SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1049
BELLSOUTH TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-0436120
(State of Incorporation) (I.R.S. Employer
Identification Number)
675 West Peachtree Street, N. E., 30375
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number 404 927-1909
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
<PAGE>
Table of Contents
Item Page
Part I
1. Financial Statements
Consolidated Statements of Income and Retained Earnings ..... 3
Consolidated Balance Sheets ................................. 4
Consolidated Statements of Cash Flows ....................... 5
Notes to Consolidated Financial Statements .................. 6
2. Management's Discussion and Analysis of Results of Operations .. 8
Part II
6. Exhibits and Reports on Form 8-K ...............................14
<PAGE>
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PART I - FINANCIAL INFORMATION
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BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(Dollars In Millions)
For the Three Month For the Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
Operating revenues:
Local service $ 2,712 $ 2,862 $ 5,366 $ 5,683
Network access 1,187 1,245 2,378 2,508
Long distance 153 131 303 266
Other 304 365 575 660
Total operating revenues 4,356 4,603 8,622 9,117
Operating expenses:
Operational and support expenses 2,325 2,321 4,544 4,595
Depreciation and amortization 847 903 1,679 1,782
Severance accrual - - - 53
Total operating expenses 3,172 3,224 6,223 6,430
Operating income 1,184 1,379 2,399 2,687
Interest expense 132 176 267 337
Other income, net - 4 1 10
Income before income taxes 1,052 1,207 2,133 2,360
Provision for income taxes 397 430 799 866
Net income $ 655 $ 777 $ 1,334 $ 1,494
Retained earnings:
At beginning of period $ 1,466 $ 1,319 $ 1,354 $ 1,452
Add: net income 655 777 1,334 1,494
Deduct: dividends declared (645) (560) (1,212) (1,410)
At end of period $ 1,476 $ 1,536 $ 1,476 $ 1,536
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
December 31, June 30,
1999 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 39 $ 146
Temporary cash investments 15 8
Accounts receivable, net
of allowance for
uncollectibles
of $84 and $63 3,094 3,146
Material and supplies 203 209
Other current assets 82 189
Total current assets 3,433 3,698
Investments and advances 320 308
Property, plant and equipment 52,549 54,170
Less: accumulated depreciation 32,645 33,715
Property, plant and equipment, net 19,904 20,455
Deferred charges and other assets 1,638 1,994
Total assets $ 25,295 $ 26,455
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Debt maturing within one year $ 3,331 $ 4,169
Accounts payable 1,230 1,625
Other current liabilities 2,250 2,135
Total current liablities 6,811 7,929
Long-term debt 6,135 6,057
Noncurrent liabilities:
Deferred income taxes 1,628 1,731
Unamortized investment tax credits 126 106
Other noncurrent liabilities 1,790 1,672
Total noncurrent liabilities 3,544 3,509
Shareholder's equity:
Common stock, one share, no par value 7,353 7,424
Retained earnings 1,452 1,536
Total shareholder's equity 8,805 8,960
Total liabilities and
shareholder's equity $ 25,295 $ 26,455
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
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 $ 1,334 $ 1,494
Adjustments to net income:
Depreciation and amortization 1,679 1,782
Severance accrual - 53
Provision for uncollectibles 68 95
Deferred income taxes and
investment tax credits 128 106
Net change in:
Accounts receivable and other current assets (38) (256)
Accounts payable and other current liabilities 260 513
Deferred charges and other assets (252) (285)
Other liabilities and deferred credits (120) (177)
Other reconciling items, net 58 83
Net cash provided by operating activities 3,117 3,408
Cash Flows from Investing Activities:
Capital expenditures (2,250) (2,423)
Other investing activities, net 7 33
Net cash used for investing activities (2,243) (2,390)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt 313 (49)
Repayments of long-term debt (7) (278)
Advances from parent and affiliates 224 1,881
Repayments of advances from parent and affiliates (215) (876)
Dividends paid to parent (1,347) (1,711)
Capital infusions by parent - 122
Net cash used for financing activities (1,032) (911)
Net (decrease) increase in cash and cash equivalents (158) 107
Cash and cash equivalents at beginning of period 337 39
Cash and cash equivalents at end of period $ 179 $ 146
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Millions)
Note A - Preparation of Interim Financial Statements
In this report, BellSouth Telecommunications, Inc. and its subsidiaries are
referred to as "we" or "BST".
The accompanying unaudited consolidated financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. In our opinion, these statements include all
adjustments necessary for a fair presentation of the results of the interim
periods shown. All adjustments are of a normal recurring nature unless otherwise
disclosed. Revenues, expenses, assets and liabilities can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year. For a more
complete discussion of our significant accounting policies and other
information, you should read this report in conjunction with the consolidated
financial statements included in our latest annual report on Form 10-K and
previous quarterly report on Form 10-Q.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
Note B - Recent Accounting Pronouncements
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 requires that revenues
and costs of revenues derived from services rendered at the beginning of a
contract or business relationship be deferred and recognized over the life of
the related contract or relationship. In June 2000, the SEC deferred the
required adoption date of the guidelines in SAB 101 to the fourth quarter of
2000. We do not expect the adoption of these guidelines to have a material
impact on our results of operations, financial position or cash flows.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now
for fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. This means that the
standard must be adopted by us no later than January 1, 2001. We do not expect
the adoption of this standard will have a material impact on results of
operations, financial position or cash flows.
Note C - Segment Information
Our predominant products are local exchange and long distance communications
services within LATAs (referred to as intraLATA) and network access services,
all of which are provided over a single network. Operating decisions regarding
resource allocation and performance evaluation are made based on total
operations. Based on these factors, we have determined that we operate as one
operating segment as defined by Statement of Financial Accounting Standards No.
131.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In Millions)
Note D - Contingencies
Following the enactment of the Telecommunications Act of 1996, we entered into
interconnection agreements with various competitive local exchange carriers
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 us for compensation associated with dial-up calls originating
on our network and connecting with Internet service providers served by the
competitive local carriers' networks. We have 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 our operating territory that have considered the
matter have, in most cases, ruled that we are responsible for paying reciprocal
compensation on these calls. We have appealed the adverse decisions and continue
to believe that we have a good legal basis for our position that such reciprocal
compensation is not owed to the competitive local carriers. For those cases
where we believe that it is probable that we have incurred a liability, we have
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 interconnection agreements. We filed a
complaint with the state regulatory commission asking that agency to declare
that we did not owe reciprocal compensation for these arrangements. In March
2000, the state commission ruled in our favor finding that compensation was not
owed to the competitive local carrier. This matter is currently on appeal.
Note E - Workforce Reduction
In February 2000, BellSouth announced that it would reduce its domestic general
and administrative staff by approximately 2,100 positions. These reductions are
the result of the streamlining of work processes in conjunction with BellSouth's
shift to a more simplified management structure. As a result of these
reductions, we recorded a one-time charge of $53, or $32 after tax, for
severance and post-employment health benefits.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
(Dollars in Millions)
For a more complete understanding of our industry, the drivers of our business
and our current period results, you should read the following Management's
Discussion and Analysis of Results of Operations (MD&A) in conjunction with the
MD&A in our latest annual report on Form 10-K and previous quarterly report on
Form 10-Q.
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Results of Operations
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Our reported results include the effect of the previously announced plan to
reduce our general and administrative staff. Also included in our reported
results is the effect of charges from an affiliated company for use of
intellectual property rights related to trademarks, service marks and patents,
which are eliminated in the consolidated financial results of our parent
company, BellSouth Corporation. When compared to 1999, these charges increased
our reported second quarter and year-to-date 2000 operational and support
expenses by $12 and $74, and reduced our reported net income by $8 for the
quarter and $45 for the year-to-date period. To assist your understanding of the
results of operations, the following discussion excludes the effect of these
charges.
Key financial and operating data for second quarter and year-to-date 2000 and
1999, adjusted to exclude the effect of the charges discussed above, are as
follows:
<TABLE>
<CAPTION>
------------------------ ------------ ---------------------------- -----------
Second Quarter % Year-to-Date %
------------ ----------- ------------ --- ----------- ------------- -----------
1999 2000 Change 1999 2000 Change
------------ ----------- ------------ --- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Revenues $ 4,356 $4,603 5.7 $ 8,622 $9,117 5.7
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Expenses $ 2,981 $3,021 1.3 $ 5,843 $5,976 2.3
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Operating income $ 1,375 $1,582 15.1 $ 2,779 $3,141 13.0
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Net income $ 772 $ 902 16.8 $ 1,567 $1,772 13.1
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Cash Flow Data:
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Cash provided by operating activities $ 1,712 $ 1,433 (16.3) $ 3,117 $ 3,408 9.3
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Cash used for investing activities $ 1,163 $ 1,236 6.3 $ 2,243 $ 2,390 6.6
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Cash used for financing activities $ 572 $ 286 (50.0) $ 1,032 $ 911 (11.7)
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
EBITDA (a) $2,222 $2,485 11.8 $4,458 $4,923 10.4
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
EBITDA margin (b) 51.0% 54.0% +300bps 51.7% 54.0% +230bps
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Key Indicators
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Access line counts (000's):
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
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(c) 15,605 23,649 51.5
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Total equivalent access lines 39,975 48,296 20.8
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Access minutes of use (millions) 27,627 28,798 4.2 54,452 57,514 5.6
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Long distance messages (millions) 168 129 (23.2) 345 265 (23.2)
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Digital and data services revenues $ 654 $ 809 23.7 $ 1,251 $1,576 26.0
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
Convenience feature revenues $ 477 $ 532 11.5 $ 921 $1,047 13.7
---------------------------------------------- ------------ ----------- ------------ --- ----------- ------------- -----------
</TABLE>
(a) EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, severance accrual and other income, net. We
present EBITDA because it is a widely accepted financial indicator used by
certain investors and analysts to analyze and compare companies on the
basis of operating performance and because we believe that EBITDA is an
additional meaningful measure of performance and liquidity. EBITDA does not
represent cash flows for the period, nor is it an alternative to operating
income (loss) as an indicator of operating performance. You should not
consider it in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. The
items excluded from the calculation of EBITDA are significant components in
understanding and assessing our financial performance. Our computation of
EBITDA may not be comparable to the computation of similarly titled
measures of other companies. EBITDA does not represent funds available for
discretionary uses.
(b) EBITDA margin is EBITDA divided by revenues.
(c) 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.
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Overview
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Our 2000 year-to-date results reflect strong revenue growth driven by growth in
digital and data services revenues when compared to the first six months of
1999. Expense growth was driven by increased spending for customer service and
network support functions and expenses for development and promotion of new
business initiatives including high-speed data and Internet service offerings.
Operating Revenues
------------------------------------------ ------------------------- ----------
Year-to-Date %
-------------------------
1999 2000 Change
------------------------------------------ ------------ ------------ ----------
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.......................... 575 660 14.8
------------------------------------------ ------------ ------------ ----------
Total operating revenues ............. $8,622 $9,117 5.7
------------------------------------------ ------------ ------------ ----------
Local service
The $317 increase in local service revenues on a year-to-date comparative basis
is attributable to growth in switched access lines and strong demand for digital
and data services and convenience features.
We ended the second quarter with over 48 million total equivalent access lines,
an increase of 20.8% since June 30, 1999. Residential access lines rose 2.4% to
17,189,000, driven by economic growth in our nine-state region as well as demand
for secondary residence lines which accounted for 42.2% of the growth in
residential access lines. We added 172,000 secondary residence lines since June
30, 1999, extending the total to over 2.5 million lines and ending the current
period with a penetration rate of 17.1%. Business access lines, including both
switched access lines and data circuits, grew 34.6%, propelled by expanding
demand for our digital and data services. Switched business access lines
decreased 1.6% reflecting continued migration of new and existing business
customers to high-capacity data lines.
Revenues from optional convenience features such as Caller ID, Call Waiting,
Call Return and voicemail service increased $126, or 13.7%, when compared to the
same 1999 period. These increases were driven by growth in convenience feature
usage through our Complete Choice(R) Package, a one-price bundled offering of
over 20 services.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $94 compared to the first six months of 1999.
Network access
Network access revenues grew $130 in the first six months of 2000 when compared
to the same 1999 period, due largely to higher demand. Access minutes of use
rose 5.6% to 57,514 million at June 30, 2000 from 54,452 million at June 30,
1999. Increases in switched access lines and promotional activities by long
distance carriers continue to be the primary drivers of the increase in minutes
of use. The growth in minutes of use was also positively impacted by the
additional day of activity resulting from the leap year.
The growth rate in total minutes of use continues to be negatively impacted by
the trend of business customers migrating from traditional switched circuits to
higher capacity data line offerings, which are fixed-charge based rather than
minute-of-use based. Revenues from these dedicated circuit services grew
approximately $137 year-to-date on a comparative basis as Internet service
providers and high-capacity users increased their use of our network. The growth
rate in switched minutes of use has also been negatively impacted by competition
from CLECs whose traffic completely bypasses our network.
Volume-related growth was largely offset by net rate impacts that decreased
revenues by $133 compared to the first six months of 1999. These rate reductions
are primarily related to the FCC's access reform and productivity factor
adjustments. The reductions were partially offset by recoveries of local number
portability costs in 2000.
Long distance
The $37 decrease for the year-to-date period compared to the same 1999 period is
primarily attributable to a 23.2% decrease in long distance message volumes
since June 30, 1999. The decrease was offset by a $30 revenue reduction in 1999
for a regulatory ruling related to compensation we receive from long distance
carriers for interconnection to our public payphones. Also offsetting the
decreases were increased revenues from the provision of digital and data
services of $11.
Competition and increased penetration of extended local area calling plans
continue to have an adverse impact on the number of customers who use our long
distance service and ultimately reduce our long distance message volumes and
revenues. We believe that competition will continue to adversely impact our
customer base, and ultimately our long distance message volumes and revenues
until BellSouth is granted full long distance relief under the
Telecommunications Act of 1996.
Other
Other revenues increased 14.8%, from $575 in the first six months of 1999 to
$660 in the first six months of 2000. Higher revenues of $178 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. We expect continued strong
growth associated with an alliance with MyWay.com, an Internet portal operated
by CMGI.
Operating Expenses
----------------------------------------- ------------------------- ----------
Year-to-Date %
-------------------------
1999 2000 Change
----------------------------------------- ------------ ------------ ----------
Operating expenses:
Operational and support expenses ...... $4,164 $4,194 0.7
Depreciation and amortization ......... 1,679 1,782 6.1
----------------------------------------- ------------ ------------ ----------
Total operating expenses ............ $5,843 $5,976 2.3
----------------------------------------- ------------ ------------ ----------
Operational and support expenses
Operational and support expenses increased $30, or 0.7%, for year-to-date 2000
when compared to year-to-date 1999. This increase was primarily attributable to
reciprocal compensation, volume-related increases in interconnection expense and
higher payments to FCC mandated universal access funds, which total $163. These
increases were offset by $61 of lower pension and benefit costs attributable to
favorable pension plan investment returns. The increases were further offset by
reductions of $54 in contract service expense and volume-driven costs from sales
of customer premises equipment and paging equipment.
Also contributing to the increase were expenses related to new data initiatives,
including high-speed Internet access and optical fiber-based broadband services,
and promotional expenses related to expanding our Internet customer base. We
have made high-speed Internet access available in 31 markets with an addressable
market of approximately 9 million access lines, and we plan to increase the
addressable market to 11.5 million access lines by the end of 2000. In January
2000, we began offering a self-install kit for high-speed Internet access in
seven cities and are planning to expand these offerings to additional areas in
the southeastern U.S. We are deploying optical fiber-based broadband products in
nearly all newly built neighborhoods and are also retrofitting some 200,000
existing homes in Atlanta and Miami.
Depreciation and amortization
Depreciation and amortization expense increased $103, or 6.1%, for the first six
months of 2000 when compared to the same 1999 period. The increase is primarily
attributable to amortization of capitalized internally developed software and
depreciation resulting from higher levels of net property, plant and equipment.
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Other Nonoperating Items
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-------------------------------------- ------------------------ -----------
Year-to-Date %
------------------------
1999 2000 Change
-------------------------------------- ----------- ------------ -----------
Interest Expense ..................... $267 $337 26.2
Other Income, net .................... 1 10 N/M*
Provision for Income Taxes ........... 946 1,042 10.1
-------------------------------------- ----------- ------------ -----------
* Not Meaningful
Interest expense
Higher interest expense in 2000 is attributable to higher average debt balances
and increases in interest rates.
Provision for income taxes
The provision for income taxes increased $96 on a year-to-date comparative
basis. The effective income tax rate for the first six months of 2000 was 37.0%
compared to 37.6% for the first six months of 1999, and is in line with our
expected rate for 2000.
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Operating Environment and Trends of the Business
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Regulatory Developments
Our future operating and financial results will be substantially influenced by
developments in a number of federal and state regulatory proceedings. Adverse
results in these proceedings could materially affect our revenues, expenses and
ability to compete effectively against other telecommunications carriers.
Our intrastate prices are regulated under price regulation plans provided by
statute or approved by state public service commissions. Some plans are subject
to periodic review and may require renewal. These commissions generally may
require price reductions and other concessions from us as conditions to
approving these plans.
In North Carolina, we reached a joint stipulation with the North Carolina Public
Staff and AT&T regarding revisions to the price regulation plan, switched access
reductions, ADSL deployment and service quality issues. In July 2000, the North
Carolina Utilities Commission approved much of the Joint Stipulation, including
a one year extension of our price regulation plan, some reductions in intrastate
switched access charges, enhanced ADSL deployment and voluntary self-enforcing
penalties associated with service quality problems.
In July 2000, the Florida Public Service Commission (FPSC) commenced a
proceeding to determine whether we violated certain FPSC rules regarding service
quality. Hearings are currently scheduled for November 2000. Also in July 2000,
the FPSC determined that our change in 1999 from a late charge based on a
percentage of the amounts overdue to a flat rate fee plus an interest charge
violated the Florida price regulation statute and voted that certain monies
should be refunded. We are considering whether to protest the decision.
On the federal level, the Federal Communications Commission (FCC) has
considerable authority to establish pricing, interconnection and other policies
that had once been considered within the exclusive jurisdiction of the state
public service commissions. We expect the FCC to accelerate the growth of local
service competition by aggressively utilizing such power.
We have been testing our operations support systems in Georgia and Florida and
expect to file our Georgia long distance application with the FCC by the end of
2000. We do not know if the FCC will require further changes in our
interconnection and network element offerings and operations support systems
before it will approve our petition. These changes could result in significant
additional expenses. During December 1999, the FCC approved Bell Atlantic's
request to provide full long distance wireline service in New York state, making
it the first Bell System-affiliated company to obtain relief under the
Telecommunications Act of 1996 in any state. In June 2000, the FCC approved
SBC's long distance application for Texas, making it the second Bell
System-affiliated company to obtain authority to offer long distance services.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit vacated the FCC
methodology for pricing unbundled network elements and the methodology for
determining wholesale rates for retail services. The order also affirmed the
previous decision of the Eighth Circuit that vacated FCC rules that required
incumbent carriers to combine previously uncombined elements for requesting
carriers.
With respect to federal access charges, FCC policies strongly favor access
reform, whereby the historical subsidy for local service that is contained in
network access charges paid by long distance carriers is eliminated. During
first quarter 2000, a coalition of local and long distance providers, including
BellSouth, Bell Atlantic, GTE, SBC, AT&T and Sprint submitted a proposal
designed to result in lower consumer prices for long distance service by
reforming the way in which access costs are recovered. The proposal was a
comprehensive package that would adjust the FCC's price cap, access charge and
universal service rules for those price cap local exchange carriers electing to
adopt the proposal. After receiving public comment on this proposal, the FCC
approved most of the proposal in an order in May 2000.
Although one effect of the FCC's order will be to reduce access charges paid to
BellSouth by other carriers, we will be able to increase subscriber line charges
paid by residential and single-line business customers each year through 2003.
Any increases which we request after July 2001 are subject to a cost review.
During June 2000, we filed tariff modifications implementing the proposal. These
modifications will result in interstate price decreases of approximately $270 on
an annual basis.
We are involved in numerous legal proceedings associated with state and federal
regulatory matters, the disposition of which could materially impact our
operating results and prospects. See note D to our consolidated interim
financial statements.
New Accounting Pronouncements
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 requires that revenues
and costs of revenues derived from services rendered at the beginning of a
contract or business relationship be deferred and recognized over the life of
the related contract or relationship. In June 2000, the SEC deferred the
required adoption date of the guidelines in SAB 101 to the fourth quarter of
2000. We do not expect the adoption of these guidelines to have a material
impact on our results of operations, financial position or cash flows.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now
for fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. This means that the
standard must be adopted by us no later than January 1, 2001. We do not expect
that the adoption of this standard will have a material impact on results of
operations, financial position or cash flows.
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Cautionary Language Concerning Forward-Looking Statements
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In addition to historical information, management's discussion and analysis
contains forward-looking statements regarding events and financial trends that
may affect our future operating results, financial position and cash flows.
These statements are based on our assumptions and estimates and are subject to
risks and uncertainties. For these statements, we claim the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
Factors that could affect future operating results, financial position and cash
flows and could cause actual results to differ materially from those expressed
in the forward-looking statements are:
. a change in economic conditions in markets where we operate or have
material investments which would affect demand for our services;
. the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
. protracted delay in BellSouth Corporation's entry into the interLATA long
distance market;
. higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
. unanticipated higher capital spending from, or delays in, the deployment of
new technologies; and
. unsatisfactory results in regulatory actions including terms of
interconnection and unbundled network elements and resale rates.
This list of cautionary statements is not exhaustive. These and other
developments could cause our actual results to differ materially from those
forecast or implied in the forward-looking statements. You are cautioned not to
place undue reliance on these forward-looking statements, which are current only
as of the date of this filing. We have no obligation, and we do not intend, to
publicly release the results of any revisions to these forward-looking
statements to reflect events or circumstances after the date of this filing.
<PAGE>
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4a No instrument which defines the rights of holders of our long- and
intermediate-term debt is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, we agree to furnish a copy
of any such instrument to the SEC upon request.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 2000.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELLSOUTH TELECOMMUNICATIONS, INC.
By /s/ Guy L. Cochran
GUY L. COCHRAN
Vice President, Chief Financial Officer and Comptroller
(Principal Financial and Accounting Officer)
August 14, 2000
<PAGE>
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 2000.
