1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8607 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 October 31, 2000, 1,868,074,357 common shares were outstanding.
Table of Contents Item Page Part I 1. Financial Statements Consolidated Statements of Income ........................... 3 Consolidated Balance Sheets ................................. 4 Consolidated Statements of Cash Flows ....................... 5 Consolidated Statements of Shareholders' Equity and Comprehensive Income ................................. 6 Notes to Consolidated Financial Statements .................. 8 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 16 3. Qualitative and Quantitative Disclosures about Market Risk ..... 29 Part II 6. Exhibits and Reports on Form 8-K ............................... 31
- ------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION - ------------------------------------------------------------------------------- BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Millions, Except Per Share Amounts) <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, 1999 2000 1999 2000 <S> <C> <C> <C> <C> Operating revenues: Wireline communications: Local service $ 2,747 $ 2,857 $ 8,113 $ 8,540 Network access 1,200 1,198 3,578 3,706 Long distance 158 133 461 399 Other wireline 310 370 845 1,012 Total wireline communications 4,415 4,558 12,997 13,657 Domestic Wireless 815 942 2,355 2,714 International operations 575 709 1,701 2,031 Advertising and publishing 540 587 1,290 1,422 Other 77 107 200 318 Total operating revenues 6,422 6,903 18,543 20,142 Operating expenses: Operational and support expenses 3,541 3,665 10,153 10,798 Depreciation and amortization 1,207 1,301 3,475 3,759 Severance accrual - - - 78 Provision for asset impairment - - 320 - Total operating expenses 4,748 4,966 13,948 14,635 Operating income 1,674 1,937 4,595 5,507 Interest expense 266 344 737 982 Gain (loss) on sale of operations 39 (14) 55 (14) Net earnings (losses) of equity affiliates (26) 10 (235) 163 Other income, net 15 35 188 164 Income before income taxes 1,436 1,624 3,866 4,838 Provision for income taxes 442 588 1,471 1,737 Net income $ 994 $ 1,036 $ 2,395 $ 3,101 Weighted-average common shares outstanding: Basic 1,885 1,871 1,903 1,878 Diluted 1,904 1,885 1,921 1,894 Dividends declared per common share $ 0.19 $ 0.19 $ 0.57 $ 0.57 Earnings per share: Basic $ 0.53 $ 0.55 $ 1.26 $ 1.65 Diluted $ 0.52 $ 0.55 $ 1.25 $ 1.64 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts) <TABLE> <CAPTION> December 31, September 30, 1999 2000 (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 1,287 $ 1,176 Temporary cash investments 105 36 Accounts receivable, net of allowance for uncollectibles of $312 and $389 5,177 5,268 Material and supplies 451 511 Other current assets 367 968 Total current assets 7,387 7,959 Investments and advances 6,097 7,002 Property, plant and equipment 61,009 64,560 Less: accumulated depreciation 36,378 38,673 Property, plant and equipment, net 24,631 25,887 Deferred charges and other assets 1,564 1,853 Intangible assets, net 3,774 6,284 Total assets $ 43,453 $ 48,985 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Debt maturing within one year $ 7,653 $ 8,987 Accounts payable 1,961 2,021 Other current liabilities 3,781 4,093 Total current liablities 13,395 15,101 Long-term debt 9,113 11,036 Noncurrent liabilities: Deferred income taxes 2,705 3,130 Unamortized investment tax credits 126 96 Other noncurrent liabilities 3,299 3,123 Total noncurrent liabilities 6,130 6,349 Shareholders' equity: Common stock, $1 par value (4,400 shares authorized; 1,883 and 1,866 shares outstanding) 2,020 2,020 Paid-in capital 6,771 6,775 Retained earnings 11,456 13,421 Accumulated other comprehensive income (358) (58) Shares held in trust and treasury (4,798) (5,452) Guarantee of ESOP debt (276) (207) Total shareholders' equity 14,815 16,499 Total liabilities and shareholders' equity $ 43,453 $ 48,985 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions) <TABLE> <CAPTION> For the Nine Months Ended September 30, 1999 2000 <S> <C> <C> Cash Flows from Operating Activities: Net income $ 2,395 $ 3,101 Adjustments to net income: Depreciation and amortization 3,475 3,759 Severance accrual - 78 (Gain) loss on sale of operations (55) 14 Provision for asset impairment 320 - Provision for uncollectibles 260 278 Net losses (earnings) of equity affiliates 235 (163) Dividends received from equity affiliates 59 55 Recognition of foreign investment tax credits (120) - Minority interests in income of subsidiaries 67 12 Deferred income taxes and investment tax credits (92) 150 Net change in: Accounts receivable and other current assets (548) (529) Accounts payable and other current liabilities 710 434 Deferred charges and other assets (391) (486) Other liabilities and deferred credits 76 (138) Other reconciling items, net 80 107 Net cash provided by operating activities 6,471 6,672 Cash Flows from Investing Activities: Capital expenditures (4,456) (4,940) Investments in and advances to equity affiliates (140) (497) Acquisitions, net of cash acquired (3,791) (1,836) Purchases of wireless licenses (123) (72) Proceeds from sale of operations 215 29 Proceeds from disposition of short-term investments 144 372 Purchases of short-term investments (243) (311) Proceeds from repayment of loans and advances 60 45 Other investing activities, net 80 60 Net cash used for investing activities (8,254) (7,150) Cash Flows from Financing Activities: Net borrowings (repayments) of short-term debt 3,451 411 Proceeds from long-term debt 508 2,118 Repayments of long-term debt (205) (334) Dividends paid (1,091) (1,072) Purchase of treasury shares (3,032) (779) Funds distributed to minority partners - (32) Other financing activities, net 27 55 Net cash (used for) provided by financing activities (342) 367 Net (decrease) increase in cash and cash equivalents (2,125) (111) Cash and cash equivalents at beginning of period 3,143 1,287 Cash and cash equivalents at end of period $ 1,018 $ 1,176 </TABLE> 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) <TABLE> <CAPTION> For the Nine Months Ended September 30, 2000 Number of Shares Amount Accum. Shares Other Shares Guaran- Held in Compre- Held in tee of Common Trust and Common Paid-in Retained hensive Trust and ESOP Stock Treasury Stock Capital Earnings Income Treasury Debt Total (a) (a) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1999 2,020 (138) $ 2,020 $ 6,771 $ 11,456 $ (358) $ (4,798) $ (276) $ 14,815 Net income - 3,101 3,101 Other comprehensive income, net of tax: Foreign currency translation adjustment - 50 50 Net unrealized gains on securities - 259 259 Minimum pension liability adjustment - (9) (9) Total comprehensive income (b) - 3,401 Dividends declared - (1,070) (1,070) Share issuances for employee benefit plans - 3 (66) 125 59 Purchase of treasury stock - (19) (779) (779) Tax benefit related to stock options - 4 4 ESOP activities and related tax benefit - 69 69 Balance at September 30, 2000 2,020 (154) $ 2,020 $ 6,775 $ 13,421 $ (58) $ (5,452) $ (207) $ 16,499 </TABLE> (a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of September 30, 2000, there were approximately 36 shares held in trust and 118 shares held in treasury. (b) Total comprehensive income for third quarter 2000 was $983. 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) <TABLE> <CAPTION> For the Nine Months Ended September 30, 1999 Number of Shares Amount Accum. Shares Other Shares Guaran- Held in Compre- Held in tee of Common Trust and Common Paid-in Retained hensive Trust and ESOP Stock Treasury Stock Capital Earnings Income Treasury Debt Total (a) (a) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1998 2,020 (70) $ 2,020 $ 6,766 $ 9,479 $ (64) $ (1,752) $ (339) $ 16,110 Net income - 2,395 2,395 Other comprehensive income, net of tax: Foreign currency translation adjustment - (145) (145) Net unrealized losses on securities - (848) (848) Total comprehensive income (b) - 1,402 Dividends declared - (1,079) (1,079) Share issuances for employee benefit plans - 2 (38) 66 28 Purchase of treasury stock - (68) (3,032) (3,032) Purchase of stock by grantor trust - (3) (3) ESOP activities and related tax benefit - 10 29 39 Balance at September 30, 1999 2,020 (136) $ 2,020 $ 6,766 $ 10,767 $ (1,057) $ (4,721) $ (310) $ 13,465 </TABLE> (a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of September 30, 1999, there were approximately 36 shares held in trust and 100 shares held in treasury. (b) Total comprehensive income for third quarter 1999 was $115. 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 reports on Form 10-Q. Certain amounts within the prior year's information have been reclassified to conform to the current year's presentation. Note B - Recent Accounting Pronouncements Revenue Recognition In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 requires that revenues and costs of revenues derived from services rendered at the beginning of a contract or business relationship be deferred and recognized over the life of the related contract or relationship. In June 2000, the SEC deferred the required adoption date of the guidelines in SAB 101 to the fourth quarter of 2000. We do not expect the adoption of these guidelines to have a material impact on our results of operations, financial position or cash flows. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. This means that we must adopt the standard, as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," no later than January 1, 2001. We do not expect the adoption of this standard will have a material impact on results of operations, financial position or cash flows. Note C - 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:
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note C - Earnings Per Share (continued) Third Quarter Year-to-Date 1999 2000 1999 2000 Basic common shares outstanding .........1,885 1,871 1,903 1,878 Incremental shares from stock options.......19 14 18 16 Diluted common shares outstanding .......1,904 1,885 1,921 1,894 The earnings amounts used for per-share calculations are the same for both the basic and diluted methods. Note D - Workforce Reduction In February 2000, we announced that we would reduce our domestic general and administrative staff by approximately 2,100 positions. These reductions are the result of the streamlining of work processes in conjunction with our shift to a more simplified management structure. As a result of these reductions, we recorded a one-time charge of $78, or $48 after tax, for severance and post-employment health benefits. Note E - E-Plus Restructuring In February 2000, we closed on a previously announced alliance with KPN Royal Dutch Telecom. We utilized our right of first refusal which enabled KPN to acquire a 77.5 percent interest in E-Plus and allows us the option after 18 months of converting our 22.5 percent interest in E-Plus into either 200 million shares of KPN or shares representing at the time an estimated 33.3 percent ownership interest in KPN's wireless subsidiary. As a result of this transaction, we recognized income of $143, or $68 after tax. The gain relates to a settlement payment from the selling shareholder regarding a dispute over the terms of the E-Plus shareholder agreement governing the provisions of the sale. As part of this transaction, we also agreed to make up to $3 billion of loans available to KPN to be used for further wireless investments in Europe and received non-detachable warrants to purchase approximately 90 million additional shares of KPN. We loaned approximately $412 to KPN during September 2000. KPN applied the proceeds towards the purchase of new third generation wireless licenses from the German government for use by our German operations. We also guaranteed $1.35 billion in bank loans to our German operations, the proceeds of which were also applied towards the purchase of the new licenses. The loan to KPN is included in Other current assets in our consolidated balance sheet at September 30, 2000. Note F - Asset Impairment Loss In June 1999, we executed a contract with Ericsson to replace infrastructure equipment, including switches, base stations and software, in 14 wireless markets in the southeastern United States. The new equipment is intended to improve network performance and to lay the foundation for migration of the network to Third Generation wireless (3G) and wireless Internet. We expect the conversion to be substantially completed by December 2000. The planned disposals of the existing infrastructure equipment require an evaluation of asset impairment in accordance with SFAS 121. As a result, a non-cash charge of $320, or $187 after tax, was recorded in the second quarter of 1999 to write these assets down to their fair market value, which was estimated as the expected future cash flows of these assets through the date of disposal. We will continue to use the assets until the conversion process has been completed and depreciate the remaining net book value over this period.
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note G - Devaluation of Brazilian Currency In mid January 1999, the Brazilian Government changed its monetary exchange policy, extinguishing the exchange band through which it had managed the range of the fluctuation of the Real in relation to the U.S. Dollar, allowing the market to freely determine the exchange rate. As a consequence of this change, the Real devalued significantly in relation to the U.S. Dollar in early 1999. The devaluation and subsequent fluctuations in the exchange rate resulted in our Brazilian wireless properties recording net currency losses related to net U.S. Dollar-denominated liabilities. Our share of the foreign currency losses was $75 for third quarter 1999 and $355 for year-to-date 1999. Note H - Segment Information We have four reportable operating segments: (1) Wireline communications; (2) Domestic wireless; (3) International operations; and (4) Advertising and publishing. We have included the operations of all other businesses falling below the reporting threshold in the "All other" segment. The "Reconciling items" shown below include Corporate Headquarters and capital funding activities, intercompany eliminations and other nonoperating items. The following table provides information for each operating segment: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Third Quarter % Year-to-Date % - ---------------------------------------------------------------------------------------------------------------------------- 1999 2000 Change 1999 2000 Change - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Wireline communications - ---------------------------------------------------------------------------------------------------------------------------- External revenues $ 4,415 $ 4,558 3.2 $ 12,997 $ 13,657 5.1 - ---------------------------------------------------------------------------------------------------------------------------- Intersegment revenues 66 87 31.8 233 245 5.2 - ---------------------------------------------------------------------------------------------------------------------------- Total revenues $ 4,481 $ 4,645 3.7 $ 13,230 $ 13,902 5.1 - ---------------------------------------------------------------------------------------------------------------------------- Operating income $ 1,438 $ 1,564 8.8 $4,241 $4,705 10.9 - ---------------------------------------------------------------------------------------------------------------------------- Segment net income $ 817 $ 870 6.5 $2,399 $2,641 10.1 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Domestic wireless - ---------------------------------------------------------------------------------------------------------------------------- External revenues $ 815 $ 942 15.6 $2,355 $2,714 15.2 - ---------------------------------------------------------------------------------------------------------------------------- Intersegment revenues 5 6 20.0 12 14 16.7 - ---------------------------------------------------------------------------------------------------------------------------- Total revenues $ 820 $ 948 15.6 $2,367 $2,728 15.3 - ---------------------------------------------------------------------------------------------------------------------------- Operating income $ 71 $ 175 146.5 $ 260 $ 460 76.9 - ---------------------------------------------------------------------------------------------------------------------------- Net earnings (losses) of equity affiliates $ 36 $ 41 13.9 $ 108 $ 121 12.0 - ---------------------------------------------------------------------------------------------------------------------------- Segment net income $ 55 $ 118 114.5 $ 186 $ 305 64.0 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- International operations - ---------------------------------------------------------------------------------------------------------------------------- External revenues $ 575 $ 709 23.3 $1,701 $2,031 19.4 - ---------------------------------------------------------------------------------------------------------------------------- Intersegment revenues 1 11 N/M* 1 32 N/M - ---------------------------------------------------------------------------------------------------------------------------- Total revenues $ 576 $ 720 25.0 $1,702 $2,063 21.2 - ---------------------------------------------------------------------------------------------------------------------------- Operating income $ 31 $ 13 (58.1) $ 152 $ 69 (54.6) - ---------------------------------------------------------------------------------------------------------------------------- Net earnings (losses) of equity affiliates $ (3) $ (29) N/M $ 5 $ (41) N/M - ---------------------------------------------------------------------------------------------------------------------------- Segment net income (loss) $ 9 $ (68) N/M $ 39 $ (72) N/M - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Advertising and publishing - ---------------------------------------------------------------------------------------------------------------------------- External revenues $ 540 $ 587 8.7 $1,290 $1,422 10.2 - ---------------------------------------------------------------------------------------------------------------------------- Intersegment revenues 2 6 N/M 8 17 N/M - ---------------------------------------------------------------------------------------------------------------------------- Total revenues $ 542 $ 593 9.4 $1,298 $1,439 10.9 - ---------------------------------------------------------------------------------------------------------------------------- Operating income $ 259 $ 298 15.1 $ 561 $ 642 14.4 - ---------------------------------------------------------------------------------------------------------------------------- Net earnings (losses) of equity affiliates $ 1 $ (2) N/M $ (4) $ 2 N/M - ---------------------------------------------------------------------------------------------------------------------------- Segment net income $ 160 $ 181 13.1 $ 342 $ 396 15.8 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> * Not Meaningful
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note H - Segment Information (continued) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------- Third Quarter % Year-to-Date % - ---------------------------------------------------------------------------------------------------------------------- 1999 2000 Change 1999 2000 Change - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> All other - ---------------------------------------------------------------------------------------------------------------------- External revenues $ 77 $ 107 39.0 $ 200 $ 318 59.0 - ---------------------------------------------------------------------------------------------------------------------- Intersegment revenues 102 115 12.7 264 309 17.0 - ---------------------------------------------------------------------------------------------------------------------- Total revenues $ 179 $ 222 24.0 $ 464 $ 627 35.1 - ---------------------------------------------------------------------------------------------------------------------- Operating loss $ (72) $ (68) 5.6 $ (224) $ (197) 12.1 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (losses) of equity affiliates $ 3 $ (3) N/M $ 3 $ (4) N/M - ---------------------------------------------------------------------------------------------------------------------- Segment net loss $ (39) $ (45) (15.4) $ (155) $ (144) 7.1 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Reconciling items - ---------------------------------------------------------------------------------------------------------------------- External revenues $ - $ - - $ - $ - - - ---------------------------------------------------------------------------------------------------------------------- Intersegment revenues (176) (225) (27.8) (518) (617) (19.1) - ---------------------------------------------------------------------------------------------------------------------- Total revenues $(176) $(225) (27.8) $ (518) $ (617) (19.1) - ---------------------------------------------------------------------------------------------------------------------- Operating loss $ (53) $ (45) 15.1 $ (395) $ (172) 56.5 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (losses) of equity affiliates $ (63) $ 3 N/M $ (347) $ 85 N/M - ---------------------------------------------------------------------------------------------------------------------- Segment net loss $ (8) $ (20) N/M $ (416) $ (25) N/M - ---------------------------------------------------------------------------------------------------------------------- Reconciliation to Consolidated Financial Information - ---------------------------------------------------------------------------------------------------------------------- Operating Revenues - ---------------------------------------------------------------------------------------------------------------------- Wireline communications $ 4,481 $ 4,645 3.7 $ 13,230 $ 13,902 5.1 - ---------------------------------------------------------------------------------------------------------------------- Domestic wireless 820 948 15.6 2,367 2,728 15.3 - ---------------------------------------------------------------------------------------------------------------------- International operations 576 720 25.0 1,702 2,063 21.2 - ---------------------------------------------------------------------------------------------------------------------- Advertising and publishing 542 593 9.4 1,298 1,439 10.9 - ---------------------------------------------------------------------------------------------------------------------- All other 179 222 24.0 464 627 35.1 - ---------------------------------------------------------------------------------------------------------------------- Total segments $ 6,598 $ 7,128 8.0 $ 19,061 $ 20,759 8.9 - ---------------------------------------------------------------------------------------------------------------------- Reconciling items $(176) $(225) (27.8) $ (518) $ (617) (19.1) - ---------------------------------------------------------------------------------------------------------------------- Total consolidated $ 6,422 $ 6,903 7.5 $ 18,543 $ 20,142 8.6 - ---------------------------------------------------------------------------------------------------------------------- Net Income - ---------------------------------------------------------------------------------------------------------------------- Wireline communications $ 817 $ 870 6.5 $2,399 $2,641 10.1 - ---------------------------------------------------------------------------------------------------------------------- Domestic wireless 55 118 114.5 186 305 64.0 - ---------------------------------------------------------------------------------------------------------------------- International operations 9 (68) N/M 39 (72) N/M - ---------------------------------------------------------------------------------------------------------------------- Advertising and publishing 160 181 13.1 342 396 15.8 - ---------------------------------------------------------------------------------------------------------------------- All other (39) (45) (15.4) (155) (144) 7.1 - ---------------------------------------------------------------------------------------------------------------------- Total segments $ 1,002 $ 1,056 5.4 $2,811 $3,126 11.2 - ---------------------------------------------------------------------------------------------------------------------- Reconciling items $ (8) $ (20) N/M $ (416) $ (25) N/M - ---------------------------------------------------------------------------------------------------------------------- Total consolidated $ 994 $ 1,036 4.2 $2,395 $3,101 29.5 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> Note I - Investment Activity Investment in Brazil In May 2000, we completed the purchase of a combination of voting common stock and American Depository Receipts representing nonvoting preferred stock of Tele Centro Oeste Celular Participacoes SA, a Brazilian company, for a total purchase price of approximately $240. Tele Centro Oeste provides cellular service in central-west Brazil, including Brasilia, as well as northern Brazil. The common stock portion of the investment represents 11.8% of the voting power of Tele Centro Oeste. The combined investment in common and preferred stock represents 17.3% of the total capital of Tele Centro Oeste. This investment is accounted for under the cost method, subject to the guidelines of available-for-sale securities under SFAS 115.
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note I - Investment Activity (continued) Investment in Colombia In June 2000, we acquired a 50.4% controlling equity interest in Celumovil S.A. for a purchase price of approximately $399, funded by $299 of cash and a $100 note payable due December 2000. We have commenced cobranding Celumovil with the BellSouth brand. Celumovil/BellSouth provides wireless service in the Eastern region of Colombia, which includes the capital city of Bogota, and in the Atlantic or coastal region. In July 2000, Celumovil/BellSouth acquired 100% of Cocelco, a wireless operator that since 1994 has been serving the Western region of Colombia, which includes the cities of Medellin and Cali. This acquisition was funded by a $384 capital contribution and a $30 shareholder loan from BellSouth. This transaction increased BellSouth's ownership interest in Celumovil to approximately 66.0%. In conjunction with these transactions, we have entered into a series of put and call agreements whereby we can acquire, or be compelled to acquire, additional shares of Celumovil from our primary partner in Celumovil, up to our partner's entire interest, at or close to an appraised fair value between the second and ninth anniversary of our June 2000 acquisition of our initial interest in Celumovil. Our partner's first put option for up to a number of shares currently equal to approximately 14% of Celumovil's outstanding stock is first exercisable in June 2002. Our first call option for up to a number of shares currently equal to approximately 9% of Celumovil's outstanding stock is first exercisable in December 2003. Acquisition of Additional Interest in Carolinas PCS Partnership In September 2000, we acquired the remaining 44.2% interest in the Carolinas PCS partnership bringing our ownership interest to 100%. The partnership provides PCS service in North Carolina, South Carolina and Northeast Georgia. The purchase price of $885 was funded through the issuance of commercial paper. The PCS property and related debt was subsequently contributed to the wireless joint venture with SBC Communications which is discussed in note Q. Note J - Marketable Securities We have investments in marketable securities, primarily common stocks, which are accounted for under the cost method. These investments are comprised primarily of a 5% equity interest in Qwest and are classified as available-for-sale under SFAS 115. Under SFAS 115, available-for-sale securities are required to be carried at their fair value, with unrealized gains and losses, net of income taxes, recorded in accumulated other comprehensive income (loss) in our statement of changes in shareholders' equity and comprehensive income. The fair values of our investments in marketable securities are determined based on market quotations. The table below shows certain summarized information related to these investments at September 30: Gross Gross Unrealized Unrealized 1999 Cost gains losses Fair Value Investment in Qwest ..$3,500 $ -- $ 1,309 $ 2,191 Other investments ..... 132 9 -- 141 Total ............$3,632 $ 9 $ 1,309 $ 2,332 Gross Gross Unrealized Unrealized 2000 Cost gains losses Fair Value Investment in Qwest ..$3,500 $ 65 $ -- $3,565 Other investments ..... 482 146 -- 628 Total ............$3,982 $ 211 $ -- $4,193
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note K - Sublease of Communications Towers In June 1999, we signed a definitive agreement with Crown Castle International Corporation for the sublease of all unused space on approximately 1,850 of our wireless communications towers in exchange for $610 to be paid in a combination of cash and Crown common stock. As of September 30, 2000 we have closed on 1,836 towers and received $604. Subleases of the remaining towers covered by the agreement are expected to be closed throughout the remainder of 2000. We also entered into a five-year, build-to-suit agreement with Crown covering up to 500 towers. Under a similar agreement, Crown will sublease all unused space on 773 PCS towers in exchange for $317 in cash. As of September 30, 2000, we have closed on 728 towers and received $298. Subleases of the remaining towers covered by the agreement are expected to be closed throughout the remainder of 2000. In connection with this agreement, we entered into an exclusive three-year, build-to-suit agreement. Note L - Summary Financial Information for Equity Investees The following table displays the summary combined financial information of our equity method businesses. These amounts are shown on a 100-percent basis. Third Quarter % Year-to-Date % 1999 2000 Change 1999 2000 Change Revenues ............ $1,363 $1,584 16.2 $3,822 $4,697 22.9 Operating income ..... $ 152 $ 80 (47.4) 293 364 24.2 Net income (loss) .... $(127) $(25) 80.3 $(735) $ 47 N/M Note M - Debt Issuance In February 2000 we issued $2 billion of long-term debt, consisting of $1 billion of Ten-year, 7 3/4% Notes and $1 billion of Thirty-year, 7 7/8% Debentures. We received total proceeds of $1,974, which were used to retire commercial paper. Note N - Sale of Operations In July 2000, we sold our ownership interests in mobile data operations in Belgium, the Netherlands and the United Kingdom for total proceeds of $28. These sales generated a pre-tax net loss of $14 and a $30 after-tax gain resulting from tax benefits associated with the sale of the operations in the United Kingdom. In August 1999, we sold our 100% ownership interest in Honolulu Cellular for total proceeds of $194. In April 1999, we sold our 100% interest in a wireless property located in Dothan, Alabama for total proceeds of $21. The pretax gains on these sales were $39, or $23 after tax, for Honolulu and $16, or $10 after tax, for Dothan. Note O - 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
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note O - Contingencies (continued) 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. At September 30, 2000, the exposure related to unrecorded amounts withheld from competitive local carriers was approximately $280, including accrued interest. We have commenced discussions with several competitive local carriers concerning settlement of some claims, and agreements have been reached in certain circumstances. Other reciprocal compensation issues. In a related matter, a competitive local carrier was claiming terminating compensation of approximately $165 for service arrangements that we did not believe involved "traffic" under our interconnection agreements. We filed a complaint with the state regulatory commission asking that agency to declare that we did not owe reciprocal compensation for these arrangements. In March 2000, the state commission ruled in our favor finding that compensation was not owed to the competitive local carrier. This matter is currently on appeal. U.S. Electronics. In October 1999, two of the Company's wholly-owned subsidiaries, BellSouth Products, Inc. (BSP) and BST filed a complaint against U. S. Electronics, Inc. (USE), in the United States District Court for the Northern District of Georgia. The complaint alleges that USE, a distributor of residential telephone equipment, breached its distributorship contract with BSP and violated the Robinson-Patman Act. It also seeks a ruling invalidating certain exclusivity and post-term non-competition covenants contained in the distributorship contract. USE denied the material allegations of the complaint and filed counterclaims against the Company, BSP, BST, and several other BellSouth entities, alleging that the BellSouth companies are in breach of the distributorship contract. The counterclaims seek an unspecified amount of damages as well as declaratory and injunctive relief. The BellSouth companies denied the material allegations of USE's counterclaims and filed a Motion for Judgment on the Pleadings seeking an early ruling that the exclusivity and post-term non-competition provisions were invalid and unenforceable as a matter of law. The court denied that motion in August 2000. At the end of September 2000, BSP informed USE that, as a result of USE's contractual violations and other factors, BSP would be unable to supply USE with sufficient products for distribution until at least the third quarter of 2001. On October 11, 2000, USE filed a Motion for a Preliminary Injunction, seeking to require BSP to continue to supply USE with residential telephone equipment for distribution. The BellSouth companies intend to pursue their claims and defend against the counterclaims vigorously. Discovery has commenced. At this early stage of the proceedings, the Company cannot predict the likely outcome of the case. Compliance Matters Foreign Corrupt Practices Act. The SEC is conducting an investigation that is focused on determining whether we and one of our Latin American subsidiaries violated the Foreign Corrupt Practices Act. We had previously engaged outside counsel to investigate this matter, and they concluded that those activities did not violate the Act. More recently 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 businesses. Our internal investigation of this matter is continuing. We have informed the SEC as to this matter, and we expect the SEC to expand its investigation to encompass it. 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 South Carolina. Beginning in 1996, we operated under a price regulation plan approved by the South Carolina Public Service Commission under existing state laws. In April 1999, however, the South Carolina Supreme Court invalidated this price regulation plan. In July 1999, we elected to be regulated under a new state statute, adopted subsequent to the Commission's approval of the earlier plan. The new statute allows telephone companies in
BELLSOUTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (Dollars In Millions) Note O - Contingencies (continued) South Carolina to operate under price regulation without obtaining approval from the Commission. The election became effective during August 1999. The South Carolina Consumer Advocate petitioned the Commission seeking review of the level of our earnings during the 1996-1998 period when we operated under the subsequently invalidated price regulation plan. The Commission voted to dismiss the petition in November 1999 and issued orders confirming the vote in February and June of this year. In July, the Consumer Advocate appealed the Commission's dismissal of the petition. Note P - Tracking Stock In October 2000, we filed with the SEC a definitive proxy statement relating to a special shareholders' meeting to be held in December 2000 to approve amendments to our charter. The amendments would permit us to issue our common stock in series, of which our Board of Directors would initially designate two: Latin America group stock, intended to reflect the separate performance of our Latin American businesses, and BLS group stock, intended to reflect the separate performance of all of our other businesses. We have also filed a registration statement for the offering of shares of Latin America group stock for sale to the public. The registration statement remains subject to further review by the SEC. 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 shareholder approval, completion of the SEC review process, market conditions and other factors. The implementation and timing of these transactions are uncertain. Note Q - Subsequent Events Domestic Wireless Joint Venture In October 2000, we combined substantially all of our domestic wireless businesses with those of SBC Communications into a joint venture that comprises the nation's second largest wireless company, with service in 42 of the top 50 U.S. markets. The venture, Cingular Wireless, covers a total population of 190 million people and serves more than 19.0 million customers, is owned 40% by BellSouth and 60% by SBC Communications but is jointly controlled. The investment in Cingular will be accounted for under the equity method; accordingly, in the future, we will not consolidate Cingular's revenues and expenses but will include our proportionate share of Cingular's earnings as Earnings of Equity Affiliates in our consolidated income statement.
BELLSOUTH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions, Except Per Share Amounts) For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our latest annual report on Form 10-K and previous quarterly reports on Form 10-Q. - ------------------------------------------------------------------------------ Consolidated Results of Operations - ------------------------------------------------------------------------------ Key financial and operating data for third quarter 2000 and 1999 and the respective year-to-date periods are as follows. All references to earnings per share are on a diluted basis: <TABLE> <CAPTION> ------------------------ ----------- --- ------------------------- ---------- Third Quarter % Year-to-Date % ------------ ----------- --- ------------ ------------ 1999 2000 Change 1999 2000 Change ------------ ----------- ----------- --- ------------ ------------ ---------- Results of operations: - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> <C> Operating revenues $ 6,422 $ 6,903 7.5 $18,543 $20,142 8.6 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Operating expenses 4,748 4,966 4.6 13,948 14,635 4.9 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Operating income 1,674 1,937 15.7 4,595 5,507 19.8 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Interest expense 266 344 29.3 737 982 33.2 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Net earnings (losses) of equity affiliates (26) 10 N/M* (235) 163 N/M - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Gain (loss) on sale of operations 39 (14) N/M 55 (14) N/M - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Other income, net 15 35 N/M 188 164 (12.8) - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Provision for income taxes 442 588 33.0 1,471 1,737 18.1 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Net income $ 994 $1,036 4.2 $2,395 $3,101 29.5 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- As Reported: - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Net income $ 994 $1,036 4.2 $ 2,395 $3,101 29.5 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Earnings per share $ .52 $ .55 5.8 $1.25 $ 1.64 31.2 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Normalized: - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Net income $ 951 $1,036 8.9 $ 2,819 $3,081 9.3 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Earnings per share $ .50 $ .55 10.0 $1.47 $ 1.63 10.9 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Cash flow data: - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Cash provided by operating activities $2,378 $1,874 (21.2) $6,471 $6,672 3.1 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Cash used for investing activities $(1,602) $(3,355) N/M $(8,254) $(7,150) 13.4 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Cash (used for) provided by financing $ (514) $1,137 N/M $ (342) $ 367 N/M activities - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Other: - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Effective tax rate 30.8% 36.2% +540bps 38.0% 35.9% -210bps - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Average debt balances: - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Short-term debt $7,361 $7,002 (4.9) $ 5,804 $6,475 11.6 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Long-term debt $8,620 $10,914 26.6 $ 8,531 $10,617 24.4 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- Total average debt balance $15,981 $17,916 12.1 $14,335 $17,092 19.2 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- EBITDA(1) $2,881 $3,238 12.4 $ 8,390 $9,344 11.4 - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- EBITDA margin(2) 44.9% 46.9% +200bps 45.2% 46.4% +120bps - ---------------------------------------------- ------------ ----------- ----------- --- ------------ ------------ ---------- </TABLE> (1) EBITDA represents income before net interest expense, income taxes, depreciation and amortization, provision for asset impairment, severance accrual, net earnings (losses) of equity affiliates and other income, net. We present EBITDA because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance and because we believe that EBITDA is an additional meaningful measure of performance and liquidity. EBITDA does not represent cash flows for the period, nor is it an alternative to operating income (loss) as an indicator of operating performance. You should not consider it in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The items excluded from the calculation of EBITDA are significant components in understanding and assessing our financial performance. Our computation of EBITDA may not be comparable to the computation of similarly titled measures of other companies. EBITDA does not represent funds available for discretionary uses. (2) EBITDA margin is EBITDA divided by operating revenues. * Not Meaningful - ------------------------------------------------------------------------------ Overview of consolidated results of operations - ------------------------------------------------------------------------------ On a comparative basis, results reflect revenue growth in the core wireline business, driven by digital and data services revenues, and significant increases in our international and domestic wireless customer bases. Expense growth was driven by volume increases at our international and domestic wireless businesses and expenses for development and promotion of new business initiatives, including high-speed data and Internet service offerings. There were no normalizing items for the third quarter 2000. Normalized results for year-to-date 2000 exclude the impacts of: . Income related to the restructuring of our ownership interest in the German wireless operator, E-Plus, which increased net income by $68, or $0.04 per share. This gain is included in Net Earnings (Losses) of Equity Affiliates. See note E to our consolidated interim financial statements for further discussion of this matter; and . Expense recorded as a result of our previously announced plan to reduce our domestic general and administrative staff, which reduced net income by $48, or $0.03 per share. See note D to our consolidated interim financial statements for further discussion of this matter. Normalized results for third quarter 1999 exclude the impacts of: . The devaluation of the Brazilian Real. Our share of the foreign currency losses in our Brazilian wireless properties reduced net income by $75, or $0.04 per share, for the quarter and $355, or $0.18 per share, for the year. These losses are included in Net Earnings (Losses) of Equity Affiliates. See note G to our consolidated interim financial statements for further discussion of this matter; . The recognition of certain foreign investment tax credits generated in prior years, which increased net income by $95, or $0.05 per share; and . The gain on sale of our 100% ownership interest in Honolulu Cellular, which increased net income by $23, or $0.01 per share. In addition to the third quarter items, the year-to-date 1999 normalized results exclude the impact of an asset impairment loss, which reduced net income by $187, or $0.10 per share. See note F to our consolidated interim financial statements for further discussion of this matter. Operating Revenues Operating revenues increased $481 during third quarter 2000 and $1,599 for the year-to-date period. The increase reflects: . growth in our wireline communications operations, spurred by demand for digital and data services and calling features; . growth from higher access, airtime and equipment sales in our domestic wireless operations, driven by a 22.0% expansion in the customer base from third quarter 1999 to third quarter 2000; . higher revenues from our international operations resulting from 76.5% growth in the customer bases of our current operations from third quarter 1999 to third quarter 2000 and the addition of new international wireless operations in Colombia; . the addition of and growth in our international directory publishing businesses, volume growth and price increases in our domestic advertising and publishing operations and increases in revenues from domestic electronic media offerings; and . growth in new lines of business. Growth in wireline revenues was partially offset by the effects of rate reductions related to access charge reform and competition in the long distance market. Growth in international revenues attributable to customer growth was partially offset by changes in foreign currency rates and decreases in average monthly revenue per customer, resulting from penetration into lower usage market segments and a growing percentage of customers selecting lower-volume prepaid services. The average monthly revenue per international wireless customer decreased 38.0% for the quarter and 41.8% for the year-to-date period. Operating Expenses Total operating expenses increased $218 during third quarter 2000 and $687 during the year-to-date period. Operating expenses for year-to-date 2000 include a $78 severance accrual related to a previously announced plan to reduce our domestic general and administrative staff. Year-to-date 1999 expenses included a $320 charge to write down network equipment in the domestic wireless operations. Excluding these items, total operating expenses increased $929 year-to-date. Operational and support expenses increased $124 during the quarter and $645 year-to-date as a result of increased spending in the core wireline business for customer service and network support functions, volume-driven increases at our international and domestic wireless businesses and expenses for development and promotion of new business initiatives, including high-speed data and Internet service offerings. Operational and support expenses of our international operations were favorably impacted by the weakening of foreign currencies against the U.S. Dollar. Depreciation and amortization increased $94 for the quarter and $284 for the year-to-date period, primarily as a result of additions of property, plant and equipment to support expansion of our wireline communications and international wireless networks. Also included in the 2000 periods are $56 in expense from our recently acquired properties in Colombia. Interest expense Higher interest expense in both the quarterly and year-to-date periods is attributable to higher average long-term debt balances resulting from borrowings associated with the financing of our investments in Colombia and Brazil and increases in interest rates. The increase in the year-to-date period is also attributable to higher average long-term debt balances resulting from the financing of our investment in Qwest. Gain (loss) on sale of operations In July 2000, we sold our ownership interests in mobile data operations in Belgium, the Netherlands and the United Kingdom. These sales generated a pre-tax net loss of $14. During third quarter 1999, we recognized a gain of $39 from the sale of our ownership interest in Honolulu Cellular. During second quarter 1999, we recognized a gain of $16 from the sale of a wireless property in Alabama. Net earnings (losses) of equity affiliates Earnings from our unconsolidated businesses increased $36 in third quarter 2000 and $398 on a year-to-date comparative basis. The year-to-date 2000 period results include $68 in income related to the restructuring of our ownership interest in our German wireless operations. See note E to our consolidated interim financial statements for further discussion of this matter. The quarter-to-date 1999 period includes $75 and the year-to-date 1999 period includes $355 of foreign exchange losses related to our Brazilian properties. See note G to our consolidated interim financial statements for further discussion of this matter. Excluding the impact of these items, earnings decreased $39 for the quarter-to-date period and $25 for the year-to-date period. These results are addressed in the discussions for the Domestic wireless, International operations and All other segments. Other income, net Other income, net includes interest income, gains/losses on disposition of assets, foreign currency gains/losses and miscellaneous nonoperating income. The increase of $20 for the quarter is attributable to higher minority interest income of $57 related to our less-than-100-percent owned subsidiaries and higher interest income of $9. These increases are offset by decreased other non-operational income, primarily gains from cellular property exchanges, and increased foreign currency losses. The year-to-date decrease of $24 is primarily attributable to $70 in higher foreign currency losses and decreased other non-operational income, partially offset by lower minority interest expense. Provision for income taxes The provision for income taxes increased $146 quarter-over-quarter and $266 on a year-to-date comparative basis. Our effective tax rate increased from 30.8% in third quarter 1999 to 36.2% in third quarter 2000. Third quarter 1999 results were significantly impacted by the recognition of foreign investment tax credits, partially offset by foreign exchange losses at our Brazilian operations. Excluding these items, our effective rate was 36.8% for third quarter 1999 and 36.2% for third quarter 2000. The decrease in the effective tax rate is due primarily to the recognition of tax incentives and tax benefits generated by the sale of our international wireless data properties. For the year-to-date period, the effective tax rate was 35.9% compared to 38.0% in 1999. Year-to-date 2000 results were favorably impacted by additional income related to the restructuring of our ownership in our German wireless operations. Year-to-date 1999 results were unfavorably impacted by foreign currency losses recorded at our unconsolidated Brazilian businesses, partially offset by the recognition of foreign investment tax credits in third quarter 1999. Excluding these and other special items, our effective rate was 37.6% for the 1999 year-to-date period and 36.5% for the 2000 year-to-date period. The decrease in the effective rate for the year-to-date period is due to the recognition of tax incentives, tax benefits generated by the sale of our international wireless data properties and more favorable results from equity-method investees, which are recorded net of tax benefits or expense. - ------------------------------------------------------------------------------- Results by Segment - ------------------------------------------------------------------------------- Our reportable segments reflect strategic business units that offer similar products and services and/or serve similar customers. We have four reportable operating segments: . Wireline communications; . Domestic wireless; . International operations; and . Advertising and publishing. We have included the operations of all other businesses falling below the reporting threshold in the "All other" segment. We evaluate the performance of each business unit based on net income, exclusive of charges for use of intellectual property rights and adjustments for special items that may arise. Special items are transactions or events that are included in reported consolidated results but are excluded from segment results due to their nonrecurring or nonoperational nature. The results of businesses in which we own noncontrolling interests are not included in our reported revenues and expenses but are included in the Net earnings (losses) of equity affiliates line item. Wireline Communications Wireline communications includes local exchange, network access and intraLATA long distance services provided by wireline transport to business and residential customers in a nine-state region located in the southeastern U.S. <TABLE> <CAPTION> - -------------------------------------------- ------------------------- ----------- ----- -------------------------- ----------- Third Quarter % Year-to-Date % ------------------------- -------------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- <S> <C> <C> <C> <C> <C> <C> Results of Operations Operating revenues: Local service $ 2,747 $2,857 4.0 $8,113 $8,540 5.3 Network access 1,200 1,198 (0.2) 3,578 3,706 3.6 Long distance 158 133 (15.8) 461 399 (13.4) Other wireline 310 370 19.4 845 1,012 19.8 Intersegment revenues 66 87 31.8 233 245 5.2 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Total operating revenues $4,481 $4,645 3.7 $13,230 $13,902 5.1 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Operating expenses $3,043 $3,081 1.2 $ 8,989 $9,197 2.3 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Operating income $1,438 $1,564 8.8 $ 4,241 $4,705 10.9 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Segment net income $ 817 $870 6.5 $ 2,399 $2,641 10.1 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Key Indicators - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Access line counts (000s): - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Switched access lines: - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Residential 16,889 17,228 2.0 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Business 7,282 7,165 (1.6) - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Other 269 255 (5.2) - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Total switched access lines 24,440 24,648 0.9 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Access line equivalents (1) 16,539 26,679 61.3 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Total equivalent access lines 40,979 51,327 25.3 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Access minutes of use (millions) 27,858 28,551 2.5 82,310 86,065 4.6 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Long distance messages (millions) 160 125 (21.9) 505 390 (22.8) - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Digital and data services revenues $ 667 $ 847 27.0 $ 1,919 $ 2,423 26.3 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- Calling feature revenues $ 491 $ 550 12.0 $ 1,412 $ 1,597 13.1 - -------------------------------------------- ------------ ------------ ----------- ----- ------------ ------------- ----------- </TABLE> (1) Access line equivalents represent a conversion of non-switched data circuits to a switched access line basis and is presented for comparability purposes. Equivalents are calculated by converting high-speed/high-capacity data circuits to the equivalent of a switched access line based on transport capacity. While the revenues generated by access line equivalents have a directional relationship with these counts, growth rates cannot be compared on an equivalent basis. Operating Revenues Local service The increases in local service revenues of $110 for third quarter 2000 and $427 for the year-to-date period are attributable to strong demand for digital and data services and calling features and growth in switched access lines. We ended the third quarter with over 51 million total equivalent access lines, an increase of 25.3% since September 30, 1999. Residential access lines rose 2.0% to 17,228,000, driven by economic growth in our nine-state region as well as demand for secondary residence lines, which accounted for 55.6% of the growth in residential access lines. We added 189,000 secondary residence lines since September 30, 1999, extending the total to over 2.9 million lines and ending the current period with a penetration rate of 20.5%. Business access lines, including both switched access lines and data circuits, grew 42.1%, propelled by expanding demand for our digital and data services. Switched business access lines decreased 1.6% reflecting competition and the continued migration of new and existing business customers to high-capacity data lines. Revenues from optional calling features such as Caller ID, Call Waiting, Call Return and voicemail service increased $59, or 12.0%, quarter-over-quarter and $185, or 13.1%, on a year-to-date comparative basis. 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 $36 compared to third quarter 1999 and $130 compared to the first nine months of 1999. Network access Network access revenues remained relatively flat in the third quarter and increased $128 for the first nine months of 2000 when compared to the same 1999 periods. Access minutes of use rose 2.5% to 28,551 million in third quarter 2000 from 27,858 million in third quarter 1999. For the year-to-date period, access minutes of use grew 4.6% to 86,065 million in 2000 from 82,310 million in 1999. Increases in switched access lines and promotional activities by long distance carriers continue to be the primary drivers of the increase in minutes of use. Year-to-date 2000 growth in minutes was also positively impacted by the additional day of activity resulting from the leap year. The growth rate in total minutes of use continues to be negatively impacted by the trend of business customers migrating from traditional switched circuits to higher capacity data line offerings which are fixed-charge based rather than minute-of-use based. Revenues from these dedicated circuit services grew approximately $99 quarter-over-quarter and $236 year-to-date on a comparative basis as Internet service providers and high-capacity users increased their use of our network. The growth rate in switched minutes of use has also been negatively impacted by competition from competitive local exchange carriers whose traffic completely bypasses our network. Volume-related growth was largely offset by net rate impacts that decreased revenues by $88 compared to third quarter 1999 and by $221 compared to the first nine months of 1999. These rate reductions are primarily related to the FCC's access reform and productivity factor adjustments. The reductions were partially offset by recoveries of local number portability costs in both 2000 periods. Long distance The $25 decrease for the quarter and $62 decrease for the year-to-date period compared to the same 1999 periods are primarily attributable to a 21.9% decrease in long distance message volumes compared to third quarter 1999 and 22.8% compared to the first nine months of 1999. For the year-to-date period, the decrease in revenues attributable to loss of message volumes was offset by a $30 revenue reduction in 1999 for a regulatory ruling related to compensation we received from long distance carriers for interconnection to our public payphones. Also offsetting the decreases were increased revenues from the provision of digital and data services of $13 for the quarter and $27 for the year-to-date period. Competition and increased penetration of extended local area calling plans continue to have an adverse impact on the number of customers who use our long distance service and ultimately reduce our long distance message volumes and revenues. We believe that competition will continue to adversely impact our customer base, and ultimately our long distance message volumes and revenues, until we are granted full long distance relief under the Telecommunications Act of 1996. Other wireline and intersegment revenues Other wireline and intersegment revenues increased 21.5%, from $376 in third quarter 1999 to $457 in third quarter 2000. For the year-to-date period, these revenues increased 16.6%, from $1,078 in 1999 to $1,257 in 2000. Higher revenues of $91 for the quarter and $269 for the year-to-date period, resulting primarily from resale of paging products and services, sales of unbundled network elements, collocation of competing carriers' equipment in our facilities, demand for our Internet access offering, interconnection charges to wireless carriers and proceeds from universal service funds, were offset by decreases in revenues from sales of customer premises equipment. At September 30, 2000 we had 871,000 subscribers to our BellSouth Internet Service(R), an increase of 36.7% compared to the same 1999 period. Increases in intersegment revenues of $21 for the quarter and $12 for the year-to-date period primarily represent increased business activity with our other operating segments. Operating Expenses Operational and support expenses Operational and support expenses decreased $18, or 0.8%, for the third quarter 2000 and increased $50, or 0.8%, for the first nine months of 2000 when compared to the same 1999 periods. The decrease for the quarter was attributable to reductions in discretionary expenses and decreases in costs from sales of customer premises equipment totaling $45. The decrease for the quarter was further affected by $12 of lower pension and benefit costs attributable to favorable pension plan investment returns. These decreases were partially offset by increases in labor costs resulting from additions to network and customer service personnel. For the year-to-date period, the change was primarily attributable to increases in labor costs and reciprocal compensation expense totaling $150. These increases were partially offset by a $73 reduction in pension and benefit costs attributable to favorable pension plan investment returns. The increase was further offset by reductions in discretionary expenses and decreases in costs from sales of customer premises equipment. Also contributing to these changes were expenses related to new data initiatives, including high-speed Internet access and optical fiber-based broadband services, and promotional expenses related to expanding our Internet customer base. Depreciation and amortization Depreciation and amortization expense increased $56, or 6.5%, for third quarter 2000 and $158, or 6.2%, for the first nine months of 2000 when compared to the same 1999 periods. The increases are primarily attributable to amortization of capitalized internally developed software and depreciation resulting from higher levels of net property, plant and equipment. Domestic Wireless Domestic wireless is comprised of cellular and personal communications service (PCS) businesses principally within the southeastern U.S. <TABLE> <CAPTION> - -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Third Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> External revenues $815 $ 942 15.6 $2,355 $2,714 15.2 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues 5 6 20.0 12 14 16.7 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $820 $ 948 15.6 $2,367 $2,728 15.3 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $749 $ 773 3.2 $2,107 $2,268 7.6 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating income $ 71 $ 175 146.5 $ 260 $460 76.9 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $ 36 $ 41 13.9 $ 108 $121 12.0 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net income $ 55 $ 118 114.5 $ 186 $305 64.0 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Customers (a) 4,680 5,711 22.0 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Average monthly revenue per customer (a) $ 51 $ 51 -- $ 51 $ 51 -- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- </TABLE> (a) The amounts shown are for our consolidated properties and do not include customer data for our unconsolidated properties. Operating Revenues Total operating revenues grew $128, or 15.6%, quarter-over-quarter and $361, or 15.3%, on a year-to-date basis when compared to the same 1999 periods. This growth is attributable to higher airtime, access and equipment sales revenues driven by a 22.0% increase in the customer base. Customer growth since 1999 has been driven by advertising, enhanced volume pricing strategies such as one-rate plans, rollover minute plans, bundled minutes at lower rates and prepaid calling plans and competitive incentive programs such as discounted wireless handsets. Average monthly usage by customers increased during third quarter 2000 and on a year-to-date basis, and, when combined with the increase in total customers, drove increases in total minutes of use. Average monthly revenue per customer remained relatively flat, due primarily to declines in per-minute rates in response to competition. The declines in average per-minute rates occurred as we expanded our product offering and further penetrated lower-usage market segments. We expect rates to continue decreasing as more customers opt for our one-rate plans and other bundled-minute packages. We expect competition to continue to intensify and pressure pricing in our markets. We believe this will further stimulate customer growth and demand and continue to increase usage as the overall market is expanded. Operating Expenses Operational and support expenses Operational and support expenses increased $65, or 11.5%, during third quarter 2000 and $193, or 11.8%, on a year-to-date basis when compared to the same 1999 periods. These increases are due to higher customer acquisition costs, higher network costs associated with network usage and costs related to new customer promotions. Higher customer acquisition costs resulted from increases in net customer additions of 125.5% for the quarter and 76.3% for the year-to-date period. Network usage and the related expense have increased as a result of customer and volume growth in established markets. Depreciation and amortization Depreciation and amortization decreased $41, or 22.5%, to $141 during third quarter 2000 and decreased $32, or 6.7%, to $443 year-to-date compared to the same 1999 periods. Depreciation expense in 2000 has been favorably impacted by a lower asset base, resulting from our equipment exchange program initiated in June 1999. See note F to our consolidated interim financial statements. Net Earnings (Losses) of Equity Affiliates Compared to the same 1999 periods, net earnings (losses) of unconsolidated domestic wireless businesses increased $5, or 13.9%, for the quarter and $13, or 12.0%, for the year-to-date period. Higher earnings at our business in Los Angeles were partially offset by decreases in earnings at other properties. International Operations International operations is comprised principally of our investments in wireless businesses in eleven countries in Latin America as well as in Denmark, Germany, India and Israel. 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. <TABLE> <CAPTION> - -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Third Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> External revenues $575 $ 709 23.3 $1,701 $2,031 19.4 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues 1 11 N/M 1 32 N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $576 $ 720 25.0 $1,702 $2,063 21.2 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $545 $ 707 29.7 $1,550 $1,994 28.6 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating income $ 31 $13 (58.1) $ 152 $ 69 (54.6) - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $ (3) $(29) N/M $ 5 $ (41) N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net income (loss) $ 9 $(68) N/M $ 39 $ (72) N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Customers (a) 3,777 6,668 76.5 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Average monthly revenue per customer (a) $ 50 $ 31 (38.0) $ 55 $ 32 (41.8) - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- </TABLE> (a) The amounts shown are for our consolidated properties and do not include customer data for our unconsolidated properties. Operating Revenues The increases of $144 quarter-over-quarter and $361 year-to-date on a comparative basis are primarily due to substantial growth in the customer bases of our consolidated operations, which collectively have increased 76.5% since September 30, 1999. Also contributing to these increases are the revenues from our new Colombian wireless operations. Partially offsetting the impacts of customer growth is declining monthly revenue per customer resulting from continued expansion into lower-usage customer segments through offerings such as prepaid cellular service and competitive pressures in certain countries. We now offer prepaid cellular products to all of the countries we serve in Latin America. Revenues from our operations in Nicaragua that were consolidated for the first time in first quarter 2000 contributed $12 to the increase in third quarter 2000 and $34 to the increase for 2000 year-to-date. A stronger U.S. Dollar against foreign currencies has had a negative impact on reported revenues. Absent changes in foreign currency exchange rates, reported revenues would have increased $212 for the quarter and $602 for the year-to-date period. Operating Expenses Operational and support expenses For the 2000 periods, these expenses increased $108 compared to third quarter 1999 and $349 compared to the first nine months of 1999. These increases are primarily the result of operational and customer acquisition costs associated with growth in customer levels and expanded operations. Also contributing to these increases are the expenses from our new Colombian wireless operations. Since September 30, 1999, our existing operations have added almost 2.0 million customers in Argentina, Chile and Venezuela. We have also added 900,000 customers through the acquisition and development of businesses in Colombia, Ecuador, Nicaragua and Peru. Operational and support expenses denominated in local currencies were favorably impacted by the weakening of foreign currencies against the U.S. Dollar. Absent changes in foreign currency exchange rates, reported operational and support expenses would have increased $144 for the quarter and $497 for the year-to-date period. Depreciation and amortization Depreciation expense increased $27 quarter-over-quarter and $58 on a year-to-date comparative basis primarily due to higher gross depreciable plant resulting from the continued investment in our wireless network infrastructure. Amortization expense increased $27 quarter-over-quarter and $37 on a year-to-date comparative basis as a result of growth in intangibles related to our purchase of additional ownership interests in several Latin American operations. Net Earnings (Losses) of Equity Affiliates Net earnings (losses) from our international equity affiliates decreased $26 to $(29) in third quarter 2000 and $46 to $(41) during the first nine months of 2000. The decline in earnings from our unconsolidated international businesses is due to lower operating results from our investments in Brazil and Germany. Both of these businesses experienced significant increases in operational and customer acquisition costs resulting from substantial growth in their customer bases. In addition, the impact of foreign currency fluctuations in Brazil for third quarter 2000 was a loss of $1 and year-to-date 2000 was a loss of $35. Advertising and Publishing Our advertising and publishing segment is comprised of companies in the U.S. and Latin America that publish, print, sell advertising in and perform related services concerning alphabetical and classified telephone directories and electronic product offerings. <TABLE> <CAPTION> - -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Third Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> External revenues $540 $587 8.7 $1,290 $1,422 10.2 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues 2 6 N/M 8 17 N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $542 $593 9.4 $1,298 $1,439 10.9 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $283 $295 4.2 $ 737 $ 797 8.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating income $259 $298 15.1 $ 561 $ 642 14.4 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $ 1 $ (2) N/M $ (4) $ 2 N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net income $160 $181 13.1 $ 342 $ 396 15.8 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- </TABLE> Operating Results External revenues increased $47 for third quarter 2000 and $132 for year-to-date 2000 when compared to the same 1999 periods. These increases are principally a result of growth in revenues at our directory publishing operations in Peru and Brazil totaling $17 for third quarter and $61 for the year-to-date period. The growth is also attributable to volume growth and price increases in the domestic operations, offset by the effects of shifts in directory production schedules. Adjusted for book shifts, external revenues for this segment would have increased by approximately 9.4% for the quarter and 10.7% for the year-to-date period. Also contributing are increases of $9 for the quarter and $29 for the year-to-date period in the revenues from our domestic electronic media offerings. Operational and support expenses increased $13 for third quarter 2000 and $55 for year-to-date 2000 when compared to the same 1999 periods. These increases are primarily due to growth at our operations in Peru and Brazil totaling $7 for the quarter and $62 for the year-to-date period. Also contributing to the increases are costs of $8 for the quarter and $19 for the year-to-date period associated with growth in electronic media offerings. These increases were offset by lower costs of $2 for the quarter and $27 for the year-to-date period in the domestic directory businesses due to the shift in directory production schedules. Depreciation and amortization remained relatively flat during third quarter 2000 and increased $5 on a year-to-date comparative basis due to the new international publishing operations. Net earnings (losses) of equity affiliates includes the results of our investment in a Brazilian directory publisher. All other <TABLE> <CAPTION> - -------------------------------------------------- ----------------------- ------------ ----- ----------------------- ----------- Third Quarter % Year-to-Date % ----------------------- ----------------------- 1999 2000 Change 1999 2000 Change - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> External revenues $ 77 $ 107 39.0 $200 $ 318 59.0 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Intersegment revenues 102 115 12.7 264 309 17.0 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Total operating revenues $ 179 $ 222 24.0 $464 $ 627 35.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating expenses $ 251 $ 290 15.5 $688 $ 824 19.8 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Operating loss $(72) $(68) 5.6 $(224) $(197) 12.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Net earnings (losses) of equity affiliates $ 3 $(3) N/M $ 3 $ (4) N/M - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- Segment net loss $(39) $(45) (15.4) $(155) $ (144) 7.1 - -------------------------------------------------- ----------- ----------- ------------ ----- ----------- ----------- ----------- </TABLE> Operating Results External revenues increased $30 for third quarter 2000 and $118 on a year-to-date comparative basis, primarily driven by growth in revenues of $11 for the quarter and $55 for the year from the resale of long distance services in markets outside of our wireline region, $4 for the quarter and $22 for the year from interactive paging services and $5 for the quarter and $20 for the year from wireless television offerings. Operating expenses reflect increased spending associated with new product and/or market introductions in all of these businesses. Higher headcount associated with customer support and installation functions also contributed to the increase in operational and support expenses of $26 for the quarter and $99 for the year-to-date period. Depreciation and amortization has increased $13 on a quarter-over-quarter basis and $37 on a year-to-date basis reflecting our continuing investment of resources associated with the growth of these businesses. - ------------------------------------------------------------------------------ Financial Condition - ------------------------------------------------------------------------------ Cash flows from operations are our primary source of funding for capital requirements of existing operations, debt service and dividends. We also have ready access to capital markets in the event additional funding is necessary. While current liabilities exceed current assets, our sources of funds -- primarily from operations and, to the extent necessary, from readily available external financing arrangements -- are sufficient to meet all current obligations on a timely basis. We believe that these sources of funds will be sufficient to meet the needs of our business for the foreseeable future. Net cash provided by (used for): - --------------------------------------------------------------------------- Year-to-Date Year-to-Date 1999 2000 Change ---------------------------------------------------- Operating activities... $ 6,471 $ 6,672 $ 201 3.1% Investing activities... $(8,254) $(7,150) $1,104 13.4 Financing activities... $ (342) $ 367 $ 709 N/M - --------------------------------------------------------------------------- Net cash provided by operating activities The increase in cash from operations between 1999 and 2000 primarily reflects better working capital management and higher net income from operations due to strong revenue growth. Operating cash flows also include cash proceeds of $92 for the 2000 period and $604 for the 1999 period associated with the sublease of wireless communications towers to Crown Castle International. Net cash used in investing activities During the first nine months of 2000, we invested $4.9 billion for capital expenditures to support our wireline and wireless networks, to promote the introduction of new products and services and increase operating efficiency and productivity. Significant investments are also being made to support deployment of high-speed Internet access and optical fiber-based broadband services. Included in these expenditures for the first nine months of 2000 is approximately $524 in costs related to the purchase and development of internal-use software. Also during the first nine months of 2000, we have paid approximately $1.8 billion to acquire new or additional interests in our domestic and international wireless businesses. Included in this amount is $299 for our investment in Celumovil (Colombia), $414 for the purchase of Cocelco (Colombia), $885 to buy out our partners in the Carolinas DCS partnerships, and $240 for our investment in Tele Centro Oeste (Brazil). In addition to amounts paid for purchases, we advanced approximately $412 to our partner in our German wireless operations which was used toward the purchase of new third generation wireless licenses from the German government. We funded these activities through the issuance of new debt, including commercial paper and short term loans with banks. Net cash provided (used) in financing activities During first quarter 2000, we issued $2 billion of long-term debt. The proceeds of $1,974 from this issuance were used to retire commercial paper borrowings. Our debt to total capitalization ratio was 54.8% at September 30, 2000 compared to 53.1% at December 31, 1999. The change is primarily a function of increases in short-term debt driven by borrowings to finance acquisitions of new and additional interests in wireless businesses and other investing activities. At November 1, 2000, we had shelf registration statements on file with the SEC under which $2.7 billion of debt securities could be publicly offered. We repurchase our common stock from time to time when we consider it attractive to do so based on stock prices. Reacquired shares are held as treasury shares pending reissuance in employee benefit plans and for other purposes. Market Risk For a complete discussion of our market risks, you should refer to the caption "Market Risk" in our 1999 Annual Report on Form 10-K. Our primary exposure to market risks relates to unfavorable movements in interest rates and foreign currency exchange rates. We do not anticipate any significant changes in our objectives and strategies with respect to managing such exposures. - ------------------------------------------------------------------------------ Operating Environment and Trends of the Business - ------------------------------------------------------------------------------ Regulatory Developments Our future operating and financial results will be substantially influenced by developments in a number of federal and state regulatory proceedings. Adverse results in these proceedings could materially affect our revenues, expenses and ability to compete effectively against other telecommunications carriers. Our intrastate prices are regulated under price regulation plans provided by statute or approved by state public service commissions. Some plans are subject to periodic review and may require renewal. The commissions reviewing these plans may require price reductions and other concessions from us as conditions to approving these plans. In July 2000, the Kentucky Public Service Commission approved a new price regulation plan. The new plan eliminates the 4% productivity factor contained in the previous plan in return for the company's commitment to bring high speed access services to certain rural areas. The level of company investment in rural high speed access services is under review at the Commission. The plan also permits the company to rebalance rates in a manner that will align residential rates more closely to the cost of providing such service. In July 2000, the Florida Public Service Commission commenced a proceeding to determine whether we violated certain Commission rules regarding service quality. Hearings originally scheduled for November 2000 are being moved to the first half of 2001. Also in July 2000, the Commission determined that our change in 1999 from a late charge based on a percentage of the amounts overdue to a flat rate fee plus an interest charge violated the Florida price regulation statute and voted that certain monies should be refunded. We protested the decision, and hearings are scheduled for late 2001. In October 2000, the Georgia Public Service Commission orally voted to approve, with certain modifications, the Commission Staff's Recommendation with respect to new company performance measures. These new performance measures will be used as one means to assess our wholesale service quality to competitive local exchange carriers. In its written decision, which has not been received, the Commission is expected to adopt additional performance measurements that will apply to our performance to our wholesale competitive local exchange carrier customers. In addition, the Commission will adopt a Self Enforcement Plan. The Enforcement Plan consists of three tiers. Under tier 1, we will be required to pay remedial sums to individual competitive local exchange carriers if we fail to meet certain performance criteria set by the Commission. Under tier 2, we will pay additional sums directly to the State Treasury for failing to meet certain performance metrics. Under tier 3, if we fail to meet certain performance criteria, then we will suspend additional marketing and sales of long distance services allowed by the Telecommunications Act of 1996. Our annual liability under the Plan will be capped at 44% of net revenues in Georgia. The decision also adopts other remedial measures for the filing of late or incomplete performance reports, and a market penetration adjustment for new and advanced services, which increases the amount of the payments where low volumes of advanced or nascent services are involved. It is anticipated that the Commission's written decision will be entered before year end. The Enforcement Plan will go into effect 45 days after the Commission enters an order. When the written decision is entered, we will have the opportunity to seek reconsideration of the order, as necessary. We are currently conducting third-party tests of our operations support systems in Georgia and Florida and expect to file our Georgia long distance application with the FCC when testing and verification of our performance data are complete and all other legal requirements have been met. We do not know if the FCC will require further changes in our interconnection and network element offerings and operations support systems before it will approve our petition. These changes could result in significant additional expenses and delays in obtaining full long-distance relief in these states. In July 2000, the U.S. Court of Appeals for the Eighth Circuit vacated the FCC methodology for pricing unbundled network elements and the methodology for determining wholesale rates for retail services. The order also affirmed the previous decision of the Eighth Circuit that vacated FCC rules that required incumbent carriers to combine previously uncombined elements for requesting carriers. The United States Supreme Court has been asked to review the decision of the Eighth Circuit. With respect to federal access charges, FCC policies strongly favor access reform, whereby the historical subsidy for local service that is contained in network access charges paid by long distance carriers is eliminated. In May 2000, the FCC implemented a comprehensive reform package that adjusted its price cap, access charge and universal service rules for those price cap local exchange carriers electing to adopt the new rules. The new rules are designed to result in lower consumer prices for long distance service by reforming the way in which access costs are recovered. The new rules, which we adopted during June 2000, reduced the access charges paid to us by other carriers, and at the same time authorized an increase to the subscriber line charges paid by residential and single-line business customers. The new rules also allow us to increase the subscriber line charges each year through 2003, although any increase which we request after July 2001 is subject to a cost review. We estimate that these modifications will result in interstate price decreases of approximately $270 on an annual basis. We are involved in numerous legal proceedings associated with state and federal regulatory matters, the disposition of which could materially impact our operating results and prospects. See note O 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, management's discussion and analysis contains forward-looking statements regarding events and financial trends that may affect our future operating results, financial position and cash flows. These statements are based on our assumptions and estimates and are subject to risks and uncertainties. For these statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Factors that could affect future operating results, financial position and cash flows and could cause actual results to differ materially from those expressed in the forward-looking statements are: . a change in economic conditions in domestic or international markets where we operate or have material investments, which would affect demand for our services; . 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; . unanticipated higher capital spending from, or delays in, the deployment of new technologies; and . unsatisfactory results in regulatory actions including terms of interconnection and unbundled network elements and resale rates. This list of cautionary statements is not exhaustive. These and other developments could cause our actual results to differ materially from those forecast or implied in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which are current only as of the date of this filing. We have no obligation, and we do not intend, to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing. - ----------------------------------------------------------------------------- PART II -- OTHER INFORMATION - ----------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number 4a No instrument which defines the rights of holders of our long- and intermediate-term debt is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to furnish a copy of any such instrument to the SEC upon request. 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of September 30, 2000. (b) Reports on Form 8-K: Date of Event Subject July 20, 2000 BellSouth 2Q00 Earnings Release
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) November 3, 2000
EXHIBIT INDEX Exhibit Number 11 Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule as of September 30, 2000.