-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jv0SkmQzISHVIrCHFwZZEzSMxq+I/nVS0pUk8Zkwc3J/vuKgwIkcGcUL3vskvHI6 C43II/Fz+SlJAiZr0xXIJw== /in/edgar/work/20000814/0000732713-00-000016/0000732713-00-000016.txt : 20000921 0000732713-00-000016.hdr.sgml : 20000921 ACCESSION NUMBER: 0000732713-00-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLSOUTH CORP CENTRAL INDEX KEY: 0000732713 STANDARD INDUSTRIAL CLASSIFICATION: [4813 ] IRS NUMBER: 581533433 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08607 FILM NUMBER: 699384 BUSINESS ADDRESS: STREET 1: 1155 PEACHTREE ST NE STREET 2: ROOM 15G03 CITY: ATLANTA STATE: GA ZIP: 30309-3610 BUSINESS PHONE: 4042492000 10-Q 1 0001.txt BELLSOUTH CORPORATION 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8607 BELLSOUTH CORPORATION (Exact name of registrant as specified in its charter) Georgia 58-1533433 (State of Incorporation) (I.R.S. Employer Identification Number) 1155 Peachtree Street, N. E., 30309-3610 Atlanta, Georgia (Zip Code) (Address of principal executive offices) Registrant's telephone number 404 249-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ At July 31, 2000, 1,874,100,602 common shares were outstanding. Table of Contents Item Page Part I 1. Financial Statements Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Consolidated Statements of Shareholders' Equity and Comprehensive Income 6 Notes to Consolidated Financial Statements 8 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 3. Qualitative and Quantitative Disclosures about Market Risk 28 Part II 4. Submission of Matters to a Vote of Security Holders 30 6. Exhibits and Reports on Form 8-K 30 - ------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION - ------------------------------------------------------------------------------- BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Millions, Except Per Share Amounts)
For the Three Months For the Six Months Ended June 30, Ended June 30, 1999 2000 1999 2000 Operating revenues: Wireline communications: Local service $ 2,712 $ 2,862 $ 5,366 $ 5,683 Network access 1,187 1,245 2,378 2,508 Long distance 153 131 303 266 Other wireline 255 357 535 642 Total wireline communications 4,307 4,595 8,582 9,099 Domestic Wireless 796 919 1,540 1,772 International operations 565 658 1,126 1,322 Advertising and publishing 407 471 750 835 Other 73 109 123 211 Total operating revenues 6,148 6,752 12,121 13,239 Operating expenses: Operational and support expenses 3,359 3,565 6,612 7,133 Depreciation and amortization 1,155 1,240 2,268 2,458 Severance accrual - - - 78 Provision for asset impairment 320 - 320 - Total operating expenses 4,834 4,805 9,200 9,669 Operating income 1,314 1,947 2,921 3,570 Interest expense 245 332 471 638 Gain on sale of operations 16 - 16 - Net earnings (losses) of equity affiliates 57 22 (209) 153 Other income, net 114 46 173 129 Income before income taxes 1,256 1,683 2,430 3,214 Provision for income taxes 470 619 1,029 1,149 Net income $ 786 $ 1,064 $ 1,401 $ 2,065 Weighted-average common shares outstanding: Basic 1,891 1,882 1,912 1,881 Diluted 1,909 1,900 1,930 1,899 Dividends declared per common share $ 0.19 $ 0.19 $ 0.38 $ 0.38 Earnings per share: Basic $ 0.42 $ 0.57 $ 0.73 $ 1.10 Diluted $ 0.41 $ 0.56 $ 0.73 $ 1.09
The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts)
December 31, June 30, 1999 2000 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,287 $ 1,520 Temporary cash investments 105 27 Accounts receivable, net of allowance for uncollectibles of $312 and $316 5,177 4,990 Material and supplies 451 468 Other current assets 367 590 Total current assets 7,387 7,595 Investments and advances 6,097 7,456 Property, plant and equipment 61,009 63,269 Less: accumulated depreciation 36,378 37,972 Property, plant and equipment, net 24,631 25,297 Deferred charges and other assets 1,564 1,717 Intangible assets, net 3,774 4,023 Total assets $ 43,453 $ 46,088 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Debt maturing within one year $ 7,653 $ 6,108 Accounts payable 1,961 2,076 Other current liabilities 3,781 4,234 Total current liablities 13,395 12,418 Long-term debt 9,113 10,869 Noncurrent liabilities: Deferred income taxes 2,705 2,963 Unamortized investment tax credits 126 106 Other noncurrent liabilities 3,299 3,230 Total noncurrent liabilities 6,130 6,299 Shareholders' equity: Common stock, $1 par value (4,400 shares authorized; 1,883 and 1,881 shares outstanding) 2,020 2,020 Paid-in capital 6,771 6,775 Retained earnings 11,456 12,746 Accumulated other comprehensive income (358) (5) Shares held in trust and treasury (4,798) (4,832) Guarantee of ESOP debt (276) (202) Total shareholders' equity 14,815 16,502 Total liabilities and shareholders' equity $ 43,453 $ 46,088
The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions)
For the Six Months Ended June 30, 1999 2000 Cash Flows from Operating Activities: Net income $ 1,401 $ 2,065 Adjustments to net income: Depreciation and amortization 2,268 2,458 Severance accrual - 78 Gain on sale of operations (16) - Provision for asset impairment 320 - Provision for uncollectibles 165 179 Net losses (earnings) of equity affiliates 209 (153) Dividends received from equity affiliates 37 39 Minority interests in income of subsidiaries 20 22 Deferred income taxes and investment tax credits (7) 98 Net change in: Accounts receivable and other current assets (208) (199) Accounts payable and other current liabilities 332 641 Deferred charges and other assets (279) (337) Other liabilities and deferred credits (81) (182) Other reconciling items, net (68) 89 Net cash provided by operating activities 4,093 4,798 Cash Flows from Investing Activities: Capital expenditures (2,885) (3,268) Investments in and advances to equity affiliates (3,711) (582) Purchases of licenses and other intangible assets (97) (73) Proceeds from disposition of short-term investments 133 247 Purchases of short-term investments (271) (177) Proceeds from repayment of loans and advances 50 14 Other investing activities, net 129 44 Net cash used for investing activities (6,652) (3,795) Cash Flows from Financing Activities: Net borrowings (repayments) of short-term debt 4,049 (1,708) Proceeds from long-term debt 6 2,083 Repayments of long-term debt (193) (335) Dividends paid (733) (715) Purchase of treasury shares (2,968) (148) Other financing activities, net 11 53 Net cash used for financing activities 172 (770) Net (decrease) increase in cash and cash equivalents (2,387) 233 Cash and cash equivalents at beginning of period 3,143 1,287 Cash and cash equivalents at end of period $ 756 $ 1,520
The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (In Millions)
For the Six Months Ended June 30, 2000 ----------------------------------------------------------------------------------------- Number of Shares Amount ------------------ ------------------------------------------------------------------- Accum. Shares Other Shares Guaran- Held in Compre- Held in tee of Common Trust and Common Paid-in Retained hensive Trust and ESOP Stock Treasury Stock Capital Earnings Income Treasury Debt Total -------- --------- -------- -------- --------- -------- --------- -------- --------- -------- --------- -------- -------- --------- -------- --------- -------- --------- (a) (a) Balance at December 31, 1999 2,020 (138) $ 2,020 $ 6,771 $ 11,456 $ (358) $ (4,798) $ (276) $ 14,815 Net income 2,065 2,065 Other comprehensive income, net of tax: Foreign currency translation adjustment 27 27 Net unrealized gains on securities 335 335 Minimum pension liability adjustment (9) (9) --------- Total comprehensive income (b) 2,418 Dividends declared (715) (715) Share issuances for employee benefit plans 2 (60) 114 54 Purchase of treasury stock (3) (148) (148) Tax benefit related to stock options 4 4 ESOP activities and related tax benefit 74 74 -------- --------- -------- -------- --------- -------- --------- -------- --------- Balance at June 30, 2000 2,020 (139) $ 2,020 $ 6,775 $ 12,746 $ (5) $ (4,832) $ (202) $ 16,502 ======== ========= ======== ======== ========= ======== ========= ======== =========
(a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of June 30, 2000, there were approximately 36 shares held in trust and 103 shares held in treasury. (b) Total comprehensive income for second quarter 2000 was $1,104. The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (In Millions)
For the Six Months Ended June 30, 1999 ---------------------------------------------------------------------------------------- Number of Shares Amount ----------------- ------------------------------------------------------------------- Accum. Shares Other Shares Guaran- Held in Compre- Held in tee of Common Trust and Common Paid-in Retained hensive Trust and ESOP Stock Treasury Stock Capital Earnings Income Treasury Debt Total ------- -------- -------- -------- --------- -------- --------- ------- --------- (a) (a) Balance at December 31, 1998 2,020 (70) $ 2,020 $ 6,766 $ 9,479 $ (64) $ (1,752) $ (339) $ 16,110 Net income 1,401 1,401 Other comprehensive income, net of tax: Foreign currency translation adjustment (114) (114) --------- Total comprehensive income (b) 1,287 Dividends declared (720) (720) Share issuances for employee benefit plans 1 (18) 33 15 Purchase of treasury stock (66) (2,965) (2,965) Purchase of stock by grantor trust (3) (3) ESOP activities and related tax benefit 3 33 36 ------- -------- -------- -------- --------- -------- --------- ------- --------- Balance at June 30, 1999 2,020 (135) $ 2,020 $ 6,766 $ 10,145 $ (178) $ (4,687) $ (306) $ 13,760 ======= ======== ======== ======== ========= ======== ========= ======= =========
(a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of June 30, 1999, there were approximately 36 shares held in trust and 100 shares held in treasury. (b) Total comprehensive income for second quarter 1999 was $830. The accompanying notes are an integral part of these consolidated financial statements. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars In Millions) Note A - Preparation of Interim Financial Statements In this report, BellSouth Corporation and its subsidiaries are referred to as "we" or "BellSouth". The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods shown. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of our significant accounting policies and other information, you should read this report in conjunction with the consolidated financial statements included in our latest annual report on Form 10-K and previous quarterly report on Form 10-Q. Certain amounts within the prior year's information have been reclassified to conform to the current year's presentation. Note B - Recent Accounting Pronouncements Revenue Recognition In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 requires that revenues and costs of revenues derived from services rendered at the beginning of a contract or business relationship be deferred and recognized over the life of the related contract or relationship. In June 2000, the SEC deferred the required adoption date of the guidelines in SAB 101 to the fourth quarter of 2000. We do not expect the adoption of these guidelines to have a material impact on our results of operations, financial position or cash flows. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. This means that the standard must be adopted by us no later than January 1, 2001. We do not expect the adoption of this standard will have a material impact on results of operations, financial position or cash flows. Note C - Earnings Per Share Basic earnings per share is computed on the weighted-average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted-average number of common shares outstanding plus net incremental shares arising out of employee stock options and benefit plans. The following is a reconciliation of the weighted-average share amounts (in millions) used in calculating earnings per share: Second Quarter Year-to-Date 1999 2000 1999 2000 Basic common shares outstanding 1,891 1,882 1,912 1,881 Incremental shares from stock options 18 18 18 18 Diluted common shares outstanding 1,909 1,900 1,930 1,899 BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) The earnings amounts used for per-share calculations are the same for both the basic and diluted methods. Note D - Workforce Reduction In February 2000, we announced that we would reduce our domestic general and administrative staff by approximately 2,100 positions. These reductions are the result of the streamlining of work processes in conjunction with our shift to a more simplified management structure. As a result of these reductions, we recorded a one-time charge of $78, or $48 after tax, for severance and post-employment health benefits. Note E - E-Plus Restructuring In February 2000, we closed on a previously announced alliance with KPN Royal Dutch Telecom. We utilized our right of first refusal that enabled KPN to acquire a 77.5 percent interest in E-Plus and allows us the option after 18 months of converting our 22.5 percent interest in E-Plus into either 200 million shares of KPN or shares representing at the time an estimated 33.3 percent ownership interest in KPN's wireless subsidiary. We also have agreed to make up to $3 billion of loans to KPN to be used for further wireless investments in Europe and received non-detachable warrants to purchase approximately 90 million additional shares of KPN. As a result of this transaction, we recognized income of $143, or $68 after tax. The gain relates to a settlement payment from the selling shareholder regarding a dispute over the terms of the E-Plus shareholder agreement governing the provisions of the sale. Note F - Asset Impairment Loss In June 1999, we executed a contract with Ericsson to replace infrastructure equipment, including switches, base stations and software, in 14 wireless markets in the southeastern United States. The new equipment is intended to improve network performance and to lay the foundation for migration of the network to Third Generation wireless (3G) and wireless Internet. We expect the conversion to be substantially completed by December 2000. The planned disposals of the existing infrastructure equipment require an evaluation of asset impairment in accordance with SFAS 121. As a result, a non-cash charge of $320, or $187 after tax, was recorded in the second quarter of 1999 to write these assets down to their fair market value, which was estimated by the expected future cash flows of these assets through the date of disposal. We will continue to use the assets until the conversion process has been completed and depreciate the remaining net book value over this period. Note G - Devaluation of Brazilian Currency In mid January 1999, the Brazilian Government changed its monetary exchange policy, extinguishing the exchange band through which it had managed the range of the fluctuation of the Real in relation to the U.S. Dollar, allowing the market to freely determine the exchange rate. As a consequence of this change, the Real devalued significantly in relation to the U.S. Dollar in early 1999. The devaluation and subsequent fluctuations in the exchange rate resulted in our Brazilian wireless properties recording net currency losses related to net U.S. Dollar-denominated liabilities. Our share of the foreign currency losses for the first quarter of 1999 was $280. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note H - Segment Information We have four reportable operating segments: (1) Wireline communications; (2) Domestic wireless; (3) International operations; and (4) Advertising and publishing. We have included the operations of all other businesses falling below the reporting threshold in the "All other" segment. The "Reconciling items" shown below include Corporate Headquarters and capital funding activities, intercompany eliminations and other nonoperating items. The following table provides information for each operating segment:
Second Quarter % Year-to-Date % 1999 2000 Change 1999 2000 Change Wireline communications External revenues $4,307 $4,595 6.7 $8,582 $9,099 6.0 Intersegment revenues 119 86 (27.7) 167 158 (5.4) Total revenues $4,426 $4,681 5.8 $8,749 $9,257 5.8 Operating income $1,390 $1,589 14.3 $2,803 $3,141 12.1 Segment net income $ 781 $ 908 16.3 $1,582 $1,771 11.9 Domestic wireless External revenues $796 $919 15.5 $1,540 $1,772 15.1 Intersegment revenues 3 4 33.3 7 8 14.3 Total revenues $799 $923 15.5 $1,547 $1,780 15.1 Operating income $102 $193 89.2 $ 189 $ 285 50.8 Net earnings (losses) of equity affiliates $ 41 $ 48 17.1 $ 72 $ 80 11.1 Segment net income $ 71 $127 78.9 $131 $187 42.7 International operations External revenues $565 $658 16.5 $1,126 $1,322 17.4 Intersegment revenues -- 10 N/M* -- 21 N/M Total revenues $565 $668 18.2 $1,126 $1,343 19.3 Operating income $ 70 $ 58 (17.1) $ 121 $ 56 (53.7) Net earnings (losses) of equity affiliates $ 21 $(29) N/M $ 8 $(12) N/M Segment net income (loss) $ 50 $(18) N/M $ 30 $ (4) N/M Advertising and publishing External revenues $407 $471 15.7 $750 $835 11.3 Intersegment revenues 3 6 N/M 6 11 83.3 Total revenues $410 $477 16.3 $756 $846 11.9 Operating income $162 $199 22.8 $302 $344 13.9 Net earnings (losses) of equity affiliates $ (4) $ 5 N/M $(5) $ 4 N/M Segment net income $ 98 $125 27.6 $182 $215 18.1 All other External revenues $ 73 $109 49.3 $ 123 $ 211 71.5 Intersegment revenues 92 106 15.2 162 194 19.8 Total revenues $165 $215 30.3 $ 285 $ 405 42.1 Operating loss $(68) $(64) (5.9) $(152) $(129) (15.1) Net earnings (losses) of equity affiliates $ (1) $ (1) -- $ -- $ (1) N/M Segment net loss $(59) $(53) (10.2) $(116) $(99) (14.7)
* Not Meaningful BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note H - Segment Information (continued)
Second Quarter % Year-to-Date % 1999 2000 Change 1999 2000 Change Reconciling items External revenues $ -- $ -- N/M $ -- $ -- N/M Intersegment revenues (217) (212) (2.3) (342) (392) 14.6 Total revenues $(217) $(212) (2.3) $(342) $(392) 14.6 Operating income $(342) $ (28) N/M $(342) $(127) (62.9) Net earnings (losses) of equity affiliates $ -- $ (1) N/M $(284) $ 82 N/M Segment net loss $(155) $ (25) N/M $(408) $ (5) N/M Reconciliation to Consolidated Financial Information Operating Revenues Wireline communications $4,426 $4,681 5.8 $8,749 $9,257 5.8 Domestic wireless 799 923 15.5 1,547 1,780 15.1 International operations 565 668 18.2 1,126 1,343 19.3 Advertising and publishing 410 477 16.3 756 846 11.9 All other 165 215 30.3 285 405 42.1 Total segments 6,365 6,964 9.4 12,463 13,631 9.4 Reconciling items (217) (212) (2.3) (342) (392) 14.6 Total consolidated $6,148 $6,752 9.8 $12,121 $13,239 9.2 Net Income Wireline communications $781 $ 908 16.3 $1,582 $1,771 11.9 Domestic wireless 71 127 78.9 131 187 42.7 International operations 50 (18) N/M 30 (4) N/M Advertising and publishing 98 125 27.6 182 215 18.1 All other (59) (53) (10.2) (116) (99) (14.7) Total segments 941 1,089 15.7 1,809 2,070 14.4 Reconciling items (155) (25) N/M (408) (5) N/M Total consolidated $ 786 $ 1,064 35.4 $1,401 $2,065 47.4
Note I - Investment Activity Investment in Brazil In May 2000, we completed the purchase of a combination of voting common stock and American Depository Receipts representing nonvoting preferred stock of Tele Centro Oeste Celular Participacoes SA, a Brazilian company, for a total purchase price of approximately $240. Tele Centro Oeste provides cellular service in central-west Brazil, including Brasilia, as well as northern Brazil. The common stock portion of the investment represents 11.8% of the voting power of Tele Centro Oeste. The combined investment in common and preferred stock represents 17.3% of the total capital of Tele Centro Oeste. This investment is accounted for under the cost method, subject to the guidelines of available-for-sale securities under SFAS 115. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note I - Investment Activity (continued) Investment in Colombia In June 2000, we acquired a 50.4% controlling equity interest in Celumovil S.A., a cellular operator in the Eastern and Atlantic regions in Colombia, for a purchase price of approximately $399, funded by $299 of cash and a $100 note payable due December 2000. We have commenced cobranding Celumovil with the BellSouth brand. Celumovil/BellSouth provides wireless service in the Eastern region of Colombia, which includes the capital city of Bogota, and in the Atlantic or coastal region. In July 2000, Celumovil/BellSouth acquired 100% of Cocelco, a wireless operator that since 1994 has been serving the Western region of Colombia, which includes the cities of Medellin and Cali. This acquisition was funded by a $384 capital contribution and a $30 shareholder loan from BellSouth. This transaction increased BellSouth's ownership interest in Celumovil to 66.0%. See note Q - Subsequent Events. Proposed Domestic Wireless Transaction In April 2000, we announced plans to combine substantially all of our domestic wireless businesses with those of SBC Communications into a venture that will comprise the nation's second largest wireless company. This venture, which will cover a total population of 175 million people and serve more than 16.0 million subscribers, will be owned 40% by BellSouth and 60% by SBC Communications but will be jointly controlled. We expect to receive the required regulatory approvals and close the transaction by the end of 2000. One of our domestic partners has sued to enjoin the contribution of our interest in the PCS property in North and South Carolina to the venture. We do not expect this action to delay the closing of the venture. Note J - Marketable Securities We have investments in marketable securities, primarily common stocks, which are accounted for under the cost method. These investments are comprised primarily of a 5% equity interest in Qwest and are classified as available-for-sale under SFAS 115. Under SFAS 115, available-for-sale securities are required to be carried at their fair value, with unrealized gains and losses, net of income taxes, recorded in accumulated other comprehensive income (loss) in our statement of changes in shareholders' equity and comprehensive income. The fair values of our investments in marketable securities are determined based on market quotations. The table below shows certain summarized information related to these investments at June 30, 2000: Gross Gross Unrealized Unrealized Cost gains losses Fair Value Investment in Qwest $3,500 $ 200 $ -- $ 3,700 Other investments 458 167 (31) 594 Total $3,958 $ 367 $(31) $ 4,294 Note K - Sublease of Communications Towers In June 1999, we signed a definitive agreement with Crown Castle International Corporation for the sublease of all unused space on approximately 1,850 of our wireless communications towers in exchange for $610 to be paid in a combination of cash and Crown common stock. As of June 30, 2000 we have closed on 1,754 towers and received $577. Remaining towers covered by the agreement are expected to be subleased throughout the remainder of 2000. We also entered into a five-year, build-to-suit agreement with Crown covering up to 500 towers. Under a similar agreement, Crown will sublease all unused space on 773 PCS towers in exchange for $317 in cash. As of June 30, 2000, we have closed on 706 towers and received $290. Remaining towers covered by the agreement are expected to be subleased throughout the remainder of 2000. In connection with this agreement, we entered into an exclusive three-year, build-to-suit agreement. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note L - Summary Financial Information for Equity Investees The following table displays the summary combined financial information of our equity method businesses. These amounts are shown on a 100-percent basis. Second Quarter % Year-to-Date % 1999 2000 Change 1999 2000 Change Revenues $1,250 $1,598 27.8 $2,459 $3,113 26.6 Operating income $ 112 $ 173 54.5 $ 141 $ 284 N/M Net income (loss) $ 41 $ 34 (17.1) $(608) $ 72 N/M Note M - Debt Issuance In February 2000 we issued $2 billion of long-term debt, consisting of $1 billion of Ten-year, 7 3/4% Notes and $1 billion of Thirty-year, 7 7/8% Debentures. We received total proceeds of $1,974, which were used to retire commercial paper. Note N - Contingencies Following the enactment of the Telecommunications Act of 1996, our telephone company subsidiary, BellSouth Telecommunications, Inc. (BST), and various competitive local exchange carriers entered into interconnection agreements providing for, among other things, the payment of reciprocal compensation for local calls initiated by the customers of one carrier that are completed on the network of the other carrier. Numerous competitive local carriers have claimed entitlement from BST for compensation associated with dial-up calls originating on BST's network and connecting with Internet service providers served by the competitive local carriers' networks. BST has maintained that dial-up calls to Internet service providers are not local calls for which terminating compensation is due under the interconnection agreements. In February 1999, the FCC issued a decision that such traffic does not terminate at the Internet service provider and, therefore, is interstate in nature, rather than local. The FCC stated, however, that it would not interfere with prior state commissions' decisions regarding this matter. The courts and state regulatory commissions in BST's operating territory that have considered the matter have, in most cases, ruled that BST is responsible for paying reciprocal compensation on these calls. BST has appealed the adverse decisions and continues to believe that it has a good legal basis for its position that such reciprocal compensation is not owed to the competitive local carriers. For those cases where BST believes it is probable that it has incurred a liability, it has recorded an estimate of the amount owed. At June 30, 2000, the exposure related to unrecorded amounts withheld from competitive local carriers was approximately $310, including accrued interest. In March 2000, the United States Court of Appeals for the D.C. Circuit vacated and remanded the FCC decision, concluding that the FCC had not adequately explained its finding that Internet service provider traffic was interstate. Based on statements made by the FCC since the court's decision, we do not believe that this most recent court decision adversely affects the ultimate outcome of pending state proceedings. Nonetheless, we have commenced discussions with several competitive local carriers concerning settlement of some claims, and agreements have been reached in certain circumstances. BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note N - Contingencies (continued) Other reciprocal compensation issues In a related matter, a competitive local carrier was claiming terminating compensation of approximately $165 for service arrangements that we did not believe involved "traffic" under our interconnection agreements. We filed a complaint with the state regulatory commission asking that agency to declare that we did not owe reciprocal compensation for these arrangements. In March 2000, the state commission ruled in our favor finding that compensation was not owed to the competitive local carrier. This matter is currently on appeal. Note O - Tracking Stock In March 2000, we filed with the SEC a preliminary proxy statement relating to a special shareholders' meeting to approve amendments to our charter. The amendments would permit us to issue our common stock in series, of which our Board of Directors would initially designate two: Latin America group stock, intended to reflect the separate performance of our Latin American businesses, and BLS group stock, intended to reflect the separate performance of all of our other businesses. We have also filed a registration statement for the offering of shares of Latin America group stock for sale to the public. Both filings remain subject to further review by the SEC. We plan to authorize a public offering of shares of Latin America group stock to finance our expansion in Latin America. At the time of a public offering, a number of shares of Latin America group stock will be reserved for the BLS group or for issuance to the holders of BLS group stock. We expect that we would distribute, as a dividend to the holders of BLS group stock, the reserved shares of Latin America group stock within six to 12 months following the public offering. Our plans to create, issue and distribute Latin America group stock are subject to a number of conditions, including completion of the SEC review process, shareholder approval, market conditions and other factors. Note P - Satellite Leases In May 2000, we signed a long-term satellite service agreement with GE Americom, a GE Capital company. As a result of this agreement, we are able to offer a full-suite of digital home entertainment and interactive information services to over 14 million households in our service territory. We plan to roll out service in our top markets within the next year and expand throughout the southeast by the first half of 2002. Note Q - Subsequent Events Through a purchase on the Bogota stock exchange in July 2000, Celumovil/BellSouth acquired 100 percent of the shares of Cocelco, a wireless communication services provider in the western region of Colombia. This acquisition was funded by a $384 capital contribution and a $30 shareholder loan from BellSouth, resulting in an increase in BellSouth's ownership interest in Celumovil to 66.0%. The transaction creates the first nationwide mobile cellular communications operator in Colombia. BELLSOUTH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions, Except Per Share Amounts) For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our latest annual report on Form 10-K and previous quarterly report on Form 10-Q. - ------------------------------------------------------------------------------- Consolidated Results of Operations - ------------------------------------------------------------------------------- Key financial and operating data for second quarter 2000 and 1999, and the respective year-to-date periods are as follows. All references to earnings per share are on a diluted basis:
----------------------- ------------ --- ------------------------- ------------ Second Quarter % Year-to-Date ----------- ----------- --- ------------ ------------ % 1999 2000 Change 1999 2000 Change ----------- ----------- ------------ --- ------------ ------------ ------------ Results of operations: - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Operating revenues $6,148 $6,752 9.8 $12,121 $13,239 9.2 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Operating expenses 4,834 4,805 (0.6) 9,200 9,669 5.1 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Operating income 1,314 1,947 48.2 2,921 3,570 22.2 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Interest expense 245 332 35.5 471 638 35.5 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Net earnings (losses) of equity affiliates 57 22 N/M* (209) 153 N/M - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Gain on sale of operations 16 -- N/M 16 -- N/M - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Other income, net 114 46 N/M 173 129 (25.4) - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Provision for income taxes 470 619 31.7 1,029 1,149 11.7 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Net income $ 786 $1,064 35.4 $ 1,401 $ 2,065 47.4 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ As Reported: - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Net income $786 $1,064 35.4 $ 1,401 $ 2,065 47.4 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Earnings per share $ .41 $ .56 36.6 $ .73 $ 1.09 49.3 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Normalized: - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Net income $973 $1,064 9.4 $ 1,868 $ 2,045 9.5 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Earnings per share $ .51 $ .56 9.8 $ .97 $ 1.08 11.3 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Cash flow data: - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Cash provided by operating activities 2,451 2,448 -- 4,093 4,798 17.2 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Cash used for investing activities (5,194) (2,239) N/M (6,652) (3,795) N/M - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Cash provided by (used for) financing activities 1,560 157 N/M 172 (770) N/M - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Other: - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Effective tax rate 37.4% 36.8% -60bps 42.3% 35.8% -650bps - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Average debt balances: - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Short-term debt $5,848 $5,607 (4.1) $5,025 $6,212 23.6 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Long-term debt $8,401 $11,029 31.3 $8,487 $10,469 23.4 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ Total average debt balance $14,249 $16,636 16.8 $13,512 $16,681 23.4 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ EBITDA(1) $2,789 $3,187 14.3 $ 5,509 $6,106 10.8 - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------ EBITDA margin(2) 45.4% 47.2% +180bps 45.5% 46.1% +60bps - -------------------------------------------- ----------- ----------- ------------ --- ------------ ------------ ------------
(1) EBITDA represents income before net interest expense, income taxes, depreciation and amortization, provision for asset impairment, severance accrual, net earnings (losses) of equity affiliates and other income, net. We present EBITDA because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance and because we believe that EBITDA is an additional meaningful measure of performance and liquidity. EBITDA does not represent cash flows for the period, nor is it an alternative to operating income (loss) as an indicator of operating performance. You should not consider it in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The items excluded from the calculation of EBITDA are significant components in understanding and assessing our financial performance. Our computation of EBITDA may not be comparable to the computation of similarly titled measures of other companies. EBITDA does not represent funds available for discretionary uses. (2) EBITDA margin is EBITDA divided by operating revenues. * Not Meaningful - ------------------------------------------------------------------------------- Overview of consolidated results of operations - ------------------------------------------------------------------------------- On a comparative basis, results reflect strong revenue growth in the core wireline business driven by digital and data services revenues and significant increases in our international and domestic wireless customer bases. Expense growth was driven by volume increases at our international and domestic wireless businesses and expenses for development and promotion of new business initiatives, including high-speed data and Internet service offerings. There were no normalizing items for the second quarter 2000. Normalized results for year-to-date 2000 exclude the impacts of: . Income related to the restructuring of our ownership interest in the German wireless operator, E-Plus, which increased net income by $68, or $0.04 per share. This gain is included in Net Earnings (Losses) of Equity Affiliates. See note E to our consolidated interim financial statements for further discussion of this matter; and . Expense recorded as a result of our previously announced plan to reduce our domestic general and administrative staff, which reduced net income by $48, or $0.03 per share. See note D to our consolidated interim financial statements for further discussion of this matter. Normalized results for second quarter 1999 exclude the impact of an asset impairment loss, which reduced net income by $187, or $0.10 per share. See note F to our consolidated interim financial statements for further discussion of this matter. In addition to the asset impairment during the second quarter, the year-to-date 1999 normalized results exclude the impact of the devaluation of the Brazilian Real. Our share of the foreign currency losses in our Brazilian wireless properties reduced net income by $280, or $0.15 per share. These losses are included in Net Earnings (Losses) of Equity Affiliates. See note G to our consolidated interim financial statements for further discussion of this matter. Operating Revenues Operating revenues increased $604 during second quarter 2000 and $1,118 for the year-to-date period. The increase reflects: . growth in our wireline communications operations spurred by demand for digital and data services and convenience features; . growth from higher access, airtime and equipment sales in our domestic wireless operations driven by a 16.0% expansion in the customer base from second quarter 1999 to second quarter 2000; . higher revenues from our international operations resulting from growth in the customer bases of our current operations, which customer bases grew 72.7% from second quarter 1999 to second quarter 2000; . the addition of new international directory publishing businesses since first quarter 1999, volume growth and price increases in our domestic advertising and publishing operations, and increases in revenues from electronic media offerings; and . growth in new lines of business. Growth in wireline revenues was offset by the effects of rate impacts related to access charge reform and competition in the long distance market. Growth in international revenues attributable to customer growth was partially offset by changes in foreign currency rates and decreases in average monthly revenue per customer driven by penetration into lower usage market segments and a growing percentage of customers selecting lower-volume prepaid services. The average monthly revenue per international wireless customer decreased 38.6% for the quarter and 37.3% for the year-to-date period. Operating Expenses Total operating expenses decreased $29 during second quarter 2000 and increased $469 during the year-to-date period. Operating expenses for year-to-date 2000 include a $78 severance accrual related to a previously announced plan to reduce our domestic general and administrative staff. Second quarter and year-to-date 1999 expenses included a $320 charge to write down network equipment in the domestic wireless operations. Excluding these items, total operating expenses increased $291 during second quarter and $711 year-to-date. Operational and support expenses increased $206 during the quarter and $521 year-to-date as a result of increased spending in the core wireline business for customer service and network support functions, volume-driven increases at our international and domestic wireless businesses and expenses for development and promotion of new business initiatives, including high-speed data and Internet service offerings. Operational and support expenses of our international operations were favorably impacted by the weakening of foreign currencies against the U.S. Dollar. Depreciation and amortization increased $85 for the quarter and $190 for the year-to-date period primarily as a result of additions of property, plant and equipment to support expansion of our wireline communications and international wireless networks. Interest expense Higher interest expense in 2000 is attributable to higher average debt balances resulting from borrowings associated with the financing of our investment in Qwest and increases in interest rates. Gain on sale of operations During second quarter 1999, we recognized a gain of $16 from the sale of a wireless property in Alabama. Net earnings (losses) of equity affiliates Earnings from our unconsolidated businesses decreased $35 in second quarter 2000 and increased $362 on a year-to-date comparative basis. The year-to-date 2000 period results include $68 in income related to the restructuring of our ownership interest in our German wireless operations. See note E to the consolidated interim financial statements for further discussion of this matter. The year-to-date 1999 period includes foreign exchange losses of $280 related to our Brazilian properties. See note G to the consolidated interim financial statements for further discussion of this matter. Excluding the impact of these items, year-to-date 2000 earnings increased $14 when compared to the same 1999 period. These results are addressed in the discussions for the Domestic wireless, International operations and All other segments. Other income, net Other income, net includes interest income, gains/losses on disposition of assets, foreign currency gains/losses and miscellaneous nonoperating income. The decrease of $68 for the quarter is attributable to lower minority interest income of $16 related to our less-than-100-percent owned subsidiaries and decreased other non-operational income, primarily gains from cellular property exchanges. The decrease for the quarter also included increased foreign currency losses of $16. The year-to-date decrease of $44 is attributable to a $15 decrease in interest income and decreased other non-operational income. Provision for income taxes The provision for income taxes increased $149 quarter-over-quarter and $120 on a year-to-date comparative basis. Our effective tax rate decreased from 37.4% in second quarter 1999 to 36.8% in second quarter 2000. The decrease in the effective tax rate is due primarily to the recognition of tax incentives and more favorable results from equity-method investees, which are recorded net of tax benefits or expense. For the year-to-date period, the effective tax rate was 35.8% compared to 42.3% in 1999. Year-to-date 2000 results were favorably impacted by additional income related to the restructuring of our ownership in our German wireless operations. Year-to-date 1999 results were unfavorably impacted by foreign currency losses recorded at our unconsolidated Brazilian businesses. Excluding these and other special items, our effective rate was 38.1% for the 1999 year-to-date period and 36.6% for the 2000 year-to-date period. The decrease in the effective rate for the year-to-date period is due to the recognition of tax incentives and more favorable results from equity-method investees. - ------------------------------------------------------------------------------- Results by Segment - ------------------------------------------------------------------------------- Our reportable segments reflect strategic business units that offer similar products and services and/or serve similar customers. We have four reportable operating segments: . Wireline communications; . Domestic wireless; . International operations; and . Advertising and publishing. We have included the operations of all other businesses falling below the reporting threshold in the "All other" segment. We evaluate the performance of each business unit based on net income, exclusive of charges for use of intellectual property rights and adjustments for special items that may arise. Special items are transactions or events that are included in reported consolidated results but are excluded from segment results due to their nonrecurring or nonoperational nature. The results of businesses in which we own noncontrolling interests are not included in our reported revenues and expenses but are included in the Net earnings (losses) of equity affiliates line item. Wireline Communications Wireline communications includes local exchange, network access and intraLATA long distance services provided by wireline transport to business and residential customers in a nine-state region located in the southeastern U.S.
- -------------------------------------------- ------------------------ ----------- ----- ------------------------ ----------- Second Quarter % Year-to-Date % ------------------------ ------------------------ 1999 2000 Change 1999 2000 Change - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Results of Operations Operating revenues: Local service $2,712 $2,862 5.5 $5,366 $5,683 5.9 Network access 1,187 1,245 4.9 2,378 2,508 5.5 Long distance 153 131 (14.4) 303 266 (12.2) Other wireline 255 357 40.0 535 642 20.0 Intersegment revenues 119 86 (27.7) 167 158 (5.4) - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Total operating revenues $4,426 $4,681 5.8 $8,749 $9,257 5.8 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Operating expenses $3,036 $3,092 1.8 $5,946 $6,116 2.9 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Operating income $1,390 $1,589 14.3 $2,803 $3,141 12.1 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Segment net income $ 781 $ 908 16.3 $1,582 $1,771 11.9 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Key Indicators - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Access line counts (000s): - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Switched access lines: - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Residential 16,782 17,189 2.4 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Business 7,316 7,198 (1.6) - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Other 272 260 (4.4) - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Total switched access lines 24,370 24,647 1.1 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Access line equivalents (1) 15,605 23,649 51.5 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Total equivalent access lines 39,975 48,296 20.8 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Access minutes of use (millions) 27,627 28,798 4.2 54,452 57,514 5.6 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Long distance messages (millions) 168 129 (23.2) 345 265 (23.2) - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Digital and data services revenues $ 685 $869 26.9 $1,306 $1,680 28.6 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ ----------- Convenience feature revenues $ 477 $532 11.5 $ 921 $1,047 13.7 - -------------------------------------------- ------------ ----------- ----------- ----- ----------- ------------ -----------
(1) Access line equivalents represent a conversion of non-switched data circuits to a switched access line basis and is presented for comparability purposes. Equivalents are calculated by converting high-speed/high-capacity data circuits to the equivalent of a switched access line based on transport capacity. While the revenues generated by access line equivalents have a directional relationship with these counts, growth rates cannot be compared on an equivalent basis. Operating Revenues Local service The increases in local service revenues of $150 for second quarter 2000 and $317 for the year-to-date period are attributable to growth in switched access lines and strong demand for digital and data services and convenience features. We ended the second quarter with over 48 million total equivalent access lines, an increase of 20.8% since June 30, 1999. Residential access lines rose 2.4% to 17,189,000, driven by economic growth in our nine-state region as well as demand for secondary residence lines which accounted for 42.2% of the growth in residential access lines. We added 172,000 secondary residence lines since June 30, 1999, extending the total to over 2.5 million lines and ending the current period with a penetration rate of 17.1%. Business access lines, including both switched access lines and data circuits, grew 34.6%, propelled by expanding demand for our digital and data services. Switched business access lines decreased 1.6% reflecting continued migration of new and existing business customers to high-capacity data lines. Revenues from optional convenience features such as Caller ID, Call Waiting, Call Return and voicemail service increased $55, or 11.5%, quarter-over-quarter and $126, or 13.7%, on a year-to-date comparative basis. These increases were driven by growth in convenience feature usage through our Complete Choice(R) Package, a one-price bundled offering of over 20 services. Increased penetration of extended local area calling plans also increased local service revenues by approximately $45 compared to second quarter 1999 and $94 compared to the first six months of 1999. Network access Network access revenues grew $58 in the second quarter and $130 for the first six months of 2000 when compared to the same 1999 periods, due largely to higher demand. Access minutes of use rose 4.2% to 28,798 million in second quarter 2000 from 27,627 million in second quarter 1999. For the year-to-date period, access minutes of use grew 5.6% to 57,514 million in 2000 from 54,452 million in 1999. Increases in switched access lines and promotional activities by long distance carriers continue to be the primary drivers of the increase in minutes of use. Year-to-date 2000 growth in minutes was also positively impacted by the additional day of activity resulting from the leap year. The growth rate in total minutes of use continues to be negatively impacted by the trend of business customers migrating from traditional switched circuits to higher capacity data line offerings which are fixed-charge based rather than minute-of-use based. Revenues from these dedicated circuit services grew approximately $78 quarter-over-quarter and $137 year-to-date on a comparative basis as Internet service providers and high-capacity users increased their use of our network. The growth rate in switched minutes of use has also been negatively impacted by competition from competitive local exchange carriers whose traffic completely bypasses our network. Volume-related growth was largely offset by net rate impacts that decreased revenues by $68 compared to second quarter 1999 and by $133 compared to the first six months of 1999. These rate reductions are primarily related to the FCC's access reform and productivity factor adjustments. The reductions were partially offset by recoveries of local number portability costs in both 2000 periods. Long distance The $22 decrease for the quarter and $37 decrease for the year-to-date period compared to the same 1999 periods are primarily attributable to a 23.2% decrease in long distance message volumes. For the year-to-date period, the decrease in revenues attributable to loss of message volumes was offset by a $30 revenue reduction in 1999 for a regulatory ruling related to compensation we receive from long distance carriers for interconnection to our public payphones. Also offsetting the decreases were increased revenues from the provision of digital and data services of $4 for the quarter and $11 for the year-to-date period. Competition and increased penetration of extended local area calling plans continue to have an adverse impact on the number of customers who use our long distance service and ultimately reduce our long distance message volumes and revenues. We believe that competition will continue to adversely impact our customer base, and ultimately our long distance message volumes and revenues until we are granted full long distance relief under the Telecommunications Act of 1996. Other wireline and intersegment revenues Other wireline and intersegment revenues increased 18.4%, from $374 in second quarter 1999 to $443 in second quarter 2000. For the year-to-date period, these revenues increased 14.0%, from $702 in 1999 to $800 in 2000. Higher revenues of $111 for the quarter and $178 for the year-to-date period resulting primarily from resale of paging products and services, sales of unbundled network elements, collocation of competing carriers' equipment in our facilities, demand for our Internet access offering, interconnection charges to wireless carriers and proceeds from universal service funds were offset by decreases in revenues from sales of customer premises equipment. At June 30, 2000 we had 788,000 subscribers to our BellSouth Internet Service (sm), an increase of 39.4% compared to the same 1999 period. Decreases in intersegment revenues of $33 for the quarter and $9 for the year-to-date period primarily represent one-time transactions with affiliates in the prior year. Operating Expenses Operational and support expenses Operational and support expenses increased $2, or 0.1%, for second quarter 2000 and increased $68, or 1.6%, for the first six months of 2000 when compared to the same 1999 periods. These increases were primarily attributable to reciprocal compensation, volume-related increases in interconnection expense and higher payments to FCC mandated universal access funds totaling $38 for the quarter and $163 for the year-to-date period. These increases were offset by $38 for the quarter and $61 for the year-to-date period for lower pension and benefit costs attributable to favorable pension plan investment returns. The increases were further offset by reductions of $18 for the quarter and $54 for the year-to-date period in contract service expense and volume-driven costs from sales of customer premises equipment and paging equipment. Also contributing to the increase were expenses related to new data initiatives, including high-speed Internet access and optical fiber-based broadband services, and promotional expenses related to expanding our Internet customer base. We have made high-speed Internet access available in 31 markets with an addressable market of approximately 9 million access lines, and we plan to increase the addressable market to 11.5 million access lines by the end of 2000. In January 2000, we began offering a self-install kit for high-speed Internet access in seven cities and are planning to expand these offerings to additional areas in the southeastern U.S. We are deploying optical fiber-based broadband products in nearly all newly built neighborhoods and are also retrofitting some 200,000 existing homes in Atlanta and Miami. Depreciation and amortization Depreciation and amortization expense increased $54, or 6.4%, for second quarter 2000 and $102, or 6.1%, for the first six months of 2000 when compared to the same 1999 periods. The increases are primarily attributable to amortization of capitalized internally developed software and depreciation resulting from higher levels of net property, plant and equipment. Domestic Wireless Domestic wireless is comprised of cellular and personal communications service (PCS) businesses principally within the southeastern U.S.
- -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Second Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- External revenues $ 796 $ 919 15.5 $1,540 $1,772 15.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues 3 4 33.3 7 8 14.3 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $ 799 $ 923 15.5 $1,547 $1,780 15.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $ 697 $ 730 4.7 $1,358 $1,495 10.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating income $ 102 $ 193 89.2 $ 189 $ 285 50.8 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $ 41 $ 48 17.1 $ 72 $ 80 11.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net income $ 71 $ 127 78.9 $ 131 $ 187 42.7 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Customers (a) 4,724 5,482 16.0 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Average monthly revenue per customer (a) $ 51 $ 52 2.0 $ 51 $ 52 2.0 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
(a) The amounts shown are for our consolidated properties and do not include customer data for our unconsolidated properties. Operating Revenues Total operating revenues grew $124, or 15.5%, quarter-over-quarter and $233, or 15.1%, on a year-to-date basis when compared to the same 1999 periods. This growth is attributable to higher airtime, access and equipment sales revenues driven by a 16.0% increase in the customer base. Adjusted for the sale of Honolulu Cellular in August 1999, the customer growth rate would have been 19.2%. Customer growth since 1999 has been driven by advertising, enhanced volume pricing strategies such as one-rate plans, bundled minutes at lower rates and prepaid calling plans and competitive incentive programs such as discounted wireless handsets. Average monthly usage by customers increased during second quarter 2000 and on a year-to-date basis, and, when combined with the increase in total customers, drove increases in total minutes of use. Average monthly revenue per customer remained relatively flat, due primarily to declines in per-minute rates in response to competition. The declines in average per-minute rates occurred as we expanded our product offering and further penetrated lower-usage market segments. We expect rates to continue decreasing as more customers opt for our one-rate plans and other bundled-minute packages. We expect competition to continue to intensify and pressure pricing in our markets. We believe this will further stimulate customer growth and demand and continue to increase usage as the overall market is expanded. Operating Expenses Operational and support expenses Operational and support expenses increased $44, or 8.1%, during second quarter 2000 and $128, or 12.0%, on a year-to-date basis when compared to the same 1999 periods. These increases are due to higher customer acquisition costs, higher network costs associated with network usage and costs related to new customer promotions. Customer acquisition costs increased as a result of increases in net customer additions of 91.8% for the quarter and 61.5% for the year-to-date period. Network usage and the related expense have increased as a result of customer and volume growth in established markets. Depreciation and amortization Depreciation and amortization decreased $11, or 7.1%, to $144 during second quarter 2000 and increased $9, or 3.1%, to $302 year-to-date compared to the same 1999 periods. Depreciation expense in 2000 has been favorably impacted by a lower asset base, resulting from our equipment exchange program initiated in June 1999. Net Earnings (Losses) of Equity Affiliates Compared to the same 1999 periods, second quarter 2000 and year-to-date 2000 net earnings (losses) of unconsolidated domestic wireless businesses remained relatively flat. Higher earnings at our business in Los Angeles were offset by decreases in earnings at other properties. International Operations International operations is comprised principally of our investments in cellular and PCS businesses in ten countries in Latin America as well as in Denmark, Germany, India and Israel. Consolidated operations include our businesses in Argentina, Chile, Ecuador, Nicaragua, Peru and Venezuela. All other businesses are accounted for under the equity method, and accordingly their results are reported as Net earnings (losses) of equity affiliates.
- -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Second Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- External revenues $ 565 $ 658 16.5 $1,126 $1,322 17.4 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues -- 10 N/M -- 21 N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $ 565 $ 668 18.2 $1,126 $1,343 19.3 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $ 495 $ 610 23.2 $1,005 $1,287 28.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating income $ 70 $ 58 (17.1) $ 121 $ 56 (53.7) - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $ 21 $ (29) N/M $ 8 $(12) N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net income (loss) $ 50 $ (18) N/M $ 30 $ (4) N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Customers (a) 3,233 5,584 72.7 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Average monthly revenue per customer (a) $ 57 $ 35 (38.6) $ 59 $ 37 (37.3) - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
(a) The amounts shown are for our consolidated properties and do not include customer data for our unconsolidated properties. Operating Revenues The increase of $103 quarter-over-quarter and $217 year-to-date on a comparative basis are primarily due to substantial growth in the customer bases of our consolidated operations, which collectively have increased 72.7% since June 30, 1999. Partially offsetting the impacts of customer growth is declining monthly revenue per customer that is driven by continued expansion into lower-usage customer segments through offerings such as prepaid cellular service and competitive pressures in certain countries. We now offer prepaid cellular products to all of the countries we serve in Latin America. Revenues from our operations in Nicaragua that were consolidated for the first time in first quarter 2000 contributed $12 to the increase in second quarter 2000 and $22 to the increase for 2000 year-to-date. A stronger U.S. Dollar against foreign currencies has had a negative impact on reported revenues. Absent changes in foreign currency exchange rates, reported revenues would have increased $184 for the quarter and $390 for the year-to-date period. Operating Expenses Operational and support expenses For the 2000 periods, these expenses increased $95 compared to second quarter 1999 and $241 compared to the first six months of 1999. These increases are primarily the result of operational and customer acquisition costs associated with growth in customer levels and expanded operations. Since June 30, 1999, our existing operations have added almost 2.2 million customers in Argentina, Chile and Venezuela. We have also added 200,000 customers through the acquisition and development of businesses in Ecuador, Nicaragua and Peru. Operational and support expenses denominated in local currencies were favorably impacted by the weakening of foreign currencies against the U.S. Dollar. Absent changes in foreign currency exchange rates, reported operational and support expenses would have increased $142 for the quarter and $353 for the year-to-date period. Depreciation and amortization Depreciation expense increased $15 quarter-over-quarter and $34 on a year-to-date comparative basis primarily due to higher gross depreciable plant resulting from the continued investment in our wireless network infrastructure. Amortization expense increased $5 quarter-over-quarter and $7 on a year-to-date comparative basis as a result of growth in intangibles related to our purchase of additional ownership interests in several Latin American operations. Net Earnings (Losses) of Equity Affiliates Net earnings (losses) from our international equity affiliates decreased $50 to $(29) in second quarter 2000 and $20 to $(12) during the first six months of 2000. The decline in our unconsolidated international businesses is due to lower results from our investments in Brazil and Germany. Both of these businesses experienced significant increases in operational and customer acquisition costs resulting from substantial growth in their customer bases. In addition, the impact of foreign currency fluctuations in Brazil for second quarter 2000 was a loss of $29 and year-to-date 2000 was a loss of $19. Advertising and Publishing Our advertising and publishing segment is comprised of companies in the U.S. and Latin America that publish, print, sell advertising in and perform related services concerning alphabetical and classified telephone directories and electronic product offerings.
- -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Second Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- External revenues $ 407 $ 471 15.7 $ 750 $ 835 11.3 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues 3 6 N/M 6 11 83.3 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $ 410 $ 477 16.3 $ 756 $ 846 11.9 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $ 248 $ 278 12.1 $ 454 $ 502 10.6 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating income $ 162 $ 199 22.8 $ 302 $ 344 13.9 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $(4) $ 5 N/M $(5) $ 4 N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net income $ 98 $ 125 27.6 $ 182 $ 215 18.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating Results External revenues increased $64 for second quarter 2000 and $85 for year-to-date 2000 when compared to the same 1999 periods. These increases are principally a result of revenues from our new directory publishing operations in Peru and Brazil totaling $31 for second quarter and $45 for the year-to-date period. The growth is also attributable to volume growth and price increases in the domestic operations, offset by the effects of shifts in directory production schedules. Adjusted for book shifts, external revenues for this segment would have increased by approximately 15.9% for the quarter and 13.4% for the year-to-date period. Also contributing are increases of $10 for the quarter and $20 for the year-to-date period in the revenues from our electronic media offerings. Operational and support expenses increased $28 for second quarter 2000 and $42 for year-to-date 2000 when compared to the same 1999 periods. These increases are primarily due to our new operations in Peru and Brazil totaling $33 for the quarter and $56 for the year-to-date period. Also contributing to the increases are costs of $5 for the quarter and $11 for the year-to-date period associated with growth in electronic media offerings. These increases were offset by lower costs of $10 for the quarter and $25 for the year-to-date period in the domestic directory businesses due to the shift in directory production schedules. Depreciation and amortization increased by $2 for second quarter 2000 and $6 on a year-to-date comparative basis due to the new international publishing operations. Net earnings (losses) of equity affiliates includes the results of our investment in a Brazilian directory publisher. All other
- -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Second Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- External revenues $ 73 $ 109 49.3 $123 $211 71.5 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues 92 106 15.2 162 194 19.8 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $ 165 $ 215 30.3 $285 $405 42.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $ 233 $ 279 19.7 $437 $534 22.2 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating loss $(68) $(64) (5.9) $(152) $(129) (15.1) - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $(1) $(1) -- $ -- $ (1) N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net loss $ (59) $(53) (10.2) $(116) $ (99) (14.7) - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- -----------
Operating Results External revenues increased $36 for second quarter 2000 and $88 on a year-to-date comparative basis, primarily driven by growth in revenues of $19 for the quarter and $44 for the year from the resale of long distance services in markets outside of our wireline region, $8 for the quarter and $18 for the year from interactive paging services and $7 for the quarter and $15 for the year from wireless television offerings. Operating expenses reflect increased spending associated with new product and/or market introductions in all of these businesses. Higher headcount associated with customer support and installation functions also contributed to the increase in operational and support expenses of $32 for the quarter and $73 for the year-to-date period. Depreciation and amortization has increased $14 on a quarter-over-quarter basis and $24 on a year-to-date basis reflecting our continuing investment of resources associated with the growth of these businesses. - ------------------------------------------------------------------------------- Financial Condition - ------------------------------------------------------------------------------- Cash flows from operations are our primary source of funding for capital requirements of existing operations, debt service and dividends. We also have ready access to capital markets in the event additional funding is necessary. While current liabilities exceed current assets, our sources of funds -- primarily from operations and, to the extent necessary, from readily available external financing arrangements -- are sufficient to meet all current obligations on a timely basis. We believe that these sources of funds will be sufficient to meet the needs of our business for the foreseeable future. Net cash provided by (used for): - ------------------------------------------------------------------------------- 1999 2000 Change ------------------------------------------------------ Operating activities $ 4,093 $4,798 $ 705 17.2 % Investing activities $(6,652) $(3,795) $2,857 N/M Financing activities $ 172 $(770) $ (942) N/M - ------------------------------------------------------------------------------- Net cash provided by operating activities The increase in cash from operations between 1999 and 2000 primarily reflects better working capital management and higher net income from operations due to strong revenue growth. Operating cash flows for 2000 also include $65 in cash proceeds associated with the sublease of wireless communications towers to Crown Castle International. Net cash used in investing activities During the first half of 2000, we invested $3.3 billion for capital expenditures to support our wireline and wireless networks, to promote the introduction of new products and services and increase operating efficiency and productivity. Significant investments are also being made to support deployment of high-speed Internet access and optical fiber-based broadband products. Included in these expenditures for the first half of 2000 are approximately $360 in costs related to the purchase and development of internal-use software. The year-to-date 2000 amount paid for investments and advances of $582 primarily consists of $240 paid to acquire our investment in Tele Centro Oeste and $299 paid for the acquisition of Celumovil. Net cash used in financing activities During first quarter 2000, we issued $2 billion of long-term debt. The proceeds of $1,974 from this issuance were used to retire commercial paper borrowings. Our debt to total capitalization ratio was 50.6% at June 30, 2000 compared to 53.1% at December 31, 1999. The decrease is a function of increases in shareholders' equity, driven by income from operations and net unrealized gains on securities. At August 1, 2000, we had shelf registration statements on file with the SEC under which $2.7 billion of debt securities could be publicly offered. We repurchase our common stock from time to time when we consider it attractive to do so based on stock prices. Reacquired shares are held as treasury shares pending reissuance in employee benefit plans, dividend reinvestment plans and for other purposes. Market Risk For a complete discussion of our market risks, you should refer to the caption "Market Risk" in our 1999 Annual Report on Form 10-K. Our primary exposure to market risks relates to unfavorable movements in interest rates and foreign currency exchange rates. We do not anticipate any significant changes in our objectives and strategies with respect to managing such exposures. - ------------------------------------------------------------------------------- Operating Environment and Trends of the Business - ------------------------------------------------------------------------------- Regulatory Developments Our future operating and financial results will be substantially influenced by developments in a number of federal and state regulatory proceedings. Adverse results in these proceedings could materially affect our revenues, expenses and ability to compete effectively against other telecommunications carriers. Our intrastate prices are regulated under price regulation plans provided by statute or approved by state public service commissions. Some plans are subject to periodic review and may require renewal. These commissions generally may require price reductions and other concessions from us as conditions to approving these plans. In North Carolina, we reached a joint stipulation with the North Carolina Public Staff and AT&T regarding revisions to the price regulation plan, switched access reductions, ADSL deployment and service quality issues. In July 2000, the North Carolina Utilities Commission approved much of the Joint Stipulation, including a one year extension of our price regulation plan, some reductions in intrastate switched access charges, enhanced ADSL deployment and voluntary self-enforcing penalties associated with service quality problems. In July 2000, the Florida Public Service Commission (FPSC) commenced a proceeding to determine whether we violated certain FPSC rules regarding service quality. Hearings are currently scheduled for November 2000. Also in July 2000, the FPSC determined that our change in 1999 from a late charge based on a percentage of the amounts overdue to a flat rate fee plus an interest charge violated the Florida price regulation statute and voted that certain monies should be refunded. We are considering whether to protest the decision. On the federal level, the Federal Communications Commission (FCC) has considerable authority to establish pricing, interconnection and other policies that had once been considered within the exclusive jurisdiction of the state public service commissions. We expect the FCC to accelerate the growth of local service competition by aggressively utilizing such power. We have been testing our operations support systems in Georgia and Florida and expect to file our Georgia long distance application with the FCC by the end of 2000. We do not know if the FCC will require further changes in our interconnection and network element offerings and operations support systems before it will approve our petition. These changes could result in significant additional expenses. During December 1999, the FCC approved Bell Atlantic's request to provide full long distance wireline service in New York state, making it the first Bell System-affiliated company to obtain relief under the Telecommunications Act of 1996 in any state. In June 2000, the FCC approved SBC's long distance application for Texas, making it the second Bell System-affiliated company to obtain authority to offer long distance services. In July 2000, the U.S. Court of Appeals for the Eighth Circuit vacated the FCC methodology for pricing unbundled network elements and the methodology for determining wholesale rates for retail services. The order also affirmed the previous decision of the Eighth Circuit that vacated FCC rules that required incumbent carriers to combine previously uncombined elements for requesting carriers. With respect to federal access charges, FCC policies strongly favor access reform, whereby the historical subsidy for local service that is contained in network access charges paid by long distance carriers is eliminated. During first quarter 2000, a coalition of local and long distance providers, including BellSouth, Bell Atlantic, GTE, SBC, AT&T and Sprint submitted a proposal designed to result in lower consumer prices for long distance service by reforming the way in which access costs are recovered. The proposal was a comprehensive package that would adjust the FCC's price cap, access charge and universal service rules for those price cap local exchange carriers electing to adopt the proposal. After receiving public comment on this proposal, the FCC approved most of the proposal in an order in May 2000. Although one effect of the FCC's order will be to reduce access charges paid to BellSouth by other carriers, we will be able to increase subscriber line charges paid by residential and single-line business customers each year through 2003. Any increases which we request after July 2001 are subject to a cost review. During June 2000, we filed tariff modifications implementing the proposal. These modifications will result in interstate price decreases of approximately $270 on an annual basis. We are involved in numerous legal proceedings associated with state and federal regulatory matters, the disposition of which could materially impact our operating results and prospects. See note N to our consolidated interim financial statements. International Operations Our reporting currency is the U.S. Dollar. However, most of our revenues are generated in the currencies of the countries in which we operate. In addition, many of our operations and equity investees hold U.S. Dollar-denominated short- and long-term debt. The currencies of many Latin American countries have experienced substantial volatility and depreciation in the past. Declines in the value of the local currencies in which we are paid relative to the U.S. Dollar will cause revenues in U.S. Dollar terms to decrease and dollar-denominated liabilities to increase. Where we consider it to be economically feasible, we attempt to limit our exposure to exchange rate fluctuations by using foreign currency forward exchange contracts or similar instruments as a vehicle for hedging; however, a substantial amount of our exposures are unhedged. The impact of a devaluation or depreciating currency on an entity depends on the residual effect on the local economy and the ability of an entity to raise prices and/or reduce expenses. Our ability to raise prices is limited in many instances by government regulation of tariff rates. Due to our constantly changing currency exposure and the potential substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations on our business. Economic, social and political conditions in Latin America are, in some countries, unfavorable and volatile, which may impair our operations. These conditions could make it difficult for us to continue development of our business, generate revenues or achieve or sustain profitability. Historically, recessions and volatility have been primarily caused by: mismanagement of monetary, exchange rate and/or fiscal policies; currency devaluations; significant governmental influence over many aspects of local economies; political and economic instability; unexpected changes in regulatory requirements; social unrest or violence; slow or negative economic growth; imposition of trade barriers; and wage and price controls. Most or all of these factors have occurred at various times in the last two decades in our core Latin American markets. We have no control over these matters. Economic conditions in Latin America are generally less attractive than those in the U.S., and poor social, political and economic conditions may inhibit use of our services which may adversely impact our business. New Accounting Pronouncements Revenue Recognition In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 requires that revenues and costs of revenues derived from services rendered at the beginning of a contract or business relationship be deferred and recognized over the life of the related contract or relationship. In June 2000, the SEC deferred the required adoption date of the guidelines in SAB 101 to the fourth quarter of 2000. We do not expect the adoption of these guidelines to have a material impact on our results of operations, financial position or cash flows. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. This means that the standard must be adopted by us no later than January 1, 2001. We do not expect that the adoption of this standard will have a material impact on results of operations, financial position or cash flows. Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK See the caption labeled "Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------------------------------------------------------------------------------- Cautionary Language Concerning Forward-Looking Statements - ------------------------------------------------------------------------------- In addition to historical information, management's discussion and analysis contains forward-looking statements regarding events and financial trends that may affect our future operating results, financial position and cash flows. These statements are based on our assumptions and estimates and are subject to risks and uncertainties. For these statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Factors that could affect future operating results, financial position and cash flows and could cause actual results to differ materially from those expressed in the forward-looking statements are: . a change in economic conditions in domestic or international markets where we operate or have material investments, which would affect demand for our services; . the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; . protracted delay in our entry into the interLATA long distance market; . higher than anticipated start-up costs or significant up-front investments associated with new business initiatives; . unanticipated higher capital spending from, or delays in, the deployment of new technologies; and . unsatisfactory results in regulatory actions including terms of interconnection and unbundled network elements and resale rates. This list of cautionary statements is not exhaustive. These and other developments could cause our actual results to differ materially from those forecast or implied in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which are current only as of the date of this filing. We have no obligation, and we do not intend, to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing. - ------------------------------------------------------------------------------- PART II -- OTHER INFORMATION - ------------------------------------------------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders We have published the information called for by this item in our "Second Quarter 2000 Report to Shareholders" which was distributed to shareholders on or about May 1, 2000. Shareholders can request a copy of this report by calling Shareholder Services at 1-800-631-6001. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number 4a No instrument which defines the rights of holders of our long- and intermediate-term debt is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to furnish a copy of any such instrument to the SEC upon request. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of June 30, 2000. (b) Reports on Form 8-K: Date of Event Subject April 20, 2000 BellSouth 1Q00 Earnings Release April 10, 2000 Announcement of wireless joint venture with SBC Communications. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BELLSOUTH CORPORATION By /s/ Ronald M. Dykes RONALD M. DYKES Chief Financial Officer (Principal Accounting Officer) August 14, 2000 EXHIBIT INDEX Exhibit Number 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of June 30, 2000. EX-11 2 0002.txt COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 BellSouth Corporation Computation of Earnings Per Share For the Three Month For the Six Month Period Ended Period Ended June 30, June 30, 1999 2000 1999 2000 Basic Earnings Per Common Share: Net Income $ 786 $1,064 $1,401 $2,065 Weighted average shares Outstanding 1,891 1,882 1,912 1,881 Earnings Per Common Share $ .42 $ .57 $ .73 $1.10 Diluted Earnings Per Common Share: Net Income $ 786 $1,064 $1,401 $2,065 Weighted average shares Outstanding 1,891 1,882 1,912 1,881 Incremental shares from assumed exercise of stock options and payment of performance share awards 18 18 18 18 Total Shares 1,909 1,900 1,930 1,899 Earnings Per Common Share $ .41 $.56 $.73 $ 1.09 EX-12 3 0003.txt COMPUTATION OF RATIOS EXHIBIT 12 BellSouth Corporation Computation Of Earnings To Fixed Charges (Dollars In Millions) For the Six Months Ended June 30, 2000 1. Earnings (a) Income from continuing operations before deductions for taxes and interest $3,852 (b) Portion of rental expense representative of interest factor 54 (c) Equity in losses from less-than-50%-owned investments (accounted for under the equity method of accounting) 59 (d) Excess of earnings over distributions of less- than-50%-owned investments (accounted for under the equity method of accounting) (98) TOTAL $3,867 2. Fixed Charges (a) Interest $ 655 (b) Portion of rental expense representative of interest factor 54 TOTAL $709 Ratio (1 divided by 2) 5.45 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-2000 JUN-30-2000 1,520 27 5,306 316 468 7,595 63,269 37,972 46,088 12,418 10,869 0 0 2,020 14,482 46,088 360 13,239 410 6,755 2,914 179 638 3,214 1,149 2,065 0 0 0 2,065 1.10 1.09
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