SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8607
BELLSOUTH CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1533433
(State of Incorporation) (I.R.S. Employer
Identification Number)
1155 Peachtree Street, N. E., 30309-3610
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number 404 249-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
At July 31, 2001, 1,875,285,201 common shares were outstanding.
Table of Contents
Item Page
Part I
1. Financial Statements
Consolidated Statements of Income ......................... 3
Consolidated Balance Sheets ............................... 4
Consolidated Statements of Cash Flows ..................... 5
Consolidated Statements of Shareholders' Equity
and Comprehensive Income ............................... 6
Notes to Consolidated Financial Statements ................ 8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 21
3. Qualitative and Quantitative Disclosures about Market Risk ... 33
Part II
4. Submission of Matters to a Vote of Security Holders .......... 34
6. Exhibits and Reports on Form 8-K ............................. 34
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PART I - FINANCIAL INFORMATION
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BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 2001 2000 2001
Operating revenues:
Communications group $ 4,601 $ 4,764 $ 9,114 $ 9,429
Domestic wireless 936 - 1,803 -
Latin America 689 744 1,367 1,517
Domestic advertising and publishing 441 436 790 870
All other 34 41 67 88
Total operating revenues 6,701 5,985 13,141 11,904
Operating expenses:
Operational and support expenses 3,514 3,232 7,035 6,393
Depreciation and amortization 1,240 1,203 2,458 2,360
Severance accrual - - 78 -
Total operating expenses 4,754 4,435 9,571 8,753
Operating income 1,947 1,550 3,570 3,151
Interest expense 332 334 638 694
Net earnings of equity affiliates 22 108 153 190
Other income, net 46 80 129 164
Income before income taxes 1,683 1,404 3,214 2,811
Provision for income taxes 619 524 1,149 1,040
Net income $ 1,064 $ 880 $ 2,065 $ 1,771
Weighted-average common shares outstanding:
Basic 1,882 1,874 1,881 1,873
Diluted 1,900 1,886 1,899 1,886
Dividends declared per common share $ 0.19 $ 0.19 $ 0.38 $ 0.38
Earnings per share:
Basic $ 0.57 $ 0.47 $ 1.10 $ 0.95
Diluted $ 0.56 $ 0.47 $ 1.09 $ 0.94
The accompanying notes are an integral part of these consolidated financial
statements.
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Per Share Amounts)
December 31, June 30,
2000 2001
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,061 $ 658
Accounts receivable, net of
allowance for uncollectibles
of $377 and $411 5,157 4,962
Material and supplies 379 434
Other current assets 809 1,046
Total current assets 7,406 7,100
Investments and advances 11,010 9,845
Property, plant and equipment 60,912 63,043
Less: accumulated depreciation 36,755 37,986
Property, plant and equipment, net 24,157 25,057
Deferred charges and other assets 4,180 4,668
Intangible assets, net 4,172 4,295
Total assets $ 50,925 $ 50,965
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year $ 7,569 $ 6,057
Accounts payable 2,233 1,734
Other current liabilities 3,468 3,695
Total current liablities 13,270 11,486
Long-term debt 12,463 13,043
Noncurrent liabilities:
Deferred income taxes 3,580 3,607
Other noncurrent liabilities 4,700 4,949
Total noncurrent liabilities 8,280 8,556
Shareholders' equity:
Common stock, $1 par value (8,650
shares authorized; 1,872 and
1,874 shares outstanding) 2,020 2,020
Paid-in capital 6,740 6,763
Retained earnings 14,074 15,102
Accumulated other comprehensive income (488) (747)
Shares held in trust and treasury (5,222) (5,126)
Guarantee of ESOP debt (212) (132)
Total shareholders' equity 16,912 17,880
Total liabilities and
shareholders' equity $ 50,925 $ 50,965
The accompanying notes are an integral part of these consolidated financial
statements.
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
For the Six Months
Ended June 30,
2000 2001
Cash Flows from Operating Activities:
Net income $ 2,065 $ 1,771
Adjustments to net income:
Depreciation and amortization 2,458 2,360
Curtailment charge - 72
Severance accrual 78 -
Loss on sale of investment - 50
Provision for uncollectibles 179 219
Net earnings of equity affiliates (153) (190)
Dividends received from equity affiliates 39 214
Minority interests in income of subsidiaries 22 (10)
Deferred income taxes and investment tax credits 98 156
Net change in:
Accounts receivable and other current assets (199) (199)
Accounts payable and other current liabilities 641 (287)
Deferred charges and other assets (337) (519)
Other liabilities and deferred credits (182) 138
Other reconciling items, net 89 (63)
Net cash provided by operating activities 4,798 3,712
Cash Flows from Investing Activities:
Capital expenditures (3,268) (3,357)
Investments in and advances to equity affiliates (582) (160)
Purchases of wireless licenses (73) (10)
Proceeds from sale of investment - 1,018
Proceeds from disposition of short-term investments 247 108
Purchases of short-term investments (177) (76)
Proceeds from repayment of loans and advances 14 100
Investments in debt securities - (176)
Other investing activities, net 44 (42)
Net cash used for investing activities (3,795) (2,595)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt (1,708) (2,130)
Proceeds from long-term debt 2,083 1,819
Repayments of long-term debt (335) (547)
Dividends paid (715) (712)
Purchase of treasury shares (148) -
Other financing activities, net 53 50
Net cash used for financing activities (770) (1,520)
Net decrease in cash and cash equivalents 233 (403)
Cash and cash equivalents at beginning of period 1,287 1,061
Cash and cash equivalents at end of period $ 1,520 $ 658
The accompanying notes are an integral part of these consolidated financial
statements.
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
For the Six Months Ended June 30, 2000
Number of Shares Amount
Accum.
Other
Shares Compre- Shares Guaran-
Held in hensive Held in tee of
Common Trust and Common Paid-in Retained Income/ Trust and ESOP
Stock Treasury Stock Capital Earnings (Loss) Treasury Debt Total
(a) (a)
Balance at December 31, 1999 2,020 (138) $ 2,020 $ 6,771 $ 11,456 $ (358) $ (4,798) $ (276) $ 14,815
Net income 2,065 2,065
Other comprehensive income, net of tax:
Foreign currency translation adjustment 27 27
Net unrealized gains on securities 335 335
Minimum pension liability adjustment (9) (9)
Total comprehensive income (b) 2,418
Dividends declared (715) (715)
Share issuances for employee benefit plans 2 (60) 114 54
Purchase of treasury stock (3) (148) (148)
Tax benefit related to stock options 4 4
ESOP activities and related tax benefit 74 74
Balance at June 30, 2000 2,020 (139) $ 2,020 $ 6,775 $ 12,746 $ (5) $ (4,832) $ (202) $ 16,502
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of June 30, 2000, there were approximately
36 shares held in trust and 103 shares held in treasury.
(b) Total comprehensive income for second quarter 2000 was $1,104.
The accompanying notes are an integral part of these consolidated financial
statements.
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
For the Six Months Ended June 30, 2001
Number of Shares Amount
Accum.
Other
Shares Compre- Shares Guaran-
Held in hensive held in tee of
Common Trust and Common Paid-in Retained Income/ Trust and ESOP
Stock Treasury Stock Capital Earnings (Loss) Treasury Debt Total
(a) (a)
Balance at December 31, 2000 2,020 (148) $ 2,020 $ 6,740 $ 14,074 $ (488) $ (5,222) $ (212) $ 16,912
Net income 1,771 1,771
Other comprehensive income, net of tax:
Foreign currency translation adjustment (12) (12)
Net unrealized losses on securities (236) (236)
Net unrealized losses on derivatives (11) (11)
Total comprehensive income (b) 1,512
Dividends declared (713) (713)
Share issuances for employee benefit plans 2 3 (32) 96 67
Purchase of treasury stock - - -
Tax benefit related to stock options 20 20
ESOP activities and related tax benefit 2 80 82
Balance at June 30, 2001 2,020 (146) $ 2,020 $ 6,763 $ 15,102 (747) $ (5,126) $ (132) $ 17,880
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of June 30, 2001, there were approximately
36 shares held in trust and 110 shares held in treasury.
(b) Total comprehensive income for second quarter 2001 was $770.
The accompanying notes are an integral part of these consolidated financial
statements.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars In Millions)
Note A - Preparation of Interim Financial Statements
In this report, BellSouth Corporation and its subsidiaries are referred to as
"we" or "BellSouth".
The accompanying unaudited consolidated financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. In our opinion, these statements include all
adjustments necessary for a fair presentation of the results of the interim
periods shown. All adjustments are of a normal recurring nature unless otherwise
disclosed. Revenues, expenses, assets and liabilities can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year. For a more
complete discussion of our significant accounting policies and other
information, you should read this report in conjunction with the consolidated
financial statements included in our latest annual report on Form 10-K and
previous quarterly report on Form 10-Q.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
Note B - NEW Accounting Pronouncements
BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets". Under these new Standards the FASB
eliminated accounting for certain mergers and acquisitions as poolings of
interests, eliminated amortization of goodwill and indefinite life intangible
assets, and established new impairment measurement procedures for goodwill. For
calendar-year reporting companies, the standards become effective for all
acquisitions completed on or after June 30, 2001. Changes in financial statement
treatment for goodwill and intangible assets arising from mergers and
acquisitions completed prior to June 30, 2001 become effective January 1, 2002.
We are currently assessing the impact of implementing these standards.
Derivative Instruments and Hedging Activities
FASB Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" requires that entities recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Gains and losses resulting
from changes in the fair values of those derivatives are to be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. We adopted SFAS No. 133 on January 1, 2001. The impact of
implementation was not material. The fair value of derivative instruments at
June 30, 2001 was not material.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note C - Earnings Per Share
Basic earnings per share is computed on the weighted-average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted-average number of common shares outstanding plus net incremental
shares arising out of employee stock options and benefit plans. The following is
a reconciliation of the weighted-average share amounts (in millions) used in
calculating earnings per share:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 2001 2000 2001
Basic common shares outstanding 1,882 1,874 1,881 1,873
Incremental shares from stock options and benefit plans 18 12 18 13
Diluted common shares outstanding 1,900 1,886 1,899 1,886
The earnings amounts used for per-share calculations are the same for both the
basic and diluted methods.
Note D - Sale of Qwest Shares
In January 2001, we sold approximately 22.2 million shares of Qwest
Communications common stock to Qwest for $1.0 billion in cash, or $45 per share.
In addition, we entered an agreement to purchase $250 of services and products
from Qwest over a five-year period, with payment being made in shares of Qwest
stock we currently own. Accordingly, 5.3 million shares are considered
restricted and are no longer classified as available-for-sale. Minimum payments
under the agreement are required to be made annually. The stock prices used to
compute the number of shares for such payments is fixed per the agreement. All
such prices are above our original cost.
Note E - Restructuring of Wireless Video Entertainment Business
In December 2000, we announced that we would restructure our video entertainment
service and concentrate our entertainment business on our fiber optic-based
wireline video operations. This move was made to better align our resources with
our strategic priorities in broadband services.
We recorded charges of approximately $498, or $323 net of tax, related to this
restructuring in the fourth quarter of 2000. These charges consisted of
approximately $289 for asset writeoffs and writedowns and $209 for contract
termination penalties, migration of customers to alternative service providers
and for severance and related benefit expenses. As of June 30, 2001, we have
charged $148 against the $209 accrued, leaving the accrual at $61 as of that
date. We expect to complete the plan by the end of 2001. Operating revenues
generated by this business were $14 in second quarter 2000 and $6 in second
quarter 2001, while operating losses were $26 in second quarter 2000 and $9 in
second quarter 2001. For the year-to-date periods, operating revenues were $28
in 2000 and $19 in 2001, while operating losses were $50 in 2000 and $16 in
2001.
NOTE F - Curtailment charge
In first quarter 2001, we recognized a curtailment loss of $72 in accordance
with provisions of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pension". The loss resulted from accelerated recognition of
prior service cost in excess of the decrease in our postretirement benefit
obligation for the wireless employees that will be covered under Cingular's
postretirement benefit plans.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE G - Contribution of AB Cellular to Cingular
In December 2000 we exercised our option to redeem AT&T's 55.6% partnership
interest in AB Cellular through the distribution of our Los Angeles Cellular
operations to AT&T. This redemption resulted in our ownership of the remaining
AB Cellular investment, including 100% of the Houston cellular operations,
87.35% of the Galveston cellular operations, and approximately $1,100 of cash.
In January 2001, we received FCC approval and transferred these properties and
the cash to Cingular, as contemplated by the October 2, 2000 Cingular
contribution and formation agreement.
Note H - Segment Information
We have four reportable operating segments: (1) Communications group; (2)
Domestic wireless; (3) Latin America; and (4) Domestic advertising and
publishing. We have included the operations of all other businesses falling
below the reporting threshold in the "All other" segment. The "Reconciling
items" shown below include Corporate Headquarters and capital funding
activities, the reversal of our proportionate share of Cingular's reported
results, intercompany eliminations and other special items that may arise.
Special items are transactions or events that are included in reported
consolidated results but are excluded from segment results due to their
nonrecurring or nonoperational nature.
During fourth quarter 2000, we contributed our domestic wireless operations to
Cingular, and we account for our investment in Cingular under the equity method.
For management purposes, however, we evaluate our domestic wireless segment
based on our proportionate share of Cingular's results. Accordingly, the
operating revenues and expenses reported for our domestic wireless segment for
second quarter and year-to-date 2001 reflect 40% of Cingular's total revenues
and expenses, whereas second quarter and year-to-date 2000 reflect the
historical results of our wireless businesses that have been contributed to
Cingular.
The following table provides information for each operating segment:
Second Quarter % Year-to-Date %
2000 2001 Change 2000 2001 Change
Communications group
External revenues $ 4,571 $ 4,764 4.2 $ 9,062 $ 9,416 3.9
Intersegment revenues 94 35 (62.8) 181 69 (61.9)
Total revenues $ 4,665 $ 4,799 2.9 $ 9,243 $ 9,485 2.6
Operating income $ 1,541 $ 1,430 (7.2) $ 3,044 $ 2,940 (3.4)
Segment net income $ 871 $ 819 (6.0) $ 1,703 $ 1,674 (1.7)
Domestic wireless
External revenues $ 1,028 $ 1,414 37.5 $ 1,972 $ 2,724 38.1
Intersegment revenues 8 - N/M* 14 - N/M
Total revenues $ 1,036 $ 1,414 36.5 $ 1,986 $ 2,724 37.2
Operating income $ 158 $ 303 91.8 $ 215 $ 508 136.3
Net earnings (losses) of equity affiliates $ 48 $ - N/M $ 80 $ - N/M
Segment net income $ 106 $ 129 21.7 $ 147 $ 217 47.6
* Not Meaningful
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note H - Segment Information (continued)
Second Quarter % Year-to-Date %
2000 2001 Change 2000 2001 Change
Latin America
External revenues $ 689 $ 744 8.0 $1,367 $1,517 11.0
Intersegment revenues 15 5 (66.7) 32 14 (56.3)
Total revenues $ 704 $ 749 6.4 $1,399 $1,531 9.4
Operating income $ 52 $ 89 71.2 $ 40 $ 87 117.5
Net earnings (losses) of equity affiliates $ (36) $ (95) N/M $ (42) $ (137) N/M
Segment net income (loss) $ (34) $ (119) N/M $ (54) $ (225) N/M
Domestic advertising and publishing
External revenues $ 441 $ 436 (1.1) $ 790 $ 870 10.1
Intersegment revenues 7 7 - 11 10 (9.1)
Total revenues $ 448 $ 443 (1.1) $ 801 $ 880 9.9
Operating income $ 204 $ 196 (3.9) $ 359 $ 422 17.5
Segment net income $ 124 $ 119 (4.0) $ 218 $ 256 17.4
All other
External revenues $ 25 $ 27 8.0 $ 48 $ 55 14.6
Intersegment revenues 1 7 N/M 3 12 N/M
Total revenues $ 26 $ 34 30.8 $ 51 $ 67 31.4
Operating income $ 3 $ 7 N/M $ 5 $ 13 N/M
Net earnings (losses) of equity affiliates $ 11 $ (9) N/M $ 34 $ (29) N/M
Segment net income (loss) $ 12 $ (4) N/M $ 33 $ (21) N/M
Reconciling items
External revenues $ (53) $(1,400) N/M $ (98) $(2,678) N/M
Intersegment revenues (125) (54) N/M (241) (105) N/M
Total revenues $(178) $(1,454) N/M $ (339) $(2,783) N/M
Operating income(loss) $ 11 $ (475) N/M $ (93) $ (819) N/M
Net earnings (losses) of equity affiliates $ (1) $ 212 N/M $ 81 $ 356 N/M
Segment net income (loss) $ (15) $ (64) N/M $ 18 $ (130) N/M
Reconciliation to Consolidated Financial Information
Operating Revenues
Communications group $ 4,665 $4,799 2.9 $9,243 $9,485 2.6
Domestic wireless 1,036 1,414 36.5 1,986 2,724 37.2
Latin America 704 749 6.4 1,399 1,531 9.4
Domestic advertising and publishing 448 443 (1.1) 801 880 9.9
All other 26 34 30.8 51 67 31.4
Total segments $ 6,879 $7,439 8.1 $ 13,480 $14,687 9.0
Reconciling items $(178) $(1,454) N/M $ (339) $(2,783) N/M
Total consolidated $ 6,701 $5,985 (10.7) $ 13,141 $11,904 (9.4)
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note H - Segment Information (continued)
Second Quarter % Year-to-Date %
2000 2001 Change 2000 2001 Change
Reconciliation to Consolidated Financial Information, continued
Net Income
Communications group $ 871 $ 819 (6.0) $1,703 $1,674 (1.7)
Domestic wireless 106 129 21.7 147 217 47.6
Latin America (34) (119) N/M (54) (225) N/M
Domestic advertising and publishing 124 119 (4.0) 218 256 17.4
All other 12 (4) N/M 33 (21) N/M
Total segments $ 1,079 $ 944 (12.5) $2,047 $1,901 (7.1)
Reconciling items $ (15) $ (64) N/M $ 18 $ (130) N/M
Total consolidated $ 1,064 $ 880 (17.3) $2,065 $1,771 (14.2)
Note I - Marketable Securities
We have investments in marketable securities, primarily common stocks, which are
accounted for under the cost method. These investments are comprised primarily
of our equity interest in Qwest and are classified as available-for-sale under
SFAS No. 115. Under SFAS No. 115, available-for-sale securities are required to
be carried at their fair value, with unrealized gains and losses, net of income
taxes, recorded in accumulated other comprehensive income (loss) in our
statement of changes in shareholders' equity and comprehensive income. The fair
values of our investments in marketable securities are determined based on
market quotations. Equity securities that are restricted for more than one year
or not publicly traded are recorded at cost.
The tables below show certain summarized information related to our investments
which are adjusted to their fair value at June 30:
Gross Gross
Unrealized Unrealized Recorded
2000 Cost gains losses Basis
Investment in Qwest ... $3,500 $ 200 $ -- $ 3,700
Other investments ...... 458 167 (31) 594
Total ............. $3,958 $ 367 $ (31) $ 4,294
Gross Gross
Unrealized Unrealized Recorded
2001 Cost gains losses Basis
Investment in Qwest ... $2,198 $ -- $(714) $1,484
Other investments ...... 509 3 (127) 385
Total ............. $2,707 $ 3 $(841) $1,869
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note J - Summary Financial Information for Equity Investees
The following table displays the summary combined financial information of our
equity method businesses. These amounts are shown on a 100-percent basis.
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
2000 2001 2000 2001
Revenues ........... $1,550 $4,695 $3,049 $9,106
Operating income .... $ 173 $ 812 $ 284 $1,283
Net income .......... $34 $ 233 $72 $ 351
Note K - Debt Issuance
In February 2000 we issued $2,000 of long-term debt, consisting of $1,000 of
Ten-year, 7 3/4% Notes and $1,000 of Thirty-year, 7 7/8% Debentures. We received
total proceeds of $1,974, which were used to retire commercial paper.
In April 2001, we privately sold $1,000 of 20-year annual put reset securities.
The notes bear interest at 4.287% until April 2002, at which time the interest
rate will be reset if certain investment banks holding call options exercise
their options and remarket the notes. If the banks do not exercise their call
options on that date, we will be required to redeem the notes at par. The
proceeds were used to pay down short-term borrowings.
Note L - Contingencies
Litigation Matters
Reciprocal compensation
Following the enactment of the Telecommunications Act of 1996, our telephone
company subsidiary, BellSouth Telecommunications, Inc. (BST), and various
competitive local exchange carriers entered into interconnection agreements
providing for, among other things, the payment of reciprocal compensation for
local calls initiated by the customers of one carrier that are completed on the
network of the other carrier. Numerous competitive local carriers have claimed
entitlement from BST for compensation associated with dial-up calls originating
on BST's network and connecting with Internet service providers served by the
competitive local carriers' networks. BST has maintained that dial-up calls to
Internet service providers are not local calls for which terminating
compensation is due under the interconnection agreements; however, the courts
and state regulatory commissions in BST's operating territory that have
considered the matter have, in most cases, ruled that BST is responsible for
paying reciprocal compensation on these calls.
During the second quarter of 2001, we adjusted our accrual for these claims.
This adjustment increased our expenses by approximately $140 and reduced net
income by $88. The adjustment reflects our current estimate of the liability for
these claims. We have commenced discussions with several competitive local
exchange carriers concerning settlement of these claims, and agreements have
been reached in certain circumstances.
Also during the second quarter of 2001, the FCC released an Order on Remand and
Report and Order addressing the issue of compensation for ISP traffic. In its
Order, the FCC acknowledged that dial-up calls to Internet service providers are
not local calls, but instead are "information access" traffic exempt from the
reciprocal compensation provisions of the 1996 Act. The FCC has implemented a
three-year interim period during which local carriers will pay inter-carrier
compensation for such calls in decreasing increments. After the three-year
interim period, the new rules on inter-carrier compensation to be adopted in
connection with a Notice of Proposed Rulemaking released on April 27, 2001 are
expected to be in effect. If no rules have been adopted by that time, the
inter-carrier compensation in effect at the end of the third year would remain
in effect.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note L - Contingencies (continued)
Other reciprocal compensation issues
In a related matter, a competitive local carrier has claimed terminating
compensation of approximately $165 for service arrangements that we did not
believe involved "traffic" under our interconnection agreements. We filed a
complaint with the state regulatory commission asking that agency to declare
that we did not owe reciprocal compensation for these arrangements. In March
2000, the state commission ruled in our favor finding that compensation was not
owed to the competitive local carrier. This matter is currently on appeal.
Compliance Matters
Foreign Corrupt Practices Act
In July 2000, the SEC began a formal investigation of whether we and others may
have violated the Foreign Corrupt Practices Act (FCPA). The SEC has subpoenaed
documents relating to the activities of our foreign subsidiaries, and we have
produced responsive documents. Prior to the commencement of the SEC's formal
investigation, we had engaged outside counsel to investigate an FCPA matter
relating to the activities of one of our foreign subsidiaries in Latin America,
and outside counsel concluded that those activities did not violate the Act.
Thereafter and independent of these developments, our internal auditors, in the
ordinary course of conducting compliance reviews, identified issues concerning
accounting entries made by another of our Latin American subsidiaries. We have
informed the SEC as to this matter, and the SEC has expanded its investigation
to encompass it. Our internal investigation of the FCPA compliance of our
foreign subsidiaries is continuing. We are cooperating with the SEC in its
investigation, but we cannot predict the duration or the outcome of the SEC's
investigation or whether the scope of the investigation will be expanded beyond
the matters currently identified.
Regulatory matters
Beginning in 1996, we operated under a price regulation plan approved by the
South Carolina Public Service Commission under existing state laws. In April
1999, however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated under a new state
statute, adopted subsequent to the Commission's approval of the earlier plan.
The new statute allows telephone companies in South Carolina to operate under
price regulation without obtaining approval from the Commission. The election
became effective during August 1999. The South Carolina Consumer Advocate
petitioned the Commission seeking review of the level of our earnings during the
1996-1998 period when we operated under the subsequently invalidated price
regulation plan. The Commission voted to dismiss the petition in November 1999
and issued orders confirming the vote in February and June of 2000. In July
2000, the Consumer Advocate appealed the Commission's dismissal of the petition.
Also in 2000, the Florida Public Service Commission adopted a staff
recommendation that our change in 1999 from a late charge based on a percentage
of the amounts overdue to a flat rate fee plus an interest charge violated the
Florida price regulation statute and voted that certain monies should be
refunded. We protested the decision and the Commission should issue a decision
by the end of 2001.
CWA Agreement
Our existing collective bargaining agreements with the Communications Workers of
America (CWA) are scheduled to expire on August 4, 2001. We are currently in
negotiations with the CWA over the terms of new agreements. Negotiations are
proceeding, but we cannot predict at this time whether agreements will be
reached by August 4, 2001.
Other Claims
We are subject to claims arising in the ordinary course of business involving
allegations of personal injury, breach of contract, anti-competitive conduct,
employment law issues, regulatory matters and other actions. BST is also subject
to claims attributable to pre-divestiture events involving environmental
liabilities, rates, taxes, contracts and torts. Certain contingent liabilities
for pre-divestiture events are shared with AT&T Corp. While complete assurance
cannot be given as to the outcome of these claims, we believe that any financial
impact would not be material to our results of operations, financial position or
cash flows.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note M - Tracking Stock
In December 2000, our shareholders approved amendments to our charter that will
permit us to issue our common stock in series, and our Board of Directors
intends to initially designate two series: Latin America group stock, intended
to reflect the separate performance of our Latin American businesses, and BLS
group stock, intended to reflect the separate performance of all of our other
businesses.
We plan a public offering of shares of Latin America group stock to finance our
expansion in Latin America. At the time of a public offering, a number of shares
of Latin America group stock will be reserved for the BLS group or for issuance
to the holders of BLS group stock. We expect that we would distribute, as a
dividend to the holders of BLS group stock, the reserved shares of Latin America
group stock within six to 12 months following the public offering.
Our plans to create, issue and distribute Latin America group stock are subject
to a number of conditions, including market conditions and other factors. The
implementation and timing of these transactions are uncertain.
Note N - Subsidiary Financial Information
We have fully and unconditionally guaranteed all of the outstanding debt
securities of BST that are subject to the reporting requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934. BST is a 100% owned
subsidiary of BellSouth. In accordance with SEC rules, BST is no longer subject
to the reporting requirements of the Securities Exchange Act of 1934, and we are
providing the following condensed consolidating financial information.
BST is listed separately because it has debt securities, registered with the
SEC, that we have guaranteed. All other operating subsidiaries that do not have
registered securities guaranteed by us are presented in the Other column. The
Parent column is comprised of headquarters entities which provide, among other
services, executive management, administrative support and financial management
to operating subsidiaries. The Adjustments column includes the necessary amounts
to eliminate the intercompany balances and transactions between BST, Other and
Parent to reconcile to our consolidated financial information.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note N - Subsidiary Financial Information (continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended June 30, 2000
BST Other Parent Adjustments Total
Total operating revenues $ 4,552 $ 2,422 $ 376 $ (649) $ 6,701
Total operating expenses 3,173 2,094 141 (654) 4,754
Operating income 1,379 328 235 5 1,947
Interest expense 176 56 210 (110) 332
Net earnings (losses) of equity affiliates 4 22 1,320 (1,324) 22
Other income (expense), net 1 (27) 188 (116) 46
Income before income taxes 1,208 267 1,533 (1,325) 1,683
Provision for (benefit from) income taxes 431 115 75 (2) 619
Net income $ 777 $ 152 $ 1,458 $ (1,323) $ 1,064
For the Three Months Ended June 30, 2001
BST Other Parent Adjustments Total
Total operating revenues $ 4,657 $ 1,603 $ 648 $ (923) $ 5,985
Total operating expenses 3,528 1,383 452 (928) 4,435
Operating income 1,129 220 196 5 1,550
Interest expense 164 80 179 (89) 334
Net earnings (losses) of equity affiliates 4 98 1,117 (1,111) 108
Other income (expense), net 1 29 143 (93) 80
Income before income taxes 970 267 1,277 (1,110) 1,404
Provision for income taxes 344 154 23 3 524
Net income $ 626 $ 113 $ 1,254 $ (1,113) $ 880
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note N - Subsidiary Financial Information (continued)
For the Six Months Ended June 30, 2000
BST Other Parent Adjustments Total
Total operating revenues $ 9,019 $ 4,600 $ 755 $ (1,233) $ 13,141
Total operating expenses 6,332 4,204 326 (1,291) 9,571
Operating income 2,687 396 429 58 3,570
Interest expense 337 120 385 (204) 638
Net earnings (losses) of equity affiliates 7 139 2,565 (2,558) 153
Other income (expense), net 3 (14) 369 (229) 129
Income before income taxes 2,360 401 2,978 (2,525) 3,214
Provision for income taxes 866 145 134 4 1,149
Net income $ 1,494 $ 256 $ 2,844 $ (2,529) $ 2,065
For the Six Months Ended June 30, 2001
BST Other Parent Adjustments Total
Total operating revenues $ 9,233 $ 3,180 $ 1,193 $ (1,702) $ 11,904
Total operating expenses 6,745 2,785 932 (1,709) 8,753
Operating income 2,488 395 261 7 3,151
Interest expense 331 168 367 (172) 694
Net earnings (losses) of equity affiliates 8 176 2,274 (2,268) 190
Other income (expense), net 10 91 243 (180) 164
Income before income taxes 2,175 494 2,411 (2,269) 2,811
Provision for (benefit from) income taxes 783 293 (39) 3 1,040
Net income $ 1,392 $ 201 $ 2,450 $ (2,272) $ 1,771
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note N - Subsidiary Financial Information (continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2000
BST Other Parent Adjustments Total
ASSETS
Current assets:
Cash and cash equivalents $ 62 $ 999 $ - $ - $ 1,061
Accounts receivable, net 3,195 2,162 5,522 (5,722) 5,157
Other current assets 271 837 184 (104) 1,188
Total current assets 3,528 3,998 5,706 (5,826) 7,406
Investments and advances 322 7,505 10,592 (7,409) 11,010
Property, plant and equipment, net 21,277 2,518 362 - 24,157
Deferred charges and other assets 3,868 219 186 (93) 4,180
Intangible assets, net 692 3,291 189 - 4,172
Total assets $ 29,687 $ 17,531 $ 17,035 $ (13,328) $ 50,925
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year $ 1,830 $ 1,724 $ 8,791 $ (4,776) $ 7,569
Other current liabilities 3,514 4,054 1,105 (2,972) 5,701
Total current liablities 5,344 5,778 9,896 (7,748) 13,270
Long-term debt 7,641 1,594 8,139 (4,911) 12,463
Noncurrent liabilities:
Deferred income taxes 2,306 1,271 3 - 3,580
Other noncurrent liabilities 3,209 1,316 321 (146) 4,700
Total noncurrent liabilities 5,515 2,587 324 (146) 8,280
Shareholders' equity: 11,187 7,572 (1,324) (523) 16,912
Total liabilities and shareholders' equity $ 29,687 $ 17,531 $ 17,035 $ (13,328) $ 50,925
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note N - Subsidiary Financial Information (continued)
June 30, 2001
BST Other Parent Adjustments Total
ASSETS
Current assets:
Cash and cash equivalents $ 102 $ 596 $ (121) $ 81 $ 658
Accounts receivable, net 3,185 1,995 3,597 (3,815) 4,962
Other current assets 359 942 281 (102) 1,480
Total current assets 3,646 3,533 3,757 (3,836) 7,100
Investments and advances 310 5,569 7,141 (3,175) 9,845
Property, plant and equipment, net 22,010 2,577 470 - 25,057
Deferred charges and other assets 4,380 211 324 (247) 4,668
Intangible assets, net 906 3,174 200 15 4,295
Total assets $ 31,252 $ 15,064 $ 11,892 $ (7,243) $ 50,965
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year $ 2,723 $ 594 $ 5,800 $ (3,060) $ 6,057
Other current liabilities 3,442 1,888 940 (841) 5,429
Total current liablities 6,165 2,482 6,740 (3,901) 11,486
Long-term debt 7,683 2,206 5,853 (2,699) 13,043
Noncurrent liabilities:
Deferred income taxes 2,476 1,283 15 (167) 3,607
Other noncurrent liabilities 3,321 1,360 391 (123) 4,949
Total noncurrent liabilities 5,797 2,643 406 (290) 8,556
Shareholders' equity: 11,607 7,733 (1,107) (353) 17,880
Total liabilities and shareholders
equity $ 31,252 $ 15,064 $ 11,892 $ (7,243) $ 50,965
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
Note N - Subsidiary Financial Information (continued)
CONDENSED CONSOLIDATING CASH FLOW STATEMENTS
For the Six Months Ended June 30, 2000
BST Other Parent Adjustments Total
Cash flows from operating activities $3,408 $ 1,162 $(1,337) $ 1,565 $ 4,798
Cash flows from investing activities (2,390) (739) 1,490 (2,156) (3,795)
Cash flows from financing activities (911) (404) (46) 591 (770)
Net increase in cash $ 107 $ 19 $ 107 $ - $ 233
For the Six Months Ended June 30, 2001
BST Other Parent Adjustments Total
Cash flows from operating activities $3,217 $ 599 $ (380) $ 276 $ 3,712
Cash flows from investing activities (2,859) (301) (610) 1,175 (2,595)
Cash flows from financing activities (317) (327) 575 (1,451) (1,520)
Net increase (decrease) in cash $ 41 $ (29) $ (415) $ - $ (403)
BELLSOUTH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions, Except Per Share Amounts)
For a more complete understanding of our industry, the drivers of our business
and our current period results, you should read the following Management's
Discussion and Analysis of Financial Condition and Results of Operations in
conjunction with our latest annual report on Form 10-K, our previous quarterly
report on Form 10-Q, and our other filings with the SEC.
-------------------------------------------------------------------------------
Consolidated Results of Operations
-------------------------------------------------------------------------------
Key financial and operating data for second quarter 2000 and 2001 and the
respective year-to-date periods are as follows. All references to earnings per
share are on a diluted basis:
Second Quarter % Year-to-Date %
2000 2001 Change 2000 2001 Change
Results of operations:
Operating revenues $6,701 $5,985 (10.7) $ 13,141 $ 11,904 (9.4)
Operating expenses 4,754 4,435 (6.7) 9,571 8,753 (8.5)
Operating income 1,947 1,550 (20.4) 3,570 3,151 (11.7)
Interest expense 332 334 0.6 638 694 8.8
Net earnings (losses) of equity affiliates 22 108 N/M* 153 190 24.2
Other income, net 46 80 N/M 129 164 N/M
Provision for income taxes 619 524 (15.3) 1,149 1,040 (9.5)
Net income $1,064 $ 880 (17.3) $2,065 $ 1,771 (14.2)
As Reported:
Net income $1,064 $880 (17.3) $2,065 $ 1,771 (14.2)
Earnings per share $ 0.56 $ 0.47 (16.1) $ 1.09 $ 0.94 (13.8)
Cash flow data:
Cash provided by operating activities $2,448 $2,108 (13.9) $4,798 $3,712 (22.6)
Cash used for investing activities $(2,239) $(1,655) (26.1) $(3,795) $(2,595) (31.6)
Cash provided by (used for) financing $ 157 $(507) N/M $ (770) $(1,520) 97.4
activities
Other:
Effective tax rate 36.8% 37.3% +50 bps 35.8% 37.0% +120 bps
Average debt balances:
Short-term debt $5,607 $ 6,039 7.7 $6,212 $ 6,281 1.1
Long-term debt $11,015 $13,431 21.9 $10,462 $13,197 26.1
Total average debt balance $16,622 $19,470 17.1 $16,674 $19,478 16.8
EBITDA(1) $3,187 $2,753 (13.6) $ 6,106 $ 5,511 (9.7)
EBITDA margin(2) 47.6% 46.0% -160bps 46.5% 46.3% -20 bps
(1) EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, severance accrual, net earnings (losses) of
equity affiliates and other income, net. We present EBITDA because it is a
widely accepted financial indicator used by certain investors and analysts
to analyze and compare companies on the basis of operating performance and
because we believe that EBITDA is an additional meaningful measure of
performance and liquidity. EBITDA does not represent cash flows for the
period, nor is it an alternative to operating income (loss) as an indicator
of operating performance. You should not consider it in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles. The items excluded from the
calculation of EBITDA are significant components in understanding and
assessing our financial performance. Our computation of EBITDA may not be
comparable to the computation of similarly titled measures of other
companies. EBITDA does not represent funds available for discretionary
uses.
(2) EBITDA margin is EBITDA divided by operating revenues.
* - Not meaningful.
-------------------------------------------------------------------------------
Overview of consolidated results of operations
-------------------------------------------------------------------------------
On a comparative basis, our results reflect the effects of the contribution of
our former domestic wireless operations to Cingular Wireless in fourth quarter
2000, and our acquisition of operations in Colombia in July 2000.
The results for year-to-date 2000 include:
- Income related to the restructuring of our ownership interest in the German
wireless operator, E-Plus, which increased net income by $68, or $0.04 per
share.
- Expense recorded as a result of our previously announced plan to reduce our
domestic general and administrative staff, which reduced net income by $48,
or $0.03 per share.
The results for second quarter 2001 include:
- Our adjustment to an accrual for reciprocal compensation, which reduced net
income by $88, or $0.05 per share.
- Losses incurred as we exit our wireless video entertainment business, which
reduced net income by $5 for the quarter and $10, or $0.01 per share, for
the year-to-date period.
In addition to the second quarter items, the year-to-date 2001 period includes:
- A loss recorded as a result of selling 22.2 million shares of Qwest common
stock. We received total proceeds of $1,000 and recognized a loss of $50,
or $32 after tax, or $0.02 per share.
- Expense recorded for changes in post retirement medical benefit
obligations, which reduced net income by $47, or $0.02 per share.
Events Affecting Comparability
Formation of Cingular Wireless
In October 2000, we contributed our domestic wireless voice and data operations
to a joint venture with SBC Communications and formed Cingular Wireless
(Cingular). We own an approximate 40% stake in Cingular, and share joint control
with SBC. Accordingly, we account for our share of Cingular's results using the
equity method. Prior to October 2000, we consolidated the revenues and expenses
of these operations. As a result of this change, our second quarter and
year-to-date 2000 results include the revenues and expenses attributable to our
former domestic wireless operations and our second quarter and year-to-date 2001
results include equity in earnings attributable to Cingular.
Operating Revenues
Our reported operating revenues decreased $716 in second quarter 2001 and $1,237
for the year-to-date period compared to the same periods in 2000. These changes
reflect:
- A decrease of $936 for the second quarter and $1,803 for the year-to-date
period from our domestic wireless operations due to the contribution of our
domestic wireless operations to Cingular, as explained above.
- Increases in our communications group of $163 for the second quarter and
$315 for the year-to-date period driven by strong growth in digital and
data revenues, wholesale revenues, and by the company's marketing of
calling features. These increases were offset by declines in basic service
revenues, reflecting competition and a slowing economy. Also impacting
revenues was the decline in our public payphone business.
- Higher revenues from our Latin America group of $55, or 8.0%, for the
second quarter and $150, or 11.0%, for the year-to-date period driven by
the acquisition of Colombia in June 2000. We added approximately 2.4
million customers quarter over quarter, with 1.2 million of those coming
from the acquisition and subsequent expansion of Colombia. The impact of
customer additions on revenue growth was offset by declining monthly
revenue per customer resulting from increased penetration of cellular
service into the mass-consumer market and exchange rate declines in some
countries.
- A decrease in revenues from our domestic advertising and publishing group
of $5 for the second quarter driven by slowing volume growth. Revenues for
the year-to-date period grew $80, or 10.1%, driven by timing of book
publications.
Operating Expenses
Total operating expenses decreased $319 during second quarter 2001 and $818
during the year-to-date period. Operating expenses for year-to-date 2000 include
a $78 severance accrual related to a plan to reduce our domestic general and
administrative staff. Operating expenses for second quarter and year-to-date
2001 were impacted by approximately $140 of expense related to our adjustment of
the accrual for reciprocal compensation. Operating expenses for year-to-date
2001 were also impacted by a curtailment loss related to postretirement medical
benefits which increased expenses by $72. The remaining decreases of $459 for
the second quarter and $952 for the year-to-date period reflect:
- A decrease of $422 for the second quarter and $854 for the year-to-date
period in operational and support expenses. Included in this change were
decreases of $633 for the second quarter and $1,281 for the year-to-date
period attributable to the domestic wireless operations which were
contributed to Cingular. Offsetting these decreases were higher expenses in
the communications group driven by our accelerated DSL growth initiative
and customer service initiatives.
- A decrease of $37 for the second quarter and $98 for the year-to-date
period in depreciation and amortization due primarily to $154 for the
second quarter and $321 for the year-to-date period of expense recorded by
our former domestic wireless operations in 2000. These decreases were
offset by increases at the communications group and Latin America group due
to additions of property, plant, equipment and software to support
expansion of our domestic wireline communications and Latin American
wireless networks and amortization of intangibles relating to our
acquisitions in Colombia.
Interest Expense
Interest expense remained relatively flat in second quarter 2001 and increased
8.8% in year-to-date 2001 as compared to the same 2000 periods. The higher
interest expense in the year-to-date period is attributed to higher average debt
balances driven by debt related to Colombia, and the buyout of our partners in
our Carolina PCS operations. Lower average interest rates on commercial paper
reduced the impact of these increases significantly in second quarter and to a
lesser extent in the year-to-date period.
Net Earnings (Losses) of Equity Affiliates
Earnings from our unconsolidated businesses increased $86 in second quarter 2001
and $37 for the year-to-date period. These increases were driven by the addition
of earnings from our equity investment in Cingular, which totaled $211 in second
quarter 2001 and $354 for year-to-date 2001. The increases were significantly
offset by higher losses of $59 for the second quarter and $95 for the
year-to-date period from our equity investments in Latin America, driven by
foreign exchange losses in Brazil. The year-to-date 2000 period results included
$68 of income related to the restructuring of our ownership interest in our
German wireless operations. These results are addressed in the discussions for
the domestic wireless, Latin America group and all other segments.
Other Income, net
Other income, net includes interest income, gains/losses on disposition of
assets, foreign currency gains/losses and miscellaneous nonoperating income.
Other income, net remained relatively flat quarter over quarter and year over
year.
Provision for Income Taxes
The provision for income taxes decreased $95 in second quarter 2001 and $109 for
the year-to-date period. Our effective tax rate increased from 36.8% in second
quarter 2000 to 37.3% in second quarter 2001. The increase in the effective tax
rate was driven by higher losses at our Brazilian equity investments which are
recorded net of tax.
For the year-to-date period, the effective tax rate increased from 35.8% in 2000
to 37.0% in 2001. The increase in the effective tax rate is due primarily to the
higher losses at our Brazilian equity investments, and to the one-time gain
related to the restructuring of E-Plus in first quarter 2000.
-------------------------------------------------------------------------------
Results by Segment
-------------------------------------------------------------------------------
We have four reportable operating segments: (1) Communications group; (2)
Domestic wireless; (3) Latin America; and (4) Domestic advertising and
publishing. We have included the operations of all other businesses falling
below the reporting threshold in the "All other" segment. We evaluate the
performance of each business unit based on net income, exclusive of charges for
use of intellectual property and adjustments for special items that may arise.
Special items are transactions or events that are included in reported
consolidated results but are excluded from segment results due to their
nonrecurring or nonoperational nature.
The following discussion highlights our performance in the context of these
segments. For a more complete understanding of our industry, the drivers of our
business, and our current period results, you should read this discussion in
conjunction with our consolidated financial statements, including the related
notes.
-------------------------------------------------------------------------------
Communications Group
-------------------------------------------------------------------------------
The communications group includes our core domestic businesses including: All
domestic wireline voice, data, broadband, e-commerce, long distance, Internet
services and advanced voice features. Services are marketed across three major
customer segments: residential, business and wholesale.
---------------------------------------------------- --------------------- ---------- --- ------------------------ ---------
Second Quarter % Year-to-Date %
--------------------- ------------------------
2000 2001 Change 2000 2001 Change
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Results of Operations
Operating revenues:
Local service $2,891 $2,964 2.5 $5,719 $5,874 2.7
Network access 1,210 1,226 1.3 2,442 2,463 0.9
Long distance 169 176 4.1 339 347 2.4
Other communications 395 433 9.6 743 801 7.8
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Total operating revenues 4,665 4,799 2.9 9,243 9,485 2.6
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Operating expenses:
Operational and support expenses 2,184 2,356 7.9 4,348 4,556 4.8
Depreciation and amortization 940 1,013 7.8 1,851 1,989 7.5
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Total Operating expenses 3,124 3,369 7.8 6,199 6,545 5.6
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Operating income 1,541 1,430 (7.2) 3,044 2,940 (3.4)
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Segment net income $ 871 $ 819 (6.0) $1,703 $1,674 (1.7)
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Key Indicators
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Access line counts (000's):
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Access lines:
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Residential 17,203 17,011 (1.1)
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Business 8,401 8,426 0.3
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Other 260 229 (11.9)
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Total access lines 25,864 25,666 (0.8)
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Access line equivalents (1) 21,821 33,877 55.2
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Total equivalent access lines 47,685 59,543 24.9
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Resold lines and unbundled network elements (000's) 1,036 1,478 42.7
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Access minutes of use (millions) 28,798 27,413 (4.8) 57,514 55,355 (3.8)
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
IntraLATA toll messages (millions) 129 111 (14.0) 265 219 (17.4)
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Internet customers (000's) 788 1,097 39.2
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
ADSL customers (000's) 74 381 414.9
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Digital and data services revenues $830 $1,056 27.2 $1,606 $2,061 28.3
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
Calling feature revenues $532 $577 8.5 $1,047 $1,144 9.3
---------------------------------------------------- ---------- ---------- ---------- --- ----------- ----------- ----------
(1) Access line equivalents represent a conversion of non-switched data
circuits to a switched access line basis and is presented for comparability
purposes. Equivalents are calculated by converting high-speed/high-capacity
data circuits to the equivalent of a switched access line based on
transport capacity. While the revenues generated by access line equivalents
have a directional relationship with these counts, growth rates cannot be
compared on an equivalent basis.
Operating Revenues
Local service
The increase in local service revenues of $73 in the second quarter and $155 for
the year-to-date period is attributable to strong growth in digital and data
revenues, wholesale revenues, and by our marketing of calling features. Those
increases were offset by a decrease in basic service revenues reflecting
competition, rate reductions and a slowing economy as well as reduced payphone
related revenues at our telephone operations.
Since second quarter 2000, residential access lines declined 1.1% to 17,011,
while business access lines increased 0.3% to 8,426. The core business was
affected by a slowing economy, as well as competitive and technological changes.
The technological changes are manifested in the shifting of customers from
wireline to wireless and second line customers to high-speed access service. At
June 30, 2001, we provided 1.5 million wholesale lines to competitors, on both a
resale and unbundled network elements (UNE) basis. At June 30, 2000, UNEs
accounted for approximately 25% of our wholesale lines and at June 30, 2001 they
represented 50%. Because of the larger discounts, this shift to UNEs is
negatively impacting our revenue growth. We also estimate that we have lost an
additional 1.8 million lines to facilities-based competitors.
Due to expanding demand for our digital and data services, we ended the second
quarter with over 59 million total equivalent access lines, an increase of 24.9%
since June 30, 2000.
Revenues from optional calling features such as Caller ID, Call Waiting, Call
Return and voicemail service increased $45, or 8.5%, quarter over quarter and
$97, or 9.3%, year over year. These increases were driven by growth in calling
feature usage through our Complete Choice(R) Package, a one-price bundled
offering of over 20 services.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $20 compared to second quarter 2000 and $46
compared to the first six months of 2000.
Network access
Network access revenues increased $16, or 1.3%, in the second quarter of 2001
when compared to the same 2000 period, and $21, or 0.9%, year over year.
Revenues from dedicated high-capacity data line offerings grew approximately $89
quarter over quarter and $211 year over year as Internet service providers and
high-capacity users increased their use of our network. The increases were
substantially offset by a $100 decline in the second quarter 2001 and a $198
decline for the year-to-date period in revenues derived from switched access
services resulting from a decrease in access minute-of-use volumes and the
impacts of access charge rate reductions.
Access minutes of use fell 4.8% to 27,413 million in second quarter 2001 from
28,798 million in second quarter 2000. For the year-to-date period, access
minutes of use decreased 3.8% to 55,355 million in 2001 from 57,514 million in
2000. These decreases resulted from: Continued migration of minutes to dedicated
digital and data services offerings which are fixed-charge based rather than
minute-of-use based; competition from competitive local exchange carriers whose
traffic completely bypasses our network; and the effect of competitive services
such as wireless and Internet e-mail. Year-to-date 2000 minute-of-use volumes
were also positively impacted by the additional day of activity resulting from
the leap year.
Access charge rate reductions negatively impacted these revenues $27 in the
second quarter 2001 and $53 for the year-to-date period. These rate reductions
are primarily related to the FCC's access reform and productivity factor
adjustments. The reductions were partially offset by recoveries of local number
portability costs.
Long distance Long distance revenue increased $7, or 4.1%, in the second quarter
2001 and $8, or 2.4%, for the year-to-date period. Strong growth in wireless
long distance and prepaid long distance cards was partially offset by losses in
intralata toll as toll messages declined 14.0% for the quarter, and 17.4%
year-to-date. These losses are driven by increased demand for Area Plus, a
BellSouth package that combines a basic telephone line with an expanded local
calling area. Area Plus packages grew 21% in the past year to over 2 million.
Other communications
Other communications revenue increased 9.6% in the second quarter 2001 and 7.8%
for the year-to-date period, driven by growth in wireless interconnection
revenues and offset by a reduction in payphone revenues, as we begin a
transition out of this business that will be completed by December 2002.
Operating Expenses
Operational and support expenses
Operational and support expenses increased $172, or 7.9%, quarter over quarter
and $208, or 4.8%, year over year. Included in these changes were expenses
primarily attributable to labor costs to support data and customer service
initiatives, which increased $212 for the second quarter 2001 and $416 for the
year-to-date period. The increases were substantially offset by income generated
as favorable pension plan returns exceeded expenses from other employee
benefits.
Depreciation and amortization
Depreciation and amortization expense increased $73, or 7.8%, in second quarter
2001 and $138, or 7.5%, for the year-to-date period when compared to the same
2000 periods. The increases are primarily attributable to amortization of
capitalized software and depreciation resulting from higher levels of net
property, plant and equipment.
-------------------------------------------------------------------------------
Domestic Wireless
-------------------------------------------------------------------------------
During fourth quarter 2000, we contributed our domestic wireless operations to
Cingular, and we account for our investment in Cingular under the equity method.
For management purposes, however, we evaluate our domestic wireless segment
based on our proportionate share of Cingular's results. Accordingly, the
operating revenues and expenses reported for our domestic wireless segment for
second quarter and year-to-date 2001 reflect 40% of Cingular's total revenues
and expenses, whereas second quarter and year-to-date 2000 reflect the
historical results of our wireless businesses that have been contributed to
Cingular.
Certain reclassifications of prior period amounts have been made, where
appropriate, to reflect comparable operating results.
-------------------------------------------------- ----------------------- ------------ ----------------------- -----------
Second Quarter % Year-to-date %
----------------------- -----------------------
2000 2001 Change 2000 2001 Change
-------------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Total operating revenues $1,036 $1,414 36.5 $1,986 $2,724 37.2
-------------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Operating expenses:
Operational and support expenses 724 921 27.2 1,450 1,846 27.3
Depreciation and amortization 154 190 23.4 321 370 15.3
Total operating expenses 878 1,111 26.5 1,771 2,216 25.1
-------------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Operating income 158 303 91.8 215 508 136.3
Segment net income $106 $ 129 21.7 $ 147 $ 217 47.6
-------------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Customers (a) 5,482 8,487 54.8
-------------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Average monthly revenue per customer (a) $ 61 $ 52 (14.8) $60 $ 51 (15.0)
-------------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
(a) For second quarter and year-to-date 2000, the amounts shown are for our
consolidated properties and do not include customer data for our
unconsolidated properties. Customer data for the second quarter and
year-to-date 2001 is comprised of BellSouth's 40% share of the managed
results of Cingular Wireless.
Operating Revenues
Total operating revenues grew $378 for second quarter 2001 and $738 for the
year-to-date period when compared to the same 2000 periods. These growth rates
are attributable to higher airtime, access and equipment sales revenues driven
by the higher customer base created by the formation of Cingular. Cingular's
revenues increased 13.6% from proforma second quarter 2000 results and 14.1%
from proforma year-to-date results, driven by an 16.9% increase in cellular and
PCS customer levels.
We expect competition to continue to intensify and pressure pricing in our
markets. We believe this will further stimulate customer growth and demand and
continue to increase usage as the overall market is expanded.
Operating Expenses
Operational and support expenses
Operational and support expenses increased $197, or 27.2%, during second quarter
2001 and $396, or 27.3%, for the year-to-date period when compared to the same
2000 periods. These increases were also attributable to the change in operations
between periods. Cingular's expenses increased 10.9% over proforma second
quarter 2000 results and 15.1% over proforma year-to-date 2000 results, impacted
by higher levels of gross subscriber additions, higher cash expenses for
marketing and advertising related to Cingular's national branding campaign, and
merger and integration related expenses.
Depreciation and amortization
Depreciation and amortization increased $36, or 23.4%, to $190 during second
quarter 2001 and $49, or 15.3%, to $370 for the year-to-date period when
compared to the same 2000 periods. Cingular's expenses increased 7.2% over
proforma second quarter 2000 results and 1.3% over proforma year-to-date 2000
results, impacted by higher levels of gross property, plant and equipment.
-------------------------------------------------------------------------------
Latin America Group
-------------------------------------------------------------------------------
The Latin America group is comprised of our investments in wireless businesses
in eleven countries in Latin America. Consolidated operations include our
businesses in Argentina, Chile, Colombia, Ecuador, Nicaragua, Peru and
Venezuela. All other businesses are accounted for under the equity method, and
accordingly their results are reported as Net earnings (losses) of equity
affiliates.
-------------------------------------------------- ----------------------- ------------ -- ----------------------- ---------
Second Quarter % Year-to-Date %
----------------------- -----------------------
2000 2001 Change 2000 2001 Change
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Total operating revenues $704 $749 6.4 $1,399 $1,531 9.4
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Operating expenses:
Operational and support expenses 522 505 (3.3) 1,103 1,135 2.9
Depreciation and amortization 130 155 19.2 256 309 20.7
Total operating expenses 652 660 1.2 1,359 1,444 6.3
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Operating income 52 89 71.2 40 87 117.5
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Net earnings (losses) of equity affiliates (36) (95) N/M* (42) (137) N/M
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Segment net income (loss) $(34) $(119) N/M $ (54) $(225) N/M
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Customers (a) 5,584 8,008 43.4
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Average monthly revenue per customer (a) $35 $ 26 (25.7) $ 37 $ 27 (27.0)
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
* - Not Meaningful.
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
The increases of $45 quarter over quarter and $132 year over year are primarily
due to the addition of the Colombia operations. Since June 30, 2000, our
existing operations have added approximately 1.2 million customers, and we also
added another 1.2 million customers with the acquisition and growth of Colombia.
Primarily offsetting the impacts of customer growth is declining monthly revenue
per customer resulting from increased penetration of our cellular service into
the mass-consumer market and exchange rate declines in some countries. Revenues
were also negatively impacted by competitive and economic pressures on Listel,
one of our advertising and publishing subsidiaries in Brazil.
A stronger U.S. Dollar against foreign currencies has had a negative impact on
reported revenues. Absent changes in foreign currency exchange rates, reported
revenues would have increased an additional $28 for the quarter and an
additional $64 for the year-to-date period.
Operating Expenses
Operational and support expenses
For the 2001 periods, these expenses decreased $17 compared to second quarter
2000 and increased $32 on a year-to-date comparative basis. The changes in both
the quarter and year-to-date periods were favorably affected by reductions in
expenses resulting from lower gross customer additions. The expense reductions
were offset by increased expenses from the addition of the Colombia operations.
Operational and support expenses denominated in local currencies were favorably
impacted by the weakening of foreign currencies against the U.S. Dollar. Absent
changes in foreign currency exchange rates, reported operational and support
expenses would have increased an additional $15 for the quarter and $38 for the
year-to-date period.
Depreciation and amortization
Depreciation expense remained relatively flat quarter over quarter and increased
$5 year over year primarily due to higher gross depreciable plant resulting from
the continued investment in our wireless network infrastructure, offset by lower
depreciation in Venezuela due to an extension of useful lives effective first
quarter 2001. Amortization expense increased $25 quarter over quarter and $48
year over year as a result of growth in intangibles related to our purchase of
Colombia.
Net Earnings (Losses) of Equity Affiliates
Net earnings (losses) from our international equity affiliates decreased $59 to
$(95) in second quarter 2001 and $95 to $(137) for the year-to-date period. The
decline in earnings from our unconsolidated international businesses is due to
lower operating results from our two principal investments in Brazil. Both of
these businesses experienced significant foreign exchange losses as a result of
the weakening of the Brazilian Real against the U.S. Dollar.
-------------------------------------------------------------------------------
Domestic Advertising and Publishing
-------------------------------------------------------------------------------
Our Domestic advertising and publishing segment is comprised of companies in the
U.S. that publish, print, sell advertising in and perform related services
concerning alphabetical and classified telephone directories and electronic
product offerings.
-------------------------------------------------- ----------------------- ------------ -- ----------------------- ---------
Second Quarter % Year-to-Date %
----------------------- -----------------------
2000 2001 Change 2000 2001 Change
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Total operating revenues $448 $443 (1.1) $801 $880 9.9
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Operating expenses:
Operational and support expenses 237 241 1.7 428 445 4.0
Depreciation and amortization 7 6 (14.3) 14 13 (7.1)
Total operating expenses 244 247 1.2 442 458 3.6
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Operating income 204 196 (3.9) 359 422 17.5
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Segment net income $124 $119 (4.0) $218 $256 17.4
-------------------------------------------------- ----------- ----------- ------------ -- ----------- ----------- ---------
Operating Results
Revenues decreased $5 for second quarter 2001 and increased $79 for the
year-to-date period when compared to the same 2000 periods. Timing of book
publications primarily drove the year-to-date increase. Adjusted for these book
shifts, external revenues for this segment would have increased by approximately
0.7% for the year-to-date period.
Operational and support expenses increased $4 for second quarter 2001 and $17
for the year-to-date period when compared to the same 2000 periods.
-------------------------------------------------------------------------------
All Other
-------------------------------------------------------------------------------
This segment primarily includes our equity investments in wireless
communications operations in Israel, Germany, Denmark and India. In addition,
other minor revenue sources are included.
-------------------------------------------------- ----------------------- ------------ -- ------------------------ --------
Second Quarter % Year-to-Date %
----------------------- ------------------------
2000 2001 Change 2000 2001 Change
-------------------------------------------------- ----------- ----------- ------------ -- ------------ ----------- --------
Total operating revenues $26 $34 30.8 $51 $67 31.4
-------------------------------------------------- ----------- ----------- ------------ -- ------------ ----------- --------
Operating expenses 23 27 17.4 46 54 17.4
-------------------------------------------------- ----------- ----------- ------------ -- ------------ ----------- --------
Operating income 3 7 N/M* 5 13 N/M
-------------------------------------------------- ----------- ----------- ------------ -- ------------ ----------- --------
Net earnings (losses) of equity affiliates 11 (9) N/M 34 (29) N/M
-------------------------------------------------- ----------- ----------- ------------ -- ------------ ----------- --------
Segment net income (loss) $12 $ (4) N/M $33 $(21) N/M
-------------------------------------------------- ----------- ----------- ------------ -- ------------ ----------- --------
* - Not Meaningful.
Operating Results
Revenues remained relatively flat, increasing $8 for second quarter 2001 and $16
for the year-to-date period when compared to the same 2000 periods. Expenses
also remained relatively flat in both 2001 periods with operating expenses
increasing $4 quarter over quarter and $8 year over year.
Net earnings (losses) from equity affiliates decreased $20 quarter over quarter
and $63 year over year due to higher losses from our equity affiliate in
Germany.
-------------------------------------------------------------------------------
Financial Condition
-------------------------------------------------------------------------------
Cash flows from operations are our primary source of funding for capital
requirements of existing operations, debt service and dividends. We also have
ready access to capital markets in the event additional funding is necessary.
While current liabilities exceed current assets, our sources of funds --
primarily from operations and, to the extent necessary, from readily available
external financing arrangements -- are sufficient to meet all current
obligations on a timely basis. We believe that these sources of funds will be
sufficient to meet the needs of our business for the foreseeable future.
Net cash provided by (used for):
---------------------- --------------------------------------------------
2000 2001 Change
--------------------------------------------------
Operating activities.. $ 4,798 $ 3,712 $ (1,086) (22.6)%
Investing activities.. $ (3,795) $ (2,595) $ 1,200 (31.6)%
Financing activities.. $(770) $ (1,520) $ (750) 97.4%
---------------------- --------------------------------------------------
Net cash provided by operating activities
The decrease in cash from operations between 2000 and 2001 primarily reflects
working capital expenditures to support our strategic initiatives on data and
Latin American wireless. We also paid $200 related to a contract termination and
$115 related to exiting the wireless entertainment business. Year-to-date 2000
included operating cash flow of approximately $440 from our former domestic
wireless operations which were contributed to Cingular. Also, 2000 year-to-date
cash flows were favorably impacted by the timing of tax payments.
Net cash used in investing activities
During the first six months of 2001, we invested $3,357 for capital expenditures
to support our wireline and wireless networks, to promote the introduction of
new products and services and increase operating efficiency and productivity.
Significant investments are also being made to support deployment of high-speed
Internet access and optical fiber-based broadband services. Included in these
expenditures is approximately $389 in costs related to the purchase and
development of internal-use software. Also, during 2001 we invested
approximately $100 into our wireless operations in Brazil and invested $176 in a
loan participation agreement related to our Colombian operations. The first six
months of 2001 investing activities also include the receipt of approximately
$1,000 from the sale of Qwest common stock.
Net cash used in financing activities
During the first six months of 2001 we reduced our net commercial paper
borrowings primarily with $1,000 of proceeds from the sale of Qwest common stock
shares and $1,000 of proceeds from the private sale of debt securities. We also
refinanced certain debt at our Colombian operations. During the first half of
2000, we issued $2,000 of long-term debt. The proceeds of $1,974 from this
issuance were used to retire commercial paper borrowings.
Our debt to total capitalization ratio was 51.6% at June 30, 2001 compared to
54.2% at December 31, 2000. The change is primarily a function of decreases in
short-term debt driven by reductions in commercial paper.
At July 31, 2001, we had shelf registration statements on file with the SEC
under which $1,200 of debt securities could be publicly offered.
Market Risk
For a complete discussion of our market risks, you should refer to the caption
"Market Risk" in our 2000 Annual Report on Form 10-K. Our primary exposure to
market risks relates to unfavorable movements in interest rates and foreign
currency exchange rates. We do not anticipate any significant changes in our
objectives and strategies with respect to managing such exposures.
-------------------------------------------------------------------------------
Operating Environment and Trends of the Business
-------------------------------------------------------------------------------
Regulatory Developments
Our future operations and financial results will be substantially influenced by
developments in a number of federal and state regulatory proceedings. Adverse
results in these proceedings could materially affect our revenues, expenses and
ability to compete effectively against other telecommunications carriers.
Federal policies implemented by the Federal Communications Commission (FCC) have
strongly favored access reform, whereby the historical subsidy for local service
that is contained in network access charges paid by long distance carriers is
moved to end-user charges or universal service funds, or both. On April 27,
2001, the FCC released a Notice of Proposed Rulemaking that commences a broad
inquiry that will begin a fundamental examination of all forms of inter-carrier
compensation--payments among telecommunications carriers resulting from their
interconnecting networks. In general, there are two broad classes of
intercarrier compensation: (1) reciprocal compensation that applies to local
calls; and (2) access charges that apply to long distance calls. The objective
of the Notice of Proposed Rulemaking is to examine the existing rules pertaining
to inter-carrier compensation and explore alternative forms of inter-carrier
compensation. This proceeding could lead to permanent changes in the
compensation that BellSouth currently receives from other carriers and its end
user customers. One alternative under consideration is "bill and keep," a policy
that requires carriers to exchange traffic freely with each other and to recover
from end user customers the costs of originating and terminating traffic. In
addition, there are other aspects of access charges and universal service fund
contribution requirements that continue to be considered by the state and
federal regulatory commissions that could result in greater expense levels or
reduced revenues.
The FCC has considerable authority to establish pricing, interconnection and
other policies that had once been considered within the exclusive jurisdiction
of the state public service commissions. We expect the FCC to continue policies
that promote local service competition.
We have petitioned the FCC for permission under the Telecommunications Act of
1996 to offer full long distance services in South Carolina and Louisiana. The
FCC has denied these petitions. In Georgia, an independent third party has
issued a final report on its testing of our operating support systems, and the
Georgia Public Service Commission has requested and received the comments of
interested parties concerning the testing and other issues relating to a grant
of long distance authority. The Georgia Commission is reviewing the comments. At
the completion of its consideration, we expect to file a petition with the FCC
for long distance authority in Georgia. We have also made filings with the
public service commissions in each of Alabama, Florida, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina and Tennessee to review our
compliance with the requirements for obtaining long distance authority. We
expect to file an application with the FCC for each state at the appropriate
point in the state commission's consideration. We do not know if the FCC will
require further changes in our network interconnection elements and operating
systems before it will approve such petitions. These changes could result in
significant additional expenses and promote local service competition.
On April 27, 2001, the FCC released an Order on Remand and Report and Order
addressing the issue of compensation for ISP traffic. In its Order, the FCC
acknowledged that dial-up calls to Internet service providers are not local
calls, but instead are "information access" traffic exempt from the reciprocal
compensation provisions of the 1996 Act. The FCC has implemented a three-year
interim period during which local carriers will pay inter-carrier compensation
for such calls in decreasing increments. After the three-year interim period,
the new rules on inter-carrier compensation to be adopted in connection with the
Notice of Proposed Rulemaking referred to above are expected to be in effect. If
no rules have been adopted by that time, the inter-carrier compensation in
effect at the end of the third year would remain in effect.
Our intrastate prices are regulated under price regulation plans provided by
statute or approved by state public service commissions. Some plans are subject
to periodic review and may require renewal. The commissions reviewing these
plans may require price reductions and other concessions from us as conditions
to approving these plans.
The Mississippi Public Service Commission has commenced its review of the
Mississippi price regulation plan that we operate under today as required by
the plan. We have requested that the plan be renewed for an additional six years
with certain modifications. As a part of the renewal and review process, the
Mississippi Commission could require modifications to prices and other terms of
the plan.
In January 2001, the Georgia Public Service Commission entered an order adopting
new company performance measures, which will be used as one means to assess our
wholesale service quality to competitive local exchange carriers. In addition,
the Commission adopted an Enforcement Plan. The Enforcement Plan consists of
three tiers. Under tier 1, we will be required to pay remedial sums to
individual competitive local exchange carriers if we fail to meet certain
performance criteria set by the Commission. Under tier 2, we will pay additional
sums directly to the State Treasury for failing to meet certain performance
metrics. Under tier 3, if we fail to meet certain performance criteria, then we
will suspend additional marketing and sales of long distance services allowed by
the Telecommunications Act of 1996. Our annual liability under the Plan will be
capped at 44% of net revenues in Georgia. The decision also adopts other
remedial measures for the filing of late or incomplete performance reports, and
a market penetration adjustment for new and advanced services, which increases
the amount of the payments where low volumes of advanced or nascent services are
involved. The Enforcement Plan went into effect on March 1, 2001. We have made
payments under the Enforcement Plan and we may be required to make payments in
the future.
In May 2001, the Louisiana Public Service Commission issued an order adopting
new company performance measures, in addition to clarification of existing
measures, which will be used as one means to assess our wholesale service
quality to competitive local exchange carriers. In addition, the Commission
adopted an Enforcement Plan. The Enforcement Plan consists of three tiers. Under
tier 1, we will be required to pay remedial sums to individual competitive local
exchange carriers if we fail to meet certain performance criteria set by the
Commission. Under tier 2, we will pay additional sums directly to the State
Treasury for failing to meet certain performance metrics. Under tier 3, if we
fail to meet certain performance criteria, then the Louisiana Public Service
Commission may initiate a proceeding to determine whether to recommend to the
FCC suspension of our marketing and sales of long distance services allowed by
the Telecommunications Act of 1996. Our annual liability under the Plan will be
capped at $59 in Louisiana. The order also adopts other remedial measures for
the filing of late or incomplete performance reports, and a market penetration
adjustment for new and advanced services, which increases the amount of the
payments where low volumes of advanced or nascent services are involved.
In 2000, the Florida Public Service Commission commenced a proceeding to
determine whether we violated certain Commission rules regarding service
quality. This matter has been resolved with the adoption of a new service
guaranty plan and the payment of monies to a fund promoting access to
telecommunication services by people with low income. Also in 2000, the
Commission adopted a staff recommendation that our change in 1999 from a late
charge based on a percentage of the amounts overdue to a flat rate fee plus an
interest charge violated the Florida price regulation statute and voted that
certain monies should be refunded. We protested the decision and the Commission
should issue a decision by the end of 2001.
We are involved in numerous legal proceedings associated with state and federal
regulatory matters, the disposition of which could materially impact our
operating results and prospects. See note L to our consolidated interim
financial statements.
International Operations
Our reporting currency is the U.S. Dollar. However, most of our revenues are
generated in the currencies of the countries in which we operate. In addition,
many of our operations and equity investees hold U.S. Dollar-denominated short-
and long-term debt. The currencies of many Latin American countries have
experienced substantial volatility and depreciation in the past. Declines in the
value of the local currencies in which we are paid relative to the U.S. Dollar
will cause revenues in U.S. Dollar terms to decrease and dollar-denominated
liabilities to increase. Where we consider it to be economically feasible, we
attempt to limit our exposure to exchange rate fluctuations by using foreign
currency forward exchange contracts or similar instruments as a vehicle for
hedging; however, a substantial amount of our exposures are unhedged.
The impact of a devaluation or depreciating currency on an entity depends on the
residual effect on the local economy and the ability of an entity to raise
prices and/or reduce expenses. Our ability to raise prices is limited in many
instances by government regulation of tariff rates and competitive constraints.
Due to our constantly changing currency exposure and the potential substantial
volatility of currency exchange rates, we cannot predict the effect of exchange
rate fluctuations on our business.
Economic, social and political conditions in Latin America are, in some
countries, unfavorable and volatile, which may impair our operations. These
conditions could make it difficult for us to continue development of our
business, generate revenues or achieve or sustain profitability. Historically,
recessions and volatility have been primarily caused by: mismanagement of
monetary, exchange rate and/or fiscal policies; currency devaluations;
significant governmental influence over many aspects of local economies;
political and economic instability; unexpected changes in regulatory
requirements; social unrest or violence; slow or negative economic growth;
imposition of trade barriers; and wage and price controls.
Most or all of these factors have occurred at various times in the last two
decades in our core Latin American markets. We have no control over these
matters. Economic conditions in Latin America are generally less attractive than
those in the U.S., and poor social, political and economic conditions may
inhibit use of our services which may adversely impact our business.
New Accounting Pronouncements
See note B to our consolidated interim financial statements.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See the caption labeled "Market Risk" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
-------------------------------------------------------------------------------
Cautionary Language Concerning Forward-Looking Statements
-------------------------------------------------------------------------------
In addition to historical information, this document contains forward-looking
statements regarding events and financial trends that may affect our future
operating results, financial position and cash flows. These statements are based
on our assumptions and estimates and are subject to risks and uncertainties. For
these statements, we claim the protection of the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995.
There are possible developments that could cause our actual results to differ
materially from those forecast or implied in the forward-looking statements. You
are cautioned not to place undue reliance on these forward-looking statements,
which are current only as of the date of this filing. We disclaim any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
While the below list of cautionary statements is not exhaustive, some factors
that could affect future operating results, financial position and cash flows
and could cause actual results to differ materially from those expressed in the
forward-looking statements are:
- a change in economic conditions in domestic or international markets where
we operate or have material investments which would affect demand for our
services;
- significant deterioration in foreign currencies relative to the U.S. Dollar
in foreign countries in which we operate;
- changes in U.S. or foreign laws or regulations, or in their
interpretations, which could result in the loss, or reduction in value, of
our licenses, concessions or markets, or in an increase in competition,
compliance costs or capital expenditures;
- a decrease in the growth rate of demand for the services which we offer;
- the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
- protracted delay in our entry into the interLATA long distance market;
- higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
- the outcome of pending litigation;
- unanticipated higher capital spending from, or delays in, the deployment of
new technologies; and
- the impact and the success of the wireless joint venture with SBC
Communications, known as Cingular Wireless, including marketing and product
development efforts and financial capacity.
-------------------------------------------------------------------------------
PART II -- OTHER INFORMATION
-------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of shareholders was held on April 23, 2001. The voting
results were as follows:
Number of Shares Outstanding as of Record Date: 1,908,679,660
Number of Shares Present: 1,573,404,800
Percent of Shares Present: 82.43%
Proposal 1:
Election of Directors
For Withheld
James H. Blanchard 1,543,363,216 30,041,584
Armando M. Codina 1,542,880,181 30,524,619
Joseph M. Magliochetti 1,542,444,208 30,960,592
Leo F. Mullin 1,542,942,173 30,462,627
The terms of the following directors continued after the meeting:
F. Duane Ackerman
Reuben V. Anderson
J. Hyatt Brown
Kathleen F. Feldstein, PhD
James R. Kelly
John G. Medlin
Eugene F. Murphy
Robin B. Smith
William S. Stavropoulos
Proposal 2:
Ratification of Auditors
For Against Abstain
1,525,352,609 35,776,980 12,275,211
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4a No instrument which defines the rights of holders of our long- and
intermediate-term debt is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to
furnish a copy of any such instrument to the SEC upon request.
10aa-5 Amendment dated June 15, 2001 to the BellSouth Employee Stock
Investment Plan.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K:
Date of Event Subject
April 19, 2001 BellSouth 1Q01 Earnings Release
May 17, 2001 Cingular Proforma First Quarter 2000 and 2001 Results
June 1, 2001 Discussion of Foreign Exchange losses on 2Q01 Results
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 and Supply Chain Management
(Principal Accounting Officer)
August 3, 2001
EXHIBIT INDEX
Exhibit
Number
10aa-5 Amendment dated June 15, 2001 to the BellSouth Employee
Stock Investment Plan.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.