SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1049
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 ... 9
Part II
6. Exhibits and Reports on Form 8-K ................................15
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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)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Operating revenues:
Local service $ 2,747 $ 2,857 $ 8,113 $ 8,540
Network access 1,200 1,198 3,578 3,706
Long distance 158 133 461 399
Other 299 393 874 1,053
Total operating revenues 4,404 4,581 13,026 13,698
Operating expenses:
Operational and support expenses 2,313 2,297 6,857 6,892
Depreciation and amortization 867 922 2,546 2,704
Severance accrual - - - 53
Total operating expenses 3,180 3,219 9,403 9,649
Operating income 1,224 1,362 3,623 4,049
Interest expense 142 179 409 516
Other income, net 17 5 18 15
Income before income taxes 1,099 1,188 3,232 3,548
Provision for income taxes 413 441 1,212 1,307
Net income $ 686 $ 747 $ 2,020 $ 2,241
Retained earnings:
At beginning of period $ 1,476 $ 1,536 $ 1,354 $ 1,452
Add: net income 686 747 2,020 2,241
Deduct: dividends declared (615) (699) (1,827) (2,109)
At end of period $ 1,547 $ 1,584 $ 1,547 $ 1,584
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39 $ 98
Temporary cash investments 15 4
Accounts receivable, net of
allowance for uncollectibles
of $84 and $70 3,094 3,128
Material and supplies 203 233
Other current assets 82 159
Total current assets 3,433 3,622
Investments and advances 320 309
Property, plant and equipment 52,549 55,015
Less: accumulated depreciation 32,645 34,271
Property, plant and equipment, net 19,904 20,744
Deferred charges and other assets 1,638 2,183
Total assets $ 25,295 $ 26,858
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Debt maturing within one year $ 3,331 $ 4,623
Accounts payable 1,230 1,430
Other current liabilities 2,250 2,212
Total current liablities 6,811 8,265
Long-term debt 6,135 6,059
Noncurrent liabilities:
Deferred income taxes 1,628 1,793
Unamortized investment tax credits 126 96
Other noncurrent liabilities 1,790 1,581
Total noncurrent liabilities 3,544 3,470
Shareholder's equity:
Common stock, one share, no par value 7,353 7,480
Retained earnings 1,452 1,584
Total shareholder's equity 8,805 9,064
Total liabilities and
shareholder's equity $ 25,295 $ 26,858
</TABLE>
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 Nine Months
Ended September 30,
1999 2000
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,020 $ 2,241
Adjustments to net income:
Depreciation and amortization 2,546 2,704
Severance accrual - 53
Provision for uncollectibles 110 141
Deferred income taxes and investment tax credits 158 158
Net change in:
Accounts receivable and other current assets (236) (279)
Accounts payable and other current liabilities 488 394
Deferred charges and other assets (419) (410)
Other liabilities and deferred credits (166) (267)
Other reconciling items, net 84 126
Net cash provided by operating activities 4,585 4,861
Cash Flows from Investing Activities:
Capital expenditures (3,461) (3,698)
Other investing activities, net 41 44
Net cash used for investing activities (3,420) (3,654)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt 521 (50)
Repayments of long-term debt (8) (278)
Advances from parent and affiliates 428 2,520
Repayments of advances from parent and affiliates (422) (1,107)
Dividends paid to parent (1,902) (2,410)
Capital infusions by parent 21 177
Net cash used for financing activities (1,362) (1,148)
Net (decrease) increase in cash and cash equivalents (197) 59
Cash and cash equivalents at beginning of period 337 39
Cash and cash equivalents at end of period $ 140 $ 98
</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 reports on Form 10-Q.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
Note B - Recent Accounting Pronouncements
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 requires that revenues
and costs of revenues derived from services rendered at the beginning of a
contract or business relationship be deferred and recognized over the life of
the related contract or relationship. In June 2000, the SEC deferred the
required adoption date of the guidelines in SAB 101 to the fourth quarter of
2000. We do not expect the adoption of these guidelines to have a material
impact on our results of operations, financial position or cash flows.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now
for fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. This means that we must
adopt the standard, as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," no later than January 1, 2001. We do not expect the adoption
of this standard will have a material impact on results of operations, financial
position or cash flows.
Note C - 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
Litigation Matters
Reciprocal compensation. 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; however, 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. At
September 30, 2000, the exposure related to unrecorded amounts withheld from
competitive local carriers was approximately $280, including accrued interest.
We have commenced discussions with several competitive local carriers concerning
settlement of some claims, and agreements have been reached in certain
circumstances.
Other reciprocal compensation issues. In a related matter, a competitive local
carrier was claiming terminating compensation of approximately $165 for service
arrangements that we did not believe involved "traffic" under our
interconnection agreements. We filed a complaint with the state regulatory
commission asking that agency to declare that we did not owe reciprocal
compensation for these arrangements. In March 2000, the state commission ruled
in our favor finding that compensation was not owed to the competitive local
carrier. This matter is currently on appeal.
U.S. Electronics. In October 1999, the Company and a wholly-owned subsidiary,
BellSouth Products, Inc. (BSP), filed a complaint against U. S. Electronics,
Inc. (USE), in the United States District Court for the Northern District of
Georgia. The complaint alleges that USE, a distributor of residential telephone
equipment, breached its distributorship contract with BSP and violated the
Robinson-Patman Act. It also seeks a ruling invalidating certain exclusivity and
post-term non-competition covenants contained in the distributorship contract.
USE denied the material allegations of the complaint and filed counterclaims
against the Company, BSP, and several other BellSouth entities, alleging that
the BellSouth companies are in breach of the distributorship contract. The
counterclaims seek an unspecified amount of damages as well as declaratory and
injunctive relief. The BellSouth companies denied the material allegations of
USE's counterclaims and filed a Motion for Judgment on the Pleadings seeking an
early ruling that the exclusivity and post-term non-competition provisions were
invalid and unenforceable as a matter of law. The court denied that motion in
August 2000. At the end of September 2000, BSP informed USE that, as a result of
USE's contractual violations and other factors, BSP would be unable to supply
USE with sufficient products for distribution until at least the third quarter
of 2001. On October 11, 2000, USE filed a Motion for a Preliminary Injunction,
seeking to require BSP to continue to supply USE with residential telephone
equipment for distribution. The BellSouth companies intend to pursue their
claims and defend against the counterclaims vigorously. Discovery has commenced.
At this early stage of the proceedings, the Company cannot predict the likely
outcome of the case.
Regulatory Matters
South Carolina. Beginning in 1996, we operated under a price regulation plan
approved by the South Carolina Public Service Commission under existing state
laws. In April 1999, however, the South Carolina Supreme Court invalidated this
price regulation plan. In July 1999, we elected to be regulated under a new
state statute, adopted subsequent to the Commission's approval of the earlier
plan. The new statute allows telephone companies in South Carolina to operate
under price regulation without obtaining approval from the Commission. The
election became effective during August 1999. The South Carolina Consumer
Advocate petitioned the Commission seeking review of the level of our earnings
during the 1996-1998 period when we operated under the subsequently invalidated
price regulation plan. The Commission voted to dismiss the petition in November
1999 and issued orders confirming the vote in February and June of this year. In
July, the Consumer Advocate appealed the Commission's dismissal of the petition.
<PAGE>
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In Millions)
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 reports 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 third quarter and year-to-date 2000 operational and support
expenses by $8 and $82, and reduced our reported net income by $5 for the
quarter and $50 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 third quarter and year-to-date 2000 and
1999, adjusted to exclude the effect of the charges discussed above, are as
follows:
<TABLE>
<CAPTION>
------------------------ ------------ ----- ------------------------- -----------
Third Quarter % Year-to-Date %
------------ ----------- ------------ ----- ----------- ------------- -----------
1999 2000 Change 1999 2000 Change
------------ ----------- ------------ ----- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Revenues $4,404 $4,581 4.0 $13,026 $13,698 5.2
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Expenses $2,986 $3,017 1.0 $ 8,829 $8,993 1.9
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Operating income $1,418 $1,564 10.3 $ 4,197 $4,705 12.1
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Net income $ 805 $ 871 8.2 $ 2,372 $2,643 11.4
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Cash Flow Data:
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Cash provided by operating activities $1,468 $1,453 (1.0) $ 4,585 $ 4,861 6.0
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Cash used for investing activities $(1,177) $(1,264) (7.4) $(3,420) $(3,654) (6.8)
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Cash used for financing activities $ (330) $ (237) 28.2 $(1,362) $(1,148) 15.7
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
EBITDA(a) $2,285 $2,486 8.8 $ 6,743 $7,409 9.9
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
EBITDA margin (b). 51.9% 54.3% +240bps 51.8% 54.1% +230bps
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Key Indicators
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Access line counts (000's):
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Switched access lines:
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Residential 16,889 17,228 2.0
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Business 7,282 7,165 (1.6)
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Other 269 255 (5.2)
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Total switched access lines 24,440 24,648 0.9
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Access line equivalents(c) 16,539 26,679 61.3
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Total equivalent access lines 40,979 51,327 25.3
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Access minutes of use (millions) 27,858 28,551 2.5 82,310 86,065 4.6
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Long distance messages (millions) 160 125 (21.9) 505 390 (22.8)
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Digital and data services revenues $667 $847 27.0 $ 1,919 $ 2,423 26.3
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
Calling feature revenues $491 $550 12.0 $ 1,412 $ 1,597 13.1
---------------------------------------------- ------------ ----------- ------------ ----- ----------- ------------- -----------
</TABLE>
(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 revenue growth driven by growth in digital
and data services revenues when compared to the first nine 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 .................. $ 8,113 $ 8,540 5.3
Network access ................. 3,578 3,706 3.6
Long distance .................. 461 399 (13.4)
Other wireline.................. 874 1,053 20.5
----------------------------------------------- ------------ ----------
Total operating revenues ..... $13,026 $13,698 5.2
----------------------------------------------- ------------ ----------
Local service
The $427 increase in local service revenues on a year-to-date comparative basis
is attributable to strong demand for digital and data services and calling
features and growth in switched access lines.
We ended the third quarter with over 51 million total equivalent access lines,
an increase of 25.3% since September 30, 1999. Residential access lines rose
2.0% to 17,228,000, driven by economic growth in our nine-state region as well
as demand for secondary residence lines, which accounted for 55.6% of the growth
in residential access lines. We added 189,000 secondary residence lines since
September 30, 1999, extending the total to over 2.9 million lines and ending the
current period with a penetration rate of 20.5%. Business access lines,
including both switched access lines and data circuits, grew 42.1%, propelled by
expanding demand for our digital and data services. Switched business access
lines decreased 1.6% reflecting competition and the continued migration of new
and existing business customers to high-capacity data lines.
Revenues from optional calling features such as Caller ID, Call Waiting, Call
Return and voicemail service increased $185, or 13.1%, when compared to the same
1999 period. These increases were driven by growth in calling feature usage
through our Complete Choice(R) Package, a one-price bundled offering of over 20
services.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $130 compared to the first nine months of
1999.
Network access Network access revenues grew $128 in the first nine months of
2000 when compared to the same 1999 period. Access minutes of use rose 4.6% to
86,065 million in the 2000 period from 82,310 million in the 1999 period.
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 $236 year-to-date on a
comparative basis as Internet service providers and high-capacity users
increased their use of our network. The growth rate in switched minutes of use
has also been negatively impacted by competition from competitive local exchange
carriers whose traffic completely bypasses our network.
Volume-related growth was largely offset by net rate impacts that decreased
revenues by $221 compared to the first nine months of 1999. These rate
reductions are primarily related to the FCC's access reform and productivity
factor adjustments. The reductions were partially offset by recoveries of local
number portability costs in 2000.
Long distance
The $62 decrease for the year-to-date period compared to the same 1999 period is
primarily attributable to a 22.8% decrease in long distance message volumes from
the 1999 period to the 2000 period. 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 $27.
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 20.5%, from $874 in the first nine months of 1999
to $1,053 in the first nine months of 2000. Higher revenues of $269, resulting
primarily from resale of paging products and services, sales of unbundled
network elements, collocation of competing carriers' equipment in our
facilities, demand for our Internet access offering, interconnection charges to
wireless carriers and proceeds from universal service funds, were offset by
decreases in revenues from sales of customer premises equipment. At September
30, 2000 we had 871,000 subscribers to our BellSouth Internet Service(R), an
increase of 36.7% compared to the same 1999 period.
Operating Expenses
------------------------------------------------------------------ ----------
Year-to-Date %
-------------------------
1999 2000 Change
----------------------------------------------------- ------------ ----------
Operating expenses:
Operational and support expenses ..... $6,283 $6,289 0.1
Depreciation and amortization ........ 2,546 2,704 6.2
----------------------------------------------------- ------------ ----------
Total operating expenses ........... $8,829 $8,993 1.9
----------------------------------------------------- ------------ ----------
Operational and support expenses
Operational and support expenses increased $6, or 0.1%, for year-to-date 2000
when compared to year-to-date 1999. This increase was primarily attributable to
increases in labor costs resulting from additions to network and customer
service personnel and reciprocal compensation expense totaling $150. These
increases were partially offset by a $73 reduction in pension and benefit costs
attributable to favorable pension plan investment returns. The increase was
further offset by reductions in discretionary expenses and decreases in costs
from sales of customer premises equipment. Also contributing to 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.
Depreciation and amortization
Depreciation and amortization expense increased $158, or 6.2%, for the first
nine 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 ...................... $ 409 $ 516 26.2
Other Income, net ..................... 18 15 (16.7)
Provision for Income Taxes ............ 1,434 1,561 8.9
------------------------------------------------- ------------ -----------
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 $127 on a year-to-date comparative
basis. The effective income tax rate for the first nine months of 2000 was 37.1%
compared to 37.7% for the first nine 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. The commissions reviewing these
plans may require price reductions and other concessions from us as conditions
to approving these plans.
In July 2000, the Kentucky Public Service Commission approved a new price
regulation plan. The new plan eliminates the 4% productivity factor contained in
the previous plan in return for the company's commitment to bring high speed
access services to certain rural areas. The level of company investment in rural
high speed access services is under review at the Commission. The plan also
permits the company to rebalance rates in a manner that will align residential
rates more closely to the cost of providing such service.
In July 2000, the Florida Public Service Commission commenced a proceeding to
determine whether we violated certain Commission rules regarding service
quality. Hearings originally scheduled for November 2000 are being moved to the
first half of 2001. Also in July 2000, the Commission determined that our change
in 1999 from a late charge based on a percentage of the amounts overdue to a
flat rate fee plus an interest charge violated the Florida price regulation
statute and voted that certain monies should be refunded. We protested the
decision, and hearings are scheduled for late 2001.
In October 2000, the Georgia Public Service Commission orally voted to approve,
with certain modifications, the Commission Staff's Recommendation with respect
to new company performance measures. These new performance measures will be used
as one means to assess our wholesale service quality to competitive local
exchange carriers. In its written decision, which has not been received, the
Commission is expected to adopt additional performance measurements that will
apply to our performance to our wholesale competitive local exchange carrier
customers. In addition, the Commission will adopt a Self Enforcement Plan. The
Enforcement Plan consists of three tiers. Under tier 1, we will be required to
pay remedial sums to individual competitive local exchange carriers if we fail
to meet certain performance criteria set by the Commission. Under tier 2, we
will pay additional sums directly to the State Treasury for failing to meet
certain performance metrics. Under tier 3, if we fail to meet certain
performance criteria, then we will suspend additional marketing and sales of
long distance services allowed by the Telecommunications Act of 1996. Our annual
liability under the Plan will be capped at 44% of net revenues in Georgia. The
decision also adopts other remedial measures for the filing of late or
incomplete performance reports, and a market penetration adjustment for new and
advanced services, which increases the amount of the payments where low volumes
of advanced or nascent services are involved. It is anticipated that the
Commission's written decision will be entered before year end. The Enforcement
Plan will go into effect 45 days after the Commission enters an order. When the
written decision is entered, we will have the opportunity to seek
reconsideration of the order, as necessary.
We are currently conducting third-party tests of our operations support systems
in Georgia and Florida and expect to file our Georgia long distance application
with the FCC when testing and verification of our performance data are complete
and all other legal requirements have been met. We do not know if the FCC will
require further changes in our interconnection and network element offerings and
operations support systems before it will approve our petition. These changes
could result in significant additional expenses and delays in obtaining full
long-distance relief in these states.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit vacated the FCC
methodology for pricing unbundled network elements and the methodology for
determining wholesale rates for retail services. The order also affirmed the
previous decision of the Eighth Circuit that vacated FCC rules that required
incumbent carriers to combine previously uncombined elements for requesting
carriers. The United States Supreme Court has been asked to review the decision
of the Eighth Circuit.
With respect to federal access charges, FCC policies strongly favor access
reform, whereby the historical subsidy for local service that is contained in
network access charges paid by long distance carriers is eliminated. In May
2000, the FCC implemented a comprehensive reform package that adjusted its price
cap, access charge and universal service rules for those price cap local
exchange carriers electing to adopt the new rules. The new rules are designed to
result in lower consumer prices for long distance service by reforming the way
in which access costs are recovered. The new rules, which we adopted during June
2000, reduced the access charges paid to us by other carriers, and at the same
time authorized an increase to the subscriber line charges paid by residential
and single-line business customers. The new rules also allow us to increase the
subscriber line charges each year through 2003, although any increase which we
request after July 2001 is subject to a cost review. We estimate that these
modifications will result in interstate price decreases of approximately $270 on
an annual basis.
We are involved in numerous legal proceedings associated with state and federal
regulatory matters, the disposition of which could materially impact our
operating results and prospects. See note D to our consolidated interim
financial statements.
New Accounting Pronouncements
See note B to our consolidated interim financial statements.
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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;
. a decrease in the growth rate of demand for the services which we offer;
. the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
. protracted delay in 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 September 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)
November 3, 2000
<PAGE>
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 2000.
