend. Each shareholder of record as of
December 3, 1998 received on December 24, 1998 one additional share of common
stock for each share owned as of the record date. As a result of the split,
1,010,156,851 shares were issued and $1,010 was transferred from paid-in capital
to common stock. Also in November 1998, our Board of Directors approved an
increase in the number of authorized shares of common stock to 4,400,000,000
from 2,200,000,000. Amounts related to common shares for all periods presented
have been restated to reflect the stock split.
PREFERRED STOCK AUTHORIZED
Our articles of incorporation authorize 100 million shares of cumulative
first preferred stock having a par value of $1 per share, of which 30 million
shares have been reserved and designated series B for possible issuance under a
shareholder rights plan. As of December 31, 1999, no preferred shares had been
issued. The series A first preferred stock was created for a previous
shareholder rights plan which has expired.
SHAREHOLDER RIGHTS PLAN
In 1999, we adopted a shareholder rights plan by declaring a dividend of
one right for each share of common stock then outstanding and to be issued
thereafter. Each right entitles shareholders to buy one one-thousandth of a
share of series B first preferred stock for $200.00 per share. The rights may be
exercised only if a person or group acquires 10% of the common stock of
BellSouth without the prior approval of the Board of Directors or announces a
tender or exchange offer that would result in ownership of 10% or more of the
common stock. If a person or group acquires 10% of BellSouth's stock without
prior Board approval, other shareholders are then allowed to purchase BellSouth
common stock, or units of preferred stock with the same voting and economic
characteristics, at half price. The rights currently trade with BellSouth common
stock and may be redeemed by the Board of Directors for one cent per right until
they become exercisable, and thereafter under certain circumstances. The rights
expire in December 2009.
F-50
<PAGE> 217
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SHARES HELD IN TRUST AND TREASURY
During 1996 and 1997, we issued shares to grantor trusts to provide partial
funding for the benefits payable under certain nonqualified benefit plans. The
trusts are irrevocable, and assets contributed to the trusts can only be used to
pay such benefits with certain exceptions. At December 31, 1999 and 1998, the
assets held in the trusts consist of cash and 35.7 million and 35.6 million
shares of BellSouth common stock. Of the total shares of BellSouth common stock
held by the trusts, 31.9 million were issued directly from us to the trusts out
of previously unissued shares and 3.8 million shares were acquired in open
market transactions through use of the trusts' funds.
The total cost of the shares issued by us as of the date of funding the
trusts is included in common stock and paid-in capital; however, because these
shares are not considered outstanding for financial reporting purposes, the
shares are included within shares held in trust and treasury, a reduction to
shareholders' equity. In addition, there is no earnings per share impact of
these shares. The cost of shares acquired in open market purchases by the trusts
are also included in shares held in trust and treasury.
In addition to shares held by the grantor trusts, shares held in trust and
treasury includes treasury shares purchased in connection with our announced
plan to repurchase shares of our common stock. In 1999 and 1998, we purchased
69.7 million and 36.2 million shares for an aggregate of $3,120 and $1,261. A
total of 1.9 million and 4.3 million shares were reissued under various employee
benefit plans and for other purposes. We completed the share repurchase program
during May 1999.
Shares held in trust and treasury, at cost, as of December 31, 1999 and
1998 are comprised of the following:
<TABLE>
<CAPTION>
1998
-------------------
SHARES AMOUNT
---------- ------
<S> <C> <C>
Shares held by grantor trusts............................... 35,578,926 $ 557
Shares held in treasury..................................... 34,316,794 1,195
---------- ------
Shares held in trust and treasury........................... 69,895,720 $1,752
========== ======
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------
SHARES AMOUNT
----------- ------
<S> <C> <C>
Shares held by grantor trusts............................... 35,653,926 $ 560
Shares held in treasury..................................... 102,113,220 4,238
----------- ------
Shares held in trust and treasury........................... 137,767,146 $4,798
=========== ======
</TABLE>
GUARANTEE OF ESOP DEBT
The amount equivalent to the guarantee of the amortizing notes issued by
our ESOP trusts is presented as a reduction to shareholders' equity. The amount
recorded as a decrease in shareholders' equity represents the cost of
unallocated BellSouth common stock purchased with the proceeds of the amortizing
notes and the timing difference resulting from the shares allocated accounting
method. See Note J.
J. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Substantially all of our nonrepresented and represented employees are
covered by noncontributory defined benefit pension plans, as well as
postretirement health and life insurance welfare plans. Principal plans are
discussed below; other plans are not significant individually or in the
aggregate.
F-51
<PAGE> 218
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The pension plan covering nonrepresented employees is a cash balance plan,
which provides pension benefits determined by a combination of
compensation-based service and additional credits and individual account-based
interest credits. The cash balance plan is subject to a minimum benefit
determined under a plan in existence for nonrepresented employees prior to July
1, 1993 which provided benefits based upon credited service and employees'
average compensation for a specified period. The minimum benefit under the prior
plan is generally applicable to employees who are eligible to retire before
January 1, 2006. The 1999 and 1998 projected benefit obligations assume interest
and additional credits greater than the minimum levels specified in the written
plan. Pension benefits provided for represented employees are based on specified
benefit amounts and years of service through 1998. During 1998, we established a
cash balance plan for represented employees based upon an initial cash balance
amount, negotiated pension band increases and interest credits effective January
1, 1999. The cash balance plan is subject to a minimum benefit determined under
a plan in existence for represented employees who were participants prior to
January 1, 1999 and who are eligible to retire. The 1999 and 1998 represented
pension obligations include the projected effect of future bargained-for
improvements. The accounting for the represented health care plan does not
anticipate future adjustments to the cost-sharing arrangements provided for in
the written plan for employees who retire after December 31, 1991. The
accounting for the nonrepresented health care plan anticipates certain
cost-sharing adjustments for employees who retire after December 31, 1991. The
adjustments consider past practice but are not provided for in the written plan.
The following tables summarize benefit costs, as well as the assumptions,
the benefit obligations, changes in plan assets and funded status at or for the
year ended December 31:
Pension Benefits
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
COMPONENTS OF NET PENSION INCOME:
Service cost................................................ $ 247 $ 273 $ 185
Interest cost............................................... 818 841 911
Expected return on plan assets.............................. (1,101) (1,209) (1,449)
Amortization of prior service cost.......................... (3) (40) 40
Amortization of actuarial gain.............................. (104) (103) (87)
Amortization of transition asset............................ (21) (21) (21)
------- ------- -------
Net pension income.................................. $ (164) $ (259) $ (421)
======= ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate............................................... 7.00% 6.75% 7.75%
Expected return on plan assets.............................. 8.25% 8.25% 9.00%
Rate of compensation increase............................... 5.00% 5.10% 4.80%
</TABLE>
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of the year............. $12,335 $13,504
Service cost................................................ 273 185
Interest cost............................................... 841 911
Amendments.................................................. 670 (13)
Actuarial (gain) or loss.................................... 319 (735)
Benefits and lump sums paid................................. (932) (892)
Curtailments................................................ (4) --
Special termination benefits................................ 2 --
------- -------
Benefit obligation at the end of the year................... $13,504 $12,960
======= =======
</TABLE>
F-52
<PAGE> 219
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $17,313 $17,983
Actual return on plan assets................................ 1,602 3,472
Benefits and lump sums paid................................. (932) (892)
------- -------
Fair value of plan assets at end of year.................... $17,983 $20,563
======= =======
FUNDED STATUS:
As of end of year........................................... $ 4,479 $ 7,603
Unrecognized prior service cost............................. 380 326
Unrecognized net (gain) or loss............................. (4,714) (7,383)
Unrecognized net (asset) or obligation...................... (89) (68)
------- -------
Prepaid or (accrued) benefit cost........................... $ 56 $ 478
======= =======
</TABLE>
Retiree Health and Life
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
COMPONENTS OF NET POSTRETIREMENT BENEFIT COST:
Service cost................................................ $ 37 $ 34 $ 45
Interest cost............................................... 263 263 273
Expected return on plan assets.............................. (149) (167) (207)
Amortization of prior service cost.......................... 34 35 52
Amortization of actuarial (gain)/loss....................... (2) (4) 2
Amortization of transition obligation....................... 83 82 82
----- ----- -----
Net postretirement benefit cost..................... $ 266 $ 243 $ 247
===== ===== =====
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate............................................... 7.00% 6.75% 7.75%
Expected return on plan assets.............................. 7.75% 7.75% 8.00%
Rate of compensation increase............................... 5.00% 5.10% 4.80%
Health care cost trend rate................................. 8.00% 8.50% 8.00%
</TABLE>
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of the year............. $ 3,879 $ 4,690
Service cost................................................ 34 45
Interest cost............................................... 263 273
Amendments.................................................. 110 195
Actuarial (gain) or loss.................................... 651 1
Benefits and lump sums paid................................. (247) (271)
------- -------
Benefit obligation at the end of the year................... $ 4,690 $ 4,933
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $ 2,597 $ 2,845
Actual return on plan assets................................ 224 478
Employer contribution....................................... 262 357
Plan participants' contributions............................ 9 11
Benefits and lump sums paid................................. (247) (270)
------- -------
Fair value of plan assets at end of year.................... $ 2,845 $ 3,421
======= =======
</TABLE>
F-53
<PAGE> 220
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
FUNDED STATUS:
As of end of year........................................... $(1,845) $(1,512)
Unrecognized prior service cost............................. 162 305
Unrecognized net (gain) or loss............................. 243 (44)
Unrecognized net (asset) or obligation...................... 740 658
------- -------
Prepaid or (accrued) benefit cost........................... $ (700) $ (593)
======= =======
</TABLE>
The health care cost trend rate used to value the accumulated
postretirement obligation in 1999 and 1998 is assumed to decrease to 6% by 2003.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects as of December 31,
1999:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components.... $ 25 $ (20)
Effect on postretirement benefit obligation................ $369 $(307)
</TABLE>
Amounts recognized in the consolidated balance sheets consist of:
<TABLE>
<CAPTION>
PENSION RETIREE HEALTH
BENEFITS AND LIFE
------------- ---------------
1998 1999 1998 1999
----- ----- ------ ------
<S> <C> <C> <C> <C>
Prepaid benefit cost.................................... $ 526 $ 774 $ 92 $ 104
Accrued benefit liability............................... (470) (296) (792) (697)
</TABLE>
Effective December 31, 1997, the nonrepresented cash balance plans were
recombined from six into one cash balance plan. Although only one nonrepresented
cash balance plan exists, separate demographic pools are maintained to generate
pension income based upon specific company information. The change in net
pension income and net postretirement benefit cost is affected by several
variables, including changes in actuarial assumptions such as discount rate,
return on plan assets and plan amendments. The consolidated net pension income
and postretirement benefit cost amounts above are exclusive of curtailment
effects reflected in the work force reduction activity and do not reflect
pension curtailment gains in the amount of $9 and $36 in 1998 and 1997.
We also maintain a nonqualified supplemental retirement plan for certain
employees. The unfunded accumulated benefit obligations were $279 and $278 at
December 31, 1999 and 1998. An intangible asset of $27 and $46 was recognized
pursuant to paragraph 37 of SFAS 87, as was accumulated other comprehensive
income, net of deferred taxes, of $45 and $0 at December 31, 1999 and 1998. The
net cost associated with this plan was $38 in 1999, $39 in 1998 and $24 in 1997.
DEFINED CONTRIBUTION PLANS
We maintain several contributory savings plans which cover substantially
all employees. The BellSouth Retirement Savings Plan and the BellSouth Savings
and Security Plan (collectively, the Savings Plans) are tax-qualified defined
contribution plans. Assets of the plans are held by two trusts (the Trusts)
which, in turn, are part of the BellSouth Master Savings Trust.
In 1990, a leveraged Employee Stock Ownership Plan (ESOP) was incorporated
into the Savings Plans. The Trusts borrowed $850 by issuing amortizing notes
which are guaranteed by BellSouth. The Trusts used the loan proceeds to purchase
shares of BellSouth common stock in the open market. These shares are held in
suspense accounts in the Trusts; a scheduled number of shares is released for
allocation to participants as each
F-54
<PAGE> 221
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
semiannual loan payment is made. The Trusts service the debt with contributions
from us and with dividends paid on the shares held by the Trusts. None of the
shares held by the Trusts is subject to repurchase.
A portion of employees' eligible contributions to the Savings Plans is
matched by us at rates determined annually by the Board of Directors. Our
matching obligation is fulfilled with shares released from the suspense accounts
semi-annually for allocation to participants. The number of shares allocated to
each participant's account is based on the market price of the shares at the
time of allocation. If shares released for allocation do not fulfill our
matching obligation, we make further contributions to the Trusts to fund the
purchase of additional shares in the open market to fulfill the remaining
obligation.
We recognize expense using the shares allocated accounting method, which
combines the cost of the shares allocated for the period plus interest incurred,
reduced by the dividends used to service the ESOP debt. Dividends on all ESOP
shares are recorded as a reduction to retained earnings, and all ESOP shares are
included in the computation of earnings per share.
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Compensation cost........................................... $ 76 $ 46 $ 31
Interest expense............................................ $ 31 $ 28 $ 24
Actual interest on ESOP Notes............................... $ 50 $ 44 $ 37
Cash contributions, excluding dividends paid to the
trusts.................................................... $ 90 $ 80 $ 73
Dividends paid to the trusts, used for debt service......... $ 43 $ 42 $ 43
Shares allocated to participants (millions)................. 33.4 38.3 43.3
Shares unallocated (millions)............................... 30.1 25.2 20.3
</TABLE>
K. STOCK COMPENSATION PLANS
At December 31, 1999, we have stock options outstanding under several
stock-based compensation plans. The BellSouth Corporation Stock Plan (the Stock
Plan) provides for grants to key employees of stock options and various other
stock-based awards. One share of BellSouth common stock is the underlying
security for any award. The aggregate number of shares of BellSouth common stock
which may be granted under the Stock Plan in any calendar year cannot exceed one
percent of the shares outstanding at the time of grant. Prior to adoption of the
Stock Plan, stock options were granted under the BellSouth Corporation Stock
Option Plan. Stock options granted under both plans entitle an optionee to
purchase shares of BellSouth common stock within prescribed periods at a price
either equal to, or in excess of, the fair market value on the date of grant.
Options granted under these plans generally become exercisable at the end of
three to five years and have a term of 10 years.
We apply APB Opinion 25 and related Interpretations in accounting for our
stock plans. Accordingly, no compensation cost has been recognized for grants of
stock options. Had compensation cost for our stock-based compensation plans been
determined in accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," our net income and earnings per share would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net income -- as reported................................... $3,261 $3,527 $3,448
Net income -- pro forma..................................... $3,242 $3,488 $3,379
Basic earnings per share -- as reported..................... $ 1.64 $ 1.79 $ 1.82
Basic earnings per share -- pro forma....................... $ 1.63 $ 1.77 $ 1.78
Diluted earnings per share -- as reported................... $ 1.64 $ 1.78 $ 1.80
Diluted earnings per share -- pro forma..................... $ 1.63 $ 1.76 $ 1.76
</TABLE>
F-55
<PAGE> 222
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options granted
in 1999, 1998 and 1997 do not vest for several years and additional awards are
made each year.
The following table summarizes the activity for stock options outstanding:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Options outstanding at January 1................ 37,142,784 45,122,812 59,202,910
Options granted................................. 12,507,766 17,963,592 15,385,731
Options exercised............................... (4,001,490) (2,784,312) (1,839,933)
Options forfeited............................... (526,248) (1,099,182) (1,049,627)
----------- ----------- -----------
Options outstanding at December 31.............. 45,122,812 59,202,910 71,699,081
=========== =========== ===========
Weighted-average option prices per common share:
Outstanding at January 1........................ $ 17.06 $ 18.67 $ 22.77
Granted at fair market value.................... $ 22.23 $ 31.95 $ 45.51
Exercised....................................... $ 14.69 $ 15.35 $ 15.74
Forfeited....................................... $ 20.02 $ 23.47 $ 30.22
Outstanding at December 31...................... $ 18.67 $ 22.77 $ 27.73
Weighted-average fair value of options granted
at fair market value during the year.......... $ 4.38 $ 7.22 $ 11.19
Options exercisable at December 31.............. 12,065,032 14,733,210 19,114,773
Shares available for grant at December 31....... 19,835,596 19,504,179 18,825,466
</TABLE>
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 5 5 5
Dividend yield.............................................. 3.24% 2.40% 1.67%
Expected volatility......................................... 19.0% 21.0% 23.0%
Risk-free interest rate..................................... 6.22% 5.42% 4.82%
</TABLE>
F-56
<PAGE> 223
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------- ---------------------
AVERAGE AVERAGE
EXERCISE AVERAGE EXERCISE EXERCISE
PRICE RANGE OPTIONS LIFE PRICE OPTIONS PRICE
----------- ---------- ------- -------- ---------- --------
(MILLIONS) (1) (MILLIONS)
<S> <C> <C> <C> <C> <C>
$12.10 - $15.08............................ 12.5 3.88 $14.28 8.7 $14.08
$15.13 - $21.28............................ 14.4 5.63 $20.33 5.5 $20.01
$21.38 - $29.22............................ 12.6 7.10 $22.28 2.7 $21.96
$30.91 - $37.92............................ 15.5 8.11 $31.06 1.6 $31.02
$39.41 - $49.41............................ 16.7 9.27 $45.12 0.6 $45.26
---- ---- ------ ----- ------
$12.10 - $49.41............................ 71.7 6.97 $27.73 19.1 $19.33
==== ==== ====== ===== ======
</TABLE>
---------------
(1) Average contractual life remaining in years.
L. INCOME TAXES
The consolidated balance sheets reflect the anticipated tax impact of
future taxable income or deductions implicit in the consolidated balance sheets
in the form of temporary differences. These temporary differences reflect the
difference between the basis in assets and liabilities as measured in the
consolidated financial statements and as measured by tax laws using enacted tax
rates.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current
Federal................................................... $1,619 $1,652 $1,875
State..................................................... 289 234 208
Foreign................................................... -- 34 11
------ ------ ------
$1,908 $1,920 $2,094
------ ------ ------
Deferred, net
Federal................................................... $ 252 $ 221 $ 78
State..................................................... 36 34 5
Foreign................................................... 20 94 71
------ ------ ------
$ 308 $ 349 $ 154
------ ------ ------
Investment tax credits, net
Federal................................................... $ (65) $ (45) $ (41)
Foreign................................................... -- -- (167)
------ ------ ------
(65) (45) (208)
------ ------ ------
Total provision for income taxes.................. $2,151 $2,224 $2,040
====== ====== ======
</TABLE>
F-57
<PAGE> 224
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Compensation related........................................ $ 710 $ 568
Loss carryforwards.......................................... 97 173
Allowance for uncollectibles................................ 97 83
Marketable securities....................................... -- 60
Regulatory sharing accruals................................. 47 68
Other....................................................... 55 116
------- -------
1,006 1,068
------- -------
Valuation allowance......................................... (95) (153)
------- -------
Deferred tax assets......................................... $ 911 $ 915
======= =======
Depreciation................................................ $(2,297) $(2,386)
Equity investments.......................................... (530) (577)
Issue basis accounting...................................... (236) (249)
Licenses.................................................... (238) (343)
Other....................................................... (329) (124)
------- -------
Deferred tax liabilities.................................... (3,630) (3,679)
------- -------
Net deferred tax liability.................................. $(2,719) $(2,764)
======= =======
</TABLE>
The valuation allowance, which increased by $58 in 1999 and $9 in 1998,
primarily relates to state and foreign net operating losses that may not be
utilized during the carryforward period. Of the net deferred tax liability at
December 31, 1999 and 1998, $(59) and $(207) were current and $(2,705) and
$(2,512) were noncurrent.
A reconciliation of the federal statutory income tax rate to our effective
tax rate follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 3.9 3.0 2.5
Investment tax credits...................................... (1.2) (0.5) (3.5)
Net earnings (losses) of equity affiliates.................. 1.6 0.6 2.0
Miscellaneous items, net.................................... 0.4 0.6 1.2
---- ---- ----
Effective tax rate.......................................... 39.7% 38.7% 37.2%
==== ==== ====
</TABLE>
The reduction in our effective tax rate during 1999 was primarily driven by
the recognition of investment tax credits by one of our foreign subsidiaries.
The credits were claimed by the subsidiary in previous years but were denied by
taxing authorities. A reserve was established while the matter was under appeal.
During 1999, we received a favorable ruling on our appeal leading to the
recognition of the benefit.
M. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Cash paid for:
Income taxes................................................ $1,839 $2,021 $1,906
====== ====== ======
Interest.................................................... $ 759 $ 838 $1,013
====== ====== ======
</TABLE>
F-58
<PAGE> 225
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
During 1999, we entered an agreement with Crown Castle International
Corporation to sublease portions of our cellular towers. See Note Q. As
consideration for the transaction, we received approximately $150 in Crown
stock.
In 1998, we contributed our ownership interests in certain domestic
wireless operations to a new joint venture. See Note B. As a result of the
transaction, net assets were increased by approximately $300 with a
corresponding increase to liabilities.
In 1998 as well as in 1997, we began consolidating certain operations which
had previously been accounted for under the equity method. These consolidations
resulted in an increase in assets of $519 and $375, net of decreases of $228 and
$225 in investments and advances, and corresponding increases in liabilities.
F-59
<PAGE> 226
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
N. 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>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
WIRELINE COMMUNICATIONS
External revenues............ $15,178 $16,401 $17,454
Intersegment revenues........ 168 221 318
Depreciation and
amortization............... 3,332 3,363 3,393
Operating income............. 4,188 4,871 5,828
Interest expense............. 534 551 560
Income taxes................. 1,372 1,573 1,971
Segment net income........... $ 2,314 $ 2,751 $ 3,315
Segment assets............... $23,226 $23,916 $25,536
Capital expenditures......... $ 3,440 $ 3,512 $ 4,638
----------------------------------------------------------
DOMESTIC WIRELESS
External revenues............ $ 2,581 $ 2,723 $ 3,191
Intersegment revenues........ 8 7 13
Depreciation and
amortization............... 446 513 656
Operating income............. 412 374 328
Interest expense............. 59 84 91
Net earnings (losses) of
equity affiliates.......... 164 165 144
Income taxes................. 230 184 143
Segment net income........... $ 333 $ 283 $ 234
Segment assets............... $ 5,859 $ 6,540 $ 6,103
Equity method investments.... $ 1,338 $ 1,610 $ 1,741
Capital expenditures......... $ 823 $ 692 $ 550
----------------------------------------------------------
INTERNATIONAL OPERATIONS
External revenues............ $ 948 $ 1,995 $ 2,289
Intersegment revenues........ -- -- 2
Depreciation and
amortization............... 126 357 442
Operating income............. 64 234 118
Interest expense............. 37 85 77
Interest income.............. 15 27 57
Net earnings (losses) of
equity affiliates.......... (220) (69) (2)
Income taxes................. 5 119 31
Segment net income (loss).... $ (187) $ (62) $ (4)
Segment assets............... $ 3,278 $ 4,449 $ 4,869
Equity method investments.... $ 693 $ 521 $ 159
Capital expenditures......... $ 412 $ 710 $ 603
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
ADVERTISING AND PUBLISHING
External revenues............ $ 1,837 $ 1,891 $ 2,010
Intersegment revenues........ 7 -- 18
Depreciation and
amortization............... 22 25 31
Operating income............. 855 849 901
Interest expense............. 5 7 8
Net earnings (losses) of
equity affiliates.......... 11 (4) (5)
Income taxes................. 320 317 339
Segment net income........... $ 543 $ 530 $ 556
Segment assets............... $ 1,262 $ 1,288 $ 1,662
Equity method investments.... $ -- $ -- $ 25
Capital expenditures......... $ 21 $ 36 $ 35
----------------------------------------------------------
ALL OTHER
External revenues............ $ 17 $ 113 $ 280
Intersegment revenues........ 185 227 371
Depreciation and
amortization............... 33 94 142
Operating income (loss)...... (143) (360) (320)
Interest expense............. 33 26 19
Interest income.............. 59 19 6
Net earnings (losses) of
equity affiliates.......... (197) -- (1)
Income taxes (benefit)....... (94) (112) (143)
Segment net income (loss).... $ (182) $ (210) $ (215)
Segment assets............... $ 1,326 $ 1,273 $ 1,409
Equity method investments.... $ 112 $ 61 $ 4
Capital expenditures......... $ 158 $ 253 $ 318
----------------------------------------------------------
RECONCILING ITEMS
External revenues............ $ -- $ -- $ --
Intersegment revenues........ (368) (455) (722)
Depreciation and
amortization............... 5 5 7
Provision for asset
impairment................. -- -- 320
Operating income (loss)...... -- (64) (418)
Interest expense............. 93 84 275
Interest income.............. 101 247 66
Net earnings (losses) of
equity affiliates.......... -- -- (298)
Gain on sale of operations... 787 335 55
Income taxes (benefit)....... 318 143 (301)
Segment net income (loss).... $ 440 $ 235 $ (438)
Segment assets............... $ 1,350 $ 1,944 $ 3,874
Equity method investments.... $ (136) $ (44) $ --
Capital expenditures......... $ 4 $ 9 $ 29
----------------------------------------------------------
</TABLE>
F-60
<PAGE> 227
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
OPERATING REVENUES
Wireline communications...... $15,346 $16,622 $17,772
Domestic wireless............ 2,589 2,730 3,204
International operations..... 948 1,995 2,291
Advertising and publishing... 1,844 1,891 2,028
All other.................... 202 340 651
------- ------- -------
Total Segments............... 20,929 23,578 25,946
Reconciling items............ (368) (455) (722)
------- ------- -------
Total consolidated........... $20,561 $23,123 $25,224
----------------------------------------------------------
NET INCOME
Wireline communications...... $ 2,314 $ 2,751 $ 3,315
Domestic wireless............ 333 283 234
International operations..... (187) (62) (4)
Advertising and publishing... 543 530 556
All other.................... (182) (210) (215)
------- ------- -------
Total Segments............... 2,821 3,292 3,886
Reconciling items............ 440 235 (438)
------- ------- -------
Total consolidated........... $ 3,261 $ 3,527 $ 3,448
----------------------------------------------------------
SEGMENT ASSETS
Wireline communications...... $23,226 $23,916 $25,536
Domestic wireless............ 5,859 6,540 6,103
International operations..... 3,278 4,449 4,869
Advertising and publishing... 1,262 1,288 1,662
All other.................... 1,326 1,273 1,409
------- ------- -------
Total Segments............... 34,951 37,466 39,579
Reconciling items............ 1,350 1,944 3,874
------- ------- -------
Total consolidated........... $36,301 $39,410 $43,453
----------------------------------------------------------
</TABLE>
Operating segments are defined based on products and services, and
secondarily geographic regions. Wireline communications operating segment
includes local service, network access, intraLATA long distance services
provided by wireline transport to business and residential customers in a
nine-state region located in the Southeastern U.S. Domestic wireless segment is
comprised of cellular and personal communication service businesses principally
within the Southeastern U.S. International operations segment is comprised
principally of our investments in wireless businesses in ten countries in Latin
America as well as in Denmark, Germany, India and Israel. Consolidated
international operations include our businesses in Argentina, Chile, Ecuador,
Peru and Venezuela. Advertising and publishing segment is comprised of companies
in the U.S. and Latin America that publish, print, and sell advertising in and
perform related services concerning alphabetical and classified telephone
directories and electronic product offerings.
Reconciling items include undistributed corporate expenses, corporate
assets, intersegment eliminations and special items. For 1999, corporate assets
are comprised primarily of our investment in Qwest. For 1998 and 1997, corporate
assets are comprised primarily of cash and cash equivalents.
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. These items include provisions for asset
impairments, foreign currency losses associated with devaluations, gains on
sales of operations, gains on swaps of wireless properties and charges for
intellectual property use.
F-61
<PAGE> 228
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net revenues to external customers are based on the location of the
customer. Geographic information as of December 31, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
UNITED
STATES INTERNATIONAL TOTAL
------- ------------- -------
<S> <C> <C> <C>
Year ended December 31, 1997:
Revenues................................................ $19,613 $ 948 $20,561
Long-lived assets....................................... 25,948 2,236 28,184
Year ended December 31, 1998:
Revenues................................................ $21,128 $1,995 $23,123
Long-lived assets....................................... 27,082 3,622 30,704
Year ended December 31, 1999:
Revenues................................................ $22,935 $2,289 $25,224
Long-lived assets....................................... 32,263 3,803 36,066
</TABLE>
O. FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, temporary cash
investments, bank loans and commercial paper approximate fair value due to the
short-term nature of these instruments. The fair value for BST's long-term debt
is estimated based on the closing market prices for each issue at December 31,
1999 and 1998. Fair value estimates for the Guarantee of ESOP Debt, Capital
Funding long-term debt, foreign exchange contracts, foreign currency swaps and
interest rate swaps are based on quotes from dealers. Since judgment is required
to develop the estimates, the estimated amounts presented herein may not be
indicative of the amounts that we could realize in a current market exchange.
Following is a summary of financial instruments where the fair values
differ from the recorded amounts as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1998
---------------------
RECORDED FAIR VALUE
AMOUNT ESTIMATED
-------- ----------
<S> <C> <C>
Balance sheet financial instruments:
Long-term debt:
BST....................................................... $6,518 $6,771
Capital Funding........................................... 1,469 1,523
Guarantee of ESOP debt.................................... 467 519
Off-balance sheet financial instruments:
Interest rate swaps....................................... -- (13)
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------
RECORDED FAIR VALUE
AMOUNT ESTIMATED
-------- ----------
<S> <C> <C>
Balance sheet financial instruments:
Long-term debt:
BST....................................................... $6,517 $6,112
Capital Funding........................................... 1,817 1,652
Guarantee of ESOP debt.................................... 391 417
Off-balance sheet financial instruments:
Interest rate swaps....................................... -- (8)
</TABLE>
F-62
<PAGE> 229
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DERIVATIVE FINANCIAL INSTRUMENTS
We are, from time to time, party to currency swap agreements, interest rate
swap agreements and foreign exchange forward contracts in our normal course of
business for purposes other than trading. These financial instruments are used
to mitigate foreign currency and interest rate risks, although to some extent
they expose us to market risks and credit risks. The credit risks associated
with these instruments are controlled through the evaluation and continual
monitoring of the creditworthiness of the counterparties. In the event that a
counterparty fails to meet the terms of a contract or agreement, our exposure is
limited to the current value at that time of the currency rate or interest rate
differential, not the full notional or contract amount. We believe that such
contracts and agreements have been executed with creditworthy financial
institutions. As such, we consider the risk of nonperformance to be remote.
INTEREST RATE SWAPS
We enter into interest rate swap agreements to exchange fixed and variable
rate interest payment obligations without the exchange of the underlying
principal amounts. At both December 31, 1999 and 1998, we were a party to
various interest rate swaps with an aggregate notional amount of $920. Under
swap agreements, we paid fixed rates averaging 6.10% and 6.11% at December 31,
1999 and 1998 and received variable rates averaging 5.41% and 5.54% at December
31, 1999 and 1998. We also paid variable rates averaging 5.35% and received
fixed rates averaging 6.00% at December 31, 1999. The swaps mature at dates
ranging from 2001 to 2002.
OTHER
We have also issued letters of credit and financial guarantees which
approximate $617 at December 31, 1999. Of this total, $356 represents the U.S.
Dollar equivalent of the outstanding debt of E-Plus guaranteed by us. We have
agreed to guarantee E-Plus borrowings up to a U.S. Dollar equivalent of $361
(705 million German Marks) at December 31, 1999. Since there is no market for
the instruments, it is not practicable to estimate their fair value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to credit risk consist
principally of trade accounts receivable. Concentrations of credit risk with
respect to these receivables, other than those from long distance carriers, are
limited due to the composition of the customer base, which includes a large
number of individuals and businesses. At December 31, 1999 and 1998,
approximately $490 and $472, of trade accounts receivable were from long
distance carriers.
P. COMMITMENTS AND CONTINGENCIES
LEASES
We have entered into operating leases for facilities and equipment used in
operations. Rental expense under operating leases was $297 for 1999, $242 for
1998 and $273 for 1997. Capital leases currently in effect are not significant.
F-63
<PAGE> 230
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 1999:
<TABLE>
<CAPTION>
MINIMUM
RENTALS
-------
<S> <C>
2000........................................................ $ 185
2001........................................................ 176
2002........................................................ 170
2003........................................................ 141
2004........................................................ 122
Thereafter.................................................. 653
------
Total............................................. $1,447
======
</TABLE>
OUTSIDE PLANT
We currently self-insure all of our outside plant against casualty losses.
Such outside plant, located in the nine southeastern states served by BST, is
susceptible to damage from severe weather conditions and other perils. The net
book value of outside plant was $7,099 at December 31, 1999 and $7,234 at
December 31, 1998.
OUTSOURCING CONTRACTS
Beginning in 1997, we contracted with various entities to outsource the
performance of certain engineering functions, as well as our information
technology operations and application development. These contracts expire at
various dates through 2007, are generally renewable, and are cancelable upon the
payment of additional fees or for nonperformance. Future minimum payments for
these contracts range from $400 to $625 annually over the contract periods.
PURCHASE COMMITMENT
During 1999, our BellSouth Long Distance operating subsidiary entered into
an agreement with a long distance carrier to purchase wholesale and retail,
voice and private line services. As of December 31, 1999 our remaining
commitment is approximately $100.
RECIPROCAL COMPENSATION
Following the enactment of the 1996 Act, BST and various competitive local
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 claim 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. In certain instances, BST has been
ordered to pay this compensation pending appeal. In other cases, the ruling
bodies have determined that BST does not owe reciprocal compensation for these
calls. BST has appealed the adverse decisions and continues to believe
F-64
<PAGE> 231
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 December 31, 1999, the exposure
related to unrecorded amounts withheld from competitive local carriers was
approximately $300, including accrued interest.
In a related matter, at least one competitive local carrier is claiming
terminating compensation of approximately $165 for service arrangements that we
do not believe involve "traffic" under BST's interconnection agreement. BST has
filed a complaint with the state regulatory commission asking that agency to
declare that BST does not owe reciprocal compensation for these arrangements.
The competitive local carrier has filed a complaint with the state regulatory
commission asking it to order BST to pay the disputed amounts. Hearings on this
matter were held in August 1999 and a decision is pending. We believe that we
have a good legal basis for our position and, accordingly, no provision has been
recorded for this claim in our financial statements.
OTHER CLAIMS
We are subject to claims arising in the ordinary course of business
involving allegations of personal injury, breach of contract, anti-competitive
conduct, employment law issues, regulatory matters and other actions. BST is
also subject to claims attributable to pre-divestiture events involving
environmental liabilities, rates, taxes, contracts and torts. Certain contingent
liabilities for pre-divestiture events are shared with AT&T Corp.
While complete assurance cannot be given as to the outcome of any legal
claims, we believe that any financial impact would not be material to our
results of operations, financial position or cash flows.
Q. 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 December 31, 1999 we have
closed on 1,574 towers for proceeds of $519. Remaining towers covered by the
agreement are expected to be subleased in 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 of
our PCS towers in exchange for $317 in cash. As of December 31, 1999 we have
closed on 648 towers and received $266. Remaining towers covered by the
agreement are expected to be subleased in 2000. In connection with this
agreement, we entered into an exclusive three year, build-to-suit agreement.
With these transactions, Crown will manage, maintain and remarket the
remaining space on the towers. We have retained, outside of the leases, a
portion of the towers for use in operating our wireless network and will
continue to fully own the communications components including switching
equipment, shelters and cell site facilities. We will pay $1,200 (whole dollars)
per tower, per month to Crown for its monitoring and maintenance services. The
subleases are classified as operating leases and the up-front payments from
Crown have been treated as prepaid rent. Rental income will be recognized over
the life of the respective leases, generally 20 years.
F-65
<PAGE> 232
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
R. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the following summary of quarterly financial information, all
adjustments necessary for a fair presentation of each period were included.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Operating Revenues.......................................... $5,426 $5,664 $5,865 $6,168
Operating Income............................................ $1,454 $1,434 $1,463 $1,553
Net Income.................................................. $ 892 $ 818 $ 814 $1,003
Earnings per share -- basic and diluted(1).................. $ .45 $ .41 $ .41 $ .51
1999
Operating Revenues.......................................... $5,973 $6,148 $6,422 $6,681
Operating Income............................................ $1,607 $1,314 $1,674 $1,842
Net Income.................................................. $ 615 $ 786 $ 994 $1,053
Earnings per share(1):
Basic..................................................... $ .32 $ .42 $ .53 $ .56
Diluted................................................... $ .32 $ .41 $ .52 $ .55
</TABLE>
---------------
(1) Due to rounding, the sum of quarterly EPS amounts may not agree to
year-to-date EPS amounts.
The quarters shown were affected by the following:
- First quarter 1998 includes a gain on the receipt of additional proceeds
related to the sale of our investment in ITT World Directories which
increased net income by $96, or $0.05 per share.
- Fourth quarter 1998 includes a gain on the sale of our interest in
BellSouth New Zealand and contingent interest and prepayment penalties
associated with the repayment of a loan. These transactions increased net
income by $110, or $0.06 per share, and $62, or $0.03 per share.
- Second quarter 1999 includes an asset impairment loss which decreased
operating income by $320 and net income by $187, or $0.10 per share.
- Third quarter 1999 includes the recognition of foreign investment tax
credits and a gain on the sale of our interest in Honolulu Cellular.
These transactions increased net income by $95, or 0.05 per share, and
$23, or 0.01 per share.
- Certain 1999 periods include foreign currency gains and losses associated
with the devaluation of the Brazilian Real. Our share of these
(losses)/gains totaled $(280) for first quarter, $(75) for third quarter
and $47 for fourth quarter.
S. SUBSEQUENT EVENTS
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 during the first quarter of 2000.
F-66
<PAGE> 233
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 100 million
shares of KPN or a 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 46 million additional shares of KPN.
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 was used to retire
commercial paper.
TRACKING STOCK PROPOSAL
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 will permit us to issue our common stock in series, of which our
Board of Directors will initially designate two: BLS group stock and Latin
America group stock. Latin America group stock is intended to reflect the
separate performance of the Latin America group, consisting of our Latin
American businesses. BLS group stock is intended to reflect the separate
performance of the BLS group, consisting of all of our other businesses and the
BLS group's interest in the portion of our equity we have attributed to the
Latin America group that is not represented by shares of Latin America group
stock sold or distributed. The amendments also provide for each outstanding
share of our existing common stock to be changed into one share of BLS group
stock immediately before the initial issuance of Latin America group stock.
Our shareholders will also be asked at the special meeting to adopt an
amended and restated stock plan. This stock plan would, among other things,
reflect the tracking stock proposal by authorizing us to grant to our employees,
officers and directors awards based on shares of BLS group stock and Latin
America group stock.
At the same time we filed our preliminary proxy statement, we filed a
registration statement pursuant to which we plan to offer shares of Latin
America group stock. The Latin America group businesses will use the proceeds
from the public offering to continue their expansion in Latin America and for
other general purposes.
We expect to distribute to the holders of BLS group stock, within six to
twelve months following the public offering of shares, of Latin America group
stock representing our equity we have attributed to the Latin America group that
is not represented by shares of Latin America group stock sold or distributed.
The decision to make such a distribution and the precise timing will depend on
market conditions and other factors. After full distribution of the Latin
America group stock, ownership in BellSouth will then be represented by two
stocks: Latin America group stock and BLS group stock.
PROPOSED DOMESTIC WIRELESS TRANSACTION
In April 2000, we signed a definitive agreement with SBC Communications
Inc. to create a national wireless business comprised of substantially all of
both companies' U.S. wireless assets. The new joint venture will serve
approximately 16.2 million subscribers and cover a geographical area with a
population of 175 million. Assuming that all of the assets are contributed as
provided for in the agreement, the venture will be 40% owned by BellSouth and
60% owned by SBC Communications. We will share joint and equal control of the
venture.
F-67
<PAGE> 234
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The joint venture will be a separately managed company capable of making
acquisition and bidding on a new or re-auctioned wireless frequencies. It may
issue debt and stock to the public to generate additional cash to fund expansion
and product development efforts. The agreement is subject to numerous
conditions, including regulatory approvals, and we expect the closing of the
venture to occur by the end of 2000.
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 million. Tele Centro Oeste provides
cellular service in central-west Brazil, including Brasilia, as well as in
northern Brazil. The common stock portion of our 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.
INVESTMENT IN COLOMBIA
In May 2000, we announced a definitive agreement to acquire a 33.8%
controlling equity interest in Celumovil S.A., a cellular operator in the
Eastern and Atlantic regions in Colombia, for a purchase price of approximately
$295 million. Celumovil is a leading provider of wireless telecommunications
services in Colombia with approximately 466,000 subscribers as of February 2000.
Celumovil's concession areas include the Eastern and Atlantic regions, covering
a combined population of approximately 26 million and six of the 10 largest
cities in Colombia, including Bogota.
F-68
<PAGE> 235
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
T. CONSOLIDATING INFORMATION
After shareholder approval and the proposed tracking stock proposal
discussed in Note S, we intend to separate for financial reporting purposes the
BLS group and the Latin America group. Below is the consolidating financial
information of the BLS group and the Latin America group. The financial
information reflects the businesses of the BLS group and the Latin America
group, including the allocation of revenues and expenses between the BLS group
and the Latin America group in accordance with our allocation policies. The BLS
group presented below excludes its intergroup interest in the Latin America
group.
CONSOLIDATING STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
External revenues.......... $19,634 $ 927 $ -- $20,561
Intercompany revenues:
Overhead allocations...... 11 13 (24) --
Wireless services......... -- -- -- --
---------------------------------------------------------------------------------
Total revenues............. 19,645 940 (24) 20,561
---------------------------------------------------------------------------------
External expenses.......... 14,257 928 -- 15,185
Intercompany expenses:
Overhead allocations...... 13 11 (24) --
Wireless services......... -- -- -- --
---------------------------------------------------------------------------------
Total operating expenses... 14,270 939 (24) 15,185
---------------------------------------------------------------------------------
Operating income........... 5,375 1 -- 5,376
Interest expense........... 718 46 (3) 761
Equity in earnings
(losses).................. (256) 14 -- (242)
Interest income............ 194 2 (3) 193
Miscellaneous other
income.................... 104 (2) -- 102
Minority interests......... (38) 4 -- (34)
---------------------------------------------------------------------------------
Other income/expense....... 260 4 (3) 261
Gain on sale of
operations................ 787 -- -- 787
---------------------------------------------------------------------------------
Income before taxes........ 5,448 (27) -- 5,421
Provision (benefit) for
income taxes.............. 2,150 1 -- 2,151
---------------------------------------------------------------------------------
Income (loss) before
extraordinary loss........ 3,298 (28) -- 3,270
Extraordinary loss......... (9) -- -- (9)
---------------------------------------------------------------------------------
Net income (loss).......... $ 3,289 $ (28) $ -- $ 3,261
---------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
External revenues.......... $21,232 $1,891 $ -- $23,123
Intercompany revenues:
Overhead allocations...... 25 16 (41) --
Wireless services......... -- -- -- --
---------------------------------------------------------------------------------
Total revenues............. 21,257 1,907 (41) 23,123
---------------------------------------------------------------------------------
External expenses.......... 15,533 1,686 -- 17,219
Intercompany expenses:
Overhead allocations...... 16 25 (41) --
Wireless services......... -- -- -- --
---------------------------------------------------------------------------------
Total operating expenses... 15,549 1,711 (41) 17,219
---------------------------------------------------------------------------------
Operating income........... 5,708 196 -- 5,904
Interest expense........... 794 53 (10) 837
Equity in earnings
(losses).................. 149 (57) -- 92
Interest income............ 316 7 (10) 313
Miscellaneous other
income.................... (15) (8) -- (23)
Minority interests......... 17 (50) -- (33)
---------------------------------------------------------------------------------
Other income/expense....... 318 (51) (10) 257
Gain on sale of
operations................ 335 -- -- 335
---------------------------------------------------------------------------------
Income before taxes........ 5,716 35 -- 5,751
Provision (benefit) for
income taxes.............. 2,121 103 -- 2,224
---------------------------------------------------------------------------------
Income (loss) before
extraordinary loss........ 3,595 (68) -- 3,527
Extraordinary loss......... -- -- -- --
---------------------------------------------------------------------------------
Net income (loss).......... $ 3,595 $ (68) $ -- $ 3,527
---------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
External revenues.......... $22,860 $2,364 $ -- $25,224
Intercompany revenues:
Overhead allocations...... 35 21 (56) --
Wireless services......... -- 20 (20) --
---------------------------------------------------------------------------------
Total revenues............. 22,895 2,405 (76) 25,224
---------------------------------------------------------------------------------
External expenses.......... 16,523 2,264 -- 18,787
Intercompany expenses:
Overhead allocations...... 21 35 (56) --
Wireless services......... 20 -- (20) --
---------------------------------------------------------------------------------
Total operating expenses... 16,564 2,299 (76) 18,787
---------------------------------------------------------------------------------
Operating income........... 6,331 106 -- 6,437
Interest expense........... 956 88 (14) 1,030
Equity in earnings
(losses).................. 185 (354) -- (169)
Interest income............ 144 14 (14) 144
Miscellaneous other
income.................... 127 (19) -- 108
Minority interests......... 34 (91) -- (57)
---------------------------------------------------------------------------------
Other income/expense....... 305 (96) (14) 195
Gain on sale of
operations................ 55 -- -- 55
---------------------------------------------------------------------------------
Income before taxes........ 5,920 (432) -- 5,488
Provision (benefit) for
income taxes.............. 2,156 (116) -- 2,040
---------------------------------------------------------------------------------
Income (loss) before
extraordinary loss........ 3,764 (316) -- 3,448
Extraordinary loss......... -- -- -- --
---------------------------------------------------------------------------------
Net income (loss).......... $ 3,764 $ (316) $ -- $ 3,448
---------------------------------------------------------------------------------
</TABLE>
F-69
<PAGE> 236
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1999
---------------------------------------------------- -------------------------
LATIN AMERICA LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH BLS GROUP GROUP
--------- ------------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets............ $ 7,989 $ 758 $ (41) $ 8,706 $ 6,413 $1,034
Investments & Advances.... 2,234 806 (179) 2,861 5,840 374
Property, Plant and
Equipment, net.......... 22,486 1,454 -- 23,940 22,908 1,723
Deferred Charges and Other
Assets.................. 934 94 -- 1,028 1,492 72
Intangible Assets, net.... 1,816 1,059 -- 2,875 2,303 1,471
------- ------ ----- ------- ------- ------
Total Assets...... $35,459 $4,171 $(220) $39,410 $38,956 $4,674
======= ====== ===== ======= ======= ======
Current Liabilities....... $ 8,349 $ 904 $(103) $ 9,150 $12,358 $1,097
Long-Term Debt............ 8,268 564 (117) 8,715 8,638 592
Noncurrent Liabilities.... 4,851 584 -- 5,435 5,490 640
Shareholders' Equity...... 13,991 2,119 -- 16,110 12,470 2,345
------- ------ ----- ------- ------- ------
Total Liabilities
and Equity...... $35,459 $4,171 $(220) $39,410 $38,956 $4,674
======= ====== ===== ======= ======= ======
<CAPTION>
AT DECEMBER 31, 1999
------------------------
ELIMINATIONS BELLSOUTH
------------ ---------
<S> <C> <C>
Current Assets............ $ (60) $ 7,387
Investments & Advances.... (117) 6,097
Property, Plant and
Equipment, net.......... -- 24,631
Deferred Charges and Other
Assets.................. -- 1,564
Intangible Assets, net.... -- 3,774
----- -------
Total Assets...... $(177) $43,453
===== =======
Current Liabilities....... $ (60) $13,395
Long-Term Debt............ (117) 9,113
Noncurrent Liabilities.... -- 6,130
Shareholders' Equity...... -- 14,815
----- -------
Total Liabilities
and Equity...... $(177) $43,453
===== =======
</TABLE>
F-70
<PAGE> 237
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
------------------------------------- -------------------------------------
LATIN AMERICA LATIN AMERICA
BLS GROUP GROUP BELLSOUTH BLS GROUP GROUP BELLSOUTH
--------- ------------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash Flow from Operating Activities:
Net Income.......................... $3,289 $ (28) $ 3,261 $ 3,595 $ (68) $ 3,527
Adjustments to reconcile net income
to net cash provided by operating
activities:....................... 3,705 73 3,778 3,667 547 4,214
------ ------ ------- ------- ------ -------
Net cash provided by
operating activities...... 6,994 45 7,039 7,262 479 7,741
------ ------ ------- ------- ------ -------
Cash Flows from Investing
Activities:
Capital expenditures................ (4,410) (448) (4,858) (4,515) (697) (5,212)
Investments in subsidiaries......... (423) (988) (1,411) (515) (681) (1,196)
Proceeds from sale of operations.... 1,000 -- 1,000 410 -- 410
Other investing activities, net..... 324 (4) 320 520 (9) 511
------ ------ ------- ------- ------ -------
Net cash used for investing
activities................ (3,509) (1,440) (4,949) (4,100) (1,387) (5,487)
------ ------ ------- ------- ------ -------
Cash Flows from Financing
Activities:
Net borrowings (repayments) of
short-term debt................... 558 321 879 210 (281) (71)
Net proceeds (repayments) of
long-term debt.................... (230) 183 (47) 638 332 970
Dividends paid...................... (1,428) -- (1,428) (1,420) -- (1,420)
Purchase of treasury shares......... (157) -- (157) (1,261) (1,261)
Funds allocated to/from the Latin
America group..................... (1,065) 1,065 -- (851) 851 --
Other financing activities, net..... 55 -- 55 101 -- 101
------ ------ ------- ------- ------ -------
Net cash provided (used) for
financing activities...... (2,267) 1,569 (698) (2,583) 902 (1,681)
------ ------ ------- ------- ------ -------
Net Increase (Decrease) in Cash and
Cash Equivalents.................. 1,218 174 1,392 579 (6) 573
Cash and Cash Equivalents at
Beginning of Period............... 1,175 3 1,178 2,393 177 2,570
------ ------ ------- ------- ------ -------
Cash and Cash Equivalents at End of
Period............................ $2,393 $ 177 $ 2,570 $ 2,972 $ 171 $ 3,143
====== ====== ======= ======= ====== =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------
LATIN AMERICA
BLS GROUP GROUP BELLSOUTH
--------- ------------- ---------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net Income.......................... $ 3,764 $ (316) $ 3,448
Adjustments to reconcile net income
to net cash provided by operating
activities:....................... 3,871 880 4,751
------- ------- -------
Net cash provided by
operating activities...... 7,635 564 8,199
------- ------- -------
Cash Flows from Investing
Activities:
Capital expenditures................ (5,553) (647) (6,200)
Investments in subsidiaries......... (3,640) (399) (4,039)
Proceeds from sale of operations.... 215 -- 215
Other investing activities, net..... 189 (53) 136
------- ------- -------
Net cash used for investing
activities................ (8,789) (1,099) (9,888)
------- ------- -------
Cash Flows from Financing
Activities:
Net borrowings (repayments) of
short-term debt................... 4,100 (30) 4,070
Net proceeds (repayments) of
long-term debt.................... 289 16 305
Dividends paid...................... (1,449) -- (1,449)
Purchase of treasury shares......... (3,120) -- (3,120)
Funds allocated to/from the Latin
America group..................... (665) 665 --
Other financing activities, net..... 27 -- 27
------- ------- -------
Net cash provided (used) for
financing activities...... (818) 651 (167)
------- ------- -------
Net Increase (Decrease) in Cash and
Cash Equivalents.................. (1,972) 116 (1,856)
Cash and Cash Equivalents at
Beginning of Period............... 2,972 171 3,143
------- ------- -------
Cash and Cash Equivalents at End of
Period............................ $ 1,000 $ 287 $ 1,287
======= ======= =======
</TABLE>
F-71
<PAGE> 238
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 2000
------- -------
<S> <C> <C>
Operating revenues:
Wireline communications:
Local service.......................................... $2,654 $2,821
Network access......................................... 1,191 1,263
Long distance.......................................... 150 135
Other wireline......................................... 280 285
------ ------
Total wireline communications..................... 4,275 4,504
Domestic wireless......................................... 744 853
International operations.................................. 561 664
Advertising and publishing................................ 343 364
Other..................................................... 50 102
------ ------
Total operating revenues.......................... 5,973 6,487
------ ------
Operating expenses:
Operational and support expenses.......................... 3,253 3,568
Depreciation and amortization............................. 1,113 1,218
Severance accrual......................................... -- 78
------ ------
Total operating expenses.......................... 4,366 4,864
------ ------
Operating income............................................ 1,607 1,623
Interest expense............................................ 226 306
Net earnings (losses) of equity affiliates.................. (266) 131
Other income, net........................................... 59 83
------ ------
Income before income taxes.................................. 1,174 1,531
Provision for income taxes.................................. 559 530
------ ------
Net income........................................ $ 615 $1,001
====== ======
Weighted-average shares of common stock outstanding:
Basic..................................................... 1,932 1,881
Diluted................................................... 1,951 1,898
Dividends declared per share of common stock................ $ .19 $ .19
Earnings per share of common stock:
Basic..................................................... $ .32 $ .53
Diluted................................................... $ .32 $ .53
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-72
<PAGE> 239
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,287 $ 1,154
Temporary cash investments................................ 105 28
Accounts receivable, net of allowance for uncollectibles
of $312 and $330....................................... 5,177 4,971
Material and supplies..................................... 451 443
Other current assets...................................... 367 524
------- -------
Total current assets................................... 7,387 7,120
------- -------
Investments and advances.................................... 6,097 6,710
------- -------
Property, plant and equipment............................... 61,009 62,073
Less: accumulated depreciation.............................. 36,378 37,139
------- -------
Property, plant and equipment, net.......................... 24,631 24,934
------- -------
Deferred charges and other assets........................... 1,564 1,652
Intangible assets, net...................................... 3,774 3,939
------- -------
Total assets......................................... $43,453 $44,355
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year............................. $ 7,653 $ 5,484
Accounts payable.......................................... 1,961 2,085
Other current liabilities................................. 3,781 3,918
------- -------
Total current liabilities.............................. 13,395 11,487
------- -------
Long-term debt............................................ 9,113 10,880
------- -------
Noncurrent liabilities:
Deferred income taxes..................................... 2,705 2,844
unamortized investment tax credits........................ 126 116
Other noncurrent liabilities.............................. 3,299 3,331
------- -------
Total noncurrent liabilities........................... 6,130 6,291
------- -------
Shareholders' equity:
Common stock, $1 par value (4,400 shares authorized; 1,883
and 1,880 shares outstanding).......................... 2,020 2,020
Paid-in capital........................................... 6,771 6,775
Retained earnings......................................... 11,456 12,078
Accumulated other comprehensive income.................... (358) (45)
Shares held in trust and treasury......................... (4,798) (4,892)
Guarantee of ESOP debt.................................... (276) (239)
------- -------
Total shareholders' equity............................. 14,815 15,697
------- -------
Total liabilities and shareholders' equity........... $43,453 $44,355
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-73
<PAGE> 240
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED MARCH 31,
-----------------
1999 2000
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 615 $ 1,001
Adjustments to net income:
Depreciation and amortization............................. 1,113 1,218
Provision for uncollectibles.............................. 84 89
Net losses (earnings) of equity affiliates................ 266 (131)
Dividends received from equity affiliates................. 14 9
Minority interests in income of subsidiaries.............. 16 2
Deferred income taxes and unamortized investment tax
credits................................................ 104 (6)
Severance Accrual......................................... -- 78
Net change in:
Accounts receivable and other current assets.............. (11) 3
Accounts payable and other current liabilities............ (308) 308
Deferred charges and other assets......................... (128) (237)
Other liabilities and deferred credits.................... (129) (34)
Other reconciling items, net................................ 6 50
------- -------
Net cash provided by operating activities......... 1,642 2,350
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (1,387) (1,563)
Investments in and advances to equity affiliates............ (55) (26)
Purchases of licenses and other intangible assets........... (38) (69)
Proceeds from disposition of short-term investments......... 181 137
Purchases of short-term investments......................... (185) (64)
Proceeds from repayment of loans and advances............... 15 17
Other investing activities, net............................. 11 12
------- -------
Net cash used for investing activities............ (1,458) (1,556)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of short-term debt.............. 982 (2,201)
Proceeds from long-term debt................................ 6 2,047
Repayments of long-term debt................................ (181) (295)
Dividends paid.............................................. (371) (358)
Purchase of treasury shares................................. (1,841) (140)
Other financing activities, net............................. 17 20
------- -------
Net cash used for financing activities............ (1,388) (927)
------- -------
Net decrease in cash and cash equivalents................... (1,204) (133)
Cash and cash equivalents at beginning of period............ 3,143 1,287
------- -------
Cash and cash equivalents at end of period.................. $ 1,939 $ 1,154
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE> 241
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
--------------------------------------------------------------------------------------------------
NUMBER OF SHARES AMOUNT
------------------ -----------------------------------------------------------------------------
SHARES ACCUMULATED SHARES
HELD IN OTHER HELD IN GUARANTEE
COMMON TRUST AND COMMON PAID-IN RETAINED COMPREHENSIVE TRUST AND OF ESOP
STOCK TREASURY STOCK CAPITAL EARNINGS INCOME TREASURY DEBT TOTAL
------ --------- ------ ------- -------- ------------- --------- --------- -------
(A) (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1999....................... 2,020 (138) $2,020 $6,771 $11,456 $(358) $(4,798) $(276) $14,815
Net income................... 1,001 1,001
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustments.............. 32 32
Net unrealized gains on
securities............... 291 291
Minimum pension liability
adjustment............... (10) (10)
-------
Total comprehensive income... 1,314
Dividends declared........... (357) (357)
Shares issuances for employee
benefit plans.............. 1 (22) 46 24
Purchase of treasury stock... (3) (140) (140)
Tax benefit related to stock
options.................... 4 4
ESOP activities and related
tax benefit................ 37 37
----- ---- ------ ------ ------- ----- ------- ----- -------
BALANCE AT MARCH 31, 2000.... 2,020 (140) $2,020 $6,775 $12,078 $ (45) $(4,892) $(239) $15,697
===== ==== ====== ====== ======= ===== ======= ===== =======
</TABLE>
---------------
(a) Trust and treasury shares are not considered to be outstanding for financial
reporting purposes. As of March 31, 2000, there were approximately 36 shares
held in trust and 104 shares held in treasury.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------------------------
NUMBER OF SHARES AMOUNT
------------------ -----------------------------------------------------------------------------
SHARES ACCUMULATED SHARES
HELD IN OTHER HELD IN GUARANTEE
COMMON TRUST AND COMMON PAID-IN RETAINED COMPREHENSIVE TRUST AND OF ESOP
STOCK TREASURY STOCK CAPITAL EARNINGS INCOME TREASURY DEBT TOTAL
------ --------- ------ ------- -------- ------------- --------- --------- -------
(B) (B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1998....................... 2,020 (70) $2,020 $6,766 $ 9,479 $ (64) $(1,752) $(339) $16,110
Net income................... 615 615
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustments.............. (158) (158)
-------
Total comprehensive income... 457
Dividends declared........... (369) (369)
Shares issuances for employee
benefit plans.............. (10) 20 10
Purchase of treasury stock... (43) (1,841) (1,841)
Purchase of stock by grantor
trust...................... (4) (4)
ESOP activities and related
tax benefit................ 3 36 39
----- ---- ------ ------ ------- ----- ------- ----- -------
BALANCE AT MARCH 31, 1999.... 2,020 (113) $2,020 $6,766 $ 9,718 $(222) $(3,577) $(303) $14,402
===== ==== ====== ====== ======= ===== ======= ===== =======
</TABLE>
---------------
(b) Trust and treasury shares are not considered to be outstanding for financial
reporting purposes. As of March 31, 1999, there were approximately 36 shares
held in trust and 77 shares held in treasury.
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE> 242
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS)
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 this prospectus.
Certain amounts within the prior year's information have been reclassified
to conform to the current year's presentation.
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. The guidelines in SAB 101 must be
adopted during the second quarter of 2000. We do not expect the adoption of
these guidelines to have a material impact on our results of operations and
financial position.
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.
F-76
<PAGE> 243
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
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:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------
1999 2000
----- -----
<S> <C> <C>
Basic common shares outstanding............................. 1,932 1,881
Incremental shares from stock options....................... 19 17
----- -----
Diluted common shares outstanding........................... 1,951 1,898
===== =====
</TABLE>
The earnings amounts used for per-share calculations are the same for both
the basic and diluted methods.
D. SEGMENT INFORMATION
We have four reportable operating segments: (1) Wireline communications;
(2) Domestic wireless; (3) International operations; and (4) Advertising and
publishing. We have included the operations of all other businesses falling
below the reporting threshold in the "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>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------- %
1999 2000 CHANGE
------ ------ ------
<S> <C> <C> <C>
WIRELINE COMMUNICATIONS
External revenues.............. $4,275 $4,504 5.4
Intersegment revenues.......... 48 72 50.0
Total revenues................. $4,323 $4,576 5.9
Operating income............... $1,413 $1,552 9.8
Segment net income............. $ 801 $ 863 7.7
---------------------------------------------------------
DOMESTIC WIRELESS
External revenues.............. $ 744 $ 853 14.7
Intersegment revenues.......... 4 4 --
Total revenues................. $ 748 $ 857 14.6
Operating income............... $ 87 $ 92 5.7
Net earnings (losses) of equity
affiliates................... $ 31 $ 32 3.2
Segment net income............. $ 60 $ 60 --
---------------------------------------------------------
INTERNATIONAL OPERATIONS
External revenues.............. $ 561 $ 664 18.4
Intersegment revenues.......... -- 11 N/M*
Total revenues................. $ 561 $ 675 20.3
Operating income (loss)........ $ 51 $ (2) N/M
Net earnings (losses) of equity
affiliates................... $ (13) $ 17 N/M
Segment net income (loss)...... $ (20) $ 14 N/M
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------- %
1999 2000 CHANGE
------ ------ ------
<S> <C> <C> <C>
ADVERTISING AND PUBLISHING
External revenues.............. $ 343 $ 364 6.1
Intersegment revenues.......... 3 5 66.7
Total revenues................. $ 346 $ 369 6.6
Operating income............... $ 140 $ 145 3.6
Net earnings (losses) of equity
affiliates................... $ (1) $ (1) --
Segment net income............. $ 84 $ 90 7.1
---------------------------------------------------------
ALL OTHER
External revenues.............. $ 50 $ 102 N/M
Intersegment revenues.......... 70 88 25.7
Total revenues................. $ 120 $ 190 58.3
Operating income (loss)........ $ (84) $ (54) (35.7)
Net earnings (losses) of equity
affiliates................... $ 1 $ -- N/M
Segment net loss............... $ (57) $ (39) (31.6)
---------------------------------------------------------
RECONCILING ITEMS
Intersegment revenues.......... $ (125) $ (180) 44.0
Operating income (loss)........ $ -- $ (110) N/M
Net earnings (losses) of equity
affiliates (Note F).......... $ (284) $ 83 N/M
Segment net income (loss)...... $ (253) $ 13 N/M
---------------------------------------------------------
</TABLE>
F-77
<PAGE> 244
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------- %
1999 2000 CHANGE
------ ------ ------
<S> <C> <C> <C>
RECONCILIATION TO CONSOLIDATED
FINANCIAL INFORMATION
OPERATING REVENUES
Wireline communications........ $4,323 $4,576 5.9
Domestic wireless.............. 748 857 14.6
International operations....... 561 675 20.3
Advertising and publishing..... 346 369 6.6
All other...................... 120 190 58.3
------ ------
Total segments................. 6,098 6,667 9.3
Reconciling items.............. (125) (180) 44.0
------ ------
Total consolidated............. $5,973 $6,487 8.6
====== ======
---------------------------------------------------------
NET INCOME
Wireline communications........ $ 801 $ 863 7.7
Domestic wireless.............. 60 60 --
International operations....... (20) 14 N/M
Advertising and publishing..... 84 90 7.1
All other...................... (57) (39) (31.6)
------ ------
Total segments................. 868 988 13.8
Reconciling items.............. (253) 13 N/M
------ ------
Total consolidated............. $ 615 $1,001 62.8
====== ======
---------------------------------------------------------
</TABLE>
* Not Meaningful
E. 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 10% 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 March 31, 2000:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment in Qwest............................. $3,500 $ 55 $-- $3,555
Other investments............................... 208 212 -- 420
------ ---- -- ------
Total................................. $3,708 $267 $-- $3,975
====== ==== == ======
</TABLE>
We held no significant investments in marketable securities at March 31,
1999.
F-78
<PAGE> 245
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
F. DEVALUATION OF BRAZILIAN CURRENCY
In mid January 1999, the Brazilian Government changed its foreign 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 the net
U.S. Dollar-denominated liabilities. Our share of the foreign currency losses
for the first quarter of 1999 was $280.
G. 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 March 31, 2000 we have closed
on 1,664 towers and received $548. 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 March 31, 2000, we have closed on 674
towers and received $277. 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.
H. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 2000
------ ------
<S> <C> <C>
Cash Paid For:
Income taxes.............................................. $ 57 $111
==== ====
Interest.................................................. $159 $204
==== ====
</TABLE>
I. SUMMARY FINANCIAL INFORMATION FOR EQUITY INVESTEES;
The following table displays the summary unaudited financial information
for our equity method businesses. These amounts are shown on a 100-percent
basis.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------- %
1999 2000 CHANGE
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... $1,209 $1,515 25.3
====== ======
Operating income............................................ $ 29 $ 111 N/M
====== ======
Net income(loss)............................................ $ (649) $ 38 N/M
====== ======
</TABLE>
J. 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
F-79
<PAGE> 246
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
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 BSTs 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 March 31, 2000, the exposure
related to unrecorded amounts withheld from competitive local carriers was
approximately $270, 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.
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 BST's interconnection agreements. BST filed a
complaint with the state regulatory commission asking that agency to declare
that BST did not owe reciprocal compensation for these arrangements. In March
2000, the state commission ruled in BST's favor finding that compensation was
not owed to the competitive local carrier.
K. 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.
L. 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 100 million
shares of KPN or a 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 46 million additional shares of KPN.
F-80
<PAGE> 247
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
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 was used to retire
commercial paper.
N. TRACKING STOCK PROPOSAL
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 will permit us to issue our common stock in series, of which our
Board of Directors will initially designate two: BLS group stock and Latin
America group stock. Latin America group stock is intended to reflect the
separate performance of the Latin America group, consisting of our Latin
American businesses. BLS group stock is intended to reflect the separate
performance of the BLS group, consisting of all of our other businesses and the
BLS group's interest in the portion of our equity we have attributed to the
Latin America group that is not represented by shares of Latin America group
stock sold or distributed. The amendments also provide for each outstanding
share of our existing common stock to be changed into one share of BLS group
stock immediately before the initial issuance of Latin America group stock.
Our shareholders will also be asked at the special meeting to adopt an
amended and restated stock plan. This stock plan would, among other things,
reflect the tracking stock proposal by authorizing us to grant to our employees,
officers and directors awards based on shares of BLS group stock and Latin
America group stock.
At the same time we filed our preliminary proxy statement, we filed a
registration statement pursuant to which we plan to offer shares of Latin
America group stock. The Latin America group businesses will use the proceeds
from the public offering to continue their expansion in Latin America and for
other general purposes.
We expect to distribute to the holders of BLS group stock within six to
twelve months following the public offering of shares of Latin America group
stock representing our equity we have attributed to the Latin America group that
is not represented by shares of Latin America group stock sold or distributed.
The decision to make such a distribution and the precise timing will depend on
market conditions and other factors. After full distribution of the Latin
America group stock, ownership in BellSouth will then be represented by two
stocks: Latin America group stock and BLS group stock.
O. SUBSEQUENT EVENTS
PROPOSED DOMESTIC WIRELESS TRANSACTION
In April 2000, we signed a definitive agreement with SBC Communications to
create a national wireless business comprised of substantially all of both
companies' U.S. wireless assets. The new joint venture will serve approximately
16.2 million subscribers and cover a geographical area with a population of 175
million. Assuming that all of the assets are contributed as provided for in the
agreement, the venture will be 40% owned by BellSouth and 60% owned by SBC
Communications. We will share joint and equal control of the venture.
The joint venture will be a separately managed company capable of making
acquisitions and bidding on new or re-auctioned wireless frequencies. It may
issue debt and stock to the public to generate additional cash to fund expansion
and product development efforts. The agreement is subject to numerous
conditions, including regulatory approvals, and we expect the closing of the
venture to occur by the end of 2000.
F-81
<PAGE> 248
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
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. We paid a total
purchase price of approximately $240 million. Tele Centro Oeste provides
cellular service in central-west Brazil, including Brasilia, as well as in
northern Brazil. The common stock portion of our 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.
INVESTMENT IN COLOMBIA
In May 2000, we announced a definitive agreement to acquire a 33.8%
controlling equity interest in Celumovil S.A., a cellular operator in the
Eastern and Atlantic regions in Colombia, for a purchase price of approximately
$295 million. Celumovil is a leading provider of wireless telecommunications
services in Colombia with approximately 466,000 subscribers as of February 2000.
Celumovil's concession areas include the Eastern and Atlantic regions, covering
a combined population of approximately 26 million and six of the 10 largest
cities in Colombia, including Bogota.
F-82
<PAGE> 249
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
P. CONSOLIDATING INFORMATION
After shareholder approval and the proposed tracking stock offering
discussed in Note N, we intend to separate for financial reporting purposes the
BLS group and the Latin America group. Below is the consolidating financial
information of the BLS group and the Latin America group. The financial
information reflects the businesses of the BLS group and the Latin America group
including the allocation of revenues and expenses between the BLS group and the
Latin America group in accordance with our allocation policies. The BLS group
presented below excludes its retained interest in the Latin America group.
CONSOLIDATING STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
External revenues........ $5,412 $ 561 $ -- $5,973
Intercompany revenues:
Overhead allocations..... 8 4 (12) --
Wireless services........ -- -- -- --
------ ----- ---- ------
Total revenues... 5,420 565 (12) 5,973
External expenses........ 3,862 504 -- 4,366
Intercompany expenses:
Overhead allocations... 4 8 (12) --
Wireless services...... -- -- -- --
------ ----- ---- ------
Total operating
expenses....... 3,866 512 (12) 4,366
------ ----- ---- ------
Operating income......... 1,554 53 -- 1,607
Interest expense......... 206 24 (4) 226
Net earnings (losses) of
equity affiliates...... 29 (295) (266)
Interest income.......... 45 5 (4) 46
Miscellaneous other
income................. 42 (13) 29
Minority interests....... -- (16) (16)
------ ----- ---- ------
Other income/expense..... 87 (24) (4) 59
------ ----- ---- ------
Income (loss) before
income taxes........... 1,464 (290) -- 1,174
Provision for income
taxes.................. 535 24 559
------ ----- ---- ------
Net income (loss)........ $ 929 $(314) $ -- $ 615
====== ===== ==== ======
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
External revenues........ $5,809 $ 678 $ -- $6,487
Intercompany revenues:
Overhead allocations..... 9 5 (14) --
Wireless services........ -- 12 (12) --
------ ----- ---- ------
Total revenues... 5,818 695 (26) 6,487
External expenses........ 4,166 698 -- 4,864
Intercompany expenses:
Overhead allocations... 5 9 (14) --
Wireless services...... 12 -- (12) --
------ ----- ---- ------
Total operating
expenses....... 4,183 707 (26) 4,864
------ ----- ---- ------
Operating income......... 1,635 (12) -- 1,623
Interest expense......... 275 33 (2) 306
Net earnings (losses) of
equity affiliates...... 137 (6) 131
Interest income.......... 31 6 (2) 35
Miscellaneous other
income................. 31 19 50
Minority interests....... 5 (7) (2)
------ ----- ---- ------
Other income/expense..... 67 18 (2) 83
------ ----- ---- ------
Income (loss) before
income taxes........... 1,564 (33) -- 1,531
Provision for income
taxes.................. 543 (13) 530
------ ----- ---- ------
Net income (loss)........ $1,021 $ (20) $ -- $1,001
====== ===== ==== ======
</TABLE>
F-83
<PAGE> 250
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
CONSOLIDATING BALANCE SHEET
AT MARCH 31, 2000
<TABLE>
<CAPTION>
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Current assets.................................... $ 6,182 $1,017 $ (79) $ 7,120
Investments & advances............................ 6,500 330 (120) 6,710
Property, plant and equipment, net................ 23,086 1,848 -- 24,934
Intangible assets, net............................ 2,392 1,547 -- 3,939
Deferred charges and other assets................. 1,571 81 -- 1,652
------- ------ ----- -------
Total assets............................ $39,731 $4,823 $(199) $44,355
======= ====== ===== =======
Current liabilities............................... $10,192 $1,374 $ (79) $11,487
Long-term debt.................................... 10,562 438 (120) 10,880
Noncurrent liabilities............................ 5,689 602 -- 6,291
Shareholders' equity.............................. 13,288 2,409 -- 15,697
------- ------ ----- -------
Total liabilities and equity............ $39,731 $4,823 $(199) $44,355
======= ====== ===== =======
</TABLE>
F-84
<PAGE> 251
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE THREE MONTHS ENDED MARCH 31,
1999 2000
------------------------------------- -------------------------------------
LATIN AMERICA LATIN AMERICA
BLS GROUP GROUP BELLSOUTH BLS GROUP GROUP BELLSOUTH
--------- ------------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income...................................... $ 929 $(314) $ 615 $ 1,021 $ (20) $ 1,001
Adjustments to reconcile net income to net cash
provided by operating activities.............. 616 411 1,027 1,273 76 1,349
------- ----- ------- ------- ----- -------
Net cash provided by operating
activities............................ 1,545 97 1,642 2,294 56 2,350
------- ----- ------- ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (1,225) (162) (1,387) (1,333) (230) (1,563)
Investments in subsidiaries..................... (66) (27) (93) (24) (71) (95)
Other investing activities, net................. 25 (3) 22 37 65 102
------- ----- ------- ------- ----- -------
Net cash used for investing
activities............................ (1,266) (192) (1,458) (1,320) (236) (1,556)
------- ----- ------- ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of short-term
borrowings.................................... 950 32 982 (2,273) 72 (2,201)
Net proceeds (repayments) of long-term debt..... (188) 13 (175) 1,690 62 1,752
Dividends paid.................................. (371) -- (371) (358) -- (358)
Purchase of treasury shares..................... (1,841) -- (1,841) (140) -- (140)
Funds allocated to/from the Latin America
group......................................... (85) 85 -- (68) 68 --
Other financing activities, net................. 17 -- 17 20 -- 20
------- ----- ------- ------- ----- -------
Net cash provided (used) for financing
activities............................ (1,518) 130 (1,388) (1,129) 202 (927)
------- ----- ------- ------- ----- -------
Net Increase (Decrease) in Cash and Cash
Equivalents................................... (1,239) 35 (1,204) (155) 22 (133)
Cash and Cash Equivalents at Beginning of
Period........................................ 2,972 171 3,143 1,000 287 1,287
------- ----- ------- ------- ----- -------
Cash and Cash Equivalents at End of Period...... $ 1,733 $ 206 $ 1,939 $ 845 $ 309 $ 1,154
======= ===== ======= ======= ===== =======
</TABLE>
F-85
<PAGE> 252
BELLSOUTH LOGO
<PAGE> 253
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee........................................ $264,000
NASD filing fee............................................. 30,500
New York Stock Exchange listing fee......................... *
Blue sky fees and expenses.................................. *
Printing expenses........................................... *
Accountants' fees and expenses.............................. *
Legal fees and expenses..................................... *
Fees and expenses of Transfer Agent and Registrar........... *
Miscellaneous expenses...................................... *
--------
Total............................................. $ *
========
</TABLE>
---------------
* To be completed by amendment.
Each amount set forth above, except the SEC registration fee, the NASD
filing fee and the New York Stock Exchange listing fee, is estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by the Georgia Business Corporation Code (the "GBCC"),
BellSouth's Articles of Incorporation limit the monetary liability of its
directors to BellSouth or its shareholders for any breach of their duty of care
or any other duty as a director except (1) for misappropriation of any business
opportunity of BellSouth, (2) for acts or omissions not in good faith or which
constitute intentional misconduct or a knowing violation of law, (3) for
liability for certain unlawful distributions, or (4) for any transaction from
which the director derived an improper personal benefit.
As authorized by the GBCC, the shareholders of BellSouth have adopted an
amendment to the By-laws expanding directors' and officers' indemnification
rights and have approved a form of Indemnity Agreement which BellSouth may enter
with its directors or officers. A person with whom BellSouth has entered into
such an Indemnity Agreement (an "Indemnitee") shall be indemnified against
liabilities and expenses related to such person's capacity as an officer or
director or to capacities served with other entities at the request of
BellSouth, except for claims excepted from the limited liability provisions
described above. An Indemnitee is also entitled to the benefits of any
directors' and officers' liability insurance policy maintained by BellSouth, and
in the event of a "change in control" (as defined in the Indemnity Agreement),
obligations under the Indemnity Agreement will be secured with a letter of
credit in favor of the Indemnitee in an amount of not less than $1,000,000.
BellSouth has entered into Indemnity Agreements with each of its directors.
The GBCC generally empowers a corporation, without shareholder approval, to
indemnify directors against liabilities in proceedings to which they are named
by reason of serving as a director of the corporation, if such person acted in a
manner believed in good faith to be in or not opposed to the best interests of
the corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. Without shareholder approval,
indemnification is not permitted of a director adjudged liable to the
corporation in a proceeding by or in the right of the corporation or a
proceeding in which the director is adjudged liable based on a personal benefit
improperly received, absent judicial determination that, in view of the
circumstances, such person is fairly and reasonably entitled to indemnification
of reasonable expenses incurred.
The GBCC permits indemnification and advancement of expenses to officers
who are not directors, to the extent consistent with public policy. The GBCC
provides for mandatory indemnification of directors and
II-1
<PAGE> 254
officers who are successful in defending against any proceeding to which they
are named because of their serving in such capacity.
BellSouth's By-laws also provide that BellSouth shall indemnify any person
made or threatened to be made a party to any action (including any action by or
in the right of BellSouth) by reason of service as a director or officer of
BellSouth (or of another entity at BellSouth's request), against liabilities and
expenses to the maximum extent permitted by the GBCC.
The general limitations in the GBCC as to indemnification may be superseded
to the extent of the limited liability provision (with respect to directors) in
BellSouth's Articles of Incorporation and the Indemnity Agreements, as
authorized by the shareholders and as described above.
The directors and officers of BellSouth are covered by liability insurance
policies pursuant to which (a) they are insured against loss arising from
certain claims made against them, jointly or severally, during the policy period
for any actual or alleged breach of duty, neglect, error, misstatement,
misleading statements, omission or other wrongful act and (b) BellSouth is
entitled to have paid by the insurers, or to have the insurers reimburse
BellSouth for amounts paid by it, in respect of such claims if BellSouth is
required to indemnify officers and directors for such claims.
Any agents, dealers or underwriters, who execute any of the Underwriting
Agreement filed as Exhibit 1 to this registration statement, will agree to
indemnify BellSouth's directors and their officers who signed the registration
statement against certain liabilities which might arise under the Securities Act
from information furnished to BellSouth by or on behalf of any such indemnifying
party.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION
---- -----------
<S> <C>
1* Form of Underwriting Agreement.
3-a Amended and Restated Articles of Incorporation of BellSouth
Corporation effective as of December 11, 1999 (Exhibit 3a to
Form 10-K for the year ended December 31, 1999, File No. 1-
8607 incorporated herein by reference).
3-b* Form of Articles of Amendment permitting BellSouth to issue
common stock in series, increasing the authorized number of
shares of common stock and reclassifying each share of
BellSouth's existing common stock into one share of
BellSouth Corporation -- BLS Group Common Stock effective
upon the creation of BellSouth Corporation -- BLS Group
Common Stock to be filed with the Georgia Secretary of State
prior to the completion of this offering (filed as Annex I
to the Proxy Statement on Schedule 14A dated March 29, 2000
and incorporated herein by reference).
3-c* Form of Articles of Amendment creating BellSouth
Corporation -- Latin America Group Common Stock and
BellSouth Corporation -- BLS Group Common Stock to be filed
with the Georgia Secretary of State prior to the completion
of this offering.
3-d* Form of Articles of Amendment creating Series C First
Preferred Stock.
3-e* Form of Articles of Amendment creating Series D First
Preferred Stock.
3-f* By-laws of BellSouth Corporation to be effective upon
completion of this offering.
3-g* Form of the Policy Statement Regarding BLS Group and Latin
America Group Matters (filed as Annex II to the Proxy
Statement on Schedule 14A dated June 2, 2000 and
incorporated herein by reference).
4-a* Form of BellSouth Corporation -- BLS Group Common Stock
share certificate.
4-b* Form of BellSouth Corporation -- Latin America Group Common
Stock share certificate.
</TABLE>
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<PAGE> 255
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION
---- -----------
<S> <C>
4-c* Form of Amended and Restated Rights Agreement, dated as of
2000, between BellSouth Corporation and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
with Form of BellSouth Corporation -- BLS Group Rights
Certificate attached as Exhibit A, Form of BellSouth
Corporation -- Latin America Group Rights Certificate
attached as Exhibit B and Form of Series C First Preferred
Stock and Series D First Preferred Stock Designations
attached as Exhibit C.
5* Opinion of Kilpatrick Stockton LLP, as to the legality of
the securities to be issued.
8* Tax opinion of Simpson Thacher & Bartlett.
23-a Consent of PricewaterhouseCoopers LLP, independent
accountants.
23-b* Consent of Kilpatrick Stockton LLP is contained in Exhibit
5.
23-c* Consent of Simpson Thacher & Bartlett is contained in
Exhibit 8.
24 Powers of Attorney.
</TABLE>
---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 256
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions referred to in Item 15 or otherwise
(other than the insurance policies referred to therein), the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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<PAGE> 257
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on the 8th day of June,
2000.
BELLSOUTH CORPORATION
By: /s/ Ronald M. Dykes
------------------------------------
Ronald M. Dykes
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
<TABLE>
<C> <S>
/s/ F. Duane Ackerman* Chairman of the Board,
----------------------------------------------------- President and Chief Executive
F. Duane Ackerman* Officer
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ Ronald M. Dykes Chief Financial Officer
-----------------------------------------------------
Ronald M. Dykes
</TABLE>
DIRECTORS:
F. Duane Ackerman*
Reuben V. Anderson*
James H. Blanchard*
J. Hyatt Brown*
Armando M. Codina*
Kathleen F. Feldstein*
James P. Kelly*
Joseph M. Magliochetti*
John G. Medlin, Jr.*
Leo F. Mullin*
Eugene F. Murphy*
Robin B. Smith*
William S. Stavropoulos*
---------------
* by power of attorney
*By: /s/ Ronald M. Dykes
-----------------------------------
Ronald M. Dykes
as attorney-in-fact and on
his own behalf as Principal
Financial and
Accounting Officer
June 8, 2000
II-5
<PAGE> 258
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION
---- -----------
<S> <C>
1* Forms of Underwriting Agreement
3-a Amended and Restated Articles of Incorporation of BellSouth
Corporation effective as of December 11, 1999 (Exhibit 3a to
Form 10-K for the year ended December 31, 1999 (File No.
1-8607 incorporated herein by reference)
3-b* Form of Articles of Amendment permitting BellSouth to issue
common stock in series, increasing the authorized number of
shares of common stock and reclassifying each share of
BellSouth's existing common stock into one share of
BellSouth Corporation -- BLS Group Common Stock effective
upon the creation of BellSouth Corporation -- BLS Group
Common Stock to be filed with the Georgia Secretary of State
prior to the completion of this offering (filed as Annex I
to the proxy statement on Schedule 14A dated March 29, 2000
and incorporated herein by reference)
3-c* Form of Articles of Amendment creating BellSouth
Corporation -- Latin America Group Common Stock and
BellSouth Corporation -- BLS Group Common Stock to be filed
with the Georgia Secretary of State prior to the completion
of this offering
3-d* Form of Articles of Amendment creating Series C First
Preferred Stock
3-e* Form of Articles of Amendment creating Series D First
Preferred Stock
3-f* By-laws of BellSouth Corporation to be effective upon
completion of this offering
3-g* Form of the Policy Statement Regarding BLS Group and Latin
America Group Matters (filed as Annex II to the Proxy
Statement on Schedule 14A dated June 2, 2000 and
incorporated herein by reference).
4-a* Form of BellSouth Corporation -- BLS Group Common Stock
share certificate
4-b* Form of BellSouth Corporation -- Latin America Group Common
Stock share certificate
4-c* Form of Amended and Restated Rights Agreement, dated as of
, 2000, between BellSouth Corporation and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
with Form of BellSouth Corporation -- BLS Group Rights
Certificate attached as Exhibit A, Form of BellSouth
Corporation -- Latin America Group Rights Certificate
attached as Exhibit B and Form of Series C First Preferred
Stock and Series D First Preferred Stock Designations
attached as Exhibit C
5* Opinion of Kilpatrick Stockton LLP, as to the legality of
the Securities to be issued
8* Tax opinion of Simpson Thacher & Bartlett
23-a Consent of PricewaterhouseCoopers LLP, independent
accountants
23-b* Consent of Kilpatrick Stockton LLP is contained in Exhibit 5
23-c* Consent of Simpson Thacher & Bartlett is contained in
Exhibit 8
24 Powers of Attorney
</TABLE>
---------------
* To be filed by amendment.
II-6
