<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 3 TO THE PRELIMINARY PROXY STATEMENT)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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BELLSOUTH CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
----------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
PRELIMINARY COPY
PROXY STATEMENT OF
BELLSOUTH CORPORATION
SPECIAL MEETING OF SHAREHOLDERS TO BE
HELD AT A.M., LOCAL TIME, ON , 2000
---------------------
, 2000
Dear Shareholder,
You are cordially invited to attend a special meeting of BellSouth
shareholders, to be held at in .
As part of our ongoing efforts to create additional value for our
shareholders, our board of directors requests your approval to amend our charter
so that we can create a new series of BellSouth common stock that is intended to
reflect, or track, the performance of our Latin American businesses. In the same
process, the BellSouth common stock you currently own will become a separate
series of BellSouth common stock, BLS group tracking stock, that is intended to
track the performance of all of our other businesses. We believe that this new
capital structure will further our efforts to continue to grow our businesses
and achieve our strategic objectives.
Following approval of the tracking stock proposal, our board of directors
intends to designate two series of common stock, BLS group stock and Latin
America group stock. Our board plans to authorize the sale of shares of Latin
America group stock in a public offering to raise cash for our expansion in
Latin America. At the time of the public offering, our board will reserve for
the BLS group or for issuance to the holders of BLS group stock (our current
shareholders) shares of Latin America group stock.
We expect to distribute as a dividend to the holders of BLS group stock
those reserved shares of Latin America group stock. We expect to make this
distribution within six to twelve months following the public offering. The
decision to make a public offering of Latin America group stock and a
distribution of shares of Latin America group stock to the holders of BLS group
stock and the precise timing of those events will depend on market conditions
and other factors. If Latin America group stock is distributed as we now plan,
your ownership in BellSouth will then be represented by two stocks: Latin
America group stock and BLS group stock.
We intend to pay a quarterly dividend of $.19 per share on the BLS group
stock, which is the current dividend amount on our existing common stock. We do
not intend to pay dividends on the Latin America group stock in the foreseeable
future.
At the special meeting, we will be asking you to vote in favor of a
proposed amendment to our charter to permit the creation of the tracking stock
capital structure. Approval of the amendment will permit us to issue common
stock in series, including the BLS group stock and Latin America group stock.
The terms of the BLS group stock and the Latin America group stock, along with
other important information, are included in this proxy statement.
FOR A DISCUSSION OF THE MATERIAL RISKS INVOLVED IN CONNECTION WITH THE
TRACKING STOCK PROPOSAL, SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROXY
STATEMENT.
At the special meeting, you also will be asked to consider and approve a
companion proposal to adopt our amended and restated stock plan, which will
reflect the tracking stock capital structure. In addition, you will be asked to
consider and approve a proposal to amend our by-laws to change the quorum and
reduce the voting requirements for approval of proposals at shareholders'
meetings.
Our board of directors unanimously recommends that you vote "FOR" the
tracking stock proposal, the proposal to adopt our amended and restated stock
plan and the proposal to amend our by-laws.
This proxy statement provides you with detailed information about the three
proposals. We encourage you to read this entire document.
I look forward to seeing you at the special meeting.
Sincerely,
F. Duane Ackerman
Chairman of the Board, President
and Chief Executive Officer
This proxy statement is first being mailed to BellSouth shareholders on or
about , 2000.
<PAGE> 3
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
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TIME: a.m., local time, , , 2000
PLACE:
PURPOSES OF MEETING: 1) Consider and approve a proposal to amend our articles of
incorporation, which would:
- permit us to issue a total of 8.65 billion shares of
BellSouth common stock in series, of which our board of
directors intends initially to designate 6.4 billion
shares as "BellSouth Corporation -- BLS Group Common
Stock" and 2.25 billion shares as "BellSouth
Corporation -- Latin America Group Common Stock;" and
- provide for each outstanding share of our existing
common stock to be changed into one share of BLS group
stock.
Approval of Proposal 1 will also constitute approval of the
terms of these two series of tracking stock as described in
the accompanying proxy statement. Proposed articles of
amendment to our charter to be voted on at the special
meeting are included in Annex I to the accompanying proxy
statement.
2) Consider and approve a proposal to adopt our amended and
restated stock plan to reflect the tracking stock capital
structure.
3) Consider and approve a proposal to amend our by-laws to
change the quorum and reduce the votes required to approve
proposals at shareholders' meetings.
WHO CAN VOTE: You can vote if you were a shareholder of record on ,
2000.
PROXY VOTING: YOUR VOTE IS IMPORTANT. Please vote in one of these ways:
1) use the toll-free telephone number shown on your proxy card;
2) visit and cast your vote at the web site listed on your proxy
card; or
3) mark, sign, date and promptly return your proxy card in the
enclosed postage-paid envelope.
</TABLE>
This notice is issued by order of our board of directors.
BELLSOUTH LOGO
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS................... 1
PROXY STATEMENT SUMMARY..................................... 2
Tracking Stock............................................ 2
BellSouth Corporation..................................... 3
The Special Meeting....................................... 5
Proposal 1 -- The Tracking Stock Proposal................. 5
Proposal 2 -- The Adoption of the Amended and Restated
BellSouth Corporation
Stock Plan............................................. 9
Proposal 3 -- Amendments to the By-laws................... 9
Recommendation of Our Board of Directors.................. 9
Selected Historical Consolidated Financial Data of
BellSouth Corporation.................................. 10
Selected Historical Combined Financial and Operating Data
of the Latin America Group............................. 12
Selected Pro Forma Condensed Combined Financial Data of
the BLS Group (Unaudited).............................. 14
RISK FACTORS................................................ 15
Risk Factors Relating to Our New Tracking Stock Capital
Structure.............................................. 15
Risk Factors Relating to Our Latin American Operations.... 23
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS... 34
INFORMATION ABOUT THE SPECIAL MEETING AND VOTING............ 35
Date, Time and Place of the Special Meeting............... 35
Proposals to be Considered at the Special Meeting......... 35
Who Can Vote.............................................. 35
Shares Outstanding........................................ 35
Proxy..................................................... 35
Voting of Shares.......................................... 35
Votes Required to Approve the Proposals................... 36
How You Can Vote.......................................... 36
Revocation of Proxy....................................... 37
Quorum.................................................... 37
Attendance at the Special Meeting......................... 37
Solicitation of Proxies................................... 37
PROPOSAL 1 -- THE TRACKING STOCK PROPOSAL................... 38
Description of the Tracking Stock Proposal................ 38
Background of and Reasons for the Tracking Stock
Proposal............................................... 40
Recommendation of Our Board of Directors.................. 42
Dividend Policy........................................... 42
Our BLS Group and Our Latin America Group................. 43
Description of BLS Group Stock and Latin America Group
Stock.................................................. 43
Actions by Our Board of Directors Without Shareholder
Approval; No Separate Boards of Directors for the
Groups............................................... 43
Authorized and Outstanding Shares...................... 44
Dividends.............................................. 47
Voting Rights.......................................... 48
Conversion and Redemption.............................. 52
Liquidation Rights..................................... 62
Shares Reserved for Another Group or for Issuance to
the Holders of the Series of Stock Related to that
Group............................................... 62
</TABLE>
i
<PAGE> 5
<TABLE>
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PAGE
----
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Determinations by Our Board of Directors............... 64
Preemptive Rights...................................... 64
Additional Series of Common Stock...................... 64
Restated Rights Agreement.............................. 65
Anti-Takeover Provisions of Georgia Law, Our Charter
and By-laws and Our Restated Rights Agreement......... 67
U.S. Federal Income Tax Considerations.................... 71
Stock Exchange Listings................................... 73
Stock Transfer Agent and Registrar........................ 73
Financial Advisor......................................... 73
Effect on Existing Stock Based Awards..................... 74
No Dissenters' Rights..................................... 74
BUSINESS OF THE BLS GROUP................................... 75
BUSINESS OF THE LATIN AMERICA GROUP......................... 89
EMPLOYEES OF OUR LATIN AMERICAN OPERATIONS.................. 119
LEGAL PROCEEDINGS........................................... 120
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF BELLSOUTH CORPORATION........ 121
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE LATIN AMERICA GROUP OF
BELLSOUTH CORPORATION..................................... 147
RELATIONSHIP BETWEEN THE BLS GROUP AND THE LATIN AMERICA
GROUP..................................................... 173
General Policy............................................ 173
Amendment and Modification of the Policy Statement........ 173
The Finance/Strategic Planning Committee.................. 173
Scope of the Business of the Groups; Competition.......... 173
Corporate Opportunities................................... 174
Relationship Between the BLS Group and the Latin America
Group.................................................. 174
Commercial Inter-Group Transactions.................... 175
Transfers of Other Assets and Liabilities.............. 175
Cash Management........................................ 175
Financing Arrangements................................. 175
Intellectual Property.................................. 175
Dividend Policy........................................... 176
Financial Reporting; Allocation Matters................... 176
Shared Corporate Services.............................. 177
Taxes.................................................. 177
PROPOSAL 2 -- THE ADOPTION OF THE AMENDED AND RESTATED
BELLSOUTH CORPORATION STOCK PLAN.......................... 178
PROPOSAL 3 -- AMENDMENTS TO THE BY-LAWS..................... 187
STOCK OWNERSHIP OF MANAGEMENT AND DIRECTORS................. 188
DIRECTOR COMPENSATION....................................... 189
EXECUTIVE NOMINATING, COMPENSATION AND HUMAN RESOURCES
COMMITTEE REPORT ON EXECUTIVE COMPENSATION................ 190
EXECUTIVE COMPENSATION...................................... 194
FIVE-YEAR PERFORMANCE COMPARISON............................ 199
INFORMATION ABOUT SHAREHOLDER PROPOSALS..................... 200
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
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VIEW PROXY STATEMENTS AND ANNUAL REPORTS ON THE INTERNET.... 200
INDEPENDENT ACCOUNTANTS..................................... 200
WHERE YOU CAN FIND MORE INFORMATION......................... 201
INDEX TO FINANCIAL STATEMENTS............................... F-1
BellSouth Corporation -- Report of Independent Accountants
and Consolidated Financial Statements.................. F-3
The Latin America Group of BellSouth Corporation -- Report
of Independent Accountants and Combined Financial
Statements............................................. F-55
ANNEX I --
Proposed Articles of Amendment to the Amended and Restated
Articles of Incorporation of BellSouth Corporation..... Annex I-1
ANNEX II --
Policy Statement Regarding BLS Group and Latin America
Group Matters.......................................... Annex II-1
ANNEX III --
The Amended and Restated BellSouth Corporation Stock
Plan................................................... Annex III-1
</TABLE>
iii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q-1: WHAT AM I BEING ASKED TO VOTE ON?
A-1: We are asking you to approve articles of
amendment to our charter to permit us to issue a total of 8.65 billion
shares of common stock in series, of which our board of directors will
initially designate 6.4 billion shares as BLS group stock and 2.25
billion shares as Latin America group stock.
We are also asking you to approve an amended and restated stock plan to
reflect our tracking stock capital structure.
Finally, we are asking you to approve amendments to our by-laws to
change the quorum and reduce the votes required to approve proposals at
shareholders' meetings.
Q-2: SHOULD I VOTE "FOR" ALL THREE PROPOSALS?
A-2: Yes. Our directors unanimously
recommend that you vote "FOR" all three proposals. We are soliciting
your vote "FOR" all three proposals with this proxy statement.
Q-3: WHAT WILL HAPPEN TO MY SHARES OF BELLSOUTH COMMON STOCK?
A-3: At the time Latin America group stock is
first issued, each of your existing shares will be changed into one
share of BLS group stock.
Q-4: SHOULD I SEND IN MY STOCK CERTIFICATES?
A-4: No. The stock certificates representing
shares of existing common stock will represent shares of BLS group
stock.
Q-5: HOW DO I VOTE ON THE PROPOSALS?
A-5: You may vote by telephone or via the
Internet. You may also mail your signed proxy card in the enclosed
return envelope, but please do so as soon as possible so that your
shares may be represented at the special meeting. Or, you may attend
the special meeting, as we describe in this proxy statement on page 35.
The special meeting will take place on , 2000.
Q-6: IF I HOLD MY SHARES THROUGH A BROKER, HOW DO I VOTE ON THE TRACKING
STOCK PROPOSAL?
A-6: You should have received with this proxy
statement a voting instruction card. If you have further questions on
voting, please contact your broker.
Q-7: CAN I CHANGE MY VOTE?
A-7: Yes. If you vote by proxy, you may revoke
that proxy at any time before it is voted at the special meeting. You
may do this by (1) voting again by telephone or on the Internet prior
to the special meeting; (2) signing another proxy card with a later
date and returning it to us prior to the special meeting; or (3)
attending the special meeting in person and casting a ballot.
If you own your shares through a broker, your broker can tell you how
to change your vote.
Q-8: WHAT HAPPENS IF I DO NOT VOTE ON THE TRACKING STOCK PROPOSAL?
A-8: If you do not return a proxy card or
otherwise vote on the tracking stock proposal, the effect will be the
same as if you have voted "AGAINST" the proposal. We urge you to vote
"FOR" the proposal.
Q-9: WHOM CAN I CALL WITH QUESTIONS?
A-9: If you have any questions about the
tracking stock proposal, please call us at (800) 969-2372.
1
<PAGE> 8
PROXY STATEMENT SUMMARY
This summary, together with the "Questions and Answers About the Proposals"
on the preceding page, highlights important information from this proxy
statement. To understand the tracking stock proposal fully and for a more
complete description of the legal terms of the tracking stock proposal, you
should read carefully this entire document. We have included page references
parenthetically to direct you to a more complete description of the topics
presented in this summary.
In this proxy statement, "we," "us," "our," "ours" and "BellSouth" refer to
BellSouth Corporation and its subsidiaries.
TRACKING STOCK
We are asking you to permit us to create two new series of BellSouth common
stock. One, Latin America group stock, is intended to reflect or "track" the
separate performance of our Latin American businesses, which we call our "Latin
America group;" the other, BLS group stock, is intended to reflect or "track"
the separate performance of all of our other businesses, which we call our "BLS
group." These groups are collections of businesses that we have grouped together
in order for us to issue BLS group stock and Latin America group stock. The
groups are not separate legal entities and cannot issue any securities. Holders
of BLS group stock and holders of Latin America group stock will be shareholders
of BellSouth only and will not have an ownership interest in our BLS group or
our Latin America group or any company in these groups. As a result, holders of
BLS group stock and 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.
We cannot assure you that either BLS group stock or Latin America group
stock will reflect the separate performance of our BLS group or our Latin
America group as we intend. In particular, we cannot assure you that the terms
of BLS group stock and Latin America group stock will guarantee a linkage
between their market prices and group performance. In addition, the market
prices of BLS group stock and Latin America group stock could be affected by
factors that do not affect the market price of the BellSouth stock you now own.
We discuss these risks more fully beginning on page 15.
If shareholders approve the tracking stock proposal, we will be able to:
- issue Latin America group stock in a public offering or some other
manner;
- change your existing BellSouth common stock into BLS group stock; and
- distribute Latin America group stock to you, as holders of BLS group
stock.
If the distribution of Latin America group stock occurs as expected, your
ownership in BellSouth will be represented by two separate securities, BLS group
stock and Latin America group stock. From that point forward, you will be able
to decide whether to retain or sell either or both series of common stock,
depending on your investment objectives.
2
<PAGE> 9
The following chart contrasts our current capital structure and our capital
structure following the completion of the expected distribution:
(Capital Structure Chart)
BELLSOUTH CORPORATION
We are a communications company serving more than 40 million customers in
17 countries. We provide local and long distance wireline and wireless
telecommunications, advertising and directory publishing services and products
and video entertainment services. Our services include digital and data
services, web design and hosting, Internet access, e-commerce and other services
to residences and businesses and institutions of all sizes. We have assets of
more than $43 billion and employ more than 99,000 individuals.
Our principal executive offices are located at 1155 Peachtree Street, N.E.,
Atlanta, Georgia 30309 and our telephone number is (404) 249-2000. We are
incorporated under the laws of the State of Georgia.
OUR OPERATIONS TRACKED BY BLS GROUP STOCK (PAGE 75)
The BLS group includes all of our businesses outside Latin America. These
businesses provide communications services in the U.S. and internationally
outside of Latin America to 34 million customers in six countries.
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.
3
<PAGE> 10
OUR OPERATIONS TRACKED BY LATIN AMERICA GROUP STOCK (PAGE 89)
BellSouth is the leading 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 and extending our geographic coverage. We currently have
operations in Venezuela, Brazil, Argentina, Colombia, Peru, Chile, Panama,
Ecuador, Uruguay and Nicaragua and plan to launch service in Guatemala in third
quarter 2000. As of July 2000, our Latin American companies held licenses for
territories with a total population of approximately 246 million and provided
wireless services to approximately 10 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
157 million and provided wireless services to approximately 6.2 million
customers, each as of July 2000.
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 and set forth in Annex II to this proxy statement. This
initial attribution is reflected in the November 30, 1999 combined balance
sheets of our Latin America group included in this proxy statement.
Under our tracking stock policy statement, the companies in our Latin
America group may generally engage in any business activity only 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 companies in our BLS group
generally may not provide telecommunications and related services and products
in Latin America.
The major assets attributed to the Latin America group consist of:
- our interests in communications companies in 11 Latin American countries;
- our interests in advertising and directory 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 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.
4
<PAGE> 11
THE SPECIAL MEETING
PROPOSALS TO BE CONSIDERED AT THE MEETING
We are asking you to consider and vote upon the following proposals at the
special meeting:
- Proposal 1: The adoption of the articles of amendment to our charter set
forth in Annex I. These articles of amendment authorize our board of
directors to issue 8.65 billion shares of our common stock in series.
Pursuant to these articles of amendment, our board of directors intends
to create BellSouth's BLS group stock and Latin America group stock with
the terms described under "Proposal 1 -- The Tracking Stock
Proposal -- Description of BLS Group Stock and Latin America Group
Stock." Your vote for Proposal 1 also will constitute approval of the
change of your existing common stock into BLS group stock and the terms
of BLS group stock and Latin America group stock. (page 38)
- Proposal 2: The adoption of the Amended and Restated BellSouth
Corporation Stock Plan set forth in Annex III. (page 178)
- Proposal 3: The adoption of amendments to our by-laws to change the
quorum and reduce the votes required to approve proposals at
shareholders' meetings. (page 187)
VOTE REQUIRED TO APPROVE THE PROPOSALS (PAGE 36)
The following shareholder votes are required for approval of the proposals:
- Proposal 1: The favorable vote of a majority of the outstanding shares
of our existing common stock.
- Proposal 2: The favorable vote of a majority of the shares of our
existing common stock represented at the special meeting and entitled to
vote.
- Proposal 3: The favorable vote of a majority of the outstanding shares
of our existing common stock.
Our directors and executive officers beneficially owned less than 1% of the
outstanding shares of our existing common stock on July 31, 2000.
PROPOSAL 1
THE TRACKING STOCK PROPOSAL (PAGE 38)
THE ARTICLES OF AMENDMENT
The adoption of our articles of amendment to our charter will:
- permit us to issue a total of 8.65 billion shares of BellSouth common
stock in series, of which our board of directors will initially designate
6.4 billion shares as BLS group stock and 2.25 billion shares as Latin
America group stock; and
- 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.
Approval of this proposal will also constitute approval of the terms of these
two series of tracking stock as described in "Proposal 1 -- The Tracking Stock
Proposal -- Description of BLS Group Stock and Latin America Group Stock."
THE PUBLIC OFFERING
If our shareholders approve the tracking stock proposal, we plan a public
offering of shares of Latin America group stock. We plan to offer to the public
shares of Latin America group stock that are intended
5
<PAGE> 12
to represent 10%-20% of the estimated value of our businesses attributed to the
Latin America group. We will determine when to proceed with the public offering
and the amount to be issued based on capital requirements of the Latin America
group, market conditions and other factors. We intend to use the proceeds from
the public offering to continue our expansion in Latin America.
We expect to complete the public offering following shareholder approval of
the tracking stock proposal. However, if subsequent considerations arise, our
board of directors can decide not to create BLS group stock and Latin America
group stock even if our shareholders have approved the articles of amendment,
delay the public offering or cancel the public offering and initially issue
Latin America group stock in some other manner.
If we do complete the public offering:
- your percentage interest in BellSouth and your voting power will be
reduced because we will have more shares with voting rights issued and
outstanding;
- however, you will own the same economic interest in BellSouth as before
the planned offering, assuming the increase in value resulting from
receipt of the cash proceeds offsets the decrease in your percentage
interest in BellSouth.
EXPECTED DISTRIBUTION OF SHARES OF LATIN AMERICA GROUP STOCK TO HOLDERS OF BLS
GROUP STOCK
At the time of the public offering, we will determine the number of shares
to offer for sale to the public and the number of shares to be reserved for the
expected distribution to the holders of BLS group stock six to 12 months
thereafter. The decision to make such a distribution and the precise timing will
depend on market conditions and other factors that our board of directors
considers relevant. Even if we complete the public offering, we cannot assure
you that the expected distribution will occur.
If we do complete the expected distribution, you will own the same economic
interest in BellSouth as you will immediately before the distribution. The only
difference will be that your interest will now be represented by two
stocks -- BLS group stock and Latin America group stock. You will then be able
to decide whether to retain or sell either or both series of common stock,
depending on your investment objectives.
REASONS FOR THE TRACKING STOCK PROPOSAL (PAGE 40)
We expect the tracking stock proposal to:
- permit greater market recognition of our businesses;
- enhance our strategic flexibility;
- increase our financial flexibility; and
- increase the effectiveness of management incentives.
For additional reasons for the tracking stock proposal, see "Proposal 1 -- The
Tracking Stock Proposal -- Background of and Reasons for the Tracking Stock
Proposal."
6
<PAGE> 13
COMPARISON OF EXISTING COMMON STOCK WITH BLS GROUP STOCK AND LATIN AMERICA GROUP
STOCK (PAGE 43)
The following table compares the terms of our existing common stock to the
terms of BLS group stock and Latin America group stock. This comparison should
be read together with the more detailed information set forth under "Proposal
1 -- The Tracking Stock Proposal -- Description of BLS Group Stock and Latin
America Group Stock."
<TABLE>
<CAPTION>
EXISTING LATIN AMERICA
COMMON STOCK BLS GROUP STOCK GROUP STOCK
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
DIVIDENDS Current quarterly Expected quarterly None for the
(SEE PAGE 47): dividend of $.19 per dividend of $.19 per foreseeable future
share paid at the share paid at the
discretion of our discretion of our
board of directors board of directors
VOTING RIGHTS One vote per share One vote per share Variable, based on
(SEE PAGE 48): relative average
market values of the
two series of common
stock; voting power of
series limited to 35%
of total voting power
CONVERSION AT OPTION OF Not convertible Convertible into Latin Convertible into BLS
BOARD OF DIRECTORS America group stock group stock
(SEE PAGE 52):
REDEMPTION IN EXCHANGE Not redeemable Redeemable for common Redeemable for common
FOR THE STOCK OF A stock of BellSouth stock of BellSouth
SUBSIDIARY AT OPTION subsidiary in the BLS subsidiary in the
OF BOARD OF DIRECTORS group Latin America group
(SEE PAGE 55):
RIGHTS ON SALE OF AT LEAST None Holders will receive a Holders will receive a
80% OF ASSETS dividend or their dividend or their
ATTRIBUTED TO A GROUP shares will be shares will be
(SEE PAGE 56): redeemed or converted redeemed or converted
into Latin America into BLS group stock
group stock at the at the option of our
option of our board of board of directors
directors
DISSOLUTION Receives remaining Receives remaining Receives remaining
(SEE PAGE 62): BellSouth assets in BellSouth assets on a BellSouth assets on a
equal amounts per per share basis in per share basis in
share of existing proportion to proportion to
common stock. liquidation units per liquidation units per
share. Each share has share. Each share has
one liquidation unit. .25 of one liquidation
unit.
</TABLE>
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TRACKING STOCK POLICY STATEMENT (PAGE 173)
Our board of directors has adopted the tracking stock policy statement set
forth in Annex II to govern the ongoing relationship between the BLS group and
the Latin America group where the holders of BLS group stock and Latin America
group stock may have potentially divergent interests. Our board of directors may
change our tracking stock policy statement at any time without shareholder
approval.
Our tracking stock policy statement provides that we will resolve all
material matters as to which the holders of BLS group stock and the holders of
Latin America 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 one series of stock. The tracking stock policy statement provides that due
consideration will be given to the potentially divergent interests and all other
interests of the separate series of common stock of BellSouth that our board of
directors or the finance/strategic planning committee, as the case may be, deems
relevant.
Our tracking stock policy statement also requires that:
- commercial transactions between the businesses attributed to one group
and the businesses attributed to the other group in the ordinary course
of their businesses be on arm's-length terms;
- the transfer of assets and liabilities between the businesses attributed
to one group and the businesses attributed to the other group not in the
ordinary course of their businesses be at fair value;
- the businesses attributed to a group generally provide telecommunications
and related services and products only in the geographic regions of the
businesses attributed to that group;
- corporate opportunities be allocated in the overall best interests of
BellSouth; and
- the businesses attributed to both groups be given access to BellSouth's
names and marks and other intellectual property.
RISK FACTORS (PAGE 15)
When evaluating the tracking stock proposal, you should be aware of the
risk factors we describe under "Risk Factors," starting on page 15.
U.S. FEDERAL INCOME TAX CONSIDERATIONS (PAGE 71)
In the opinion of Simpson Thacher & Bartlett, our counsel, BLS group stock
will be considered our common stock for U.S. federal income tax purposes. This
means that changing our existing common stock into BLS group stock under the
tracking stock proposal will not be taxable to you. We also anticipate that the
expected distribution of shares of Latin America group stock to the holders of
BLS group stock will not be taxable to you. However, the Internal Revenue
Service could disagree. There are no court decisions or other authorities
bearing directly on the terms of stock similar to those of BLS group stock and
Latin America group stock. The Internal Revenue Service has also announced that
it will not issue rulings on the characterization of stock with characteristics
similar to BLS group stock and Latin America group stock. Therefore, the tax
treatment of the tracking stock proposal is subject to some uncertainty.
STOCK EXCHANGE LISTINGS (PAGE 73)
Our existing common stock is listed on the New York, Boston, Chicago,
Pacific, Philadelphia, London, Frankfurt, Amsterdam and Swiss Stock Exchanges.
We expect to list BLS group stock on these exchanges under the trading symbol
"BLS." We expect to list Latin America group stock on the New York Stock
Exchange under the trading symbol "LA."
8
<PAGE> 15
PROPOSAL 2
THE ADOPTION OF THE AMENDED AND RESTATED BELLSOUTH CORPORATION STOCK PLAN
(PAGE 178)
We are also asking you to vote on a related proposal to adopt our Amended
and Restated BellSouth Corporation Stock Plan. Our restated 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. We intend that awards to employees
will reflect the group for which they work.
PROPOSAL 3
AMENDMENTS TO THE BY-LAWS (PAGE 187)
We are also asking you to vote on a proposal to adopt amendments to our
by-laws. The amendments would:
- reflect our new voting structure under the tracking stock proposal by
providing that a quorum would exist at a shareholders' meeting if 40% of
the voting power of the outstanding shares are represented at the
meeting; and
- change the way in which we determine the shareholder votes required to
take action on certain issues. The change would, except as otherwise
required by law, allow the shareholders to approve a proposal made at a
meeting by a vote in which the number of votes cast in favor of the
proposal exceeds the number of votes cast against the proposal. For
example, if there were shares representing 2,000,000 votes at a
shareholders' meeting and 1,600,000 votes were cast on a proposal, the
proposal would be approved if 800,001 votes were cast in favor of it.
---------------------
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has carefully considered each of these proposals and
believes that the approval of these proposals by the shareholders is advisable
and in the best interests of BellSouth. Our board of directors unanimously
recommends that you vote "FOR" each of these proposals.
9
<PAGE> 16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
OF BELLSOUTH CORPORATION
We derived the selected historical 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 six months ended
June 30, 1999 (first half 1999) and 2000 (first half 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.
- Results for the six months ended June 30, 1999 include foreign currency losses
related to the devaluation of the Brazilian Real, which reduced net income by
$280 million, or $.15 per share, and an asset impairment loss which reduced
net income by $187 million, or $.10 per share.
- Results for the six months ended June 30, 2000 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)
10
<PAGE> 17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
OF BELLSOUTH CORPORATION -- (CONTINUED)
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
AT OR FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
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 $12,121 $13,239
Operating expenses.............. 14,594 14,261 15,185 17,219 18,787 9,200 9,669
Operating income................ 3,292 4,779 5,376 5,904 6,437 2,921 3,570
Net income (loss)............... (1,232) 2,863 3,261 3,527 3,448 1,401 2,065
Operating income margin......... 18.4% 25.1% 26.1% 25.5% 25.5% 24.1% 27.0%
Diluted earnings (loss) per
share of common stock:
Before extraordinary losses... $ .79 $ 1.44 $ 1.64 $ 1.78 $ 1.80 $ .73 $ 1.09
After extraordinary losses.... (.62) 1.44 1.64 1.78 1.80 .73 1.09
Diluted weighted-average shares
of common stock outstanding
(millions).................... 1,989 1,992 1,989 1,984 1,916 1,930 1,899
Dividends declared per share of
common stock.................. $ .71 $ .72 $ .72 $ .73 $ .76 $ .38 $ .38
BALANCE SHEET DATA:
Total assets.................... 31,880 32,568 36,301 39,410 43,453 41,184 46,088
Long-term debt.................. 7,924 8,116 7,348 8,715 9,113 8,391 10,869
Shareholders' equity............ 11,825 13,249 15,165 16,110 14,815 13,760 16,502
OTHER:
Operating cash flow............. 5,443 5,863 7,039 7,741 8,199 4,093 4,798
</TABLE>
11
<PAGE> 18
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 six months ended May 31, 1999
(first half 1999) and 2000 (first half 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."
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.
Results for the six months ended May 31, 1999 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 elected 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>
AT OR FOR THE AT OR FOR THE
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
-------------------------- -----------------------------
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 $1,139 $1,354
Advertising and directory publishing
revenues................................ -- -- 69 4 45
---- ------ ------ ------ ------
Total operating revenues........... 940 1,907 2,405 1,143 1,399
---- ------ ------ ------ ------
Operating expenses:
Cost of services, products and
equipment............................... 344 607 867 375 537
Selling, general and administrative....... 455 766 982 438 566
Depreciation and amortization............. 140 338 450 212 256
---- ------ ------ ------ ------
Total operating expenses........... 939 1,711 2,299 1,025 1,359
---- ------ ------ ------ ------
Operating income............................ 1 196 106 118 40
Interest expense............................ 46 53 88 49 59
Other income (expense), net................. -- (1) (5) 5 18
---- ------ ------ ------ ------
Income (loss) before income taxes........... (45) 142 13 74 (1)
Provision (benefit) for income taxes........ 1 103 (116) 47 (11)
---- ------ ------ ------ ------
Income (loss) before net earnings (losses)
of equity affiliates and minority
interests................................. (46) 39 129 27 10
Net earnings (losses) of equity
affiliates................................ 14 (57) (354) (300) (42)
Minority interests in income of
subsidiaries.............................. 4 (50) (91) (36) (22)
---- ------ ------ ------ ------
Net loss attributable to the Latin America
group..................................... $(28) $ (68) $ (316) $ (309) $ (54)
==== ====== ====== ====== ======
</TABLE>
---------------
After the public offering 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 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)
12
<PAGE> 19
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>
AT OR FOR THE AT OR FOR THE
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
------------------------------------ ------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA (dollars in millions):
Cash flows from operating activities......... $ 55 $ 476 $ 568 $ 248 $ 220
Cash used in investing activities............ (1,440) (1,387) (1,099) (392) (683)
Cash provided by financing activities........ 1,569 902 651 303 520
Capital expenditures......................... 448 697 647 310 441
Investments and advances to equity
affiliates................................. 679 248 77 29 243
BALANCE SHEET DATA (dollars in millions):
Cash and cash equivalents.................... $ 177 $ 171 $ 287 $ 328 $ 344
Investment in equity affiliates.............. 684 805 348 395 261
Licenses and other intangible assets, net.... 651 1,059 1,471 1,013 1,520
Total assets................................. 3,098 4,171 4,674 4,129 5,125
Long-term debt, including current
maturities................................. 436 678 638 716 1,050
Group net worth.............................. 1,414 2,119 2,345 1,883 2,436
OPERATING DATA (in thousands, except as
noted):
Customers.................................... 1,624 2,598 4,230 3,233 5,584
Licensed population.......................... 60,900 79,400 111,700 103,000 114,600
Billed minutes of use........................ 3,066,145 5,183,254 6,655,884 3,170,786 3,937,485
Average revenue per user (whole dollars)..... $ 84 $ 73 $ 52 $ 59 $ 37
OTHER (dollars in millions):
EBITDA....................................... 141 534 556 330 296
EBITDA margin................................ 15.0% 28.0% 23.1% 28.9% 21.2%
</TABLE>
EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, net earnings (losses) of equity affiliates and
other income, net. We present EBITDA because it is a widely accepted financial
indicator used by certain investors and analysts to analyze and compare
companies on the basis of operating performance and because we believe that
EBITDA is an additional meaningful measure of performance and liquidity. EBITDA
does not represent cash flows for the period, nor is it an alternative to
operating income (loss) as an indicator of operating performance. You should not
consider it in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles. The items excluded
from the calculation of EBITDA are significant components in understanding and
assessing our financial performance. Our computation of EBITDA may not be
comparable to the computation of similarly titled measures of other companies.
EBITDA does not represent funds available for discretionary uses.
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.
13
<PAGE> 20
SELECTED PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF THE BLS GROUP
(UNAUDITED)
The following table presents selected unaudited pro forma condensed
combined financial data of the BLS group assuming that the Latin America group
was a separate group as of January 1, 1999 for income statement purposes, and as
of December 31, 1999 and June 30, 2000 for balance sheet and other operating
data purposes.
You should not rely on the selected unaudited pro forma condensed combined
financial data as an indication of the results of operations or financial
position that would have been achieved had the Latin America group been a
separate group.
The results of operations for the year ended December 31, 1999 include an
asset impairment loss that reduced net income by $187 million and a gain on the
sale of Honolulu Cellular that increased net income by $23 million.
The results of operations for the six months ended June 30, 2000 include
expense recorded as a result of a previously announced plan to reduce the BLS
group's domestic general and administrative staff, which reduced net income by
$48 million. Results for the first six months of 2000 also include income
related to the restructuring of BellSouth's ownership interest in the German
wireless operator, E-Plus, which increased net income by $68 million.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 JUNE 30, 2000
---------------------- ----------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
INCOME STATEMENT DATA:
Operating revenues.................................... $22,895 $11,886
Operating expenses.................................... 16,564 8,356
Operating income...................................... 6,331 3,530
Net income attributable to the BLS group.............. 3,764 2,119
CASH FLOW DATA:
Operating cash flow................................... $ 7,635 $ 4,578
Cash used in investing activities..................... 8,789 3,112
Cash used in financing activities..................... 818 1,290
Capital expenditures.................................. 5,553 2,827
FINANCIAL POSITION:
Total assets.......................................... $38,956 $41,366
Long-term debt........................................ 8,638 10,421
Group net worth....................................... 12,470 14,066
OTHER:
EBITDA................................................ $10,872 $ 5,810
EBITDA margin......................................... 47.5% 48.9%
</TABLE>
14
<PAGE> 21
RISK FACTORS
You should carefully consider the following risks and other information
contained in this proxy statement before deciding to vote in favor of the
tracking stock proposal.
RISK FACTORS RELATING TO OUR NEW TRACKING STOCK CAPITAL STRUCTURE
RISKS RELATING TO BOTH SERIES OF STOCK
THE MARKET PRICES OF BLS GROUP STOCK AND LATIN AMERICA GROUP STOCK MAY NOT
REFLECT THE SEPARATE PERFORMANCE OF THE GROUPS
The market price of BLS group stock may not reflect the separate
performance of our non-Latin American businesses. Similarly, the market price of
Latin America group stock may not reflect the separate performance of our Latin
American businesses. The market price of either or both series of stock could
simply reflect the performance of BellSouth as a whole, or the market price
could move independently of the performance of the businesses of the related
group. Investors may discount the value of BLS group stock and Latin America
group stock because they are part of a common enterprise rather than stand-alone
entities.
THE MARKET PRICES OF BLS GROUP STOCK AND LATIN AMERICA GROUP STOCK COULD BE
AFFECTED BY FACTORS THAT DO NOT AFFECT TRADITIONAL COMMON STOCK
THE COMPLEX NATURE OF THE TERMS OF THE TWO SERIES OF STOCK MAY ADVERSELY
AFFECT THE MARKET PRICES OF THE TWO SERIES OF STOCK
The complex nature of the terms of BLS group stock and Latin America group
stock, such as the convertibility of Latin America group stock into BLS group
stock or vice versa, and the potential difficulties investors may have in
understanding these terms may adversely affect the market prices of BLS group
stock and Latin America group stock.
As a result, we cannot assure you that:
- the market price of BLS group stock before the expected distribution to
the holders of BLS group stock of Latin America group stock; or
- the combined market values of BLS group stock and Latin America group
stock after the expected distribution
will equal or exceed the market value of our existing common stock.
THE MARKET PRICE OF ONE SERIES OF STOCK COULD BE ADVERSELY AFFECTED BY
EVENTS INVOLVING THE OTHER GROUP OR THE PERFORMANCE OF THE OTHER SERIES OF
STOCK
Events, such as earnings announcements or announcements of new products or
services, acquisitions or dispositions that the market does not view favorably
and thus adversely affect the market price of one series of stock, may adversely
affect the market price of the other series of stock. Because both series are
common stock of BellSouth, an adverse market reaction to one series of stock
may, by association, cause an adverse reaction to the other series of stock.
This could occur even if the triggering event was not material to BellSouth as a
whole.
YOU WILL BE SUBJECT TO ALL OF THE RISKS OF AN INVESTMENT IN BELLSOUTH AS A
WHOLE, EVEN IF YOU OWN ONLY ONE SERIES OF STOCK
The holders of BLS group stock and the holders of Latin America group stock
will be shareholders of a single company, BellSouth. 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 condition of the other group. The BLS group and the Latin America
group will not be separate legal
15
<PAGE> 22
entities and as such cannot own assets or enter into legally binding agreements.
The issuance of BLS group stock and Latin America group stock and the
attribution of assets, liabilities and shareholders' equity to the BLS group or
the Latin America group will not affect ownership of our assets or
responsibility for our liabilities or those of our subsidiaries.
WE COULD BE REQUIRED TO USE ASSETS ATTRIBUTED TO ONE GROUP TO PAY THE
LIABILITIES ATTRIBUTED TO THE OTHER GROUP
The assets we attribute to one group could be subject to the liabilities
attributed to the other group, even if those liabilities arise from lawsuits,
contracts or indebtedness that we attribute to the other group. No provision of
our charter prevents us from using the assets attributed to one group to satisfy
the liabilities attributed to the other group.
FINANCIAL EFFECTS FROM ONE GROUP COULD ADVERSELY AFFECT THE OTHER GROUP'S
ABILITY TO PAY DIVIDENDS
Net losses of either the BLS group or the Latin America group and dividends
paid on shares of BLS group stock or Latin America group stock will reduce the
dividends we can pay on each series of common stock under Georgia law.
FINANCIAL EFFECTS FROM ONE GROUP COULD ADVERSELY AFFECT THE OTHER GROUP'S
BORROWING COSTS
If BellSouth or any of its subsidiaries were to incur significant
indebtedness on behalf of one 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 other group and BellSouth as a whole.
OUR BOARD OF DIRECTORS MAY CHANGE OUR TRACKING STOCK POLICY STATEMENT TO THE
DETRIMENT OF ONE GROUP WITHOUT SHAREHOLDER APPROVAL
Our board of directors may at any time change, 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. A decision to change, or make exceptions
to, these policies or adopt additional policies could disadvantage the holders
of one series of common stock, and advantage the holders of the other series of
common stock.
HOLDERS OF BLS GROUP STOCK AND LATIN AMERICA GROUP STOCK WILL NOT HAVE
SHAREHOLDER RIGHTS ASSOCIATED WITH TRADITIONAL COMMON STOCK
THERE WILL BE NO BOARD OF DIRECTORS THAT OWES ANY SEPARATE DUTIES TO THE
HOLDERS OF EITHER SERIES OF STOCK
Neither the BLS group nor the Latin America group will have a separate
board of directors to represent solely the interests of the holders of BLS group
stock or Latin America group stock. Consequently, there will be no board of
directors that owes any separate duties to the holders of either series of
stock.
HOLDERS OF BLS GROUP STOCK AND LATIN AMERICA GROUP STOCK MAY NOT HAVE ANY
REMEDIES IF ANY ACTION BY DIRECTORS OR OFFICERS HAS AN ADVERSE EFFECT ON
THE SERIES OF STOCK RELATED TO THEIR GROUP
Shareholders may not have any remedies if any action or decision of our
directors or officers has an adverse effect on the holders of one series of
common stock compared to the other series of common 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
stocks 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.
16
<PAGE> 23
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 either group. As a result, in some circumstances,
our directors or officers may even be required to make a decision that is
adverse to the holders of one series of common stock. A Georgia court hearing a
case involving such a challenge may decide in any such case to apply principles
of Georgia law that are different from the principles of Delaware law that are
discussed above, or may develop new principles of law.
SALES OF LATIN AMERICA GROUP STOCK MAY REDUCE YOUR ECONOMIC INTEREST IN
BELLSOUTH
We intend that, prior to the expected distribution, the holders of BLS
group stock will participate in the performance of our Latin American businesses
through the shares of Latin America group stock reserved for the BLS group or
for issuance to the holders of BLS group stock. The price at which Latin America
group stock will be sold to the public in the planned public offering will be
determined by negotiations with the underwriters. Holders of BLS group stock
will suffer an immediate loss in value if the increase in value resulting from
receipt of the cash proceeds does not offset the decrease in their percentage
interest in BellSouth.
In addition, the price at which any shares of Latin America group stock may
be sold in the future, such as in acquisitions, for strategic investments, for
purchases of interests of partners or for other transactions, may not reflect
accurately the value of Latin America group stock. Prior to the expected
distribution, the holders of BLS group stock and the holders of Latin America
group stock will suffer an immediate loss in value if the increase in value
resulting from these sales does not offset the decrease in percentage interest
in BellSouth. Similarly, after the expected distribution, the holders of Latin
America group stock will suffer an immediate loss in value if the increase in
value resulting from these sales does not offset the decrease in percentage
interest in BellSouth.
SALES OF LATIN AMERICA GROUP STOCK WILL DILUTE YOUR VOTING POWER IN BELLSOUTH
The holders of BLS group stock and the holders of Latin America group stock
will generally vote together as a single group on those matters on which they
are entitled to vote. As a result, the sale of Latin America group stock in the
planned public offering or otherwise, such as in acquisitions, for strategic
investments, for purchases of interests of partners or for other transactions,
will reduce your voting power in BellSouth.
TRANSFERS OF CASH, OTHER ASSETS OR LIABILITIES BETWEEN THE BLS GROUP AND THE
LATIN AMERICA GROUP COULD CAUSE A LOSS IN VALUE TO ONE SERIES OF STOCK
Under our tracking stock policy statement, our board of directors may
decide to transfer cash, other assets or liabilities between groups for
consideration it would determine. If the financial markets do not view a
transfer as fair to both groups, then one series of stock may suffer a loss in
value.
A transfer could result in a corresponding change in the number of shares
of Latin America group stock reserved for the BLS group or for issuance to the
holders of BLS group stock. Any increase or decrease in the number of shares of
Latin America group stock reserved for the BLS group or for issuance to the
holders of BLS group stock would be determined under our charter by reference to
fair value of the asset or liability transferred, as determined by our board of
directors, and the then-current market price of Latin America group stock. The
market price of your shares may be adversely affected if the financial markets
do not view the consideration received by the transferee group as fair or:
- shares of Latin America group stock are considered under-valued and you
are a holder of Latin America group stock; or
- shares of Latin America group stock are considered over-valued and you
are a holder of BLS group stock.
17
<PAGE> 24
HOLDERS OF THE SERIES OF STOCK RELATED TO ONE GROUP WILL NOT BE ENTITLED TO VOTE
ON A SALE OF THE ASSETS ATTRIBUTED TO THAT 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 either group represent less than substantially
all of the assets of BellSouth as a whole, our board of directors could, without
shareholder approval, approve sales and other dispositions of any amount,
including all or substantially all, of the assets attributed to either 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 the series of stock related to the group to which we have attributed
the assets being sold or with the smallest effect on the series of stock related
to the other group.
In addition, under Georgia law, our board of directors could decline to
sell the assets attributed to a group, despite the request of a majority of the
holders of the series of stock related to that group.
CONFLICTS OF INTEREST MAY ARISE BETWEEN HOLDERS OF BLS GROUP STOCK AND HOLDERS
OF LATIN AMERICA GROUP STOCK THAT MAY BE DIFFICULT FOR OUR BOARD OF DIRECTORS TO
RESOLVE OR MAY BE RESOLVED ADVERSELY TO ONE OF THE SERIES, WHICH MAY SUFFER A
LOSS IN VALUE
The existence of separate series of common stock could give rise to
occasions when the interests of the holders of BLS group stock and the holders
of Latin America group stock diverge, conflict or appear to diverge or conflict.
Because the value of the assets attributed to the BLS group, the revenue and
earnings generated by those assets and the market capitalization of BLS group
stock initially will be substantially larger than the value of the assets
attributed to the Latin America group, the revenue and earnings generated by
those assets and the market capitalization of Latin America group stock, our
board of directors may resolve many conflicts of interest between the two groups
in favor of the BLS group.
OPERATIONAL AND FINANCIAL DECISIONS COULD FAVOR ONE GROUP OVER THE OTHER
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 one group may be equally or more suitable
for the other group. Furthermore, any such decision may benefit the businesses
in one group more than the businesses in the other. For example, the decision to
borrow funds for companies in one group may adversely affect the ability of
companies in the other group to borrow funds sufficient to implement their
growth strategies or may increase the cost of those funds.
PROCEEDS OF A MERGER MAY BE ALLOCATED DISPROPORTIONATELY BETWEEN THE TWO
SERIES OF STOCK
Because our articles of amendment do not specify how consideration to be
received in a merger involving BellSouth will be allocated between the holders
of BLS group stock and the holders of Latin America group stock, our board of
directors will make that determination. In doing so, our board of directors
could allocate the proceeds in a manner not proportionate to the market
capitalizations of the two series of stock. In that event, the holders of one
series of stock could be adversely affected.
OUR BOARD OF DIRECTORS MAY PAY MORE OR LESS DIVIDENDS ON THE SERIES OF
STOCK RELATED TO ONE GROUP THAN IF THAT GROUP WERE A SEPARATE COMPANY
Our board of directors has the authority to declare and pay dividends on
BLS group stock and Latin America group stock in any legal amount. Our board of
directors could, in its sole discretion, declare and
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pay dividends exclusively on BLS group stock, exclusively on Latin America group
stock, or on both, in equal or unequal amounts. Our board of directors could pay
more dividends on the series of stock related to one group than would be
financially prudent if that group were a stand-alone corporation.
CONVERSION OF ONE SERIES OF STOCK INTO THE OTHER WILL CHANGE THE NATURE OF
YOUR INVESTMENT, COULD DILUTE YOUR ECONOMIC INTEREST IN BELLSOUTH AND COULD
RESULT IN A LOSS IN VALUE
Our board of directors could, without shareholder approval, convert shares
of Latin America group stock into shares of BLS group stock or shares of BLS
group stock into shares of Latin America group stock, at some or no premium. A
conversion would preclude the holders of both series of common stock from
retaining their investment in a security that is intended to reflect separately
the performance of the related group.
If you own shares of the series of stock into which the other series is
being converted and the conversion is at a premium, it is likely that your
shares will suffer a loss in value because your economic interest in BellSouth
will be diluted. In addition, if you own shares of the series of stock into
which the other series is being converted and the shares of that other series
are considered over-valued, the holders of shares of the series of stock being
converted will receive more shares of your series of stock than they should and
you will suffer a loss in value in addition to any loss resulting from dilution
of your economic interest. Conversely, if you own shares of the series of stock
being converted and these shares are considered under-valued, you will not
receive as many shares of the other series of stock as you should and will
suffer a loss in value. Your loss would increase if the other series of stock is
also considered over-valued.
DECISIONS BY DIRECTORS AND OFFICERS THAT AFFECT MARKET PRICES COULD DECREASE
RELATIVE VOTING POWER OF A SERIES OF STOCK AND THE NUMBER OF SHARES RECEIVED IN
A CONVERSION
The relative voting power per share of each series of common stock and the
number of shares of one series of common stock issuable upon the conversion of
the other series of common stock will vary depending upon the relative market
prices of BLS group stock and Latin America group stock. The market price 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 disadvantage one series of common stock.
IF OUR BOARD OF DIRECTORS CAUSES A SEPARATION OF ONE GROUP FROM BELLSOUTH,
EITHER OR BOTH SERIES OF STOCK MAY SUFFER A LOSS IN VALUE
Our board of directors may, without shareholder approval, declare that all
outstanding shares of either series of common 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 that group. Such an exchange would result in the
subsidiary or subsidiaries becoming independent of BellSouth. If our board of
directors chooses to exchange shares of one series of common stock:
- the market value of the subsidiary shares received in that exchange could
be or become less than the market value of the series of common stock
exchanged; and/or
- the market value of BellSouth's remaining series of common stock could
decrease from its market value before the exchange.
The market value of the subsidiary shares and/or our remaining series of common
stock may decrease in part because the subsidiary and/or our remaining
businesses may no longer benefit from the advantages of doing business under
common ownership with the other group. Specifically, they will no longer be able
to take advantage of our strategic and operational benefits of common branding,
shared managerial expertise, synergies relating to technology and purchasing
arrangements, cost savings in corporate overhead and enhanced access to capital
markets.
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HOLDERS OF ONE SERIES OF COMMON STOCK MAY RECEIVE LESS CONSIDERATION UPON A SALE
OF THE ASSETS ATTRIBUTED TO THEIR GROUP THAN IF THEIR GROUP WERE A SEPARATE
COMPANY
If we sell 80% or more of the properties and assets attributed to either
group, our board of directors must, subject to some exceptions:
- distribute to the holders of the stock related to that group by special
dividend or redemption an amount equal to their proportionate interest in
net proceeds of the sale; or
- convert the outstanding shares of the series of stock related to that
group into a number of shares of the series of stock related to the other
group, based on the average market values of the two series of common
stock during a ten-trading day period after the sale.
If the group to which the sold assets were attributed 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 the stock related to that group. In
addition, we cannot assure you that the net proceeds per share of the stock
related to that group will be equal to or more than the market value per share
of the series of common stock prior to or after announcement of a sale.
IF BELLSOUTH WERE TO BE LIQUIDATED, AMOUNTS DISTRIBUTED TO HOLDERS OF EACH
SERIES WILL NOT BEAR ANY RELATIONSHIP TO THE VALUE OF THE ASSETS ATTRIBUTED TO
THE GROUPS
The liquidation rights of the holders of the respective series of common
stock are fixed. As a result, liquidation rights of the two series of stock will
not bear any relationship to the relative market values, the relative voting
rights of the series of common stock or the relative value of the assets
attributed to the groups. For example, each share of Latin America group stock
will be entitled to an amount equal to 25% of the amount to which each share of
BLS group stock will be entitled. As a result, holders of Latin America group
stock may receive less than they would if there were only one series of
BellSouth common stock outstanding.
IN THE FUTURE, WE MAY ISSUE ADDITIONAL SERIES OF COMMON STOCK, WITHOUT
SHAREHOLDER APPROVAL, INCLUDING BY REATTRIBUTING ASSETS AND LIABILITIES FROM AN
EXISTING 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 attributing to it newly
acquired assets or by reattributing to it some of the assets and liabilities
from either or both of the BLS group or the Latin America group. If our board of
directors decides to reattribute assets and liabilities from an existing group
to a new group, we would reserve for the group or groups to which those assets
and liabilities were previously attributed shares of the new series of common
stock, 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 BLS group and the Latin America group.
BLS group stock and Latin America group stock could be convertible into any
new series of common stock. Also, the terms of the new series of common stock
could provide for the convertibility into either BLS group stock or, beginning
on the second anniversary of the initial issuance of Latin America group stock,
Latin America group stock at premiums and on the terms determined by our board
of directors.
In the event our board of directors issues an additional series of common
stock, the risk factors discussed in this proxy statement would then also apply
to the new series of common stock and the new groups created in relation to BLS
group stock and Latin America group stock.
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INTERNAL REVENUE SERVICE COULD ASSERT THAT THE RECEIPT OF TRACKING STOCK IS
TAXABLE
While we believe the change of our existing common stock into BLS group
stock under the tracking stock proposal will not be taxable to you, there are no
court decisions or other authorities bearing directly on the effect of the
features of BLS group stock and Latin America group stock. In addition, the IRS
has announced that it will not issue rulings on the characterization of stock
with characteristics similar to BLS group stock and Latin America group stock.
It is possible, therefore, that the IRS could successfully assert that the
change of our existing common stock into BLS group stock as well as the
subsequent conversion of one series of common stock into another could be
taxable to you and/or to us.
CLINTON ADMINISTRATION PROPOSAL COULD HAVE ADVERSE TAX CONSEQUENCES FOR US OR
FOR HOLDERS OF BLS GROUP STOCK OR LATIN AMERICA GROUP STOCK
The Clinton Administration proposed legislation in February 2000 dealing
with tracking stock such as BLS group stock and Latin America group stock. This
proposal would, among other things, treat the receipt of stock similar to BLS
group stock and 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, you could be subject to tax on your
receipt of BLS group stock, or, if we make the expected distribution, on your
receipt 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 initial issuance of Latin America group stock, shares
of BLS group stock into 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.
RISKS RELATING TO BLS GROUP STOCK ONLY
PRIOR TO THE EXPECTED DISTRIBUTION, THE MARKET PRICE OF BLS GROUP STOCK MAY NOT
REFLECT THE VALUE OF THE RESERVED SHARES OF LATIN AMERICA GROUP STOCK, INCLUDING
ANY INCREASES IN VALUE
The market price of BLS group stock should reflect the value of the shares
of Latin America group stock reserved for the BLS group or for issuance to the
holders of BLS group stock. However, we cannot assure you that the holders of
BLS group stock will benefit from the value of the reserved shares of Latin
America group stock until they are distributed. Moreover, if the market price of
Latin America group stock increases, the market price of BLS group stock should
reflect the increase in value of the reserved shares. However, we cannot assure
you that the market price of BLS group stock will increase correspondingly, or
at all.
PRIOR TO THE EXPECTED DISTRIBUTION, THE MARKET PRICE OF BLS GROUP STOCK COULD BE
PARTICULARLY ADVERSELY AFFECTED BY EVENTS INVOLVING THE LATIN AMERICA GROUP
We cannot assure you that events involving our businesses in Latin America,
such as earnings announcements or acquisitions, or the performance of Latin
America group stock will not have an adverse effect on the market price of BLS
group stock prior to the expected distribution of Latin America group stock to
the holders of BLS group stock. For example, the financial markets may not view
favorably subsequent sales of Latin America group stock because of the price
paid to us or issuances of Latin America group stock in acquisitions, for
strategic investments, for purchases of interests of partners or other
transactions due to the price we pay or the assets we purchase.
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IN CIRCUMSTANCES WHERE A SEPARATE SERIES VOTE IS REQUIRED, HOLDERS OF LATIN
AMERICA GROUP STOCK CAN BLOCK ACTION
If Georgia law, stock exchange rules, our charter, our by-laws or our board
of directors requires a separate vote on a matter by the holders of Latin
America group stock, those holders could prevent approval of the matter -- even
if the holders of a majority of the total number of votes cast or entitled to be
cast, voting together as one voting group, were to vote in favor of it.
RISKS RELATING TO LATIN AMERICA GROUP STOCK ONLY
LIMITS EXIST ON THE VOTING POWER OF LATIN AMERICA GROUP STOCK
HOLDERS OF LATIN AMERICA GROUP STOCK COULD HAVE VOTING POWER THAT IS LESS
THAN THEIR ECONOMIC INTEREST IN BELLSOUTH
If the market capitalization of Latin America group stock is more than 35%
of the combined market capitalization of both series of stock, the voting power
of the holders of Latin America group stock will be less than their economic
interest in BellSouth.
SHAREHOLDERS THAT OWN ONLY LATIN AMERICA GROUP STOCK MAY NOT HAVE
SUFFICIENT VOTING POWER TO PROTECT THEIR INTERESTS
The holders of BLS group stock, to the extent they vote the same way, could
control the outcome of a vote because BLS group stock will retain a substantial
majority of the combined voting power of BLS group stock and Latin America group
stock. This will be true even if the matter involves a divergence from or
conflict with the interests of the holders of BLS group stock and the holders of
Latin America group stock. These matters may include mergers and other
extraordinary transactions. This control results because the multiple series of
stock will generally vote as a single voting group, except in limited
circumstances requiring a vote of a single series voting as a separate voting
group.
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 the shares
of Latin America group stock; or
- any issuances of Latin America group stock in acquisitions, for strategic
investments, for purchases of interests of partners and 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.
IF COMPANIES IN THE LATIN AMERICA GROUP LOAN FUNDS TO COMPANIES IN THE BLS
GROUP, THE LATIN AMERICA GROUP COULD EARN A LOWER RATE OF RETURN THAN IT MIGHT
HAVE EARNED FROM ALTERNATIVE INVESTMENTS
Under our tracking stock policy statement, the companies in one group may
make loans to companies in the other group at interest rates and on other terms
and conditions designed to reflect the interest rates, terms and conditions that
the borrowing group, assuming it were a legal entity, would be able to obtain
from third parties. If the companies in the Latin America group were to make any
loans to the companies in the BLS group, we expect that they would do so at
interest rates, terms and conditions highly favorable to the BLS group because
we expect that the BLS group, assuming it were a legal entity, would be able to
obtain highly favorable interest rates, terms and conditions from third parties.
Consequently, we expect
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interest rates paid to the 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.
RISK FACTORS RELATING TO OUR LATIN AMERICAN OPERATIONS
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:
- prices for handsets and service;
- call quality and reliability;
- services and features offered, including plans;
- coverage; and
- customer service.
COMPETITION CAUSES DOWNWARD PRICE PRESSURE, WHICH COULD DECREASE OUR
REVENUES AND 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 INCREASES 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;
- pricing and 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;
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- bundle more attractive offerings of wireline services and other services;
- deploy and expand their networks faster; and
- develop and deploy improved wireless technologies faster.
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 backbone 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, backbone networks,
interconnection facilities and operating support systems;
- expand and maintain customer care, network management and management and
administrative systems; and
- obtain additional radio spectrum.
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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.
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.
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.
OUR LATIN AMERICAN OPERATIONS MAY NOT BE ABLE TO SATISFY THEIR CAPITAL NEEDS ON
FAVORABLE ECONOMIC TERMS, OR AT ALL, IF OUR NON-LATIN AMERICAN OPERATIONS OR OUR
PARTNERS IN OUR LATIN AMERICAN OPERATIONS DECLINE TO CONTRIBUTE CAPITAL
Historically, our Latin American companies have relied on assistance from
our other 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 other
companies 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 other companies 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. In that case, we may be obligated to seek capital from more
expensive sources, such as external debt.
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
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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.
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 expansion to execute.
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.
IF WE CANNOT WORK IN A COOPERATIVE FASHION WITH OUR LATIN AMERICAN PARTNERS, WE
MAY BE UNABLE TO CARRY OUT OUR GROWTH STRATEGY
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. Our Latin American operations are mostly conducted through
companies in which we own a significant, but less than 100%, ownership interest.
As a result, we must generally obtain the cooperation of our partners in order
to implement and expand upon our Latin American business strategies, even where
we own a majority of the venture. For instance, approval of operating and
capital expenditure budgets and distributions to and capital contributions from
partners typically require the consent of our partners. Moreover, 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 we are unable to receive a corresponding increase in our
ownership percentage.
IF CONSUMERS CHOOSE COMPETING WIRELESS TECHNOLOGIES OR IF OUR LATIN AMERICAN
COMPANIES CANNOT KEEP PACE WITH DEVELOPING WIRELESS TECHNOLOGIES, THEY WILL LOSE
CUSTOMERS
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.
The wireless communications industry is experiencing significant
technological change. Wireless service providers are in the process of selecting
the next generation of wireless technologies. If the technology and networks we
have deployed in our existing operations are not compatible with the next
generation technologies, or can be made compatible only at significant capital
expense, our operations could suffer. In addition, if the next generation
technology that we select does not gain widespread consumer acceptance, our
Latin American companies could suffer. Significant capital investments may not
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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, our businesses may lose customers to 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 our 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.
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.
WE MAY NOT BE ABLE TO OBTAIN THE WIRELESS HANDSETS WE NEED TO COMPETE
EFFECTIVELY
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.
WE MAY NOT BE ABLE TO OBTAIN THE EQUIPMENT WE NEED TO BUILD AND EXPAND OUR
NETWORKS
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
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suppliers under those circumstances could require significant expenditures to
change network infrastructure. As a result, our 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.
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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 may render us at a competitive disadvantage to other
telecommunications providers, causing our Latin American companies to lose
customers and 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.
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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.
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 COULD IMPEDE OR STOP DEVELOPMENT OF OUR
MARKETS
Our Latin American operations are subject to greater regulatory risks than
our U.S. business. 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, privatization and taxation 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
businesses. 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.
WE MAY NOT BE ABLE TO COLLECT AMOUNTS DUE FROM OTHER COMMUNICATIONS CARRIERS,
WHICH MAY REDUCE CASH FLOWS AND EARNINGS
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 wireline telephone to one of our Latin American mobile 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 amounts due could also
increase administrative costs, interest expenses 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 almost exclusively 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
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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.
Economic difficulties have been common in the countries in which our more
significant Latin American businesses operate, including Argentina, Brazil,
Chile and Venezuela. Other countries in which we have significant operations,
such as Venezuela and Peru, suffer from political instability, and Colombia,
where our newest operations are located, has experienced significant economic
and political disturbances, including high levels of violence. We describe some
of these recent economic and political events in more detail below in "Business
of the Latin America Group -- Overview of Country Operations."
Moreover, negative economic or political developments in one country in
Latin America, or even in other emerging markets, can lead to or exacerbate
economic or political crises in Latin American markets. For instance,
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.
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 both the Latin America group stock
and BLS group stock.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES COULD HARM OUR LATIN AMERICAN COMPANIES'
OPERATING RESULTS AND IMPAIR THEIR ABILITY TO RAISE CAPITAL
Any devaluation or depreciation of local currencies in the countries in
which our Latin American companies operate is likely to hurt their customers,
which can decrease their sales, revenues and net income and expose them to
foreign currency risk. Volatility in local currencies and capital markets can
also impair our Latin America group's ability to access international capital
markets to raise capital, and may depress the price of both the Latin America
group stock and BLS group stock, regardless of the operating performance of our
Latin American companies. 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.
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;
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- changes in wage and price controls; and
- price inflation in local currencies.
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
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. 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.
OUR LATIN AMERICAN COMPANIES MAY NOT BE ABLE TO COMPENSATE FOR INFLATION BY
INCREASING PRICES, WHICH COULD DECREASE THEIR PROFITABILITY
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.
RESTRICTIONS ON THE EXPATRIATION OF EARNINGS OR CAPITAL FROM THE COUNTRIES
IN WHICH OUR LATIN AMERICAN COMPANIES OPERATE COULD IMPEDE OUR LATIN
AMERICAN OPERATIONS
Significant fluctuations in foreign exchange rates could also result in new
or increased exchange controls. 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.
WE MAY FACE LIABILITY UNDER THE FOREIGN CORRUPT PRACTICES ACT FOR THE ACTS OF
LOCAL COMPANY EMPLOYEES, PARTNERS, AGENTS OR OTHER INTERMEDIARIES
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 obtaining or keeping
business. 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 are not so heavily
regulated. We cannot assure you that the compliance program we have instituted
to comply with the Act 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 employees,
partners, agents and other intermediaries for whom we may have exposure under
the Act.
We may be held responsible for actions taken by local company employees,
partners, agents or other intermediaries, even though we may have limited
ability to control them. Because 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. In
addition, our local operating companies are managed almost exclusively by local
employees who have less familiarity with U.S. laws and customs and may take
actions that, while customary in the local country, may create exposure under
the Act. Any determination that we have violated the Act could result in
liabilities, litigation costs, injury to our reputation and other detrimental
effects.
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WE COMPETE AGAINST COMPANIES THAT ARE NOT SUBJECT TO THE FOREIGN CORRUPT
PRACTICES ACT, WHICH MAY GIVE THEM A COMPETITIVE ADVANTAGE
Many of our competitors in Latin America are not subject to the Foreign
Corrupt Practices Act. To the extent that our Latin American competitors can use
improper payments to help secure licenses, concessions, preferential treatment
or other advantages, our Latin American companies may suffer.
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.
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 have
recently received increased focus, including the adoption in July 2000 by the
leading industry trade group of a policy requiring handset manufacturers to
disclose emission levels. 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. In June 2000, the U.S. Food and
Drug Administration agreed to oversee a $1 million industry funded study on
handset emissions. 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 proxy statement 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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INFORMATION ABOUT THE SPECIAL MEETING AND VOTING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
We are providing this proxy statement to you in connection with the
solicitation of proxies by our board of directors for use at the special meeting
of our shareholders. The special meeting will be held on , 2000,
at a.m., local time, at . This proxy statement is
first being mailed to our shareholders on or about , 2000.
PROPOSALS TO BE CONSIDERED AT THE SPECIAL MEETING
You will be asked to consider and vote on the three proposals described in
this proxy statement.
If Proposal 1 is approved, we intend to implement it whether or not
Proposals 2 or 3 are approved. However, even if our shareholders approve
Proposal 1, our board of directors can decide not to implement Proposal 1 if
subsequent considerations arise. If Proposal 1 is not approved and implemented,
we will not implement Proposal 2. If Proposal 3 is approved, we will implement
it.
We do not expect that any other matter will be brought before the special
meeting. If, however, other matters are properly presented, the Directors' Proxy
Committee will vote the shares represented by it in accordance with its best
judgment.
WHO CAN VOTE
You are entitled to vote if you were a holder of record of our existing
common stock as of the close of business on , 2000. Your shares
can be voted at the meeting only if you are present or represented by a valid
proxy.
SHARES OUTSTANDING
On July 31, 2000, 1,874,100,602 shares of our existing common stock were
outstanding and entitled to vote. This total includes shares issued to certain
grantor trusts, which are not considered outstanding for financial reporting
purposes. We do not know of any shareholder who beneficially owned more than 5%
of BellSouth stock as of July 31, 2000.
PROXY
Our board of directors has designated a Directors' Proxy Committee, which
will vote the shares represented by proxies at the special meeting. Its members
are Messrs. Reuben V. Anderson, James H. Blanchard and John G. Medlin, Jr.
If you sign the proxy card or submit your vote by Internet or by telephone
but do not specify how you want your shares to be voted, your shares will be
voted by the Directors' Proxy Committee for Proposals 1, 2 and 3. The Directors'
Proxy Committee will vote at its discretion on any other matter that may
properly come before the special meeting.
If you wish to assign your proxy to someone other than the Directors' Proxy
Committee and you are using the proxy card, you should cross out all three names
appearing on the proxy card and insert the name(s) of up to three other people.
The person or persons representing you must present your signed proxy card and a
ballot at the special meeting in order to vote your shares.
VOTING OF SHARES
Each share of BellSouth stock represented at the special meeting is
entitled to one vote on each matter properly brought before the special meeting.
All shares entitled to vote and represented by properly executed proxies
received before the polls are closed at the special meeting, and not revoked or
superseded, will be voted at the special meeting in accordance with the
instructions indicated on those proxies.
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BELLSOUTH DIRECT INVESTMENT PLAN: If you participate in this Plan, your
proxy will represent shares held in the Plan, as well as shares you hold in
certificate form registered in the same name.
FOR BELLSOUTH EMPLOYEES: If you are a registered shareholder and/or own
stock in one or more of the following employee payroll-based plans and the
accounts are registered in the same name, you will receive one proxy card which
will serve as voting instructions to the Directors' Proxy Committee, if
applicable, and also to the trustees of those plans:
- BellSouth Employee Stock Ownership Plan (PAYSOP)
- BellSouth Employee Stock Investment Plan (ESIP)
- BellSouth Employee Stock Purchase Plan (ESPP)
- BellSouth Savings and Security Plan (SSP)
- BellSouth Retirement Savings Plan (BRSP)
The trustee will vote plan shares in the PAYSOP, the SSP and the BRSP
represented by proxies which are not submitted in the same proportion as shares
for which proxies are submitted for each plan. Shares owned by an employee in
the ESIP and ESPP are not voted unless that employee submits his or her proxy.
VOTES REQUIRED TO APPROVE THE PROPOSALS
Proposal 1 requires the favorable vote of a majority of the outstanding
shares of our existing common stock. As a result, abstentions and broker
non-votes on Proposal 1 will have the same effect as negative votes. Broker
non-votes occur when a broker returns a proxy but does not have authority to
vote on a particular proposal.
Proposal 2 requires a favorable vote of a majority of the shares of our
existing common stock represented at the special meeting and entitled to vote.
As a result, abstentions and broker non-votes on Proposal 2 will have the same
effect as negative votes.
Proposal 3 requires the favorable vote of a majority of the outstanding
shares of our existing common stock. As a result, abstentions and broker
non-votes on Proposal 3 will have the same effect as negative votes.
HOW YOU CAN VOTE
You may vote by proxy or in person at the special meeting. To vote by
proxy, you may select one of the following options:
VOTE BY TELEPHONE
You can vote your shares by telephone by calling the toll-free telephone
number (at no cost to you) shown on your proxy card. Telephone voting is
available 24 hours-a-day, seven days-a-week. Easy-to-follow voice prompts allow
you to vote your shares and confirm that your instructions have been properly
recorded. Our telephone voting procedures are designed to authenticate the
shareholder by using individual control numbers. Proxies granted by telephone
using these procedures are valid under Georgia law. You can also consent to view
future proxy statements and annual reports on the Internet instead of receiving
them in the mail. If you vote by telephone, you do NOT need to return your proxy
card.
VOTE BY INTERNET
You can also choose to vote on the Internet. The web site for Internet
voting is shown on your proxy card. Internet voting is available 24 hours-a-day,
seven days-a-week. You will be given the opportunity to confirm that your
instructions have been properly recorded. Proxies granted over the Internet
using these procedures are valid under Georgia law. You can also consent to view
future proxy statements and annual
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reports on the Internet instead of receiving them in the mail. If you vote on
the Internet, you do NOT need to return your proxy card.
VOTE BY MAIL
If you choose to vote by mail, simply mark your proxy card, date and sign
it, and return it in the postage-paid envelope provided. If you wish to view
future proxy statements and annual reports on the Internet, check the box
provided on the card.
REVOCATION OF PROXY
If you vote by proxy, you may revoke that proxy at any time before it is
voted at the special meeting. You may do this by:
- voting again by telephone or on the Internet prior to the meeting;
- signing another proxy card with a later date and returning it to us prior
to the meeting; or
- attending the meeting in person and casting a ballot.
QUORUM
Forty percent of the outstanding shares of BellSouth common stock must be
present, either in person or represented by proxy, in order to conduct the
special meeting, without regard to whether the proxy is marked as casting a vote
or abstaining.
ATTENDANCE AT THE SPECIAL MEETING
If you plan to attend the special meeting, please keep the admission ticket
and map attached to the proxy card. If you come to the special meeting and do
not have an admission ticket, or if your shares are held by brokers or other
institutions, you will be admitted upon presentation of proper identification at
the door.
SOLICITATION OF PROXIES
We will pay the cost of soliciting proxies. We have retained Morrow & Co.,
Inc. to solicit proxies, by mail, in person or by telephone, for a fee of
$125,000 plus reimbursement of reasonable out-of-pocket expenses. In addition,
we have retained Morrow to answer telephone call inquiries from shareholders for
which BellSouth will pay a fee of $3.00 per call. Employees of BellSouth also
may solicit proxies on our behalf.
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PROPOSAL 1
THE TRACKING STOCK PROPOSAL
DESCRIPTION OF THE TRACKING STOCK PROPOSAL
We are asking you to approve the tracking stock proposal which will permit
us, without further shareholder approval, to:
- issue common stock in series;
- issue Latin America group stock, a new series of our common stock that is
intended to reflect the separate performance of the businesses attributed
to the Latin America group;
- change your existing common stock into BLS group stock, a second series
of our common stock that is intended to reflect the separate performance
of the businesses attributed to the BLS group; and
- distribute to holders of BLS group stock shares of Latin America group
stock.
We discuss each of these transactions and their effect on you below.
ARTICLES OF AMENDMENT
We are asking you to consider and approve articles of amendment to our
charter, which would:
- permit us to issue a total of 8.65 billion shares of BellSouth common
stock in series, of which our board of directors intends initially to
designate 6.4 billion shares as "BellSouth Corporation -- BLS Group
Common Stock" and 2.25 billion shares as "BellSouth Corporation -- Latin
America Group Common Stock;" and
- provide for each outstanding share of our existing common stock to be
changed into one share of BLS group stock which will occur immediately
before the initial issuance of Latin America group stock.
The articles of amendment we are asking you to consider and approve are set
forth in Annex I. If our shareholders approve these articles of amendment, our
board of directors intends to adopt additional articles of amendment without
shareholder approval as permitted by Georgia law. Those articles of amendment
will designate 6.4 billion shares as "BellSouth Corporation -- BLS Group Common
Stock" and 2.25 billion shares as "BellSouth Corporation -- Latin America Group
Common Stock" and establish the terms of these two series. Our shareholders'
approval of the articles of amendment set forth in Annex I will also constitute
approval of the terms of BLS group stock and Latin America group stock described
under "-- Description of BLS Group Stock and Latin America Group Stock." Each
outstanding share of our existing common stock will be changed into one share of
BLS group stock immediately before the initial issuance of Latin America group
stock.
If the tracking stock proposal is implemented, your rights as shareholders
will continue to be governed by (1) our charter as amended by the proposed
articles of amendment submitted to the shareholders attached as Annex I and the
proposed articles of amendment planned to be adopted by the board of directors
and (2) our amended by-laws, all of which will have been filed with the SEC, and
(3) Georgia law.
If the articles of amendment are approved and we issue Latin America group
stock, we will file the articles of amendment with the Secretary of State of the
State of Georgia. No state or federal regulatory approvals are required for the
consummation of the tracking stock proposal.
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LINKAGE BETWEEN GROUP PERFORMANCE AND STOCK PRICE
We believe that BLS group stock and Latin America group stock will reflect
the separate performance of our non-Latin American businesses and our Latin
American businesses, respectively. Our belief is based in part on the following:
- upon the sale of 80% or more of the assets attributed to a group, our
board of directors is required to take action that returns the value of
the net proceeds of those assets to the holders of the series of stock
related to that group;
- the amount available for payment of dividends to the holders of BLS group
stock and Latin America group stock is limited to the amount that would
be available for payment of dividends if the businesses tracked by each
stock were separate corporations;
- if we decide to spin-off the assets attributed to a group, we can redeem
shares of the series of stock related to that group for shares in one or
more wholly-owned subsidiaries that hold all of the assets attributed to
that group; and
- the availability of separate, more detailed and specific public
information about the BLS group and the Latin America group and more
focused coverage of the Latin America group by research analysts.
While we believe that these factors will cause BLS group stock to reflect
the separate performance of our non-Latin American businesses and Latin America
group stock to reflect the separate performance of our Latin American
businesses, we cannot guarantee that the stocks will perform as intended.
THE PUBLIC OFFERING
Currently, all of the equity in BellSouth is represented by our existing
common stock. Prior to the completion of the planned public offering, we will
create BLS group stock and Latin America group stock. We will reserve a number
of shares of Latin America group stock for the BLS group or for issuance to the
holders of BLS group stock. The number of shares so reserved will be determined
by dividing the estimated value of our businesses attributed to the Latin
America group by the estimated offering price of Latin America group stock in
the planned public offering.
We plan a public offering of additional shares of Latin America group
stock. The decision to proceed with the public offering and the precise timing
will depend on market conditions and other factors that our board of directors
considers relevant. The public offering could occur promptly following
shareholder approval of the tracking stock proposal or at some time thereafter.
If subsequent considerations arise, however, our board of directors can decide
to initially issue Latin America group stock in some other manner or not to
create BLS group stock and Latin America group stock, even if our shareholders
have approved the articles of amendment.
The shares of Latin America group stock sold in the public offering will be
new, unreserved shares and will not reduce the number of shares reserved for the
BLS group or for issuance to the holders of BLS group stock. We plan to offer
shares of Latin America group stock that are intended to represent 10% - 20% of
the estimated value of our businesses attributed to the Latin America group.
THE EXPECTED DISTRIBUTION
We expect to distribute to the holders of BLS group stock all of the shares
of Latin America group stock reserved for the BLS group or for issuance to the
holders of BLS group stock within six to 12 months after the public offering.
The decision to make such a distribution and the precise timing will depend on
market conditions and other factors that our board of directors considers
relevant. The distribution could be accomplished in multiple stages. For
example, half of the shares could be distributed in six months and the remaining
shares in 12 months. In addition, market factors or other circumstances could
cause our board of directors to delay or cancel the expected distribution.
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If we do complete the expected distribution, you will own the same economic
interest in BellSouth as you will immediately before the distribution. The only
difference will be that your interest will then be represented by two
stocks -- BLS group stock and Latin America group stock. You will then be able
to decide whether to retain or sell either or both series of common stock,
depending on your investment objectives.
BACKGROUND OF AND REASONS FOR THE TRACKING STOCK PROPOSAL
BellSouth continually reviews each of its businesses and BellSouth as a
whole to determine ways to increase shareholder value. As a result of this
review process, we concluded that a different capital structure would improve
our ability to execute our business strategies and achieve a proper valuation of
the businesses of each of the groups. As a result, in late 1999, we engaged a
financial advisor and began to evaluate the creation of a tracking stock.
At a meeting of our board of directors on January 24, 2000, our directors
discussed the creation of a BellSouth tracking stock for some or all of our
wireless businesses. At meetings on February 27 and 28, March 27, April 24, June
26 and 2000, our board of directors discussed the creation of a
tracking stock for our Latin American businesses. After extensive discussions
with our senior management, legal counsel and financial advisors, our board of
directors has determined that the issuance of a tracking stock for our Latin
American businesses would increase market awareness of our Latin American
businesses and provide for more efficient valuation of all of our businesses,
advance our strategic and financial objectives and create flexibility for our
overall future growth.
In making this determination, our directors determined that implementation
of the tracking stock proposal would likely have the following advantages:
- GREATER MARKET RECOGNITION AND MORE EFFICIENT VALUATION. Separating the
performance of the BLS group and the Latin America group and reflecting
separately the operating results and growth prospects of each group
should permit greater market recognition of the businesses attributed to
the BLS group and the Latin America group. Separate public information
about the Latin America group should result in broader and more focused
coverage by research analysts. As a result, investors should better
understand the businesses attributed to the Latin America group and
BellSouth as a whole. Wireless businesses are valued based on multiples
of cash flow, population in a service area and subscribers, and
traditional telephone companies are valued based on multiples of earnings
and on dividends. Having two publicly traded equity securities should
allow equity investors to apply different and more specific criteria in
valuing the businesses attributed to the BLS group and the Latin America
group.
- GREATER STRATEGIC FLEXIBILITY. By separately tracking the performance of
our Latin American businesses through the Latin America group stock
rather than our existing common stock, we expect to reduce the financial
impacts on our current shareholders resulting from additional investment
necessary to grow and expand our Latin American businesses. Having two
different equity securities that track the performance of separate
business groups should provide BellSouth greater flexibility to take
advantage of strategic opportunities for each group. BellSouth will be
able to issue either BLS group stock or Latin America group stock for
strategic investments, in acquisitions, for purchases of interests of
partners and for other transactions. In addition, shareholders of an
entity acquired for the series of stock related to either the BLS group
or the Latin America group will be able to continue to own an investment
in familiar businesses with similar dynamics rather than in the much
larger and diversified BellSouth.
- INCREASED FINANCIAL FLEXIBILITY. BellSouth also expects that Latin
America group stock will assist us in meeting the capital requirements of
our Latin American companies by creating an additional publicly traded
equity security that we can use to raise capital. In addition, because we
do not expect to pay dividends on Latin America group stock for the
foreseeable future, our issuance of Latin America group stock, in
connection with an acquisition or otherwise, would not reduce cash flow
that would otherwise be available for strategic investments.
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- INCREASED SHAREHOLDER CHOICE. The creation of tracking stock will allow
investors to invest in BellSouth by owning either or both series of
common stock, depending on their particular investment objectives. Some
investors may want to own BLS group stock with more predictable and
stable earnings growth and dividends, while other investors may desire to
own Latin America group stock with higher risk and growth profiles.
Others may want to own both BLS group stock and Latin America group
stock.
- MORE EFFECTIVE MANAGEMENT INCENTIVES. Latin America group stock will
permit us to structure distinctive and more effective incentive and
retention programs for our management and employees. Stock options and
other incentive awards to management and employees who work principally
for the businesses attributed to the Latin America group or the BLS group
will be tied more directly to the performance of the particular group in
which they work.
- ADVANTAGES OF DOING BUSINESS UNDER COMMON OWNERSHIP. In contrast to a
spin-off, the tracking stock proposal will retain for us the advantages
of doing business as a single company and allow the businesses attributed
to each group to capitalize on relationships with the businesses
attributed to the other group. As part of a single organization, we
expect to continue to take advantage of the strategic and operational
benefits of common branding, shared managerial expertise, synergies
relating to technology and purchasing arrangements and cost savings in
corporate overhead expenses.
- PRESERVES CAPITAL STRUCTURE FLEXIBILITY. The tracking stock proposal
retains future restructuring flexibility by preserving our ability to
undertake future asset segmentation and capital restructurings, such as
spin-offs and split-offs, and the creation and issuance of other tracking
stocks reflecting other unique business groups, if we decide that action
is appropriate. The proposal also preserves our ability to modify our
capital structure by unwinding the tracking stock structure.
Our board of directors also considered that the implementation of the
tracking stock proposal is not expected to be taxable for U.S. federal income
tax purposes to BellSouth or to you. In addition, our board of directors
considered the performance of similar equity securities issued by other
telecommunications companies, such as U S West, Inc, Sprint Corporation and
AT&T.
Our board of directors also considered the following potential negative
consequences of the tracking proposal:
- UNCERTAINTY OF MARKET VALUATION. Not every company that has issued
tracking stock has seen an increase in its market capitalization. In
fact, many tracking stocks have traded flat or down from their original
issue price. We believe that in many cases these results reflect
fundamental weaknesses in those companies or attempts to segregate and
create higher market value from Internet-related aspects of their
business. We believe our tracking stock proposal is distinguishable from
those circumstances. However, we cannot predict exactly:
- the degree to which the market price of BLS group stock and Latin
America group stock will reflect the separate performances of the BLS
group and the Latin America group;
- the impact of the tracking stock proposal on the market price of our
existing common stock prior to the special meeting of shareholders;
- the impact of the issuance of Latin America group stock on the market
price of BLS group stock after the completion of the planned public
offering of Latin America group stock or the expected distribution to
the holders of BLS group stock of shares of Latin America group stock
reserved for the BLS group or for issuance to the holders of BLS group
stock; or
- whether the issuance of BLS group stock and Latin America group stock
will increase the total market capitalization of BellSouth.
- MORE COMPLEX CORPORATE GOVERNANCE. The tracking stock proposal
introduces additional corporate governance issues, such as the fiduciary
obligation of our board of directors to holders of different
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series of common stock representing different lines of business.
Interests of the companies in two groups could diverge or conflict, or
appear to diverge or conflict, and issues could arise in resolving
conflicts with the result that our board of directors may benefit the
companies in one group more than the companies in the other group with
respect to any particular issue.
- COMPLEX CAPITAL STRUCTURE. The tracking stock proposal will make the
corporate structure of BellSouth more complex and could confuse
investors, thereby adversely affecting their valuation of our businesses.
- UNCERTAINTY OF MARKET REACTION TO TRACKING STOCK DECISIONS. The market
values of BLS group stock and Latin America group stock could be affected
by the market reaction to decisions by our board of directors and
management that investors perceive as affecting differently one series of
common stock compared to the other. These decisions could include
decisions regarding business transactions between the groups and the
allocation of assets, expenses, liabilities and corporate opportunities
and financing resources.
- POTENTIAL ADVERSE EFFECTS IN CONNECTION WITH ACQUISITIONS. The use of a
tracking stock in connection with future acquisitions could have various
adverse effects, such as the possible inability or increased difficulty
of obtaining a ruling from the Internal Revenue Service for an
acquisition designed to be tax-free.
- POTENTIAL ADVERSE TAX CONSEQUENCES. The Internal Revenue Service could
successfully assert that the change of our existing common stock into BLS
group stock could be taxable to you and/or us. In addition, the Clinton
Administration's Fiscal Year 2001 Budget Proposal included a provision
that would treat the receipt of stock similar to BLS group stock and
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 provision is enacted following creation of our
tracking stock, BellSouth might decide to change its capital structure by
unwinding the tracking stock to avoid adverse tax consequences.
Our board of directors determined that, on balance, the potential
advantages of the tracking stock proposal far outweigh any potentially negative
consequences.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has carefully considered the tracking stock proposal
and believes that the approval of this proposal by the shareholders is advisable
and in the best interests of BellSouth. Our board of directors unanimously
recommends that you vote for this proposal.
DIVIDEND POLICY
BLS GROUP STOCK. We currently intend to pay a quarterly dividend of $.19
per share on BLS group stock, which is the same as the current dividend amount
on our existing common stock. The payment of dividends on BLS group stock will
be a business decision to be made by our board of directors from time to time
based primarily upon the results of operations, financial condition and capital
requirements of the companies in the BLS group and of BellSouth as a whole, and
such other factors as our board of directors considers relevant.
LATIN AMERICA GROUP STOCK. Because the companies in the Latin America
group are expected to require significant capital to finance their operations
and fund their future growth, BellSouth does 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.
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In making its dividend decisions, 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 the series of stock related to
either group to the lesser of funds available for distributions under Georgia
law and the available distribution amount for the applicable group. The
available distribution amount for a group is the same amount that would be
legally available for the payment of dividends on the series of stock related to
that group if that group were a separate company under Georgia law.
OUR BLS GROUP AND OUR LATIN AMERICA GROUP
The articles of amendment to our charter that our board of directors will
adopt if the shareholders approve our tracking stock proposal will establish 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
attributed to the BLS group are described beginning on page 75, and the
businesses attributed to the Latin America group are described beginning on page
89. 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. BLS
group stock and Latin America group stock are both common stocks of BellSouth
and not of either group.
DESCRIPTION OF BLS GROUP STOCK AND LATIN AMERICA GROUP STOCK
We have summarized below the material terms of BLS group stock and Latin
America group stock, the terms of which will be contained in the articles of
amendment to be adopted by our board of directors.
The following summary refers to the shares of Latin America group stock
that we have reserved for the BLS group or for issuance to the holders of BLS
group stock. It also refers to the related outstanding shares fraction which 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 the BLS group or for issuance to the
holders of BLS group stock. The outstanding shares fraction will equal one at
any time that there are no shares of Latin America group stock then so reserved.
The number of reserved shares of Latin America group stock and the
outstanding shares 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 they would have on the holders of BLS group stock
and the holders of Latin America group stock are further described in "-- Shares
Reserved for Another Group or for Issuance to the Holders of the Series of Stock
Related to that Group."
ACTIONS BY OUR BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL;
NO SEPARATE BOARDS OF DIRECTORS FOR THE GROUPS
Under our charter as amended by our articles of amendment, the board of
directors of BellSouth will be able to take actions with respect to the BLS
group and the Latin America group and BLS group stock 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. Neither the BLS group nor the
Latin America group will
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have a separate board of directors to represent solely the interests of holders
of BLS group stock or Latin America group stock. As described under "-- Voting
Rights," the holders of BLS group stock and the holders of Latin America 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 BLS group stock or Latin
America group stock or the BLS group or the Latin America group that is not on
the terms and conditions in our articles of amendment, 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 BLS group stock, Latin America 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 whose rights were affected by such 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 BLS group stock and Latin America 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 a series of common stock in exchange for stock of one or more
wholly-owned subsidiaries holding all of the assets and liabilities
attributed to the related group;
- dispose of assets attributed to the BLS group or the Latin America group;
- if we dispose of 80% or more of the assets attributed to a group, pay a
special dividend on, or redeem shares of, the series of common stock
related to that group or convert shares of that series into shares of
another series; or
- take actions that require an increase or decrease in the number of shares
of Latin America group stock reserved for the BLS group or for issuance
to the holders of BLS group stock.
AUTHORIZED AND OUTSTANDING SHARES
OUR CURRENT CAPITAL STRUCTURE
Our current charter authorizes us to issue 4.5 billion shares of stock,
consisting of 4.4 billion shares of common stock, par value $1 per share, and
100 million shares of first preferred stock, par value $1 per share. Of the 100
million shares of first preferred stock, our board of directors has designated
30 million shares as Series B First Preferred Stock in connection with our
existing rights agreement. As of July 31, 2000, approximately 1,874,100,602
shares of our existing common stock and no shares of first preferred stock were
issued and outstanding.
OUR PROPOSED CAPITAL STRUCTURE
The articles of amendment will 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:
- 6.4 billion shares as "BellSouth Corporation -- BLS Group Common Stock;"
and
- 2.25 billion shares as "BellSouth Corporation -- Latin America Group
Common Stock."
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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 immediately before the initial issuance of Latin America group
stock.
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 initial
issuance of Latin America group stock.
REASONS FOR INCREASE IN AUTHORIZED COMMON STOCK
Our board of directors believes that an increase in the number of
authorized shares of common stock at this time is in the best interests of
BellSouth so that we can implement the tracking stock proposal and have
available the number of shares needed for:
- capital raising;
- possible acquisitions;
- potential share dividends;
- future conversions; and
- our restated stock plan.
As described under "-- Conversion and Redemption," our board of directors
will have the right to convert Latin America group stock into BLS group stock at
specified premiums payable in shares of BLS group stock. Similarly, our board of
directors will have the right to convert BLS group stock into Latin America
group stock at specified premiums payable in shares of Latin America group
stock. The number of shares issuable in a conversion will vary based on the
relative market values of the two series of common stock and the number of
outstanding shares of common stock being converted. Our board of directors also
may pay a dividend in shares of a series of common stock. If our board of
directors determines that a conversion or a share dividend is in the best
interests of BellSouth, but at that time sufficient authorized shares of common
stock are not available, approval by our shareholders would be required to
approve an amendment to our charter.
We also have 84,355,475 shares of our existing common stock subject to
issuance pursuant to existing stock options under our stock plan as of July 31,
2000.
We have no present understanding or agreement for the issuance of any
additional shares of BLS group stock or Latin America group stock or for the
issuance of any additional series of common stock other than:
- the issuance of shares of Latin America group stock in the planned public
offering;
- the issuance of shares of Latin America group stock in the expected
distribution to the holders of BLS group stock;
- the issuance of shares of BLS group stock and Latin America group stock
under our restated stock plan and other employee benefit and shareholder
dividend reinvestment and purchase plans; and
- the issuance of shares of Latin America group stock in consideration for
a potential acquisition of our partner's interest in our Colombian
operations.
The additional shares of BLS group stock or Latin America group stock or
additional series of common stock that would be authorized for issuance if the
tracking stock proposal is implemented could be issued in one or more
transactions that would make a takeover of BellSouth more difficult and,
therefore, less likely, even though a takeover might be financially beneficial
to BellSouth and our shareholders. We have
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no present intention of issuing shares of common stock for these purposes. We
also have no knowledge of any person or entity that intends to seek a
controlling interest in BellSouth or to make a takeover proposal.
ISSUANCES OF COMMON STOCK WITHOUT SHAREHOLDER APPROVAL
After the initial issuance of Latin America group stock, our board of
directors may issue authorized but unissued shares of BLS group stock and Latin
America 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 BLS group stock and Latin America group stock.
Our board of directors will have the authority under our charter, as amended by
our articles of amendment, 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 any one or more of
the BLS group, the Latin America 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, we would reserve for the group or groups
to which those assets and liabilities were previously attributed shares of the
new series of common stock, 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.
Prior to the initial issuance of Latin America group stock, our board of
directors will, based on the advice of our financial advisor, designate the
initial number of shares of Latin America group stock reserved for the BLS group
or for issuance to the holders of BLS group stock. See "-- Shares Reserved for
Another Group or to the Holders of the Series of Stock Related to that Group."
ATTRIBUTION OF PROCEEDS OF ISSUANCES OF COMMON STOCK
If we issue shares of a series of common stock for cash or other property,
such as in an acquisition, the proceeds of that issuance, including property
acquired in an acquisition, will be attributed to the group in respect of which
that series of common stock has been issued. However, if there are shares of the
series of stock related to that group reserved for another group or for issuance
to the holders of the series of stock related to that other group, our board of
directors will decide at the time of the issuance whether any portion of the
proceeds should be attributed to the group for which those reserved shares have
been reserved. If it makes a determination to so attribute all or a portion of
the proceeds, then the number of reserved shares would be reduced by the number
of shares sold for those proceeds. For example, if our board of directors
decides to sell shares of Latin America group stock at a time when there are
shares of Latin America group stock reserved for the BLS group or for issuance
to the holders of BLS group stock, our board of directors could decide to
attribute the proceeds of those shares of Latin America group stock:
- to the Latin America group;
- to the BLS group; or
- partly to the BLS group and partly to the Latin America group.
When we attribute proceeds of an issuance of shares of Latin America group
stock to the BLS group, we may do so only to the extent there are a sufficient
number of shares of Latin America group stock
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reserved for the BLS group or for issuance to the holders of BLS group stock. If
at the time of any sale of shares of Latin America group stock there were no
shares of Latin America group stock reserved for the BLS group or for issuance
to the holders of BLS group stock, we could not attribute the proceeds of that
sale to the BLS group.
DIVIDENDS
Dividends on our existing common stock are limited to the funds of
BellSouth legally available for distributions under Georgia law, subject to the
prior payment on any preferred stock.
Our articles of amendment provide that dividends on BLS group stock or
Latin America group stock will be limited to the lesser of:
- the funds of BellSouth legally available for distributions under Georgia
law; and
- the available distribution amount for the BLS group or the Latin America
group, as the case may be.
The available distribution amount for a particular group is the same amount that
would be legally available for the payment of dividends on the series of stock
related to that group if that group were a separate company under Georgia law.
The available distribution amount for the relevant group is calculated by
multiplying:
- the outstanding shares fraction related to that stock, times
- the lesser of:
- any amount in excess of the minimum amount necessary to pay debts
attributed to that group as they become due in the usual course of
business; and
- the total assets attributed to that group less the sum of the total
liabilities attributed to that group plus the amount that would be
needed to satisfy the preferential rights upon dissolution of shares of
stock, if any, attributed to that group that are superior to the series
of stock related to that group.
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 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 BLS group stock, Latin America group stock, any
additional series of common stock that is subsequently created or any
preferred stock; and
- any repurchases of BLS group stock, Latin America group stock, any
additional series of common stock that is subsequently created or any
preferred stock.
Payment of dividends on BLS group stock or 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 the BLS group
or for issuance to the holders of BLS group stock 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.
If there are no longer any shares of Latin America group stock reserved for
the BLS group or for issuance to the holders of BLS group stock and we have
shares of BLS group stock reserved for the Latin America group or for issuance
to the holders of Latin America group stock 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
reserved shares were outstanding shares.
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<PAGE> 54
VOTING RIGHTS
Currently, the holders of our existing common stock have one vote per share
on all matters submitted to shareholders.
The holders of BLS group stock and the holders of Latin America 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 BLS group stock and the holders of Latin America 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.
On all matters as to which all 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 a number of votes,
which may be a fraction of one vote, 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.
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 of a series of stock related to one group
that we reserve for another group or for issuance to the holders of the series
of stock related to that other group will not have any voting rights.
Accordingly, the relative per share voting rights of BLS group stock, Latin
America 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.
Upon implementation of the tracking stock proposal, 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 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 BLS group stock,
Latin America 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
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<PAGE> 55
shareholders' meeting the number of outstanding shares and per share voting
rights of BLS group stock, Latin America group stock and any additional series
of common stock.
If shares of only one series of common stock are outstanding, each share of
that series will have one vote. If any series of common 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 BLS group stock and the holders of Latin America 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.
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 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 would 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:
- 2 billion shares of BLS group stock and 200 million shares of Latin
America 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;
49
<PAGE> 56
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>
As a result, the shares of BLS group stock would represent 2 billion votes,
which would equal 95.24% of our total voting power, and the shares of Latin
America group stock would represent 100 million votes, which would equal 4.76%
of our total voting power. These amounts are calculated as follows:
<TABLE>
<S> <C> <C> <C> <C>
1 vote per share X 2 billion shares of = 2 billion votes for
of BLS group stock BLS group stock BLS group stock
.5 votes per share 200 million outstanding 100 million votes for
of Latin America group X shares of Latin = Latin America group stock
stock America group stock
</TABLE>
<TABLE>
<S> <C> <C>
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
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
</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 would 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:
- 2 billion shares of BLS group stock and 800 million shares of Latin
America 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;
50
<PAGE> 57
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
800 million
2 votes per share of outstanding
Latin America X shares of Latin = 1.6 billion votes for
group stock America Latin America group
group stock stock
</TABLE>
<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
1.6 billion votes for of common 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 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 total votes to which the holders of
outstanding shares of Latin America group stock are entitled as a
group; and
y = the number of total 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
1,076,923,077 votes
x = 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>
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<PAGE> 58
The following table illustrates the calculation of the percentage of total
voting power represented by shares of BLS group stock and Latin America group
stock with respect to matters on which the holders of BLS group stock and the
holders of Latin America group stock vote as a single voting group, assuming a
number of shares outstanding and a range of average market values. Please note
that the average market values set forth in the following tables are for
illustrative purposes only and are not intended to be predictive of future
market values of BLS group stock or Latin America group stock.
ASSUMING 2 BILLION SHARES OF BLS GROUP STOCK AND
200 MILLION SHARES OF LATIN AMERICA GROUP STOCK OUTSTANDING
<TABLE>
<CAPTION>
AVERAGE MARKET VALUE FOR THE 20-TRADING PERCENTAGE OF TOTAL VOTING POWER
DAY VALUATION PERIOD FOR: REPRESENTED BY SHARES OF:
--------------------------------------- ---------------------------------
BLS LATIN AMERICA BLS LATIN AMERICA
GROUP STOCK GROUP STOCK GROUP STOCK GROUP STOCK
----------------- ------------------- -------------- ----------------
<S> <C> <C> <C>
$40 $15 96.39% 3.61%
$40 $25 94.12% 5.88%
$40 $35 91.95% 8.05%
$50 $15 97.09% 2.91%
$50 $25 95.24% 4.76%
$50 $35 93.46% 6.54%
$60 $15 97.56% 2.44%
$60 $25 96.00% 4.00%
$60 $35 94.49% 5.51%
</TABLE>
ASSUMING 2 BILLION SHARES OF BLS GROUP STOCK AND
1.5 BILLION SHARES OF LATIN AMERICA GROUP STOCK OUTSTANDING
<TABLE>
<CAPTION>
AVERAGE MARKET VALUE FOR THE 20-TRADING PERCENTAGE OF TOTAL VOTING POWER
DAY VALUATION PERIOD FOR: REPRESENTED BY SHARES OF:
--------------------------------------- ---------------------------------
BLS LATIN AMERICA BLS LATIN AMERICA
GROUP STOCK GROUP STOCK GROUP STOCK GROUP STOCK
----------------- ------------------- -------------- ----------------
<S> <C> <C> <C>
$40 $15 78.05% 21.95%
$40 $25 68.09% 31.91%
$40 $35 65.00%* 35.00%*
$50 $15 81.63% 18.37%
$50 $25 72.73% 27.27%
$50 $35 65.57% 34.43%
$60 $15 84.21% 15.79%
$60 $25 76.19% 23.81%
$60 $35 69.57% 30.43%
</TABLE>
* As adjusted to reflect the 35% limitation on the total voting power of
Latin America group stock
CONVERSION AND REDEMPTION
Our charter does not provide for either mandatory or optional conversion or
redemption of our existing common stock. The articles of amendment will permit
the conversion or redemption of BLS group stock and Latin America group stock as
described below.
CONVERSION OF COMMON 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
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<PAGE> 59
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, beginning on the second anniversary of the initial issuance of
Latin America group stock, our board of directors may effect a conversion of
Latin America group stock into BLS group stock only if the average market
capitalization of Latin America group stock is less than 60% of the average
combined market capitalization of Latin America group stock and BLS group stock.
CONVERSION OF BLS GROUP STOCK INTO LATIN AMERICA GROUP STOCK. Beginning on
the second anniversary of the initial issuance of Latin America group stock, 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 below 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.
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 RATIOS. The percentage of the ratio of the average market
values will be as follows:
- during the first year after the initial issuance of Latin America group
stock -- 120%;
- beginning on the first anniversary but before the second anniversary of
initial issuance of Latin America group stock -- 115%; and
- beginning on the second anniversary of the initial issuance of Latin
America group stock:
-- 110% if the average market capitalization of the series of common
stock to be converted is less than 40% of the average combined market
capitalization of the series of common stock to be converted and the
series of common stock into which it is to be converted; and
-- 100% if the average market capitalization of the series of common
stock to be converted is 40% or more, but less than 60%, of the
average combined market capitalization of the series of common stock
to be converted and the series of common stock into which it is to be
converted.
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 LATIN AMERICA GROUP STOCK OR BLS GROUP STOCK INTO ANY
ADDITIONAL SERIES OF COMMON STOCK. If our board of directors has issued one or
more additional series of common stock, our board of directors, without
shareholder approval, may convert each share of Latin America group stock or BLS
group stock into a number of shares of the additional series of common stock
equal to a percentage, set forth above "-- Conversion Ratios," of the ratio of
the average market value of one share of Latin America group stock or BLS group
stock, as the case may be, to the average market value of one share of the
additional series of common stock. A conversion of BLS group stock or 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 or BLS group stock
into Latin America 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 the
series of common stock to be converted will not receive any premium in a
conversion that is effected under such circumstances.
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<PAGE> 60
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; or
- the publication of any judicial or regulatory decision, determination or
pronouncement; or
- 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 BLS group stock or Latin America 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 BLS group stock or Latin America group stock
relates;
- the issuance or existence of BLS group stock or Latin America 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 BLS group stock or Latin America 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 BLS
group stock and Latin America group stock into one series of common stock that
would, after the recapitalization, represent an equity interest in the combined
businesses of the BLS group and the Latin America 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
consisting of these two series of stock was no longer in the best interests of
BellSouth. Our board of directors may decide to convert one series of stock into
another series of stock if the equity capital markets were to use the same
criteria in valuing Latin America group stock as they use to value BLS group
stock. For example, if Latin America group stock were to be valued primarily on
the basis of an earnings per share multiple and dividends, rather than multiples
of EBITDA, subscribers and population in licensed territories, and if the
performance of the underlying businesses were expected to be similar based on
those criteria, then our board of directors may be more likely to consider
converting Latin America group stock into BLS group stock, or vice versa, and
eliminate the separate series. A conversion could be exercised, however, at a
time that is disadvantageous to the holders of the series of stock related to
one group.
Conversion would be based upon the relative market values of BLS group
stock and Latin America group stock. Many factors could affect the market values
of BLS group stock and Latin America 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.
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<PAGE> 61
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 initial issuance of
Latin America group stock.
If:
- there is not more than an insubstantial risk of adverse income tax
consequences;
- 2 billion shares of BLS group stock and 200 million shares of Latin
America 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
- 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
$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 BLS group stock or
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 relevant group.
These provisions are intended to give us increased flexibility with respect
to spinning-off the assets attributed to one of the groups by transferring all
of the assets attributed to that group to one or more wholly-owned subsidiaries.
As a result of this redemption, the holders of BLS group stock and the holders
of Latin America 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 of either the BLS group or 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 BLS group stock and Latin America
group stock is no longer in the best interests of BellSouth and a spin-off of
the assets attributed to the BLS group or the Latin America group, as the case
may be, in a company separate from BellSouth is desirable.
If at the time of this redemption of Latin America group stock there are
shares of Latin America group stock reserved for the BLS group or for issuance
to the holders of BLS group stock, 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 shares fraction; and
- the number of shares of common stock of each subsidiary that will be
outstanding immediately after the redemption.
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<PAGE> 62
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, shares of BLS group
stock are reserved for the Latin America group or for issuance to the holders of
Latin America group stock.
If there are no longer any shares of Latin America group stock reserved for
the BLS group or for issuance to the holders of BLS group stock and shares of
BLS group stock are reserved for the Latin America group or for issuance to the
holders of Latin America group stock, 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 the Latin America group or for
issuance to the holders of Latin America group stock 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, shares of Latin America group stock are reserved for the BLS
group or for issuance to the holders of BLS group stock.
We may redeem shares of BLS group stock or Latin America group stock for
subsidiary stock only if we have funds legally available for distribution under
Georgia law.
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 were outstanding;
- 800 million shares of Latin America group stock were reserved for the BLS
group or for issuance to the holders of BLS group stock, resulting in a
1/5 outstanding shares 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 =
shares fraction outstanding immediately after the redemption
</TABLE>
<TABLE>
<C> <C> <C> <C> <S>
1/5 X 400 million = 80 million shares
</TABLE>
As a result of the outstanding shares fraction, 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
GROUP ASSETS OCCURS
If we dispose of 80% or more of the then fair value of the properties and
assets attributed to either the BLS group or 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 the stock related to that group. 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."
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<PAGE> 63
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 shares of the stock related to
that group in cash and/or securities or other property having a fair
value equal to the product of:
-- the outstanding shares fraction related to that stock; and
-- the net proceeds of the disposition;
- if the disposition involves:
- 100% of the properties and assets, redeem all outstanding shares of the
stock series of related to that group in exchange for cash and/or
securities or other property having a fair value equal to the product
of:
-- the outstanding shares fraction related to that stock; and
-- the net proceeds of the disposition;
- 80% or more but less than 100% of the properties and assets, redeem a
number of whole shares of the stock related to that group in exchange
for cash and/or securities or other property having a fair value equal
to the product of:
-- the outstanding shares 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 shares fraction related to that stock; and
-- the net proceeds of the disposition; or
- convert each outstanding share of the series of stock related to that
group into a number of shares of the series of stock related to another
group equal to 110% of the ratio of the average market value of one share
of the stock related to that group to the average market value of one
share of the stock related to the other group. 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 the series of
stock related to that group into a number of shares of an additional
series of common stock. The same premium provisions would apply.
If shares of Latin America group stock are reserved for the BLS group or
for issuance to the holders of BLS group stock 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 there are no longer any shares of Latin America group stock reserved for
the BLS group or for issuance to the holders of BLS group stock and we have
shares of BLS group stock reserved for the Latin America group or for issuance
to the holders of Latin America group stock 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 BLS group stock or
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 available
distribution amount for the group. We will pay the special dividend or complete
the redemption or conversion on or prior to the 120th trading day following the
disposition date.
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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 group whose assets are disposed of,
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
- any preferential amounts plus any accumulated and unpaid dividends in
respect of any preferred stock attributed to that 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
one series into the other will depend upon all of the facts and circumstances at
the time. Generally, if we dispose of 80% or more of the properties and assets
attributed to a group, we probably would redeem the series of common stock
related to that group 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 that group. We
may wish to convert one series of common stock into the other series, 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 occurs.
If:
- 200 million shares of Latin America group stock were outstanding;
- 800 million shares of Latin America group stock were reserved for the BLS
group or for issuance to the holders of BLS group stock, resulting in a
1/5 outstanding shares fraction;
- the net proceeds of the sale of more than 80% but less than 100% of the
properties and 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;
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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 shares net proceeds
fraction X --------------------------------- =
number of outstanding shares
of Latin America group stock
$22 billion
1/5 X --------------------------------- = $22 per share
200 million shares
</TABLE>
Because of the reserved shares of Latin America group stock, we will credit
to the BLS group, and charge against the Latin America group, $17.6 billion
( 4/5 X $22 billion).
(2) redeem for $25 per share a number of shares of Latin America group stock
equal to:
<TABLE>
<S> <C> <C> <C> <C>
outstanding shares net proceeds
fraction X --------------------------------- =
average market value of
Latin America group stock
$22 billion
1/5 X --------------------------------- = 176 million shares
$25 per share
</TABLE>
At the same time, because of the reserved shares of Latin America group
stock, we will effectively treat as redeemed 704 million reserved shares of
Latin America group stock 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
110% X Latin America group stock =
average market value of
BLS group stock
$25 per share
1.1 X --------------------------------- = .55 shares
$50 per share
</TABLE>
If we dispose of 80% or more but less than 100% of the properties and
assets attributed to the BLS group or 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 the series of stock related to that group into a number of shares of the
series of stock related to another group equal to 110% of the ratio of the
average market value of one share of the series of stock of the group to which
the disposed assets were attributed to the average market value of one share of
the series of stock related to another group. Following the second anniversary
of the initial issuance of Latin America group stock, 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 Common 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 80% or more but less than 100% of the properties and
assets attributed to a group, the market value of the series of stock related to
that group will decrease to reflect the sale and subsequent special dividend or
redemption and thus will only reflect the value of the remaining assets.
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<PAGE> 66
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 the
series of stock related to the group to which the disposed assets were
attributed into a number of shares of an additional series of common stock. A
conversion of BLS group stock or 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 or
BLS group stock into Latin America group stock.
The following illustration demonstrates the calculation of the number of
shares issuable upon conversion of the series of stock related to one series
into shares of the series of stock related to another group within two years
after a special dividend following a disposition of 80% or more but less than
100% of the properties and assets attributed to a group.
If:
- 2 billion shares of BLS group stock and 200 million shares of Latin
America group stock were outstanding;
- 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
$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 80% or more of the properties and assets attributed to
either 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 that
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 a group to other entities engaged or proposing to engage
in businesses similar or complementary to those of that group without requiring
a special dividend on, or a redemption or conversion of, the series of stock
related to that group, 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 80% or more 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;
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<PAGE> 67
- 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 the stock related to that
group, voting as a separate voting group.
NOTICES IF DISPOSITION OF GROUP ASSETS 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 the series of common stock related to
the group to which the disposed assets were attributed;
- the number of shares of that series of common 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 shares 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 stock with the net
proceeds of the disposition or convert the shares of the series of stock related
to the group to which the disposed assets were attributed into another series of
common stock.
We will mail to each holder of shares of the series of stock related to the
group to which the disposed assets were attributed the additional notices and
other information required by our articles of amendment.
DISPOSITION OF LESS THAN 80% OF THE ASSETS. If we dispose of less than 80%
of the properties and assets attributed to either the BLS group or the Latin
America group in a transaction or series of transactions, we will attribute the
proceeds to the group to which the disposed assets were attributed. We will use
those proceeds:
- in the business of that group;
- for distribution to the holders of the series of stock related to that
group; or
- to buy back shares of the series of stock related to that group in the
open market.
We may use those proceeds in the business of another group only if we
reattribute to the group to which the disposed assets and proceeds were
originally attributed consideration with an equivalent fair value.
SELECTION OF SHARES FOR REDEMPTION
If fewer than all of the outstanding shares of a series of stock are to be
redeemed, we will redeem those shares proportionately from among the holders of
outstanding shares of that series of 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 either series of 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.
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<PAGE> 68
LIQUIDATION RIGHTS
Currently, in the event of our dissolution, the holders of existing common
stock are entitled to share equally in our net assets after payment or provision
for payment of our debts and other liabilities and the payment of full
preferential amounts to which the holders of any preferred stock are entitled.
Under our articles of amendment, in the event of our dissolution, the
holders of BLS group stock, the holders of Latin America 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. Similar to our existing common
stock, however, holders of BLS group stock, Latin America 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 BLS group stock will have one liquidation unit;
and
- each outstanding share of Latin America group stock will have .25 of one
liquidation unit.
If we issue any 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 BLS group stock and
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 relative value of the assets
attributed to the groups.
No holder of BLS group stock will have any special right to receive
specific assets attributed to the BLS group and no holder of Latin America group
stock will have any special right to receive specific assets attributed to the
Latin America 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 80% or more
of our assets, will, alone, cause the dissolution of BellSouth, for purposes of
these liquidation provisions.
SHARES RESERVED FOR ANOTHER GROUP OR FOR ISSUANCE TO THE HOLDERS OF THE
SERIES OF STOCK RELATED TO THAT GROUP
Prior to the completion of the planned public offering of Latin America
group stock, BellSouth will reserve a number of shares of Latin America group
stock for the BLS group or for issuance to the holders of BLS group stock. This
number of shares of Latin America group stock will be determined by our
financial advisor, subject to the approval of our board of directors, by
dividing:
- the estimated value of our businesses attributed to the Latin America
group by
- the estimated offering price of Latin America group stock.
Our board of directors can attribute the net proceeds from the planned
public offering of Latin America group stock or future public offerings of Latin
America group stock or BLS group stock in its sole discretion to the Latin
America group or the BLS group. See "-- Attribution of Proceeds of Issuances
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<PAGE> 69
of Common Stock." Our board of directors intends to allocate the net proceeds
from the planned public offering to the businesses of the Latin America group.
That number of shares of Latin America group stock that we reserve for the
BLS group or for issuance to the holders of BLS group stock are not outstanding
shares of Latin America group stock and are not entitled to vote until we
actually issue them. The outstanding shares fraction indicates the relationship
between the shares of Latin America group stock held by the public and the sum
of those shares and the shares reserved for the BLS group or for issuance to the
holders of BLS group stock. It is calculated by dividing the number of shares of
Latin America group stock issued to the public by the sum of the number of
shares of Latin America group stock issued to the public plus the number of
shares of Latin America group stock then reserved for the BLS group or for
issuance to the holders of BLS group stock. The outstanding shares fraction will
equal one at any time that there are no shares of Latin America group stock
reserved for the BLS group or for issuance to the holders of BLS group stock.
At any time that there are shares of Latin America group stock reserved for
the BLS group or for issuance to the holders of BLS group stock, the outstanding
shares fraction will be used to allocate to the BLS group any dividend or
redemption payment made to the holders of Latin America group stock.
The following illustration demonstrates the calculation of the outstanding
shares 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 reserved for the BLS
group or for issuance to the holders of BLS group stock;
then the outstanding shares fraction with respect to the Latin America group
stock would equal 1/5 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 reserved shares of
Latin America group stock
100 million shares
--------------------------------------- = 1/5
100 million shares + 400 million shares
</TABLE>
The number of shares of Latin America group stock reserved for the BLS
group or for issuance to the holders of BLS group stock 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.
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<PAGE> 70
The number of shares of Latin America group stock reserved for the BLS
group or for issuance to the holders of BLS group stock 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 the holders of BLS group
stock, such as in the expected distribution;
- the issuance of Latin America group stock when convertible securities are
converted if those shares of Latin America group stock were reserved for
the BLS group or for issuance to the holders of BLS group stock;
- the issuance of Latin America group stock when securities convertible
into Latin America group stock and issued as a distribution to the
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 the
BLS group or for issuance to the holders of BLS group stock under other
circumstances as our board of directors determines appropriate to reflect the
economic substance of any other event or circumstance.
We are not currently aware of any transaction other than the expected
distribution that would require an increase or decrease in the number of shares
of Latin America group stock reserved for the BLS group or for issuance to the
holders of BLS group stock.
DETERMINATIONS BY OUR 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 any series of common stock will not have any preemptive
rights.
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 BLS group stock and Latin
America group stock. Our board of directors will have the authority under our
articles of amendment 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 BLS group, the Latin America 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, we would reserve for the group or groups
to which those assets and liabilities were previously attributed shares of the
new series of common stock, unless the new group paid fair value 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
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<PAGE> 71
applicable to that additional series of common stock. Any additional series of
common stock issued may be convertible into either BLS group stock or Latin
America 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 shares of either BLS group stock or Latin
America group stock, or both, could be reserved for the group related to that
additional series of common stock or for issuance to the holders of that
additional series of common stock. Similarly, our board of directors may provide
that shares of that additional series could be reserved for the BLS group or for
issuance to the holders of BLS group stock or for the Latin America group or for
issuance to the holders of Latin America group stock, or both.
RESTATED RIGHTS AGREEMENT
Under our current rights agreement, each share of our existing common stock
has associated with it one preferred stock purchase right. Each of these rights
entitles its holder to purchase, at a purchase price of $200, subject to
adjustment, "units" of one one-thousandth of a share of Series B first preferred
stock under circumstances provided for in our current rights agreement. Under
our current charter, a holder of a unit of the Series B first preferred stock
would be entitled to voting, dividend and other rights substantially similar to
those of a holder of one share of our existing common stock.
Our board of directors has determined that, if our shareholders approve the
tracking stock proposal, effective upon our completion of the planned public
offering of Latin America group stock, BellSouth will amend and restate our
current rights agreement to reflect our new equity structure. As a result,
instead of rights currently applicable to our existing common stock:
- each share of BLS group stock will have associated with it a right to
purchase a "unit" of one ten-thousandth of a share of Series C first
preferred stock at a purchase price of $200, subject to adjustment; and
- 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 Series D
first preferred stock at a purchase price of $200, subject to adjustment.
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 to all of
our shareholders or all holders of that series of common stock, as
applicable; and
- 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 or tender offer.
Our board of directors will designate shares of our first preferred stock
as "Series C First Preferred Stock" and "Series D First Preferred Stock" in
connection with the restated rights agreement. A holder of a Series C unit would
be entitled to voting, dividend and other rights substantially similar to those
of a holder of a share of BLS group stock. Similarly, a holder of a Series D
unit would be entitled to voting, dividend and other rights substantially
similar to those of a holder of a share of Latin America group stock.
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<PAGE> 72
As is the case with the existing rights, until a "distribution date"
occurs, the BLS group rights and the Latin America group rights:
- will not be exercisable;
- 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 the shares of BLS group stock and Latin America 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 BLS group stock;
- 20% or more of the outstanding shares of Latin America 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. Under our current rights
agreement, a person becomes an "acquiring person" if the person, alone or
together with a group, acquires beneficial ownership of 10% or more of the
outstanding voting power of the existing common stock.
If any person becomes an acquiring person:
- 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; and
- 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.
For these purposes, we will assume that each Series C unit has the same
market value as a share of BLS group stock, and each Series D unit has the same
market value as a share of Latin America group stock.
Under our current rights agreement, if a person becomes an acquiring
person, each holder of one of our existing rights would be entitled to purchase,
at the purchase price, a number of Series B units having a market value two
times the purchase price.
If a person becomes an acquiring person, our board of directors may, at its
option, exchange the BLS group rights and the Latin America group rights, other
than rights owned by the acquiring person, at an exchange ratio of two Series C
units for each BLS group right and two Series D units for each Latin America
group right. Our current rights agreement includes a similar exchange provision.
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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;
- 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 BellSouth's assets or earning power is sold or
transferred,
each holder of a BLS group right and each holder of a Latin America 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. Our current rights
agreement includes a similar provision.
As is the case with our existing rights, the BLS group rights and the Latin
America group rights will expire on December 11, 2009, unless we extend or
terminate them.
Also, as with our existing rights, at any time until a public announcement
that a person has become an acquiring person, our board of directors may redeem
all of the BLS group rights and the Latin America 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 BLS group rights or Latin America group rights will not, as
such, have any rights as a shareholder of BellSouth, including rights to vote or
to 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; and
- 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.
Like our current rights agreement, the restated rights agreement will
contain provisions designed to prevent the inadvertent triggering of the rights
and to allow our board of directors to waive or suspend its provisions to enable
a transaction it deems to be in the best interests of BellSouth.
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 and by-laws and our restated rights agreement that could be viewed as
having the effect of discouraging an attempt to obtain control of BellSouth.
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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 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 will provide 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 will authorize 100 million
shares of first preferred stock, of which ten million shares will have been
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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 be 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.
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 together
as a single 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.
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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.
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 that 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.
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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.
OUR RESTATED RIGHTS AGREEMENT
As described under "-- Restated Rights Agreement," in the event that a
person or group acquires, without the approval of our board of directors, 20% or
more of the shares of BLS group stock, 20% or more of the shares of Latin
America 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.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Where indicated, the following discussion reflects the opinion of Simpson
Thacher & Bartlett, our counsel, and 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 BLS group stock or Latin America group
stock, or the Treasury could issue regulations that change current law. Any
future legislation or regulations could apply retroactively to the
implementation of the tracking stock proposal.
This discussion addresses only those of you who hold your existing common
stock and would hold your BLS group stock as a capital asset. This discussion
does not:
- discuss all aspects of U.S. federal income taxation that may be relevant
to you in light of your particular tax circumstances;
- apply to you if you are:
- a foreign person;
- a dealer in securities or currencies;
- a trader in securities that has elected the mark-to-market method of
accounting for your securities;
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- a tax-exempt organization;
- an S corporation or other pass-through entity;
- a mutual fund;
- a small business investment company;
- a regulated investment company;
- an insurance company or other financial institution;
- a broker-dealer;
- a U.S. person whose "functional currency" is not the U.S. dollar; or
- are otherwise subject to special treatment under the federal income
tax law; or
- apply to you if you hold your existing common stock as part of a hedging,
integrated or conversion transaction, constructive sale or straddle.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH REGARD TO THE APPLICATION OF THE
U.S. FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION, AS WELL AS TO THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS TO WHICH YOU
MAY BE SUBJECT.
TAX IMPLICATIONS TO YOU OF THE IMPLEMENTATION OF THE TRACKING STOCK
PROPOSAL
In the opinion of Simpson Thacher & Bartlett, our counsel, for U.S. federal
income tax purposes, BLS group stock will be considered our common stock. This
means that:
- you will not recognize any income, gain or loss on the reclassification
of your existing common stock for shares of BLS group stock;
- your basis in BLS group stock received will equal your basis in your
existing common stock exchanged therefor;
- your holding period of BLS group stock will include the holding period of
the existing common stock; and
- any gain or loss recognized upon a subsequent sale or exchange of BLS
group stock will be capital gain or loss.
TAX IMPLICATIONS OF THE EXPECTED DISTRIBUTION OF LATIN AMERICA GROUP STOCK
We anticipate that the expected distribution of Latin America group stock
to the holders of BLS group stock will be tax-free to you. However, the exact
tax consequences will depend on the form of the distribution and other facts in
existence at the time of the distribution.
TAX IMPLICATIONS TO YOU OF A CONVERSION OF BLS GROUP STOCK OR LATIN AMERICA
GROUP STOCK
Generally, you will not recognize any income, gain or loss if we exercise
any of our options to convert one series of common stock into the other series
of common stock, and you will have a carryover adjusted tax basis in the shares
of common stock that you receive and generally a holding period that includes
the holding period of the common stock you surrendered in the conversion.
NO IRS RULING
No ruling has been sought from the IRS. The IRS has announced that it will
not issue any 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. Simpson Thacher & Bartlett's opinion is not binding on the IRS. In
addition, there are no court decisions or other authorities bearing directly on
the classification of instruments with characteristics similar to those
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of BLS group stock and Latin America group stock. It is possible, therefore,
that the IRS could assert that the receipt of BLS group stock as well as the
expected distribution of Latin America group stock or any subsequent conversion
of one series of common stock into the other series of common stock could be
taxable to you and to us.
CLINTON ADMINISTRATION PROPOSAL
The Clinton Administration proposed legislation in February 2000 dealing
with tracking stock such as BLS group stock and Latin America group stock. This
proposal would, among other things, treat the receipt of stock similar to BLS
group stock and 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, you could be subject to tax on your
receipt of BLS group stock or Latin America group stock after the date of
enactment. 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 BLS group stock or Latin America group stock into shares of
the other series without any premium on such conversion if there is more than an
insubstantial risk of adverse 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 is likely that we would exercise our right to convert
if there were more than an insubstantial risk of adverse income tax
consequences. If our shareholders approve the tracking stock proposal, our board
of directors will consider legislative developments relating to the proposal of
the Clinton Administration prior to creating BLS group stock and Latin America
group stock or distributing Latin America group stock.
STOCK EXCHANGE LISTINGS
We expect BLS group stock to be listed on the New York, Boston, Chicago,
Pacific, Philadelphia, London, Frankfurt, Amsterdam and Swiss Stock Exchanges.
BLS group stock will be listed under the symbol BLS.
We expect Latin America group stock to be listed on the New York Stock
Exchange. Latin America group stock will be listed under the symbol LA.
STOCK TRANSFER AGENT AND REGISTRAR
Our existing stock transfer agent and registrar, ChaseMellon Shareholder
Services, L.L.C., will act as the stock transfer agent and registrar for both
BLS group stock and Latin America group stock.
FINANCIAL ADVISOR
Evercore Partners Inc. has acted as financial advisor in connection with
structuring our tracking stock provisions. We have agreed to pay Evercore $2.3
million in fees. We have also agreed to reimburse Evercore for its reasonable
out-of-pocket expenses, including the fees and expenses of its lawyers, and to
indemnify it against liabilities under the Securities Act and certain other
liabilities.
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EFFECT ON EXISTING STOCK BASED AWARDS
If we implement the tracking stock proposal, each outstanding award for our
existing common stock under our existing stock plans will change into an award
for the same number of shares of BLS group stock effective upon the creation of
BLS group stock at the time of the completion of the planned public offering
and, where applicable, at the same purchase price. In addition, if we effect the
expected distribution of Latin America group stock to the holders of BLS group
stock, each outstanding award for BLS group stock will be converted into
separate awards for a number of shares of BLS group stock and a number of shares
of Latin America group stock determined based on the expected distribution. The
purchase price of the original outstanding award, if applicable, will be
allocated between the resulting BLS group stock award and the Latin America
group stock award.
NO DISSENTERS' RIGHTS
Under Georgia law, shareholders who dissent from the tracking stock
proposal will not have appraisal rights.
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BUSINESS OF THE BLS GROUP
The primary lines of business attributed to the BLS group include all of
our operations outside of Latin America, including our domestic wireline and
wireless communications businesses, our non-Latin American international
operations and our non-Latin American advertising and directory 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 communications services,
including local exchange, network access and limited long distance services.
Wireline communications operations provided 76% of the total operating revenues
of the BLS group in 1999 and 77% in the six months ended June 30, 2000.
While we provide telephone service to the majority of the metropolitan
areas in our region, there are many localities and sizable geographic areas
within the region that are served by nonaffiliated telecommunications carriers.
In addition, there is increasing competition for business customers and
residential customers within our territory from other telecommunications
carriers, including cable television operators.
Our business strategy is to grow by solidifying BellSouth as the leading
choice of customers for an expanding array of voice, data and Internet services
and to meet their national needs through organic expansion and teaming
arrangements with other companies. We have organized our marketing efforts to
parallel our four major customer bases:
- consumer;
- small business;
- large business; and
- interconnection services.
CONSUMER. This unit serves the largest segment of the market within our
region, the residential customer. While traditional telephone service remains
the core of this market, customer demands are rapidly broadening to include an
expanded range of standard services, from convenience features such as caller
ID, call forwarding and voice mail, to secondary lines, dial-up access to the
Internet, high-speed digital subscriber lines and video services.
SMALL BUSINESS. This unit focuses on providing, in addition to traditional
voice services, advanced voice, data, Internet and networking solutions to small
and medium-sized businesses. It offers a full selection of standard and
customized communications services to this market.
LARGE BUSINESS. This unit provides a wide range of standard and highly
specialized services and products to large and complex business customers. In
addition to traditional voice services, product and service offerings to these
customers include Internet access, private networks, high-speed data
transmission, conferencing and industry-specific communications arrangements.
INTERCONNECTION SERVICES. This unit provides interconnection to our
network and other related wholesale services to telecommunications carriers for
use in providing services to their customers. The unit provides services to both
affiliated and nonaffiliated customers in six different carrier markets:
- wireless service providers;
- competitive local exchange carriers;
- competitive switched and special access providers;
- long distance carriers;
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- information service providers; and
- public payphone service providers.
This unit provides these customers with voice and data, as well as advanced
products, transport and interconnection services.
Our customers are increasingly demanding bundled offerings of services of
two or more service offerings, and as such, we offer a wide array of services
consisting of combinations and prices responsive to our customers' needs.
LOCAL SERVICE
Local service operations provide lines from our exchange offices to
customers' premises for the origination and termination of telecommunications,
including the following:
- basic dial-tone local telephone service provided through the regular
switched network;
- dedicated private line facilities for voice and special services, such as
transport of data and video;
- switching services for customers' internal communications through our
facilities;
- services for data communications, which include managing and configuring
special service networks; and
- dedicated low- or high-capacity public or private digital networks.
We also offer various standard convenience features, such as caller ID,
call waiting, call return and 3-way calling on a monthly subscription or per-use
basis. Additional local service revenues are derived from charges for inside
wire maintenance contracts, voice messaging services, directory assistance and
public payphone services.
NETWORK ACCESS SERVICES
We provide network access and interconnection services by connecting the
equipment and facilities of our subscribers with the communications networks of
long distance carriers, competitive local exchange carriers, competitive
switched and special access providers and wireless providers. These connections
are provided by linking these carriers to our public switched network through
dedicated services and facilities.
LONG DISTANCE SERVICES
We provide limited long distance services within, but not between, areas
within our local service territory that were defined at the time the Bell
System, of which we were a part, was broken up in 1984. These services include
the following:
- service beyond the local calling area;
- Wide Area Telecommunications Service (WATS or 800 services) for customers
with highly concentrated demand; and
- special services, such as transport of data and video.
Revenues from these services have decreased as competition for customers
has intensified and as more customers have subscribed to our wider local area
calling plans. Long distance revenues will continue to decline until we receive
permission from the FCC to provide full long distance services.
While the Telecommunications Act of 1996 continued the restrictions on
providing full long distance wireline communications applicable to operations
that were in the Bell System, it established procedures for the removal of the
restrictions. We and other companies also subject to these restrictions
-- Verizon Communications, which results from the merger of GTE Corporation and
Bell Atlantic; SBC Communications; and Qwest Communications International, which
merged with U S West -- may apply
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to the FCC on a state-by-state basis to offer full long distance wireline
service. The FCC must act on each application within 90 days. The FCC must grant
the application if it determines, among other things, that the applicant has:
- met a competitive checklist establishing that it has opened its network
to competitive carriers; and
- shown:
-- the presence of a facilities-based competitor offering both
residential and business local services; or
-- if there is no such competitor, a statement that has been approved or
permitted to take effect by state regulatory authorities of the terms
under which the company would be willing to interconnect with a
competitive local exchange carrier; and
-- its application is consistent with the public interest.
The FCC is required to consult with state regulatory authorities and the U.S.
Justice Department when reviewing an application.
We believe that, in order to remain competitive, we must aggressively
pursue a corporate strategy of expanding service offerings beyond our
traditional businesses and markets. These offerings include local and full long
distance wireline voice, information and data communications. We plan to begin
offering full long distance wireline service in each of our Southeastern states
as soon as the FCC approves our application for each state.
During December 1999, the FCC approved Bell Atlantic's request to provide
full long distance wireline service in New York state, making it the first Bell
System-affiliated company to obtain relief under the Telecommunications Act of
1996 in any state. In June 2000, the FCC approved SBC Communications'
application to provide full long distance services in Texas. We are currently
conducting third-party tests of our operating support systems in Georgia and
Florida and expect to submit to the FCC by the end of this year a petition to
offer full long-distance wireline service in Georgia.
We have a three-pronged approach to gain relief under the
Telecommunications Act of 1996:
- continue to modify our facilities and operation support systems to
facilitate competition and aggressively seek approvals from the FCC and
state commissions;
- seek judicial review of adverse decisions that we believe to be
erroneous; and
- participate in actions by Congress to urge the FCC to implement the
Telecommunications Act of 1996 in a timely fashion.
Because of the scrutiny of applications by the state commissions, the FCC and
the Justice Department, the time required to obtain judicial review of adverse
decisions and the possible challenges by other carriers of any approved
applications, it is uncertain when we will be authorized to commence full long
distance service over our wireline network.
In April 1999, we bought an equity stake in Qwest Communications, currently
less than 5%, and formed a strategic commercial relationship with it to
facilitate the offering of a full set of integrated digital data, image and
voice communications services to our business customers. Under the agreement, we
immediately began the coordinated marketing of our respective services, with
Qwest offering its full portfolio of long distance services, data networking,
Internet and voice services. Once we are allowed to provide full long distance
wireline service, we will jointly develop and deliver a comprehensive set of
end-to-end high-speed data, image and voice communications services to business
customers, with an emphasis on broadband and Internet-based services.
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DIGITAL AND DATA SERVICES
A key component of our growth in local service and network access revenues
is the provision of digital and data services to all of our customer groups. We
deliver these services primarily over non-switched access lines that typically
have significantly greater capacity per line than a traditional switched access
line. These lines are well suited for high-capacity applications that previously
could not be provided over traditional switched access lines. Uses of these
lines include:
- bulk data transmission;
- video conferencing;
- automated teller machines, or ATMs;
- check/credit card authentication;
- multimedia; and
- interconnection with wireless networks.
We believe that the data telecommunications business will eventually become
larger than the traditional voice telephony market and that we will have to
expand significantly our capabilities in the data communications market. Data
communications provided over wireline facilities are generally subject to the
same laws and regulations as fixed line voice communications.
We have continuously updated our network with new advances in digital
technology. Our deployment of broadband services and upgraded systems enables us
to provide high-speed Internet access and entertainment services. These services
also utilize new technologies that provide for the simultaneous, high-speed
transport of voice, data, imaging and video data.
Since 1995, fiber optics has been our technology of choice for servicing
new housing developments. Nearly 500,000 homes are now served by fiber systems.
Of these, some 200,000 will have access to high-speed Internet and video
services provided by an integrated fiber architecture, which we began deploying
in Atlanta and South Florida during 1999. Integrated fiber also enables the
delivery of 160 channels of digital entertainment in Atlanta and South Florida.
We have also deployed products which provide high-speed Internet access up
to 1.5 Mbps (Megabits per second), 30 times faster than today's fastest dial-up
modems. We offer this product in 31 markets and had 74,000 customers at June 30,
2000. Access is currently available to approximately nine million access lines,
and we plan to increase this to 11.5 million by the end of 2000. We offer a
self-install kit for high-speed Internet access in seven cities and are planning
to expand these offerings to additional areas in the Southeastern U.S.
BellSouth offers dial-up and dedicated Internet and intranet connections to
consumers and businesses. This service is deployed on local Internet protocol
networks across the Southeastern U.S., whereby customers have access to a
variety of public-switched and dedicated networking capabilities to meet their
data communications, electronic commerce, web design and hosting and customer
network management needs. We provided Internet services to approximately 788,000
customers at June 30, 2000.
OTHER SERVICES
Other services include:
- billing and collection services for long distance carriers;
- customer premises equipment sales and maintenance services;
- provision of separate network elements to competitors;
- enhanced white pages listings;
- collocation of competitors' equipment in our facilities; and
- multichannel video programming.
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REGULATION
LOCAL AND LONG DISTANCE SERVICE. We are subject to regulation of our local
and limited long distance services by a state authority in each state where we
provide intrastate telecommunications services. Such regulation covers prices,
services, competition and other issues.
The state regulatory commissions or state legislatures have established
maximum prices that can be charged for certain telecommunications services.
While such plans limit the amount of increases in prices for specified services,
they enhance our ability to adjust prices and service options to respond more
effectively to changing market conditions and competition. Price regulation also
provides an opportunity to benefit more fully from productivity enhancements.
The majority of these plans have limitations on raising prices for basic local
exchange services during the early years with provisions for inflation-based
price increases in later years.
NETWORK ACCESS. The FCC regulates rates and other aspects of interstate
network access services. State regulatory commissions have jurisdiction over the
provision of network access services to carriers to complete intrastate
telecommunications on their networks.
Historically, network access service charges paid by other carriers were
set at levels that subsidized the cost of providing local residential service.
The Telecommunications Act of 1996 requires that the FCC identify the local
service subsidy implicitly provided by historical network access charges,
provide for the removal of that subsidy from network access rates, arrange for a
universal service fund to ensure the continuation of service to high-cost,
low-income service areas and develop the arrangements for payments into that
fund by all carriers.
The FCC regulates interstate prices using a price regulation plan, which is
known as a "price cap" plan. The FCC's price cap plan limits aggregate price
changes to the rate of inflation, minus a productivity offset, plus or minus
other cost changes approved by the FCC. In May 1997, the FCC adopted orders
regarding revisions to the price cap plan, access charge reform and the
establishment of the universal service fund. The orders on the price cap plan
and access charge reform resulted in access rate reductions related to
per-minute-of-use charges and increases to per-line charges. We have been
pricing our services based on a 6.5% productivity factor, which means that price
increases could only occur to the extent that the gross domestic product price
index of the U.S. increased by greater than 6.5% over an annual period. If the
Index increases by less than 6.5%, we would reduce prices. Interstate prices
have been decreasing over the last few years as a result of low inflation in the
U.S. economy.
In May 1999, the U.S. Court of Appeals for the District of Columbia Circuit
overturned the FCC's order establishing the 6.5% productivity factor and
remanded the matter to the FCC. In November 1999, the FCC initiated a rulemaking
proceeding to review the 6.5% productivity factor. Any increase in this factor
would result in reductions of network access charges paid to us by long distance
carriers, subscribers or both.
The FCC's 1997 order addressed the way in which local exchange telephone
companies, such as our subsidiary, BellSouth Telecommunications, are compensated
when their networks are used to originate or terminate long distance
telecommunications. This order changed some of the compensation that local
exchange telephone companies receive as per-minute charges from long distance
carriers to a flat-rate form of compensation that is collected from both
end-user subscribers and long distance carriers. Implementation of access reform
was not intended to affect the revenues collected by local exchange telephone
companies because decreases in revenues associated with per minute charges
resulting from access reform were offset by increased revenues associated with
flat-rated charges.
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 are at risk. In addition, other aspects of access
charge regulation
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and universal service fund contribution requirements that are applicable to
local exchange telephone companies are also under consideration and could result
in greater expense levels or reduced revenues.
On May 31, 2000 the FCC released an order on a proposal submitted by a
coalition of local and long distance providers, including BellSouth, Bell
Atlantic, GTE, SBC Communications, AT&T and Sprint, 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 apply to
all local exchange carriers operating under price caps. Although one effect of
the order will be to reduce access charges paid to BellSouth by other carriers,
we will be able to increase subscriber line charges paid by residential and
single-line business customers each year through 2003. Any increases which we
request after July 2001 are subject to a cost review. During June 2000, we filed
tariff modifications implementing the proposal. These modifications will result
in interstate price decreases of approximately $270 million on an annual basis.
The FCC's 1997 universal service order established new funding mechanisms
for high-cost, low-income service areas. We began contributing to the new funds
on January 1, 1998 and are allowed recovery of our contributions through
increased interstate charges. As part of implementing the coalition proposal,
our universal service contributions are being recovered directly from retail end
users.
In October 1999, the FCC announced the details of its universal service
mechanism for non-rural carriers serving high-cost areas to ensure that
customers in those areas receive telephone service at affordable rates. We
expect to receive support for service to residents in Alabama, Kentucky,
Mississippi and South Carolina. We believe the net financial effect of the new
arrangement will not be material.
The order established significant discounts to be provided to eligible
schools and libraries for all telecommunications services, internal connections
and Internet access. It also established support for rural health care providers
so that they may pay rates comparable to those that urban health care providers
pay for similar services. Industry-wide annual costs of the program, estimated
at approximately $2.3 billion, are to be funded out of the universal service
fund. Local and long distance carriers' contributions to the education and
health care funds would be assessed by the fund administrator on the basis of
their interstate end-user revenues.
COMPETITION
LOCAL SERVICE. The Telecommunications Act of 1996 requires the elimination
of state and local legislative and regulatory barriers to competition for
interstate and intrastate telecommunications services, subject only to
competitively neutral requirements to preserve and advance universal service,
protect the public safety and welfare, maintain the quality of
telecommunications services and safeguard the rights of customers. The
Telecommunications Act of 1996 also includes requirements that incumbent local
exchange carriers, such as BellSouth Telecommunications, negotiate rates, terms
and conditions with other carriers regarding interconnection, the provision of
access to unbundled network elements, the payment of compensation for local
calls terminating on the network of a carrier other than the originating
carrier, the resale of telecommunications services and the provision of physical
collocation of equipment in the incumbent carriers' facilities. If a negotiated
agreement cannot be reached, either party may seek arbitration with the state
regulatory authority or the FCC if the state fails to act. If rates are
disputed, the arbitrator must set rates based on cost, which may include a
reasonable profit. Incumbent carriers are also required to negotiate wholesale
rates for the purpose of providing retail telecommunications services available
for resale by competing carriers. If agreement cannot be reached, the arbitrator
must set the wholesale rates at the incumbent carriers' retail rates, less costs
that are avoided. We have executed numerous interconnection and resale
agreements with other carriers. Many of these agreements expired during 1999 and
are being renegotiated.
The state public service commissions with jurisdiction over our services
have granted numerous applications to competitive local exchange carriers for
authority to offer local telephone service. As a result, substantial competition
has developed for business customers, which provide a greater concentration of
higher margin revenues than residential customers. Competitors include major
carriers which resell our local services, use separate network elements or
provide services over their own facilities.
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In connection with the requirements of the Telecommunications Act of 1996,
in August 1996, the FCC released an order adopting rules governing
interconnection and related matters. With regard to setting the price of
interconnection between incumbent carriers and other carriers, the FCC has
jurisdiction to set pricing standards to be implemented by the state
commissions. The FCC has prescribed a forward-looking economic cost approach for
pricing interconnection and the separate, unbundled network elements, such as
the use of the customer access line, the central office switch and other
properties that together constitute what a carrier needs to provide
telecommunications service.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit vacated the
FCC methodology for pricing unbundled network elements and the methodology for
determining wholesale rates for retail services. The order also affirmed the
previous decision of the Eighth Circuit that vacated FCC rules that required
incumbent carriers to combine previously uncombined elements for requesting
carriers.
Access to proprietary network elements can be required only when necessary
or, in the case of a non-proprietary element, when the failure to provide access
would impair the ability of the requesting carrier to provide services. Based on
a U.S. Supreme Court decision in 1999, the FCC has issued an order adopting a
revised list of network elements that incumbent carriers must make available to
competitors.
The FCC's revised list, together with its regulations prohibiting incumbent
carriers from separating currently combined elements, means that incumbent
carriers will be required to provide certain combinations of network elements
that competitors may substitute for certain higher priced incumbent carriers'
services. This substitution could lead to further increases in competition for
certain local exchange access services and materially reduce the incumbent
carrier's access charge revenues. The FCC determined that, for an interim
period, it would not apply new rules that would allow the substitution of
certain network elements for special access services unless the
telecommunications carrier provides a significant amount of local exchange
services. The FCC announced that it will conduct a further inquiry into the use
of network element combinations to provide certain special access services.
The FCC's revised list does not, however, require incumbent carriers to
make some network elements used to provide advanced data services available to
competitors, except in very limited circumstances. This outcome reduces a
disincentive to the incumbent carriers to invest in these rapidly expanding
services.
The FCC has also adopted a "pick and choose" rule which requires that
incumbent carriers make available to requesting competitive local exchange
carriers contractual provisions, including related rates and terms, contained in
any other agreements that have been previously approved by the state commission
for that same state. Exceptions are allowed when the incumbent carrier can prove
to the state commission that providing the particular item requested is either
more costly than providing it to the original carrier or is technically
infeasible. These rulings may make it easier for a competitive local exchange
carrier to compete with us.
An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by communications
providers in all major metropolitan areas throughout our wireline service
territory. These networks offer high-volume users a competitive alternative to
our public and private line offerings. Furthermore, wireless services, such as
cellular, personal communications service (PCS) and paging services, and
Internet services (including all of these services being provided by our
companies) increasingly compete with wireline communications services. These
wireless services are provided by a number of well-capitalized entities in most
of our markets.
Technological developments have made it feasible for cable television
networks to carry data and voice communications, and, as such, we face increased
competition within our region from cable television ventures. AT&T has purchased
extensive cable systems and has announced plans to upgrade those systems to
offer two-way telephony services. AT&T has also formed joint ventures and has
announced plans to expand this initiative with other cable television companies
to provide telephony nationwide.
In May 1998, the FCC adopted an order that will allow telecommunications
carriers to recover over five years their carrier-specific costs of implementing
long-term number portability, which allows customers to retain their local
telephone numbers in the event they change local carriers. The order allows for
such
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cost recovery in the form of a surcharge from customers to whom number
portability is available. The surcharge began during the second quarter of 1999.
It remains unclear to what degree, if any, we will be compensated for the
non-carrier-specific costs of interconnection.
Federal and state policies strongly favor further changes to the networks
and business operations of incumbent carriers to encourage telecommunications
services competition. 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 its power. While competition for local service revenues could
adversely affect our results of operations, we are working to support the
opening of local markets to competition by facilitating interconnection of our
facilities and systems with those of competitive local exchange carriers. These
actions, among other things, should allow us to qualify to offer in-region full
long distance wireline service as contemplated in the Telecommunications Act of
1996.
NETWORK ACCESS. FCC rules require us to offer expanded interconnection for
interstate special and switched network access transport. As a result, we must
permit competitive carriers and customers to terminate their transmission lines
on our facilities in our central office buildings and other locations through
collocation arrangements. The effects of the rules are to increase competition
for network access transport. Furthermore, long distance carriers are
increasingly connecting their lines directly to their customers' facilities,
bypassing our networks and thereby avoiding network access charges entirely. In
addition, commercial applications of Internet telephony are being developed.
This medium could attract substantial traffic because of its lower cost
structure due to the fact that FCC rules do not currently impose access charges
on most Internet communications.
LONG DISTANCE. A number of companies compete with us in our nine-state
region for the limited long distance business that we are permitted to conduct
by reselling long distance services obtained at bulk rates from us or providing
long distance services over their own facilities. Effective February 1999, we
implemented 1+ dialing parity in the last of the nine states in our region. This
feature allows customers to choose a competing long distance carrier without
having to dial a special access code.
The Telecommunications Act of 1996 permits all carriers, including local
exchange carriers such as Verizon, Qwest and SBC Communications, to offer full
long distance service outside of the states containing their local wireline
service territories. Many of these carriers have announced plans to compete for
all long distance service in our territory. In addition, AT&T, WorldCom, Sprint
and other carriers currently provide long distance service to our local service
customers.
FRANCHISES AND LICENSES
Our local exchange business is typically provided under certificates of
public convenience and necessity granted pursuant to state statutes and public
interest findings of the various public utility commissions of the states in
which we do business. These certificates provide for franchises of indefinite
duration, subject to the maintenance of satisfactory service at reasonable
rates. The Telecommunications Act of 1996 provides that these franchises must be
non-exclusive.
DOMESTIC WIRELESS
BUSINESS OPERATIONS
We are one of the largest wireless communications providers in the U.S.,
with operations primarily in our wireline service territory. These operations
provided 14% of the total operating revenues of the BLS group in 1999 and 15% in
the six months ended June 30, 2000. We own subsidiaries and interests in joint
ventures that operate 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,
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Atlanta and Tampa-St. Petersburg. At June 30, 2000, we had approximately 5.9
million wireless customers on a proportionate basis with a penetration rate of
10.2% of the population in our licensed markets.
Our wireless revenues are derived primarily from monthly access and airtime
charges, sales of phones and equipment, roaming charges, custom calling and
convenience features, long distance charges and service activation fees. Prices
of wireless services are not regulated by the FCC or state regulatory
commissions.
The Telecommunications Act of 1996 Act does not regulate the offering of
wireless long distance services, and we offer full long distance wireless
communications in conjunction with our wireless offerings. Approximately 80% of
our customers subscribe to our long distance service. In areas where we do not
have long distance telephone facilities, we connect with the networks of long
distance carriers.
The transformation of our network from analog to digital technology has
increased our costs, primarily as a result of higher-cost digital handsets,
which typically cost one-third more than analog handsets. Although total
customer acquisition costs have increased, we have broadened our sales
distribution channels to reduce other components of customer acquisition costs.
Wireless services are marketed through company-owned stores, authorized agents,
national retail outlets and an Internet sales channel. In addition, we are
increasingly utilizing cross-selling efforts by customer service representatives
handling other services, a less costly alternative to independent agents and a
natural entrant to selling bundled services. New methods of addressing the issue
of customer retention are also being implemented, including the use of
predictive models to identify customers who are likely to discontinue service.
TECHNOLOGY
We offer both analog and digital wireless services in most of our markets.
Where we provide digital wireless services, we utilize either TDMA (Time
Division Multiple Access) or GSM (Global System for Mobile Communications)
digital technologies. Digital cellular technology offers many advantages over
analog technology, including a three-fold gain in channel capacity, the ability
to provide advanced services and functionality, inherent privacy, higher
transmission quality and transmission security and the opportunity to provide
improved data transmissions. Digital customers also generate higher average
revenue per customer and have lower churn than analog customers.
We are addressing the interoperability of our different wireless
technologies through participation in industry alliances and investments in
businesses that are developing adaptive technologies. In addition, we are
evaluating standards and assessing the potential demand for high speed wireless
data access using third generation wireless technologies. We are focusing on
maximizing our ability to deliver these capabilities while fully utilizing our
existing wireless networks.
COMPETITION
Under FCC regulations, up to ten wireless carriers -- two cellular, six PCS
and two enhanced specialized mobile radio -- and any number of resellers may
operate in a single market. This structure has resulted in the presence of
multiple aggressive competitors and makes it more difficult to attract new
customers and retain existing ones. While we do not compete primarily on the
basis of price, low prices offered by competitors who are attempting to build a
subscriber base have created pressure to reduce prices and develop pricing plans
attractive to lower usage customers. We are responding to the competitive
conditions by offering a variety of innovative plans and new products and
targeting the lower-usage customer through use of prepaid calling and other
service options. We are addressing pressure on margins by aggressively reducing
expenses.
The wireless communications industry continues to experience significant
consolidation. The merger of Bell Atlantic/GTE/Vodafone/AirTouch (Verizon) will
create a large, well-capitalized competitor with substantial financial,
technical, marketing and other resources to compete with our offerings. AT&T has
acquired wireless companies and negotiated roaming arrangements that give it a
national presence. These
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competitors may be able to offer nationwide services and plans more quickly and
more economically than we can and obtain roaming rates that are more favorable
than those which we can obtain.
In response to competition, we have introduced variations of fixed-rate
calling plans that appeal to a broad base of customers. The U.S. wireless
industry is increasingly shifting towards the use of one-rate pricing plans,
which include roaming and long distance at no extra charge. We have introduced a
variety of one-rate plans, which include certain numbers of minutes of use per
month. These plans have increased our customers' roaming activity and the
roaming charges payable to other carriers. To keep these costs down, we have
signed long-term roaming contracts with other carriers, which gives customers
access to nationwide coverage at favorable rates. To reduce costs in areas
covered by smaller carriers, we can program customers' digital handsets over the
air to seek out the most cost-effective roaming provider.
We have also introduced prepaid wireless calling plans in many areas to
further penetrate the market. Prepaid customers can purchase service in fixed
dollar increments, and these plans allow those consumers to receive service in a
cost-effective manner with no credit check, service contract or monthly access
fee. This customer base has a significantly higher churn rate than the post-paid
customer base, and we are seeking methods to reduce that rate. Prepaid
subscribers represent a small but growing portion of the domestic customer base.
We have also introduced a "roll-over" plan across our markets which allows
customers to retain unused minutes from one month for use in subsequent months.
We are the first wireless carrier to offer such a plan and expect it to increase
market share and market penetration.
We are also introducing new wireless products to differentiate our service,
such as BellSouth One Number Service, text messaging and multiple product
offerings, including Internet service. For business customers, we have begun
offering wireless systems that allow business customers to use their wireless
handsets as office phones while at the workplace and as mobile phones when out
of their buildings.
JOINT VENTURE WITH SBC COMMUNICATIONS
In April 2000, we announced plans to combine substantially all of our
domestic wireless businesses with those of SBC Communications into a venture
that will comprise the nation's second largest wireless company, with service in
42 of the top 50 U.S. markets. This venture, which will cover a total population
of 175 million people and serve more than 16.0 million subscribers, will be
owned 40% by BellSouth and 60% by SBC Communications but will be jointly
controlled. We expect to receive the required regulatory approvals and close the
transaction by the end of 2000. One of our domestic partners has sued to enjoin
the contribution to the venture of our interest in the PCS property located in
North Carolina and South Carolina. We do not believe this action will delay the
closing of the venture.
LICENSES AND REGULATION
The domestic wireless systems in which we have an interest are operated
under licenses granted by the FCC. A carrier holding a license to provide
cellular service in a territory has limited eligibility for a PCS license
covering the same territory. Prior approval by the FCC is required for the
assignment of a license or the transfer of control of a license. The licenses
are generally issued for up to 10-year periods. At the end of the license
period, a renewal application must be filed. We believe renewal will generally
be granted on a routine basis upon showing of compliance with FCC regulations.
Licenses may be revoked and license renewal applications may be denied for
cause. With regard to cellular licenses, the FCC has established the procedures
and standards for conducting comparative renewal proceedings, including the
award of a "renewal expectancy" that effectively eliminates the need to consider
competing applicants when the incumbent meets specified criteria.
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ADVERTISING AND DIRECTORY PUBLISHING
BUSINESS OPERATIONS
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, which
represented approximately 8% of total operating revenues of the BLS group in
1999 and 7% in the six months ended June 30, 2000.
We are one of the leading publishers of telephone directories in the United
States. In 1999, we published alphabetical white page directories of business
and residential telephone subscribers in all of our wireline telecommunications
markets and sold advertising in and published classified directories under The
Real Yellow Pages(R) trademark in the same markets.
We also act as sales agent for advertising in yellow page directories in
certain states and for nonaffiliated telephone companies and receive a portion
of the advertising revenue as a commission. During 1999, we contracted with 105
nonaffiliated telephone companies to sell advertising in over 300 classified
directories in over 40 states. We also act as agent for national yellow page ad
placements in all 50 states on behalf of over 700 companies.
In addition to publishing directories in traditional paper form, we publish
white and yellow page directories in other media. For example, we offer white
page directories on CD ROM for our major markets, publish Internet white and
yellow page directories for the Southeastern U.S. and offer additional Internet
advertising services. These services link to and are available on similar
on-line directories with information for businesses nationwide. We also sell
additional advertising to local and national businesses for our on-line yellow
pages.
We continually seek to expand our advertising and publishing business by
increasing advertising sales in our traditional directory products. We also
market to organizations and companies with unique directory needs. Export
directories, audio text advertising, restaurant and entertainment guides and
Internet directories are examples of such directory services and products.
We own a printing company that prints substantially all white and yellow
pages and specialty directories distributed within our wireline
telecommunications markets. In 1999, it printed 56 million white page, yellow
page and specialty directories. This company also prints other materials for us
and our affiliates and, to a limited extent, documents for nonaffiliated
companies.
COMPETITION
Competition for advertising revenues continues to intensify. Many different
media compete for advertising revenues, and some newspaper organizations and
other companies have begun publishing their own directories. Competition for
directory sales agency contracts for the sale of advertising in publications of
nonaffiliated companies also continues to be strong. Competitors offer directory
information in various media such as CD ROM, the Internet and other electronic
databases. As these offerings expand and are enhanced through interactivity and
other features, we will experience heightened competition in our directory
advertising and publishing businesses. We have responded to the increasing
competition and changing market environment with new directory products, product
enhancements, multi-media delivery options, including Internet directory
services, pricing changes, competitive advertising, local promotions, directory
redeliveries and extended distributions.
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ALL OTHER
INTERNATIONAL OPERATIONS
We own interests in joint ventures that provide wireless communications in
Denmark, Germany, Israel and India.
DENMARK. We have a 46.5% ownership interest in a company that offers
GSM-based nationwide wireless services to Denmark's total population of
approximately 5.3 million people. This company began providing nationwide
wireless voice service in Denmark in 1992 and nationwide wireless data services
in 1994. Its principal competitors are Tele Denmark, Telia and Mobilix.
GERMANY. We have a 22.5% ownership interest in E-Plus, a wireless
communications company that provides nationwide service on its GSM network to
Germany's total population of approximately 82.0 million people. It began
providing nationwide wireless service in Germany in 1994 and now also offers
wireless Internet services. Its principal competitors are Deutsche Telekom,
Mannesman-Vodafone AirTouch and VIAG.
In 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% interest in E-Plus, and we received an option exercisable after 18 months
of converting our 22.5% interest in E-Plus into either 200 million shares of KPN
or shares representing at the time an estimated 33.3% ownership interest in
KPN's wireless subsidiary. We also have agreed to make up to $3 billion of loans
to KPN to be used for further wireless investments in Europe and received
non-detachable warrants to purchase approximately 90 million additional shares
of KPN.
ISRAEL. We have a 34.75% ownership interest in a company that offers
TDMA-based nationwide wireless services to Israel's total population of
approximately six million people. It began providing nationwide wireless service
in Israel in 1994. Its principal competitors are Pelephone and Partner.
INDIA. We have a 24.5% ownership interest in a small company that offers
GSM-based wireless communications to areas covering approximately 5.5 million
people. This company began providing wireless service in 1995.
Our international wireless operations are subject to significant
competition, generally from at least one other wireless provider and
increasingly, from multiple new PCS providers and any number of resellers. These
competing service providers generally have partners who are at least as well
capitalized as we are. In some cases, the government-owned telephone companies
operate incumbent wireline and wireless systems or have a substantial investment
in the competing wireless provider. In all cases, the competing wireless
providers generally have access to substantial financial resources. Many
governments have privatized the government-owned telephone companies, and these
privatized companies often become more formidable competitors due to the
availability of additional capital and technical expertise. We anticipate an
increasing number of facilities-based competitors in our wireless service
markets.
Our ability to introduce new products and services depends to a large
extent upon whether the new products and services are permitted by the local
laws and regulatory authorities. As countries have encouraged foreign investment
in telecommunications and have privatized their government-owned wireless
telephone companies, the general trend has been toward increasing deregulation
of telecommunications. In several of our markets, our joint ventures offer or
plan to offer international long distance services either to their wireless
subscriber bases or, in some cases, to the entire population. In addition, we
offer domestic long distance service in certain markets through our nationwide
wireless facilities.
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These international wireless operations are provided pursuant to the terms
of licenses granted by the telecommunications agency or similar supervisory
authority in the various countries. Such agencies typically also promulgate and
enforce regulations regarding the construction and operation of network
equipment. Our international operations also typically require government
permits, including permits from local building and planning commissions for the
construction and operation of cell sites. Some of our international operations
have not been able to obtain all required permits. Although we do not believe
such non-compliance will have a material 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. Other
regulations commonly encountered in international markets include legal
restrictions on the percentage ownership of telecommunications licensees by
foreign entities, such as us, and transfer restrictions or government approval
requirements regarding changes in the ownership of licensees.
The terms of the licenses granted to our international ventures and
conditions of the license renewal vary from country to country. Although license
renewal is not usually guaranteed, most licenses do address the renewal process
and terms, which we believe we will be able to satisfy. As licenses approach the
end of their terms, it is our intention to pursue renewal as provided by these
license agreements.
ENTERTAINMENT
We have subsidiaries and joint ventures that develop, implement and manage
video systems in several areas within our region. These systems include wireline
and wireless based systems designed to compete with cable operators market by
market. We currently operate 100% digital wireless video systems covering more
than one million homes in Atlanta, New Orleans, Jacksonville, Daytona Beach and
Orlando. In addition, we operate wired systems in several local communities near
Atlanta, Birmingham, Charleston, SC, Miami and Jacksonville, FL. Programming
content for the cable systems is provided primarily by americast(R), a joint
venture partnership of which we are a part owner.
In May 2000, we signed a long-term satellite service agreement with GE
Americom, a subsidiary of GE Capital Corporation. Through this arrangement, we
will have the capability to deliver digital TV entertainment and interactive
information to over 14 million households in our current markets and potentially
50 million households in neighboring states outside the Southeastern U.S.
WIRELESS DATA
We offer to businesses and individuals wireless data services through a
nationwide, wireless packet data network that covers a service area of
approximately 200 million people. We offer the ability to customize the wireless
data services, including e-mail messaging, applications and access to
information and e-commerce. For businesses, the service addresses the following
markets:
- telemetry (monitoring of devices);
- transactions (point-of-sale, debit cards and ATMs);
- field force automation (field service, transportation, utilities, etc.);
and
- general business needs of mobile workforce professionals (executive
management, sales force, marketing teams, etc.)
To both businesses and individuals we offer Interactive Messaging PLUS.
Customers may use our services on hand-held devices, such as the RIM
Inter@ctive(TM) Pager 950 and Palm VII(TM), and on laptops. Our wireless data
operations are included in our agreement with SBC Communications discussed
above.
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RESEARCH AND DEVELOPMENT
We conduct research and development activities internally and through
external vendors, primarily Telcordia Technologies. Telcordia provides research
and development and other services to us and other telecommunications companies.
We have contracted with Telcordia for ongoing support of engineering and
systems. In addition, we are a member of the National Telecommunications
Alliance, an organization that supports our commitment to national security and
emergency preparedness.
EMPLOYEES
At June 30, 2000, operations in the BLS group employed approximately 89,200
individuals. Of those totals, approximately 67,800 were employees engaged in our
wireline operations. About 59% of our employees at June 30, 2000 were
represented by the Communications Workers of America (the CWA), which is
affiliated with the AFL-CIO. In September 1998, members of the CWA ratified new
three-year contracts. The contracts include basic wage increases totaling 12.39%
over the three years covered by the contracts. In addition, the agreement
provides for a standard award of between 2% and 2.5% of base salary and overtime
compensation, which is subject to adjustment based on company performance
measures for plan years 1999 and 2000. Other terms of the agreement include
pension band increases and pension plan cash balance improvements for active
employees.
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BUSINESS OF THE 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 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, Colombia, Peru, Chile, Panama, Ecuador, Uruguay and Nicaragua and are
planning to launch service in Guatemala in the third quarter of 2000. As of July
2000, our Latin American companies held licenses for territories with a total
population of approximately 246 million and provided wireless services to
approximately 10 million customers. We do not own 100% of each these companies;
adjusting market and customer data to reflect this partial ownership, our
licensed service areas had a population of approximately 157 million and
provided wireless services to approximately 6.2 million customers, each as of
July 2000.
Our goal is to become the leading pan-regional integrated communications
provider in Latin America by leveraging our existing wireless businesses. 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.
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 and other
income, net. For the six months ended May 31, 2000, the companies in aggregate
generated total revenues of almost $2.0 billion and EBITDA of $458 million. As
of May 31, 2000, BellSouth's proportionate share of each of its Latin American
companies' debt amounted to $2.4 billion.
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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 data in the paragraph above and the table below does not include BellSouth's
approximately 17% equity interest in Telo Centro Oeste Celular Participacoes
S.A., a Brazilian wireless company which served approximately 1.2 million
customers in the central-west and northern regions of Brazil as of June 30,
2000. The data in the paragraph above and the table below also does not include
BellSouth's approximately 66.0% combined equity interest in Celumovil and
Cocelco, two wireless service providers in Colombia which serve a total of
approximately 726,000 customers, acquired in June and July 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)
Rest of Country mid-2000 65.0 22.4 -- -- --
Brazil.............. Metro Sao Paulo 5/98 44.5 18.1 1,291 692.8 155.4
Northeast Region 6/98 46.8 26.6 440 103.0 (35.7)
Chile............... Santiago, Valparaiso 3/89 100.0 7.5 339 139.4 (4.8)(1)
Rest of Country 12/99 100.0 7.6 13 -- --
Ecuador............. Nationwide 11/93 89.4 12.4 186 85.4 22.2
Guatemala........... Nationwide mid-2000 60.0 11.9 -- -- --
Nicaragua........... Managua,
Pacific Coast 11/93 89.0 2.9 39 31.1 11.6
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
Rest of Country 8/99 96.8 17.9 7 0.7 (5.5)
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>
SIX MONTHS ENDED
MAY 31, 2000
----------------------------------
WIRELESS
COUNTRY CUSTOMERS REVENUE EBITDA
------- -------------- -------- ------
(IN THOUSANDS) (IN MILLIONS)
<S> <C> <C> <C>
COMMUNICATIONS:
Argentina........... 1,402 $ 385.2 $ 81.0(1)
14 25.5 (21.0)
Brazil.............. 1,455 340.7 101.4
731 83.8 (13.9)
Chile............... 427 96.4 15.7(1)
56 -- --
Ecuador............. 200 34.9 12.0
Guatemala........... -- -- --
Nicaragua...........
60 22.1 8.3
Panama.............. 158 58.1 33.6
Peru................ 326 61.4 3.8
21 1.8 (4.1)
Uruguay............. 138 43.9 20.4
Venezuela........... 3,078 681.0 255.9
----- -------- ------
Communications
subtotal:....... 8,066 1,834.8 493.1
ADVERTISING AND
DIRECTORY
PUBLISHING.......... 101.3 7.6
-------- ------
OTHER................ 45.4 (42.7)
-------- ------
TOTAL (100% OF
OPERATING
COMPANIES)........ $1,981.5 $458.0
======== ======
</TABLE>
---------------
(1) Includes development costs associated with new operations in the rest of the
country and long distance service.
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 Corporation" and our Latin
America group's combined financial statements and related notes appearing
elsewhere in this document.
INDUSTRY OVERVIEW
The global telecommunications industry is undergoing rapid change, fueled
by:
- privatization;
- increased competition;
- expansion of wireless services;
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<PAGE> 97
- 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
Colombia................................... 41.6 17.8 4.6 0.4
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
Guatemala.................................. 11.9 5.4 1.8 0.2
Nicaragua.................................. 4.9 3.2 1.4 N/A
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
WIRELINE WIRELESS INTERNET
COUNTRY POPULATION(1) PENETRATION(1) PENETRATION(1) PENETRATION(2)
------- ------------- -------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
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 that in 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>
FIVE-YEAR
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>
FIVE-YEAR
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> 100
-- 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.
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 May 31, 2000, our Latin American
companies served an aggregate of 8.1 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 six months ended
May 31, 2000, the customer base grew by an additional 1.9 million
customers, or 30.6%. 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
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<PAGE> 101
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. We are currently enhancing and expanding our 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 that 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 five 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 deploying 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.
- STRONG RELATIONSHIP WITH COMPANIES IN OUR BLS GROUP. We expect companies
in our Latin America group to continue benefiting from their
relationships 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
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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. 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 Tel Centro Oeste, a
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. In June 2000, for example, we acquired a
controlling interest in Celumovil, a Colombian wireless service
provider, and we subsequently caused Celumovil to acquire all of
Cocelco, another Colombian wireless service provider. These
acquisitions provide us with a national licensed coverage area in
Colombia. We will primarily focus on establishing operations in
countries of strategic importance to our pan-regional operations, when
it is economically attractive to do so, such as Mexico, Bolivia,
Paraguay, El Salvador, Honduras, Costa Rica and Caribbean countries.
- 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 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 will continue to enhance and expand, via owned or leased capacity,
our 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 Central America.
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<PAGE> 103
- 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 our 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 X
Colombia....................... X 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 X
Uruguay........................ X 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. 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, we offer wireless service using PCS frequencies in
Argentina, and the license recently obtained in Guatemala is for PCS
frequencies. We are also implementing wireless service at PCS frequencies in
Uruguay to supplement an existing analog network. Wireless service over enhanced
specialized mobile radio frequencies is offered in Argentina and Colombia.
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 from any difference in the properties of the particular radio frequencies.
For example, all three systems are capable of providing value-added services and
roaming.
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<PAGE> 104
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 that 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 for 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, Peru,
Uruguay and Venezuela. We offer dial-up Internet access and support dedicated
lines to serve residential and business customers. We plan to offer 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, Colombia and Peru. The variety and quality of network
services available to customers is augmented by
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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.
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.
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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
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.
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As part of our plans to interconnect our Latin American networks with each
other and with North America and Europe, we have implemented and continue to
enhance and expand 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, Panama 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, Nicaragua, Panama, Peru
and Uruguay, and anticipate commencing operations during the third quarter of
2000 in Guatemala. In addition, we have recently acquired a controlling interest
in a wireless operator in Colombia, which has in turn acquired another Colombian
wireless provider.
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
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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 that of 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, Telcel initiated a co-branding campaign, 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 in 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 859,000 customers in the six months ended May 31, 2000. As
of May 31, 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 May 31, 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
six-month periods ended May 31, 1999 and 2000, and nationwide wireless
penetration and GDP growth for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
------------------------------- ------------------
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 $544.9 $ 681.0
EBITDA....................................... $190.8 $373.4 $ 374.4 $214.1 $ 255.9
Licensed Population.......................... 21.9 22.7 23.2 23.2 23.2
Telcel Wireless Customers.................... 697 1,168 2,219 1,562 3,078
As Adjusted for BellSouth's Equity Interest:
Revenue...................................... $247.3 $556.2 $ 866.6 $425.9 $ 532.2
EBITDA....................................... $104.1 $257.4 $ 292.6 $167.3 $ 200.0
Licensed Population.......................... 12.6 17.7 18.1 18.1 18.1
Telcel Wireless Customers.................... 400 913 1,734 1,221 2,406
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%.
POLITICAL AND ECONOMIC ENVIRONMENT. 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 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 has been experiencing a period of political
uncertainty since 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 held on July 30. Mr. Chavez won reelection as President, and
candidates from his party generally did well.
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.
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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. We began co-branding Telcel with the BellSouth brand earlier this
year, and we expect to widely use the Telcel/BellSouth brand in 2001.
MANAGEMENT TEAM. Telcel has assembled a strong management team to help it
execute its business strategy. At May 2000, Telcel had approximately 2,700
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
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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.
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>
Mobile wireless service at cellular frequencies............. 1991 2011
Value Added Services, including Internet service............ 1995 2005
Private networks............................................ 1993 2003
Wireless data............................................... 1994 2014
</TABLE>
Telcel's wireless 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 wireless 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 wireless service at cellular frequencies 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 2.2 million customers at May 31, 2000. The
following table shows several key statistics concerning BCP's metropolitan Sao
Paulo and Northeast operations for the fiscal years ended
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November 30, 1997, 1998 and 1999 and the six-month periods ended May 31, 1999
and 2000, and nationwide wireless penetration and GDP growth in Brazil for 1997,
1998 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
-------------------------------- ---------------------------
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(DOLLARS IN MILLIONS; CUSTOMERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Company:
Revenue................................... -- $482.6 $795.8 $398.5 $424.5
EBITDA.................................... $(56.5) $ 44.7 $119.7 $ 46.6 $ 87.5
Licensed Population....................... 44.3 44.6 44.7 44.7 44.7
BCP Wireless Customers.................... -- 780 1,731 1,203 2,186
As Adjusted for BellSouth's Equity Interest:
Revenue................................... $ -- $200.1 $356.3 $178.3 $190.8
EBITDA.................................... $(25.1) $ 17.9 $ 52.4 $ 20.4 $ 39.6
Licensed Population....................... 18.6 20.5 20.5 20.5 20.5
BCP Wireless Customers.................... -- 350 780 540 989
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.
In May 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 S.A. for a total
purchase price of approximately $240 million. As of June 30, 2000, Tele Centro
Oeste provides wireless services to approximately 1.2 million customers in the
central-west and northern regions of Brazil. Its licensed service areas include
approximately 65% of the Brazilian land mass and include 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.
BellSouth also operates 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.
ECONOMIC ENVIRONMENT. 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
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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 August 2, 2000, the Real traded at a rate of R$1.71 = $1.00.
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 recently announced proposed rules for the auctions of PCS licenses across
Brazil in 2001 and 2002. Under the proposed rules, BellSouth is permitted to
participate in these auctions, potentially providing an opportunity to expand
our coverage area in Brazil; however, we would have to divest any existing
cellular properties that overlap with new PCS licensed territories. In addition,
Brazil is obligated by international treaty to open all of its
telecommunications market segments to competition over the next four years. We
may consider expanding our 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 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 May 2000, BCP had over 2,900 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 company and
was employed at Motorola-International Networks Division and LH of Brazil
Ltd.
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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 wireless 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. O Estado de S. Paulo, 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.
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. Under the proposed Brazilian PCS auction rules, three PCS
licenses will be granted in each of three concession areas throughout Brazil.
The auctions of these licenses, which will be open to existing wireless and
wireline operators as well as new entrants, will result in five licensed
wireless service providers in every region in Brazil, as opposed to the current
duopoly. Our principal competition in the directory publishing business in
Brazil is Ebid.
REGULATORY ENVIRONMENT. In conjunction with the breakup and privatization
of the Telebras monopoly, Brazil officially opened its 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
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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 May 31, 2000, Movicom/BellSouth served over 1.4 million
wireless customers, representing an increase of approximately 41% since May 31,
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. We currently offer wireless
service at PCS frequencies in Buenos Aires and expect to launch service outside
of Buenos Aires 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 technology at cellular, PCS and enhanced
specialized mobile radio frequencies, Movicom/BellSouth offers long distance,
data network services, Internet, wireless data, and paging.
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 six-month periods ended May 31, 1999 and 2000, and
nationwide wireless penetration and GDP growth in Argentina for 1997, 1998 and
1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, MAY 31,
--------------------------- ------------------
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 $391.3 $410.7
EBITDA.................................... $123.0 $203.3 $234.0 $133.6 $ 60.0
Licensed Population....................... 13.1 13.1 35.8 35.8 35.8
Movicom Wireless Customers................ 629 885 1,171 1,003 1,416
As Adjusted for BellSouth's Equity Interest:
Revenue................................... $342.3 $468.8 $519.7 $254.4 $267.0
EBITDA.................................... $ 75.5 $132.1 $152.1 $ 86.9 $ 39.0
Licensed Population....................... 8.5 8.5 23.3 23.3 23.3
Movicom Wireless Customers................ 409 575 761 652 920
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.
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ECONOMIC ENVIRONMENT. In 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, Moody's downgraded Argentina's long-term foreign currency
rating.
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 telecommunications markets to competition, we intend to begin marketing
local and long-distance 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.
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 wireless 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 May 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.
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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
wireless service at PCS frequencies 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
wireless service at PCS frequencies 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.
CTI has become the fourth nationwide wireless operator, with its new
license to offer wireless service at PCS frequencies in 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.
The Argentinean government announced in June 2000 that it would begin
awarding comprehensive telecommunications licenses by the end of 2000. New
entrants will be allowed to offer fixed or mobile, wireline or wireless and
national or international communications services pursuant to a single license,
although radio spectrum concessions are not included with the license.
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.
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CONCESSIONS. Movicom/BellSouth holds various licenses to provide the
following services. The years of grant of the licenses are shown
parenthetically.
<TABLE>
<S> <C> <C> <C>
- mobile wireless service at cellular - mobile wireless service at PCS
frequencies (1988 and 1995) frequencies (1999)
- basic telephone service (1999) - paging (1994)
- mobile wireless service at enhanced - Value Added Services, including Internet
specialized mobile radio frequencies (1995)
(1994)
</TABLE>
The terms of the licenses are indefinite. All of the licenses are
nationwide, except for Movicom/BellSouth's cellular 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.
COLOMBIA
In June 2000, BellSouth acquired approximately 50.4% of the outstanding
common stock of Celumovil, a leading provider of wireless service in Colombia,
for a total purchase price of approximately $399 million. We have commenced
co-branding Celumovil with the BellSouth brand. In operation since 1994,
Celumovil provides digital wireless service at cellular frequencies using TDMA
technology in the Eastern region of Colombia, which includes the capital city of
Bogota, and in the Atlantic coastal region. Celumovil had approximately 505,000
customers as of July 2000. Celumovil also offers fixed wireless personal and
public telephones and limited short messaging service using cellular digital
packet data technology and wireless service at enhanced specialized mobile radio
frequencies.
On July 17, 2000, Celumovil acquired all of the outstanding common stock of
Cocelco, a wireless operator that since 1994 has been serving the Western region
of Colombia, which includes the cities of Medellin and Cali. The acquisition of
Cocelco was funded by an approximately $384 million capital contribution to
Celumovil by BellSouth and a $30 million loan from BellSouth, resulting in an
increase in BellSouth's ownership interest in Celumovil to approximately 66.0%.
Offering analog service and digital wireless service at cellular frequencies
using TDMA technology, Cocelco had approximately 221,000 customers as of July
31, 2000. Cocelco also offers wireless service at enhanced specialized mobile
radio frequencies. With the acquisition of Cocelco, Celumovil is the only mobile
wireless provider in Colombia with licenses covering the nation's entire
population of 41.6 million. Celumovil intends to emphasize its broader license
area to attract more wireless customers and to improve its digital network to
provide additional revenue-generating services from existing customers.
For the year ended December 31, 1999, Celumovil had revenues of $213.5
million and EBITDA of $55.0 million. Cocelco had revenues of $84.8 million and
EBITDA of $28.3 million during the same period. BellSouth owned no interest in
either Celumovil or Cocelco during any of these periods.
MARKET DEMOGRAPHICS. Colombia is the third most populous country in Latin
America, after Brazil and Mexico, and has the fourth largest gross domestic
product. This population is concentrated in urban areas, with 70% living in
cities with 100,000 or more residents. Colombia presents an attractive growth
opportunity for our Latin American operations, with wireless penetration at the
end of 1999 of only 4.6%, trailing Mexico and Brazil by 3-4 percentage points.
Wireline penetration in Colombia was approximately 17.8% in 1999.
POLITICAL AND ECONOMIC ENVIRONMENT. 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 and unemployment of over 20%. Colombia's gross domestic product growth
remained flat in
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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 entirely 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. Political conditions such as these led
Standard & Poor's to downgrade Colombia's credit rating again in May 2000. In an
effort to improve upon these conditions, the United States has recently pledged
approximately $1.3 billion to assist Colombia in combating drug trafficking and
achieving a peaceful settlement with the principal rebel force.
BUSINESS OPPORTUNITY. We believe Celumovil's status as Colombia's only
wireless provider with a national license area positions the company to benefit
from Colombia's combination of relatively large population and low wireless
penetration. The opportunity to obtain additional wireless customers represents
the most significant growth prospect for our Colombian operations. We intend to
accomplish this through improved sales and marketing, including better service
plans with more emphasis on market segmentation, through handsets with increased
functionality and through network enhancements that will facilitate the offering
of more value-added services. Celumovil plans to improve its existing digital
backbone network through further implementation of fiber optic wire and other
technology. With an advanced backbone network in place throughout Colombia,
Celumovil will be able to carry higher volumes of communications traffic more
economically. As penetration increases, Celumovil will leverage its customer
base and national backbone network to offer other communications services such
as long distance, data network and Internet service. We will also explore
opportunities to achieve synergies with existing BellSouth operations in the
surrounding countries of Brazil, Ecuador, Panama, Peru and Venezuela.
Celumovil already possesses the licenses and concessions necessary to offer
a number of new services. For instance, both Celumovil and Cocelco have
value-added services licenses pursuant to which they may offer Internet and
other services and carrier services licenses which permit the offering of data
network services. Celumovil also recently acquired a nationwide license to
operate a Local Multipoint Distribution System network, a "last mile" fixed
wireless technology that will facilitate the offering of broadband wireless
local access network services in the future.
SALES AND MARKETING. Historically, Celumovil's sales and marketing
strategy utilized substantial handset subsidies to attract new customers.
Service plans were not necessarily designed to encourage usage, however. We
intend to increase Celumovil's penetration and customer usage by new and varied
offerings of calling plans, with different pricing structures, and with an
increased focus on market segmentation and prepaid plans. With the establishment
of a national coverage area and ongoing build-out of its backbone network, which
facilitates more efficient transmission of communications traffic, we believe
Celumovil will be able to offer a variety of calling plans that are more
attractive to a wider spectrum of Colombian subscribers. Celumovil began
offering prepaid service in the first half of 1999 and anticipates growth during
2000 due to the continued rollout and development of these calling plans.
Celumovil has approximately 23 sales and service centers and 370 other
distribution points for its wireless service and handsets. Prepaid calling
cards, which can also be used in Celumovil's network of fixed wireless public
telephones, can be purchased from approximately 29,000 points of distribution,
including through a network of dispensing machines and certain ATMs. Cocelco
sells its products and services through over 70 resellers and its prepaid cards
can be also purchased from ATMs. We believe there are opportunities to improve
Cocelco's sales through improvements to the distribution network, including
integration with Celumovil's operations.
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MANAGEMENT TEAM. BellSouth is assembling a management team to lead
Celumovil in its national expansion and strategy to become an integrated
communications provider. At July 31, 2000, Celumovil had over 1,800 employees
and Cocelco had approximately 800 employees. Current Celumovil officers include:
Larry Smith, President and Chief Executive Officer. Mr. Smith has
recently been appointed as President and Chief Executive Officer of
Celumovil. Mr. Smith has served with BellSouth in various capacities for 19
years, including most recently as President of BellSouth Peru. Previously,
he served as Chief Operating Officer of BellSouth's Israeli operations, and
in numerous management positions with BellSouth's U.S. operations.
Dario Fernando Arango Diez, Financial Vice President. Mr. Arango
joined Celumovil in 1996 as Financial Vice President. He serves on the
Board of Directors of Conalvidrios S.A., a glass manufacturer, and
Comunicaciones Trunking S.A., a Celumovil affiliate that provides wireless
service at enhanced specialized mobile radio frequencies. Prior to joining
Celumovil, Mr. Arango served as Finance Manager of Empresas Publicas de
Medellin and as a director of Empresa Antioquena de Energia, Gases de
Antioquia and Empresa Antioquena de Telecomunicaciones S.A., all public
utility companies.
STRATEGIC PARTNERS. BellSouth's primary partner in Celumovil is Valores
Bavaria, a large industrial and commercial conglomerate in Colombia with
interests in a broad range of businesses. BellSouth has agreed to a series of
related put and call agreements whereby it can acquire, or could be compelled by
Bavaria Valores to acquire, additional shares of the company from Valores
Bavaria, up to Valores Bavaria's entire interest, at or close to an appraised
fair value between the second and ninth anniversary of BellSouth's June 2000
acquisition of its initial interest in Celumovil. Valores Bavaria's first put
option for up to a number of shares currently equal to approximately 14% of
Celumovil's outstanding common stock is first exercisable in June 2002.
BellSouth's first call option for up to a number of shares currently equal to
approximately 9% of Celumovil's outstanding common stock is first exercisable in
December 2003. The options are payable, at Valores Bavaria's election, in either
50% cash and 50% Latin America group stock, or entirely in Latin America group
stock.
COMPETITION. Since the award of wireless concessions in 1994, Colombia has
been divided into three geographic regions for purposes of wireless service
provision. Each region includes an incumbent provider with partial government
ownership and a competitive provider. In the Eastern region -- which is the
largest region in terms of both geographic area and population -- Celumovil
competes with the incumbent Comcel. Cocelco competes with the incumbent Occel in
the Western region. Both Comcel and Occel are affiliates of Bell Canada. In the
Atlantic coastal region, Celumovil competes with the incumbent CelCaribe, a
subsidiary of Millicom International.
Although the Colombian government has announced its intention to sell new
PCS licenses for each of its three wireless regions, the timing of the auction
is currently uncertain. The anticipated PCS license auctions could result in new
wireless providers in each of the three regions. The auctions could also result
in Celumovil competing with another provider with a nationwide licensed
territory, whether from an incumbent carrier that purchases PCS licenses to
extend their licensed area or from a new entrant that purchases PCS licenses
covering all of Colombia. Under current rules, Celumovil would not be permitted
to participate in the auction.
REGULATORY ENVIRONMENT. Colombia's telecommunications market has largely
been liberalized as a result of a 1990 law. Local access and value-added service
provision is substantially deregulated; wireless service was made competitive
with wireless concession grants in 1994; and the long distance monopoly ended in
1998. Local wireline telephone service is provided by dozens of local operators,
and long distance is provided by three carriers. A calling party pays regime is
mandated for mobile wireless service.
The Ministry of Communications regulates and oversees the cellular
telecommunications sector in Colombia. The Ministry of Communications grants
wireless concessions and supervises and audits the performance of the
concessionaires' legal and contractual obligations, in particular those related
to the
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technical standards and coverage requirements established in the bid conditions.
The Ministry of Communications also has general authority, subject to other
applicable laws, to issue regulations relating to the operation of cellular
networks. The Telecommunications Regulatory Commission, which is chaired by the
Minister of Communication, regulates the procedures for negotiating
interconnection agreements between cellular operators and local and long
distance operators.
CONCESSIONS. Celumovil holds wireless licenses for the Eastern and
Atlantic regions of Colombia and Cocelco holds a wireless license for the
Western region. The wireless concessions have an initial term of 10 years that
commenced in March 1994. The concessions provide Celumovil and Cocelco with the
right to provide wireless service at cellular frequencies through March 2004.
Celumovil and Cocelco have prepaid options to extend the term of their wireless
concessions to March 2014. Celumovil and Cocelco make quarterly royalty payments
equal to 5% of their total wireless operating revenues to the Ministry of
Communications for the right to use their assigned frequencies. The concessions
also require that Celumovil, Cocelco and other concessionaires have the ability
to provide national roaming services among their wireless telecommunications
networks and to enter into interconnection agreements with wireline telephone
companies.
Celumovil and Cocelco both hold nationwide value-added services licenses,
with Celumovil's expiring in 2007 and Cocelco's expiring in 2004. Both companies
also hold carrier services licenses for selected urban areas that expire in
2008. The value-added and carrier services license can each be renewed for an
additional ten years for little or no additional charge, and each provides for
the quarterly payment of royalties equal to 3-5% of the income derived from the
services delivered under the particular concession. Celumovil was also recently
awarded a national Local Multipoint Distribution System license with a ten-year
term, and a renewal provision for an additional ten years. Subsidiaries of
Celumovil hold concessions to provide wireless service at enhanced specialized
mobile radio frequencies.
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 over cellular
frequencies 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 131,000 customers in the six months ended May 31, 2000.
Penetration in the Chilean wireless market was approximately 14.7% in 1999.
Wireline penetration in 1999 was approximately 22.7%.
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 wireless 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
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under a separate wireless license covering Peru's remaining population of 17.9
million, giving it a nationwide license. BellSouth Peru provides digital service
at cellular frequencies 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 wireless licenses expiring in 2011 and 2018,
respectively. The company's primary wireless competitor is Moviline, a
Telefonica affiliate. In addition, an affiliate of Telecom Italia won a third
nationwide mobile wireless license in March 2000. The incumbent wireline
operator and major competing directory publisher is Telefonica de Peru, another
Telefonica affiliate.
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 45,000 customers in the six months ended May 31,
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 wireless telephone network. BellSouth Panama, in
which BellSouth holds a 43.7% interest, operates a fully digital TDMA-based
network that launched service at cellular frequencies in June 1996. BellSouth
Panama also holds concessions for data and Internet services, and in 1999
launched its Internet service provider business. Its wireless 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 38,000 customers in the six months ended May 31, 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 wireless service at cellular frequencies 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 wireless 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
14,000 customers in the six months ended May 31, 2000. Wireline penetration was
approximately 7.3% and wireless penetration was about 3.6% in 1999.
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
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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 network using cellular frequencies
with a CDMA-based digital network providing service over PCS frequencies. The
digital wireless 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 wireless 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 22,000 customers in the six months ended
May 31, 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 mobile wireless operator in
Nicaragua, and exercised an option to acquire an additional 40% interest in June
2000, bringing BellSouth's total interest to 89%. 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 providing mobile wireless service over cellular
frequencies. 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 21,000
customers in the six months ended May 31, 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 in the third quarter of 2000
under the BellSouth brand. BellSouth Guatemala obtained 60 megahertz of PCS
frequency 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.
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
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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 operations of our BLS group to be material to the
operations of our Latin America group.
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EMPLOYEES OF OUR LATIN AMERICAN OPERATIONS
At May 31, 2000, operations in the Latin America group employed
approximately 14,500 individuals, including approximately 9,800 individuals at
our combined businesses and 4,700 individuals at our equity method businesses.
Substantially all of these employees 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.
The following table sets forth the names, ages and titles of the BellSouth
employees who will be significant to our Latin American operations.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Charles C. Miller III...................... 47 President, Latin America Group
Mark E. Droege............................. 46 Chief Financial Officer, Latin America
Group
Roberto Peon............................... 50 President -- Brazil
Mauricio Wior.............................. 43 President, Latin America -- South
George Daniel Smith........................ 53 Executive Vice President, Latin America --
North
</TABLE>
The following summarizes the prior work experience of these employees,
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, Director of Investor Relations for BellSouth
Corporation. Mr. Droege serves on the board of directors of BellSouth Foundation
and is a member of the advisory boards of Warburg Pincus and the Financial
Services Institute at Clark Atlanta University.
Roberto Peon. Mr. Peon has served as President -- Brazil 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 Executive Vice President,
Latin America -- North, of BellSouth International since February 2000. Prior to
that, Mr. Smith served as Vice President, Latin America -- North, of BellSouth
International from 1998 to February 2000 and as Vice President -- Sales and
Marketing of BellSouth Cellular Corp. from 1996 to 1998. Mr. Smith has over 15
years of experience in the cellular industry.
For a period of time and from time to time, these and other employees
assigned to the Latin America group will also have responsibilities with respect
to our other international operations.
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LEGAL PROCEEDINGS
We are subject to a number of environmental matters as a result of our
operations and the shared liability provisions related to the break-up of the
Bell System. As a result, we expect that we will be required to expend funds to
remedy certain facilities, including those Superfund sites for which we have
been named as a potentially responsible party, for the remediation of sites with
underground fuel storage tanks and other expenses associated with environmental
compliance. At June 30, 2000, our recorded liability, related primarily to
remediation of these sites, was approximately $22 million.
We monitor our operations with respect to potential environmental issues,
including changes in legally mandated standards and remediation technologies.
Our recorded liability reflects those specific issues where remediation
activities are currently deemed to be probable and where the cost of remediation
is estimable. We continue to believe that expenditures in connection with
additional remedial actions under the current environmental protection laws or
related matters would not be material to our results of operations, financial
position or cash flows.
Our businesses 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. While we cannot provide complete assurance 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.
We have attributed, and intend to attribute in the future, to each group
liabilities, claims and expenses arising out of the businesses of that group or
the related series of common stock.
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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 six months ended June 30, 1999 (first
half 1999) and 2000 (first half 2000) are as follows. All references to earnings
per share are on a diluted basis.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
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 $12,121 $13,239
Operating expenses............................... 15,185 17,219 18,787 9,200 9,669
Operating income................................. 5,376 5,904 6,437 2,921 3,570
Interest expense................................. 761 837 1,030 471 638
Net earnings (losses) of equity affiliates....... (242) 92 (169) (209) 153
Gain on sale of operations....................... 787 335 55 16 --
Other income, net................................ 261 257 195 173 129
Provision for income taxes....................... 2,151 2,224 2,040 1,029 1,149
Extraordinary loss............................... (9) -- -- -- --
------- ------- ------- ------- -------
Net income............................. $ 3,261 $ 3,527 $ 3,448 $ 1,401 $ 2,065
======= ======= ======= ======= =======
As Reported:
Net income..................................... $ 3,261 $ 3,527 $ 3,448 $ 1,401 $ 2,065
Earnings per share............................. $ 1.64 $ 1.78 $ 1.80 $ .73 $ 1.09
Normalized:
Net income..................................... $ 2,814 $ 3,259 $ 3,825 $ 1,868 $ 2,045
Earnings per share............................. $ 1.41 $ 1.64 $ 2.00 $ .97 $ 1.08
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
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 $ 4,093 $ 4,798
Cash used for investing activities............... (4,949) (5,487) (9,888) (6,652) (3,795)
Cash used for financing activities............... (698) (1,681) (167) 172 (770)
OTHER:
Effective tax rate............................... 39.7% 38.7% 37.2% 42.3% 35.8%
Average short-term debt.......................... $ 2,123 $ 3,239 $ 6,182 $ 5,025 $ 6,212
Average long-term debt........................... 7,822 8,220 8,599 8,487 10,469
------- ------- ------- ------- -------
Total average debt..................... $ 9,945 $11,459 $14,781 $13,512 $16,681
------- ------- ------- ------- -------
EBITDA(1)........................................ 9,340 10,261 11,428 5,509 6,106
EBITDA margin(2)................................. 45.4% 44.4% 45.3% 45.5% 46.1%
</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 HALF 2000 COMPARED TO FIRST HALF 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 the first half of 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 E 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 D to BellSouth's
consolidated interim financial statements for further discussion of this
matter.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
Normalized results for the first half of 1999 exclude:
- An asset impairment loss, which reduced net income by $187, or $0.10 per
share. See note F to BellSouth's consolidated interim financial
statements for further discussion of this matter; and
- The impact of the devaluation of the Brazilian Real. Our share of the
foreign currency losses in our Brazilian wireless properties reduced net
income by $280, or $0.15 per share. These losses are included in Net
earnings (losses) of equity affiliates. See note G to BellSouth's
consolidated interim financial statements for further discussion of this
matter.
OPERATING REVENUES
Operating revenues increased $1,118 million during the first half of 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 16.0% expansion in the customer base from
the first half of 1999 to the first half of 2000;
- higher revenues from our international operations resulting from growth
in the customer bases of our current operations, which customer bases
grew 72.7% from the first half of 1999 to the first half of 2000;
- the addition of new international directory publishing businesses since
the first half of 1999, volume growth and price increases in our domestic
advertising and publishing operations, and increases in revenues from
electronic media offerings; and
- growth in new lines of business.
Growth in wireline revenues was offset by the effects of rate impacts
related to access charge reform and competition in the long distance market.
Growth in international revenues attributable to customer growth was partially
offset by changes in foreign currency rates and a 37.3% decrease in average
monthly revenue per customer driven by penetration into lower usage market
segments and a growing percentage of customers selecting lower-volume prepaid
services.
OPERATING EXPENSES
Total operating expenses increased $469 during the first half of 2000.
Operating expenses for the first half of 2000 include a $78 severance accrual
related to a previously announced plan to reduce our domestic general and
administrative staff. Expenses for the first half of 1999 included a $320 charge
to write down network equipment in the domestic wireless operations. Excluding
these items, total operating expenses increased $711 during the first half of
2000.
Operational and support expenses increased $521 as a result of increased
spending in the core wireline business for customer service and network support
functions, volume-driven increases at our international and domestic wireless
businesses and expenses for development and promotion of new business
initiatives, including high-speed data and Internet service offerings.
Operational and support expenses of our international operations were favorably
impacted by the weakening of foreign currencies against the U.S. Dollar.
Depreciation and amortization increased $190 primarily as a result of additions
of property, plant and equipment to support expansion of our wireline
communications and international wireless networks.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
INTEREST EXPENSE
Higher interest expense in 2000 is attributable to higher average debt
balances resulting from borrowings associated with the financing of our
investment in Qwest and increases in interest rates.
GAIN ON SALE OF OPERATIONS
During second quarter 1999, we recognized a gain of $16 from the sale of a
wireless property in Alabama.
NET EARNINGS (LOSSES) OF EQUITY AFFILIATES
Earnings from our equity affiliates increased $362 million in the first
half of 2000 compared to the first half of 1999. The 2000 period results include
$68 million in income related to the restructuring of our ownership interest in
our German wireless operations. The 1999 period includes foreign exchange losses
of $280 million related to our Brazilian properties. Excluding the impact of
these items, earnings in the first half of 2000 increased $14 million when
compared to the first half of 1999. These results are addressed in the
discussions for the Domestic wireless, International operations and All other
segments.
OTHER INCOME, NET
Other income, net includes interest income, gains/losses on disposition of
assets, foreign currency gains/losses and miscellaneous nonoperating income. The
decrease of $44 million is attributable to a $15 million decrease in interest
income and decreased non-operational income.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $120 million. Our effective tax
rate decreased from 42.3% in 1999 to 35.8% in 2000. The 2000 period results were
favorably impacted by additional income related to the restructuring of our
ownership in our German wireless operations. The 1999 period results were
unfavorably impacted by foreign currency losses recorded at our unconsolidated
Brazilian businesses. Excluding these and other special items, our effective
rate was 38.1% for the first half of 1999 and 36.6% for the first half of 2000.
The decrease in the effective tax rate is due to the recognition of tax
incentives and more favorable results at foreign equity method subsidiaries,
which are recorded net of tax benefits or expense.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
RESULTS BY SEGMENT --
WIRELINE COMMUNICATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------- %
1999 2000 CHANGE
--------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues:
Local service............................................. $ 5,366 $ 5,683 5.9
Network access............................................ 2,378 2,508 5.5
Long distance............................................. 303 266 (12.2)
Other wireline............................................ 535 642 20.0
Intersegment revenues..................................... 167 158 (5.4)
Total operating revenues.......................... $ 8,749 $ 9,257 5.8
Operating expenses.......................................... $ 5,946 $ 6,116 2.9
Operating income............................................ $ 2,803 $ 3,141 12.1
Segment net income.......................................... $ 1,582 $ 1,771 11.9
KEY INDICATORS:
Access line counts (000s):
Switched access lines
Residential............................................ 16,782 17,189 2.4
Business............................................... 7,316 7,198 (1.6)
Other.................................................. 272 260 (4.4)
------- -------
Total switched access lines....................... 24,370 24,647 1.1
------- -------
Access line equivalents(1)................................ 15,605 23,649 51.5
------- -------
Total equivalent access lines..................... 39,975 48,296 20.8
======= =======
Access minutes of use (millions)............................ 54,452 57,514 5.6
Long distance messages (millions)........................... 345 265 (23.2)
Digital and data services revenues.......................... $ 1,306 $ 1,680 28.6
Convenience feature revenues................................ $ 921 $ 1,047 13.7
</TABLE>
---------------
(1) Access line equivalents represent a conversion of non-switched data circuits
to a switched access line basis and is presented for comparability purposes.
Equivalents are calculated by converting high-speed/high-capacity data
circuits to the equivalent of a switched access line based on transport
capacity. While the revenues generated by access line equivalents have a
directional relationship with these counts, growth rates cannot be compared
on an equivalent basis.
OPERATING REVENUES
LOCAL SERVICE. The $317 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 half with over 48 million total equivalent access lines,
an increase of 20.8% since June 30, 1999. Residential access lines rose 2.4% to
17,189,000, driven by economic growth in our nine-state region as well as demand
for secondary residence lines which accounted for 42.2% of the growth in
residential access lines. We added 172,000 secondary residence lines since June
30, 1999, extending the total to over 2.5 million lines and ending the current
period with a penetration rate of 17.1%. Business access lines, including both
switched access lines and data circuits, grew 34.6%, propelled by expanding
demand for our digital and data services. Switched business access lines
decreased 1.6%, reflecting continued migration of new and existing business
customers to high-capacity data lines.
125
<PAGE> 132
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
Revenues from optional convenience features such as Caller ID, Call
Waiting, Call Return and voice mail service increased $126 million, or 13.7%,
when compared to the first half of 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 $94 million compared to the first half
of 1999.
NETWORK ACCESS. Network access revenues grew $130 million in the first
half of 2000 due largely to higher demand. Access minutes of use rose 5.6% to
57,514 million in the first half of 2000 from 54,452 million in the first half
of 1999. Increases in switched access lines and promotional activities by long
distance carriers continue to be the primary drivers of the increase in minutes
of use. Year-to-date 2000 growth in minutes was also positively impacted by the
additional day of activity resulting from the leap year.
The growth rate in total minutes of use continues to be negatively impacted
by the trend of business customers migrating from traditional switched circuits
to higher capacity data line offerings which are fixed-charge based rather than
per-minute-of-use based. Revenues from these dedicated circuit services grew
approximately $137 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 $133 million compared to the first half of 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 $37 million decrease is primarily attributable to a
23.2% decrease in long distance message volumes since the first half of 1999.
The decrease in revenues attributable to loss of message volumes was offset by a
$30 million revenue reduction in 1999 for a regulatory ruling related to
compensation we receive from long distance carriers for interconnection to our
public payphones. Also offsetting the decreases were $11 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 reduce our long distance message volumes. We
believe that competition will continue to adversely impact our customer base,
and ultimately our long distance message volumes and revenues until we are
granted full long distance relief under the Telecommunications Act of 1996.
OTHER WIRELINE AND INTERSEGMENT REVENUES. Other wireline and intersegment
revenues increased 14.0%, from $702 million in the first half of 1999 to $800
million in the first half of 2000. Higher revenues of $178 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, interconnection charges to
wireless carriers and proceeds from universal service funds were offset by
decreases in revenues from sales of customer premises equipment. At June 30,
2000 we had 788,000 subscribers to our BellSouth Internet Service(sm), an
increase of 39.4% compared to the same 1999 period. The $9 million decrease in
intersegment revenues primarily represents one-time transactions with affiliates
in the prior year.
126
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. Operational and support expenses
increased $68 million, or 1.6%, for the first half of 2000 when compared to the
first half of 1999. Increases of $163 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 $61 million of lower pension and benefit costs
attributable to favorable pension plan investment returns. The increases were
further offset by reductions totalling $54 in contract service expense and
volume-driven costs from sales of customer premises equipment and paging
equipment.
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 $102 million, or 6.1% for the first half of 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>
SIX MONTHS ENDED
JUNE 30,
---------------------- %
1999 2000 CHANGE
--------- --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues........................................... $1,540 $1,772 15.1
Intersegment revenues....................................... 7 8 14.3
Total operating revenues.......................... $1,547 $1,780 15.1
Operating expenses.......................................... $1,358 $1,495 10.1
Operating income............................................ $ 189 $ 285 50.8
Net earnings (losses) of equity affiliates.................. $ 72 $ 80 11.1
Segment net income.......................................... $ 131 $ 187 42.7
Customers(1)................................................ 4,724 5,482 16.0
Average revenue per user(1)................................. $ 51 $ 52 2.0
</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 $233 million, or 15.1%, compared to the same
1999 period. This growth is attributable to higher airtime, access, and
equipment sales revenues driven by a 16.0% increase in the customer base.
Adjusted for the sale of Honolulu Cellular in August 1999, the customer growth
rate would have been 19.2%. Customer growth since 1999 has been driven by
advertising, enhanced volume pricing strategies such as one-rate plans, bundled
minutes at lower rates and prepaid calling plans and competitive incentive
programs such as discounted wireless handsets. Average monthly usage by
customers increased during the first half of 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. We expect rates to continue decreasing
as more customers opt for our one-rate plans and other bundled -- minute
packages.
127
<PAGE> 134
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 $128 million, or 12.0%, during the first half of 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 61.5% increase in net customer additions. Network
usage and the related expense have increased as a result of customer and volume
growth in established markets.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $9
million, or 3.1%, to $302 million during the first half of 2000. Depreciation
expense in 2000 has been favorably impacted by a lower asset base, resulting
from our equipment exchange program initiated in June 1999.
NET EARNINGS (LOSSES) OF EQUITY AFFILIATES
Compared to the first half of 1999, the first half of 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.
INTERNATIONAL OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------- %
1999 2000 CHANGE
--------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues........................................... $1,126 $1,322 17.4
Intersegment revenues....................................... -- 21 N/M*
Total operating revenues.......................... $1,126 $1,343 19.3
Operating expenses.......................................... $1,005 $1,287 28.1
Operating income (loss)..................................... $ 121 $ 56 (53.7)
Net earnings (losses) of equity affiliates.................. $ 8 $ (12) N/M
Segment net income (loss)................................... $ 30 $ (4) N/M
Customers(1)................................................ 3,233 5,584 72.7
Average monthly revenue per customer(1)..................... $ 59 $ 37 (37.3)
</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 $217 million is primarily due to substantial growth in the
customer bases of our consolidated operations, which collectively have grown
almost 72.7% since June 30, 1999. Partially offsetting the impacts of customer
growth is declining monthly revenue per customer that is driven by continued
expansion into lower-usage customer segments through offerings such as prepaid
cellular service and competitive pressures in certain countries. We now offer
prepaid cellular products to all of the countries we serve in Latin America. The
current period also includes $22 million of revenues from our operations in
Nicaragua that were consolidated for the first time in first quarter 2000.
128
<PAGE> 135
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
A stronger U.S. Dollar against foreign currencies has had a negative impact
on reported revenues. Absent changes in foreign currency exchange rates,
reported revenues would have increased $390 million.
OPERATING EXPENSES
OPERATIONAL AND SUPPORT EXPENSES. For the first half of 2000, these
expenses increased $241 million compared to the first half of 1999. This
increase is primarily the result of operational and customer acquisition costs
associated with growth in customer levels and expanded operations. Since June
30, 1999, our existing operations have added almost 2.2 million customers in
Argentina, Chile and Venezuela. We have also added 200,000 customers through the
acquisition and development of businesses in Ecuador, Nicaragua and Peru.
Operational and support expenses denominated in local currencies were
favorably impacted by the weakening of foreign currencies against the U.S.
Dollar. Absent changes in foreign currency exchange rates, reported operational
and support expenses would have increased $353 million.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $34 million
due primarily to higher gross depreciable plant resulting from the continued
investment in our wireless network infrastructure. Amortization expense
increased $7 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 decreased $20 million to
($12) million in the first six months of 2000. The decline in our unconsolidated
international businesses is due to lower results from our investments in Brazil
and Germany. Both of these businesses experienced significant increases in
operational and customer acquisition costs resulting from substantial growth in
their customer bases. The impact of foreign currency fluctuations in Brazil for
the first half of 2000 was a loss of $19.
ADVERTISING AND PUBLISHING
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------- %
1999 2000 CHANGE
-------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues....................................... $ 750 $ 835 11.3
Intersegment revenues................................... 6 11 83.3
Total operating revenues...................... $ 756 $ 846 11.9
Operating expenses...................................... $ 454 $ 502 10.6
Operating income........................................ $ 302 $ 344 13.9
Net earnings (losses) of equity affiliates.............. $ (5) $ 4 N/M
Segment net income...................................... $ 182 $ 215 18.1
</TABLE>
OPERATING RESULTS
External revenues increased $85 million for the first half of 2000,
principally as a result of $45 million of revenues from our new directory
publishing operations in Peru and Brazil. The growth is also attributable to
volume growth and price increases in the domestic operations offset by the
effects of shifts in directory production schedules. Adjusted for book shifts,
external revenues for this segment would have increased by approximately 13.4%.
Also contributing are increases of $20 million in the revenues from our
electronic media offerings.
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<PAGE> 136
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
Operational and support expenses increased $42 million for the first six
months of 2000, due primarily to $56 million in expense from our new operations
in Brazil and $11 million in costs associated with growth in electronic media
offerings. These increases were offset by a $25 million reduction in costs in
the domestic directory businesses due to the shift in directory production
schedules. Depreciation and amortization increased by $6 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.
ALL OTHER
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------- %
1999 2000 CHANGE
-------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
External revenues......................................... $ 123 $ 211 71.5
Intersegment revenues..................................... 162 194 19.8
Total operating revenues........................ $ 285 $ 405 42.1
Operating expenses........................................ $ 437 $ 534 22.2
Operating loss............................................ $ (152) $ (129) (15.1)
Net earnings (losses) of equity affiliates................ $ -- $ (1) N/M
Segment net income........................................ $ (116) $ (99) (14.7)
</TABLE>
OPERATING RESULTS
External revenues increased $88 million for the first six months of 2000
driven by growth in revenues of $44 million from the resale of long distance
services in markets outside of our wireline region, $18 million from interactive
paging services and $15 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 $73 million increase in operational and support expenses. Depreciation and
amortization has increased $24 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;
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
- 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.
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.
131
<PAGE> 138
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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. 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
132
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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.
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
</TABLE>
133
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
<TABLE>
<CAPTION>
PERCENT CHANGE
-------------------
1998 VS. 1999 VS.
1997 1998 1999 1997 1998
------- ------- ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
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-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
134
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 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.
135
<PAGE> 142
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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.
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.
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<PAGE> 143
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 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
138
<PAGE> 145
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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.
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>
139
<PAGE> 146
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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>
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.
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<PAGE> 147
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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>
SIX MONTHS
ENDED JUNE 30,
-----------------
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 $ 4,093 $ 4,798
Investing activities................. $(4,949) $(5,487) $(9,888) $(6,652) $(3,795)
Financing activities................. $ (698) $(1,681) $ (167) $ 172 $ (770)
</TABLE>
NET CASH PROVIDED BY OPERATING ACTIVITIES
The increase in cash from operations between the first six months of 1999
and the first six months of 2000 primarily reflects better working capital
management and higher net income from operations due to strong revenue growth.
Operating cash flows for 2000 also include $65 million in cash proceeds
associated with the sublease of 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.
NET CASH USED IN INVESTING ACTIVITIES
During the first six months of 2000, we invested $3.3 billion for capital
expenditures. Included in these expenditures for the first half of 2000 are
approximately $360 million in costs related to the purchase and development of
internal-use software.
The year-to-date 2000 amount paid for investments and advances of $582
million primarily consists of $240 million paid to acquire our investment in
Tele Centro Oeste and $299 million paid for the acquisition of Celumovil.
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.
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<PAGE> 148
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 the first half of 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 50.6% at June 30, 2000 compared
to 53.1% at December 31, 1999. The decrease is a function of increases in
shareholders' equity, driven by income from operations and net unrealized gains
on securities.
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 August 1, 2000, we have shelf registration statements on file with the
SEC under which $2.7 billion of debt securities could be publicly offered.
We repurchase our common stock from time to time when we consider it
attractive to do so based on stock prices. Reacquired shares are held as
treasury shares pending reissuance in employee benefit plans and for other
purposes.
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 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.
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<PAGE> 149
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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>
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
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<PAGE> 150
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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.
On May 31, 2000 the FCC released an order on a proposal submitted by a
coalition of local and long distance providers, including BellSouth, Bell
Atlantic, GTE, SBC Communications, AT&T and Sprint, 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 apply to
all local exchange carriers operating under price caps. Although one effect of
the order will be to reduce access charges paid to BellSouth by other carriers,
we will be able to increase subscriber line charges paid by residential and
single-line business customers each year through 2003. Any increases which we
request after July 2001 are subject to a cost review. During June 2000, we filed
tariff modifications implementing the proposal. These modifications will result
in interstate price decreases of approximately $270 million on an annual basis.
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 been testing our operations support systems in Georgia and Florida
and expect to file our Georgia long distance application with the FCC by the end
of 2000. We do not know if the FCC will require further changes in our 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.
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
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FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 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
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FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BELLSOUTH CORPORATION -- (CONTINUED)
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 2000. We do not expect the adoption of these
guidelines to have a material impact on our results of operations, financial
position or cash flows.
DERIVATIVE INSTRUMENTS AND HEDGING 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 EVENT
INVESTMENT IN COLOMBIA. Through a purchase on the Bogota stock exchange in
July 2000, Celumovil/BellSouth acquired 100% of the shares of Cocelco, a leading
company in the provision of wireless communication services in the western
region of Colombia. This acquisition was funded by a $384 million capital
contribution and a $30 million shareholder loan from BellSouth, resulting in an
increase in BellSouth's ownership interest in Celumovil to 66.0%. The
transaction creates the first nationwide mobile cellular communications operator
in Colombia.
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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
We have created the Latin America group, which consists of our Latin
American businesses, and 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 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 included as
Annex II to this document. 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 companies in
our Latin America group may generally engage in any business activity only 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 companies in our BLS
group generally may not provide telecommunications and related services and
products in Latin America.
The major assets and liabilities attributed to the Latin America group 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 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
TCO Tele Centro Oeste Participacoes S.A......... 17.3
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>
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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)
We have also attributed to the Latin America group BellSouth's interests in
advertising and 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
BellSouth Advertising &
Peru Publishing Peru S.R.L. Directory Publishing 100.0
BellSouth International
Atlanta, Georgia 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>
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. The amounts allocated to the Latin
America group by BellSouth as part of BellSouth's shared corporate expenses
represent less than one percent of the Latin America group's general,
administrative and selling 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.
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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)
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 MAY 31, 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
COST INVESTMENTS:
Communications:
Brazil -- Tele Centro Oeste..................... -- -- -- 17.3%
</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. Through a
series of transactions which occurred in June and July 2000, BellSouth
purchased a 66.0% stake in a wireless operation in Colombia.
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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)
- 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.
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.
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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)
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 subsidies are heavily dependent on market
conditions in each individual market within a particular country. During
the prior three-year period, the average subsidy on equipment was
approximately 50%.
- 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.
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CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
- 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. Recently, high customer growth has been accompanied by a
significant shift in customer accounts from postpaid to prepaid. Prepaid
accounts now comprise about 65% of our proportionate customer base, compared to
about 43% a year ago.
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
HALF HALF 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 1.649 1.793 (7.1)% (34.6)%
Chilean Peso................. 417.972 457.446 503.358 483.562 517.670 (8.6) (9.1)
Ecuadorian Sucre............. 3,931.9 5,263.0 10,819.3 8,448.3 23,844.4 (25.3) (51.3)
Guatemalan Quetzal........... 6.008 6.350 7.307 6.985 7.747 (5.4) (13.1)
Nicaraguan Cordoba Oro....... 9.36 10.48 11.71 11.408 12.439 (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 3.308 3.480 (8.4) (13.7)
Uruguayan Peso............... 9.333 10.403 11.271 11.003 11.771 (10.3) (7.7)
Venezuelan Bolivar........... 486.296 542.273 599.287 579.118 662.004 (10.3) (9.5)
<CAPTION>
FIRST HALF
2000 VS. 1999
% DEPRECIATION
--------------
<S> <C>
Argentinean Peso............. --
Brazilian Real............... (8.0)%
Chilean Peso................. (6.6)
Ecuadorian Sucre............. (64.6)
Guatemalan Quetzal........... (9.8)
Nicaraguan Cordoba Oro....... (8.3)
Panamanian Balboa............ --
Peruvian Nuevo Sol........... (4.9)
Uruguayan Peso............... (6.5)
Venezuelan Bolivar........... (12.5)
</TABLE>
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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)
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 six
months ended May 31, 1999 (first half 1999) and 2000 (first half 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, SIX MONTHS ENDED
--------------------------------------- MAY 31,
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 $ 1,139 $ 1,354
Advertising and directory publishing
revenues............................ -- -- -- 69 4 45
------- ------ ------- ------- ------- -------
Total operating revenues.... 940 1,270 1,907 2,405 1,143 1,399
------- ------ ------- ------- ------- -------
Cost of services, products and
equipment........................... 344 418 607 867 375 537
Selling, general and administrative... 455 568 766 982 438 566
Depreciation and amortization......... 140 214 338 450 212 256
------- ------ ------- ------- ------- -------
Operating income...................... 1 70 196 106 118 40
Interest expense...................... 46 51 53 88 49 59
Other income (expense), net........... -- 1 (1) (5) 5 18
Provision (benefit) for income
taxes............................... 1 13 103 (116) 47 (11)
Net earnings (losses) of equity
affiliates.......................... 14 (16) (57) (354) (300) (42)
Minority interests.................... 4 (24) (50) (91) (36) (22)
------- ------ ------- ------- ------- -------
Net loss.............................. $ (28) $ (33) $ (68) $ (316) $ (309) $ (54)
======= ====== ======= ======= ======= =======
CASH FLOW DATA:
Cash provided by operating
activities.......................... $ 55 N/M* $ 476 $ 568 $ 248 $ 220
Cash used for investing activities.... (1,440) N/M (1,387) (1,099) (392) (683)
Cash provided by financing
activities.......................... 1,569 N/M 902 651 303 520
Capital expenditures.................. $ 448 $ 572 $ 697 $ 647 $ 310 $ 441
OTHER:
EBITDA(2)............................. 141 284 534 556 330 296
EBITDA margin(3)...................... 15.0% 22.4% 28.0% 23.1% 28.9% 21.2%
</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.
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CONDITION AND RESULTS OF OPERATIONS
OF THE LATIN AMERICA GROUP OF BELLSOUTH CORPORATION -- (CONTINUED)
(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 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, SIX MONTHS ENDED
------------------------------ MAY 31,
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 $ 1,041 $1,149
Equipment sales............................. 58 47 133 49 103
Long distance............................... 29 27 22 12 32
Other revenues.............................. 31 49 97 37 70
------- ------- -------- ------- ------
Total communications operating revenues..... 1,270 1,907 2,336 1,139 1,354
Cost of services, products and equipment.... 418 601 833 373 518
Selling, general and administrative......... 568 766 944 434 529
Depreciation and amortization............... 214 338 446 212 252
------- ------- -------- ------- ------
Operating income............................ 70 202 113 120 55
Interest expense............................ 51 53 87 49 59
Other income (expense), net................. 1 (1) (3) 5 17
Provision (benefit) for income taxes........ 13 105 (116) 48 (4)
Net losses of equity affiliates............. (16) (57) (349) (297) (46)
Minority interests.......................... (24) (50) (91) (36) (22)
------- ------- -------- ------- ------
Segment net loss............................ $ (33) $ (64) $ (301) $ (305) $ (51)
======= ======= ======== ======= ======
Capital expenditures........................ $ 572 $ 697 $ 646 $ 310 $ 441
OPERATING DATA: (in thousands, except as
noted)
Customers at end of period(1)
Venezuela................................. 697 1,168 2,219 1,562 3,078
Argentina................................. 629 885 1,171 1,003 1,416
Other..................................... 298 545 840 668 1,090
------- ------- -------- ------- ------
1,624 2,598 4,230 3,233 5,584
======= ======= ======== ======= ======
Average revenue per user(2)................. $ 84 $ 73 $ 52 $ 59 $ 37
</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
154
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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)
Venezuela, which are the businesses included in the combined financial
statements included elsewhere in this proxy statement. Amounts for the first
half of 2000 also include data for the Nicaraguan operations, which was
combined beginning in that period. Data for the businesses in Brazil,
Guatemala, Panama and 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, net roaming, long distance and value-added services.
FIRST HALF 2000 COMPARED TO FIRST HALF 1999
OPERATING REVENUES
<TABLE>
<CAPTION>
1999 2000 $ CHANGE % CHANGE
------ ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela.......................... $ 545 $ 681 $136 25.0%
Argentina.......................... 391 411 20 5.1%
Other.............................. 203 262 59 29.1%
------ ------ ----
Total operating
revenues............... $1,139 $1,354 $215 18.9%
====== ====== ====
</TABLE>
Total operating revenues increased $215 million, or 18.9%, from $1,139
million to $1,354 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 $388 million, or
34.1%.
WIRELESS SERVICE REVENUES. Wireless service revenues increased $108
million, or 10.4%, from $1,041 million to $1,149 million. Venezuela accounted
for $96 million, or 88.9%, of the increase. The increase was principally related
to customer growth. From May 31, 1999 to May 31, 2000, Venezuela grew its
customer base by 97.1%.
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 $36 million of the increase in revenues. Customer
growth of 84.0% from 262,000 to 482,000 was offset by a 9.5% decline in average
usage per customer. The decline in average usage per customer resulted from
further penetration into lower-usage market segments.
In Argentina, revenues decreased $18 million due to declines of 14.2% in
average usage per customer and 15.5% 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 41.2% from 1,003,000 to 1,416,000.
Revenues in Peru decreased $17 million due to a 35.4% 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 34.4% from 259,000 to 348,000.
Revenues in Ecuador decreased $9 million as a result of the 64.6% average
decline of the Ecuadorian Sucre against the U.S. Dollar and related turbulent
economic and political conditions. Customer growth of 35.4% partially offset the
impact of negative economic conditions on revenues.
155
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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)
Wireless revenues increased $20 million as a result of the combination of
the Nicaraguan operations beginning in first quarter 2000.
EQUIPMENT SALES. Revenues from equipment sales increased $54 million, or
110.2%, from $49 million to $103 million. The increase was primarily
attributable to the Venezuelan operations and was driven by a 62.7% increase in
gross customer additions. Higher revenues of $13 million at the operations in
Argentina also contributed to the increase.
LONG DISTANCE. Long distance revenues are derived primarily from the
provision of fixed long distance services in Chile as well as the new long
distance operations in Argentina. These revenues increased $20 million, or
166.7%, from $12 million in 1999 to $32 million in 2000 as a result of $23
million in revenues from the new long distance operations in Argentina. Revenues
from the operations in Chile declined $3 million as a result of changes in long
distance rates in response to competition.
OTHER. Other revenues increased $33 million, or 89.2%, from $37 million to
$70 million. The increase is primarily attributable to revenues from wholesale
long distance voice, data access and transport.
OPERATIONAL AND SUPPORT EXPENSES
<TABLE>
<CAPTION>
1999 2000 $ CHANGE % CHANGE
---- ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela............................. $331 $ 425 $ 94 28.4%
Argentina............................. 258 351 93 36.0%
Other................................. 218 271 53 24.3%
---- ------ ----
Total operational and
support expenses.......... $807 $1,047 $240 29.7%
==== ====== ====
</TABLE>
Operational and support expenses include the cost of services, products and
equipment and selling, general and administrative expenses. Cash operating
expenses increased $240 million, or 29.7%, from $807 million to $1,047 million.
The most significant contributors to the increase were operations in Venezuela,
with an increase of $94 million, and operations in Argentina, with an increase
of $93 million.
Cost of services, products and equipment increased $145 million, or 38.9%,
from $373 million to $518 million. The primary factors driving the change were:
- An increase of $67 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, 73.3% were related to new prepaid customers
in Venezuela. The increase in the cost of equipment sold was partially
offset by a 1.9% 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 $78 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 $95 million, or 21.9%,
from $434 million to $529 million. Of the increase, $106 million was related to
sales and marketing expenses associated with the 67.4% increase in gross
customer additions. General and administrative expenses decreased $11 million,
driven by a $20 million reduction at the Venezuelan operations attributable to
promotional activities in 1999 and cost control measures in 2000. The decrease
was partially offset by higher expense of $5 million at the Chilean operations
resulting from increased business volume.
156
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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)
Included in selling, general and administrative expenses was an allocation
of BellSouth's shared corporate services costs that amounted to $28 million for
the first half of 2000 and $33 million for the first half of 1999. 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 $352 million, or 43.6%.
EBITDA
<TABLE>
<CAPTION>
1999 2000 $ CHANGE % CHANGE
---- ---- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Venezuela............................................. $214 $256 $ 42 19.6%
Argentina............................................. 134 60 (74) (55.2)%
Other................................................. (16) (9) 7 43.8%
---- ---- ----
Total EBITDA................................ $332 $307 $(25) (7.5)%
==== ==== ====
</TABLE>
EBITDA decreased $25 million, or 7.5%, from $332 million to $307 million.
Higher acquisition costs related to the 67.4% 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
$65 million in the first six months of 2000 and $3 million in the first six
months of 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 $40 million, or 18.9%, from
$212 million to $252 million. Depreciation expense increased $32 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 $8 million in
the first six months of 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 $10 million, or 20.4%, from $49 million to $59
million. This increase primarily reflected interest on debt related to the
purchase of a new wireless license in Argentina. The remaining increase was
attributable to higher average debt balances and an increase in average interest
rates from 8.23% in the first half of 1999 to 8.47% in the first half of 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 $12 million from $5 million in the
first six months of 1999 to $17 million in the first six months of 2000. Higher
net foreign currency gains in Chile and higher interest income in Venezuela were
the primary contributors.
157
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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 the first six months of 2000 was $4
million compared to a provision of $48 million in the first six months of 1999,
a $52 million decrease in the provision.
Items that influenced the tax provision (benefit) included in the Latin
America group financial statements included:
- A $63 million decrease in operating income before taxes between the first
six months of 1999 and the first six months of 2000.
- The impact of investment tax credits at the Venezuelan operations, which
changed $20 million from an expense of $13 million in the first six
months of 1999 to a benefit of $7 million in the first six months of
2000.
- Adjustments to deferred income taxes resulting in a $6 million benefit in
Argentina in the first half of 2000.
- A one-time transactional tax of $9 million incurred in Venezuela in the
first half of 1999.
NET LOSSES OF EQUITY AFFILIATES
Net losses of equity affiliates improved $251 million from a loss of $297
million to a loss of $46 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 the first six months of 2000 was flat when compared to the first
six months of 1999.
A summary of the factors affecting Brazil's operating results were as
follows:
- Revenues increased $27 million, or 6.8%, from $398 million in the 1999
period to $425 million in the 2000 period. 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$136 million, or 21.7%, from R$627 million to R$763 million.
Airtime and access revenues increased R$181, driven by 81.7% 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$14 million. Equipment revenues decreased R$34 million reflecting
lower pricing on handsets due to promotional activity and lower average
costs of handsets.
- EBITDA increased $41 million on a U.S. Dollar basis. On a local currency
basis, EBITDA increased R$70 million from R$86 million to R$156 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 increased $6 million as a result
of changes in foreign currency exchange rates. On a local currency basis,
interest expense increased R$35 million, or 14.8%, from R$236 million to
R$271 million due primarily to higher average borrowings.
- Depreciation and amortization decreased $3 million on a U.S. Dollar basis
due to changes in foreign currency exchange rates. On a local currency
basis, depreciation and amortization increased R$8 million. Increases in
depreciation attributable to additions of network equipment were
partially 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.
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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)
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.
MINORITY INTERESTS
Deductions for minority interests' share in income decreased by $14 million
during the first six months of 2000, primarily related to operations in
Argentina. The decrease was attributable to lower income before minority
interests during the first six months of 2000 as compared to the first six
months of 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.
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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)
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 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
160
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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)
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 $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.
161
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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)
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 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.
162
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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)
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.
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.
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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)
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%.
164
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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)
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.
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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)
- 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.
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 SIX MONTHS
NOVEMBER 30, ENDED MAY 31,
------------- -------------
1998 1999 1999 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Advertising and directory publishing revenues............... $-- $ 69 $ 4 $ 45
Cost of services, products and equipment.................... 6 34 2 19
Selling, general and administrative......................... -- 38 4 37
Depreciation and amortization............................... -- 4 -- 4
--- ---- --- -----
Operating loss.............................................. (6) (7) (2) (15)
Interest expense............................................ -- 1 -- --
Other income (expense), net................................. -- (2) -- 1
Benefit for income taxes.................................... (2) -- (1) (7)
Net earnings (losses) of equity affiliates.................. -- (5) (3) 4
--- ---- --- -----
Segment net loss............................................ $(4) $(15) $(4) $ (3)
=== ==== === =====
</TABLE>
YEAR ENDED NOVEMBER 30, 1999 COMPARED TO YEAR ENDED NOVEMBER 30, 1998 AND FIRST
HALF 2000 COMPARED TO FIRST HALF 1999
The change in operating revenues and expenses related to the operations of
Listel-Listas Telefonicas, which we acquired during mid-1999. Net earnings
(losses) of equity affiliates represented our share of losses reported by OESP
Midia Ltda.
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
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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)
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>
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1999 MAY 31, 2000
----------------------------------------------- --------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER TOTAL QUARTER QUARTER TOTAL
------- ------- ------- ------- ------- ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues......... $ 565 $ 578 $ 620 $ 642 $ 2,405 $ 695 $ 704 $1,399
Net income (loss)................ (314) 5 8 (15) (316) (20) (34) (54)
CASH FLOW DATA:
Cash provided by operating
activities..................... 99 149 216 104 568 56 164 220
Cash used for investing
activities..................... (192) (200) (429) (278) (1,099) (236) (447) (683)
Cash provided by financing
activities..................... 130 173 204 144 651 202 318 520
OTHER DATA:
EBITDA(1)........................ 157 173 141 85 556 114 182 296
</TABLE>
---------------
(1) 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 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.
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.
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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)
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 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>
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, MAY 31,
--------------------------- -----------------
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 $ 248 $ 220
Investing activities........................................ (1,440) (1,387) (1,099) (392) (683)
Financing activities........................................ 1,569 902 651 303 520
</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. The results for the first six
months of 2000 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 the first six months of 1999 to
the first six months of 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 $441 million in the first six months 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 the first six months of 2000, we paid $240 million to acquire our
investment in Tele Centro Oeste.
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.
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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)
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 external financing sources,
including the net proceeds of the planned public offering, or capital infusions
from owners. 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 PROVIDED BY 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 in funds attributed from the BLS group 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 $303 million in the
first six months of 1999 to $520 million in the first six months of 2000 as a
result of long-term borrowings to finance the purchase of Tele Centro Oeste.
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 34.0% at
May 31, 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 the purchase of Tele Centro
Oeste, purchases of wireless licenses and buildout of new wireless license
areas.
The Latin America group's proportional ratio of debt to total
capitalization was 49.1% at May 31, 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 $344 million as of May 31, 2000.
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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)
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 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.
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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)
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.
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
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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)
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.
SUBSEQUENT EVENTS
INVESTMENT IN COLOMBIA -- CELUMOVIL
In June 2000, we acquired a 50.4% controlling equity interest in Celumovil
S.A., a cellular operator in the Eastern and Atlantic regions in Colombia, for a
purchase price of approximately $399 million, funded by $299 million of cash and
a $100 million note payable due December 2000. We have commenced cobranding
Celumovil with the BellSouth brand. Celumovil/BellSouth provides wireless
service in the Eastern region of Colombia, which includes the capital city of
Bogota, and in the Atlantic or coastal region.
INVESTMENT IN COLOMBIA -- COCELCO
Through a purchase on the Bogota stock exchange in July 2000,
Celumovil/BellSouth acquired 100% of the shares of Cocelco, a leading company in
the provision of wireless communication services in the western region of
Colombia. This acquisition was funded by a $384 million capital contribution and
a $30 million shareholder loan from BellSouth, resulting in an increase in
BellSouth's ownership interest in Celumovil to 66.0%. The transaction creates
the first nationwide mobile cellular communications operator in Colombia.
We financed these purchases through borrowings of $813 million by companies
in the BLS group, which then loaned the required funds to companies in the Latin
America group, as contemplated by the tracking stock policy statement.
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RELATIONSHIP BETWEEN THE BLS GROUP
AND THE LATIN AMERICA GROUP
Our board of directors has adopted a tracking stock policy statement
regarding BLS group and Latin America group matters. We encourage you to read
the tracking stock policy statement, which we have attached as Annex II to this
proxy statement.
GENERAL POLICY
Our policy statement provides that all material matters as to which the
holders of BLS group stock and the holders of Latin America 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 due
consideration to the potentially divergent interests and all other interests of
the separate series of common stock of BellSouth that our board of directors or
the finance/strategic planning committee, as the case may be, deems relevant.
For example, our board of directors could consider the relative sizes and
contributions of the two groups to BellSouth as a whole as a relevant factor in
resolving conflicts.
AMENDMENT AND MODIFICATION OF THE POLICY STATEMENT
Our board of directors may, without shareholder approval, change 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 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 to be in the best interests of BellSouth.
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 BLS group stock and Latin America
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.
The committee in turn may develop procedures to implement the policy statement
and may delegate the day-to-day administration of the policy statement and the
procedures to one or more officers.
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 currently 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 companies in the Latin America group
may generally engage in any business activity only 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.
The companies in the Latin America group will principally provide
telecommunications and related services and products. These include:
- wireless and wireline and related services, which include voice, video
and data, whether local or long distance;
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- Internet access services; and
- 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
generally 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 BLS group and the companies in the Latin America 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. For example, 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. Similarly, 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.
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 BLS group and the companies in the
Latin America 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 BLS group or the companies
in the Latin America 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 BLS group and Latin America 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 in accordance with procedures that our board of
directors adopts from time to time, or as otherwise determined by our board of
directors, 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 Business 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 BLS GROUP AND THE LATIN AMERICA GROUP
Our policy statement provides that BellSouth will manage the companies in
the BLS group and the companies in the Latin America 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.
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COMMERCIAL INTER-GROUP TRANSACTIONS
All material transactions in the ordinary course of business between the
companies in the BLS group and the companies in the Latin America 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.
TRANSFERS OF OTHER ASSETS AND LIABILITIES
Our board of directors may, without shareholder approval, reallocate assets
and liabilities between the BLS group and the Latin America 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 BLS group and the Latin America group and we issue only one
series of stock as consideration for this acquisition. In that event, our board
of directors would likely reallocate assets and liabilities between the two
groups according to the fair value of the assets or liabilities.
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 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, determined in accordance with procedures adopted by our board of
directors from time to time, or as otherwise determined by our board of
directors or the finance/strategic planning committee, as the case may be. 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,
determined in accordance with procedures adopted by our board of directors from
time to time, or as otherwise determined by our board of directors or the
finance/strategic planning committee, as the case may be. 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.
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.
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Use of the 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 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
BLS group and the companies in the Latin America group and the companies in the
BLS group and the companies in the Latin America 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 BLS group or the
companies in the Latin America group or was jointly developed by the companies
in the BLS group and the companies in the Latin America group but the companies
in the BLS group and the companies in the Latin America 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 articles of amendment and to the limitations of Georgia law,
the holders of BLS group stock and the holders of Latin America 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.
The payment of dividends on BLS group stock will be a business decision
that our board of directors makes from time to time based primarily on the
results of operations, financial condition and capital requirements of the
companies in the BLS group and of BellSouth as a whole and other factors that
our board of directors considers relevant.
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 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 that our board of directors considers relevant.
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
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for 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.
In addition to allocating debt and interest as described above under
"-- Relationship Between the BLS Group and the Latin America Group -- Financing
Arrangements" and assets and liabilities as described above under
"-- Relationship Between the BLS Group and the Latin America 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
We will directly charge specifically identified costs for shared corporate
services to the BLS group and the Latin America group based upon their use of
those services. Where determinations based on use alone are not practical, we
will use other methods and criteria that our 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 BLS group and the Latin America
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.
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PROPOSAL 2
THE ADOPTION OF THE AMENDED AND RESTATED
BELLSOUTH CORPORATION STOCK PLAN
BACKGROUND AND REASONS FOR THE PROPOSAL
On November 28, 1994, our board of directors adopted the BellSouth
Corporation Nonemployee Director Stock Plan and on April 24, 1995, our board of
directors adopted the BellSouth Corporation Stock Plan (together, the "prior
stock plans"). On April 24, 1995, the prior stock plans were approved by our
shareholders. On , 2000, our board of directors adopted the Amended and
Restated BellSouth Corporation Stock Plan (the "restated stock plan"), amending
and restating the prior stock plans in a single plan document.
The primary reason for the restated stock plan is to reflect the tracking
stock proposal by authorizing grants of awards with respect to BLS group stock
and Latin America group stock. Executives and key employees with general
managerial responsibilities will be granted balanced awards of both BLS group
stock and Latin America group stock. Management employees of the BLS group will
receive a preponderance of awards in BLS group stock, and management employees
of the Latin America group will receive a preponderance of awards in Latin
America group stock. Our board of directors believes that granting participants
awards weighted toward the separate performance of the group in which the
participants work and, in certain cases, the other group, is in the best
interests of BellSouth. In addition, nonemployee directors will be granted
balanced awards of both BLS group stock and Latin America group stock.
We currently intend to grant awards for Latin America group stock on the
date the planned public offering is completed to executives principally assigned
to the Latin America group, BellSouth executives, certain other employees and
nonemployee directors.
If approved by our shareholders, the restated stock plan will become
effective upon the completion of the planned public offering of Latin America
group stock. We believe that the restated stock plan will promote the best
interests of BellSouth by:
- helping to attract and retain exceptional employees, officers and
directors;
- motivating the participants by means of stock options, stock appreciation
rights, restricted stock awards, performance shares, dividend equivalent
rights and stock payments to achieve long-term performance goals; and
- enabling our employees, officers and directors to participate in our
long-term growth and financial success.
We have summarized below the material terms of our restated stock plan. The
summary is not complete. We encourage you to read the restated stock plan which
is attached to this proxy statement as Annex III.
SUMMARY OF AMENDMENTS TO THE BELLSOUTH CORPORATION STOCK PLAN AND THE BELLSOUTH
CORPORATION NONEMPLOYEE DIRECTOR STOCK PLAN
If approved by our shareholders, the restated stock plan would:
- amend the provisions that currently limit the number of shares of our
existing common stock that may be granted under the prior stock plans to
provide that awards, other than stock payments, in any year may be
granted to eligible employees up to a number of shares of:
- BLS group stock equal to 1.25% of the total number of shares of BLS
group stock outstanding; and
- Latin America group stock equal to 1.25% of the total number of shares
of Latin America group stock outstanding;
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and, within those limits, stock of each such group equal to .25% of the
total number of shares outstanding may be used for restricted stock awards
and performance shares;
- amend the provisions that currently limit the number of shares of our
existing common stock that may be granted under the prior stock plans to
provide that awards of stock payments in any year may be granted to
eligible employees up to a number of shares of BLS group stock and Latin
America group stock equal to .125% of the total number of outstanding
shares of each such group:
- amend the provisions that currently limit the number of shares of our
existing common stock that may be granted to nonemployee directors under
the prior stock plans to provide that nonemployee directors may be
granted awards, other than stock payments, with respect to no more than
1.2 million shares of BLS group stock and 1.2 million shares of Latin
America group stock;
- amend the provisions that currently limit the number of shares of our
existing common stock that may be granted to nonemployee directors under
the prior stock plans to provide that nonemployee directors may be
granted awards of stock payments with respect to no more than 700,000
shares of BLS group stock and 700,000 shares of Latin America group
stock;
- amend the provisions that currently limit the number of shares of our
existing common stock that may be granted under the prior stock plans to
any eligible employee during any calendar year to provide that no
participant may be granted awards, other than stock payments, for more
than 2.5 million shares of BLS group stock and 2.5 million shares of
Latin America group stock during any calendar year, and within this limit
no more than 500,000 shares of BLS group stock and no more than 500,000
shares of Latin America group stock for restricted stock awards,
performance shares and dividend equivalent rights;
- amend the provisions that currently limit the number of shares of our
existing common stock that may be granted under the prior stock plans to
any eligible employee during any calendar year to provide that no
participant may be granted awards of stock payments for more than 250,000
shares of BLS group stock and 250,000 shares of Latin America group
stock, during any calendar year;
- provide that all shares available in any year that have not been awarded
under the prior stock plans or are not awarded under the restated stock
plan will be available for awards in subsequent years;
- in addition to the above shares, in the event of a distribution of Latin
America group stock to the holders of BLS group stock, authorize the
issuance of awards based on Latin America group stock as an adjustment to
existing awards based on BLS group stock;
- amend the provisions of the BellSouth Corporation Stock Plan to limit the
aggregate number of shares that may be granted in the form of incentive
stock options to no more than four million shares of BLS group stock and
no more than four million shares of Latin America group stock;
- amend the definition of "Shares" to provide for definitions of shares of
BLS group stock and shares of Latin America group stock;
- with respect to Latin America group stock, the term "outstanding" shall
include:
- the number of issued and outstanding shares of Latin America group
stock; and
- the number of shares of Latin America group stock reserved for the BLS
group or for issuance to the holders of BLS group stock on the
particular reference date.
SUMMARY OF THE RESTATED STOCK PLAN
TYPES OF INCENTIVES
Incentives granted under the restated stock plan may be:
- stock options, consisting of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code, and non-qualified stock
options (collectively, "options");
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- rights to receive a payment which reflects the appreciation in the fair
market value of shares of BLS group stock or Latin America group stock
("stock appreciation rights");
- shares of BLS group stock or Latin America group stock which may be
subject to restrictions ("restricted stock awards");
- shares of BLS group stock or Latin America group stock subject to
performance goals ("performance shares");
- rights to receive cash or shares of BLS group stock or Latin America
group stock based on the value of dividends paid on BLS group stock or
Latin America group stock ("dividend equivalent rights"); or
- payments of shares of BLS group stock or Latin America group stock as a
bonus, additional compensation or in lieu of the payment of cash
compensation ("stock payments").
ELIGIBILITY
Under the terms of the restated stock plan, the following individuals are
eligible to receive awards under the restated stock plan:
- all of our employees, including executive officers and former employees
(other than incentive stock options with respect to former employees);
- all nonemployee directors (other than incentive stock options); and
- all consultants performing significant services for us (other than
incentive stock options).
ADMINISTRATION
With respect to employees who are or may become "covered employees" as
defined under Section 162(m) of the Internal Revenue Code and other executive
officers of BellSouth, the restated stock plan will be administered by the
Executive Nominating, Compensation and Human Resources Committee (the
"compensation committee") of our board of directors, all of the members of which
qualify as outside directors as defined under Section 162(m) of the Internal
Revenue Code and nonemployee directors as defined under Rule 16b-3 under the
Securities Exchange Act of 1934.
With respect to nonemployee directors, the restated stock plan will be
administered by the Committee on Directors and Corporate Governance (the
"director committee") of our board of directors.
With respect to all other individuals eligible to receive awards under the
restated stock plan, the restated stock plan will be administered by our chief
executive officer or another individual designated by the compensation committee
(the "administrator").
The compensation committee, the director committee and/or the administrator
will determine, subject to the restated stock plan, the employees, nonemployee
directors and consultants to whom, and the time or times at which, it will grant
awards, as well as the terms and provisions of each award.
STOCK OPTIONS
The purchase price of any share of stock covered by any option granted
under the restated stock plan will not be less than the greater of the par value
of the underlying stock and the fair market value of the underlying stock on the
date of grant. The vesting period and all other terms and conditions of each
option will be determined by the compensation committee, the director committee
or the administrator.
Unless otherwise determined by the director committee, each nonemployee
director will automatically be granted an option to purchase shares of BLS group
stock and/or an option to purchase shares of Latin America group stock at each
annual meeting of shareholders.
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Options will be exercisable only by the optionee or his or her guardian or
legal representative, and may not be transferred except that non-qualified stock
options may be transferred by certain optionees to:
- certain members of the optionee's (and the optionee's spouse's) family;
- a trust, the beneficiaries of which consist only of members of the
optionee's (and the optionee's spouse's) family; or
- a partnership, the partners of which consist only of members of the
optionee's (and the optionee's spouse's) family.
After the death of an optionee, that optionee's options may be transferred
pursuant to the laws of descent and distribution.
STOCK APPRECIATION RIGHTS
Stock appreciation rights may be granted either:
- in tandem with an option; or
- independent of an option.
The exercise price of a stock appreciation right will not be less than the
greater of the par value of the underlying stock and the fair market value of
the underlying stock on the date of grant. The vesting period and all other
terms and conditions of each stock appreciation right will be determined by the
compensation committee, the director committee or the administrator.
Upon exercise of the stock appreciation right, the holder will be entitled
to receive the excess of the fair market value of the shares of stock subject to
the exercise over the exercise price of the shares. Payments may be made in
cash, in shares of BLS group stock or Latin America group stock, as the case may
be, or a combination of cash and shares.
Stock appreciation rights will be exercisable only by the holder or his or
her guardian or legal representative, and may not be transferred except by a
holder to:
- certain members of the holder's (and the holder's spouse's) family;
- a trust, the beneficiaries of which consist only of members of the
holder's (and the holder's spouse's) family; or
- a partnership, the partners of which consist only of members of the
holder's (and the holder's spouse's) family.
After the death of a holder, the stock appreciation right may be
transferred pursuant to the laws of descent and distribution.
RESTRICTED STOCK AWARDS
Restricted stock awards will be subject to restrictions, as determined by
the compensation committee, the director committee or the administrator. Until
those conditions are met, the recipient may not sell, assign, bequeath,
transfer, pledge or otherwise dispose of the shares. Recipients of restricted
stock awards will otherwise be entitled to the rights of a shareholder with
respect to the shares of stock subject to restricted stock awards, including the
right to vote and receive dividends and other distributions made with respect to
the stock.
If a recipient of a restricted stock award fails to meet the terms and the
conditions of the restricted stock award before any applicable restrictions
lapse, the shares subject to the restricted stock award will be forfeited.
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PERFORMANCE SHARES
Performance shares will become payable based on the attainment of
performance goals. The performance goals with respect to employees who are or
may become "covered employees" under Section 162(m) of the Internal Revenue Code
are intended to meet the requirements of that section and the regulations under
that section. These performance goals could relate to stock price, market share,
sales, earnings per share, return on equity, costs, cash flow as well as other
objective performance criterion, as determined by the compensation committee.
A grant of performance shares may provide for the forfeiture of the shares
in the event of termination of employment or other events, subject to exceptions
for death, disability, retirement or other events, all as the compensation
committee, the director committee or the administrator may determine. Payment of
the performance shares may be made in the form of cash, shares of BLS group
stock or Latin America group stock, as the case may be, or a combination of cash
and shares.
DIVIDEND EQUIVALENT RIGHTS
Dividend equivalent rights may be granted either:
- in tandem with the grant of options, stock appreciation rights or
performance shares; or
- independent of any other awards.
Payment under the dividend equivalent right may be subject to continued
employment or service, the attainment of performance criteria or other
conditions as the compensation committee, the director committee or the
administrator may determine. Payments may be made in cash, in shares of BLS
group stock or Latin America group stock, as the case may be, or a combination
of cash and shares.
STOCK PAYMENTS
Stock payments may be granted by the compensation committee, the director
committee or the administrator as a bonus or additional compensation or in lieu
of obligations of BellSouth to pay cash compensation, with or without the
election of the participant. A stock payment will be granted to each nonemployee
director for the number of shares of BLS group stock and/or Latin America group
stock, as determined by the director committee, equal to 50% of the retainer
payable to each nonemployee director. The stock payment will be in lieu of the
payment of 50% of the retainer. The participant will be entitled to the rights
of a shareholder with respect to the stock payments, including the right to vote
and receive dividends and other distributions made with respect to the stock.
The compensation committee, the director committee or the administrator may,
however, impose restrictions on the participant's ability to transfer the stock
payments.
LIMITATIONS ON GRANTS OF AWARDS
Subject to adjustment as provided below under "-- Adjustments,":
- the aggregate number of shares of BLS group stock and Latin America group
stock that may be granted to participants (other than nonemployee
directors) as restricted stock awards and performance shares in any
calendar year may not exceed .25% of the shares of BLS group stock and
Latin America group stock outstanding;
- the aggregate number of shares of BLS group stock and Latin America group
stock that may be granted to participants (other than nonemployee
directors) as stock payments in any calendar year may not exceed .125% of
the number of shares of BLS group stock and Latin America group stock
outstanding;
- in no event will more than four million shares of BLS group stock and
Latin America group stock be granted with respect to incentive stock
options; and
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- in no event will more than 1.2 million shares of BLS group stock and 1.2
million shares of Latin America group stock be granted to nonemployee
directors with respect to awards other than stock payments and in no
event will more than 700,000 shares of BLS group stock and 700,000 shares
of Latin America group stock be granted to nonemployee directors with
respect to stock payments.
In addition, subject to adjustment as provided below under
"-- Adjustments," the number of shares of BLS group stock and Latin America
group stock that may be granted as awards, other than stock payments, to a
participant in any calendar year may not exceed 2.5 million shares of BLS group
stock and 2.5 million shares of Latin America group stock. Within this limit,
the number of shares of BLS group stock and Latin America group stock that may
be granted as restricted stock awards, performance shares and dividend
equivalent rights in any calendar year may not exceed 500,000 shares of BLS
group stock and 500,000 shares of Latin America group stock. Finally, the number
of shares of BLS group stock and Latin America group stock that may be granted
as stock payments to a participant in any calendar year may not exceed 250,000
of shares of BLS group stock and 250,000 shares of Latin America group stock.
CHANGE IN CONTROL
The compensation committee, or the director committee with respect to
nonemployee directors, may provide for the acceleration of vesting of restricted
stock awards, performance shares, dividend equivalent rights and stock payments
in the event of a change in control of BellSouth. In addition, all options and
stock appreciation rights granted under the prior stock plans, subject in some
cases to the participant's consent, and the restated stock plan will become
fully and immediately exercisable in the event of a change in control.
A change in control is defined for purposes of our restated stock plan as:
- the acquisition by a party or certain related parties of 20% or more of
total voting power of BellSouth;
- a turnover of the majority of our board of directors in any period of two
consecutive years;
- a merger or similar transaction after which BellSouth's shareholders hold
securities representing 70% or less of the total voting power of the
surviving entity;
- the sale or disposition of subsidiary or assets which produced for the
most recent fiscal year more than 30% of BellSouth's total operating
revenues or net income;
- the dissolution of BellSouth or the sale of all or substantially all of
the assets of BellSouth; or
- the consummation of any other transaction which a majority of our board
of directors determines to constitute a change in control.
TERMINATION AND AMENDMENT
No award may be made under the restated stock plan after December 31, 2004.
Our board of directors may at any time prior to that date terminate the restated
stock plan or make any amendment or modification it deems advisable. However,
any such amendments will require shareholder approval, to the extent the
approval is required by applicable law.
No enactment, modification, suspension or termination of the restated stock
plan will alter or impair any awards previously granted under the restated stock
plan without the consent of the holder, unless otherwise required by law.
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ADJUSTMENTS
The restated stock plan provides that the compensation committee, the
director committee or the administrator may adjust, in order to prevent dilution
or enlargement of the rights of participants under the restated stock plan, as
it deems appropriate:
- the number and kind of shares that may be delivered in connection with
awards;
- the number and kind of shares that may be delivered or deliverable with
respect to outstanding awards;
- the number and kind of shares that may be granted as awards; and
- the exercise price or purchase price relating to an award
to reflect changes in the outstanding stock that occur because of stock
dividends, stock splits, recapitalizations, reorganizations, share exchanges,
liquidations or other similar events.
In addition, the compensation committee, the director committee or the
administrator, if deemed appropriate as a result of such events, may provide for
a cash payment with respect to any outstanding awards.
U.S. INCOME TAX CONSEQUENCES
We believe that, based upon the laws as in effect on the date of this proxy
statement, the following are the principal U.S. federal income tax consequences
to participants and BellSouth of awards granted under the restated stock plan.
State and local laws are not discussed, and special rules may apply if a
participant has been a resident or citizen of a foreign country during his or
her period of plan participation. THIS SUMMARY IS NOT A COMPLETE ANALYSIS OF ALL
POTENTIAL TAX CONSEQUENCES RELEVANT TO PARTICIPANTS AND BELLSOUTH AND DOES NOT
DESCRIBE TAX CONSEQUENCES BASED ON PARTICULAR CIRCUMSTANCES. FOR THESE REASONS,
PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO ANY SPECIFIC QUESTIONS
REGARDING THE TAX CONSEQUENCES OF AWARDS GRANTED UNDER THE RESTATED STOCK PLAN.
INCENTIVE STOCK OPTIONS. If we issue shares to an employee upon the
exercise of an incentive stock option granted under the restated stock plan
during the employee's employment or within three months after the employee's
termination of employment, then:
- the employee will not recognize income at the time of the grant of the
incentive stock option or upon exercise of the incentive stock option;
- we will not be allowed a federal income tax deduction in connection with
the grant or exercise of the incentive stock option; and
- upon a sale or exchange of the shares after the later of (1) one year
from the date of transfer of the shares to the employee and (2) two years
from the date of grant of the incentive stock option, any amount received
by the employee in excess of the incentive stock option price will be
taxed to the employee as a capital gain, and any loss sustained by the
employee will be a capital loss. The capital gain, if any, from sales or
exchanges of shares is subject to tax at various rates depending upon the
length of time the shares were held, the date of disposition and the
income tax bracket of the employee.
If the shares are disposed of before the holding period requirements are
satisfied, then:
- the employee will recognize ordinary income in the year of disposition in
an amount (1) equal to the excess, on the date of exercise of the
incentive stock option, of the fair market value of the shares received
over the option price paid, but (2) limited to the excess of the amount
received on the sale over the option price if the shares are disposed of
at a loss;
- we will be entitled to a deduction for the year equal to the ordinary
income recognized by the employee; and
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- the employee will have capital gain or loss equal to the difference
between (1) the amount received by the employee upon the sale or exchange
of the shares and (2) the option price paid by the employee increased by
any ordinary income recognized.
NON-QUALIFIED STOCK OPTIONS. A participant to whom a non-qualified stock
option is granted will not recognize income at the time the option is granted.
When the participant exercises the option, he or she will recognize ordinary
income equal to the excess, if any, of the fair market value over the option
price paid, as of the date of exercise, of the shares received. Subject to the
Internal Revenue Code and regulations under the Internal Revenue Code, we will
generally be entitled to a federal income tax deduction equal to the ordinary
income recognized by the participant. Any compensation included in an employee's
gross income will be subject to federal employment taxes. Upon the sale of
shares acquired through the exercise of a non-qualified stock option, the
participant will have capital gain or loss equal to the difference between the
amount received on the sale and the tax basis of the shares sold.
STOCK APPRECIATION RIGHTS. A participant to whom a stock appreciation
right is granted will not recognize income at the time the stock appreciation
right is granted. When the participant exercises the stock appreciation right,
he or she will recognize ordinary income equal to the fair market value of the
shares received or the amount of cash received. Subject to the Internal Revenue
Code and regulations under the Internal Revenue Code, we will generally be
entitled to a federal income tax deduction equal to the ordinary income
recognized by the participant. Any compensation included in an employee's gross
income will be subject to federal employment taxes.
RESTRICTED STOCK AWARDS. No taxable income will be recognized by a
participant upon the grant of a restricted stock award that is subject to a
substantial risk of forfeiture unless the participant makes the election under
Section 83(b) of the Internal Revenue Code referred to in the next paragraph. If
the participant does not make an election, he or she will recognize ordinary
income at the time his or her interest in the shares is either transferable or
no longer subject to a substantial risk of forfeiture (the "Section 83
restrictions"). The amount of this ordinary income will be equal to the excess
of the fair market value of the shares received at the time over the amount, if
any, the participant paid for the shares. The participant's tax basis in the
shares received at the lapse of the Section 83 restrictions will be equal to the
amount, if any, paid for the shares plus the amount of ordinary income
recognized. Dividends paid on shares while they are subject to the Section 83
restrictions will be taxable as ordinary compensation income and not as
dividends.
A participant receiving shares under a restricted stock award may elect
under Section 83(b) of the Internal Revenue Code to be taxed at the time the
participant receives the shares in an amount equal to the fair market value of
the shares received, determined without regard to the Section 83 restrictions,
at the time of transfer less the purchase price, if any, paid for the shares. If
a Section 83(b) election is made, dividends paid on these shares will not be
taxable as compensation income but will be taxable as dividends, and no
additional compensation income will be recognized when the Section 83
restrictions lapse or are released. Participants should consult their tax
advisor regarding the possible use of a Section 83(b) election, which must be
made within 30 days following the transfer of the shares.
PERFORMANCE SHARES. Generally, no income will be recognized by a
participant upon the grant of performance shares and instead the participant
will recognize ordinary income at the time the performance shares become payable
and are no longer subject to Section 83 restrictions. The ordinary income will
be equal to the excess of the fair market value of the shares at the time they
become payable or non-forfeitable over the amount, if any, the participant paid
for the shares. The participant's tax basis in the shares will be equal to the
amount, if any, paid for the shares plus the amount of ordinary income
recognized with respect to the shares. Dividends paid on shares while they are
subject to the Section 83 restrictions will be taxable as ordinary compensation
income and not as dividends.
A participant receiving performance shares that are subject to Section 83
restrictions may elect under Section 83(b) of the Internal Revenue Code to be
taxed at the time the participant receives the shares, as described above.
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DIVIDEND EQUIVALENT RIGHTS. No taxable income will be recognized by a
participant upon the grant of a dividend equivalent right and instead the
participant will recognize ordinary income at the time the participant receives
payments under the dividend equivalent right. The ordinary income will equal the
fair market value of the shares received or the amount of cash received.
STOCK PAYMENTS. The participant will recognize ordinary income at the time
the stock payments are paid and are no longer subject to Section 83
restrictions. The ordinary income will equal the fair market value of the shares
at the time they become payable or non-forfeitable. The participant's tax basis
in the shares will be equal to the amount of ordinary income recognized with
respect to the shares. Dividends paid on shares while they are subject to the
Section 83 restrictions will be taxable as ordinary compensation income and not
as dividends.
A participant receiving stock payments that are subject to Section 83
restrictions may elect under Section 83(b) of the Internal Revenue Code to be
taxed at the time the participant receives the shares, as described above.
LIMITS ON DEDUCTIONS. Under Section 162(m) of the Internal Revenue Code,
our deduction for compensation paid to our chief executive officer and our four
other most highly paid executive officers during a particular year is limited to
$1 million per person, except that compensation that is performance-based will
be excluded for purposes of calculating the amount of compensation subject to
this $1 million limitation. Our ability to deduct compensation paid to any other
executive officer or employee is not affected by this provision.
Except where the compensation committee deems it to be in the best interest
of BellSouth, the compensation committee will attempt to structure awards under
the restated stock plan to qualify as performance-based under Section 162(m) of
the Internal Revenue Code. This qualification depends upon the shareholders
approving the restated stock plan and assumes that the provisions of the
restated stock plan relating to stock options and performance shares are
followed. With respect to any awards under the restated stock plan that are not
performance-based, any deduction we may claim will be subject to the limitations
on deductibility in Section 162(m) of the Internal Revenue Code.
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PROPOSAL 3
AMENDMENTS TO THE BY-LAWS
SUMMARY OF THE PROPOSAL
We are asking you to consider and approve amendments to our by-laws, which
would:
- provide that a quorum would exist at a shareholders meeting if 40% of the
voting power of the outstanding shares are represented at the meeting.
Our present by-laws provide for a quorum to exist at a meeting if 40% of
all shares, rather than all votes, are present.
- change the way in which we determine the shareholder votes required to
take action on certain issues. The change would allow the shareholders to
approve a proposal made at a meeting by a vote in which the number of
votes cast in favor of the proposal exceeds the number of votes cast
against the proposal. Our present by-laws require that a proposal receive
the affirmative vote of a majority of the votes present at the meeting.
BACKGROUND AND REASONS FOR THE PROPOSAL
The primary reason for the amendment relating to the quorum at a
shareholders meeting is to reflect our new voting structure under the tracking
stock proposal. Our present by-laws provide for a quorum to exist at a meeting
of shareholders if 40% of all shares are present. Because under our current
voting structure each share has one vote, the presence at a meeting of 40% of
the outstanding shares also ensures that 40% of the outstanding votes are
present. Under the voting structure that will be in effect if the tracking stock
proposal is adopted, each share of Latin America group stock, or any additional
series of common stock, may have less than one, one or more than one vote. The
proposed change to the quorum provision in our by-laws will ensure that at least
40% of the outstanding votes are present at any meeting at which action may be
taken. The proposed change would have the effect of requiring to be present a
number of shares that is greater or less than 40% of the number of outstanding
shares, depending on the relative market values of the shares of each series and
the number of shares of each series outstanding.
The other proposed amendments to our by-laws would change the way in which
we determine the shareholder votes required to take action on certain issues.
The changes would allow the shareholders to approve a proposal made at a meeting
by a vote in which the number of votes cast in favor of the proposal exceeds the
number of votes cast against the proposal. Approval of a proposal under our
present by-laws generally requires that the proposal receive the affirmative
vote of a majority of the votes present at the meeting. As a result, abstentions
and broker non-votes have the same effect as negative votes on the proposal.
Broker non-votes occur when a broker returns a proxy but does not have authority
to vote on a particular proposal. The provisions of our current by-laws that we
propose to amend were consistent with the requirements of Georgia law when they
were adopted. Georgia law has changed. These proposed changes to our by-laws
will conform the affected provisions to current Georgia law on shareholder
voting. The changes would permit shareholder approval of an action by fewer
votes than under our current by-laws at shareholder meetings at which
abstentions or broker non-votes are received. These amendments would not,
however, change our shareholder voting rules in director elections. They also
would not apply to shareholder votes for which Georgia law, our charter or our
by-laws require a greater vote than would be required under these amendments.
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STOCK OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth ownership of shares of BellSouth stock by
each director, by each executive officer named in the summary compensation table
set forth under "Executive Compensation -- Summary of Cash and Certain Other
Compensation," and by all directors and executive officers as a group, as of
July 1, 2000. These shares represent in the aggregate less than 1% of the
outstanding shares.
<TABLE>
<CAPTION>
SHARES AND
CURRENT SHARES SUBJECT STOCK UNITS
BENEFICIAL TO HELD UNDER
NAME HOLDINGS OPTIONS(A) DEFERRAL PLANS(B) TOTAL
---- ---------- -------------- ----------------- ---------
<S> <C> <C> <C> <C>
F. Duane Ackerman............................. 193,125 970,384 99,318 1,262,827
Reuben V. Anderson............................ 2,000 25,383 5,471 32,854
James H. Blanchard............................ 14,738 35,694 18,238 68,670
J. Hyatt Brown................................ 60,637 32,000 12,273 104,910
Armando M. Codina............................. 44,041 15,773 15,037 74,851
Francis A. Dramis, Jr. ....................... 5,586 0 0 5,586
Jere A. Drummond.............................. 84,371 494,158 31,945 610,474
Ronald M. Dykes............................... 6,046 251,729 31,883 289,658
Kathleen F. Feldstein......................... 2,000 4,000 3,350 9,350
James P. Kelly................................ 0 0 1,060 1,060
Joseph M. Magliochetti........................ 1,500 0 949 2,449
Earle Mauldin (C)............................. 55,421 1,714,258 61,792 1,831,471
John G. Medlin, Jr. .......................... 10,000 39,116 21,271 70,387
Leo F. Mullin................................. 16,484 12,000 4,971 33,455
Eugene F. Murphy.............................. 9,000 0 2,619 11,619
Robin B. Smith................................ 4,000 21,425 3,444 28,869
William S. Stavropoulos....................... 6,400 9,818 5,720 21,938
Directors and executive officers as a group
(27 persons)................................ 690,087 4,948,966 461,057 6,100,110
</TABLE>
---------------
(A) Represents shares that may be acquired currently or within 60 days after
July 1, 2000 through the exercise of stock options. The exercise price of
options is the market price of BellSouth stock on the date of grant and is
not discounted. Directors and officers realize value from options only when
exercised and only to the extent that the price of BellSouth stock on the
exercise date exceeds the price of the stock on the grant date.
(B) Represents shares of BellSouth stock, phantom stock units and units
representing accrued dividends, receipt of which has been deferred pursuant
to various deferral plans. The phantom stock units are payable in cash, but
track the performance of BellSouth stock. Neither the shares nor the units
can be voted or transferred.
(C) Mr. Mauldin retired from BellSouth effective March 1, 2000. On that date,
all of his outstanding stock options other than those granted in 2000 vested
and became exercisable.
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DIRECTOR COMPENSATION
FEES AND OTHER COMPENSATION
During 1999, directors who were not employees of BellSouth received the
following:
<TABLE>
<S> <C> <C>
Annual retainer................................. $30,000 (50% paid in our existing
common stock)
Attendance fee for each meeting of our board of
directors.....................................
1,800
Attendance fee for each committee meeting.......
1,500
Annual retainer for each committee chaired......
5,000
Annual grant of our existing common stock....... 400 shares
</TABLE>
Nonemployee directors also are provided certain telecommunications services and
death benefits and, while on BellSouth business, travel accident insurance. In
1999, the cost of these benefits was approximately $1,518 per director.
NONEMPLOYEE DIRECTOR STOCK PLAN
Under the BellSouth Nonemployee Director Stock Plan, each nonemployee
director receives an annual grant of non-qualified stock options to purchase
4,000 shares of our existing common stock together with tandem stock
appreciation rights, at an exercise price per share equal to the fair market
value of the stock on the grant date. The options become exercisable one year
after the grant date. In 1999, each of the 12 eligible nonemployee directors was
granted options to purchase 4,000 shares of our existing common stock at a per
share exercise price of $43.63.
STOCK OWNERSHIP INCENTIVES
To further link director and shareholder interests, the Director Stock Plan
provides for the award of additional stock options to each nonemployee director
who owns our existing common stock valued at least five times the amount of the
annual retainer for members of our board of directors. The director receives one
additional option for every two shares owned in excess of five times the
retainer amount. The maximum number of additional options that may be granted
annually to any director is 4,000 options. Directors only receive additional
stock options for each excess share one time; thereafter, they must acquire
additional shares in order to continue to receive additional stock options. The
following directors received grants of additional options at a per share grant
price of $43.63 in 1999: Anderson (1,345 additional options), Blanchard (4,000
additional options), Brown (4,000 additional options), Codina (3,773 additional
options), Davis (2,362 additional options), Medlin (4,000 additional options),
Mullin (4,000 additional options), Smith (1,325 additional options), Spangler
(4,000 additional options), Stavropoulos (1,818 additional options), and Wilson
(2,178 additional options).
The director realizes value from the stock options only when exercised, and
only to the extent that the price of our existing common stock on the exercise
date exceeds the price of the stock on the grant date.
RETIREMENT PLAN
We have historically maintained a retirement plan for nonemployee directors
who have served on our board of directors or a subsidiary board for at least
five years and have reached the age of 55. Eligible directors receive an annual
retirement benefit of up to a maximum of 100% of the retainer with ten years or
more service. Payments are made for a maximum of 12 years following retirement.
Effective April 30, 1997, the accrual of retirement benefits under this plan was
discontinued.
NONEMPLOYEE DIRECTORS' CHARITABLE CONTRIBUTION PROGRAM
The Nonemployee Directors' Charitable Contribution Program has been
terminated with respect to new members of our board of directors; however,
contributions will continue to be made on behalf of
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directors who were members of our board of directors prior to January 1997. This
program was designed to acknowledge the service of our directors and to
recognize the mutual interests of directors and us in supporting worthy
institutions. The program provided that we would make a contribution to
educational or cultural organization(s) designated by the director upon the
director's death or retirement. Directors had to have five years of service on
our board of directors or on the board of a subsidiary to qualify for this
program. The amount contributed by BellSouth increased with each year served by
the director, up to a maximum contribution of $1 million, payable after ten
years of service. All charitable deductions for tax purposes accrue solely to us
and the individual directors derive no direct financial benefit from the
program.
EXECUTIVE NOMINATING, COMPENSATION AND HUMAN RESOURCES
COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Executive Nominating, Compensation and Human Resources Committee of the
BellSouth board of directors (the "compensation committee") is responsible for
the oversight and administration of BellSouth's executive compensation program.
The compensation committee is composed entirely of independent, nonemployee
directors.
BellSouth's executive compensation program is based on a philosophy that
the total compensation package must be competitive with similar companies in
order to attract and retain executive talent. The program also seeks to
emphasize variable compensation. The 1999 executive compensation program was
based on the following principles:
- base salaries are targeted to the median level of salaries paid to
officers in comparable companies with comparable responsibilities;
- annual incentive awards are dependent upon BellSouth's performance
against established target levels and its financial performance relative
to its peers; and
- long-term compensation, in the form of stock options, directly links
officers' rewards to stock price appreciation.
The 1999 executive compensation program and a specific discussion regarding the
compensation of BellSouth's chief executive officer are set out in detail below.
The tables included elsewhere in this proxy statement reflect the results of the
procedures and principles discussed below.
STOCK OWNERSHIP GUIDELINES
In keeping with its belief that tying the financial interests of BellSouth
executives to those of the shareholders will result in enhanced shareholder
value, the board of directors has established executive stock ownership
guidelines. Under these guidelines, the officers are expected to own BellSouth
stock valued at between one and four times their individual base salary amounts,
depending upon their position in BellSouth. In order to incent officers to
exceed the targets, awards of incentive stock options are made to those who do
exceed the targets. In 1999, BellSouth awarded 75,533 incentive stock options to
35 officers who exceeded their stock ownership targets.
BASE SALARY
BellSouth establishes a market-competitive target salary for each officer
based upon his or her job responsibilities. The target salary is established by
utilizing information from general industry surveys, surveys of the
telecommunications industry specifically, and proxy materials of a peer group of
other large United States telecommunications companies, including Bell Atlantic
Corporation, GTE Corporation, SBC Communications, Inc. and U S West, Inc. The
compensation committee reviewed the market competitiveness of each individual
salary and the chief executive officer's recommendations regarding individual
pay treatment and approved individual salary levels for BellSouth's officers.
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ANNUAL INCENTIVE AWARDS
The BellSouth Corporation Officer Short Term Incentive Award Plan (the
"incentive award plan"), which was approved by BellSouth's shareholders in 1996,
is designed to provide annual incentive awards that qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code (see discussion
below), thus allowing BellSouth to fully deduct these payments. The incentive
award plan establishes an overriding performance goal prohibiting the payment of
any short-term award to eligible officers unless BellSouth has positive
consolidated earnings, as defined in the incentive award plan. Furthermore, the
incentive award plan establishes maximum levels of awards payable to any one
individual. The compensation committee works within these limitations and then
exercises discretion in determining the actual amount of individual awards. A
target incentive award amount, determined as a percentage of base salary, is
established for each officer.
The incentive award plan is intended to place a significant part of each
executive's annual compensation at risk. An executive's annual incentive award
for a particular year is based on the performance of BellSouth or the business
unit of the executive for that year (measured by revenue growth, net income,
customer satisfaction, and other factors), and the executive's individual
achievement of personal commitments. The compensation committee approves
performance objectives at the beginning of each year based on a projection of
the results BellSouth will be required to achieve in order to be a top-
performing company in its peer group. The weight given to each of these
performance components varies, depending upon the officer's particular job
assignment. In addition, the officer's award can be adjusted by the compensation
committee based upon a comparison of the financial performance of BellSouth or
that business unit with the financial performance of the peer group of
companies.
The method used to determine the chief executive officer's annual incentive
award is discussed below under "-- 1999 Compensation for the Chief Executive
Officer."
LONG TERM INCENTIVE PROGRAM
BellSouth's long term incentive program is intended to focus the officer
group on the achievement of corporate goals over time. Officers must carefully
weigh the short and long term benefits or consequences of their decisions and
manage the business to effectively grow and compete in a rapidly changing
communications marketplace. They also must balance long term business
development with the need for a reasonable current return. The compensation
committee's intention is to incent BellSouth's officers to take the risks
necessary to secure a strong foothold for BellSouth in the competitive
marketplace, which is continually changing to admit new competitors such as
alternative local exchange service providers, cable companies, wireless service
providers and long distance carriers.
Awards in 1999: This philosophy is put into effect by basing BellSouth's
long term incentive plans on the performance of BellSouth stock. Under the
BellSouth Corporation Stock Plan, each officer receives an annual grant of
nonqualified stock options. The options are issued at market price on the date
of grant. BellSouth does not issue options at less than fair market value at the
date of grant, and the officer receives value from the options only if the stock
price has appreciated on the date of exercise.
The number of stock options granted to each officer for 1999 was determined
by applying an annual grant level percentage against each individual executive's
base salary. This percentage was comparable to the grant practices of
high-performing companies, as determined by examining external surveys and data
from proxy statements. The actual number of stock options granted was determined
by using the Black-Scholes option pricing model. The compensation committee does
not adjust each annual grant to reflect options outstanding or previously
granted to a particular executive officer.
Payments in 1999: In 1995, BellSouth's executives received grants of
dividend equivalent rights under the Shareholder Return Cash Program. Each grant
provided for five annual cash payments. The maximum payment was 100% of the
value of the annual dividends paid by BellSouth on a share of BellSouth stock
multiplied by the number of units granted. The actual amount of the payments is
determined by comparing BellSouth's Total Shareholder Return ("TSR") with the
median TSR of a peer
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group of companies. TSR is measured by adding the amount of appreciation in
BellSouth's stock price to the amount of dividends paid to shareholders. The
compensation committee compared BellSouth's TSR to the TSR of the peer group for
the 1995 through 1999 performance periods and awarded the named executive
officers the amounts set forth in the summary compensation table set forth under
"Executive Compensation -- Summary of Cash and Certain Other Compensation."
The Shareholder Return Cash Program was amended in 1996. In 1997, under the
amended plan, BellSouth's executives received grants of units that provided for
one cash payment at the end of a three-year performance period. Awards can vary
from 0-200% of the value of the total dividends paid by BellSouth on a share of
BellSouth stock, multiplied by the number of units granted. The actual award is
based on the ranking of BellSouth's TSR as compared with the TSR of a peer group
of companies. The compensation committee reviewed the numerical results and,
after taking into account the impact of a corporate transaction within the peer
group, awarded the named executive officers the amounts set forth in the summary
compensation table set forth under "Executive Compensation -- Summary of Cash
and Certain Other Compensation."
1999 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
Evaluation Procedure: In 1998, the Executive Nominating and Compensation
Committee implemented, with the approval of the full board of directors, a
procedure for evaluating the chief executive officer's performance. The
compensation committee annually reviews the chief executive officer's
accomplishments and develops an evaluation of the chief executive officer. Our
full board of directors discusses the results of the evaluation and the
compensation committee chair reviews these results with the chief executive
officer.
1999 Base Salary: In determining Mr. Ackerman's 1999 base salary, the
compensation committee reviewed the chief executive officer's major
accomplishments and developed an evaluation of his performance. It also reviewed
reported base salary information for the chief executive officers of the other
companies in the peer group as well as the salaries of chief executive officers
of other companies of comparable size. Based upon this evaluation and its review
of relevant market data, the compensation committee increased the chief
executive officer's salary to the amount reported in the summary compensation
table set forth under "Executive Compensation -- Summary of Cash and Certain
Other Compensation."
1999 Short Term Incentive Award: In determining the chief executive
officer's short term incentive award for 1999 performance, the compensation
committee applied the evaluation procedure discussed above. In early 2000, the
compensation committee conducted a review of Mr. Ackerman's accomplishments
during 1999 and concluded that, under Mr. Ackerman's leadership, BellSouth
continued to achieve its overall financial and business goals in accordance with
its corporate strategies. Based on these factors, the compensation committee
exercised its judgment and awarded the chief executive officer the overall short
term incentive award shown in the summary compensation table set forth under
"Executive Compensation -- Summary of Cash and Certain Other Compensation."
1999 Long Term Incentive Award: The compensation committee also approved
payment to the chief executive officer of the amount shown in the summary
compensation table for units granted under the Shareholder Return Cash Program
for performance periods beginning in 1995 and 1997. The amount of this payment
was determined by using the same method as is described for the executive
officers in "-- Long Term Incentive Program -- Payments in 1999" above. The
compensation committee also approved grants of stock options to Mr. Ackerman as
shown in the "Option/SAR Grants in 1999" table set forth under "Executive
Compensation -- Stock Options and Stock Appreciation Rights." The number of
options granted was determined by using the same procedure as is described for
the executive officers in "-- Long Term Incentive Program -- Awards in 1999"
above.
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INTERNAL REVENUE CODE SECTION 162(M) IMPLICATIONS FOR EXECUTIVE COMPENSATION
The compensation committee is responsible for addressing issues raised by
Section 162(m) of the Internal Revenue Code. This section limits BellSouth's tax
deduction for compensation paid to certain executive officers that does not
qualify as "performance-based" to $1 million per executive officer. To qualify
as performance-based under Section 162(m), compensation payments must be made
pursuant to a plan that is administered by a committee of outside directors and
must be based on achieving objective performance goals. In addition, the
material terms of the plan must be disclosed to and approved by shareholders,
and the compensation committee must certify that the performance goals were
achieved before payments can be awarded.
The compensation committee continues to carefully consider the impact of
this rule and has taken several steps that are designed to comply with its
provisions and to maximize the corporate tax deduction for performance-based
compensation. First, it adopted the BellSouth Corporation Stock Plan, which was
approved by BellSouth's shareholders in 1995. This plan establishes performance
criteria that are intended to qualify awards made under the plan to the named
executive officers as performance-based awards approved by the shareholders;
thus, these awards should not be counted toward the $1 million limitation.
Second, it adopted the BellSouth Corporation Officer Short Term Incentive Award
Plan approved by BellSouth's shareholders in 1996. Awards made under this plan
are intended to qualify as performance-based awards approved by the shareholders
and thus also should not count toward the $1 million limitation. However, the
compensation committee believes that in some instances it may be necessary to
forsake a tax deduction in order to continue to attract and retain qualified
executives.
The Executive Nominating,
Compensation and Human
Resources Committee
James H. Blanchard (Chair)
John G. Medlin, Jr.
C. Dixon Spangler, Jr.
J. Tylee Wilson
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee (as of April 2000, James
H. Blanchard, John G. Medlin, Jr., Leo F. Mullin and Joseph M. Magliochetti) are
former or current officers or employees of BellSouth or any of its subsidiaries.
193
<PAGE> 200
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The table below shows, for the last three years, the compensation paid or
accrued by BellSouth and its subsidiaries to each of the five named executive
officers.
SUMMARY COMPENSATION TABLE
($000)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------- ------------------------------------
AWARDS PAYOUTS
------------------------- --------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) ($)(A) ($)(B) ($)(C) (#) ($)(D) ($)(E)
------------------ ---- --------- -------- ------------ ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F. DUANE ACKERMAN.............. 1999 $1,100.0 $2,400.0 $92.4 589,992 $1,249.0 $244.5
Chairman of the Board, 1998 990.0 2,000.0 11.9 $6,345.3 1,942,918 802.4 136.2
President and Chief Executive 1997 825.0 1,300.0 11.0 417,216 148.0 108.7
Officer
JERE A. DRUMMOND............... 1999 $ 620.0 $1,002.0 $48.5 260,692 $ 543.2 $156.2
Vice Chairman -- External
Affairs 1998 580.0 900.0 11.3 302,574 497.4 99.5
1997 500.0 522.5 11.2 179,616 83.2 84.3
EARLE MAULDIN(F)............... 1999 $ 562.7 $ 774.5 $48.3 226,992 $ 504.4 $155.4
Vice Chairman 1998 511.5 799.0 12.0 256,174 454.5 116.7
1997 465.0 523.5 12.9 167,416 77.5 109.0
RONALD M. DYKES................ 1999 $ 483.3 $ 925.0 $21.3 160,692 $ 326.2 $100.6
Chief Financial Officer 1998 428.0 553.0 12.8 177,920 248.5 71.6
1997 360.0 349.0 16.9 112,592 35.1 65.4
FRANCIS A. DRAMIS, JR.(G)...... 1999 $ 431.3 $ 992.0 $28.2 135,100 $ 0.0 $104.9
Chief Information and 1998 35.4 200.0 0.0 0 0.0 29.3
Ecommerce Officer
</TABLE>
---------------
(A) These amounts were earned under the BellSouth Corporation Officer Short Term
Incentive Award Plan. The amounts reported for Mr. Dramis include special
bonuses of $200.0 for 1999 and $200.0 for 1998 as part of his employment
offer.
(B) Represents tax "gross ups" for the five named executive officers.
(C) This item shows the grant date value of shares of restricted stock awarded
to Mr. Ackerman pursuant to the terms of an agreement approved by our board
of directors on November 23, 1998, as described under "-- Executive
Employment Agreements and Other Retirement and Change in Control
Arrangements." The value shown in the table is based on the closing price of
BellSouth stock on the New York Stock Exchange on the grant date, November
23, 1998. At December 31, 1999, Mr. Ackerman held 152,440 shares of
restricted stock valued at $7,136.1, based on the closing price of $46.8125
of BellSouth stock on the New York Stock Exchange on December 31, 1999. Mr.
Ackerman receives the dividends paid on these shares at the same rate as the
dividend rate received by all shareholders.
(D) The amounts reported for 1999 include the amounts that were earned under the
Shareholder Return Cash Program for the fifth year of the five-year
performance period beginning in 1995, and the three-year performance period
beginning in 1997. The amounts reported for 1998 include the amounts that
were earned under the Shareholder Return Cash Program for the fifth year of
the five-year performance period beginning in 1994, the fourth year of the
five-year performance period beginning in 1995, and the three-year
performance period beginning in 1996. The amounts reported for 1997 include
the amounts that were earned under the fifth year of the five-year
performance period beginning in 1993, the fourth year of the five-year
performance period beginning in 1994, and the third year of the five-year
performance period beginning in 1995.
(E) Included in this category for 1999 are amounts for the five named executive
officers for: (a) above-market interest on voluntary salary deferrals under
nonqualified deferred compensation plans, $67.3, $51.3, $65.5, $43.3 and
$0.0, respectively; (b) BellSouth matching contributions to certain employee
benefit plans, $16.0, $17.8, $9.5, $16.8 and $12.9, respectively; (c)
benefits substantially equal to BellSouth matching contributions that could
not be provided under employee savings plans because of limitations under
the Internal Revenue Code or on amounts deferred from compensation, $56.4,
$27.6, $27.5, $19.4 and $16.3, respectively; (d) value of life insurance
premiums paid by BellSouth, $83.1, $42.2, $40.1, $10.1 and $16.7,
respectively; and (e) value of benefits from premiums paid by BellSouth for
split-dollar life insurance, $21.7, $17.3, $12.8, $11.0 and $0.0,
respectively. BellSouth uses the Present Value Ratio Method to determine the
portion of each split-dollar life insurance premium dollar attributable to
the executive officer. BellSouth will recover the cost of premium payments
from the cash value of the split-dollar life insurance policies. The amounts
reported for Mr. Dramis include amounts paid in connection with his
relocation of $59.0 for 1999 and $29.3 for 1998.
194
<PAGE> 201
(F) Mr. Mauldin retired from BellSouth effective March 1, 2000 and received the
amounts described under "-- Executive Employment Agreements and Other
Retirement and Change in Control Arrangements -- Succession Planning
Arrangements."
(G) Mr. Dramis was hired on December 1, 1998; therefore, information for prior
periods is not reported. Bonus for 1999 includes special bonus of $200.0 as
discussed in (A) above.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock
options to the five named executive officers during 1999. BellSouth utilized the
Black-Scholes option pricing model to develop the theoretical values set forth
under the "Grant Date Value" column. The officer realizes value from the stock
options only to the extent that the price of BellSouth stock on the date the
officer exercises the options exceeds the price of the stock on the grant date.
Consequently, there is no assurance the value realized by an officer will be at
or near the value estimated below; these amounts should not be used to predict
stock performance.
OPTION/SAR GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF % OF TOTAL GRANT DATE
SECURITIES OPTIONS/SARS EXERCISE VALUE
UNDERLYING GRANTED TO OR GRANT DATE
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE VALUE ($000)
---- ----------------- -------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
F. Duane Ackerman............... 587,700(A) 3.82% $45.53 2/1/09 $ 6,530.0(C)
2,292(B) .02 43.63 4/26/09 25.1(D)
Jere A. Drummond................ 258,400(A) 1.68% $45.53 2/1/09 $ 2,871.1(C)
2,292(B) .02 43.63 4/26/09 25.1(D)
Earle Mauldin................... 224,700(A) 1.46% $45.53 2/1/09 $ 2,496.7(C)
2,292(B) .02 43.63 4/26/09 25.1(D)
Ronald M. Dykes................. 152,300(A) .99% $45.53 2/1/09 $ 1,692.2(C)
2,292(B) .02 43.63 4/26/09 25.1(D)
6,100(A) .04 45.53 12/1/09 76.3(E)
Francis A. Dramis, Jr........... 130,000(A) .85% $45.53 2/1/09 $ 1,444.4(C)
5,100(A) .03 45.53 12/1/09 63.8(E)
</TABLE>
---------------
(A) Under provisions of the BellSouth Corporation Stock Plan, the board of
directors granted stock options to key employees to purchase shares of
BellSouth stock within prescribed periods at prices equal to the fair
market value of the stock on the date of the grant. Options granted in 1999
generally become exercisable at the end of three years, determined from the
date of the grant. No stock appreciation rights were granted to officers in
1999. All options vest immediately in the event of a change in control.
(B) Incentive stock options were awarded to certain officers based on their
achievement of ownership of specified levels of BellSouth stock as
established by the board of directors. These options, which have exercise
prices equal to the fair market value of the stock on the date of the
grant, are exercisable six months from the date of the grant. See
"-- Executive Nominating, Compensation and Human Resources Committee Report
on Executive Compensation."
(C) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility 23%, dividend yield 1.67% and a risk-free rate of return of
4.73% based on options being outstanding for a five-year term.
(D) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility 23%, dividend yield 1.74% and a risk-free rate of return of
5.20% based on options being outstanding for a five-year term.
(E) This value was determined using the standard application of the
Black-Scholes option pricing methodology using the following assumptions:
volatility 23%, dividend yield 1.67% and a risk-free rate of return of
6.29% based on options being outstanding for a five-year term.
195
<PAGE> 202
OPTION/SAR EXERCISES AND HOLDINGS
The following table sets forth information with respect to the five named
executive officers concerning the exercise of options/SARs during 1999 and
unexercised options/SARs held on December 31, 1999.
AGGREGATE OPTION/SAR EXERCISE IN 1999
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBERS OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FISCAL YEAR-END(#) FISCAL YEAR-END ($000)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($000) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
F. Duane Ackerman.............. 0 $ 0 280,984 3,451,418 $8,504.3 $42,519.6
Jere A. Drummond............... 0 0 189,474 1,047,800 5,751.8 18,168.8
Earle Mauldin.................. 0 0 179,136 928,500 5,414.1 16,332.9
Ronald M. Dykes................ 11,573 402.1 75,329 583,600 2,151.8 9,585.1
Francis A. Dramis, Jr.......... 0 0 0 135,100 0.0 185.8
</TABLE>
PENSION AND OTHER RETIREMENT BENEFITS
The following table shows the estimated single life annual pension annuity
benefit provided to eligible participants under the BellSouth Personal
Retirement Account Pension Plan and the BellSouth Supplemental Executive
Retirement Plan combined, based on the specified remuneration levels and years
of credited service. The supplemental plan provides benefits in excess of
amounts permitted by certain Internal Revenue Code provisions on qualified
benefit plans. The amounts set forth as payable in the table below assume an
undiscounted retirement age and are reduced, in accordance with the supplemental
plan, by an average Social Security Primary Insurance Benefit determined
annually to be payable at age 65.
PENSION PLAN TABLE
($000)
<TABLE>
<CAPTION>
YEARS OF SERVICE
REMUNERATION 10 15 20 25 30 35 40 45
------------ ------ ------ ------ ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 400.................................... $ 61.9 $101.9 $141.9 $171.9 $201.9 $ 221.9 $ 241.9 $ 261.9
600.................................... 101.9 161.9 221.9 266.9 311.9 341.9 371.9 401.9
800.................................... 141.9 221.9 301.9 361.9 421.9 461.9 501.9 541.9
1,000.................................... 181.9 281.9 381.9 456.9 531.9 581.9 631.9 681.9
1,500.................................... 281.9 431.9 581.9 694.4 806.9 881.9 956.9 1,031.9
1,600.................................... 301.9 461.9 621.9 741.9 861.9 941.9 1,021.9 1,101.9
1,700.................................... 321.9 491.9 661.9 789.4 916.9 1,001.9 1,086.9 1,171.9
1,800.................................... 341.9 521.9 701.9 836.9 971.9 1.061.9 1,151.9 1,241.9
</TABLE>
Pension benefits are based on the average compensation (salary and bonus)
over the five-year period preceding retirement. Therefore, the covered
compensation presented in the table below for the five named executive officers
is based upon the last five-year average of pension eligible compensation
actually paid and, as such, will differ from the salary and bonus amounts set
forth in the summary compensation table set forth under "-- Summary of Cash and
Certain Other Compensation." In addition, the number of whole years of credited
service attained in 1999 is presented.
<TABLE>
<CAPTION>
COVERED YEARS OF SERVICE
NAME COMPENSATION (#)
---- ------------ ----------------
<S> <C> <C>
F. Duane Ackerman.......................................... $1,783.9 35
Jere A. Drummond........................................... $ 995.9 37
Earle Mauldin.............................................. $ 898.9 35
Ronald M. Dykes............................................ $ 649.5 28
Francis A. Dramis, Jr...................................... $ 431.3 1
</TABLE>
196
<PAGE> 203
EXECUTIVE EMPLOYMENT AGREEMENTS AND OTHER RETIREMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Agreement with Chief Executive Officer: Upon Mr. Ackerman's election to
the positions of chairman of the board, president and chief executive officer,
BellSouth entered into a new retirement agreement with him, which became
effective November 23, 1998. The new agreement is designed to incent Mr.
Ackerman to remain with BellSouth beyond the age of 60 and to link compensation
under the agreement to BellSouth's performance.
Pursuant to the retirement agreement, Mr. Ackerman was awarded 152,440
shares of restricted stock and 1,348,918 nonqualified stock options. These
shares of restricted stock will vest and these options will become exercisable
over a period of five years, beginning with a 20% increment on Mr. Ackerman's
60th birthday, followed by subsequent 20% increments on his 61st, 62nd, 63rd and
64th birthdays, provided he remains employed by BellSouth.
Upon Mr. Ackerman's retirement on or after his 65th birthday (or on or
after his 60th birthday, with the consent of the board of directors), he would
be entitled to an enhanced nonqualified pension benefit and certain perquisites
(e.g., financial counseling for seven years and office space for life). Upon
such retirement, all restricted stock would become fully vested and all options
would become fully exercisable.
The agreement provides for a severance payment to Mr. Ackerman in the event
his employment is terminated by BellSouth (other than for cause) prior to his
65th birthday. The amount of such payment would be equal to two times his annual
base pay in effect at the termination date plus two times his standard bonus for
the year of termination. Mr. Ackerman would receive a bonus for the year of such
termination in an amount no less than his standard bonus. In addition, all
restricted stock would become fully vested and all options would become fully
exercisable.
Finally, the agreement provides that, in the event Mr. Ackerman dies or
becomes disabled while still employed by BellSouth, he or his estate will be
paid an amount equal to two times his base pay for the year in which such event
occurs, plus two times his standard bonus for such year. If such event occurs
after Mr. Ackerman's 60th birthday, all restricted stock would become fully
vested and all options would become fully exercisable.
Succession Planning Arrangements: BellSouth has entered into long range
succession planning arrangements with Messrs. Drummond and Mauldin. These
agreements require that the officers retire prior to the normal retirement age
of 65. In order to compensate them for this early retirement, the agreements
provide for the payment of certain severance and other benefits.
Mr. Drummond's agreement was revised in October 1999 to provide that Mr.
Drummond will retire from BellSouth no later than December 31, 2001. Upon such
retirement, Mr. Drummond would receive benefits including payment of an amount
equal to two times his annual base pay plus the standard bonus for the year of
his retirement. In addition, he would receive an enhanced nonqualified pension
benefit, an additional grant of stock options equal to the amount most recently
granted, and financial counseling through age 67. The agreement also provides
that if Mr. Drummond should die prior to retirement, his estate will receive a
cash payment equal to the amounts he would otherwise have received upon
retirement.
Mr. Mauldin's agreement was amended in November 1999 and Mr. Mauldin
retired from BellSouth, pursuant to the agreement, on March 1, 2000. He received
payment of an amount equal to two times his annual base pay, equal to
$1,180,000, plus the amount of his standard bonus, $590,000. He also received a
grant of 371,900 options and will receive an annual enhanced nonqualified
pension benefit payment of $96,765 and financial counseling through age 67.
197
<PAGE> 204
Change In Control Agreements: BellSouth has also entered into severance
agreements (which are presently effective until January 1, 2003) with the named
executive officers that provide specified payments and enhanced benefits in the
event of involuntary termination of employment incident to a change in control
of BellSouth. In such event, in their current positions, each of Messrs.
Ackerman, Drummond, Dykes and Dramis would receive payment of an amount equal to
three times his annual base pay plus three times his standard annual bonus. In
addition, under these agreements, each of these officers would receive:
- an immediate cash-out of his bonus for the year of termination equal to
the greater of the full standard bonus for such year or such bonus based
on actual performance results through the date of termination; and
- an immediate cash-out of his dividend equivalent rights multiplied by the
greater of 100% or actual performance results through the date of
termination.
All benefits of each such executive officer under nonqualified deferred
compensation plans, supplemental retirement plans, and similar arrangements
would in such event be immediately vested and nonforfeitable. These agreements
also provide for certain "gross up" payments to compensate these executive
officers for any excise taxes incurred in connection with these benefits, and
reimbursement for certain outplacement services.
A covered executive officer will be entitled to the benefits under these
change in control severance agreements if, within two years after the occurrence
of a change in control, his employment is terminated by BellSouth (other than
for cause) or by the executive for good reason. For these purposes, "cause"
means the executive officer's willfully engaging in conduct materially injurious
to BellSouth, and "good reason" includes the assignment to the executive officer
of duties inconsistent with his prior status and position, certain reductions in
compensation or benefits, and relocation or increased travel obligations.
A "change in control" is defined for purposes of these agreements as:
- the acquisition by a party or certain related parties of 20% or more of
the total voting power of BellSouth;
- a turnover of the majority of our board of directors in any period of two
consecutive years;
- a merger or similar transaction after which BellSouth's shareholders hold
70% or less of the total voting power of the surviving entity;
- the sale or disposition of a subsidiary or assets which produced for the
most recent fiscal year more than 30% of BellSouth's total operating
revenues or net income;
- the dissolution of BellSouth or the sale of all or substantially all of
the assets of BellSouth; or
- the consummation of any other transaction which a majority of our board
of directors determines to constitute a change in control.
Should either Mr. Ackerman or Mr. Drummond become entitled to both the
benefits described in his agreement discussed above and his change in control
severance agreement, he may choose which agreement shall apply but will in no
event be entitled to benefits under both.
198
<PAGE> 205
FIVE-YEAR PERFORMANCE COMPARISON
The following graph compares the cumulative total returns of BellSouth, the
Standard & Poor's 500 Index, and a peer group of other large United States
telecommunications companies (Bell Atlantic Corporation, GTE Corporation, SBC
Communications, Inc., and U S West, Inc.) over a five-year period.
The below performance chart assumes that $100 was invested on January 1,
1995, with dividends reinvested. Prices are as of the end of the period. Peer
returns are weighted by market capitalization.
5-YEAR CUMULATIVE SHAREHOLDER RETURN
(PERFORMANCE GRAPH)
<TABLE>
<CAPTION>
BELLSOUTH PEER GROUP S&P 500
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
12/31/94 100.00 100.00 100.00
12/31/95 167.29 148.49 137.44
12/31/96 161.59 151.26 168.92
12/31/97 231.60 212.30 225.20
12/31/98 418.14 301.54 289.42
12/31/99 399.24 319.53 350.23
</TABLE>
For the years 1994-1996, NYNEX Corporation and Pacific Telesis Group were
part of the peer group. During the second quarter of 1997, Pacific Telesis
merged with SBC Communications. During the third quarter of 1997, NYNEX merged
with Bell Atlantic. For the years 1994-1998, Ameritech Corporation was part of
the peer group. During the fourth quarter of 1999, Ameritech merged with SBC
Communications. The peer group returns were adjusted to reflect these mergers.
For the years 1994-1997, prices and dividends of U S West Communications
Group (USW) and U S West Media Group (UMG) were added together to compute total
returns. During the second quarter of 1998, UMG separated from USW and the
separation was treated as a one-time dividend to USW shareholders. The peer
group returns were adjusted to reflect this separation.
199
<PAGE> 206
INFORMATION ABOUT SHAREHOLDER PROPOSALS
SHAREHOLDER PROPOSALS FOR THE 2001 PROXY STATEMENT
If you satisfy SEC requirements and wish to submit a proposal to be
included in the proxy statement for our 2001 annual meeting of shareholders, you
should submit the proposal in writing to the Corporate Secretary, BellSouth
Corporation, 1155 Peachtree Street, N.E., Room 14B06, Atlanta, Georgia 30309-
3610. We must receive a proposal by November 9, 2000 in order to consider it for
inclusion in the 2001 proxy statement.
DIRECTOR NOMINEES OR OTHER BUSINESS FOR PRESENTATION AT THE 2001 ANNUAL MEETING
If you wish to present director nominations or any other business at our
2001 annual meeting of shareholders, you are required to notify the Corporate
Secretary of your intent no later than February 12, 2001 and the notice must
provide information as required in our by-laws. A copy of our by-laws will be
provided upon request in writing to the Corporate Secretary, BellSouth
Corporation, 1155 Peachtree Street, N.E., Room 14B06, Atlanta, Georgia
30309-3610.
This requirement does not apply to the deadline for submitting shareholder
proposals for inclusion in the 2001 proxy statement, nor does it apply to
questions a shareholder may wish to ask at the annual meeting.
We retain discretion to vote proxies we receive with respect to proposals
received after February 12, 2001. We retain discretion to vote proxies we
receive with respect to proposals received prior to February 12, 2001 provided:
- we included in our 2001 Proxy Statement advice on the nature of the
proposal and how we intend to exercise our voting discretion; and
- the proponent does not issue its own proxy statement.
VIEW PROXY STATEMENTS AND ANNUAL REPORTS ON THE INTERNET
Beginning this year, BellSouth shareholders may elect to view all future
proxy statements and annual reports on the Internet instead of receiving them by
U.S. mail each year. If you choose to access future proxy statements and annual
reports online, you will continue to receive a proxy card in the mail. Future
proxy cards will contain the web site access address and other necessary
information to view the proxy material and to submit your vote. Whether you
receive your proxy material in the mail or view it on the Internet, you will
continue to have the option to vote by telephone, on the Internet or by mail.
If you wish to take advantage of this option, you may make this election
when voting by proxy. If you vote by telephone or on the Internet, simply
respond to the question when prompted. If you vote by mail, please mark the box
on your proxy card.
If you elect to view the proxy material on the Internet and then change
your mind, you may revoke the election by calling BellSouth Shareholder Services
at 1-800-631-6001.
INDEPENDENT ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP will attend the special
meeting and will have an opportunity to make a statement and to respond to
appropriate questions that you pose.
200
<PAGE> 207
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 BLS group and 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.
201
<PAGE> 208
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
BELLSOUTH CORPORATION
For the years ended December 31, 1997, 1998 and 1999
Report of Independent Accountants........................... F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the years ended December 31,
1997, 1998 and 1999....................................... F-7
Notes to Consolidated Financial Statements.................. F-8
For the six months ended June 30, 1999 and 2000
Consolidated Statements of Income for the six months ended
June 30, 1999 and 2000.................................... F-40
Consolidated Balance Sheets as of December 31, 1999 and June
30, 2000.................................................. F-41
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 2000.............................. F-42
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the six months ended June 30,
1999 and 2000............................................. F-43
Notes to Consolidated Financial Statements.................. F-44
</TABLE>
F-1
<PAGE> 209
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<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-55
Combined Statements of Operations for the years ended
November 30, 1997, 1998 and 1999.......................... F-56
Combined Balance Sheets as of November 30, 1998 and 1999.... F-57
Combined Statements of Cash Flows for the years ended
November 30, 1997, 1998 and 1999.......................... F-58
Combined Statements of Group Net Worth and Comprehensive
Income for the years ended November 30, 1997, 1998 and
1999...................................................... F-59
Notes to Combined Financial Statements...................... F-60
For the six months ended May 31, 1999 and 2000
Combined Statements of Operations for the six months ended
May 31, 1999 and 2000..................................... F-82
Combined Balance Sheets as of November 30, 1999 and May 31,
2000...................................................... F-83
Combined Statements of Cash Flows for the six months ended
May 31, 1999 and 2000..................................... F-84
Combined Statements of Group Net Worth and Comprehensive
Income for the six months ended May 31, 1999 and 2000..... F-85
Notes to Combined Financial Statements...................... F-86
</TABLE>
---------------------
You should understand the following when reading the combined financial
statements of the Latin America group of BellSouth Corporation:
- BellSouth has presented the combined financial statements of the Latin
America group at substantially the same level of detail as the
consolidated financial statements of BellSouth. BellSouth believes that
investors will require detailed financial information for the Latin
America group to properly evaluate the market potential of Latin America
group stock. It is BellSouth's expectation that investors will use the
combined financial information of the Latin America group in conjunction
with BellSouth's consolidated financial information to assist them in
making informed financial decisions relative to the acquisition or
disposition of Latin America group stock;
- the Latin America group is a collection of BellSouth's Latin American
businesses and is not a separate legal entity;
- the holders of the Latin America group stock are shareholders of
BellSouth and do not have an ownership interest in the Latin America
group or any company in the Latin America group or a claim on any of the
assets attributed to the Latin America group;
- the attribution of a portion of BellSouth's assets and liabilities to the
Latin America group does not affect BellSouth's ownership of these assets
or responsibility for these liabilities and does not affect the rights of
any creditor of BellSouth; and
- the assets attributed to the Latin America group could be subject to the
liabilities attributed to the BLS group.
F-2
<PAGE> 210
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-3
<PAGE> 211
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-4
<PAGE> 212
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-5
<PAGE> 213
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-6
<PAGE> 214
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-7
<PAGE> 215
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-8
<PAGE> 216
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.
VALUATION OF LONG-LIVED ASSETS
We review long-lived assets 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 we intend to hold for use,
if the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, we recognize a loss for the difference between the
fair value and carrying value of the asset. For assets we intend to dispose of,
we recognize a loss for the amount that the estimated fair value, less costs to
sell, is less than the carrying value of the assets.
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.
F-9
<PAGE> 217
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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>
F-10
<PAGE> 218
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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
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.
F-11
<PAGE> 219
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 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.
F-12
<PAGE> 220
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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.
F-13
<PAGE> 221
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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> <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
<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.
F-14
<PAGE> 222
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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
F-15
<PAGE> 223
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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>
F-16
<PAGE> 224
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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> <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.
F-17
<PAGE> 225
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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
F-18
<PAGE> 226
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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.
F-19
<PAGE> 227
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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> <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
</TABLE>
F-20
<PAGE> 228
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C> <C>
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
======= ========
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> <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
</TABLE>
F-21
<PAGE> 229
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C> <C>
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
======= ========
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
F-22
<PAGE> 230
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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
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.
F-23
<PAGE> 231
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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>
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-24
<PAGE> 232
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-25
<PAGE> 233
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-26
<PAGE> 234
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-27
<PAGE> 235
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-28
<PAGE> 236
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.
We evaluate the performance of each business unit based on net income,
exclusive of reconciling items and special items. 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.
F-29
<PAGE> 237
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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>
F-30
<PAGE> 238
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<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>
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.
F-31
<PAGE> 239
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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.
F-32
<PAGE> 240
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 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
F-33
<PAGE> 241
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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.
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
F-34
<PAGE> 242
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
recorded a one-time charge of $78, or $48 after tax, for severance and
post-employment health benefits during the first quarter of 2000.
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
F-35
<PAGE> 243
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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
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-36
<PAGE> 244
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.
For each group, we attribute assets, liabilities, equity, revenue and
expenses, except shared corporate services, based on specific identification of
the companies which we include in each group. We attribute equity investments
operating in Latin America to the Latin America group and all other equity
investments to the BLS group.
We directly charge specifically identified costs for shared corporate
services to each group based upon use of those services. Where determinations
based on use alone are not practical, we use other methods and criteria, based
on revenues, expenses, net assets or income that we believe 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.
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-37
<PAGE> 245
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-38
<PAGE> 246
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-39
<PAGE> 247
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1999 2000
------ -------
<S> <C> <C>
Operating revenues:
Wireline communications:
Local service.......................................... $5,366 $ 5,683
Network access......................................... 2,378 2,508
Long distance.......................................... 303 266
Other wireline......................................... 535 642
------ -------
Total wireline communications..................... 8,582 9,099
Domestic wireless......................................... 1,540 1,772
International operations.................................. 1,126 1,322
Advertising and publishing................................ 750 835
Other..................................................... 123 211
------ -------
Total operating revenues.......................... 12,121 13,239
------ -------
Operating expenses:
Operational and support expenses.......................... 6,612 7,133
Depreciation and amortization............................. 2,268 2,458
Severance accrual......................................... -- 78
Provision for asset impairment............................ 320 --
------ -------
Total operating expenses.......................... 9,200 9,669
------ -------
Operating income............................................ 2,921 3,570
Interest expense............................................ 471 638
Gain on sale of operations.................................. 16 --
Net earnings (losses) of equity affiliates.................. (209) 153
Other income, net........................................... 173 129
------ -------
Income before income taxes.................................. 2,430 3,214
Provision for income taxes.................................. 1,029 1,149
------ -------
Net income........................................ $1,401 $ 2,065
====== =======
Weighted-average shares of common stock outstanding:
Basic..................................................... 1,912 1,881
Diluted................................................... 1,930 1,899
Dividends declared per share of common stock................ $ .38 $ .38
Earnings per share of common stock:
Basic..................................................... $ .73 $ 1.10
Diluted................................................... $ .73 $ 1.09
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 248
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,287 $ 1,520
Temporary cash investments................................ 105 27
Accounts receivable, net of allowance for uncollectibles
of $312 and $316....................................... 5,177 4,990
Material and supplies..................................... 451 468
Other current assets...................................... 367 590
------- -------
Total current assets................................... 7,387 7,595
------- -------
Investments and advances.................................... 6,097 7,456
------- -------
Property, plant and equipment............................... 61,009 63,269
Less: accumulated depreciation.............................. 36,378 37,972
------- -------
Property, plant and equipment, net.......................... 24,631 25,297
------- -------
Deferred charges and other assets........................... 1,564 1,717
Intangible assets, net...................................... 3,774 4,023
------- -------
Total assets......................................... $43,453 $46,088
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year............................. $ 7,653 $ 6,108
Accounts payable.......................................... 1,961 2,076
Other current liabilities................................. 3,781 4,234
------- -------
Total current liabilities.............................. 13,395 12,418
------- -------
Long-term debt............................................ 9,113 10,869
------- -------
Noncurrent liabilities:
Deferred income taxes..................................... 2,705 2,963
unamortized investment tax credits........................ 126 106
Other noncurrent liabilities.............................. 3,299 3,230
------- -------
Total noncurrent liabilities........................... 6,130 6,299
------- -------
Shareholders' equity:
Common stock, $1 par value (4,400 shares authorized; 1,883
and 1,881 shares outstanding).......................... 2,020 2,020
Paid-in capital........................................... 6,771 6,775
Retained earnings......................................... 11,456 12,746
Accumulated other comprehensive income.................... (358) (5)
Shares held in trust and treasury......................... (4,798) (4,832)
Guarantee of ESOP debt.................................... (276) (202)
------- -------
Total shareholders' equity............................. 14,815 16,502
------- -------
Total liabilities and shareholders' equity........... $43,453 $46,088
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 249
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,401 $ 2,065
Adjustments to net income:
Depreciation and amortization............................. 2,268 2,458
Severance Accrual......................................... -- 78
Gain on sale of operations................................ (16) --
Provision for asset impairment............................ 320 --
Provision for uncollectibles.............................. 165 179
Net losses (earnings) of equity affiliates................ 209 (153)
Dividends received from equity affiliates................. 37 39
Minority interests in income of subsidiaries.............. 20 22
Deferred income taxes and investment tax credits.......... (7) 98
Net change in:
Accounts receivable and other current assets.............. (208) (199)
Accounts payable and other current liabilities............ 332 641
Deferred charges and other assets......................... (279) (337)
Other liabilities and deferred credits.................... (81) (182)
Other reconciling items, net................................ (68) 89
------- -------
Net cash provided by operating activities......... 4,093 4,798
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (2,885) (3,268)
Investments in and advances to equity affiliates............ (3,711) (582)
Purchases of licenses and other intangible assets........... (97) (73)
Proceeds from disposition of short-term investments......... 133 247
Purchases of short-term investments......................... (271) (177)
Proceeds from repayment of loans and advances............... 50 14
Other investing activities, net............................. 129 44
------- -------
Net cash used for investing activities............ (6,652) (3,795)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of short-term debt.............. 4,049 (1,708)
Proceeds from long-term debt................................ 6 2,083
Repayments of long-term debt................................ (193) (335)
Dividends paid.............................................. (733) (715)
Purchase of treasury shares................................. (2,968) (148)
Other financing activities, net............................. 11 53
------- -------
Net cash used for financing activities............ 172 (770)
------- -------
Net decrease in cash and cash equivalents................... (2,387) 233
Cash and cash equivalents at beginning of period............ 3,143 1,287
------- -------
Cash and cash equivalents at end of period.................. $ 756 $ 1,520
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 250
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------------------------
NUMBER OF SHARES AMOUNT
------------------ -----------------------------------------------------------------------------
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................... 2,065 2,065
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustments.............. 27 27
Net unrealized gains on
securities............... 335 335
Minimum pension liability
adjustment............... (9) (9)
-------
Total comprehensive income... 2,418
Dividends declared........... (715) (715)
Shares issuances for employee
benefit plans.............. 2 (60) 114 54
Purchase of treasury stock... (3) (148) (148)
Tax benefit related to stock
options.................... 4 4
ESOP activities and related
tax benefit................ 74 74
----- ---- ------ ------ ------- ----- ------- ----- -------
BALANCE AT JUNE 30, 2000..... 2,020 (139) $2,020 $6,775 $12,746 $ (5) $(4,832) $(202) $16,502
===== ==== ====== ====== ======= ===== ======= ===== =======
</TABLE>
---------------
(a) Trust and treasury shares are not considered to be outstanding for financial
reporting purposes. As of June 30, 2000, there were approximately 36 shares
held in trust and 103 shares held in treasury.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 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................... 1,401 1,401
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustments.............. (114) (114)
-------
Total comprehensive income... 1,287
Dividends declared........... (720) (720)
Shares issuances for employee
benefit plans.............. 1 (18) 33 15
Purchase of treasury stock... (66) (2,965) (2,965)
Purchase of stock by grantor
trust...................... (3) (3)
ESOP activities and related
tax benefit................ 3 33 36
----- ---- ------ ------ ------- ----- ------- ----- -------
BALANCE AT JUNE 30, 1999..... 2,020 (135) $2,020 $6,766 $10,145 $(178) $(4,687) $(306) $13,760
===== ==== ====== ====== ======= ===== ======= ===== =======
</TABLE>
---------------
(b) Trust and treasury shares are not considered to be outstanding for financial
reporting purposes. As of June 30, 1999, there were approximately 36 shares
held in trust and 100 shares held in treasury.
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE> 251
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 document.
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. In June 2000, the SEC deferred the
required adoption date of the guidelines in SAB 101 to the fourth quarter of
2000. We do not expect the adoption of these guidelines to have a material
impact on our results of operations, financial position or cash flows.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Among other provisions, it
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. Gains and losses resulting from changes in the fair values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The effective date of this standard
was delayed via the issuance of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 -- an amendment of FASB Statement 133." The effective date for
SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. This
means that the standard must be adopted by us no later than January 1, 2001. We
do not expect the adoption of this standard will have a material impact on
results of operations, financial position or cash flows.
F-44
<PAGE> 252
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 SIX
MONTHS ENDED
JUNE 30,
--------------
1999 2000
----- -----
<S> <C> <C>
Basic common shares outstanding............................. 1,912 1,881
Incremental shares from stock options....................... 18 18
----- -----
Diluted common shares outstanding........................... 1,930 1,899
===== =====
</TABLE>
The earnings amounts used for per-share calculations are the same for both
the basic and diluted methods.
D. WORKFORCE REDUCTION
In February 2000, we announced that we would reduce our domestic general
and administrative staff by approximately 2,100 positions. These reductions are
the result of the streamlining of work processes in conjunction with our shift
to a more simplified management structure. As a result of these reductions, we
recorded a one-time charge of $78, or $48 after tax, for severance and
post-employment health benefits.
E. E-PLUS RESTRUCTURING
In February 2000, we closed on a previously announced alliance with KPN
Royal Dutch Telecom. We utilized our right of first refusal that enabled KPN to
acquire a 77.5 percent interest in E-Plus and allows us the option after 18
months of converting our 22.5 percent interest in E-Plus into either 200 million
shares of KPN or shares representing at the time an estimated 33.3 percent
ownership interest in KPN's wireless subsidiary. We also have agreed to make up
to $3 billion of loans to KPN to be used for further wireless investments in
Europe and received non-detachable warrants to purchase approximately 90 million
additional shares of KPN.
As a result of this transaction, we recognized income of $143, or $68 after
tax. The gain relates to a settlement payment from the selling shareholder
regarding a dispute over the terms of the E-Plus shareholder agreement governing
the provisions of the sale.
F. ASSET IMPAIRMENT LOSS
In June 1999, we executed a contract with Ericsson to replace
infrastructure equipment, including switches, base stations and software, in 14
wireless markets in the southeastern United States. The new equipment is
intended to improve network performance and to lay the foundation for migration
of the network to Third Generation wireless (3G) and wireless Internet. We
expect the conversion to be substantially completed by December 2000.
The planned disposals of the existing infrastructure equipment require an
evaluation of asset impairment in accordance with SFAS 121. As a result, a
non-cash charge of $320, or $187 after tax, was recorded in the second quarter
of 1999 to write these assets down to their fair market value, which was
F-45
<PAGE> 253
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
estimated by the expected future cash flows of these assets through the date of
disposal. We will continue to use the assets until the conversion process has
been completed and depreciate the remaining net book value over this period.
G. DEVALUATION OF BRAZILIAN CURRENCY
In mid January 1999, the Brazilian Government changed its monetary exchange
policy, extinguishing the exchange band through which it had managed the range
of the fluctuation of the Real in relation to the U.S. Dollar, allowing the
market to freely determine the exchange rate. As a consequence of this change,
the Real devalued significantly in relation to the U.S. Dollar in early 1999.
The devaluation and subsequent fluctuations in the exchange rate resulted in our
Brazilian wireless properties recording net currency losses related to the net
U.S. Dollar-denominated liabilities. Our share of the foreign currency losses
for the first quarter of 1999 was $280.
H. SEGMENT INFORMATION
We have four reportable operating segments: (1) Wireline communications;
(2) Domestic wireless; (3) International operations; and (4) Advertising and
publishing. We have included the operations of all other businesses falling
below the reporting threshold in the "All Other" segment. The "Reconciling
items" shown below include Corporate Headquarters and capital funding
activities, intercompany eliminations and other nonoperating items. The
following table provides information for each operating segment:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
--------------- %
1999 2000 CHANGE
------ ------ ------
<S> <C> <C> <C>
WIRELINE COMMUNICATIONS
External revenues.............. $8,582 $9,099 6.0
Intersegment revenues.......... 167 158 (5.4)
------ ------
Total revenues................. $8,749 $9,257 5.8
====== ======
Operating income............... $2,803 $3,141 12.1
====== ======
Segment net income............. $1,582 $1,771 11.9
====== ======
---------------------------------------------------------
DOMESTIC WIRELESS
External revenues.............. $1,540 $1,772 15.1
Intersegment revenues.......... 7 8 14.3
------ ------
Total revenues................. $1,547 $1,780 15.1
====== ======
Operating income............... $ 189 $ 285 50.8
====== ======
Net earnings (losses) of equity
affiliates................... $ 72 $ 80 11.1
====== ======
Segment net income............. $ 131 $ 187 42.7
====== ======
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
--------------- %
1999 2000 CHANGE
------ ------ ------
<S> <C> <C> <C>
INTERNATIONAL OPERATIONS
External revenues.............. $1,126 $1,322 17.4
Intersegment revenues.......... -- 21 N/M*
------ ------
Total revenues................. $1,126 $1,343 19.3
====== ======
Operating income (loss)........ $ 121 $ 56 (53.7)
====== ======
Net earnings (losses) of equity
affiliates................... $ 8 $ (12) N/M
====== ======
Segment net income (loss)...... $ 30 $ (4) N/M
====== ======
---------------------------------------------------------
ADVERTISING AND PUBLISHING
External revenues.............. $ 750 $ 835 11.3
Intersegment revenues.......... 6 11 83.3
------ ------
Total revenues................. $ 756 $ 846 11.9
====== ======
Operating income............... $ 302 $ 344 13.9
====== ======
Net earnings (losses) of equity
affiliates................... $ (5) $ 4 N/M
====== ======
Segment net income............. $ 182 $ 215 18.1
====== ======
---------------------------------------------------------
</TABLE>
F-46
<PAGE> 254
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
----------------- %
1999 2000 CHANGE
------- ------- ------
<S> <C> <C> <C>
ALL OTHER
External revenues............ $ 123 $ 211 71.5
Intersegment revenues........ 162 194 19.8
------- -------
Total revenues............... $ 285 $ 405 42.1
======= =======
Operating income (loss)...... $ (152) $ (129) (15.1)
======= =======
Net earnings (losses) of
equity affiliates.......... $ -- $ (1) N/M
======= =======
Segment net loss............. $ (116) $ (99) (14.7)
======= =======
---------------------------------------------------------
RECONCILING ITEMS
Intersegment revenues........ $ (342) $ (392) 14.6
======= =======
Operating income (loss)...... $ (342) $ (127) (62.9)
======= =======
Net earnings (losses) of
equity affiliates.......... $ (284) $ 82 N/M
======= =======
Segment net income (loss).... $ (408) $ (5) N/M
======= =======
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
----------------- %
1999 2000 CHANGE
------- ------- ------
<S> <C> <C> <C>
RECONCILIATION TO CONSOLIDATED
FINANCIAL INFORMATION
OPERATING REVENUES
Wireline communications...... $ 8,749 $ 9,257 5.8
Domestic wireless............ 1,547 1,780 15.1
International operations..... 1,126 1,343 19.3
Advertising and publishing... 756 846 11.9
All other.................... 285 405 42.1
------- -------
Total segments............... 12,463 13,631 9.4
------- -------
Reconciling items............ (342) (392) 14.6
------- -------
Total consolidated........... $12,121 $13,239 9.2
======= =======
---------------------------------------------------------
NET INCOME
Wireline communications...... $ 1,582 $ 1,771 11.9
Domestic wireless............ 131 187 42.7
International operations..... 30 (4) N/M
Advertising and publishing... 182 215 18.1
All other.................... (116) (99) (14.7)
------- -------
Total segments............... 1,809 2,070 14.4
Reconciling items............ (408) (5) N/M
------- -------
Total consolidated........... $ 1,401 $ 2,065 47.4
======= =======
---------------------------------------------------------
</TABLE>
* Not Meaningful
I. INVESTMENT ACTIVITY
Investment in Brazil
In May 2000, we completed the purchase of a combination of voting common
stock and American Depository Receipts representing nonvoting preferred stock of
Tele Centro Oeste Celular Participacoes SA, a Brazilian company, for a total
purchase price of approximately $240. Tele Centro Oeste provides cellular
service in central-west Brazil, including Brasilia, as well as northern Brazil.
The common stock portion of the investment represents 11.8% of the voting power
of Tele Centro Oeste. The combined investment in common and preferred stock
represents 17.3% of the total capital of Tele Centro Oeste. This investment is
accounted for under the cost method, subject to the guidelines of
available-for-sale securities under SFAS 115.
Investment in Colombia
In June 2000, we acquired a 50.4% controlling equity interest in Celumovil
S.A., a cellular operator in the Eastern and Atlantic regions in Colombia, for a
purchase price of approximately $399, funded by $299 of cash and a $100 note
payable due December 2000. We have commenced cobranding Celumovil with the
BellSouth brand. Celumovil/BellSouth provides wireless service in the Eastern
region of Colombia, which includes the capital city of Bogota, and in the
Atlantic or coastal region.
See Note R -- Subsequent Event.
F-47
<PAGE> 255
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
Proposed Domestic Wireless Transaction
In April 2000, we announced plans to combine substantially all of our
domestic wireless businesses with those of SBC Communications into a venture
that will comprise the nation's second largest wireless company. This venture,
which will cover a total population of 175 million people and serve more than
16.0 million subscribers, will be owned 40% by BellSouth and 60% by SBC
Communications but will be jointly controlled. We expect to receive the required
regulatory approvals and close the transaction by the end of 2000. One of our
domestic partners has sued to enjoin the contribution to the venture of our
interest in the PCS property located in North Carolina and South Carolina. We do
not believe this action will delay the closing of the venture.
J. MARKETABLE SECURITIES
We have investments in marketable securities, primarily common stocks,
which are accounted for under the cost method. These investments are comprised
primarily of a 5% equity interest in Qwest and are classified as
available-for-sale under SFAS 115. Under SFAS 115, available-for-sale securities
are required to be carried at their fair value, with unrealized gains and
losses, net of income taxes, recorded in accumulated other comprehensive income
(loss) in our statement of changes in shareholders' equity and comprehensive
income. The fair values of our investments in marketable securities are
determined based on market quotations. The table below shows certain summarized
information related to these investments at June 30, 2000:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment in Qwest............................. $3,500 $200 $ -- $3,700
Other investments............................... 458 167 (31) 594
------ ---- ---- ------
Total................................. $3,958 $367 $(31) $4,294
====== ==== ==== ======
</TABLE>
K. SUBLEASE OF COMMUNICATIONS TOWERS
In June 1999, we signed a definitive agreement with Crown Castle
International Corporation for the sublease of all unused space on approximately
1,850 of our wireless communications towers in exchange for $610 to be paid in a
combination of cash and Crown common stock. As of June 30, 2000 we have closed
on 1,754 towers and received $577. Remaining towers covered by the agreement are
expected to be subleased throughout the remainder of 2000. We also entered into
a five-year, build-to-suit agreement with Crown covering up to 500 towers.
Under a similar agreement, Crown will sublease all unused space on 773 PCS
towers in exchange for $317 in cash. As of June 30, 2000, we have closed on 706
towers and received $290. Remaining towers covered by the agreement are expected
to be subleased throughout the remainder of 2000. In connection with this
agreement, we entered into an exclusive three-year, build-to-suit agreement.
F-48
<PAGE> 256
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
L. SUMMARY FINANCIAL INFORMATION FOR EQUITY INVESTEES;
The following table displays the summary unaudited financial information
for our equity method businesses. These amounts are shown on a 100-percent
basis.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------- %
1999 2000 CHANGE
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... $2,459 $3,113 26.6
====== ======
Operating income............................................ $ 141 $ 284 N/M
====== ======
Net income(loss)............................................ $ (608) $ 72 N/M
====== ======
</TABLE>
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. CONTINGENCIES
Following the enactment of the Telecommunications Act of 1996, our
telephone company subsidiary, BellSouth Telecommunications, Inc. (BST), and
various competitive local exchange carriers entered into interconnection
agreements providing for, among other things, the payment of reciprocal
compensation for local calls initiated by the customers of one carrier that are
completed on the network of the other carrier. Numerous competitive local
carriers have claimed entitlement from BST for compensation associated with
dial-up calls originating on BST's network and connecting with Internet service
providers served by the competitive local carriers' networks. BST has maintained
that dial-up calls to Internet service providers are not local calls for which
terminating compensation is due under the interconnection agreements.
In February 1999, the FCC issued a decision that such traffic does not
terminate at the Internet service provider and, therefore, is interstate in
nature, rather than local. The FCC stated, however, that it would not interfere
with prior state commissions' decisions regarding this matter. The courts and
state regulatory commissions in BST's operating territory that have considered
the matter have, in most cases, ruled that BST is responsible for paying
reciprocal compensation on these calls. BST has appealed the adverse decisions
and continues to believe that it has a good legal basis for its position that
such reciprocal compensation is not owed to the competitive local carriers. For
those cases where BST believes it is probable that it has incurred a liability,
it has recorded an estimate of the amount owed. At June 30, 2000, the exposure
related to unrecorded amounts withheld from competitive local carriers was
approximately $310, including accrued interest.
In March 2000, the United States Court of Appeals for the D.C. Circuit
vacated and remanded the FCC decision, concluding that the FCC had not
adequately explained its finding that Internet service provider traffic was
interstate. Based on statements made by the FCC since the court's decision, we
do not believe that this most recent court decision adversely affects the
ultimate outcome of pending state proceedings. Nonetheless, we have commenced
discussions with several competitive local carriers concerning settlement of
some claims, and agreements have been reached in certain circumstances.
OTHER RECIPROCAL COMPENSATION ISSUES
In a related matter, a competitive local carrier was claiming terminating
compensation of approximately $165 for service arrangements that we did not
believe involved "traffic" under our
F-49
<PAGE> 257
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
interconnection agreements. We filed a complaint with the state regulatory
commission asking that agency to declare that we did not owe reciprocal
compensation for these arrangements. In March 2000, the state commission ruled
in our favor finding that compensation was not owed to the competitive local
carrier. This matter is currently on appeal.
O. 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 would permit us to issue our common stock in series, of which our
Board of Directors would initially designate two: Latin America group stock,
intended to reflect the separate performance of our Latin American businesses,
and BLS group stock, intended to reflect the separate performance of all of our
other businesses. We have also filed a registration statement for the offering
of shares of Latin America group stock for sale to the public. Both filings
remain subject to further review by the SEC.
We plan to authorize a public offering of shares of Latin America group
stock to finance our expansion in Latin America. At the time of a public
offering, a number of shares of Latin America group stock will be reserved for
the BLS group or for issuance to the holders of BLS group stock. We expect that
we would distribute, as a dividend to the holders of BLS group stock, the
reserved shares of Latin America group stock within six to 12 months following
the public offering.
Our plans to create, issue and distribute Latin America group stock are
subject to a number of conditions, including completion of the SEC review
process, shareholder approval, market conditions and other factors.
P. SATELLITE LEASES
In May 2000, we signed a long-term satellite service agreement with GE
Americom, a GE Capital company. As a result of this agreement, we are able to
offer a full-suite of digital home entertainment and interactive information
services to over 14 million households in our service territory. We plan to roll
out service in our top markets within the next year and expand throughout the
southeast by the first half of 2002.
F-50
<PAGE> 258
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
Q. QUARTERLY FINANCIAL INFORMATION
In the following summary of quarterly financial information, all
adjustments necessary for a fair presentation of each period were included.
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
------- -------
<S> <C> <C>
1999
Operating Revenues.......................................... $5,973 $6,148
Operating Income............................................ $1,607 $1,314
Net Income.................................................. $ 615 $ 786
Earnings per share:
Basic..................................................... $ .32 $ .42
Diluted................................................... $ .32 $ .41
2000
Operating Revenues.......................................... $6,487 $6,752
Operating Income............................................ $1,623 $1,947
Net Income.................................................. $1,001 $1,064
Earnings per share:
Basic..................................................... $ .53 $ .57
Diluted................................................... $ .53 $ .56
</TABLE>
The quarters shown were affected by the following:
- First quarter 2000 includes income related to the restructuring of our
ownership interest in the German wireless operator, E-plus, which
increased net income by $68, or $0.04 per share. First quarter 2000 also
includes expense recorded as a result of our previously announced plan to
reduce our domestic general and administrative staff, which reduced
operating income by $78 and net income by $48, or $0.03 per share.
- First quarter 1999 includes foreign currency gains and losses associated
with the devaluation of the Brazilian Real, which reduced net income by
$280.
- Second quarter 1999 includes an asset impairment loss which decreased
operating income by $320 and net income by $187, or $0.10 per share.
R. SUBSEQUENT EVENT
Through a purchase on the Bogota stock exchange in July 2000,
Celumovil/BellSouth acquired 100% of the shares of Cocelco, a wireless
communications provider in the western region of Colombia. This acquisition was
funded by a $384 capital contribution and a $30 shareholder loan from BellSouth,
resulting in an increase in BellSouth's ownership interest in Celumovil to
66.0%. The transaction creates the first nationwide mobile cellular
communications operator in Colombia.
S. 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
F-51
<PAGE> 259
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
allocation policies. The BLS group presented below excludes its retained
interest in the Latin America group.
For each group, we attribute assets, liabilities, equity, revenue and
expenses, except shared corporate services, based on specific identification of
the companies which we include in each group. We attribute equity investments
operating in Latin America to the Latin America group and all other equity
investments to the BLS group.
We directly charge specifically identified costs for shared corporate
services to each group based upon use of those services. Where determinations
based on use alone are not practical, we use other methods and criteria, based
on revenues, expenses, net assets or income that we believe 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.
CONSOLIDATING STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
----------------------------------------------------
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
External revenues............ $10,990 $1,131 $ -- $12,121
Intercompany revenues:
Overhead allocations......... 19 10 (29) --
Wireless services............ -- 2 (2) --
------- ------ ---- -------
Total revenues....... 11,009 1,143 (31) 12,121
External expenses............ 8,194 1,006 -- 9,200
Intercompany expenses:
Overhead allocations....... 10 19 (29) --
Wireless services.......... 2 -- (2) --
------- ------ ---- -------
Total operating
expenses........... 8,206 1,025 (31) 9,200
------- ------ ---- -------
Operating income............. 2,803 118 -- 2,921
Interest expense............. 429 49 (7) 471
Net earnings (losses) of
equity affiliates.......... 91 (300) -- (209)
Interest income.............. 80 7 (7) 80
Gain on sale of operations... 16 -- -- 16
Miscellaneous other income
(loss)..................... 115 (2) -- 113
Minority interests........... 16 (36) -- (20)
------- ------ ---- -------
Other income/expense......... 227 (31) (7) 189
------- ------ ---- -------
Income (loss) before income
taxes...................... 2,692 (262) -- 2,430
Provision (benefit) for
income taxes............... 982 47 -- 1,029
------- ------ ---- -------
Net income (loss)............ $ 1,710 $ (309) $ -- $ 1,401
======= ====== ==== =======
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
----------------------------------------------------
LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH
--------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
External revenues............ $11,872 $1,367 $ -- $13,239
Intercompany revenues:
Overhead allocations......... 14 10 (24) --
Wireless services............ -- 22 (22) --
------- ------ ---- -------
Total revenues....... 11,886 1,399 (46) 13,239
External expenses............ 8,324 1,345 -- 9,669
Intercompany expenses:
Overhead allocations....... 10 14 (24) --
Wireless services.......... 22 -- (22) --
------- ------ ---- -------
Total operating
expenses........... 8,356 1,359 (46) 9,669
------- ------ ---- -------
Operating income............. 3,530 40 -- 3,570
Interest expense............. 583 59 (4) 638
Net earnings (losses) of
equity affiliates.......... 195 (42) -- 153
Interest income.............. 56 14 (4) 66
Gain on sale of operations... -- -- -- --
Miscellaneous other income
(loss)..................... 81 4 -- 85
Minority interests........... -- (22) -- (22)
------- ------ ---- -------
Other income/expense......... 137 (4) (4) 129
------- ------ ---- -------
Income (loss) before income
taxes...................... 3,279 (65) -- 3,214
Provision (benefit) for
income taxes............... 1,160 (11) -- 1,149
------- ------ ---- -------
Net income (loss)............ $ 2,119 $ (54) $ -- $ 2,065
======= ====== ==== =======
</TABLE>
F-52
<PAGE> 260
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT JUNE 30, 2000
---------------------------------------------------- -------------------------
LATIN AMERICA LATIN AMERICA
BLS GROUP GROUP ELIMINATIONS BELLSOUTH BLS GROUP GROUP
--------- ------------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current assets........... $ 6,413 $1,034 $ (60) $ 7,387 $ 6,528 $1,110
Investments & advances... 5,840 374 (117) 6,097 7,315 501
Property, plant and
equipment, net......... 22,908 1,723 -- 24,631 23,384 1,913
Intangible assets, net... 2,303 1,471 -- 3,774 2,503 1,520
Deferred charges and
other assets........... 1,492 72 -- 1,564 1,636 81
------- ------ ----- ------- ------- ------
Total assets..... $38,956 $4,674 $(177) $43,453 $41,366 $5,125
======= ====== ===== ======= ======= ======
Current liabilities...... $12,358 $1,097 $ (60) $13,395 $11,168 $1,293
Long-term debt........... 8,638 592 (117) 9,113 10,421 808
Noncurrent liabilities... 5,490 640 -- 6,130 5,711 588
Shareholders' equity..... 12,470 2,345 -- 14,815 14,066 2,436
------- ------ ----- ------- ------- ------
Total liabilities
and equity..... $38,956 $4,674 $(177) $43,453 $41,366 $5,125
======= ====== ===== ======= ======= ======
<CAPTION>
AT JUNE 30, 2000
------------------------
ELIMINATIONS BELLSOUTH
------------ ---------
<S> <C> <C>
Current assets........... $ (43) $ 7,595
Investments & advances... (360) 7,456
Property, plant and
equipment, net......... -- 25,297
Intangible assets, net... -- 4,023
Deferred charges and
other assets........... -- 1,717
----- -------
Total assets..... $(403) $46,088
===== =======
Current liabilities...... $ (43) $12,418
Long-term debt........... (360) 10,869
Noncurrent liabilities... -- 6,299
Shareholders' equity..... -- 16,502
----- -------
Total liabilities
and equity..... $(403) $46,088
===== =======
</TABLE>
F-53
<PAGE> 261
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
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...................................... $ 1,710 $(309) $ 1,401 $ 2,119 $ (54) $ 2,065
Adjustments to reconcile net income to net cash
provided by operating activities.............. 2,137 555 2,692 2,459 274 2,733
------- ----- ------- ------- ----- -------
Net cash provided by operating
activities............................ 3,847 246 4,093 4,578 220 4,798
------- ----- ------- ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (2,575) (310) (2,885) (2,827) (441) (3,268)
Investments in subsidiaries..................... (3,682) (29) (3,711) (339) (243) (582)
Other investing activities, net................. (3) (53) (56) 54 1 55
------- ----- ------- ------- ----- -------
Net cash used for investing
activities............................ (6,260) (392) (6,652) (3,112) (683) (3,795)
------- ----- ------- ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of short-term
borrowings.................................... 3,995 54 4,049 (1,758) 50 (1,708)
Net proceeds (repayments) of long-term debt..... (218) 31 (187) 1,437 311 1,748
Dividends paid.................................. (733) -- (733) (715) -- (715)
Purchase of treasury shares..................... (2,968) -- (2,968) (148) -- (148)
Funds allocated to/from the Latin America
group......................................... (218) 218 -- (159) 159 --
Other financing activities, net................. 11 -- 11 53 -- 53
------- ----- ------- ------- ----- -------
Net cash provided (used) for financing
activities............................ (131) 303 172 (1,290) 520 (770)
------- ----- ------- ------- ----- -------
Net Increase (Decrease) in Cash and Cash
Equivalents................................... (2,544) 157 (2,387) 176 57 233
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...... $ 428 $ 328 $ 756 $ 1,176 $ 344 $ 1,520
======= ===== ======= ======= ===== =======
</TABLE>
F-54
<PAGE> 262
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-55
<PAGE> 263
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-56
<PAGE> 264
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-57
<PAGE> 265
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-58
<PAGE> 266
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-59
<PAGE> 267
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 40 million customers in 17 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 the separate 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 attributed to the Latin America
group. Immediately prior to the completion of that public offering, BellSouth
will reserve a number of shares of Latin America group stock for the BLS group
or for issuance to the holders of BLS group stock. The number of shares so
reserved will be determined by dividing the estimated value of our businesses
attributed to the Latin America group by the estimated offering price of Latin
America group stock.
Latin America group stock is intended 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 document. 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 appearing as
Annex II to this document. This initial attribution is reflected in the November
30, 1999 combined balance sheets of the Latin America group. Under the tracking
stock policy statement, the companies in the Latin America group may generally
engage in any business activity only 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 companies in the BLS group generally may not provide
telecommunications and related services and products in Latin America.
F-60
<PAGE> 268
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
The major assets and liabilities attributed to the Latin America group 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>
* 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.
The Company has also attributed to the Latin America group BellSouth's
interests in advertising and directory publishing companies in Brazil and Peru,
a network services business providing wholesale communications services, an
international roaming clearinghouse and BSI headquarters.
<TABLE>
<CAPTION>
LOCATION OPERATING COMPANY BUSINESS BELLSOUTH INTEREST
-------- ----------------- -------- ------------------
<S> <C> <C> <C>
Brazil Listel-Listas Telefonicas S.A. Advertising and Directory Publishing 100.0%
Brazil OESP Midia Ltda. Advertising and Directory Publishing 40.0
Peru BellSouth Advertising & Publishing
Peru S.R.L. Advertising and 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>
As we acquire 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.
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
F-61
<PAGE> 269
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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 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 attributed to 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 attributed to the
Latin America group. 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. 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 the series of stock related to both groups.
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
F-62
<PAGE> 270
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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 document 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.
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
F-63
<PAGE> 271
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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 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
F-64
<PAGE> 272
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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.
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
Income taxes included in the financial statements of the Latin America
group primarily reflect taxes of foreign entities not included in the
consolidated tax return of BellSouth. Foreign income taxes are determined on a
separate return basis by operating entity for their country of domicile and are
included in the Latin America group financial statements.
U.S. federal and state income taxes related to domestic operations of the
Latin America group are allocated to the Latin America group in accordance with
BellSouth's tax allocation policy. In general, this policy provides that the
consolidated tax provision (and related tax payments or refunds) are allocated
between the groups based principally upon financial income, taxable income,
credits and other amounts directly related to the respective group. Tax benefits
that cannot be utilized by the group generating such attributes, but can be
utilized on a consolidated basis, are allocated to the group that generated such
benefits.
Assuming U.S. federal and state income taxes for domestic operations of the
Latin America group were calculated on a separate return basis, the benefit for
income taxes for the year ended November 30, 1999 would have been $84 and the
net loss would have been $348.
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.
F-65
<PAGE> 273
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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 a portion of Latin America group earnings
equal to the product of (i) net income of the Latin America group times (ii) 1
minus the outstanding shares fraction) 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 shares fraction," by the weighted-average number of shares of Latin
America group stock outstanding. The outstanding shares fraction is calculated
by dividing the number of shares of Latin America group stock then outstanding
by the sum of (i) the number of shares of Latin America group stock then
outstanding and (ii) the number of shares of Latin America group stock then
reserved for issuance for the benefit of the BLS group or to the holders of BLS
group stock. 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 shares 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 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
F-66
<PAGE> 274
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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 businesses attributed
to the BLS group and the businesses attributed to the Latin America group not in
the ordinary course of their respective businesses by:
- increasing or decreasing, as applicable, the number of reserved shares
related to the group transferring or receiving the assets or liabilities;
- 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, reserved shares.
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:
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.
F-67
<PAGE> 275
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 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, 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.
F-68
<PAGE> 276
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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>
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
F-69
<PAGE> 277
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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. Management has concluded that it is more
likely than not that the NOLs will be utilized. Management's conclusion is based
on the following positive factors:
- The carryforward period for NOLs in Brazil is indefinite;
- Financial projections prepared by management indicate that the NOLs will
be utilized in the foreseeable future;
- The Sao Paulo operation has generated positive cash flow since 1998; and
- BellSouth has operated in a start-up situation in similar environments,
and most of these ventures became net income positive in a relatively
short period of time.
Based on these factors, no valuation allowance has been established against
the deferred tax asset.
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> <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-70
<PAGE> 278
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-71
<PAGE> 279
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-72
<PAGE> 280
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 of both BLS group stock and
Latin America group stock. With respect to management employees of the BLS
group, a preponderance of awards will be made in BLS group stock, and, with
respect to management in the Latin America group, a preponderance of awards will
be made in Latin America group stock. In addition, nonemployee directors will be
granted awards of both BLS group stock and Latin America group stock. The Board
of Directors believes that granting participants awards weighted toward the
separate performance of the group 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 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
F-73
<PAGE> 281
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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-74
<PAGE> 282
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-75
<PAGE> 283
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-76
<PAGE> 284
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-77
<PAGE> 285
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-78
<PAGE> 286
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
F-79
<PAGE> 287
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
(due to 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-80
<PAGE> 288
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.
F-81
<PAGE> 289
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
MAY 31, MAY 31,
1999 2000
------- -------
<S> <C> <C>
Operating revenues.......................................... $1,143 $1,399
------ ------
Operating expenses:
Cost of services, products and equipment.................. 375 537
Selling, general and administrative....................... 438 566
Depreciation and amortization............................. 212 256
------ ------
Total operating expenses.......................... 1,025 1,359
------ ------
Operating income (loss)..................................... 118 40
Interest expense............................................ 49 59
Other income (expense), net................................. 5 18
------ ------
Income (loss) before income taxes........................... 74 (1)
Provision (benefit) for income taxes........................ 47 (11)
------ ------
Income (loss) before net earnings (losses) of equity
affiliates and minority interests......................... 27 10
Net earnings (losses) of equity affiliates.................. (300) (42)
Minority interests.......................................... (36) (22)
------ ------
Net loss.......................................... $ (309) $ (54)
====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-82
<PAGE> 290
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 287 $ 344
Temporary cash investments................................ 66 --
Accounts receivable, net of allowance for uncollectibles
of $99 and $111........................................ 503 559
Inventory................................................. 56 91
Other current assets...................................... 122 116
------ ------
Total current assets................................... 1,034 1,110
------ ------
Investments and advances.................................... 374 501
Property, plant and equipment............................... 2,822 3,211
Less: accumulated depreciation.............................. 1,099 1,298
------ ------
Property, plant and equipment, net.......................... 1,723 1,913
------ ------
Deferred charges and other assets........................... 72 81
Intangible assets, net...................................... 1,471 1,520
------ ------
Total assets...................................... $4,674 $5,125
====== ======
LIABILITIES AND GROUP NET WORTH
Current liabilities:
External debt maturing within one year.................... $ 280 $ 425
Intercompany debt maturing within one year................ 23 23
Accounts payable.......................................... 322 432
Other current liabilities................................. 472 413
------ ------
Total current liabilities.............................. 1,097 1,293
------ ------
Long-term debt:
External long-term debt................................... 475 448
Intercompany long-term debt............................... 117 360
------ ------
Total long-term debt................................... 592 808
------ ------
Noncurrent liabilities:
Deferred income taxes..................................... 151 105
Other noncurrent liabilities.............................. 174 177
------ ------
Total noncurrent liabilities........................... 325 282
------ ------
Minority interests.......................................... 315 306
Group net worth:
Attributed capital........................................ 3,059 3,218
Retained deficit.......................................... (450) (504)
Accumulated other comprehensive income.................... (264) (278)
------ ------
Total group net worth.................................. 2,345 2,436
------ ------
Total liabilities and group net worth............. $4,674 $5,125
====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-83
<PAGE> 291
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
MAY 31, MAY 31,
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(309) $ (54)
Adjustments to net loss:
Depreciation and amortization............................. 212 256
Provision for uncollectibles.............................. 32 33
Net losses of equity affiliates........................... 300 42
Foreign currency exchange (gains) losses.................. (1) (4)
Minority interests in income (losses) of subsidiaries..... 36 22
Deferred income taxes and investment tax credits.......... 28 (31)
Net change in:
Accounts receivable and other current assets.............. (114) (108)
Accounts payable and other current liabilities............ 37 98
Deferred charges and other assets......................... 18 (5)
Other liabilities and deferred credits.................... 9 (29)
----- -----
Net cash provided by operating activities......... 248 220
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (310) (441)
Investments in and advances to equity affiliates............ (29) (243)
Purchases of wireless licenses.............................. -- (69)
Other investing activities, net............................. (53) 70
----- -----
Net cash used for investing activities............ (392) (683)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt............................... 69 296
Repayments of short-term debt............................... (15) (246)
Proceeds from long-term debt................................ 45 347
Repayments of long-term debt................................ (14) (36)
Funds attributed from the BLS group......................... 218 159
----- -----
Net cash provided by financing activities......... 303 520
----- -----
Effect of exchange rate changes on cash and cash
equivalents............................................... (2) --
Net increase in cash and cash equivalents................... 157 57
Cash and cash equivalents at beginning of
period.......................................... 171 287
----- -----
Cash and cash equivalents at end of period.................. $ 328 $ 344
===== =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-84
<PAGE> 292
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
COMBINED STATEMENTS OF GROUP NET WORTH
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
For the six months ended May 31, 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............................................... (54) (54)
Other comprehensive income, net of tax:
Foreign currency translation adjustment.............. 5 5
Net unrealized gains on securities................... (19) (19)
------
Total comprehensive income............................. (68)
Funds attributed from the BLS group.................... 159 159
------ ----- ----- ------
BALANCE AT MAY 31, 2000................................ $3,218 $(504) $(278) $2,436
====== ===== ===== ======
</TABLE>
For the six months ended May 31, 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............................................... (309) (309)
Other comprehensive income, net of tax:
Foreign currency translation adjustment.............. (143) (143)
------
Total comprehensive income............................. (452)
Funds attributed from the BLS group.................... 218 218
------ ----- ----- ------
BALANCE AT MAY 31, 1999................................ $2,559 $(443) $(231) $1,885
====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements
F-85
<PAGE> 293
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 document.
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>
FOR THE SIX MONTHS
ENDED MAY 31,
-------------------
CONDENSED INCOME STATEMENT INFORMATION 1999 2000
-------------------------------------- ------- ------
<S> <C> <C>
Revenues.................................................... $ 532 $615
Operating (loss) income..................................... (11) 57
Net loss.................................................... (665) (90)
</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.
F-86
<PAGE> 294
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
D. PARTNERSHIPS, ACQUISITIONS AND DIVESTITURES
INVESTMENT IN BRAZIL
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 S.A., a Brazilian company, for
a total purchase price of approximately $240. Tele Centro Oeste provides
cellular service in central-west Brazil, including Brasilia, as well as northern
Brazil. The common stock portion of the investment represents 11.8% of the
voting power of Tele Centro Oeste. The combined investment in common and
preferred stock represents 17.3% of the total capital of Tele Centro Oeste. This
investment is accounted for under the cost method, subject to the guidelines of
available-for-sale securities under SFAS 115.
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 June 30, 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.
- 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.
F-87
<PAGE> 295
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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>
FOR THE
SIX MONTHS
ENDED
MAY 31,
---------------
1999 2000
------ ------
<S> <C> <C>
COMMUNICATIONS:
Operating revenues.......................................... $1,139 $1,354
Depreciation and amortization............................... 212 252
Operating income............................................ 120 55
Interest expense............................................ 49 59
Net losses of equity affiliates............................. (297) (46)
Provision (benefit) for income taxes........................ 48 (4)
Segment net loss............................................ $ (305) $ (51)
ADVERTISING AND DIRECTORY PUBLISHING:
Operating revenues.......................................... $ 4 $ 45
Depreciation and amortization............................... -- 4
Operating loss.............................................. (2) (15)
Interest expense............................................ -- --
Net earnings (losses) of equity affiliates.................. (3) 4
Benefit for income taxes.................................... (1) (7)
Segment net loss............................................ $ (4) $ (3)
</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 $28 for the six months ended May 31, 2000 and $33 for the
six months ended May 31, 1999.
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 $10 for the six
months ended May 31, 2000 and $10 for the six months ended May 31, 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
F-88
<PAGE> 296
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
has recognized revenue of $22 for the six months ended May 31, 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 $78 for the six months ended
May 31, 2000 and $44 for the six months ended May 31, 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. QUARTERLY FINANCIAL INFORMATION
In the following summary of quarterly financial information, all
adjustments necessary for a fair presentation of each period were included.
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
------- -------
<S> <C> <C>
1999
Operating revenues.......................................... $ 565 $ 578
Operating income............................................ $ 53 $ 65
Net Income (loss)........................................... $(314) $ 5
2000
Operating revenues.......................................... $ 695 $ 704
Operating income (loss)..................................... $ (12) $ 52
Net loss.................................................... $ (20) $ (34)
</TABLE>
First quarter 1999 includes foreign currency gains and losses associated with
the devaluation of the Brazilian Real, which reduced net income by $280.
K. SUBSEQUENT EVENTS
INVESTMENT IN COLOMBIA
In June 2000, BellSouth acquired a 50.4% controlling equity interest in
Celumovil S.A., a cellular operator in the Eastern and Atlantic regions in
Colombia, for a purchase price of approximately $399, funded by $299 of cash and
a $100 note payable due December 2000. BellSouth has commenced cobranding
Celumovil with the BellSouth brand. Celumovil/BellSouth provides wireless
service in the Eastern region of Colombia, which includes the capital city of
Bogota, and in the Atlantic or coastal region.
F-89
<PAGE> 297
THE LATIN AMERICA GROUP
OF BELLSOUTH CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
Through a purchase on the Bogota stock exchange in July 2000,
Celumovil/BellSouth acquired 100% of the shares of Cocelco, a wireless
communications provider in the western region of Colombia. This acquisition was
funded by a $384 capital contribution and a $30 shareholder loan from BellSouth,
resulting in an increase in BellSouth's ownership interest in Celumovil to
66.0%. The transaction creates the first nationwide mobile cellular
communications operator in Colombia.
F-90
<PAGE> 298
ANNEX I
TO BE ADOPTED BY OUR SHAREHOLDERS AT THE SPECIAL MEETING.
PROPOSED ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BELLSOUTH CORPORATION
To the Secretary of State
State of Georgia
Pursuant to Section 14-2-1003 of the Georgia Business Corporation Code,
BellSouth Corporation (the "Corporation") delivers these Articles of Amendment
to the Amended and Restated Articles of Incorporation of the Corporation to the
Secretary of State of Georgia for filing.
1.
The name of the Corporation is BellSouth Corporation.
2.
Article 5 of the Amended and Restated Articles of Incorporation of the
Corporation is hereby amended by deleting the first two paragraphs thereof and
substituting therefor the text of the amendments attached hereto as Exhibit A
and incorporated by reference herein.
3.
The amendments herein provided for were adopted by the Board of Directors
of the Corporation on , 2000 and were duly approved by the shareholders
of the Corporation on , 2000 in accordance with the provisions of
Section 14-2-1003 of the Georgia Business Corporation Code.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be executed by its duly authorized officer, this day of ,
2000.
BELLSOUTH CORPORATION
By:
------------------------------------
Name:
Title:
Annex I-1
<PAGE> 299
EXHIBIT A
The aggregate number of shares which the Corporation is authorized to issue
is 8.75 billion shares, of which 8.65 billion shares shall be designated "Common
Stock" and have a par value of $1 per share and 100,000,000 shares shall be
designated "First Preferred Stock" and have a par value of $1 per share.
The number of authorized shares of any class or classes may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of shares of stock having a majority of the
votes entitled to be cast by the holders of all shares, voting together as a
single voting group, and without a vote of the holders of any class or series of
stock, voting as a separate voting group, unless a vote of any such holders is
required pursuant to the terms of such class or series or by law.
The following is a description of the voting powers, preferences,
designations, rights, qualifications, limitations and restrictions of the Common
Stock:
All shares of Common Stock shall be identical except that the Board of
Directors of the Corporation is expressly authorized and empowered to create
from the unissued Common Stock one or more series and prior to the issuance of
any of such shares in any particular series, to fix and determine, in the manner
provided by law, the voting powers, preferences, designations, rights,
qualifications, limitations or restrictions of shares of such series, permitted
by law and these Articles of Incorporation. Each share of Common Stock within an
individual series shall be identical in all respects with the other shares of
such series, but each series may have voting powers, preferences, designations,
rights, qualifications, limitations or restrictions different from those of any
other series.
After the Board of Directors of the Corporation has established a series in
accordance with applicable law and the terms of these Articles of Incorporation
and unless otherwise specifically provided in the original Articles of Amendment
establishing such series, the Board of Directors may at any time and from time
to time increase or decrease the number of shares contained in such series (but
not below the number of shares thereof then issued) in accordance with
applicable law.
Except as otherwise provided by law or by any provision of the Articles of
Incorporation and subject to all the rights of any outstanding First Preferred
Stock, the Common Stock shall together have unlimited voting rights and be
entitled to receive the net assets of the Corporation upon dissolution. Such
voting rights and rights upon dissolution may be allocated among one or more
series of Common Stock pursuant to the terms of such series as fixed or as
determined by the Board of Directors in the manner permitted by law and these
Articles of Incorporation. If at any time there shall be outstanding shares of
only one series of Common Stock or only shares having identical rights with all
other outstanding shares of Common Stock, such shares shall together have all
such voting rights and rights upon dissolution.
The Common Stock of the Corporation as authorized by these Articles of
Incorporation prior to the effectiveness of any Articles of Amendment to these
Articles of Incorporation adopted by the Board of Directors creating and
designating one or more series of Common Stock (the "Old Common Stock") shall be
convertible into a new series of Common Stock designated as "BellSouth
Corporation -- BLS Group Common Stock" (the "BLS Group Stock") as follows. Upon
the effectiveness of such Articles of Amendment creating the BLS Group Stock
with voting powers, preferences, designation, rights, qualifications,
limitations and restrictions as described in the proxy statement dated
, 2000, a copy of which shall be made available by the Corporation at
any time on request to the holder of any share of Old Common Stock, each share
of the Corporation's Old Common Stock outstanding at such time or held in the
treasury of the Corporation shall be automatically redesignated, reclassified
and converted into one share of BLS Group Stock.
Annex I-2
<PAGE> 300
ANNEX II
BELLSOUTH CORPORATION
BOARD OF DIRECTORS
POLICY STATEMENT REGARDING
BLS GROUP AND LATIN AMERICA GROUP MATTERS
1. GENERAL POLICY
It is the policy of the Board of Directors of BellSouth Corporation
("BellSouth") that all material matters as to which the holders of BLS Stock and
Latin America Stock may have potentially divergent interests shall be resolved
in a manner that the Board of Directors or the Finance/Strategic Planning
Committee of the Board of Directors determines to be in the best interests of
BellSouth, after giving due consideration to the potentially divergent interests
and all other interests of holders of the separate series of Common Stock of
BellSouth that the Board of Directors or the Finance/Strategic Planning
Committee, as the case may be, deems relevant.
2. ROLE OF FINANCE/STRATEGIC PLANNING COMMITTEE
The Finance/Strategic Planning Committee of the Board of Directors shall
have and exercise such power, authority and responsibilities as the Board of
Directors shall delegate to the Finance/Strategic Planning Committee with
respect to the BLS Stock and the Latin America Stock, which initially shall
include authority to interpret, make determinations under and oversee the
implementation of these policies.
3. SCOPE OF BUSINESS OF GROUPS; COMPETITION
(a) The companies in the Latin America Group may generally engage in
any business activity only in South America, Central America, Mexico and
the Caribbean area, excluding the territories and possessions of the United
States and the Commonwealth of Puerto Rico (collectively, "Latin America"),
except as provided in Paragraphs 3(c) and (d) and Paragraph 4;
(b) The companies in the BLS Group may generally engage in any
business activity, except for the provision of telecommunications and
related services and products in Latin America, except as provided in
Paragraphs 3(c) and (d) and Paragraph 4. For this purpose,
telecommunications and related services and products include all wireless
and wireline services, including voice, video and data, whether local or
long distance, Internet related services and the provision of The Real
Yellow Pages(R) or white pages directories, whether in paper or electronic
format.
(c) The companies in the Latin America Group may provide outside Latin
America telecommunications or related services or products that are
incidental or ancillary to the provision of telecommunications services or
products in Latin America and may establish facilities related to such
products and services outside Latin America. The companies in the BLS Group
may provide in Latin America telecommunications or related services or
products that are incidental or ancillary to the provision of
telecommunications services or products outside Latin America and may
establish facilities related to such products and services in Latin
America.
(d) Paragraphs 3(a) and (b) shall not preclude the formation of
commercially reasonable contracts or other arrangements between the
companies in the BLS Group and the companies in the Latin America 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 BLS Group or the companies in the
Latin America Group.
4. CORPORATE OPPORTUNITIES
The Board of Directors will review any significant matter which involves
the allocation of any business opportunities and operations, any acquired assets
and businesses and any assumed liabilities between the
Annex II-1
<PAGE> 301
BLS Group and the Latin America Group, in whole or in part, in a manner it
considers to be in the best interests of BellSouth as contemplated by this
Policy Statement, notwithstanding Paragraph 3. To the extent 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, it will be
allocated by the Board of Directors in accordance with procedures adopted by the
Board of Directors from time to time, or as otherwise determined by the Board of
Directors, to ensure that decisions will be made in the best interests of
BellSouth. Any such allocation may involve the consideration of a number of
factors that the 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 a Group's business and whether a Group is better
positioned to undertake or have allocated to it such business opportunity or
operation, acquired assets or business or assumed liability.
5. RELATIONSHIPS BETWEEN GROUPS
BellSouth will seek to manage the companies in the BLS Group and the
companies in the Latin America Group in a manner designed 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 for telecommunications and related
services and products.
(A) Commercial Inter-Group Transactions. All material transactions in
the ordinary course of the business between the companies in the BLS Group
and the companies in the Latin America 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.
(B) Other Transfers of Assets and Liabilities. BellSouth may
reallocate assets (including cash) and liabilities between the companies in
the BLS Group and the companies in the Latin America Group in addition to
transfers resulting from commercial transactions in the ordinary course of
the businesses of the companies in the Groups described in Paragraph 5(a).
Any reallocation of assets and liabilities between the companies in the
Groups not in the ordinary course of their respective businesses shall be
effected by:
(i) the reallocation by the transferee Group to the transferor
Group of other assets or consideration or liabilities;
(ii) the creation of inter-group debt owed by the transferee Group
to the transferor Group;
(iii) the reduction of inter-group debt owed by the transferor
Group to the transferee Group;
(iv) the creation of, or an increase in, an Inter-Group Interest in
the transferee Group held by the transferor Group;
(v) the reduction of an Inter-Group Interest in the transferor
Group held by the transferee Group; or
(vi) a combination of any of the foregoing,
in each case, in an amount having a fair value equivalent to the fair value
of the assets or liabilities reallocated by the transferor Group and, in
the case of the creation of or an increase or decrease in an Inter-Group
Interest, in accordance with the provisions of the Amended and Restated
Articles of Incorporation and as determined by the Board of Directors or
the Finance/Strategic Planning Committee, as the case may be. The Board of
Directors will approve any creation of, or increase or decrease in, an
Inter-Group Interest.
(C) Cash Management. BellSouth will continue to manage most financial
activities on a centralized basis. These activities include the investment
of surplus cash, the issuance and repayment
Annex II-2
<PAGE> 302
of debt and the issuance and repurchase of Common Stock and preferred stock
for the account of each Group.
(D) Financing Arrangements. Loans from the companies in the BLS Group
or the companies in the Latin America Group to the companies in the other
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 borrowing Group (assuming it were a legal entity) would be able to
obtain from third parties, including the public markets, determined in
accordance with procedures adopted by the Board of Directors from time to
time, or as otherwise determined by the Board of Directors or the
Finance/Strategic Planning Committee, as the case may be. This policy
contemplates that these loans will be made on the basis set forth above
regardless of the interest rates and other terms and conditions on which
those funds may have been acquired. In the case of debt incurred for the
Latin America Group, the difference, if any, between the interest rate
charged to the Latin America Group and the borrowing cost, including fees
and expenses, of such debt will be allocated to the BLS Group as
compensation for use of the BLS Group's presumed credit capacity. Any fees
incurred in connection with debt incurred for a particular Group will be
allocated to the borrowing Group.
(E) Intellectual Property. The companies in the BLS Group will manage
on a centralized basis the intellectual property of BellSouth attributed to
the Groups. The companies in the Latin America Group will manage the
intellectual property attributed to the Latin America Group that is owned
by the operating companies in the Latin America Group.
The companies in the Group will have the right to use the intellectual
property attributed to the other Group for appropriate business activities.
Each operating company within the Latin America Group will be
permitted to operate under the BellSouth mark and other BellSouth owned
names and marks such as The Real Yellow Pages(R) for appropriate business
activities in its capacity as a majority owned division or subsidiary of
BellSouth or as a joint venture of BellSouth through which BellSouth is
actively and substantially engaged in the operation of the business or in
the provision of goods and services under the BellSouth mark and subject to
the terms of a license agreement between BellSouth and each operating
entity.
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 sold or licensed. If the intellectual
property being sold or licensed was jointly developed by the companies in
the Groups and the companies in the Groups 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 such intellectual property was not predominantly developed by
the companies in any one Group or was jointly developed by the companies in
the Groups but the companies in the Groups do not agree to allocate fees
obtained in proportion to costs incurred, then any fees obtained through
such sale or licensing will be allocated using the same general allocation
as overhead expenses.
6. DIVIDEND POLICY
Subject to the limitations set forth in Amended and Restated Articles
of Incorporation, including any preferential rights of any series of
preferred stock of BellSouth, and to the limitations of applicable law,
holders of shares of BLS Stock or Latin America Stock will be entitled to
receive dividends on such stock when, as and if authorized and declared by
the Board of Directors.
The payment of dividends on the BLS Stock will be a business decision
to be made by the Board of Directors from time to time based upon the
results of operations, financial condition and capital requirements of the
companies in BellSouth and such other factors as the Board of Directors
considers relevant. Payment of dividends on the BLS Stock may be restricted
by loan agreements, indentures and other transactions entered into by
BellSouth from time to time.
Because the companies in the Latin America Group are expected to
require significant capital commitments to finance their operations and
fund their future growth, BellSouth does not expect to
Annex II-3
<PAGE> 303
pay any dividends on shares of Latin America Stock for the foreseeable
future. If and when the Board of Directors does determine to pay any
dividends on shares of Latin America Stock, any such determination will
also be subject to factors similar to those described above with respect to
the payment of dividends on the BLS Stock.
7. FINANCIAL REPORTING; ALLOCATION MATTERS
(A) Financial Reporting. BellSouth will prepare and include in its
filings with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), consolidated
financial statements of BellSouth and combined financial statements of the
Latin America Group (for so long as the Latin America Stock is
outstanding). In addition, prior to the expected distribution to the
holders of BLS Stock of Latin America Stock representing the BLS Group's
inter-group interest in the Latin America Group, BellSouth will prepare and
include in its filings with the Securities and Exchange Commission under
the Exchange Act condensed consolidating financial statements of BellSouth.
The combined financial statements of the Latin America Group will reflect
the combined financial position, results of operations and cash flows of
the businesses attributed thereto and in the case of annual financial
statements shall be audited.
(B) Shared Corporate Services. A portion of BellSouth's shared
corporate services (such as executive management, sponsorships, human
resources, legal, accounting and auditing, tax, treasury, strategic
planning, media and investor relations and corporate technology) will be
allocated to the BLS Group and the Latin America Group based upon specific
identification of such services used by that Group. Where determinations
based on use alone are impracticable, other methods and criteria shall be
used that management believes are fair and provide a reasonable estimate of
the cost attributable to the Groups.
(C) Taxes. Depending on the tax laws of the respective jurisdictions,
income taxes, including any adjustments thereto, 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
Groups 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.
8. AMENDMENT AND MODIFICATION OF POLICY
This Policy Statement and any resolution implementing the provisions
hereof may at any time and from time to time be amended, modified or
rescinded by the Board of Directors, and the Board of Directors may adopt
additional or other policies or make exceptions with respect to the
application of these policies in connection with particular facts and
circumstances, all as the Board of Directors may determine to be in the
best interests of BellSouth.
9. DEFINITIONS
Capitalized terms not defined in this Policy Statement shall have the
meanings set forth in the Amended and Restated Articles of Incorporation.
"Amended and Restated Articles of Incorporation" means the Amended and
Restated Articles of Incorporation of BellSouth, as amended from time to
time.
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ANNEX III
THE AMENDED AND RESTATED
BELLSOUTH CORPORATION STOCK PLAN
EFFECTIVE APRIL 24, 1995
AS AMENDED
ARTICLE I
PURPOSE
The purpose of this Plan is to promote the interests of BellSouth by
granting stock-related Awards to Eligible Employees and Non-Employee Directors
to:
(1) attract and retain Eligible Employees and Non-Employee Directors;
(2) provide Eligible Employees and Non-Employee Directors with long
term financial incentives to increase the value of BellSouth; and
(3) provide Eligible Employees and Non-Employee Directors with a stake
in the future of BellSouth which corresponds to the stake of each of
BellSouth's shareowners.
Only Eligible Employees and Non-Employee Directors shall be eligible for Awards
under this Plan.
ARTICLE II
DEFINITIONS
2.1. DEFINITIONS. Each term set forth in this Article II shall have the
respective meaning set forth opposite such term for purposes of this Plan, and
when the defined meaning is intended the term is capitalized.
"Additional Option" means an Option granted to a Non-Employee Director
pursuant to Section 6.4 based upon his or her level of Stock ownership.
"Administrator" means the Compensation Committee, the Director Committee or
the Company Administrator, as applicable.
"Agreement" means the written agreement which sets forth the terms and
conditions of the grant of an Award as provided in this Plan and such additional
terms and conditions, not inconsistent with this Plan, as the Administrator
determines are appropriate.
"Award" means an Option, SAR, Restricted Share, Performance Share, Dividend
Equivalent Right or Stock Payment granted to a Participant under this Plan.
"Basic Option" means an Option granted to a Non-Employee Director pursuant
to Section 6.3.
"BellSouth" means BellSouth Corporation, a Georgia corporation.
"Beneficiary" means the person entitled to receive any payments or exercise
any rights following the death of a Participant as determined pursuant to
Section 10.5.
"BLS Share" means one share of BLS Stock.
"BLS Stock" means the BellSouth Corporation -- BLS Group Common Stock, par
value $1 per share.
"Board" means the Board of Directors of BellSouth.
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"Change in Control" means the occurrence, effective on or after January 1,
2000, of any of the following:
(i) any "person" (as such term is defined in the Exchange Act), other
than a trustee or other fiduciary holding securities under an employee
benefit plan of BellSouth (or of another entity owned directly or
indirectly by the shareholders of BellSouth in substantially the same
proportions as their ownership of stock of BellSouth), becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of BellSouth representing 20% or more of the
total voting power represented by BellSouth's then outstanding voting
securities;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board and any new director
whose election by the Board or nomination for election by BellSouth's
shareholders was approved by a vote of at least two-thirds of the directors
who either were directors at the beginning of the two year period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute a majority thereof;
(iii) the consummation of a merger, plan of reorganization,
consolidation, share exchange, or other transaction, in one or a series of
related transactions, involving BellSouth, if immediately following such
merger, plan of reorganization, consolidation, share exchange, or other
transaction or transactions the holders of the voting securities of
BellSouth outstanding immediately prior thereto hold securities
representing 70% or less of the combined voting power represented by the
voting securities of BellSouth or such surviving entity outstanding
immediately after such merger, plan of reorganization, consolidation, share
exchange, or other transaction or transactions;
(iv) the consummation of a transaction involving the sale or other
disposition by BellSouth or one or more of its subsidiaries (defined for
purposes of this subparagraph (iv) only as any corporation in which 50% or
more of the total combined voting power of all classes of stock is owned
directly or indirectly by BellSouth and any joint venture, partnership,
limited liability company, or other similar entity of which 50% or more of
the capital or profits interest is owned directly or indirectly by
BellSouth), in one or a series of related transactions, of interests in an
entity or entities, or of assets, which for the most recent audited
twelve-month period produced total operating revenues or net income
aggregating more than 30% of the total operating revenues or net income of
BellSouth and its subsidiaries (taken as a whole), if following such
transaction or transactions, any such entity is no longer a subsidiary or
such assets are no longer held by a subsidiary;
(v) the dissolution of BellSouth or the sale of all or substantially
all of the assets of BellSouth; or
(vi) the consummation of any other transaction which a majority of the
Board, in its sole and absolute discretion, shall determine constitutes a
Change in Control, for this purpose.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Company Administrator" means the chief executive officer of BellSouth, the
senior officer of BellSouth responsible for human resources matters or such
other person or persons as are designated by the Compensation Committee to
administer the Plan on behalf of Participants who are neither Non-Employee
Directors nor Covered Employees.
"Compensation" means all compensation payable to a Non-Employee Director
for service to BellSouth as a director, other than reimbursement for expenses,
including retainer fees for service on, and fees for attendance at meetings of,
the Board and any committees thereof.
"Compensation Committee" means the Executive Nominating, Compensation and
Human Resources Committee of the Board, or any successor committee of the Board
which administers this Plan as provided in Article V.
"Covered Employee" means with respect to any grant of an Award a
Participant whom the Compensation Committee deems may be or become a covered
employee as defined in Section 162(m)(3)
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of the Code for any year that such Award may result in remuneration to the
Participant and for which year such Participant may receive remuneration over $1
million which would not be deductible under Section 162(m) of the Code but for
the provisions of the Plan and any other "qualified performance-based
compensation" plan (as defined under Section 162(m) of the Code) of BellSouth;
provided, however, that the Compensation Committee may determine that a
Participant has ceased to be a Covered Employee prior to Settlement of any
Award.
"Director Committee" means the Committee on Directors and Corporate
Governance of the Board, or any successor committee of the Board which
administers this Plan as provided in Article V.
"Dividend Equivalent Right" means a right, granted to a Participant under
Section 9.4, to receive cash or Shares based on the value of dividends paid with
respect to a Share.
"Eligible Employee" means any employee (including an Officer, Executive
Officer or director who is an employee and including for purposes other than
ISOs any former employee) of BellSouth or any Subsidiary. Such term also
includes for purposes other than ISOs any non-employee advisor, consultant or
independent contractor to BellSouth or any Subsidiary, and any references to
employment or termination of employment under this Plan shall be deemed to apply
to such an advisor, consultant or independent contractor, for purposes of this
Plan only, as if the services of such person constitute employment services.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"Executive Officer" means an Officer or other employee or former employee
of BellSouth or a Subsidiary who is subject to the reporting requirements of
Section 16(a) of the Exchange Act.
"Fair Market Value" for any day means (i) the average of the high and low
daily sale prices of a Share on the New York Stock Exchange for that day or, if
there are no sales on such day, for the most recent prior day on which a Share
was sold on the New York Stock Exchange or (ii) the value of a Share determined
in such other manner which reasonably reflects the fair value of a Share on that
day as shall be determined by the Administrator.
"IPO" means the initial Public Offering of the Latin America Shares.
"ISO" or "Incentive Stock Option" means an option granted under this Plan
to purchase Shares which is intended by BellSouth to satisfy the requirements of
Code Section 422.
"Latin America Share" means one share of Latin America Stock.
"Latin America Stock" means the BellSouth Corporation -- Latin America
Group Common Stock, par value $1 per share.
"Non-Employee Director" means a member of the Board who is not an Officer
or employee of BellSouth or its affiliates.
"NQSO" or "Non-Qualified Stock Option" means an option granted under this
Plan to purchase Shares which is not intended by BellSouth to be treated as an
ISO.
"Number of Shares Issuable with Respect to the Inter-Group Interest" has
the meaning set forth in the Amended and Restated Articles of Incorporation.
"Officer" means any executive of BellSouth or any Subsidiary who is a
member of the executive compensation group under BellSouth's compensation
practices (but not necessarily an Executive Officer).
"Option" means an NQSO or ISO granted under this Plan.
"Option Price" means the price determined in accordance with Section 6.6
which shall be paid to purchase one Share upon the exercise of an Option granted
under this Plan.
"Parent Corporation" means any corporation which is a parent of BellSouth
within the meaning of Code Section 424(e).
"Participant" means an Eligible Employee or a Non-Employee Director to whom
an Award is made.
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"Performance Objective" means, as described in Section 10.2, a performance
objective specified in the Agreement for a Performance Share, or for any other
Award which the Administrator determines to make subject to a performance
objective, upon which the vesting or Settlement of such Award is conditioned.
"Performance Period" means the period of time specified in an Agreement
over which Performance Shares are to be earned.
"Performance Share" means a bookkeeping entry that records the equivalent
of one share awarded pursuant to Section 9.2 of this Plan.
"Plan" means this Amended and Restated BellSouth Corporation Stock Plan, as
effective as of the date of the completion of the IPO and as thereafter amended
from time to time.
"Prior Plan" means the BellSouth Corporation Stock Option Plan, the
BellSouth Enterprises, Inc. Key Manager Incentive Compensation Plan, the
BellSouth Executive Long Term Incentive Plan, the BellSouth Corporation
Shareholder Return Cash Plan, the BellSouth Corporation Key Manager Shareholder
Return Cash Plan and the BellSouth Corporation Non-Employee Director Stock
Option Plan, as applicable.
"Prior Stock Plan" means the BellSouth Corporation Non-Employee Director
Stock Plan.
"Public Offering" means the first day as of which sales of Shares are made
to the public in the United States pursuant to an underwritten public offering
of the Shares.
"Restricted Period" means the period of time from the date of grant of a
Restricted Share until the lapse of restrictions attached thereto under the
terms of the applicable Agreement.
"Restricted Share" means a Share which has been awarded to a Participant
subject to restrictions under Section 8.1.
"Retainer Multiple" has the meaning set forth in Section 6.4(a).
"Rule 16b-3" means Rule 16b-3 under the Exchange Act.
"SAR" or "Stock Appreciation Right" means the contractual right granted to
a Participant pursuant to Section 7.1 to receive a payment upon the exercise of
such right which reflects the appreciation in the Fair Market Value of the
number of Shares for which such right was granted.
"SAR Exercise Date" means the date on which the exercise of an SAR occurs
under the related Agreement.
"SAR Exercise Price" means the Fair Market Value of a Share on the SAR
Exercise Date.
"SAR Grant Price" means the price which would have been the Option Price
for one Share if the SAR had been granted as an Option or, if the SAR is granted
in tandem with an Option, the Option Price for the related Option.
"Settlement Date" means:
(i) with respect to any Option that has been exercised in whole or in
part, the date or dates upon which Shares are to be delivered to the
Participant and the Option Price therefor paid;
(ii) with respect to any SARs that have been exercised, the date or
dates upon which a cash payment is to be made to the Participant, or in the
case of SARs that are to be settled in Shares, the date or dates upon which
such Shares are to be delivered to the Participant;
(iii) with respect to Performance Shares, the date or dates upon which
cash or Shares are to be delivered to the Participant;
(iv) with respect to Dividend Equivalent Rights, the date upon which
payment thereof is to be made; and
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(v) with respect to Stock Payments, the date upon which payment
thereof is to be made, in each case, determined in accordance with the
terms of this Plan and the Agreement under which any such Award was made.
"Share" means a BLS Share or Latin America Share, as the case may be.
"Stock" means BLS Stock or Latin America Stock, as the case may be.
"Stock Payment" means payment of compensation in the form of Shares
pursuant to Section 9.3.
"Subsidiary" means:
(i) with respect to an Award other than an ISO, any corporation, joint
venture or partnership in which BellSouth owns directly or indirectly (A)
with respect to a corporation, stock possessing at least 10% of the total
combined voting power of all classes of stock in the corporation, or (B) in
the case of a joint venture or partnership, a 10% interest in the capital
or profits of such joint venture or partnership; and
(ii) any corporation which is a subsidiary corporation (within the
meaning of Code Section 424(f)) of BellSouth by reason of being in an
unbroken chain of corporations (beginning with BellSouth) in which each
corporation in the unbroken chain (except the last such corporation) owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
"Ten Percent Shareowner" means a person who owns (after taking into account
the attribution rules of Code Section 424(d)) more than 10% of the total
combined voting power of all classes of stock of either BellSouth, or Subsidiary
or Parent Corporation.
"Tracking Stock Transactions" mean each of the IPO and any other
transaction that provides for the distribution of the Latin America Shares.
2.2. REFERENCES. All pronouns are masculine, solely for ease of reading,
and should be read as feminine where applicable. Unless the context clearly
requires otherwise, the singular shall include the plural and the plural shall
include the singular. All references to sections of the Code or other laws or
regulations shall include amendments and successor provisions thereto unless
otherwise specifically stated or clearly required by the context.
ARTICLE III
SHARES SUBJECT TO PLAN
3.1 AGGREGATE LIMITS.
(a) BLS SHARES. The aggregate number of BLS Shares with respect to which
the grant of Awards, other than Stock Payments and Awards to Non-Employee
Directors, may be made in any calendar year under this Plan shall not exceed
1.25% of the total number of BLS Shares outstanding at the time of such grant;
provided, however, that the number of such BLS Shares with respect to which
grants are not made in any calendar year shall be available for grant in a
subsequent calendar year; provided, further, however, that the number of BLS
Shares available for such Awards shall be increased by the excess of the number
of shares available under the Plan in calendar years prior to the IPO for such
Awards over the number of shares with respect to which grants of such Awards
were made in calendar years prior to the IPO. Within such total, the aggregate
number of BLS Shares with respect to which the grant of Performance Shares and
Restricted Shares may be made in any calendar year under this Plan shall not
exceed in combination .25% of the total number of BLS Shares outstanding at the
time of grant. Furthermore, in no event shall ISOs with respect to more than
4,000,000 BLS Shares be granted under this Plan. The aggregate number of BLS
Shares with respect to which the grant of Stock Payments may be made in any
calendar year under this Plan shall not exceed .125% of the total number of BLS
Shares outstanding at the time of grant. Finally, the aggregate number of BLS
Shares with respect to which Awards, other than Stock
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Payments, may be made to Non-Employee Directors shall not exceed 1,200,000, and
the aggregate number of BLS Shares with respect to which Stock Payments may be
granted to Non-Employee Directors shall not exceed 700,000.
(b) LATIN AMERICA SHARES. The aggregate number of Latin America Shares
with respect to which the grant of Awards, other than Stock Payments and Awards
to Non-Employee Directors, may be made in any calendar year under this Plan
shall not exceed 1.25% of the total number of Latin America Shares outstanding
at the time of such grant; provided, however, that the number of such Latin
America Shares with respect to which grants are not made in any calendar year
shall be available for grant in a subsequent calendar year. Within such total,
the aggregate number of Latin America Shares with respect to which the grant of
Performance Shares and Restricted Shares may be made in any calendar year under
this Plan shall not exceed in combination .25% of the total number of Latin
America Shares outstanding at the time of grant. Furthermore, in no event shall
ISOs with respect to more than 4,000,000 Latin America Shares be granted under
this Plan. The aggregate number of Latin America Shares with respect to which
the grant of Stock Payments may be made in any calendar year under this Plan
shall not exceed .125% of the total number of Latin America Shares outstanding
at the time of grant. Finally, the aggregate number of Latin America Shares with
respect to which Awards, other than Stock Payments, may be made to Non-Employee
Directors shall not exceed 1,200,000, and the aggregate number of Latin America
Shares with respect to which Stock Payments may be granted to Non-Employee
Directors shall not exceed 700,000.
For purposes of this Section 3.1, the total number of Latin America Shares
outstanding shall include the sum of (i) the number of Latin America Shares
issued and outstanding; and (ii) the Number of Shares Issuable with Respect to
the Inter-Group Interest in the Latin America Group held by the BLS Group. In
the event of a distribution of Latin America Shares to holders of BLS Shares,
any grant of an Award of Latin America Shares to adjust an Award of BLS Shares
to reflect such distribution shall not reduce the number of Latin America Shares
available for grant under the Plan.
3.2 INDIVIDUAL LIMITS.
(a) BLS SHARES. The number of BLS Shares with respect to which the grant
of Awards, other than Stock Payments, may be made to any Participant in any
calendar year under this Plan shall not exceed 2,500,000 BLS Shares. Within such
total, the number of BLS Shares with respect to which the grant of each of
Performance Shares, Restricted Shares and Dividend Equivalent Rights may be made
to any Participant in any calendar year under this Plan shall not exceed in
combination 500,000 BLS Shares. Finally, the number of BLS Shares with respect
to which the grant of Stock Payments may be made to any Participant in any
calendar year under this Plan shall not exceed 250,000 BLS Shares.
(b) LATIN AMERICA SHARES. The number of Latin America Shares with respect
to which the grant of Awards, other than Stock Payments, may be made to any
Participant in any calendar year under this Plan shall not exceed 2,500,000
Latin America Shares. Within such total, the number of Latin America Shares with
respect to which the grant of each of Performance Shares, Restricted Shares and
Dividend Equivalent Rights may be made to any Participant in any calendar year
under this Plan shall not exceed in combination 500,000 Latin America Shares.
Finally, the number of Latin America Shares with respect to which the grant of
Stock Payments may be made to any Participant in any calendar year under this
Plan shall not exceed 250,000 Latin America Shares. In the event of a
distribution of Latin America Shares to holders of BLS Shares, any grant of an
Award of Latin America Shares to adjust an Award of BLS Shares to reflect such
distribution shall not reduce the number of Latin America Shares available for
grant to any Participant under the Plan for the calendar year in which such
distribution occurs.
3.3 APPLICATION OF LIMITS. No grant of an Award shall be made at any time
during a calendar year to the extent the number of Shares subject to such Award
and the number of Shares subject to Awards previously granted during such year
(or during the life of the Plan in the case of ISOs) would exceed a limit in
Section 3.1 or 3.2. The number of Shares subject to an Award shall be:
(i) the number of Shares subject to an Option or subject to a SAR that
is not granted in tandem with an Option (including a SAR that can be
settled in cash);
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(ii) the number of Shares subject to a grant of Restricted Shares;
(iii) the maximum number of Shares that could be issued upon
Settlement of a grant of Performance Shares (or upon which a cash payment
could be based) as determined under the Agreement for such grant and this
Plan;
(iv) the number of Shares with respect to which Dividend Equivalent
Rights are granted, but excluding Shares subject to Dividend Equivalent
Rights which are granted in tandem with another Award grant which otherwise
does not provide for the payment of dividends to the Participant; and
(v) the number of Shares that are paid as a Stock Payment.
3.4 ADJUSTMENTS. The limits in Sections 3.1 and 3.2 shall be adjusted as
provided in Section 10.6. If any Shares subject to an Award are forfeited or
such Award otherwise terminates, such number of Shares shall be available for
new Awards under the Plan. In addition, Shares surrendered in payment of any
exercise or purchase price or in payment of taxes relating to any such Award
shall be deemed to constitute Shares not delivered to the Participant and shall
be deemed to be available for new Awards under the Plan for purposes of Section
3.1 only.
3.5 SHARES. BellSouth shall reserve from time to time Shares for use under
this Plan, and such Shares shall be reserved to the extent BellSouth deems
appropriate from authorized but unissued Shares and from Shares which have been
reacquired by BellSouth.
ARTICLE IV
EFFECTIVE DATE AND DURATION
4.1 EFFECTIVE DATE. The effective date of the amendment and restatement of
this Plan shall be the date of the completion of the IPO. This Plan, as amended
and restated, will become effective only if approved by the shareholders of
BellSouth.
4.2 PRIOR PLAN. This Plan is a successor to each Prior Plan and the Prior
Stock Plan. No further grants of stock options, stock appreciation rights,
performance shares, dividend equivalent rights, shareholder return cash units or
other interests shall be made (i) under the Prior Plans on or after April 24,
1995 and (ii) under the Prior Stock Plan on or after the date of the completion
of the IPO, if the Plan is approved by the shareholders. Options and stock
appreciation rights, or performance shares, dividend equivalent rights,
shareholder return cash units or other outstanding interests under a Prior Plan
or Prior Stock Plan shall continue to be governed by the terms of the Prior Plan
or Prior Stock Plan, as the case may be; provided, that, effective on and after
September 23, 1996, terms of this Plan shall constitute an amendment to the
terms of a Prior Plan or Prior Stock Plan, and to the terms of outstanding
grants under a Prior Plan or Prior Stock Plan where applicable, when expressly
so provided in this Plan.
4.3 DURATION. This Plan shall terminate on December 31, 2004, unless
earlier terminated by the Board pursuant to Article XI. No Award shall be
granted after the date this Plan terminates. The applicable terms of this Plan,
and any terms and conditions applicable to Awards granted prior to such date,
shall survive the termination of the Plan and continue to apply to such Awards.
ARTICLE V
ADMINISTRATION
5.1 ADMINISTRATOR. The Plan shall be administered by the Compensation
Committee with respect to Covered Employees, the Director Committee with respect
to Non-Employee Directors and, subject to regulations and guidelines that may be
established by the Compensation Committee, by the Company Administrator with
respect to all other Eligible Employees. The Compensation Committee or the
Director Committee may adopt such regulations and guidelines as it deems are
necessary or appropriate for the administration of the Plan. Subject to such
rules, regulations or guidelines, the Company Administrator
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shall have the power to adopt rules, regulations and guidelines to permit it to
administer the Plan with respect to Eligible Employees other than Covered
Employees.
5.2 COMPENSATION COMMITTEE AND DIRECTOR COMMITTEE RESPONSIBILITIES. The
Compensation Committee shall consist solely of at least two individuals who are
intended to qualify as "non-employee directors" within the meaning of Rule 16b-3
under the Exchange Act (or any successor rule thereto) and "outside directors"
within the meaning of Section 162(m) of the Code (or any successor section
thereto). No member of the Compensation Committee or the Director Committee
shall be personally liable for any action, determination, or interpretation made
in good faith with respect to the Plan or Awards. All members of the
Compensation Committee and the Director Committee shall be fully protected by
BellSouth, to the fullest extent permitted by applicable law, in respect of any
such action, determination or interpretation.
5.3 ADMINISTRATOR RESPONSIBILITIES. The Administrator shall (a) determine
the amount of all grants of Awards under this Plan, (b) determine the terms and
conditions of grant Agreements and all election and other forms, which terms and
conditions shall not be inconsistent with this Plan, (c) interpret the Plan and
(d) make all other decisions relating to the operation of the Plan. The
Administrator may adopt, amend or rescind rules or guidelines as it deems are
appropriate to implement the Plan and correct any defect or supply any omission
or reconcile any inconsistency in the Plan in the manner and to the extent the
Administrator deems necessary or desirable.
5.4 DETERMINATIONS. All actions taken and all interpretations and
determinations made by the Administrator in good faith shall be final and
binding upon Participants, BellSouth and all other interested persons.
ARTICLE VI
OPTIONS
6.1 GRANT. Subject to the terms and conditions of this Plan, the
Administrator from time to time may grant such Options to such Eligible
Employees and such Non-Employee Directors to purchase Shares as the
Administrator acting in its sole discretion deems are appropriate under the
circumstances. Each grant of an Option shall be evidenced by an Agreement, and
each Agreement shall incorporate such terms and conditions as the Administrator
in its sole discretion deems are consistent with the terms of this Plan,
including conditions on the exercise of such Option which relate to the
employment or service of the Participant or the requirement that the Participant
exchange a prior outstanding Option and/or SAR; provided that, if the
Administrator grants an ISO and NQSO to an Eligible Employee, the right of the
Eligible Employee to exercise one such Option shall not be conditioned on his
failure to exercise the other such Option. The Administrator may issue new
Options equal to the number of Shares surrendered by a Participant upon exercise
of a previously granted stock option.
6.2 SPECIAL RULES FOR INCENTIVE STOCK OPTIONS. The grant of ISOs shall be
subject to the following additional restrictions:
(a) ELIGIBLE INDIVIDUALS. Incentive Stock Options shall only be
granted to an Eligible Employee who at the time of grant is a common law
employee of BellSouth or a Subsidiary.
(b) TIME OF GRANT. No Incentive Stock Option shall be granted
pursuant to this Plan more than 10 years after the effective date of the
Plan under Section 4.1.
(c) ANNUAL LIMIT. The aggregate Fair Market Value (determined at the
time the ISO is granted) of the Shares with respect to which one or more
ISOs are exercisable for the first time by a Participant during any
calendar year under the Plan or with respect to which any incentive stock
options described in Section 422 of the Code are so first exercisable under
any other stock plan of BellSouth or a Parent Corporation or any Subsidiary
shall not exceed $100,000 or such other maximum amount permitted under
Section 422 of the Code.
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(d) OPTION TERM. The term of an ISO shall not exceed 10 years from
the date of grant.
(e) TEN PERCENT SHAREHOLDER. If any Participant to whom an ISO is to
be granted pursuant to the provisions of the Plan is, on the date of grant,
a Ten Percent Shareholder, then the following special provisions shall be
applicable to the ISO granted to such individual:
(i) the Option Price of shares subject to such ISO shall not be
less than 110% of Fair Market Value on the date of grant; and
(ii) the Option shall not have a term in excess of 5 years from the
date of grant.
Any Option purporting to constitute an ISO in violation of the restrictions in
this Section 6.2 shall constitute a NQSO.
6.3 NON-EMPLOYEE DIRECTOR BASIC OPTIONS.
(a) Unless otherwise determined by the Director Committee, on the date
of each BellSouth annual shareholders' meeting, each individual who is at
that time serving as a Non-Employee Director, whether or not such
individual is first elected as a Board member at that meeting or whether or
not such individual is standing for reelection as a Board member at that
meeting, shall be granted an Option to purchase BLS Shares and/or an Option
to purchase Latin America Shares as determined by the Director Committee.
6.4 NON-EMPLOYEE DIRECTOR ADDITIONAL OPTIONS.
(a) Unless otherwise determined by the Director Committee, each
Non-Employee Director who receives a grant of a Basic Option under Section
6.3 on the date of an annual shareholders' meeting shall be granted
Additional Options to purchase BLS Shares and/or Latin America Shares on
such date if:
(i) the number of BLS Shares and Latin America Shares owned by such
Non-Employee Director (as determined under paragraph (b) below) as of
the immediately preceding December 31 (adjusted to appropriately reflect
the Tracking Stock Transactions) exceeds
(ii) the sum of (A) the number of BLS Shares and Latin America
Shares determined by: (I) dividing a portion of the product of (a) five
multiplied by (b) the amount of the annual retainer for Board members in
effect on such December 31 (the "Retainer Multiple") by the
representative BLS Share price on such December 31, and (II) dividing a
portion of the Retainer Multiple by the representative Latin America
Share price on such December 31 (as determined under paragraph (c)
below) and (B) the number of BLS Shares and Latin America Shares subject
to Additional Options previously granted to such Non-Employee Director
under this Section 6.4 (whether or not any such previously granted
Additional Option has been exercised or has expired). The portion of the
Retainer Multiple to be applied to BLS Shares and Latin America Shares
shall be in proportion to the number of BLS Shares and Latin America
Shares granted as Basic Options for such year.
Such Additional Option shall be for the number of BLS Shares and/or Latin
America Shares equal to the excess of (A) one half of the number by which
Section 6.4(a)(i) exceeds Section 6.4(a)(ii)(A) (rounded to the next highest
whole number) over (B) Section 6.4(a)(ii)(B), limited to a maximum annual grant
of BLS Shares and Latin America Shares as determined by the Director Committee.
(b) For purposes of this Section 6.4 only, a Non-Employee Director
shall be deemed to "own" the number of Shares equal to the sum of:
(i) those BLS Shares and Latin America Shares, whether registered
in the owner's name or in nominee name, which (1) are owned by the
Non-Employee Director or his spouse (or jointly) or (2) are owned by a
trust with respect to which the Non-Employee Director or his spouse (or
both) contributed the BLS Shares or Latin America Shares (or the money
or other property
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used by the trustee to purchase the BLS Shares and/or Latin America
Shares) and also holds the power to vote and dispose of such Shares; and
(ii) the number of stock units (i.e., bookkeeping units which
reflect the price changes and dividends on a Share) credited to the
Non-Employee Director pursuant to any deferred compensation plan
maintained by BellSouth.
(c) For purposes of this Section 6.4 only, the representative price of
a BLS Share or Latin America Share on any December 31 will equal the
average of the Fair Market Value of such Share for the last five trading
days on the New York Stock Exchange for the year ending that December 31
and the first five such trading days in the next succeeding year.
6.5 OTHER OPTIONS. The Administrator may establish rules with respect to,
and may grant to Eligible Employees or Non-Employee Directors, Options which
comply with any amendment to the Code providing for special tax benefits for
stock options made after the effective date of this Plan, provided such rules
otherwise are consistent with the terms of this Plan.
6.6 OPTION PRICE. The Option Price for each Share subject to an Option
shall not be less than the greater of (i) the par value of a Share or (ii) the
Fair Market Value of a Share on the date the Option is granted.
6.7 OPTION PERIOD AND EXERCISABILITY.
(a) ELIGIBLE EMPLOYEES. Each Option granted to an Eligible Employee
under this Plan shall be exercisable at such time or times as set forth in
the related Agreement over the period which begins on the date such Option
is granted, and each Option shall expire automatically on the earliest of
(i) the date such Option is exercised in full, (ii) the date such Option
expires in accordance with the terms of the related Agreement or (iii) the
date such Option is forfeited or deemed to expire upon the exercise of any
tandem SAR. An Agreement may provide for the exercise of an Option after
the employment of an Eligible Employee has terminated for any reason
whatsoever, including retirement, death or disability, but such provision
shall have no force or effect whatsoever and shall be inoperative if the
Administrator determines that such termination was for "cause" or was a
result of misconduct in connection with his employment. Upon such
termination, the Option shall be forfeited.
(b) NON-EMPLOYEE DIRECTORS.
(i) Unless otherwise provided in an Agreement, an Option granted to
a Non-Employee Director shall become exercisable on the first
anniversary of the Grant Date; provided, however, that in the event
that, prior to such first anniversary, (1) the Non-Employee Director
terminates his service on the Board by reason of (A) death, (B)
disability, or (C) retirement (which shall mean termination of service
on the Board after the Non-Employee Director has attained age 55 and
completed at least five years of service as a director on the Board), or
(2) a Change in Control shall occur, then an Option shall become
immediately exercisable upon the occurrence of such event or, if later,
the expiration of the six-month period following the Grant Date. Subject
to the foregoing, an Option shall be exercisable at any time in whole or
in part (but if in part, in an amount equal to at least 100 Shares or,
if less, the number of Shares remaining to be exercised under the
Option) on any business day of BellSouth before the date such Option
expires under this Section 6.7.
(ii) Unless otherwise provided in an Agreement, an Option shall
expire on the earlier of:
(1) the first date on or after the Grant Date and prior to a
Change in Control on which the Non-Employee Director (A) resigns from
or is not re-elected to the Board prior to being eligible for
retirement under clause (b)(i)(1)(c) of this Section 6.7; (B) resigns
for the purpose of accepting, or retires and subsequently accepts, a
directorship or employment, or becomes associated with, employed by
or renders service to, or owns an interest in (other than as a
shareholder with a less than 5% interest in a publicly traded
company) any business that is competitive with any BellSouth company
or with any other
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business in which any of the BellSouth companies have a substantial
direct or indirect interest; or (C) resigns as a result of an
interest or affiliation which would prohibit continued service as a
director;
(2) the date the Option (or a tandem SAR) has been exercised in
full; or
(3) one day after the expiration of the ten-year period which
begins on the Option Grant Date or, in the case of a Non-Employee
Director who dies within six months prior to such day, the last day
of the six month period which begins on the date of the Non-Employee
Director's death.
6.8 METHOD OF EXERCISE.
(a) EXERCISE OF OPTION. An Option may be exercised by properly
completing and actually delivering to BellSouth an exercise form prescribed
by the Administrator for this purpose, together with payment in full of the
Option Price for the Shares the Participant desires to purchase through
such exercise in the manner specified in the exercise form. Payment may be
made:
(i) in cash or its equivalent (e.g., by check);
(ii) in BLS Shares or Latin America Shares, as the case may be,
having a Fair Market Value equal to the aggregate Option Price for the
Shares being purchased and satisfying such other requirements as may be
imposed by the Administrator; provided, that such Shares have been held
by the Participant for no less than six months (or such other period as
established from time to time by the Administrator or generally accepted
accounting principles);
(iii) partly in cash and partly in such Shares;
(iv) through the delivery of irrevocable instructions to a broker
to deliver promptly to BellSouth an amount equal to the aggregate Option
Price for the Shares being purchased; or
(v) in the form of other property as determined by the
Administrator.
Any Shares which are tendered in payment shall be valued at their Fair
Market Value on the Settlement Date.
(b) ATTESTATION. Wherever in this Plan or any Agreement a Participant
is permitted to pay the Option Price of an Option or taxes relating to the
exercise of an Option by delivering Shares, the Participant may, subject to
procedures satisfactory to the Administrator, satisfy such delivery
requirement by presenting proof of beneficial ownership of such Shares, in
which case BellSouth shall treat the Option as exercised without further
payment and shall withhold such number of Shares from the Shares acquired
by the exercise of the Option.
ARTICLE VII
STOCK APPRECIATION RIGHTS
7.1 GRANT. Subject to the terms and conditions of this Plan, the
Administrator may grant a SAR to any Eligible Employee or Non-Employee Directors
either (i) in tandem with the grant of an ISO in the case of an Eligible
Employee, (ii) in tandem with the grant of an NQSO or (iii) independent of the
grant of an ISO or NQSO. The Administrator may grant a SAR to each Non-Employee
Director in tandem with each grant of a Basic Option and an Additional Option.
Each grant of a SAR which is in tandem with the grant of an ISO or an NQSO shall
be evidenced by the same Agreement as the ISO or NQSO which is granted in tandem
with such SAR and such SAR shall relate to the same number of Shares as such
Option. Each SAR which is granted independent of an ISO or NQSO shall be
evidenced by a separate Agreement which shall state the number of Shares to
which such SAR shall relate and such other terms and conditions as the
Administrator in its sole discretion deems are consistent with the terms of this
Plan, including conditions on the exercise of such SAR which relate to the
employment or service
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of the Participant or the requirement that the Participant exchange a prior
outstanding Option and/or SAR.
7.2 PAYMENT AT EXERCISE. Upon the settlement of a SAR in accordance with
the terms of the related Agreement, the Participant shall (subject to the terms
and conditions of this Plan and such Agreement) receive a payment equal to the
excess, if any, of the SAR Exercise Price for the number of Shares of the SAR
being exercised at that time over the SAR Grant Price for such Shares. Such
payment may be made in whole Shares or in cash, or partially in Shares and
partially in cash, as determined under the SAR Agreement. If payment is made in
whole or in part in Shares, such Shares shall be valued for this purpose at the
SAR Exercise Price on the date the SAR is exercised, and any payment in Shares
which calls for a payment in a fractional Share automatically shall be paid in
cash based on such valuation.
7.3 SPECIAL TERMS AND CONDITIONS. Each Agreement which evidences the grant
of a SAR shall incorporate such terms and conditions as the Administrator in its
absolute discretion deems are consistent with the terms of this Plan and the
Agreement for the ISOs and NQSOs, if any, granted in tandem with such SAR except
that (i) if a SAR is granted in tandem with an ISO or a NQSO, the SAR shall be
exercisable only when the related ISO or NQSO is exercisable and (ii) the
Participant's right to exercise a SAR granted in tandem with an ISO or NQSO
shall be forfeited to the extent that he exercises the related ISO or NQSO and
his right to exercise the ISO or NQSO shall be forfeited to the extent he
exercises the related SAR, but any such forfeiture shall not count as a
forfeiture for purposes of making the Shares subject to such Option or SAR again
available for use under Article III.
ARTICLE VIII
RESTRICTED SHARES
8.1 GRANT. Subject to the terms and conditions of this Plan, the
Administrator may grant Restricted Shares to any Eligible Employee or
Nonemployee Director as provided in this Article VIII. Each grant of Restricted
Shares shall be evidenced by an Agreement which shall state such terms and
conditions as the Administrator deems are consistent with the terms of this
Plan.
8.2 RESTRICTIONS. Restricted Shares shall be subject to such conditions
and restrictions as the Administrator shall determine and specify in the related
Agreement, which may include, but are not limited to, continued employment or
service with BellSouth or a Subsidiary and achievement of Performance
Objectives, which restrictions may lapse separately or in combination at such
times, under such circumstances, in such installments, or otherwise, as the
Administrator may determine and so specify. Except to the extent restricted
under the terms of the Plan and the Agreement relating to the Restricted Shares,
a Participant granted Restricted Shares shall have all of the rights of a
shareholder including, without limitation, the right to vote Restricted Shares
and the right to receive dividends thereon.
8.3 FORFEITURE. If a Participant fails to meet the terms and conditions of
the Agreement for such Restricted Shares during the Restricted Period,
Restricted Shares still subject to restrictions shall be forfeited, and all
rights of the Participant to such Shares shall terminate without further
obligation on the part of BellSouth. An Agreement may provide that the
Restricted Period will end upon the retirement, death or disability of a
Participant while an employee or director or upon such other event or events as
the Administrator shall determine or may otherwise provide that such an event
will not result in forfeiture of the Restricted Shares.
8.4 CERTIFICATES FOR SHARES. Restricted Shares granted under the Plan may
be evidenced in such manner as the Administrator shall determine. The
Administrator may place a legend on the Share certificates referring to such
restrictions and may require the Participant, until the restrictions have
lapsed, to keep the Share certificates, together with duly endorsed stock
powers, in the custody of BellSouth or its transfer agent or to maintain
evidence of Share ownership, together with duly endorsed stock powers, in a
certificateless book-entry account with BellSouth's transfer agent.
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8.5 ADJUSTMENTS. Shares distributed in connection with a stock split or
stock dividend, and other property distributed as a dividend or pursuant to an
adjustment under Section 10.6, shall be subject to restrictions and a risk of
forfeiture to the same extent as the Restricted Shares with respect to which
such Shares or other property has been distributed.
ARTICLE IX
OTHER STOCK RIGHTS
9.1 GRANT. Subject to the terms and conditions of this Plan, the
Administrator may grant Performance Shares, Stock Payments or Dividend
Equivalent Rights as provided in this Article IX. A grant of Performance Shares
and Dividend Equivalent Rights shall be evidenced by an Agreement, and a grant
of Stock Payments may be evidenced by an Agreement, which Agreement shall
contain such terms and conditions as the Administrator deems are consistent with
the terms of this Plan.
9.2 PERFORMANCE SHARES. Performance Shares shall become payable to a
Participant based upon the achievement of specified Performance Objectives and
upon such other terms and conditions as the Administrator may determine and
specify in the Agreement evidencing such Performance Shares. Each grant shall
satisfy the conditions for performance-based Awards under Section 10.2. A grant
may provide for the forfeiture of Performance Shares in the event of termination
of employment or other events, subject to exceptions for death, disability,
retirement or other events, all as the Administrator may determine and specify
in the Agreement for such grant, provided that no exception shall apply if the
Administrator determines that the termination was for "cause" or was a result of
misconduct in connection with his employment or service. Payment may be made at
such time and in such form, either in cash or Shares, or a combination thereof,
as the Administrator shall determine and specify in the Agreement.
9.3 STOCK PAYMENTS.
(a) ELIGIBLE EMPLOYEES. The Administrator may grant Stock Payments to
an Eligible Employee as a bonus or additional compensation or in lieu of
the obligation of BellSouth or a Subsidiary to pay cash compensation under
other compensatory arrangements, with or without the election of the
Eligible Employee. A Participant shall have all voting, dividend,
liquidation and other rights with respect to Shares issued to the
Participant as a Stock Payment upon the Participant becoming holder of
record of such Shares; provided, however, the Plan Administrator may impose
such restrictions on the assignment or transfer of such Shares as it deems
are appropriate and specifies in an Agreement for such Stock Payment. A
Stock Payment shall be subject to such other terms as the Administrator
deems are consistent with the terms of this Plan and specifies in any
Agreement for such Stock Payment.
(b) NON-EMPLOYEE DIRECTORS. The Director Committee may grant Stock
Payments to a Non-Employee Director as additional compensation or in lieu
of the obligation of BellSouth to pay cash compensation. In addition,
unless otherwise determined by the Director Committee, for each date that a
retainer payment otherwise is due to a Non-Employee Director, BellSouth
shall pay such Non-Employee Director a Stock Payment for the number of BLS
Shares and/or Latin America Shares, as determined by the Director
Committee, equal to 50% of such retainer payment based upon the average of
the high and low daily sales prices of a BLS Share and/or a Latin America
Share on the New York Stock Exchange ("NYSE") for the period of five
trading days ending on such retainer payment date (or the period of five
trading days immediately preceding such date if the NYSE is closed on such
date). Such Stock Payment will be made in lieu of the cash payment of such
50% of the retainer. Certificates or other evidence of all whole Shares
will be delivered promptly following each Stock Payment. Any payment for a
fractional Share automatically will be made in cash.
9.4 DIVIDEND EQUIVALENT RIGHTS. The Plan Administrator may grant Dividend
Equivalent Rights in tandem with the grant of Options, SARs, or Performance
Shares that otherwise do not provide for the payment of dividends on the Shares
subject to such Awards for the period of time to which such Dividend Equivalent
Rights apply, or may grant Dividend Equivalent Rights that are independent of
any such
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Award. A Dividend Equivalent Right granted in tandem with another Award may be
evidenced by the Agreement for such other Award; otherwise, a Dividend
Equivalent Right shall be evidenced by a separate Agreement. Payment may be made
in cash or Shares, or a combination thereof, may be immediate or deferred, and
may be subject to such employment, Performance Objectives or other conditions as
the Administrator may determine and specify in the Agreement for such Dividend
Equivalent Rights. The total payment attributable to a Share subject to a
Dividend Equivalent Right shall not exceed 100% of the equivalent dividends
payable with respect to a Share during the term of such Dividend Equivalent
Right, taking into account any assumed reinvestment (including assumed
reinvestment in Shares) or interest earnings on such equivalent dividends as
determined under the Agreement in the case of deferred payment, provided that
such percentage may increase to a maximum of 200% if the Dividend Equivalent
Right is subject to a Performance Objective as described in Section 10.2.
ARTICLE X
SPECIAL PROVISIONS APPLICABLE TO AWARDS
10.1 RULE 16B-3 COMPLIANCE.
(a) SIX-MONTH HOLDING PERIOD. Unless a Participant could otherwise
exercise a derivative security or dispose of Shares delivered upon exercise
of a derivative security granted under the Plan without incurring liability
under Section 16(b) of the Exchange Act, (i) Shares delivered under the
Plan other than upon exercise or conversion of a derivative security
granted under the Plan shall be held for at least six months from the date
of acquisition, and (ii), with respect to a derivative security granted
under the Plan, at least six months shall elapse from the date of
acquisition of the derivative security to the date of disposition of the
derivative security (other than upon exercise or conversion) or its
underlying equity security.
(b) REFORMATION TO COMPLY WITH EXCHANGE ACT RULES. It is the intent
of BellSouth that this Plan comply in all respects with applicable
provisions of Rule 16b-3 or Rule 16a-l(c)(3) under the Exchange Act in
connection with any grant of Awards to, or other transaction by, a
Participant who is subject to Section 16 of the Exchange Act (except for
transactions exempted under alternative Exchange Act Rules). Accordingly,
if any provision of this Plan or any Agreement relating to an Award does
not comply with the requirements of Rule 16b-3 or Rule 16a-l(c)(3) as then
applicable to any such transaction, such provision will be construed or
deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 or Rule 16a-l(c)(3) so that such Participant
shall avoid liability under Section 16(b).
(c) PRIOR PLAN WINDOW PERIOD SARS. Effective November 24, 1996, in
light of the elimination by the Securities and Exchange Commission of the
condition for exemption from Section 16(b) of the Exchange Act that stock
appreciation rights be exercised for cash only during a specified "window
period", outstanding stock appreciation rights tandem to non-qualified
options issued under the BellSouth Corporation Stock Option Plan are
amended to remove the window period restriction for cash exercise such that
such stock appreciation rights granted in 1989 and 1990 are now exercisable
for cash at any time and that such stock appreciation rights granted in all
other years are now exercisable for either cash or Shares at any time,
provided in all cases that such a stock appreciation right can only be
exercised if the optionee meets all other applicable requirements for the
exercise of such stock appreciation right under the terms of the Prior Plan
and the applicable grant agreement, including any requirement relating to
the optionee's status under Section 16(a) of the Exchange Act at the time
of grant or exercise. This Section 10.1(c) shall constitute an amendment to
the BellSouth Corporation Stock Option Plan, and to outstanding
non-qualified stock option and tandem stock appreciation right agreements
thereunder, to the extent necessary to effect this change to such
outstanding stock appreciation rights under such plan. A Prior Plan
participant's (or beneficiary's) election to exercise such an outstanding
stock appreciation right during any expanded period provided by this
Section 10.1(c) shall constitute any required consent by the participant
(or beneficiary) to such amendment.
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10.2 PERFORMANCE-BASED AWARDS.
(a) GENERAL. Each Agreement for the grant of Performance Shares shall
specify the number of Performance Shares subject to such Agreement, the
Performance Period and the Performance Objective, and each Agreement for
the grant of any other Award that the Administrator determines to make
subject to a Performance Objective similarly shall specify the applicable
number of Shares, the period for measuring performance and the Performance
Objective. Each Agreement for a performance-based grant shall specify in
respect of a Performance Objective the minimum level of performance below
which no payment will be made, shall describe the method for determining
the amount of any payment to be made if performance is at or above the
minimum acceptable level but falls short of full achievement of the
Performance Objective, and shall specify the maximum percentage payout
under the Agreement. Such maximum percentage in no event shall exceed 100%
in the case of performance-based Restricted Shares and 200% in the case of
Performance Shares or performance-based Dividend Equivalent Rights.
(b) PERFORMANCE OBJECTIVE. The Administrator shall determine and
specify the Performance Objective in the Agreement for a Performance Share
or for any other performance-based Award, which Performance Objective shall
consist of (i) one or more business criteria, including (except as limited
under Section 10.2(c) below for Awards to Covered Employees) financial,
service level and individual performance criteria, and (ii) a targeted
level or levels of performance with respect to such criteria. Performance
Objectives may differ between Participants and between types of Awards and
from year to year.
(c) ADDITIONAL RULES APPLICABLE TO COVERED EMPLOYEES. The Performance
Objective for Performance Shares and any other performance-based Award
granted to a Covered Employee shall be objective and shall otherwise meet
the requirements of Section 162(m)(4)(C) of the Code and shall be based on
one or more of the following business criterion: (i) consolidated earnings
before or after taxes (including earnings before interest, taxes,
depreciation and amortization); (ii) net income; (iii) operating income;
(iv) earnings per Share; (v) book value per Share; (vi) return on
shareholders' equity; (vii) expense management; (viii) return on
investment; (ix) improvements in capital structure; (x) profitability of an
identifiable business unit or product; (xi) maintenance or improvement of
profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or
sales; (xv) costs; (xvi) cash flow; (xvii) working capital; (xviii) return
on assets; and (xix) total shareholder return. The foregoing criterion may
relate to BellSouth, one or more of its Subsidiaries or one or more of its
divisions or units, or any combination of the foregoing, and may be applied
on an absolute basis and/or be relative to one or more peer group companies
or indices, or any combination thereof, all as the Compensation Committee
shall determine. In addition, to the degree consistent with Section 162(m)
of the Code (or any successor section thereto), the performance goals may
be calculated without regard to extraordinary items. Achievement of this
Performance Objective shall be measured over a period of years not to
exceed ten as specified by the Compensation Committee in the Agreement for
the performance-based Award. No business criterion other than that named
above in this Section 10.2(c) may be used in establishing the performance
objective for an Award to a Covered Employee under this Section 10.2. For
each such Award relating to a Covered Employee, the Compensation Committee
shall establish the targeted level or levels of performance for such
business criterion (i) while the outcome for that performance period is
substantially uncertain and (ii) no more than 90 days after the
commencement of the performance period to which the performance goal
relates or, if less, the number of days which is equal to 25 percent of the
relevant performance period. The Compensation Committee may, in its
discretion, reduce the amount of a payout otherwise to be made in
connection with an Award under this Section 10.2(c), but may not exercise
discretion to increase such amount, and the Committee may consider other
performance criteria in exercising such discretion. All determinations by
the Compensation Committee as to the achievement of Performance Objectives
under this Section 10.2(c) shall be made in writing. The Compensation
Committee may not delegate any responsibility under this Section 10.2(c).
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(d) INTENT WITH REGARD TO CODE SECTION 162(m). It is the intent of
BellSouth that, unless otherwise determined by the Compensation Committee,
Options, SARs, and Awards subject to Performance Objectives specified under
this Section 10.2, granted under the Plan to persons who are Covered
Employees, shall constitute "qualified performance-based compensation"
within the meaning of Code Section 162(m) and regulations thereunder.
Accordingly, unless otherwise determined by the Compensation Committee, if
any provision of the Plan or any Award agreement relating to such an Award
granted to a Covered Employee does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder (including
Proposed Regulation 1.162-27 unless and to the extent it is superseded by
an interim or final regulation), such provision shall be construed or
deemed amended to the extent necessary to conform to such requirements, and
no provision shall be deemed to confer upon the Compensation Committee or
any other person discretion to increase the amount of compensation
otherwise payable to a Covered Employee in connection with any such Award
upon attainment of the Performance Objectives.
10.3 CHANGE IN CONTROL.
(a) GENERAL. The Compensation Committee shall have the right in its
sole discretion to include with respect to any Award granted to a
Participant under this Plan provisions accelerating the vesting or
Settlement of such Award upon a Change in Control, subject to the
restrictions on dispositions of equity securities set forth in Sections
10.1(a) and 12.1 and the restrictions in Section 10.3(d) below. Such
acceleration rights may be included as part of the Agreement for such Award
or may be included at any time after the Award has been granted to the
Participant. Such acceleration rights may include, or be made subject to,
such restrictions as the Compensation Committee may deem are appropriate to
avoid or ameliorate the federal income tax impact of excess parachute
payments as defined in Section 280G(b) of the Code.
(b) OPTIONS AND SAR GRANTS. Any Option or SAR granted under the Plan
on and after September 23, 1996 shall become fully vested and exercisable
upon a Change in Control. Such Option or SAR following a Change in Control
accordingly (i) shall be exercisable without regard to any dates specified
in the applicable grant Agreement and (ii) any conditions specified in the
grant Agreement or otherwise in the Plan for the forfeiture of the Option
or SAR, including any conditions related to termination of employment or
noncompetition, shall not apply, subject in both cases to the continued
application of the expiration date specified in the grant Agreement on
which the Option or SAR will expire in all events.
(c) OUTSTANDING NON-QUALIFIED STOCK OPTIONS AND SARS. Effective
September 23, 1996, Section 10.3(b) also shall apply to all outstanding
non-qualified stock options and tandem SARs under this Plan and also those
issued under the BellSouth Corporation Stock Option Plan, subject in both
cases to the consent of the applicable participant in accordance with rules
established by BellSouth. This Section 10.3 (and related definitions) shall
constitute an amendment to the BellSouth Corporation Stock Option Plan, and
to all outstanding non-qualified stock options and tandem stock
appreciation rights under this Plan and under the Prior Plan, to the extent
necessary to effect this change to all such outstanding non-qualified stock
options and stock appreciation rights.
(d) POOLING OF INTERESTS ACCOUNTING TREATMENT. Notwithstanding
anything to the contrary in this Plan, if the application of this Section
10.3 would preclude the use of pooling of interests accounting treatment
with respect to a transaction for which such treatment otherwise is
available and to be adopted by BellSouth, the provisions of this Section
10.3 shall be modified as it applies to such transaction, to the minimum
extent necessary to prevent such impact, including if necessary the
invalidation of such provisions to the extent they otherwise would have
been triggered by such transaction. If the pooling of interests accounting
rules require modification or invalidation of one or more provisions of
this Section 10.3 as it applies to such transaction, the adverse impact on
the Participant (including for this purpose a Prior Plan participant)
shall, to the extent reasonably possible, be proportionate to the adverse
impact on other similarly situated Participants of BellSouth. The Board
shall, in its sole and absolute discretion, make all determinations
necessary under this
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subsection; provided, that determinations regarding the application of the
pooling of interests accounting rules for these purposes shall be made by
BellSouth with the concurrence of BellSouth's independent auditors at the
time such determination is to be made.
10.4 TRANSFERABILITY DURING LIFETIME.
(a) GENERAL RULE. During the lifetime of a Participant to whom an
Award is granted, only the Participant (or such Participant's legal
representative) may exercise or receive payment of an Award. No Award
(other than unrestricted Stock Payments upon receipt) may be sold,
assigned, transferred (except as provided in the sentence above),
exchanged, or otherwise encumbered or made subject to any creditor's
process, whether voluntary, involuntary or by operation of law, and any
attempt to do so shall be of no effect. This Section 10.4(a) shall apply to
all Awards except as provided in Sections 10.4(b) and 10.4(c) below.
(b) LIMITED EXCEPTION FOR CERTAIN NQSOS AND SARS. Unless the terms of
the applicable grant Agreement for an NQSO or SAR specifically provides
that this Section 10.4(b) shall not apply, a Participant who is an Officer
or a Non-Employee Director (or a retired Officer or Non-Employee Director)
may transfer such Participant's rights under any NQSO or SAR Agreement
(other than a SAR tandem to an ISO) granted on or after November 24, 1996
by properly completing and delivering to the executive compensation group
at BellSouth headquarters a Non-Qualified Stock Option Assignment Form and
satisfying such other conditions as BellSouth may impose, provided that
such transfer is without consideration and to (i) one or more of the
Participant's spouse, parents, spouse's parents, siblings, siblings' lineal
descendants, children, children's lineal descendants, children's spouses
and children's spouses' lineal descendants, including in all cases legally
adopted individuals, or (ii) a trust, partnership or similar entity for the
benefit solely of one or more of the family members described above. The
rights of any such transferee thereafter shall be nontransferable except
that such transferee, where applicable under the terms of the transfer by
the Participant, shall have the right previously held by the Participant to
designate a Beneficiary. A Participant may make such a transfer of the
Participant's rights with respect to less than all of the total number of
Shares subject to an Option or SAR Agreement provided that each such
transfer shall apply to at least 20% of the total number of Shares
initially subject to such Agreement. Upon the transfer by a Participant of
any rights under an SAR Agreement or under an NQSO Agreement which includes
a tandem SAR, any right under the SAR to exercise such SAR for cash
automatically is eliminated with respect to such transferred interest.
Notwithstanding Section 12.5 or the terms of any Agreement, BellSouth or
any Subsidiary shall not withhold any amount attributable to the
Participant's tax liability from any payment of cash or Shares to a
transferee or transferee's Beneficiary under this Section 10.4(b) upon
exercise of a transferred NQSO or SAR by such person, but may require the
payment of an amount equal to BellSouth's or any Subsidiary's withholding
tax obligation as a condition to such exercise or as a condition to the
release of cash or Shares upon such exercise.
(c) OUTSTANDING NON-QUALIFIED STOCK OPTIONS AND SARS. Effective
November 24, 1996, Section 10.4(b) also shall apply to all non-qualified
stock options and SARs tandem to non-qualified stock options outstanding
under the Plan and also to all outstanding non-qualified stock options and
tandem SARs issued under the BellSouth Corporation Stock Option Plan. This
Section 10.4 (and related Plan provisions on transferability) shall
constitute an amendment to the BellSouth Corporation Stock Option Plan, and
to all outstanding non-qualified stock option and tandem stock appreciation
right grant agreements under this Plan and the Prior Plan, to the extent
necessary to effect this change to such outstanding non-qualified stock
options and tandem stock appreciation rights. The election by a Participant
or Beneficiary (including for this purpose a participant or beneficiary
under the Prior Plan) to transfer any such non-qualified stock option and
tandem stock appreciation right pursuant to this Section 10.4(c) shall
constitute any required consent by the Participant (or Beneficiary) to such
amendment.
10.5 TRANSFERS TO DEATH BENEFICIARY. In the event of a Participant's
death, all of such person's outstanding Awards, including his or her rights to
receive any accrued but unpaid Stock Payments, will
Annex III-17
<PAGE> 321
transfer to the maximum extent permitted by law to such person's Beneficiary
(except to the extent a permitted transfer of a NQSO or SAR previously was made
pursuant to Section 10.4). Each Participant may name, from time to time, any
beneficiary or beneficiaries (which may be named contingently or successively)
as his or her Beneficiary for purposes of this Plan. Each designation shall be
on a form prescribed by the Administrator, will be effective only when delivered
to BellSouth, and when effective will revoke all prior designations by the
Participant. If a Participant dies with no such beneficiary designation in
effect, such person's Beneficiary shall be his or her estate and such person's
Awards will be transferable by will or pursuant to laws of descent and
distribution applicable to such person.
10.6 ADJUSTMENTS. In the event that the Administrator shall determine that
any dividend or other distribution (whether in the form of cash, Shares, or
other property), recapitalization, forward or reverse split, reorganization,
merger, consolidation, spin-off, combination, repurchase, or share exchange, or
other similar corporate transaction or event, affects Shares such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under this Plan, then the Administrator, in such manner
as it may deem equitable, shall adjust any or all of (i) the number and kind of
shares which may thereafter be delivered in connection with Awards, (ii) the
number and kind of shares that may be delivered or deliverable in respect of
outstanding Awards, (iii) the number and kind of shares with respect to which
Awards may be granted as set forth in Article III, and (iv) the exercise price,
grant price, or purchase price relating to any Award, or, if deemed appropriate,
make provision for a cash payment with respect to any outstanding Award. Any
such adjustment made by the Administrator, including any cancellation of an
outstanding Award made as part of such adjustment, will be final and binding.
The terms of this Section 10.6 (and related definitions) shall apply to all
outstanding grants and awards under the Prior Plans, and this Section 10.6 shall
constitute an amendment to the terms of the Prior Plans and to the terms of all
such outstanding grants and awards.
ARTICLE XI
AMENDMENTS AND TERMINATION
The Board shall have the right to amend, modify, suspend or terminate the
Plan at any time; provided, that following the approval of the Plan by BellSouth
shareholders, this Plan may not be amended without further approval by
shareholders, to the extent such approval is required by the Code, the Exchange
Act or other applicable law. No enactment, modification, suspension or
termination of the Plan shall alter or impair any Awards previously granted
under this Plan without the consent of the holder thereof, unless otherwise
required by law. It is conclusively presumed for this purpose that any
adjustment for changes in capitalization pursuant to Section 10.6 of this Plan
does not affect any right of the holder of an Award. Notwithstanding the
foregoing, the Board may not amend the terms of any Option to reduce the Option
price. Nor may the Board, without approval by shareholders, cancel any Option
and grant a new Option with a lower Option price such that the effect would be
the same as reducing the Option price.
ARTICLE XII
GENERAL PROVISIONS
12.1 STOCK RESTRICTIONS. BellSouth shall have the right under this Plan to
restrict or otherwise delay the issuance of any Shares purchased or paid under
this Plan until the requirements of any applicable laws or regulations and any
stock exchange requirements have been in BellSouth's judgment satisfied in full.
Furthermore, any Shares which are issued as a result of purchases or payments
made under this Plan shall be issued subject to such restrictions and conditions
on any resale and any other disposition as BellSouth shall deem necessary or
desirable under any applicable laws or regulations or in light of any stock
exchange requirements.
12.2 TERM OF SERVICE. The granting of an Award to a Participant under this
Plan shall not obligate BellSouth to provide that Participant upon the
termination of his or her employment or service with any
Annex III-18
<PAGE> 322
benefit whatsoever except as provided under the terms and conditions of that
Award or obligate the Participant to remain an employee or director.
12.3 NO SHAREHOLDER RIGHTS. No Award shall confer on any Participant, or
anyone claiming on his behalf, any of the rights of a shareholder of BellSouth
unless and until Shares are duly issued or transferred on the books of BellSouth
in accordance with the terms and conditions of the Award.
12.4 NO RIGHT TO EMPLOYMENT/CONTINUED SERVICE OR AWARDS. The granting of
an Award under the Plan shall impose no obligation on BellSouth or any
Subsidiary to continue the employment or service of a Participant and shall not
lessen or affect BellSouth's or Subsidiary's right to terminate the employment
or service of such Participant. No Participant or other Person shall have any
claim to be granted any Award, and there is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Awards. The terms and
conditions of Awards and the Administrator's determinations and interpretations
with respect thereto need not be the same with respect to each Participant
(whether or not such Participants are similarly situated).
12.5 UNFUNDED PLAN. This Plan shall be unfunded and BellSouth shall not be
required to segregate any assets that may at any time be represented by Awards
under this Plan. Neither BellSouth, its affiliates, the Administrator, nor the
Board shall be deemed to be a trustee of any amounts to be paid under this Plan
nor shall anything contained in this Plan or any action taken pursuant to its
provisions create or be construed to create a fiduciary relationship between any
such party and a Participant or anyone claiming on his or her behalf. To the
extent a Participant or any other person acquires a right to receive payment
pursuant to an Award under this Plan, such right shall be no greater than the
right of an unsecured general creditor of BellSouth.
12.6 TAXES. BellSouth or any Subsidiary shall withhold from any payment of
cash or Shares to a Participant or other person under this Plan an amount
sufficient to cover any withholding taxes which may become required with respect
to such payment or shall take any other action as it deems necessary to satisfy
any income or other tax withholding requirements as a result of the grant or
exercise of any Award under this Plan. BellSouth or any Subsidiary shall have
the right to require the payment of any such taxes and require that any person
furnish information deemed necessary by BellSouth or any Subsidiary to meet any
tax reporting obligation as a condition to exercise or before making any payment
pursuant to an Award.
12.7 BINDING EFFECT. The provisions of this Plan, and any applicable
Agreement, election, Beneficiary designation or other related document, shall be
binding upon each Participant and any of his Beneficiaries, transferees, heirs,
assignees, distributees, executors, administrators, personal representatives or
any other person claiming any rights under this Plan. Any such person claiming
any rights under this Plan shall be subject to the terms and conditions of this
Plan and all such documents and such other terms and conditions, not
inconsistent with this Plan, as the Administrator may impose pursuant to Article
V.
12.8 CHOICE OF LAW AND VENUE. This Plan and all related documents shall be
governed by, and construed in accordance with, the laws of the State of Georgia,
without regard to the conflict of laws provisions thereof (except to the extent
provisions of federal law may be applicable). Acceptance of an Award shall be
deemed to constitute consent to the jurisdiction and venue of the Superior Court
of Fulton County, Georgia and the United States District Court for the Northern
District of Georgia for all purposes in connection with any suit, action, or
other proceeding relating to such Award, including the enforcement of any rights
under this Plan or any Agreement or other document, and shall be deemed to
constitute consent to any process or notice of motion in connection with such
proceeding being served by certified or registered mail or personal service
within or without the State of Georgia, provided a reasonable time for
appearance is allowed.
Annex III-19
<PAGE> 323
PROXY/ VOTING INSTRUCTION CARD [BELLSOUTH LOGO]
This proxy is solicited on behalf of the Board of Directors for the Special
Meeting of BellSouth Shareholders to be held on XXXXX, 2000.
The undersigned hereby appoints Reuben V. Anderson, James H. Blanchard and John
G. Medlin, Jr., and each of them, proxies with full power of substitution, to
vote all shares of BellSouth stock of the undersigned at the Special Meeting of
Shareholders to be held at 9:00 A.M.EDT, on XXXX, XXXXX, 2000 at the XXXXX
XXXXXX XXX, Atlanta, Georgia, and at any adjournment thereof, upon all subjects
that may properly come before the meeting, including the matters described in
the proxy statement furnished herewith, subject to any directions indicated on
the reverse side of this card. IF NO DIRECTIONS ARE GIVEN, THE PROXIES WILL VOTE
IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATION ON THE REVERSE SIDE OF
THIS CARD, AND AT THEIR DISCRETION ON ANY OTHER MATTER THAT MAY PROPERLY COME
BEFORE THE MEETING.
This card also provides voting instructions for shares held in the BellSouth
Direct Investment Plan and, if registrations are identical, shares held in the
various employee stock purchase and benefit plans.
YOUR VOTE IS IMPORTANT. IF YOU CHOOSE TO VOTE BY MAIL, PLEASE SIGN AND DATE ON
THE REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE; OR MAIL TO BELLSOUTH
CORPORATION, CHURCH STREET STATION, P. O. BOX 1456, NEW YORK, NEW YORK
10277-1456.
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Detach here from proxy voting card.
SPECIAL MEETING
OF BELLSOUTH
SHAREHOLDERS
XXXXXX
XXXXX, 2000
9:00 A.M. EASTERN
TIME
<PAGE> 324
Please mark
your votes as X
indicated in
this example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL PROPOSALS
<TABLE>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
1. Approval of the Tracking Stock Proposal as described in the
accompanying proxy statement under "Proposal 1--The
Tracking Stock Proposal"
<C> <C> <C> <C>
FOR AGAINST ABSTAIN
2. Approval of the Amended and Restated BellSouth
Corporation Stock Plan as described in the accompanying
proxy statement under "Proposal 2--The Adoption of the
Amended and Restated BellSouth Corporation Stock Plan"
3. Approval of the amendments to the By-laws as described
in the accompanying proxy statement under "Proposal 3--
Amendments to the By-laws"
</TABLE>
I consent to access future Annual Reports
and Proxy Statements electronically via the
Internet
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Signature(s) Date
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If joint owner please sign
NOTE: Please sign as name appears hereon. Joint owners
should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such.
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VOTE BY TELEPHONE OR INTERNET OR MAIL
24 HOURS A DAY, 7 DAYS A WEEK
<TABLE>
<S> <C> <C> <C> <C>
Telephone Internet Mail
1-800-840-1208 http://www.proxyvoting.com/bls
Use any touch-tone telephone to Use the Internet to vote your Mark, sign and date
vote your proxy. Have your proxy OR proxy. Have your proxy card in OR your proxy card
card in hand when you call. You will hand when you access the web and
be prompted to enter your control site. You will be prompted to enter return it in the
number, located in the box below, your control number, located in enclosed postage-paid
and then follow the directions on the box below, to create and envelope.
the enclosed instructions. submit an electronic ballot.
</TABLE>
If you vote your proxy by telephone or on the Internet,
you do NOT need to mail back your proxy card.
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CONTROLNUMBER
BellSouth Special Meeting Admission Ticket
