-----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, MNGToAgouSTZDs0MaldjZjs7KaePExguHp94CfCeVfWkSv7r6JqCc38Qt3Rlzzim bWipNY1lAz7SjuxNhxt+4A== 0000732713-03-000197.txt : 20031022 0000732713-03-000197.hdr.sgml : 20031022 20031022085517 ACCESSION NUMBER: 0000732713-03-000197 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20031022 ITEM INFORMATION: FILED AS OF DATE: 20031022 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLSOUTH CORP CENTRAL INDEX KEY: 0000732713 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 581533433 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08607 FILM NUMBER: 03950856 BUSINESS ADDRESS: STREET 1: 1155 PEACHTREE ST NE STREET 2: ROOM 15G03 CITY: ATLANTA STATE: GA ZIP: 30309-3610 BUSINESS PHONE: 4042492000 MAIL ADDRESS: STREET 1: 1155 PEACHTREE STREET NE CITY: ATLANTA STATE: GA ZIP: 30309-3610 8-K 1 form8kq303.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): October 22, 2003 BELLSOUTH CORPORATION (Exact name of registrant as specified in its charter) Georgia 1-8607 58-1533433 (State or other (Commission (IRS Employer jurisdiction of File Number) Identification incorporation) No.) Room 15G03, 1155 Peachtree Street, N. E., Atlanta, Georgia 30309-3610 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (404) 249-2000 Item 12. Results of Operations and Financial Condition The information in this report, including the Exhibits described below, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing. Attached and incorporated herein by reference are: (i) Exhibit 99-a, which is a copy of a press release of BellSouth Corporation dated October 22, 2003, reporting the company's financial results for the quarter ended September 30, 2003 and (ii) Exhibit 99-b, which is a document entitled "Investor News" that contains more detailed information about the recently completed quarter. Non-GAAP Financial Information To provide clarity, internally and externally, about the most tangible and relevant measures of our financial performance, we supplement the reporting of BellSouth's consolidated financial information under GAAP with certain non-GAAP financial measures, including normalized operating results, operating free cash flow and operating income before deprecation and amortization margin. This information should not be considered in isolation or as a substitute for the consolidated (GAAP) financial information. We believe the presentation of these measures provides useful information to investors for the following specific reasons: Normalized Results. The presentation of normalized results enables investors to focus on period-over-period operating performance, without the impact of significant non-operational or non-recurring items. Additionally, normalized results include BellSouth's 40 percent share of Cingular Wireless' revenues and expenses. Cingular's results are recognized on the equity method for GAAP purposes. Accordingly, Cingular's results are not included in the revenue, expense or operating income line items in the GAAP presentation. The financial results of Cingular, a joint venture representing our second largest operating segment, are a critical element of BellSouth's overall financial performance. The inclusion of Cingular's revenues and expenses on a proportional basis enables investors to evaluate BellSouth's overall financial performance, including all business segments. Normalized results are provided to enhance the user's overall understanding of the Company's current financial performance and the Company's prospects for the future. We believe normalized results are an important measure of our recurring operations because it excludes items that may not be indicative of our core operating results, includes items that are core to our operating results not allowed by GAAP (e.g. Cingular's results) and provides a better baseline for modeling future earnings expectations. We believe the inclusion of normalized results provides consistency and comparability in our financial reporting and is provided in order to enable investors to more thoroughly evaluate our current performance compared to past performance. Finally, normalized measures are among the primary indicators management uses in planning and operating the business. By providing this information to investors supplementally, investors will be able to evaluate the results of the business through the eyes of management and assess the fundamental performance of the business. Normalized results may exclude (a) events, such as changes in accounting method, that are generally non-recurring in nature and (b) material one-time gains or losses, both of which can distort reported operating results. A complete list of normalizing items, as well as a full reconciliation of normalized results to GAAP reporting, are included in the quarterly financial statements that are attached hereto and are available on the company's Web site, www.bellsouth.com/investor. Free Cash Flow. We believe free cash flow provides investors a meaningful measure of liquidity of the business. It indicates the level of cash the business is generating from normal operations less capital reinvestment that is required to continue the operations. Investors can utilize this measure to make assessments of the viability of the company and as a base line for valuation of the company. Management monitors operating free cash flow and makes operating decisions based on its level. We define operating free cash flow as operating cash flow less capital expenditures, both of which are taken directly from the statement of cash flows. Operating Income Before Depreciation and Amortization and Related Margin. Facility-based telecommunications companies require significant recurring capital investments that generate large non-cash expense, making operating income a less meaningful measure of current period business performance and profitability. We use operating income before depreciation and amortization, and the related margin, as a measure of underlying operating performance of the business and to make meaningful comparisons of different operating periods. In addition to historical information, this document contains forward-looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in domestic or international markets where we operate or have material investments which would affect demand for our services; (ii) currency devaluations and continued economic weakness in certain international markets in which we operate or have material investments; (iii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iv) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (v) unfavorable regulatory actions and (vi) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and BellSouth assumes no duty to update this information. 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/ W. Patrick Shannon W. Patrick Shannon Vice President - Finance October 22, 2003 EX-99 3 form8kq303ex99a.txt EXHIBIT 99-A Exhibit 99-a For Immediate Release October 22, 2003 For More Information Contact: Jeff Battcher, Media Relations at 404-249-2793 BellSouth Investor Relations at 800-241-3419 BellSouth Reports Third Quarter EPS of 51 Cents o High-speed Internet customers reach 1.3 million o Communications services bundles exceed 2.6 million o Cingular Wireless adds 745,000 customers in quarter o Latin America adds 421,000 customers ATLANTA - BellSouth Corporation (NYSE: BLS) reported earnings per share (EPS) of 51 cents in the third quarter of 2003, including special charges totaling 2 cents. This compared to reported EPS of 34 cents in the third quarter of 2002, which included special charges totaling 17 cents (see below). Consolidated revenues increased 5.4 percent to $5.7 billion from $5.4 billion in the third quarter of 2002. Consolidated operating expenses were $4.2 billion compared to $4.4 billion in the same quarter of 2002. Net income was $936 million compared to $640 million in the same quarter a year ago. Operating free cash flow (defined as cash flow from operations less capital expenditures) was $1.7 billion. Capital expenditures in the third quarter of 2003 were $764 million for a total of $2.1 billion year-to-date, a reduction of 25.8 percent compared to $2.9 billion in the first nine months of 2002. Total debt at September 30, 2003 was $15.0 billion, a reduction of $2.4 billion, or 13.8 percent, since the first of the year. In accordance with Generally Accepted Accounting Principles (GAAP), BellSouth's reported consolidated revenues and consolidated operating expenses do not include the company's 40 percent share of Cingular Wireless. Normalized results include BellSouth's 40 percent proportionate share of Cingular's revenues and expenses. Normalized EPS of 53 cents in the third quarter of 2003 increased 3.9 percent compared to 51 cents in the same quarter of 2002. Normalized total operating revenues were $7.3 billion, an increase of 2.7 percent versus the third quarter of 2002. Normalized total operating expenses of $5.5 billion increased 2.6 percent. Normalized net income was $980 million, compared to $958 million in the same quarter a year ago. Communications Group BellSouth Long Distance and DSL high-speed Internet service drove Communications Group revenue growth in the third quarter of 2003, as customers increasingly chose BellSouth's integrated communications packages. Revenues increased 1.1 percent to $4.7 billion compared to $4.6 billion in the third quarter of 2002. Operating margin increased to 26.6 percent from 25.3 percent in the second quarter of 2003. Throughout the third quarter, packages fueled increased retention and reacquisition of residential and small business customers. BellSouth AnswersSM packages, which combine local, long distance, Internet and wireless services all on one bill, increased to more than 2.6 million. BellSouth(R) Unlimited AnswersSM contributed to the significant growth in package customers. Unlimited Answers allows customers to call anywhere in the United States anytime for a flat monthly fee. BellSouth added 654,000 net long distance customers in the third quarter. The company now serves 3.4 million long distance customers, including approximately 24 percent of its residence and 34 percent of its mass-market small business accounts. Driven by DSL, data revenues of $1.1 billion in the third quarter of 2003 grew 5.5 percent compared to the same quarter of 2002. BellSouth added 111,000 net DSL customers during the quarter, for a total of 1.3 million at September 30, 2003. The July introduction of BellSouth(R) FastAccess(R) DSL Lite helped generate new retail broadband customers. FastAccess Lite allows customers to choose between two tiers of broadband service at a connection speed and price that match their Internet service needs. Total access lines of 23.9 million at September 30 declined 4.0 percent compared to a year earlier, impacted by the economy, competition and technology substitution. Residence and business access lines served by BellSouth competitors under UNE-P (unbundled network elements-platform) increased by 188,000 in the third quarter, the smallest increase since the fourth quarter of 2001. Domestic Wireless / Cingular Cingular Wireless added 745,000 net total cellular and PCS customers in the third quarter, exceeding total net customer additions for the first half of 2003. It was the highest number of new customers in 10 quarters. Cingular's focus on calling plans tailored to local markets and co-branding and bundling programs with its parent companies were significant contributors to growth at Cingular, which ended the quarter with 23.4 million total customers. BellSouth's share of Cingular's revenues was $1.6 billion, a gain of 4.7 percent compared to the same quarter a year ago. BellSouth's share of Cingular operating income was $195 million compared to $246 million in the third quarter last year. Increased operating costs were impacted by significantly higher gross customer additions and by customer retention programs in anticipation of Wireless Local Number Portability in November. In addition, depreciation costs were higher, associated with the technology upgrade of Cingular's nationwide network to improve services and coverage. The company's GSM/GPRS network now covers 92 percent of its potential customers, ahead of its target for year-end 2003. Cingular significantly improved its spectrum position during the third quarter with acquisitions and swaps, including an agreement to purchase licenses from NextWave in 34 markets covering approximately 83 million potential customers. Cingular also will expand its coverage under agreements announced with Dobson Communications, Sunshine PCS Corporation and US Unwired Inc. Latin America Group Continuing the trend of organic growth, Latin America Group wireless customers increased 421,000 during the third quarter on a consolidated basis. Year-over-year, customers increased 1.4 million, or 18.2 percent. Consolidated customers served by BellSouth and its partners at the end of the quarter were 9.4 million. Consolidated Latin America revenues increased 18.8 percent to $588 million in the third quarter of 2003 compared to the same three months of the previous year. Strong customer growth in Colombia, Ecuador and Chile, as well as more stable local currencies, drove the growth in segment revenues. Net income was $48 million in the third quarter and $99 million year-to-date. Latin America Group generated positive operating free cash flow year-to-date in 2003. Advertising & Publishing Advertising & Publishing revenues were $505 million in the third quarter of 2003, a decrease of 3.1 percent compared to the same quarter a year ago, resulting in part from the soft economy and competition. Operating income of $238 million was 12.8 percent higher than the third quarter of 2002, primarily the result of improvement in uncollectibles expense. Special Items In the third quarter of 2003, the difference between reported (GAAP) EPS of 51 cents and normalized EPS of 53 cents is the result of two special items: Foreign currency transaction losses 1 cent Charge Asset Impairment 2 cents Charge Effect of Rounding 1 cent Total of special items 2 cents Charge Foreign currency transaction losses - Primarily associated with the remeasurement of U.S. dollar-denominated liabilities in Latin America. Asset Impairment - Write-off of capitalized software. In the third quarter of 2002, special charges totaled 17 cents per share, after rounding, for: workforce reduction (6 cents); service curtailments/asset impairments (5 cents); refund of certain late payment fees to customers in Florida (4 cents); foreign currency transaction losses (1 cent); early extinguishment of debt (1 cent); and Advertising & Publishing accounting change (1 cent). About BellSouth Corporation BellSouth Corporation is a Fortune 100 communications services company headquartered in Atlanta, Georgia. BellSouth serves more than 45 million local, long distance, Internet and wireless customers in the United States and 14 other countries. Consistently recognized for customer satisfaction, BellSouth provides a full array of broadband data solutions to large, medium and small businesses. In the residential market, BellSouth offers DSL high-speed Internet access, advanced voice features and other services. BellSouth also offers long distance service throughout its markets, serving both business and residential customers. The company's BellSouth AnswersSM package combines local and long distance service with an array of calling features; wireless data, voice and e-mail services; and high-speed DSL or dial-up Internet service. BellSouth also provides online and directory advertising services through BellSouth(R) RealPages.comSM and The Real Yellow Pages(R). BellSouth owns 40 percent of Cingular Wireless, the nation's second largest wireless company, which provides innovative data and voice services. Further information about BellSouth's third quarter earnings can be accessed at www.bellsouth.com/investor. The press release, financial statements and BLS Investor News summarizing highlights of the quarter are available on the BellSouth Investor Relations Web site starting today at 8 a.m. Eastern Time. BellSouth will host a conference call with investors today at 10 a.m. Eastern Time. Participating will be BellSouth CFO Ron Dykes and Investor Relations Vice President Nancy Davis. Dial-in information for the conference call is: Domestic: 888-370-1863 International: 706-634-1735 A replay of the call will be available beginning at approximately 1 p.m. Eastern Time today, through October 29, 2003. The replay can be accessed by dialing: Domestic: 800-642-1687 - Reservation number: 2135954 International: 706-645-9291 - Reservation number: 2135954 In addition to historical information, this document may contain forward-looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in domestic or international markets where we operate or have material investments which would affect demand for our services; (ii) currency devaluations and continued economic weakness in certain international markets in which we operate or have material investments; (iii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iv) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (v) unfavorable regulatory actions and (vi) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and BellSouth assumes no duty to update this information. This document may also contain certain non-GAAP financial measures. The most directly comparable GAAP financial measures, and a full reconciliation of non-GAAP to GAAP financial information, are attached hereto and provided on the Company's investor relations Web site, www.bellsouth.com/investor. BellSouth Corporation Consolidated Statements of Income - Reported Basis (unaudited) (amounts in millions, except per share data) Note to Readers: See Normalization Earnings Summary and Reconciliation to GAAP results on pages 3 and 4 for a summary of unusual items included in Reported Basis results. 3Q03 3Q02 Growth 2Q03 Growth Operating Revenues Communications group $4,626 $4,469 3.5% $4,545 1.8% Latin America 587 494 18.8% 563 4.3% Advertising and publishing 501 458 9.4% 520 -3.7% All other 14 13 7.7% 14 0.0% Total Operating Revenues 5,728 5,434 5.4% 5,642 1.5% Operating Expenses Cost of services and products 2,038 1,879 8.5% 2,008 1.5% Selling, general & administrative expenses 1,032 1,024 0.8% 1,133 -8.9% Depreciation and amortization 1,052 1,161 -9.4% 1,046 0.6% Provision for restructuring and asset impairments 52 328 -84.1% 20 160.0% Total Operating Expenses 4,174 4,392 -5.0% 4,207 -0.8% Operating Income 1,554 1,042 49.1% 1,435 8.3% Interest Expense 260 291 -10.7% 249 4.4% Other Income (Expense), net 148 211 -29.9% 287 -48.4% Income Before Taxes and Accounting Change 1,442 962 49.9% 1,473 -2.1% Provision for Income Taxes 506 322 57.1% 522 -3.1% Income Before Cumulative Effect Change 936 640 46.3% 951 -1.6% Cumulative Effect of Changes in Accounting Principle - - - Net Income $936 $640 46.3% $951 -1.6% Diluted: Weighted Average Common Shares Outstanding 1,851 1,871 -1.1% 1,851 0.0% Earnings Per Share $0.51 $0.34 50.0% $0.51 0.0% * - Not meaningful. Selected Financial and Operating Data Operating income $1,554 $1,042 49.1% $1,435 8.3% Operating margin 27.1% 19.2% 790 bps 25.4% 170 bps Declared dividends per share $0.23 $0.20 15.0% $0.23 0.0% Capital expenditures $764 $835 -8.5% $729 4.8% Common shares outstanding 1,848 1,862 -0.8% 1,847 0.1% Book value per share $10.65 $9.47 12.5% $10.32 3.2% Debt ratio 43.2% 50.0% -680 bps 44.6% -140 bps Total employees 76,009 80,882 -6.0% 75,779 0.3% BellSouth Corporation Consolidated Statements of Income - Reported Basis (unaudited) (amounts in millions, except per share data) Note to Readers: See Normalization Earnings Summary and Reconciliation to GAAP results on pages 3 and 4 for a summary of unusual items included in Reported Basis results. Year-to-Date 2003 2002 Growth Operating Revenues Communications group $13,679 $13,745 -0.5% Latin America 1,659 1,747 -5.0% Advertising and publishing 1,515 1,212 25.0% All other 40 44 -9.1% Total Operating Revenues 16,893 16,748 0.9% Operating Expenses Cost of services and products 5,979 5,718 4.6% Selling, general & administrative expenses 3,217 3,243 -0.8% Depreciation and amortization 3,136 3,492 -10.2% Provision for restructuring and asset impairments 193 685 -71.8% Total Operating Expenses 12,525 13,138 -4.7% Operating Income 4,368 3,610 21.0% Interest Expense 805 896 -10.2% Other Income (Expense), net 741 790 -6.2% Income Before Taxes and Accounting Change 4,304 3,504 22.8% Provision for Income Taxes 1,502 1,470 2.2% Income Before Cumulative Effect Change 2,802 2,034 37.8% Cumulative Effect of Changes in Accounting Principle 315 (1,285) 124.5% Net Income $3,117 $749 N/M* Diluted: Weighted Average Common Shares Outstanding 1,854 1,881 -1.4% Earnings Per Share $1.68 $0.40 N/M * - Not meaningful. Selected Financial and Operating Data Operating income $4,368 $3,610 21.0% Operating margin 25.9% 21.6% 430 bps Declared dividends per share $0.67 $0.59 13.6% Capital expenditures $2,124 $2,863 -25.8% BellSouth Corporation Consolidated Statements of Income - Normalized Basis (unaudited) (amounts in millions, except per share data) Note to Readers: Our reported results, as shown on page 1, are prepared in accordance with generally accepted accounting principles (GAAP). The normalized results presented below exclude the impact of certain non-recurring or non-operating items, the details of which are provided on pages 3 and 4 of this release. In addition, the normalized results reflect our 40% proportionate share of Cingular's results, the presentation of which is not allowed under GAAP. Certain reclassifications have been made to prior periods to conform to the current presentation. 3Q03 3Q02 Growth 2Q03 Growth Operating Revenues Communications group $4,583 $4,539 1.0% $4,504 1.8% Domestic wireless 1,582 1,511 4.7% 1,514 4.5% Latin America 587 494 18.8% 563 4.3% Advertising and publishing 501 515 -2.7% 520 -3.7% All other 14 14 0.0% 14 0.0% Total Operating Revenues 7,267 7,073 2.7% 7,115 2.1% Operating Expenses Cost of services and products 2,600 2,370 9.7% 2,471 5.2% Selling, general, & administrative expenses 1,605 1,606 -0.1% 1,637 -2.0% Depreciation and amortization 1,261 1,352 -6.7% 1,249 1.0% Total Operating Expenses 5,466 5,328 2.6% 5,357 2.0% Operating Income 1,801 1,745 3.2% 1,758 2.4% Interest Expense 316 348 -9.2% 313 1.0% Other Income (Expense), net 24 54 -55.6% 61 -60.7% Income Before Income Taxes 1,509 1,451 4.0% 1,506 0.2% Provision for Income Taxes 529 493 7.3% 535 -1.1% Net Income $980 $958 2.3% $971 0.9% Diluted: Weighted Average Common Shares Outstanding 1,851 1,871 -1.1% 1,851 0.0% Earnings Per Share $0.53 $0.51 3.9% $0.52 1.9% Selected Financial and Operating Data Operating income $1,801 $1,745 3.2% $1,758 2.4% Operating margin 24.8% 24.7% 10 bps 24.7% 10 bps Dividends per share $0.23 $0.20 15.0% $0.23 0.0% Capital expenditures $764 $835 -8.5% $729 4.8% Common shares outstanding 1,848 1,862 -0.8% 1,847 0.1% Book value per share $10.65 $9.47 12.5% $10.32 3.2% Debt ratio 43.2% 50.0% -680 bps 44.6% -140 bps Total employees 76,009 80,882 -6.0% 75,779 0.3% BellSouth Corporation Consolidated Statements of Income - Normalized Basis (unaudited) (amounts in millions, except per share data) Note to Readers: Our reported results, as shown on page 1, are prepared in accordance with generally accepted accounting principles (GAAP). The normalized results presented below exclude the impact of certain non-recurring or non-operating items, the details of which are provided on pages 3 and 4 of this release. In addition, the normalized results reflect our 40% proportionate share of Cingular's results, the presentation of which is not allowed under GAAP. Certain reclassifications have been made to prior periods to conform to the current presentation. Year-to-Date 2003 2002 Growth Operating Revenues Communications group $13,556 $13,739 -1.3% Domestic wireless 4,532 4,428 2.3% Latin America 1,659 1,747 -5.0% Advertising and publishing 1,515 1,586 -4.5% All other 40 44 -9.1% Total Operating Revenues 21,302 21,544 -1.1% Operating Expenses Cost of services and products 7,435 7,119 4.4% Selling, general, & administrative expenses 4,779 4,906 -2.6% Depreciation and amortization 3,743 4,045 -7.5% Total Operating Expenses 15,957 16,070 -0.7% Operating Income 5,345 5,474 -2.4% Interest Expense 993 1,069 -7.1% Other Income (Expense), net 124 182 -31.9% Income Before Income Taxes 4,476 4,587 -2.4% Provision for Income Taxes 1,584 1,616 -2.0% Net Income $2,892 $2,971 -2.7% Diluted: Weighted Average Common Shares Outstanding 1,854 1,881 -1.4% Earnings Per Share $1.56 $1.58 -1.3% Selected Financial and Operating Data Operating income $5,345 $5,474 -2.4% Operating margin 25.1% 25.4% -30 bps Dividends per share $0.67 $0.59 13.6% Capital expenditures $2,124 $2,863 -25.8% BellSouth Corporation Normalized Earnings Summary and Reconciliation to Reported Results (amounts in millions, except per share data) Third Quarter 2003 Normalizing Items FX Asset Losses Impair- Cingular (Gains) ment Norma- GAAP A F L lized Operating Revenues $5,728 $1,539 $- $- $7,267 Operating Expenses 4,174 1,344 - (52) 5,466 Operating Income 1,554 195 - 52 1,801 Interest Expense 260 56 - - 316 Other Income (Expense), net 148 (136) 12 - 24 Income Before Taxes and Accounting Change 1,442 3 12 52 1,509 Provision for Income Taxes 506 3 - 20 529 Net Income Before Cumulative Effect Change 936 - 12 32 980 Cumulative Effect of Change in Accounting Principle - - - - - Net Income $936 $0 $12 $32 $980 Diluted Earnings Per Share * $0.51 $0.00 $0.01 $0.02 $0.53 * Normalized earnings per share for third quarter 2003 does not sum due to rounding. Year-to-Date 2003 Normalizing Items FX A&P Losses Acctg. Cingular (Gains) Change FAS 143 GAAP A F G I Operating Revenues $16,893 $4,409 $- $- $- Operating Expenses 12,525 3,625 - - - Operating Income 4,368 784 - - - Interest Expense 805 188 - - - Other Income (Expense), net 741 (588) (104) - - Income Before Taxes and Accounting Change 4,304 8 (104) - - Provision for Income Taxes 1,502 8 (3) - - Net Income Before Cumulative Effect Change 2,802 - (101) - - Cumulative Effect of Change in Accounting Principle 315 - - 501 (816) Net Income $3,117 $0 ($101) $501 ($816) Diluted Earnings Per Share * $1.68 $0.00 ($0.05) $0.27 ($0.44) * Normalized earnings per share for year-to-date 2003 does not sum due to rounding. Year-to-Date 2003 Normalizing Items Sale of Asset Pension/ Brazil Impair- Severance NE ment J K L Normalized Operating Revenues $- $- $- $21,302 Operating Expenses (141) - (52) 15,957 Operating Income 141 - 52 5,345 Interest Expense - - - 993 Other Income (Expense), net - 75 - 124 Income Before Taxes and Accounting Change 141 75 52 4,476 Provision for Income Taxes 55 2 20 1,584 Net Income Before Cumulative Effect Change 86 73 32 2,892 Cumulative Effect of Change in Accounting Principle - - - - Net Income $86 $73 $32 $2,892 Diluted Earnings Per Share * $0.05 $0.04 $0.02 $1.56 * Normalized earnings per share for year-to-date 2003 does not sum due to rounding. BellSouth Corporation Normalized Earnings Summary and Reconciliation to Reported Results (amounts in millions, except per share data) Third Quarter 2002 Normalizing Items FX A&P Losses Acctg. Pension/ Cingular (Gains) Change Severance GAAP A F G J Operating Revenues $5,434 $1,473 $- $58 $- Operating Expenses 4,392 1,225 - 38 (192) Operating Income 1,042 248 - 20 192 Interest Expense 291 63 - - - Other Income (Expense), net 211 (185) (9) - - Income Before Taxes and Accounting Change 962 - (9) 20 192 Provision for Income Taxes 322 - (21) 8 75 Net Income Before Cumulative Effect Change 640 - 12 12 117 Cumulative Effect of Change in Accounting Principle - - - - - Net Income $640 $0 $12 $12 $117 Diluted Earnings Per Share * $0.34 $0.00 $0.01 $0.01 $0.06 * Normalized earnings per share for third quarter 2002 does not sum due to rounding. Third Quarter 2002 Normalizing Items Asset Early Impair- Exting. Florida ments of Debt Late Pay L M N Normalized Operating Revenues $- $- $108 $7,073 Operating Expenses (135) - - 5,328 Operating Income 135 - 108 1,745 Interest Expense - - (6) 348 Other Income (Expense), net - 37 - 54 Income Before Taxes and Accounting Change 135 37 114 1,451 Provision for Income Taxes 50 15 44 493 Net Income Before Cumulative Effect Change 85 22 70 958 Cumulative Effect of Change in Accounting Principle - - - - Net Income $85 $22 $70 $958 Diluted Earnings Per Share * $0.05 $0.01 $0.04 $0.51 * Normalized earnings per share for third quarter 2002 does not sum due to rounding. Year-to-Date 2002 Normalizing Items Losses on Equity Cingular E-Plus Invest. GAAP A B C Operating Revenues $16,748 $4,314 $- $- Operating Expenses 13,138 3,512 - - Operating Income 3,610 802 - - Interest Expense 896 179 - - Other Income (Expense), net 790 (623) (1,339) 388 Income Before Taxes and Accounting Change 3,504 - (1,339) 388 Provision for Income Taxes 1,470 - (482) 114 Net Income Before Cumulative Effect Change 2,034 - (857) 274 Cumulative Effect of Change in Accounting Principle (1,285) - - - Net Income $749 $0 ($857) $274 Diluted Earnings Per Share $0.40 $0.00 ($0.46) $0.15 Year-to-Date 2002 Normalizing Items Brazil Loan Unbilled FX A&P Impair- Rec. Losses Acctg. ments Adj. (Gains) Change D E F G Operating Revenues $- $163 $- $211 Operating Expenses - - - 104 Operating Income - 163 - 107 Interest Expense - - - - Other Income (Expense), net 383 - 546 - Income Before Taxes and Accounting Change 383 163 546 107 Provision for Income Taxes 120 62 (25) 41 Net Income Before Cumulative Effect Change 263 101 571 66 Cumulative Effect of Change in Accounting Principle - - - - Net Income $263 $101 $571 $66 Diluted Earnings Per Share $0.14 $0.05 $0.30 $0.04 Year-to-Date 2002 Normalizing Items Pension/ Asset FAS 142 Severance Impairments H J L Operating Revenues $- $- $- Operating Expenses - (549) (135) Operating Income - 549 135 Interest Expense - - - Other Income (Expense), net - - - Income Before Taxes and Accounting Change - 549 135 Provision for Income Taxes - 207 50 Net Income Before Cumulative Effect Change - 342 85 Cumulative Effect of Change in Accounting Principle 1,285 - - Net Income $1,285 $342 $85 Diluted Earnings Per Share $0.68 $0.18 $0.05 Year-to-Date 2002 Normalizing Items Early Exting. Florida of Debt Late Pay M N Normalized Operating Revenues $- $108 $21,544 Operating Expenses - - 16,070 Operating Income - 108 5,474 Interest Expense - (6) 1,069 Other Income (Expense), net 37 - 182 Income Before Taxes and Accounting Change 37 114 4,587 Provision for Income Taxes 15 44 1,616 Net Income Before Cumulative Effect Change 22 70 2,971 Cumulative Effect of Change in Accounting Principle - - - Net Income $22 $70 $2,971 Diluted Earnings Per Share $0.01 $0.04 $1.58 BellSouth Corporation Notes to Normalized Financial and Operating Data (pages 3 and 4) Our normalized earnings have been adjusted for the following: (a) The periods presented have been adjusted to include our 40% proportional share of Cingular Wireless' operating results, net of proportional eliminations for amounts charged by other BellSouth companies to Cingular. (b) Gain on E-Plus conversion and sale of KPN stock - In March 2002, we exchanged our 22.5% investment in E-Plus, a German wireless carrier, for 234.7 million shares of KPN Royal. As a result of this exchange, we recorded a pretax gain of $1,335 to recognize the difference between the fair value of the KPN shares obtained and our investment balance in E-Plus. In addition, we subsequently sold the KPN shares for cash proceeds of $1,076 and recognized a pretax loss of $27. The amount shown also includes income of $20 generated from the settlement of forward contracts associated with advances to E-Plus. These advances were restructured in conjunction with the ownership exchange. (c) Losses on equity investments - Represents charges for the impairment of and open market sales of an equity investment in Qwest Communications. Also includes $63 impairment related to an investment in Guatemala and $6 in losses for the liquidation of an investment in Crown Castle. (d) Brazil loan impairments - Represents recognition of an impairment on shareholder loans to our Brazilian equity investments, as well as the recognition of a guarantee on a portion of those operations' debt. (e) Unbilled receivable adjustment - During first quarter 2002, BellSouth determined that the unbilled receivable balance at its advertising and publishing subsidiary was overstated. As a result, BellSouth recorded a reduction to advertising and publishing revenues. (f) Foreign currency transaction (gains) losses - Represents net transaction (gains) losses incurred by our Latin American operations related primarily to US Dollar denominated liabilities. These (gains) losses reflect the impact of the (strengthening) weakening of those operations' local currencies against the U.S. Dollar which requires recognition in the current period income statement. (g) Change in method of accounting related to our directory publishing business from the issue basis method to the deferral method - The 2003 amount is a one-time charge to net income of $501. The 2002 amounts reflect our recasting of prior year results to present the advertising and publishing segment on a comparable basis year-over-year. (h) Adoption of Financial Accounting Standard No. 142 (FAS 142) - Represents a one-time charge related to the adoption of new accounting rules for goodwill. The non-cash charge reduced the value of goodwill on the company's balance sheet by approximately $1.3 billion. (i) Adoption of Financial Accounting Standard No. 143 (FAS 143) - Represents a one-time charge related to the adoption of new accounting rules associated with obligations related to the retirement of long-lived assets. The adjustment resulted in a one-time increase to net income of $816. (j) Pension/Severance Costs - Represents severance accruals recorded to reflect workforce reductions in an effort to reduce operating costs. The accruals include cash severance, outplacement costs and payroll taxes. Amounts also include pension settlements as the number of employees who separated and elected to receive lump-sum retirement benefits exceeded thresholds which required current recognition of deferred amounts related to these benefits. (k) Loss on sale of Brazil NE. (l) Service curtailments/Asset impairments - The third quarter 2003 charge for asset impairment represents the write-off of capitalized software related to an abandoned systems project. Prior periods represent charges related to the decision to elimate sales of certain services: wholesale long distance ($17 after tax), e-business services ($44 after tax), multi-media internet exchange ($20 after tax) and public communications (pay phones) ($4 after tax). Charges relate to asset impairments, early termination penalties on contracts and leases, and severance for affected employees. (m) Early extinguishment of debt - Represents one-time expenses associated with the early extinguishment of $620 million of long-term debt. (n) Florida late payment fees - On October 31, 2002, the Florida Supreme Court, by a 5-2 vote affirmed the decision of the Florida Public Service Commission regarding our dispute over late payment fees. This will require a one-time refund to affected customers in Florida. Based on this decision, we recorded a reduction to revenues of $108 plus interest expense of $6 in the third quarter of 2002. BellSouth Corporation Consolidated Balance Sheets (unaudited) (amounts in millions, except per share data) Change Change vs. vs. Sept. 30, Dec. 31, Prior June 30, Prior 2003 2002 Year 2003 Quarter Assets Current Assets: Cash and cash equivalents $5,025 $2,482 $2,543 $4,122 $903 Accounts receivable, net of allowance for uncollectibles of $461, $476, and $492 3,013 4,129 (1,116) 2,999 14 Material and supplies 329 313 16 312 17 Other current assets 932 938 (6) 1,029 (97) Total Current Assets 9,299 7,862 1,437 8,462 837 Investments and Advances 8,394 9,741 (1,347) 8,283 111 Property, Plant and Equipment, net 23,765 23,445 320 24,047 (282) Deferred Charges and Other Assets 5,756 5,726 30 5,757 (1) Goodwill 346 347 (1) 346 0 Intangible Assets, net 2,262 2,358 (96) 2,356 (94) Total Assets $49,822 $49,479 $343 $49,251 $571 Liabilities and Shareholders' Equity Current Liabilities: Debt maturing within one year $3,347 $5,114 ($1,767) $3,694 ($347) Accounts payable 1,294 1,572 (278) 1,344 (50) Other current liabilities 3,701 2,897 804 3,421 280 Total Current Liabilities 8,342 9,583 (1,241) 8,459 (117) Long-Term Debt 11,646 12,283 (637) 11,718 (72) Noncurrent Liabilities: Deferred income taxes 5,352 4,452 900 5,109 243 Other noncurrent liabilities 4,810 5,255 (445) 4,908 (98) Total Noncurrent Liabilities 10,162 9,707 455 10,017 145 Shareholders' Equity: Common stock, $1 par value 2,020 2,020 0 2,020 0 Paid-in capital 7,656 7,546 110 7,620 36 Retained earnings 16,251 14,531 1,720 15,744 507 Accumulated other comprehensive income (771) (740) (31) (779) 8 Shares held in trust and treasury (5,488) (5,372) (116) (5,503) 15 Guarantee of ESOP debt 4 (79) 83 (45) 49 Total Shareholders' Equity 19,672 17,906 1,766 19,057 615 Total Liabilities and Shareholders' Equity $49,822 $49,479 $343 $49,251 $571 BellSouth Corporation Consolidated Statements of Cash Flows (unaudited) (amounts in millions, except per share data) Year-To-Date 3Q03 3Q02 2Q03 2003 2002 Cash Flows from Operating Activities: Net income $936 $640 $951 $3,117 $749 Adjustments to net income: Depreciation and amortization 1,052 1,161 1,046 3,136 3,492 Provision for uncollectibles 117 197 138 423 617 Net losses (earnings) of equity affiliates (82) (114) (179) (435) 8 Minority interests in income of subsidiaries 18 (3) 20 30 (80) Deferred income taxes 275 213 229 963 990 Net (gains) losses on sale or impairment of equity securities (1) - 8 7 388 Pension income (134) (208) (133) (401) (618) Pension settlement (gains) losses - 107 20 87 107 Curtailment and termination benefits charges - - - - 60 Stock-based compensation 35 40 36 102 132 Unbilled receivable adjustment - - - - 163 Asset impairments 52 81 - 52 81 Foreign currency transaction (gains) losses 7 (8) (99) (137) 637 Cumulative effect of changes in accounting principle - - - (539) 1,285 (Gain) loss on sale/disposal of operations - - 75 75 (1,335) Net change in: Accounts receivable and other current assets (68) (86) 120 (69) (9) Accounts payable and other current liabilities 228 223 197 339 (62) Deferred charges and other assets 128 21 39 242 (23) Other liabilities and deferred credits (100) (9) 18 (139) (9) Other reconciling items, net 6 85 32 42 (40) Net cash provided by operating activities 2,469 2,340 2,518 6,895 6,533 Cash Flows from Investing Activities: Capital expenditures (764) (835) (729) (2,124) (2,863) Investments in and advances to equity affiliates - (274) - - (281) Investments in debt and equity securities (40) (11) (7) (61) (28) Proceeds from sale of securities and operations 1 18 46 82 1,472 Proceeds from repayment of loans and advances - 6 1,899 1,899 432 Settlement of derivatives on advances - - (352) (352) 85 Other investing activities, net (9) (5) 2 (17) (8) Net cash provided by (used for) investing activities (812) (1,101) 859 (573) (1,191) Cash Flows from Financing Activities: Net borrowing (repayments) of short-term debt (30) 263 (179) (411) (1,130) Proceeds from long-term debt - - - 1 8 Repayments of long-term debt (307) (651) (1,072) (1,893) (1,219) Dividends paid (424) (375) (388) (1,183) (1,088) Purchase of treasury shares - (266) (67) (322) (455) Other financing activities, net 7 (2) 9 29 - Net cash used for financing activities (754) (1,031) (1,697) (3,779) (3,884) Net Increase (Decrease) in Cash and Cash Equivalents 903 208 1,680 2,543 1,458 Cash and Cash Equivalents at Beginning of Period 4,122 1,842 2,442 2,482 592 Cash and Cash Equivalents at End of Period $5,025 $2,050 $4,122 $5,025 $2,050 BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Communications Group (1) 3Q03 3Q02 Growth 2Q03 Growth Operating Revenues Voice $3,184 $3,133 1.6% $3,175 0.3% Data 1,118 1,060 5.5% 1,064 5.1% Other 366 422 -13.3% 347 5.5% Total Operating Revenues 4,668 4,615 1.1% 4,586 1.8% Operating Expenses Cost of services and products 1,720 1,673 2.8% 1,712 0.5% Selling, general, & administrative expenses 755 641 17.8% 768 -1.7% Depreciation and amortization 949 1,046 -9.3% 944 0.5% Total Operating Expenses 3,424 3,360 1.9% 3,424 0.0% Segment Operating Income 1,244 1,255 -0.9% 1,162 7.1% Interest Expense 98 119 -17.6% 101 -3.0% Other Income (Expense), net 7 6 16.7% 18 -61.1% Income Before Income Taxes 1,153 1,142 1.0% 1,079 6.9% Provision for Income Taxes 426 432 -1.4% 400 6.5% Segment Net Income(1) $727 $710 2.4% $679 7.1% * - Not meaningful. Selected Financial and Operating Data (amounts in millions) Segment operating income $1,244 $1,255 -0.9% $1,162 7.1% Segment operating margin 26.6% 27.2% -60 bps 25.3% 130 bps Long distance revenues $399 $234 70.5% $309 29.1% Access minutes of use 23,390 24,591 -4.9% 23,053 1.5% Capital expenditures $692 $737 -6.1% $665 4.1% (amounts in thousands) Wholesale Lines 2,873 2,260 27.1% 2,730 5.2% DSL customers 1,336 924 44.6% 1,225 9.1% LD customers 3,440 416 N/M 2,786 23.5% Consumer ARPU (5) $53.46 $48.99 9.1% $51.34 4.1% BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Communications Group (1) Year-To-Date 2003 2002 Growth Operating Revenues Voice $9,490 $9,442 0.5% Data 3,272 3,219 1.6% Other 1,068 1,307 -18.3% Total Operating Revenues 13,830 13,968 -1.0% Operating Expenses Cost of services and products 5,057 4,928 2.6% Selling, general, & administrative expenses 2,287 2,115 8.1% Depreciation and amortization 2,830 3,120 -9.3% Total Operating Expenses 10,174 10,163 0.1% Segment Operating Income 3,656 3,805 -3.9% Interest Expense 317 364 -12.9% Other Income (Expense), net 28 3 N/M* Income Before Income Taxes 3,367 3,444 -2.2% Provision for Income Taxes 1,252 1,297 -3.5% Segment Net Income(1) $2,115 $2,147 -1.5% * - Not meaningful. Selected Financial and Operating Data (amounts in millions) Segment operating income $3,656 $3,805 -3.9% Segment operating margin 26.4% 27.2% -80 bps Long distance revenues $972 $652 49.1% Access minutes of use 69,238 75,247 -8.0% Capital expenditures $1,923 $2,577 -25.4% BellSouth Corporation Results by Segment (unaudited) Supplemental Operating Data (in thousands) Communications Group - Network Access Lines In Service(a)(b) 3Q03 3Q02 Growth 2Q03 Growth Access lines (b) Residence Retail Primary 12,684 13,481 -5.9% 12,852 -1.3% Additional 1,671 2,002 -16.5% 1,758 -4.9% Total Retail Residence 14,355 15,483 -7.3% 14,610 -1.7% Wholesale Resale 198 383 -48.3% 238 -16.8% UNE-P 1,534 775 97.9% 1,369 12.1% Total Wholesale Residence 1,732 1,158 49.6% 1,607 7.8% Total Residence 16,087 16,641 -3.3% 16,217 -0.8% Business Retail Voice 5,484 5,783 -5.2% 5,542 -1.0% ISDN 1,432 1,588 -9.8% 1,504 -4.8% Total Retail Business 6,916 7,371 -6.2% 7,046 -1.8% Wholesale Resale 82 110 -25.5% 81 1.2% UNE-P 660 584 13.0% 640 3.1% Total Wholesale Business 742 694 6.9% 721 2.9% Total Business 7,658 8,065 -5.0% 7,767 -1.4% Other Retail / Wholesale Lines Retail 113 165 -31.5% 123 -8.1% Wholesale 46 23 100.0% 43 7.0% Total Other Retail/Wholesale Lines 159 188 -15.4% 166 -4.2% Total Access Lines in Service 23,904 24,894 -4.0% 24,150 -1.0% Access Line Equivalents (c) Selected digital data services: Unbundled Loops 353 385 -8.3% 359 -1.7% DS0 & ADSL 8,301 5,863 41.6% 7,646 8.6% DS1 7,088 6,849 3.5% 7,000 1.3% DS3 & higher 31,309 31,035 0.9% 31,672 -1.1% Total digital data lines in service 47,051 44,132 6.6% 46,677 0.8% Total equivalent access lines in service 70,955 69,026 2.8% 70,827 0.2% (a) Prior period operating data are often revised at later dates to reflect updated information. The above information reflects the latest data available for the periods indicated. (b) Access line counts include amounts for switched access lines, Basic Rate ISDN (converted at 1.5:1), Primary Rate ISDN (converted at 24:1) and UNE Combos. (c) Access line equivalents represent a conversion of non-switched data circuits to a switched access line basis and is presented for comparability purposes. Equivalents are calculated by converting high-speed/high-capacity 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, revenue growth rates cannot be compared to line growth rates on an equivalent basis. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Domestic Wireless Segment (1)(a) 3Q03 3Q02 Growth 2Q03 Growth Operating Revenues Service revenues (3) $1,429 $1,409 1.4% $1,412 1.2% Equipment and other revenues 153 102 50.0% 102 50.0% Total Operating Revenues 1,582 1,511 4.7% 1,514 4.5% Operating Expenses Cost of services and products 601 500 20.2% 501 20.0% Selling, general, & administrative expenses 577 574 0.5% 507 13.8% Depreciation and amortization 209 191 9.4% 203 3.0% Total Operating Expenses 1,387 1,265 9.6% 1,211 14.5% Segment Operating Income 195 246 -20.7% 303 -35.6% Interest Expense 79 93 -15.1% 92 -14.1% Other Income (Expense), net (44) (43) -2.3% (39) -12.8% Income Before Income Taxes 72 110 -34.5% 172 -58.1% Provision for Income Taxes 28 42 -33.3% 68 -58.8% Segment Net Income(1) $44 $68 -35.3% $104 -57.7% Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $195 $246 -20.7% $303 -35.6% Segment operating margin 12.3% 16.3% -400 bps 20.0% -770 bps Cellular/PCS Operating Metrics: Total Customers 9,354 8,830 5.9% 9,056 3.3% Net Customer Additions 298 (43) N/M* 216 38.0% Partitioned Customers and/or Adjustments 0 0 N/M 6 -100.0% Churn 2.8% 3.0% -20 bps 2.5% 30 bps Wireless Service ARPU (5) $50.91 $52.17 -2.4% $51.80 -1.7% Wireless Subscriber ARPU (5) $48.25 $48.84 -1.2% $48.87 -1.3% Minutes Of Use Per Subscriber 456 399 14.3% 445 2.5% Licensed POPs (b) 94 88 6.8% 94 0.0% Penetration (b) 10.6% 10.2% 40 bps 10.2% 40 bps Cingular Interactive Operating Metrics: Total Customers 315 320 -1.6% 315 0.0% Net Customer Additions - 6 -100.0% (19) 100.0% * - Not meaningful. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Domestic Wireless Segment (1)(a) Year-To-Date 2003 2002 Growth Operating Revenues Service revenues (3) $4,179 $4,133 1.1% Equipment and other revenues 353 295 19.7% Total Operating Revenues 4,532 4,428 2.3% Operating Expenses Cost of services and products 1,570 1,429 9.9% Selling, general, & administrative expenses 1,571 1,644 -4.4% Depreciation and amortization 607 553 9.8% Total Operating Expenses 3,748 3,626 3.4% Segment Operating Income 784 802 -2.2% Interest Expense 261 271 -3.7% Other Income (Expense), net (114) (111) -2.7% Income Before Income Taxes 409 420 -2.6% Provision for Income Taxes 160 161 -0.6% Segment Net Income(1) $249 $259 -3.9% Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $784 $802 -2.2% Segment operating margin 17.3% 18.1% -80 bps Cellular/PCS Operating Metrics: Total Customers 9,354 8,830 5.9% Net Customer Additions 590 192 207.3% Partitioned Customers and/or Adjustments 6 0 N/M Churn 2.6% 2.9% -30 bps Wireless Service ARPU (5) $50.93 $51.58 -1.3% Wireless Subscriber ARPU (5) $48.17 $48.31 -0.3% Minutes Of Use Per Subscriber 436 384 13.5% Licensed POPs (b) 94 88 6.8% Penetration (b) 10.6% 10.2% 40 bps Cingular Interactive Operating Metrics: Total Customers 315 320 -1.6% Net Customer Additions (12) 27 -144.4% * - Not meaningful. (a) The domestic wireless segment is comprised of BellSouth's 40% share of the reported results of Cingular Wireless. (b) Licensed POPs refers to the number of people residing in areas where Cingular and its partners, Salmon and T-Mobile USA, Inc., have licenses to provide cellular or PCS service, including the New York City metropolitan area, and in areas where Cingular has not yet commenced service, such as the Salt Lake City area. As a result of the consolidation of Salmon, effective January 1, 2003, Salmon's licensed POPs of 4 million (BellSouth's 40% share) are included in the 2003 total licensed POPs. Penetration calculation is based upon licensed operational POPs of 89 million (BellSouth's 40% share). The New York City metropolitan area is included in the penetration calculation, beginning in the third quarter of 2002. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Latin America Group (1)(2) 3Q03 3Q02 Growth 2Q03 Growth Operating Revenues Service revenues (3) $494 $404 22.3% $471 4.9% Equipment and other revenues 94 78 20.5% 94 0.0% Advertising and publishing revenues - 13 -100.0% - N/M* Total Operating Revenues 588 495 18.8% 565 4.1% Operating Expenses Cost of services and products 249 173 43.9% 243 2.5% Selling, general, & administrative expenses 151 156 -3.2% 154 -1.9% Depreciation and amortization 91 106 -14.2% 93 -2.2% Total Operating Expenses 491 435 12.9% 490 0.2% Segment Operating Income 97 60 61.7% 75 29.3% Interest Expense 31 33 -6.1% 22 40.9% Other Income (Expense), net (4) (23) 82.6% (7) 42.9% Income Before Income Taxes 62 4 N/M 46 34.8% Provision for Income Taxes 14 (50) 128.0% 5 180.0% Segment Net Income(1) $48 $54 -11.1% $41 17.1% * - Not meaningful. Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $97 $60 61.7% $75 29.3% Segment operating margin 16.5% 12.1% 440 bps 13.3% 320 bps Average monthly revenue per customer (3) $18 $17 5.9% $18 0.0% Customer net adds in period (a) 421 (152) N/M 377 11.7% Customers (voice) (a) 9,351 7,913 18.2% 8,921 4.8% POPs 160,600 162,100 -0.9% 160,600 0.0% Penetration rate (4) 5.8% 4.9% 90 bps 5.6% 20 bps (a) The beginning balance of 3Q02 customers was adjusted to include 225 customers related to fixed wireless customers in Venezuela. Year- to-date net adds for 2002 would have been 143 higher. Annual growth in net adds would have been 375.6%. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Latin America Group (1)(2) Year-To-Date 2003 2002 Growth Operating Revenues Service revenues (3) $1,397 $1,467 -4.8% Equipment and other revenues 265 250 6.0% Advertising and publishing revenues - 35 -100.0% Total Operating Revenues 1,662 1,752 -5.1% Operating Expenses Cost of services and products 750 669 12.1% Selling, general, & administrative expenses 441 546 -19.2% Depreciation and amortization 274 342 -19.9% Total Operating Expenses 1,465 1,557 -5.9% Segment Operating Income 197 195 1.0% Interest Expense 96 108 -11.1% Other Income (Expense), net (7) (52) 86.5% Income Before Income Taxes 94 35 168.6% Provision for Income Taxes (5) (34) 85.3% Segment Net Income(1) $99 $69 43.5% * - Not meaningful. Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $197 $195 1.0% Segment operating margin 11.9% 11.1% 80 bps Average monthly revenue per customer (3) $18 $20 -10.0% Customer net adds in period (a) 1,170 103 N/M Customers (voice) (a) 9,351 7,913 18.2% POPs 160,600 162,100 -0.9% Penetration rate (4) 5.8% 4.9% 90 bps (a) The beginning balance of 3Q02 customers was adjusted to include 225 customers related to fixed wireless customers in Venezuela. Year- to-date net adds for 2002 would have been 143 higher. Annual growth in net adds would have been 375.6%. BellSouth Corporation Worldwide Wireless (unaudited) Customers and POPs by Country (in thousands) Ownership Percentage As of Total Customers As of Country Brand 3Q03 3Q03 3Q02 Growth 2Q03 Growth United Cingular States Wireless 40.0% 23,386 22,076 5.9% 22,640 3.3% Argentina Movicom BellSouth 86.7% 1,391 1,339 3.9% 1,336 4.1% Brazil - Sao Paulo Region BCP 45.4% 1,699 1,683 1.0% 1,699 0.0% Chile BellSouth 100.0% 1,238 1,023 21.0% 1,161 6.6% Colombia Celumovil BellSouth 66.0% 1,824 1,277 42.8% 1,684 8.3% Ecuador BellSouth 89.4% 833 532 56.6% 740 12.6% Guatemala BellSouth 60.0% 246 173 42.2% 214 15.0% Nicaragua BellSouth 89.0% 262 201 30.3% 247 6.1% Panama BellSouth 43.7% 405 329 23.1% 377 7.4% Peru BellSouth 97.4% 614 509 20.6% 573 7.2% Uruguay Movicom BellSouth 46.0% 143 149 -4.0% 141 1.4% Venezuela Telcel BellSouth 78.2% 3,189 3,033 5.1% 3,179 0.3% Total Latin America 11,844 10,248 15.6% 11,351 4.3% Denmark Sonofon 46.5% 1,305 1,063 22.8% 1,312 -0.5% Israel Cellcom 34.8% 2,614 2,405 8.7% 2,551 2.5% Total Europe 3,919 3,468 13.0% 3,863 1.4% Total Worldwide Wireless 39,149 35,792 9.4% 37,854 3.4% BellSouth Corporation Worldwide Wireless (unaudited) Customers and POPs by Country (in thousands) Total POPs As of Country Brand 3Q03 3Q02 Growth 2Q03 Growth United States Cingular Wireless 236,000 219,000 7.8% 236,000 0.0% Argentina Movicom BellSouth 37,400 37,500 -0.3% 37,400 0.0% Brazil - Sao Paulo Region BCP 18,100 18,100 0.0% 18,100 0.0% Chile BellSouth 15,300 15,400 -0.6% 15,300 0.0% Colombia Celumovil BellSouth 40,300 43,000 -6.3% 40,300 0.0% Ecuador BellSouth 13,200 12,800 3.1% 13,200 0.0% Guatemala BellSouth 13,000 11,700 11.1% 13,000 0.0% Nicaragua BellSouth 2,900 2,900 0.0% 2,900 0.0% Panama BellSouth 2,800 3,000 -6.7% 2,800 0.0% Peru BellSouth 27,500 26,100 5.4% 27,500 0.0% Uruguay Movicom BellSouth 2,100 2,100 0.0% 2,100 0.0% Venezuela Telcel BellSouth 24,000 24,400 -1.6% 24,000 0.0% Total Latin America 196,600 197,000 -0.2% 196,600 0.0% Denmark Sonofon 5,300 5,300 0.0% 5,300 0.0% Israel Cellcom 6,100 6,100 0.0% 6,100 0.0% Total Europe 11,400 11,400 0.0% 11,400 0.0% Total Worldwide Wireless 444,000 427,400 3.9% 444,000 0.0% BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Advertising & Publishing (1) 3Q03 3Q02 Growth 2Q03 Growth Operating Revenues Advertising and publishing revenues 475 494 -3.8% 480 -1.0% Commission revenues 30 27 11.1% 45 -33.3% Total Operating Revenues 505 521 -3.1% 525 -3.8% Operating Expenses Cost of services 94 83 13.3% 82 14.6% Selling, general, & administrative expenses 168 220 -23.6% 184 -8.7% Depreciation and amortization 5 7 -28.6% 7 -28.6% Total Operating Expenses 267 310 -13.9% 273 -2.2% Segment Operating Income 238 211 12.8% 252 -5.6% Interest Expense 1 3 -66.7% 2 -50.0% Other Income (Expense), net - - N/M* 2 -100.0% Income Before Income Taxes 237 208 13.9% 252 -6.0% Provision for Income Taxes 90 80 12.5% 95 -5.3% Segment Net Income(1) $147 $128 14.8% $157 -6.4% Segment operating income $238 $211 12.8% $252 -5.6% Segment operating margin 47.1% 40.5% 660 bps 48.0% -90 bps * - Not meaningful. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Advertising & Publishing (1) Year-To-Date 2003 2002 Growth Operating Revenues Advertising and publishing revenues 1,436 1,513 -5.1% Commission revenues 92 88 4.5% Total Operating Revenues 1,528 1,601 -4.6% Operating Expenses Cost of services 254 265 -4.2% Selling, general, & administrative expenses 522 614 -15.0% Depreciation and amortization 19 21 -9.5% Total Operating Expenses 795 900 -11.7% Segment Operating Income 733 701 4.6% Interest Expense 5 9 -44.4% Other Income (Expense), net 1 1 0.0% Income Before Income Taxes 729 693 5.2% Provision for Income Taxes 276 266 3.8% Segment Net Income(1) $453 $427 6.1% Segment operating income $733 $701 4.6% Segment operating margin 48.0% 43.8% 420 bps * - Not meaningful. BellSouth Corporation Notes (1) Segment net income (loss) is based on normalized results which exclude certain one-time transactions and certain corporate intercompany billings. Intersegment revenues are not eliminated for purposes of management reporting. (2) Results for the Latin America segment are reported one month in arrears. (3) Wireless service revenues includes activation fees, access, airtime, roaming, long distance and value added services. Roaming revenues are included on a gross basis for the Domestic Wireless segment and on a net basis for the Latin America segment. Average monthly revenue per customer is calculated by dividing average monthly service revenue by average customers. (4) Penetration rate is calculated by dividing customers by POPs (excludes POPs in markets where service has not been initiated). (5) Management uses average revenue per unit (ARPU) as an indicator of operating performance of the business. Consumer ARPU - is defined as consumer revenues during the period divided by average primary access lines during the period. Wireless Subscriber ARPU - Cellular/ PCS is defined as cellular/PCS subscriber revenues during the period divided by average cellular/PCS subscribers during the period. Wireless Subscriber ARPU - Cellular/PCS is our primary measure of customer value. It provides a metric to evaluate our pricing and promotional activity. We benchmark against this measure in comparisons to prior periods and internal targets. Wireless Service ARPU - Cellular/PCS is defined as Cellular/PCS service revenues during the period divided by average Cellular/PCS subscribers during the period. This metric is used to compare the recurring revenue amounts being generated on our network to prior periods and internal targets. We believe that each of these metrics provides useful information concerning the performance of our initiatives to attract and retain high value customers and the use of our network. BellSouth Corporation Non-GAAP Measures - Reconciliation (amounts in millions) (unaudited) Segment Net Income Reconciliation to GAAP Net Income Year-to-Date 3Q03 3Q02 2Q03 2003 2002 Communications group segment net income $727 $710 $679 $2,115 $2,147 Domestic wireless group segment net income (a) 44 68 104 249 259 Latin America group segment net income 48 54 41 99 69 Advertising and publishing group segment net income 147 128 157 453 427 Corporate, eliminations and other 14 (2) (10) (24) 69 Normalized net income 980 958 971 2,892 2,971 Add back Excluded non-recurring or non-operational items (b) (44) (318) (20) 225 (2,222) Consolidated GAAP net income $936 $640 $951 $3,117 $749 Free Cash Flow Year-to-Date 3Q03 3Q02 2Q03 2003 2002 Net cash provided by operating activities $2,469 $2,340 $2,518 $6,895 $6,533 Less Capital Expenditures (764) (835) (729) (2,124) (2,863) Operating Free Cash Flow $1,705 $1,505 $1,789 $4,771 $3,670 Net Debt September 30, December 31, June 30, 2003 2002 2003 Total Debt $14,993 $17,397 $15,412 Less Cash (5,025) (2,482) (4,122) Net Debt $9,968 $14,915 $11,290 Communications Group Operating Income Before Depreciation and Amortization Year-to-Date 3Q03 3Q02 2Q03 2003 2002 Operating Revenues $4,668 $4,615 $4,586 $13,830 $13,968 Operating Income 1,244 1,255 1,162 3,656 3,805 Add back Depreciation and Amortization 949 1,046 944 2,830 3,120 Operating Income before Depreciation and Amortization $2,193 $2,301 $2,106 $6,486 $6,925 Margin 47.0% 49.9% 45.9% 46.9% 49.6% (a) The domestic wireless segment is comprised of BellSouth's 40% share of the reported results of Cingular Wireless. (b) See pages 3 and 4 for detail of excluded items. EX-99 4 form8kq303ex99b.txt EXHIBIT 99-B Exhibit 99-b BLS Investor News BellSouth Reports Third Quarter EPS of 51 Cents o High-speed internet customers reach 1.3 million o Communications services bundles exceed 2.6 million o Cingular Wireless adds 745,000 customers in quarter o Latin America adds 421,000 customers ATLANTA - BellSouth Corporation (NYSE: BLS) reported earnings per share (EPS) of 51 cents in the third quarter of 2003, including special charges totaling 2 cents. This compared to reported EPS of 34 cents in the third quarter of 2002, which included special charges totaling 17 cents (see below). Consolidated revenues increased 5.4 percent to $5.7 billion from $5.4 billion in the third quarter of 2002. Consolidated operating expenses were $4.2 billion compared to $4.4 billion in the same quarter of 2002. Net income was $936 million compared to $640 million in the same quarter a year ago. Operating free cash flow (defined as cash flow from operations less capital expenditures) was $1.7 billion. Capital expenditures in the third quarter of 2003 were $764 million for a total of $2.1 billion year-to-date, a reduction of 25.8 percent compared to $2.9 billion in the first nine months of 2002. Total debt at September 30, 2003 was $15.0 billion, a reduction of $2.4 billion, or 13.8 percent, since the first of the year. In accordance with Generally Accepted Accounting Principles (GAAP), BellSouth's reported consolidated revenues and consolidated operating expenses do not include the company's 40 percent share of Cingular Wireless. Normalized results include BellSouth's 40 percent proportionate share of Cingular's revenues and expenses. Normalized EPS of 53 cents in the third quarter of 2003 increased 3.9 percent compared to 51 cents in the same quarter of 2002. Normalized total operating revenues were $7.3 billion, an increase of 2.7 percent versus the third quarter of 2002. Normalized total operating expenses of $5.5 billion increased 2.6 percent. Normalized net income was $980 million, compared to $958 million in the same quarter a year ago. Communications Group BellSouth Long Distance and DSL high-speed Internet service drove Communications Group revenue growth in the third quarter of 2003, as customers increasingly chose BellSouth's integrated communications packages. Revenues increased 1.1 percent to $4.7 billion compared to $4.6 billion in the third quarter of 2002. Operating margin increased to 26.6 percent from 25.3 percent in the second quarter of 2003. Throughout the third quarter, packages fueled increased retention and reacquisition of residential and small business customers. BellSouth AnswersSM packages, which combine local, long distance, Internet and wireless services all on one bill, increased to more than 2.6 million. BellSouth(R) Unlimited AnswersSM contributed to the significant growth in package customers. Unlimited Answers allows customers to call anywhere in the United States anytime for a flat monthly fee. BellSouth added 654,000 net long distance customers in the third quarter. The company now serves 3.4 million long distance customers, including approximately 24 percent of its residence and 34 percent of its mass-market small business accounts. Driven by DSL, data revenues of $1.1 billion in the third quarter of 2003 grew 5.5 percent compared to the same quarter of 2002. BellSouth added 111,000 net DSL customers during the quarter, for a total of 1.3 million at September 30, 2003. The July introduction of BellSouth(R) FastAccess(R) DSL Lite helped generate new retail broadband customers. FastAccess Lite allows customers to choose between two tiers of broadband service at a connection speed and price that match their Internet service needs. Total access lines of 23.9 million at September 30 declined 4.0 percent compared to a year earlier, impacted by the economy, competition and technology substitution. Residence and business access lines served by BellSouth competitors under UNE-P (unbundled network elements-platform) increased by 188,000 in the third quarter, the smallest increase since the fourth quarter of 2001. Domestic Wireless / Cingular Cingular Wireless added 745,000 net total cellular and PCS customers in the third quarter, exceeding total net customer additions for the first half of 2003. It was the highest number of new customers in 10 quarters. Cingular's focus on calling plans tailored to local markets and co-branding and bundling programs with its parent companies were significant contributors to growth at Cingular, which ended the quarter with 23.4 million total customers. BellSouth's share of Cingular's revenues was $1.6 billion, a gain of 4.7 percent compared to the same quarter a year ago. BellSouth's share of Cingular operating income was $195 million compared to $246 million in the third quarter last year. Increased operating costs were impacted by significantly higher gross customer additions and by customer retention programs in anticipation of Wireless Local Number Portability in November. In addition, depreciation costs were higher, associated with the technology upgrade of Cingular's nationwide network to improve services and coverage. The company's GSM/GPRS network now covers 92 percent of its potential customers, ahead of its target for year-end 2003. Cingular significantly improved its spectrum position during the third quarter with acquisitions and swaps, including an agreement to purchase licenses from NextWave in 34 markets covering approximately 83 million potential customers. Cingular also will expand its coverage under agreements announced with Dobson Communications, Sunshine PCS Corporation and US Unwired Inc. Latin America Group Continuing the trend of organic growth, Latin America Group wireless customers increased 421,000 during the third quarter on a consolidated basis. Year-over-year, customers increased 1.4 million, or 18.2 percent. Consolidated customers served by BellSouth and its partners at the end of the quarter were 9.4 million. Consolidated Latin America revenues increased 18.8 percent to $588 million in the third quarter of 2003 compared to the same three months of the previous year. Strong customer growth in Colombia, Ecuador and Chile, as well as more stable local currencies, drove the growth in segment revenues. Net income was $48 million in the third quarter and $99 million year-to-date. Latin America Group generated positive operating free cash flow year-to-date in 2003. Advertising & Publishing Advertising & Publishing revenues were $505 million in the third quarter of 2003, a decrease of 3.1 percent compared to the same quarter a year ago, resulting in part from the soft economy and competition. Operating income of $238 million was 12.8 percent higher than the third quarter of 2002, primarily the result of improvement in uncollectibles expense. Special Items In the third quarter of 2003, the difference between reported (GAAP) EPS of 51 cents and normalized EPS of 53 cents is the result of two special items: Foreign currency transaction losses 1 cent Charge Asset Impairment 2 cents Charge Effect of Rounding 1 cent Total of special items 2 cents Charge Foreign currency transaction losses - Primarily associated with the remeasurement of U.S. dollar-denominated liabilities in Latin America. Asset Impairment - Write-off of capitalized software. - -------------------------------------------------------------------------------- Normalized Earnings Summary 1 3Q03 3Q02 % chg YTD03 YTD02 % chg - -------------------------------------------------------------------------------- EPS - Reported Diluted $0.51 $0.34 N/M $1.68 $0.40 N/M Gain on E-Plus conversion and sale of KPN stock (0.46) Losses on equity investments 0.15 Brazil loan impairments 0.14 Unbilled receivable adjustment 0.05 Foreign currency transaction losses (gains) - primarily debt related 0.01 0.01 (0.05) 0.30 A&P accounting change 0.01 0.27 0.04 SFAS 142 Impairment Charge 0.68 Adoption of SFAS 143 (0.44) Pension / Severance Costs 0.06 0.05 0.18 Loss on sale of Brazil NE 0.04 Asset Impairments 0.02 0.05 0.02 0.05 Early extinguishment of debt 0.01 0.01 FL Late Payment Fees 0.04 0.04 - -------------------------------------------------------------------------------- EPS - Normalized 2 $0.53 $0.51 3.9% $1.56 $1.58 (1.3%) - -------------------------------------------------------------------------------- 1 See press release for an explanation of all normalizing items. 2 Normalized earnings per share may not sum due to rounding - -------------------------------------------------------------------------------- In addition to historical information, this document may contain forward-looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in domestic or international markets where we operate or have material investments which would affect demand for our services; (ii) currency devaluations and continued economic weakness in certain international markets in which we operate or have material investments; (iii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iv) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (v) unfavorable regulatory actions and (vi) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and BellSouth assumes no duty to update this information. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This document may also contain certain non-GAAP financial measures. The most directly comparable GAAP financial measures, and a full reconciliation of non-GAAP to GAAP financial information, are attached hereto and provided on the Company's investor relations Web site, www.bellsouth.com/investor. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Complete financial statements and the third quarter 2003 earnings press release can be accessed at BellSouth's Web site, www.bellsouth.com/investor - -------------------------------------------------------------------------------- Communications Group Communications Group revenues grew 1.1 percent over third quarter 2002, the best revenue performance since the fourth quarter of 2001. Voice revenue grew 1.6 percent and data revenue grew 5.5 percent. Driven by DSL, data revenue of $1.12 billion is at the highest level in the company's history and the data revenue growth showed the best performance in the past 5 quarters. Communications Group revenue growth was driven by increased sales of interLATA long distance and broadband DSL, both of which were spurred by package sales, primarily BellSouth AnswersSM. This was offset to a degree by continued retail access line market share loss -- but with improved access line trends -- and technology substitution. Revenue growth was also impacted by the continued phase-out of BellSouth's payphone business and the discontinuance of its wholesale long distance business, which, combined, reduced revenue growth by 100 basis points. Sequentially, revenue grew 1.8 percent. Revenues from the Consumer unit, which accounts for about 44 percent of Communications Group revenues, grew 2.6 percent. Again, this was driven by growth in interLATA long distance and DSL, aided by growth in BellSouth Answers. Consumer ARPU (average revenue per user) rose 9.1 percent over the same quarter of the prior year to $53.46. This was partially offset by 7.3 percent retail residential access line loss. Consumer reacquisitions are up more than three-fold compared to the first nine months of 2002. Consumer has reacquired 1 of every 2 competitive disconnects this year. Small business revenue grew 3.7 percent, aided by substantially improved year-over-year access line trends, growth in packages and a strong customer reacquisition [Graphic inserted here Consumer ARPU Monthly Average 3Q02 - $48.99 4Q02 - $49.10 1Q03 - $50.03 2Q03 - $51.34 3Q03 - $53.46 Shading indicates break-out between Core Local and LD/Internet.] program. BellSouth's retail small business unit remains focused on customer retention and reacquisition. Competitive disconnects, an indicator of retention, are down approximately 36 percent in small business year-to-date. Competitive disconnects, which averaged about 29,000 per month in 2001, are down to about 2,000 per month year-to-date. Wholesale revenue was flat compared to the third quarter of 2002 as growth in wholesale lines was offset by continued IXC network grooming. Large business revenue declined 2.9 percent primarily due to the lingering impacts of the weak economy and competition. Packages BellSouth Answers is the company's signature communications package. Answers combines local calling plans with long distance, Internet and wireless services, all on one bill. Customers receive discounts on the additional services, ranging from $5 for Complete Choice(R), BellSouth's local and multiple calling feature package - an approximate $15 buy up -- to $10 for Complete Choice and unlimited long distance - a buy up of approximately an additional $20. For their personalized plans, customers can select local service and/or long distance service; wireless; dial-up, FastAccess DSL or FastAccess DSL Lite Internet access; as well as a number of other calling features. Pricing ranges from approximately $33 monthly for local service and fixed rate long distance to $130 for local service, unlimited long distance, Fast-Access DSL and Cingular Wireless. Starting next year, BellSouth will add DIRECTV(R) digital satellite television service to the BellSouth Answers bundles. BellSouth added 509,000 Answers customers in the third quarter, ending the quarter with more than 2.6 million residential packages, a 23.7 percent sequential quarter increase, representing a 20.9 percent penetration of our retail primary line residence base. Over 70 percent of Answers customers have long distance in their package and nearly 40 percent have either DSL or dial-up Internet service. Answers helps reduce competitive churn of high-value customers. For example, when a Complete Choice customer adds just long distance to the bundle, there is a slight improvement to competitive churn. If that customer adds just one additional service such as DSL, wireless or dial-up, churn decreases about 45 percent, more than enough to offset the average 5 percent discount that Answers customers receive. Answers also has helped spur sales of Complete Choice. BellSouth added nearly 200,000 Complete Choice packages in the first nine months of 2003, as we incented customers to buy up to receive the value-based Answers packages. [Graphic inserted here BellSouth Answers Customers In thousands 3Q02 - 1,000 4Q02 - 1,187 1Q03 - 1,601 2Q03 - 2,145 3Q03 - 2,654] A valuable tool in reducing churn, BellSouth Answers also improves ARPU by spurring sales of Complete Choice, long distance and DSL. Answers customers have ARPU of approximately $62, more than 45 percent higher than non-Answers customers. BellSouth Answers also leverages BellSouth's ownership in Cingular by including wireless services in the package, a combination not all competitors can match. Also, during the quarter, BellSouth entered into a strategic alliance with DIRECTV to offer BellSouth residential customers DIRECTV digital satellite television service, at packaged discounted savings, beginning in early 2004. This will make BellSouth Answers the most comprehensive bundle in the marketplace today. Long Distance The first of the regional Bell operating companies to offer long distance service throughout its markets, BellSouth continued its long distance success in the third quarter, adding 654,000 customers. InterLATA revenues grew 54 percent sequentially to $194 million. At September 30, 2003, BellSouth had more than 3.4 million long distance customers, a penetration rate of 24 percent of primary residential access lines and 34 percent of mass-market small business accounts. In Georgia and Louisiana, where BellSouth has been competing the longest, the company has achieved total mass market residential and business penetration of 30 percent. The strongest growth in the quarter occurred in BellSouth's two newest long distance markets, Florida and Tennessee. Both states grew long distance customers over 30 percent sequentially. BellSouth has been offering service in these two states for only nine months and has achieved a total mass market penetration of 21 percent. Long distance ARPU continues to be significantly higher in Florida compared to BellSouth's other states due to the higher mix of international calling. In Florida, one out of three customers has chosen an international long distance calling plan. Earlier this year, BellSouth began offering unlimited long distance to reduce competitive churn and fuel retention and reacquisition of residential customers. This plan has been a success -- since its April launch, over one-third of BellSouth's long distance gross adds have chosen the Unlimited plan. Overall, Unlimited is the company's most popular consumer long distance plan with over 25 percent of the long distance consumer base on the Unlimited plan. BellSouth continued its success in complex business, signing over 1,000 contracts for LD services during the quarter. Cumulatively, the company has signed nearly 5,500 complex business contracts with a total contract value of over $600 million. Through the first nine months of 2003, on a monthly basis, BellSouth has sold about $20 million in annualized contract value in the complex business segment. The majority of the revenue comes from customers who spend over $100,000 annually on long distance. BellSouth provides combined data and voice services, including Frame Relay, ATM and Private Line with speeds up to OC-192 to customers in the small and large business segments. [Graphic inserted here Long Distance Customers In thousands 3Q02 - 416 4Q02 - 1,002 1Q03 - 1,930 2Q03 - 2,786 3Q03 - 3,440] Voice Revenue Details Voice revenues increased 1.6 percent in the quarter, driven primarily by growth in interLATA long distance offset by continued access line share loss, but at a substantially slower rate in third quarter. Long distance revenue increased 70 percent, driven primarily by growth in interLATA long distance, partially offset by the continuing phase-out of BellSouth's wholesale long distance business. Total switched access lines declined 4.0 percent year-over-year. The access line decline was the result of continued demand weakness, share loss and technology substitution. Retail residential lines declined 7.3 percent, with additional lines representing over one-third of the loss. Retail business lines declined 6.2 percent. However, business voice sequential line loss of 58,000 was the lowest level since the second quarter of 2000. Business ISDN lines were again affected by the cancellation of 94,000 lines by a bankrupt carrier. Excluding this impact, switched access lines declined 3.6 percent and switched business lines declined 4.9 percent. Total UNE-P growth slowed in the third quarter, with 188,000 net UNE-P adds compared to 249,000 in the second quarter of 2003. This is the lowest net add total of UNE-P since the fourth quarter of 2001 and represents a 24 percent sequential quarter decline. Switched access minutes of use declined 4.9 percent compared to the third quarter of 2002. The year-over-year decline is the result of access line loss, the continuing shift of wholesale lines from resale to UNE-P, and alternative communications services, primarily wireless and e-mail. MOUs grew sequentially for the second consecutive quarter, primarily due to the positive impact of unlimited long distance plans. Broadband and Data Services Data revenues were $1.12 billion in the second quarter, a growth rate of 5.5 percent compared to the same quarter of the prior year. Data revenues represented 15.4 percent of total BellSouth normalized revenues and 24.0 percent of Communications Group revenues in the quarter. Sales of retail data services grew 17.7 percent in the third quarter of 2003, driven by DSL. Sales of wholesale data transport services to other communications providers, including long distance companies and CLECs, declined 5.4 percent compared to the third quarter of 2002, primarily due to the lingering impacts of a soft economy. However, wholesale data revenues grew 1.5 percent sequentially. [Graphic inserted here DSL Customers In thousands 3Q02 - 924 4Q02 - 1,021 1Q03 - 1,122 2Q03 - 1,225 3Q03 - 1,336] BellSouth ended the third quarter with 1.336 million DSL customers, a 45 percent increase over the third quarter of 2002. BellSouth added 111,000 DSL customers in the third quarter. With penetration increasing to 8.7 percent of qualified lines and 5.6 percent of total switched access lines, BellSouth's broadband market share -- including both retail and wholesale DSL -- exceeds the industry average. BellSouth's broadband coverage reaches over 70 percent of its households. This percentage has stayed relatively stable since the end of 2001, as BellSouth's early DSL capital deployment targeted about 85 percent of its high-value customers. DSL capital deployment since then has been mostly success-based to meet the growing demand. The company's industry-leading coverage is a result of targeted, market-driven deployment of DSL to nearly 1,350 central offices and over 12,500 remote terminals. Early in the third quarter, BellSouth introduced FastAccess(R) DSL Lite, creating a tiered approach to broadband that allows customers to choose the connection speed and price best suited to their Internet use. FastAccess DSL Lite delivers download speeds of up to 256 kbps and upload speeds of up to 128 kbps. With this launch, BellSouth is building a pool of users new to the high-speed Internet experience. Once customers experience the convenience and improved features of broadband over dial-up, the company will offer promotions and incentives to encourage them to upgrade to the full-speed product. Only about one percent of the existing 1.5 Mbps base has downgraded to DSL Lite. Including Fast Access DSL Lite, BellSouth added 115,000 net retail broadband customers in the third quarter, up from 92,000 in the second quarter, 25 percent growth in retail net adds. These retail adds were offset somewhat by wholesale disconnects as BellSouth continues to see a mix shift to more retail customers. BellSouth offers among the most competitive broadband prices in its markets. With a qualifying BellSouth Answers bundle including Complete Choice and unlimited long distance, customers can buy FastAccess DSL for as low as $34.95 and FastAccess DSL Lite for as low as $24.95. Pricing varies by market and bundle. In the third quarter, the company launched specific price reductions of $5 on DSL, targeted to BellSouth Answers customers in key metros. These price reductions are offered in BellSouth's highly competitive broadband markets. As BellSouth has scaled the broadband business, costs have been tightly managed. Through the first nine months of 2003, cash expense per average subscriber per month has dropped 16 percent since the end of 2002. And this metric decreased more than 50 percent in the previous year. In addition, BellSouth has been successful in incenting FastAccess DSL self-install. Ninety-five percent of consumer customers chose the self-install option in the third quarter, with a success rate of over 95 percent. BellSouth continued to implement process improvements to increase DSL efficiency in the third quarter, including: improved modem contract terms and CPE fulfillment improvements; a new Interactive Voice Response platform allowing smart call routing, outage notification, and order and appointment status; and a new set of retention tools to identify customers with a propensity to churn, allowing customer service reps to proactively take steps to resolve issues before the customer churns. In addition, a dedicated Churn Action Team began operations to reach "at risk" customers ensuring technical, sales or billing issues are fully resolved. Also, in late June, a new integrated support site was launched enabling BellSouth to better leverage e-chat capabilities. This site helped increase Web transactions 57 percent in third quarter compared to second. In addition, the company launched a sophisticated level of diagnostics and trouble resolution in its Installation Wizard to assist both customers and help desk agents in identifying any issue during the installation process. Preliminary results indicate average handling time has been reduced by about 3 minutes. During the quarter, BellSouth entered into an agreement with Movielink, a leading online movie download service, to create a customized version of Movielink's movie rental service for BellSouth's consumer broadband Internet customers. These customers can preview trailers from hundreds of movies on BellSouth's home page and they can rent and download their favorite movies with unprecedented speed. Movies currently are priced between $2.95 and $4.99 for a 24-hour viewing period. Premium content extends the value proposition of broadband by giving customers a new Internet experience that goes far beyond a faster connection. BellSouth is consistently recognized for its state-of-the-art data network. As of September 30, BellSouth had over 4.65 million miles of fiber, nearly 25,000 SONET rings, over 1,000 broadband switches, more than 220 Dense Wave Division Multiplexing (DWDM) systems and over 50 points of presence on its regional IP backbone network. 85 percent of all BellSouth loops can support a 3 Mbps downstream DSL rate and 50 percent can support 5 Mbps. In addition, BellSouth has metro Ethernet networks in 46 major metros, with 200 switches deployed. BellSouth leads its peer group with nearly 200 fiber miles per 1000 access lines, allowing the company to pass nearly 1 million homes with fiber-to-the-curb capability by the end of 2003. Other Communications Group Revenues Other Communications Group revenues declined 13.3 percent, primarily due to BellSouth's continuing phase-out of its payphone and wholesale long distance businesses. BellSouth will complete the exit of its retail payphone business by the end of 2003. Expenses and Margins Communications Group total operating expenses increased 1.9 percent year-over-year, but were flat sequentially. Cost of services and products was up 2.8 percent year-over-year, primarily as a result of increases in network employee pensions and benefits, as well as costs of providing retail long distance services. These factors were partially offset by reduced force levels and, to a lesser degree, by the phase-out of the payphone and wholesale long distance businesses. SG&A expense rose 17.8 percent compared to an unusually low third quarter of 2002. The increase was driven primarily by increased customer acquisition costs and increased employee pension and benefits, partially offset by reductions in force levels and reduced uncollectibles. Depreciation and amortization expense declined 9.3 percent, primarily driven by declining capex spending since 2000. In addition, the reduction was impacted by the effects of the previously announced adoption of SFAS 143, "Accounting for Asset Retirement Obligations," which addresses accounting for the cost of legal obligations associated with the retirement of long-lived assets. For 2003 as a whole, this accounting change will result in depreciation savings of about $130 million. The operating margin was 26.6 percent, down 60 basis points from the third quarter of 2002. As in prior quarters, increased pension and retiree medical costs lowered operating margin 200 basis points of which 150 basis points relates to non-cash pension impacts. Absent this impact, operating margins improved 140 basis points due to higher revenues, lower force levels and improved uncollectible expense. Sequentially, operating margins expanded 130 basis points as revenues grew and expenses were held flat. During the third quarter, BellSouth announced Web Repair Service, a new Web-based tool giving residential customers useful information regarding basic telephone service problems, such as noise on the line, inability to receive calls or loss of dial tone. The tool provides customers with quick troubleshooting tips to determine possible causes of their phone service problem and solutions to address the causes in a timely manner. Using the troubleshooting information, customers may match their service trouble with a likely solution in real time, potentially saving them and BellSouth time and money for repairs. Service Excellence BellSouth has a heritage of industry leadership in providing the highest levels of customer satisfaction. In the third quarter, BellSouth received the highest ranking in J.D. Power and Associates 2003 Local Residential Telephone Service StudySM in the Southeast region giving the company its third straight highest ranking in major independent customer satisfaction studies of local phone service. Earlier this year, BellSouth received its 10th straight No. 1 ranking among local telephone service providers in the American Customer Satisfaction Index (ACSI), marking a decade of distinction in customer service. In addition, BellSouth achieved the top ranking, for the second consecutive year, in overall customer satisfaction among residential customers according to the Yankee Group's 2002 Technologically Advanced Family(R) survey. In the past year, BellSouth has achieved the top ranking for local service in the J.D. Power and Associates 2002 Major Provider Business Telecommunications Service StudySM, the second year in a row BellSouth was recognized for customer satisfaction among business customers. Earlier this year, and in its first year of providing long distance service, BellSouth was ranked fourth in customer satisfaction out of 17 long distance providers across the country, according to the J.D. Power and Associates 2003 Residential Long Distance Telephone Service StudySM. In broadband, BellSouth received the highest ranking for business broadband data service providers for the second year in a row in the J.D. Power and Associates 2003 Major Provider Business Telecommunications Services StudySM. In addition, BellSouth took the highest honors in customer satisfaction in the 2002 J.D. Power and Associates Residential Internet Customer Satisfaction StudySM for High Speed ISPs, tying for highest score. BellSouth outperformed its cable modem competitors in this study. Cingular Wireless - -------------------------------------------------------------------------------- Cingular's financial statements for 2003, 2002 and 2001 can be accessed at www.bellsouth.com/investor. - -------------------------------------------------------------------------------- In the third quarter, Cingular recorded 745,000 net customer additions, the strongest net add quarter in more than two years. At $4.0 billion, third quarter operating revenues rose 4.4 percent sequentially, and 4.6 percent relative to the same period in 2002. Data revenue also contributed to revenue growth. Cellular/PCS data revenue increased 104 percent compared to the third quarter of 2002, largely due to the rising popularity of SMS (short messaging service), downloadable ring tones and photo messaging. Customer growth was coupled with an increase in the quality of new subscribers - 92 percent of third quarter net customer additions were post-paid. This quarter's post-paid net customer additions of 687,000 represents a 72 percent increase over second quarter 2003. In addition, this quarter yielded the highest number of post-paid gross customer additions in Cingular's history. Total churn for the quarter was 2.8 percent compared to 3.0 percent in the third quarter last year but was up sequentially by 30 basis points. As of October 20, Cingular moved ahead of schedule in its GSM/GPRS network overlay. The GSM/GPRS network is now available to 92 percent of the company's total POPs, exceeding its previously announced target of 90 percent coverage by the end of 2003. Major markets turned up since the end of the second quarter include Boston, Washington, D.C., Baltimore, Dallas, Houston, Atlanta, San Antonio, St. Louis and Kansas City. Customer response to Cingular's next generation GSM network launch has exceeded expectations, with store traffic increasing as much as 40 percent in some newly converted markets. GSM brings to customers a number of advantages including the widest variety of handsets in the industry, with features like color screens and camera phones. Cingular's network also provides the latest in data services including multi-media messaging and high-speed packet data. Cingular began offering its 3G service EDGE (Enhanced Data rate for Global Evolution) in Indianapolis in July, becoming the first commercial wireless company in the world to offer the service. [Graphic inserted here Cingular Wireless Qrtrly Net Adds In thousands 3Q02 - (107) 4Q02 - (121) 1Q03 - 189 2Q03 - 540 3Q03 - 745] Cingular continued to leverage its relationship with its parent companies, BellSouth and SBC Communications, in the third quarter. Benefiting from bundled offerings and co-branding, parent channel sales accounted for almost 14 percent of Cingular's gross contract additions for the third quarter. Wireless/wireline integration continued in the third quarter with Cingular's introduction of FastForward. Launched in October, FastForward allows customers to automatically forward mobile calls to their landline office or home phone when they place their wireless phone into a patented charging cradle. Cingular's operating income for the quarter was $488 million compared to $616 million in the third quarter last year. Total operating expenses increased by 9.6 percent year-over-year and were driven by a substantial increase in gross additions, customer service and retention initiatives in anticipation of Wireless Local Number Portability, higher minute volumes and network costs associated with the GSM overlay. The recent implementation of targeted customer retention plans has enabled Cingular to bring more than 70 percent of its post-paid customers under contract. Cingular's total capital investment was $1.0 billion in the third quarter, down 20.2 percent from the same period in 2002. Since the end of the second quarter, Cingular has made a series of moves that will open new markets and improve its spectrum position in existing markets. These initiatives will enable Cingular to expand its network, increase capacity and lower roaming costs. On August 5, 2003, Cingular announced that it would purchase licenses to provide wireless services in 34 markets for $1.4 billion from NextWave Telecom. The licenses cover approximately 83 million potential customers and are primarily in markets where Cingular currently has voice and data operations. This purchase will allow Cingular to address future growth in existing markets and will add capacity in six complementary, new markets. Cingular also increased its footprint this quarter by purchasing additional spectrum in Florida, Texas, Arkansas and Louisiana from Sunshine PCS Corporation and US Unwired Inc., and by entering into a spectrum and operations swap with Dobson Communications. The Dobson Communications transaction will allow Cingular to offer coverage along Maryland's eastern shore, enhancing service for existing and new customers throughout the Maryland and Washington, D.C. markets. Latin America BellSouth added 421,000 wireless customers in the seven consolidated Latin countries during the third quarter -- the segment's best customer growth over the last nine quarters. Nearly 1.2 million customers have been added through organic growth during the first nine months of 2003. At the end of the quarter, BellSouth served 9.4 million wireless customers in Latin America, an 18.2 percent increase from the third quarter of 2002 on a consolidated basis. Colombia, Ecuador and Chile continued their strong growth. For the second consecutive quarter these countries collectively contributed more than 300,000 net new customers. Movicom, BellSouth's Argentine affiliate, continuing to recover from last year's economic crisis, added 55,000 customers in the quarter. [Graphic inserted here Latin America Group Customers In thousands 2000 - 7,069 2001 - 7,585 2002 - 8,172 1Q03 - 8,544 2Q03 - 8,921 3Q03 - 9,351 Consolidated Customers] Consolidated Latin revenues were $588 million in the third quarter, an 18.8 percent increase from the same period last year. Strong customer growth across the region, stable ARPUs and the partial recovery of the Argentine Peso drove third quarter revenue, partially offset by a decline in the Venezuelan Bolivar. Five of the seven consolidated operations -- Chile, Venezuela, Colombia, Ecuador and Argentina -- reported double-digit revenue growth, ranging from 11 percent in Chile to 55 percent in Argentina. Even considering the strong customer growth in the third quarter ARPU remained stable at $18. Operating margin in the third quarter was 16.5 percent, an increase of 440 bps from the third quarter last year. The improvement results from growing revenue and a decline in depreciation and amortization expense. The decline in depreciation and amortization primarily related to currency impacts and a significant reduction in capital expenditures over the last three years. Sequentially, operating margin increased 320 bps due primarily to the strong revenue growth. Year to date, BellSouth's Latin operations have generated positive operating free cash flow. Strong revenues, improved efficiencies and targeted capital deployment are contributing to the positive cash flow. The Latin segment deployed $145 million in capital in the first nine months of 2003, compared to $134 million in the same period in 2002. The Latin segment's targeted investment in 2003 includes the upgrade of BellSouth's wireless network to CDMA 1XRTT. Guatemala, Nicaragua, Colombia and Chile have implemented CDMA 1XRTT overlays, enabling 3G services. The only remaining country without CDMA, Peru, is expected to implement an overlay by the end of 2003. CDMA 1XRTT enables advanced applications and handsets across BellSouth's Latin American footprint. It also delivers significant economies of scale, greater voice capacity, a quick path to higher data speeds and enhanced roaming. The benefits of the technology move to CDMA are already being seen in the marketplace. With the third quarter launch of BellSouth Interactivo service in Colombia, BellSouth began the deployment of a new generation of wireless services in Latin America that will turn cellular phones into more productive and entertaining devices. Colombia marks the first of several BellSouth Interactivo launches that will take place in BellSouth markets over the next six months. BellSouth Interactivo allows customers to browse the Web with their cell phones, and to download applications such as games, business services, weather information, news, chat and e-business. BellSouth will continue to foster organic growth across the 10 Latin countries it actively manages. Efforts continue to dispose of BellSouth's interest in BCP, a wireless property in Sao Paulo, Brazil. In accordance with GAAP, BellSouth is carrying on its balance sheet a cumulative foreign currency translation adjustment (CTA) of approximately $180 million related to that investment. BellSouth's reported net income will be negatively impacted by this CTA [Graphic inserted here Latin America Group Revenue In millions 3Q02 - 495 4Q02 - 486 1Q03 - 509 2Q03 - 565 3Q03 - 588 Consolidated Revenue] adjustment upon disposal of its remaining interest in BCP. During the third quarter BellSouth purchased an incremental 22 percent ownership share in Movicom from our partner for a nominal amount. BellSouth now owns 86.7 percent of its Argentine affiliate. The impact of currency fluctuations on U.S. dollar-denominated debt in Latin America resulted in a $12 million decrease in reported earnings in the third quarter for foreign currency transaction losses. This non-cash loss, which is excluded from normalized segment results, was generated largely by the depreciation of the Argentine Peso. Normalized segment net income for the third quarter was $48 million. Additional Details Domestic Advertising and Publishing BellSouth's advertising and publishing revenues declined 3.1 percent in the quarter, primarily reflecting weak economic conditions that affected the directory advertising environment. Increasing competition also had an impact. Operating income of $238 million increased 12.8 percent compared to the same period in the prior year, primarily due to a $48 million reduction year-over-year in uncollectible expense. The operating margin was 47.1 percent, a 660 basis point improvement year-over-year. Normalized Results Total normalized operating expenses increased 2.7 percent in the quarter. Cost of services and products increased 9.7 percent, driven primarily by growth in employee pension and retirement costs, increasing Cingular and Latin American volumes and increased cost of goods for retail long distance services, partially offset by lower salaries and wages. Selling, general and administrative expenses decreased 0.1 percent due to a decline in uncollectible expense offset by increased customer acquisition costs. Depreciation and amortization expense declined 6.7 percent, primarily driven by declining wireline capex spending, partially offset by increases in capex at Cingular. In addition, the impacts of SFAS 143 helped lower depreciation expense. Sequentially, expenses were up 2.0 percent, impacted by higher customer acquisition costs and the contract salary increase in August. The normalized effective tax rate for the quarter was 35.1 percent. Normalized interest expense decreased 9.2 percent. The drivers were a $2.7 billion reduction in total debt in the past year -- a 15.2 percent drop -- and lower interest rates. Net debt is down $5.7 billion in the past 12 months, to $10 billion, a 36 percent reduction. BellSouth's capital expenditures totaled $764 million in the third quarter, down 8.5 percent from the same quarter a year ago, resulting in a 13.4 percent ratio of capex to total normalized operating revenue excluding domestic wireless. BellSouth expects capex-to-revenue to be in the 13-14 percent range for 2003. By targeting capital expenditures, BellSouth will continue its focus on strong service excellence and customer satisfaction. [Graphic inserted here Net Debt In billions 3Q02 - $15.6 4Q02 - $14.9 1Q03 - $14.2 2Q03 - $11.3 3Q03 - $10.0 (Defined as long-term plus short-term debt less cash)] [Graphic inserted here Capex to Total Normalized Operating Revenue Percent 3Q02 - 15.0% 4Q02 - 16.8% 1Q03 - 11.5% 2Q03 - 13.0% 3Q03 - 13.4% (Capex and Normalized TOR both exclude domestic wireless)] -----END PRIVACY-ENHANCED MESSAGE-----