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 March 31, 2002
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 April 30, 2002, 1,874,454,666 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........................ 20
3. Qualitative and Quantitative Disclosures about Market Risk .. 32
Part II
6. Exhibits and Reports on Form 8-K ............................ 34
PART I - FINANCIAL INFORMATION
-----------------------------------------------------------------------------
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Amounts)
For the Three Months
Ended March 31,
2001 2002
Operating revenues:
Communications group $4,665 $4,645
Latin America 773 656
Domestic advertising and publishing 434 216
All other 47 17
Total operating revenues 5,919 5,534
Operating expenses:
Operational and support expenses 3,161 2,965
Depreciation and amortization 1,157 1,161
Total operating expenses 4,318 4,126
Operating income 1,601 1,408
Interest expense 360 304
Gain on sale of operations - 1,318
Net earnings of equity affiliates 84 165
Other income (loss), net 82 (665)
Income before income taxes 1,407 1,922
Provision for income taxes 516 767
Net income $891 $1,155
Weighted-average common
shares outstanding:
Basic 1,873 1,879
Diluted 1,886 1,888
Dividends declared per common
share $ 0.19 $ 0.19
Earnings per share:
Basic $ 0.48 $ 0.61
Diluted $ 0.47 $ 0.61
The accompanying notes are an integral part of these
consolidated financial statements.
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Per Share Amounts)
December 31, March 31,
2001 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 592 $ 2,061
Accounts receivable, net of
allowance for uncollectibles
of $476 and $416 5,206 4,667
Material and supplies 382 341
Other current assets 675 713
Total current assets 6,855 7,782
Investments and advances 10,620 9,717
Property, plant and equipment 64,332 64,334
Less: accumulated depreciation 39,389 39,838
Property, plant and equipment, net 24,943 24,496
Deferred charges and other assets 5,122 5,296
Goodwill, net 1,672 1,672
Other intangible assets, net 2,834 2,702
Total assets $ 52,046 $ 51,665
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year $ 5,111 $ 4,998
Accounts payable 1,656 1,439
Other current liabilities 3,301 3,246
Total current liabilities 10,068 9,683
Long-term debt 15,014 14,078
Noncurrent liabilities:
Deferred income taxes 3,206 3,884
Other noncurrent liabilities 5,161 4,878
Total noncurrent liabilities 8,367 8,762
Shareholders' equity:
Common stock, $1 par value (8,650
shares authorized; 1,877
and 1,879 shares outstanding) 2,020 2,020
Paid-in capital 6,875 6,875
Retained earnings 15,137 15,895
Accumulated other comprehensive loss (294) (618)
Shares held in trust and treasury (4,996) (4,928)
Guarantee of ESOP debt (145) (102)
Total shareholders' equity 18,597 19,142
Total liabilities and
shareholders' equity $ 52,046 $ 51,665
The accompanying notes are an integral part of these
consolidated financial statements.
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
For the Three Months
Ended March 31,
2001 2002
Cash Flows from Operating Activities:
Net income $ 891 $ 1,155
Adjustments to net income:
Depreciation and amortization 1,157 1,161
Net losses on sale or impairment of equity securities 50 236
Foreign currency transaction losses 21 298
Postretirement benefit curtailment charge 72 -
Brazilian loan impairment - 383
(Gain) loss on sale of operations - (1,318)
Provision for uncollectibles 106 156
A&P unbilled receivable adjustment - 163
Net earnings of equity affiliates (84) (165)
Dividends received from equity affiliates 29 -
Minority interests in income of subsidiaries (15) (81)
Deferred income taxes 16 611
Net change in:
Accounts receivable and other current assets (210) 194
Accounts payable and other current liabilities (107) (479)
Deferred charges and other assets (279) (185)
Other liabilities and deferred credits (29) (38)
Other reconciling items, net 55 (26)
Net cash provided by operating activities 1,673 2,065
Cash Flows from Investing Activities:
Capital expenditures (1,690) (1,005)
Investments in and advances to equity affiliates (115) (6)
Proceeds from sale of investments 1,000 1,334
Proceeds from disposition of short-term investments 107 -
Purchases of short-term investments (76) -
Proceeds from repayment of loans and advances 5 426
Investments in debt securities (176) -
Other investing activities, net 5 (4)
Net cash (used for) provided by investing activities (940) 745
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt (986) (962)
Proceeds from long-term debt 744 4
Repayments of long-term debt (517) (10)
Dividends paid (351) (357)
Other financing activities, net 28 (16)
Net cash used for financing activities (1,082) (1,341)
Net (decrease) increase in cash and cash equivalents (349) 1,469
Cash and cash equivalents at beginning of period 1,061 592
Cash and cash equivalents at end of period $ 712 $ 2,061
The accompanying notes are an integral part of these
consolidated financial statements.
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
For the Three Months ended March 31, 2001
------------------------------------------------------------------------------------------------------
Number of Shares Amount
--------------------- -------------------------------------------------------------------------------
Accum.
Other
Shares Compre- Shares Guaran-
Held in hensive Held in tee of
Common Trust and Common Paid-in Retained Income/ Trust and ESOP
Stock Treasury Stock Capital Earnings (Loss) Treasury Debt Total
(a) (a)
Balance at December 31, 2000 2,020 (148) $ 2,020 $ 6,740 $ 14,074 $ (488) $ (5,222) $ (212) $ 16,912
Net income 891 891
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment (20) (20)
Net unrealized losses
on securities (108) (108)
Net unrealized losses
on derivatives (21) (21)
Total comprehensive income 742
Dividends declared (357) (357)
Share issuances for
employee benefit plans 1 1 (20) 54 35
Tax benefit related to
stock options 20 20
ESOP activities and related
tax benefit 41 41
Balance at March 31, 2001 2,020 (147) $ 2,020 $ 6,761 $ 14,588 $ (637) $ (5,168) $ (171) $ 17,393
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of March 31, 2001, there were
approximately 36 shares held in trust and 111 shares held in treasury.
The accompanying notes are an integral part of these
consolidated financial statements.
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
For the Three Months ended March 31, 2002
Number of Shares Amount
---------------------- --------------------------------------------------------------------------------
Accum.
Other
Shares Compre- Shares Guaran-
Held in hensive Held in tee of
Common Trust and Common Paid-in Retained Income/ Trust and ESOP
Stock Treasury Stock Capital Earnings (Loss) Treasury Debt Total
(a) (a)
Balance at December 31, 2001 2,020 (143) $ 2,020 $6,875 $ 15,137 $(294) $ (4,996) $ (145) $ 18,597
Net income 1,155 1,155
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment (339) (339)
Net unrealized losses
on securities (25) (25)
Net unrealized gains
on derivatives (b) 40 40
Total comprehensive income 831
Dividends declared (357) (357)
Share issuances for
employee benefit plans 2 (42) 68 26
ESOP activities and
related tax benefit 2 43 45
Balance at March 31, 2002 2,020 (141) $ 2,020 $6,875 $15,895 $ (618) $ (4,928) $(102) $ 19,142
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of March 31, 2002, there were
approximately 36 shares held in trust and 105 shares held in treasury.
(b) Net unrealized gains on derivatives include an adjustment for realized
gains of $31.
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.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS
BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS No. 141) and Statement No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also provides new criteria to determine whether an
acquired intangible asset should be recognized separately from goodwill. Under
SFAS No. 142, we ceased to amortize goodwill, embedded goodwill related to
equity investments and costs associated with indefinite life wireless licenses.
In addition, our net earnings of equity affiliates will reflect the impact of
adopting these new accounting standards on the operations of our equity
investments (the most significant of which is our investment in Cingular
Wireless). As required by SFAS No. 142, we reassessed the expected useful lives
of existing intangible assets. This resulted in changes to the expected useful
lives of some of our Latin American wireless licenses.
Cingular has determined that the FCC wireless licenses they own have an
indefinite useful life because cash flows are expected to continue indefinitely
and historical practice has shown that Cingular has been able to renew the
licenses at each expiration period. Under SFAS No. 142, Cingular will not
amortize these wireless licenses until Cingular determines that the licenses
have a finite life.
The following table reflects amounts recorded in the first quarter 2001, which
were not recorded in the first quarter 2002 as a result of implementing SFAS No.
142:
Pre-tax Impact Net Income Earnings
Impact per Share
Equity earnings from Cingular $25 $15
Latin America goodwill and
license amortization 12 11
Other goodwill amortization 2 1
----- ----- -----
Total $39 $27 $ 0.01
=== ===
We expect the annual increase to earnings for 2002 compared to 2001 to
approximate $130, or $0.07 per share.
As part of the adoption of SFAS No. 142, we are required to perform initial
valuations to determine if any impairment of goodwill and indefinite-lived
intangibles exists. We will continue to test embedded goodwill related to equity
investments for impairment under accounting rules for equity investments, which
are based on comparisons between fair value and carrying value.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS (continued)
During 2002, we will perform the first step of the required SFAS No. 142
impairment tests as of January 1, 2002. This first step requires us to compare
the carrying value of any reporting unit that has goodwill to the estimated fair
value of the reporting unit. A reporting unit is one of our operating segments
or a discrete component of that segment. If the current fair value is less than
the carrying value, then we will perform the second step of the impairment test.
This second step requires us to measure the excess of the recorded goodwill over
the current value of the goodwill, and to record any excess as an impairment.
We are in the process of completing step one of the impairment test and
therefore cannot determine if an impairment exists at this time. We plan to
complete the impairment tests during the second quarter of 2002. Any impairment
resulting from the initial application of the statements will be recorded as a
cumulative effect of accounting change as of January 1, 2002 in accordance with
SFAS No. 142.
ASSET RETIREMENT OBLIGATIONS AND DISPOSAL OF A SEGMENT OF A BUSINESS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No. 143
requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. That
cost is then depreciated over the remaining life of the underlying long-lived
asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are
currently evaluating the impact this new standard will have on our future
results of operations or financial position.
NOTE C - EARNINGS PER SHARE
Basic earnings per share is computed on the weighted-average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted-average number of common shares outstanding plus net incremental
shares arising out of employee stock options and benefit plans. The following is
a reconciliation of the weighted-average share amounts (in millions) used in
calculating earnings per share:
For the Three Months
Ended March 31,
2001 2002
---- ----
Basic common shares outstanding 1,873 1,879
Incremental shares from stock
options and benefit plans 13 9
----- -----
Diluted common shares outstanding 1,886 1,888
===== =====
The earnings amounts used for per-share calculations are the same for both the
basic and diluted methods. Outstanding options to purchase 44 million shares for
the three months ended March 31, 2001 and 57 million shares for the three months
ended March 31, 2002 were not included in the computation of diluted earnings
per share because the exercise price of these options was greater than the
average market price of the common stock.
NOTE D - DIVESTITURES
Conversion of E-Plus Interest to KPN
In March 2002, we completed a transaction with Dutch telecommunications provider
Royal KPN N.V. (KPN) in which we exchanged our 22.51% stake in E-Plus for 234.7
million KPN shares. After this exchange, we held approximately 9.42% of KPN's
outstanding shares. As part of this transaction, we surrendered existing
warrants to purchase KPN shares and exchange rights with regard to KPN Mobile.
We recorded a gain of $1,335, or $854 after tax, representing the difference in
the fair value of the KPN shares received and the carrying value of our
investment in E-Plus. We sold the 234.7 million shares that we held in KPN in
March 2002 for $1,076 in proceeds
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE D - DIVESTITURES (continued)
and recognized a loss of $27, or $17 after tax, on the sale.
We report our results on a calendar basis, except for our international
operations, including E-Plus, which we reported on a one-month lag basis. As
described above, we disposed of our investment in E-Plus during March 2002.
Therefore, the lag basis of reporting is no longer applicable to this
investment. Accordingly, the gain resulting from this transaction is recorded in
our financial statements for the period ended March 31, 2002.
As part of the agreement, KPN repaid $426 under a loan facility provided by
BellSouth and assumed approximately 2.13 billion Euro of BellSouth loans that
were previously extended to E-Plus. Concurrent with KPN's assumption of loans,
we unwound several foreign-currency forward contracts associated with the
original loans to E-Plus and recognized a gain of $31, or $20 after tax. At the
same time, we entered into three foreign currency swap contracts to mitigate
foreign currency risk on the KPN loans. The swaps, which qualify as cash flow
hedges, lock-in the foreign exchange rate at an average of Euro / USD of 0.8730
for the three payments of principal along with the quarterly interest payments
from KPN during 2002 through 2004.
NOTE E - BRAZILIAN LOAN IMPAIRMENT
We own equity interests in two wireless communications companies in Brazil (BCP
SA and BSE SA). In addition to equity infusions, we have advanced these
companies $398 in the form of shareholder loans. After recognition of equity
losses equal to our initial investment, the carrying value of the loans had been
reduced to $330. In January 2002, we guaranteed R$246 (approximately $108) of a
BCP debenture issuance. We have not guaranteed any other debt of BCP. Our
principal partner and we have been in discussions regarding shareholder support
for the funding requirements of the respective operations and were not able to
reach an agreement prior to the March 28 due date for a $375 principal payment
that BCP owes its principal lenders. This disagreement regarding shareholder
support and BCP's inability to meet the payment from its own operating cash
flows led to BCP's default on the $375 payment.
As a result of default and inability to reach an agreement, we recorded a
contingent liability for the debt guarantee which increased our investment in
Brazil. We also evaluated the probability of collecting our outstanding loans to
these companies. In our assessment, given the companies' current capital
structures, deterioration of credit measures and the subordination of some of
our loans to other third-party debt, we determined that it was probable that the
loans would not be repaid. In determining the impairment, we compared the book
basis of our net investment, including the debt guarantee, with the fair value
of our interests in the companies. This analysis indicated an impairment of
approximately $383, including $7 of accrued interest on the loans. Subsequent to
the impairment, our net investment in these companies is $62. In the event of
sale or liquidation of our investment, we will recognize cumulative translation
losses as part of the gain or loss on sale or liquidation. The cumulative
foreign currency translation losses related to these investments were $220 at
March 31, 2002.
We continue to discuss possible funding solutions with our principal partner and
BCP's lenders. The parties have not reached any agreement to date. There can be
no assurance that an agreement will be reached.
NOTE F - DOMESTIC ADVERTISING AND PUBLISHING
During first quarter 2002, we determined that the unbilled receivable balance at
our advertising and publishing subsidiary was overstated. As a result, we
recorded a reduction to advertising and publishing revenues of $163 million, or
$101 million after tax, to adjust the unbilled receivable balance. Based on our
analysis of this matter, we have concluded that the overstatement was caused by
a number of customer adjustments that were not properly posted to the general
ledger. Our analysis indicates that: this issue occurred over an extended period
of time; no one period was materially misstated and operating trends were not
affected; no regulatory requirements have been affected; we do not have any debt
or any covenants with which to comply that are
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE F - DOMESTIC ADVERTISING AND PUBLISHING (continued)
affected by this error; and the error did not result from an unlawful
transaction.
NOTE G - CURRENCY DEVALUATIONS
In early 2002, the Argentine government announced economic reforms, including a
devaluation of the peso. As a result of the devaluation, our Argentine operation
violated covenants on $350 of its U.S. Dollar-denominated debt. The debt
is classified as current in the March 31, 2002 balance sheet. The devaluation,
resulting new laws and regulations instituted, and the instability of the
government make it difficult to anticipate the long term impacts of the economic
situation in Argentina. Based on the current monetary liability position of this
operation, we recorded foreign currency transaction losses of $326, or $228
after minority partner interests, in the first quarter of 2002. We recorded a
100% valuation allowance reserving against the tax benefits generated by these
losses due to the limited carryover period in Argentina. As a result of the
additional deterioration of the peso, we recorded a charge of $65 subsequent to
the end of first quarter 2002. Due to the rapidly changing environment, we are
closely monitoring the situation and cannot anticipate the ultimate outcome.
On February 12, 2002, Venezuela's government floated its currency, ending a
five-year-old regime that permitted the bolivar to trade only within a
fixed-band against the U.S. Dollar. As a result, devaluation occurred. It is
uncertain what the long-term impacts of the devaluation will have on our
operations. Based on the current monetary asset position of this operation, we
recorded a benefit of $27, or $14 after taxes and minority partner interests, in
the first quarter of 2002.
NOTE H - CURTAILMENT CHARGE
In first quarter 2001, we recognized a curtailment loss of $72 in accordance
with provisions of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The loss resulted from accelerated recognition of
prior service cost in excess of the decrease in our postretirement benefit
obligation for the wireless employees that were subsequently transferred to and
covered under Cingular's postretirement benefit plans.
NOTE I - MARKETABLE SECURITIES
We have investments in marketable securities, primarily common stocks, which are
accounted for under the cost method. These investments are comprised primarily
of our equity interest in Qwest and are classified as available-for-sale under
SFAS No. 115. Under SFAS No. 115, available-for-sale securities are required to
be carried at their fair value, with unrealized gains and losses, net of income
taxes, recorded in accumulated other comprehensive income (loss) in our
statement of changes in shareholders' equity and comprehensive income.
The fair values of our investments in marketable securities are determined based
on market quotations. Equity securities that are restricted for more than one
year or are not publicly traded are recorded at cost.
Qwest
At the beginning of 2001, we held 74 million shares of Qwest common stock. Since
that time, we have sold 45.2 million shares for a total of $1.3 billion. Our
first quarter 2001 results include cash proceeds of $1 billion, a pretax loss of
$50, and an after-tax loss of $32 for the sale of 22.2 million of these shares.
Our first quarter 2002 results include cash proceeds of $166, a pretax loss of
$92, and an after-tax loss of $60 for the sale of 18.5 million of these shares.
As of March 31, 2002, we held 27.0 million shares of Qwest stock, all of which
are classified as available-for-sale.
Since March 31, 2002, we have sold an additional 9.65 million shares of Qwest
common stock for total proceeds of $71, a pretax loss of $9, or $6 after tax.
After these sales, we hold 17.3 million shares of Qwest common stock.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE I - MARKETABLE SECURITIES (continued)
Qwest Impairment
The value of Qwest stock declined 41% since December 31, 2001. As a result, we
recorded a charge of $137 to reduce the value of our remaining stake in Qwest to
the quarter-end market price. We concluded that the continuing difficulties
experienced by Qwest and other companies in the telecom sector indicated that
the decline was other than temporary. This charge is included in Other income
(expense), net in our consolidated statement of income.
Telecentro Oeste Celular Participacoes SA (TCO)
During first quarter 2002, we sold the American Depositary Receipts representing
nonvoting preferred stock that we held in TCO. We received total proceeds of $90
and recognized a gain of $22, or $14 after tax. The pretax gain is included in
Other income (expense), net in our consolidated statement of income.
The table below shows certain summarized information related to our investments
at March 31, 2002:
Unrealized Unrealized Recorded
Cost Gains Losses Basis
Investment in Qwest $222 $ -- $ -- $ 222
Other investments 74 18 2 90
--- ---- ---- -----
Total $296 $ 18 $ 2 $ 312
==== ==== ==== =====
NOTE J - SEGMENT INFORMATION
We have four reportable operating segments: (1) Communications group; (2)
Domestic wireless; (3) Latin America; and (4) Domestic advertising and
publishing.
The following table provides information for each operating segment:
For the Three Months
Ended March 31, %
2001 2002 Change
Communications group
External revenues $4,637 $ 4,645 0.2
Intersegment revenues 34 37 8.8
Total revenues $4,671 $ 4,682 0.2
Operating income $1,510 $ 1,363 (9.7)
Segment net income $855 $ 770 (9.9)
Domestic wireless
External revenues $1,310 $ 1,417 8.2
Intersegment revenues - - N/M*
Total revenues $1,310 $ 1,417 8.2
Operating income $205 $ 266 29.8
Net losses of equity affiliates $ - $ (23) N/M
Segment net income $ 88 $ 92 4.5
* Not Meaningful
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE J - SEGMENT INFORMATION (continued)
For the Three Months
Ended March 31, %
2001 2002 Change
Latin America
External revenues $773 $ 656 (15.1)
Intersegment revenues 9 3 (66.7)
Total revenues $782 $ 659 (15.7)
Operating (loss) income $ (2) $ 63 N/M
Net losses of equity affiliates $(13) $ (6) N/M
Segment net (loss) income $(63) $ 4 N/M
Domestic advertising
and publishing
External revenues $434 $ 379 (12.7)
Intersegment revenues 3 4 33.3
Total revenues $437 $ 383 (12.4)
Operating income $226 $ 172 (23.9)
Segment net income $137 $ 104 (24.1)
Reconciliation to Consolidated
Financial Information
Operating Revenues
Total reportable segments $7,200 $ 7,141 (0.8)
Cingular proportional
consolidation (1,284) (1,386)
A&P unbilled receivable
adjustment - (163)
Customer premises equipment
revenues 13 -
Florida gross receipts tax 15 -
Corporate, eliminations
and other (25) (58)
Total consolidated $5,919 $ 5,534 (6.5)
Net income
Total reportable segments $1,017 $ 970 (4.6)
Corporate and other (4) 46
Foreign currency transaction
losses (43) (204)
Brazilian loan impairments - (263)
Net gains on sales of
operations - 857
A&P unbilled receivable
adjustment - (101)
Net losses on sale or
impairment of securities (32) (150)
Pension and postretirement
related losses (47) -
Total consolidated $891 $ 1,155 29.6
NOTE K - 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.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE K - SUMMARY FINANCIAL INFORMATION FOR EQUITY INVESTEES (continued)
For the Three
Months Ended
March 31,
2001 2002
Revenues $4,411 $4,580
====== ======
Operating income $471 $ 800
====== ======
Net income $118 $ 397
====== ======
NOTE L- RELATED PARTY TRANSACTIONS
We have made advances to Cingular that totaled $2,130 at March 31, 2001 and
$2,671 at March 31, 2002. We earned $71 in the first three months of 2001 and
$72 in the first three months of 2002 from interest income on this advance. In
addition, Cingular owed us $46 at March 31, 2002, which represents receivables
incurred in the ordinary course of business, and is included in other current
assets. In addition, we generated revenues of approximately $51 in first quarter
2001 and $78 in first quarter 2002 from the provision of local interconnect and
long distance services to Cingular.
NOTE M - CONTINGENCIES
Regulatory matters
Beginning in late 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 statute,
adopted subsequent to the Commission's approval of the earlier plan. The new
statute allows telephone companies in South Carolina to operate under price
regulation without obtaining approval from the Commission. The election became
effective during August 1999. The South Carolina Consumer Advocate petitioned
the Commission seeking review of the level of our earnings during the 1996 -
1998 period when we operated under the subsequently invalidated price regulation
plan. The Commission voted to dismiss the petition in November 1999 and issued
orders confirming the vote in February and June of 2000. In July 2000, the
Consumer Advocate appealed the Commission's dismissal of the petition. If the
Consumer Advocate prevails, the case could be remanded to the South Carolina PSC
which could, after considering evidence, order refunds to customers in South
Carolina. At this time, we are unable to determine the impact, if any, this may
have on future earnings.
Also in 2000, the Florida Public Service Commission issued a proposed agency
action stating 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 approximately $65 should be
refunded. We protested the decision. On August 30, 2001, the Commission issued
an order adopting its proposed action. We have appealed to the Florida Supreme
Court and continue to collect the charges subject to refund. The total amount as
of March 31, 2002 subject to potential refund was $91, including accrued
interest. No accrual has been recorded in these financial statements related to
this matter.
Other Claims
We are subject to claims arising in the ordinary course of business involving
allegations of personal injury, breach of contract, anti-competitive conduct,
employment law issues, regulatory matters and other actions. BST is also subject
to claims attributable to pre-divestiture events involving environmental
liabilities, rates, taxes, contracts and torts. Certain contingent liabilities
for pre-divestiture events are shared with AT&T Corp. While complete assurance
cannot be given as to the outcome of these claims, we believe that any financial
impact would not be material to our results of operations, financial position or
cash flows.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE N - SUBSIDIARY FINANCIAL INFORMATION
We have fully and unconditionally guaranteed all of the outstanding debt
securities of BST that are subject to the reporting requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934. BST is a 100% owned
subsidiary of BellSouth. In accordance with SEC rules, BST is no longer subject
to the reporting requirements of the Securities Exchange Act of 1934, and we are
providing the following condensed consolidating financial information.
BST is listed separately because it has debt securities, registered with the
SEC, that we have guaranteed. All other operating subsidiaries that do not have
registered securities guaranteed by us are presented in the Other column. The
Parent column is comprised of headquarter entities which provide, among other
services, executive management, administrative support and financial management
to operating subsidiaries. The Adjustments column includes the necessary amounts
to eliminate the intercompany balances and transactions between BST, Other and
Parent to reconcile to our consolidated financial information.
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE N - SUBSIDIARY FINANCIAL INFORMATION (continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended March 31, 2001
BST Other Parent Adjustments Total
Total operating
revenues $ 4,575 $ 1,576 $ 544 $ (776) $ 5,919
Total operating
expenses 3,216 1,402 480 (780) 4,318
Operating income 1,359 174 64 4 1,601
Interest expense 167 89 188 (84) 360
Net earnings of
equity affiliates 4 77 1,156 (1,153) 84
Other income, net 8 63 100 (89) 82
Income before
income taxes 1,204 225 1,132 (1,154) 1,407
Provision for
(benefit from)
income taxes 439 138 (62) 1 516
Net income $ 765 $ 87 $ 1,194 $ (1,155) $ 891
For the Three Months Ended March 31, 2002
BST Other Parent Adjustments Total
Total operating
revenues $ 4,522 $ 1,231 $ 611 $ (830) $ 5,534
Total operating
expenses 3,308 1,224 427 (833) 4,126
Operating income 1,214 7 184 3 1,408
Interest expense 124 50 203 (73) 304
Net earnings of
equity affiliates 3 164 848 (850) 165
Other income
(expense), net (4) (136) (101) 894 653
Income (loss) before
income taxes 1,089 (15) 728 120 1,922
Provision for
income taxes 409 76 259 23 767
Net income (loss) $ 680 $ (91) $ 469 $ 97 $ 1,155
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE N - SUBSIDIARY FINANCIAL INFORMATION (continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2001
BST Other Parent Adjustments Total
ASSETS
Current assets:
Cash and cash equivalents $ 111 $ 481 $ - $ - $ 592
Accounts receivable, net 3,115 2,308 4,066 (4,283) 5,206
Other current assets 437 571 75 (26) 1,057
Total current assets 3,663 3,360 4,141 (4,309) 6,855
Investments and advances 287 5,801 8,117 (3,585) 10,620
Property, plant and
equipment, net 22,085 2,580 278 - 24,943
Deferred charges and
other assets 4,795 213 180 (66) 5,122
Intangible assets, net 1,122 3,081 288 15 4,506
Total assets $ 31,952 $ 15,035 $ 13,004 $ (7,945) $ 52,046
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within
one year $ 3,468 $ 794 $ 4,261 $ (3,412) $ 5,111
Other current liabilities 3,063 1,568 1,182 (856) 4,957
Total current liabilities 6,531 2,362 5,443 (4,268) 10,068
Long-term debt 7,353 2,313 8,450 (3,102) 15,014
Noncurrent liabilities:
Deferred income taxes 2,907 1,080 (840) 59 3,206
Other noncurrent liabilities 3,330 1,436 492 (97) 5,161
Total noncurrent liabilities 6,237 2,516 (348) (38) 8,367
Shareholders' equity 11,831 7,844 (541) (537) 18,597
Total liabilities and
shareholders' equity $ 31,952 $ 15,035 $ 13,004 $ (7,945) $ 52,046
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE N - SUBSIDIARY FINANCIAL INFORMATION (continued)
March 31, 2002
BST Other Parent Adjustments Total
ASSETS
Current assets:
Cash and cash equivalents $ 84 $ 615 $ 1,362 $ - $ 2,061
Accounts receivable, net 2,956 1,813 3,265 (3,367) 4,667
Other current assets 385 602 146 (79) 1,054
Total current assets 3,425 3,030 4,773 (3,446) 7,782
Investments and advances 311 6,083 6,823 (3,500) 9,717
Property, plant and
equipment, net 22,009 2,208 280 (1) 24,496
Deferred charges and
other assets 4,974 200 180 (58) 5,296
Intangible assets, net 1,134 2,950 289 1 4,374
Total assets $ 31,853 $ 14,471 $ 12,345 $ (7,004) $ 51,665
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year $ 3,432 $ 772 $ 3,388 $ (2,594) $ 4,998
Other current liabilities 3,062 1,193 1,199 (769) 4,685
Total current liabilities 6,494 1,965 4,587 (3,363) 9,683
Long-term debt 6,851 1,443 8,419 (2,635) 14,078
Noncurrent liabilities:
Deferred income taxes 2,999 1,335 (368) (82) 3,884
Other noncurrent liabilities 3,306 1,118 504 (50) 4,878
Total noncurrent liabilities 6,305 2,453 136 (132) 8,762
Shareholders' equity 12,203 8,610 (797) (874) 19,142
Total liabilities and
shareholders' equity $ 31,853 $ 14,471 $ 12,345 $ (7,004) $ 51,665
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Dollars In Millions)
NOTE N - SUBSIDIARY FINANCIAL INFORMATION (continued)
CONDENSED CONSOLIDATING CASH FLOW STATEMENTS
For the Three Months Ended March 31, 2001
BST Other Parent Adjustments Total
Cash flows from
operating activities $ 1,560 $ 24 $ 42 $ 47 $ 1,673
Cash flows from
investing activities (1,410) (191) (1,438) 2,099 (940)
Cash flows from
financing activities (129) 1 1,192 (2,146) (1,082)
Net increase (decrease)
in cash $ 21 $ (166) $ (204) $ - $ (349)
For the Three Months Ended March 31, 2002
BST Other Parent Adjustments Total
Cash flows from
operating activities $ 1,714 $ 317 $ 149 $ (115) $ 2,065
Cash flows from
investing activities (876) (25) 2,382 (736) 745
Cash flows from
financing activities (865) (158) (1,169) 851 (1,341)
Net increase (decrease)
in cash $ (27) $ 134 $ 1,362 $ - $ 1,469
NOTE O - SUBSEQUENT EVENTS
Since first quarter 2002, we have repurchased approximately 6.0 million shares
of our common stock in the open market for approximately $190.
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 our other filings
with the SEC.
------------------------------------------------------------------------------
Consolidated Results of Operations
------------------------------------------------------------------------------
Key financial and operating data for the three months ended March 31, 2001 and
2002 are as follows. All references to earnings per share are on a diluted
basis:
For the Three Months
Ended March 31, %
2001 2002 Change
Results of operations:
Operating revenues $5,919 $5,534 (6.5)
Operating expenses 4,318 4,126 (4.4)
Operating income 1,601 1,408 (12.1)
Interest expense 360 304 (15.6)
Gain on sale of operations -- 1,318 N/M*
Net earnings of equity affiliates 84 165 96.4
Other income (expense), net 82 (665) N/M
Provision for income taxes 516 767 48.6
Net income $ 891 $1,155 29.6
Earnings per share $ 0.47 $ 0.61 29.8
Cash flow data:
Cash provided by
operating activities $1,673 $2,065 23.4
Cash (used for) provided
by investing activities $ (940) $745 N/M
Cash used for financing
activities $(1,082) $(1,341) 23.9
Other:
Effective tax rate 36.7% 39.9% +320bps
Average debt balances:
Short-term debt $6,523 $4,641 (28.9)
Long-term debt $12,963 $14,819 14.3
Total average debt balance $19,486 $19,460 (0.1)
* Not meaningful
------------------------------------------------------------------------------
Overview of consolidated results of operations
------------------------------------------------------------------------------
The following events impacted reported results during the three months ended
March 31:
Impact on Reported Results -
Increase (Decrease)
Operating Operating Income Before
Revenues Expense Taxes Net Income
------------ ------------ --------------- ----------
2001
Postretirement benefit
expense for former
wireless employees $ -- $ 72 $ (72) $ (47)
---- ---- ------ ------
$ -- $ 72 $ (72) $ (47)
==== ==== ====== ======
2002
Domestic advertising and
publishing unbilled
receivable adjustment
$(163) $ -- $(163) $(101)
------ ------ ------ ------
$(163) $ -- $(163) $(101)
====== ====== ====== ======
Postretirement benefit expense for former wireless employees - The amount shown
represents expense for changes in postretirement medical benefit obligations for
the wireless employees that were transitioned to Cingular.
Domestic advertising and publishing unbilled receivable adjustment - During
first quarter 2002, BellSouth determined that the unbilled receivable balance
was overstated. As a result, BellSouth recorded a reduction to advertising and
publishing revenues.
Operating Revenues
Operating revenues decreased $385 in first quarter 2002 compared to first
quarter 2001. This decrease includes the $163 correction of unbilled accounts
receivable at our domestic advertising and publishing operations. The remaining
decrease reflects:
o A decline in revenues of $20 at the communications group attributable
to: continuing weak economic conditions and increased competitive activity,
most notably in the wholesale and business markets; loss of retail access
lines, specifically in the small business and mid-market segments; and
unfavorable impacts from the movement of wholesale customers from a resale
basis to lower-priced unbundled network elements. These decreases were
offset by growth in retail digital and data revenues, in wholesale long
distance revenues and, to a lesser degree, in calling features.
o A decline in revenues of $117 at the Latin America group. Revenues in this
segment were negatively impacted by the effect of foreign currency exchange
rates. If foreign currency exchange rates had remained constant with first
quarter 2001, Latin America group revenues would have increased $13.
o A $55 decline in revenues from domestic advertising and publishing revenues
driven by timing of directory publishing schedules.
Operating Expenses
Total operating expenses decreased $192 during first quarter 2002 compared to
first quarter 2001. Excluding the postretirement benefit expense discussed
above, total operating expenses decreased $120 during first quarter 2002
compared to first quarter 2001, which reflect the following:
o Operational and support expenses decreased $124 during first quarter 2002
compared to first quarter 2001.
o Expenses in the communications group increased $91 as a result of
higher volumes in BellSouth's wholesale long distance businesses,
higher uncollectibles due to bankruptcies of telecom sector customers
and continued economic slowing, and higher employee benefit costs
driven primarily by higher pension and retiree benefits and increasing
medical costs, offset by lower salary and wages and employee expenses
due to staff reductions.
o Expenses in the Latin America segment decreased $152 driven primarily
by changes in foreign currency exchange rates. If foreign currency
exchange rates had remained constant with first quarter 2001, these
expenses would have decreased by $65, reflecting decreases in
customer-acquisition-related costs.
o Other contributing factors include decreases in headquarters related
expenses, which include a reduction in expenses related to the exit of
the wireless entertainment business.
o Depreciation and amortization increased $4 compared to first quarter 2001
due to increases at the communications group reflecting increased
deployment of capitalized software and investment in the network. The
increase was offset by a $36 decline in expenses in the Latin America
segment, reflecting the effect of foreign currency exchange rates,
revisions to depreciation at the Colombian operations and the cessation of
amortization of goodwill due to the adoption of SFAS No. 142.
Interest Expense
Interest expense decreased $56 during first quarter 2002 as compared to first
quarter 2001. Lower average interest rates on short-term and long-term
borrowings were the drivers of the decrease.
Gain on sale of operations
Gain on sale of operations for first quarter 2002 includes a gain of
$1,335 related to the conversion of our ownership interest in E-Plus and a loss
of $17 associated with the exit of one of our Brazilian advertising and
publishing companies.
Net earnings of equity affiliates
Earnings from our unconsolidated businesses increased $81 in first quarter 2002
compared to first quarter 2001. The increase was attributable to a $43
improvement at our Brazilian operations driven by lower net foreign currency
transaction losses, and a $25 decrease in losses from our former wireless
subsidiary in Germany. The remaining increase was attributable to higher
earnings from Cingular and our operations in Israel and Denmark.
Other income (expense), net
Other income (expense), net includes interest income, gains (losses) on
disposition of assets, foreign currency gains (losses), gains (losses) on the
sale and impairments of investments and miscellaneous nonoperating income.
The quarter over quarter change of $747 is primarily driven by: $275 of expense
in first quarter 2002 from the recognition of an impairment on shareholder loans
to our Brazilian equity investments; $108 of expense in first quarter 2002 for
the recognition of a guarantee on a portion of the Brazilian operations' debt; a
quarter over quarter increase of $277 in foreign currency transaction losses
driven by the devaluation of the Argentinean peso; a $42 increase in losses
associated with the sale of Qwest shares; and $137 of expense in first quarter
2002 to reduce our remaining investment in Qwest to market value. These expenses
and losses were partially offset by a $66 increase in minority interests at our
Latin American operations.
Provision for income taxes
The provision for income taxes increased $251 in first quarter 2002 and our
effective tax rate increased from 36.7% in first quarter 2001 to 39.9% in first
quarter 2002. The increase in the effective tax rate was driven by an increase
in the foreign tax valuation allowance, which is related to the increased losses
at our operations in Argentina.
-------------------------------------------------------------------------------
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:
o Communications group;
o Domestic wireless;
o Latin America; and
o Domestic advertising and publishing.
We have included the operations of all other businesses falling below the
reporting threshold in the "All other businesses" segment.
Management evaluates the performance of each business unit based on net income,
exclusive of internal charges for use of intellectual property and adjustments
for unusual items that may arise. Unusual 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. In addition, when
changes in our business affect the comparability of current versus historical
results, we will adjust historical operating information to reflect the current
business structure.
The following discussion highlights our performance in the context of these
segments. For a more complete understanding of our industry, the drivers of our
business, and our current period results, you should read this discussion in
conjunction with our consolidated financial statements, including the related
notes.
------------------------------------------------------------------------------
Communications Group
------------------------------------------------------------------------------
The communications group includes our core domestic businesses including: all
domestic wireline voice, data, broadband, e-commerce, long distance, Internet
services and advanced voice features. The group provides these services to an
array of customers, including residential, business and wholesale.
Adjustments to Segment Results
Gross versus net presentation - We have adjusted the communications group's
historical revenues and expenses to reflect a change in reporting of gross
receipts taxes in Florida. Beginning in the fourth quarter of 2001, we are
required to account for the tax collected from customers as a pass-through
billing (i.e. net presentation). This change is neutral to earnings as it
reduces revenues and expenses by an equal amount.
For the Three Months
Ended March 31, %
2001 2002 Change
Results of Operations
Segment operating revenues:
Local service $2,898 $2,941 1.5
Network access 1,235 1,205 (2.4)
Long distance 171 205 19.9
Other communications 367 331 (9.8)
Total segment operating revenues 4,671 4,682 0.2
Segment operating expenses:
Operational and support expenses 2,185 2,304 5.4
Depreciation and amortization 976 1,015 4.0
Total segment operating expenses 3,161 3,319 5.0
Segment operating income 1,510 1,363 (9.7)
Segment net income $855 $770 (9.9)
Key Indicators
Access line counts:
Access lines:
Residential 17,192 16,608 (3.4)
Business 8,464 8,616 1.8
Other 242 201 (16.9)
Total access lines 25,898 25,425 (1.8)
Access line equivalents (1) 31,227 41,398 32.6
Total equivalent access lines 57,125 66,823 17.0
Resold lines and unbundled network elements 1,408 1,921 36.4
Access minutes of use (millions) 28,430 25,583 (10.0)
Toll messages (millions) 111 96 (13.5)
DSL customers 303 729 140.6
Digital and data services revenues $975 $1,117 14.6
Calling feature revenues $563 $592 5.2
Capital expenditures $1,477 $922 (37.6)
(1) Access line equivalents represent a conversion of non-switched data circuits
to a switched access line basis and are 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.
Segment operating revenues
Local service
Local service revenues increased $43 in the first quarter 2002 attributable to
strong growth in digital and data revenues and by our marketing of calling
features. Those increases were substantially offset by a decrease in basic and
extended area service revenues reflecting competition and a slowing economy.
Residential access lines decreased 3.4% and business access lines increased
1.8%. We continue to experience access line declines but the rate of decline
decreased slightly from a rate of 1.9% in fourth quarter 2001. The core business
was affected by a slowing economy, competitive impacts related to over 300
active carriers authorized to provide telecommunications services in our region
and technological changes manifested in the shifting of customers from wireline
to wireless and second line customers to high-speed access service.
At March 31, 2002, we provided 1.9 million wholesale lines to competitors, on
both a resale and unbundled network elements (UNE) basis. At March 31, 2002,
UNEs accounted for approximately 67% of our wholesale lines and at March 31,
2001 they represented 47%. Because of the larger discounts associated with UNEs
versus resale, this shift to UNEs is negatively impacting our revenue growth. We
also estimate that we have lost an additional 2.2 million lines to
facilities-based competitors.
Revenues from optional calling features such as caller ID, call waiting, call
return and voicemail service increased $29, or 5.2%, during first quarter 2002
compared to first quarter 2001. These increases were driven by growth in calling
feature usage through our Complete Choice(R) Package, a one-price bundled
offering of over 20 calling features.
Network access
Network access revenues decreased $30 in the first quarter of 2002 when compared
to the same 2001 period. Revenues from dedicated high-capacity data line
offerings grew approximately $32 quarter over quarter as high-capacity users
increased their use of our network. The increases were offset by a $35 decline
in revenues derived from switched access services resulting from a 10.0%
decrease in access minutes-of-use volumes. These volumes continue to be
negatively impacted by migration of minutes to dedicated digital and data
services offerings which are fixed-charge based rather than minute-of-use based,
competition from competitive local exchange carriers whose traffic completely
bypasses our network, and the effect of alternative services such as wireless
and Internet e-mail.
Long distance
Long distance revenues increased $34 in the first quarter 2002. Strong growth of
$60 in wholesale long distance and prepaid long distance cards was partially
offset by $26 in losses of intraLATA toll revenues as toll messages declined
13.5% for the quarter. Growth in wholesale long distance was driven by increased
sales to second and third tier long distance carriers and higher volumes related
to Cingular driven by proliferation of free long distance plans. IntraLATA toll
losses are driven by the increased demand for Area Plus services, which are
included in local service.
Other communications
Other communications revenue decreased $36 during first quarter 2002. Reductions
in payphone and video entertainment revenues were offset by growth in revenues
from wireless interconnection and customer premises equipment. BellSouth
continues to transition out of the payphone business by year-end 2003.
Segment operating expenses
Operational and support expenses
Operational and support expenses increased $119 during first quarter 2002. The
increase was primarily attributable to result of higher volumes in the wholesale
long distance business, higher uncollectibles due to bankruptcies of telecom
sector customers and continued economic slowing, and higher employee benefit
costs driven primarily by higher pension and increasing medical costs, offset by
lower salary and wages and employee expenses due to staff reductions.
Depreciation and amortization
Depreciation and amortization expense increased $39 during first quarter 2002
compared to first quarter 2001. The increases are primarily attributable to
amortization of capitalized software and depreciation resulting from higher
levels of net property, plant and equipment partially offset by declines in the
overall composite depreciation rate.
------------------------------------------------------------------------------
Domestic Wireless
------------------------------------------------------------------------------
During fourth quarter 2000, we contributed our domestic wireless operations to a
joint venture with SBC Communications, forming the second largest wireless
carrier in the U.S., Cingular. We own an approximate 40% economic interest in
the venture and share control with SBC. We account for the investment under the
equity method. For management purposes, we evaluate our domestic wireless
segment based on our proportionate share of Cingular's results. Accordingly,
results for our domestic wireless segment reflect the proportional consolidation
of approximately 40% of Cingular's results.
For the Three Months
Ended March 31, %
2001 2002 Change
Segment operating revenues:
Service revenues $ 1,205 $1,326 10.0
Equipment revenues 105 91 (13.3)
Total segment operating revenues 1,310 1,417 8.2
Segment operating expenses:
Operational and support expenses 925 971 5.0
Depreciation and amortization 180 180 0.0
Total segment operating expenses 1,105 1,151 4.2
Segment operating income 205 266 29.8
Segment net income $88 $92 4.5
Customers (000s) 8,214 8,732 6.3
Average monthly revenue per customer $50 $50 0.0
Segment operating revenues
Segment operating revenues grew $107 during first quarter 2002 compared to the
same 2001 period. Service revenues increased $121, primarily as a result of
higher local service revenues associated with growth in the customer base and
the adoption of new national and regional rate plans which offer larger numbers
of included minutes and bundling of roaming and long distance offerings.
Revenues derived from the first quarter 2002 addition of a wireless handset
captive insurance subsidiary contributed $13 to the increase. These increases
were offset by declines in roaming and long distance revenues reflecting the
migration of customers to the new national and regional plans. Roaming revenues
derived from the provision of access to customers of competitors declined as
competitors continue to negotiate and pay lower rates as well as build out their
networks and reduce the need of their customers to roam on Cingular's network.
Equipment revenues decreased as a result of fewer gross customer additions
quarter over quarter.
The rate of customer growth was impacted by churn reflecting management
initiatives to migrate analog customers to digital services and reduce the mix
of prepaid and reseller customers in Cingular's subscriber base. Average monthly
usage by customers increased during the first quarter reflecting the impact of
the new customer plans.
Segment operating expenses
Operational and support expenses
Operational and support expenses increased $46 during first quarter 2002
compared to the same 2001 period. Cingular's expense growth was driven by
increased service costs resulting from a rise in minutes of use, higher long
distance costs driven by the bundling of long distance offerings in new rate
plans, and costs associated with the commencement of operations of a captive
insurance subsidiary. These increases were offset by a decline in equipment
costs due to lower gross customer additions, and declines in branding expenses
associated with the introduction of the Cingular brand name last year.
Depreciation and amortization
Depreciation and amortization remained flat during first quarter 2002 when
compared to the same 2001 period. The increase in Cingular's depreciation
expense attributable to higher levels of gross property, plant and equipment was
largely offset by decreases associated with the contribution of network assets
to a joint venture. Amortization expense declined $19 as a result of the
cessation of amortization of licenses and goodwill due to the implementation of
SFAS No. 142.
---------------------------------------------------------------------------
Latin America
---------------------------------------------------------------------------
The Latin America segment is comprised of our investments in wireless businesses
in eleven countries in Latin America. Consolidated operations include our
businesses in Argentina, Chile, Colombia, Ecuador, Nicaragua, Peru and
Venezuela. All other businesses, the most significant being the wireless
operations in Brazil, are accounted for under the equity method, and accordingly
their results are reported as Net earnings (losses) of equity affiliates.
For the Three Months
Ended March 31, %
2001 2002 Change
Segment operating revenues:
Service revenues $642 $546 (15.0)
Equipment revenues 139 110 (20.9)
Advertising and publishing revenues 1 3 N/M*
Total segment operating revenues 782 659 (15.7)
Operating expenses:
Operational and support expenses 630 478 (24.1)
Depreciation and amortization 154 118 (23.4)
Total operating expenses 784 596 (24.0)
Operating income (2) 63 N/M
Net losses of equity affiliates (13) (6) N/M
Segment net income (loss) $(63) $4 N/M
Customers (a) (000s) 7,784 7,908 1.6
Average monthly revenue per customer (a) $28 $23 (17.9)
* Not Meaningful
(a) The amounts shown are for our consolidated properties and do not
include customer data for our unconsolidated properties.
Segment operating revenues
Segment operating revenues decreased $123 compared to first quarter 2001 due to
numerous factors including:
o The continued weakening of our Latin American operations' local currencies
against the U.S. Dollar. Absent changes in foreign currency exchange rates,
revenues would have been $130 higher in 2002; and
o Decreases in equipment revenues at our operations in Venezuela, Colombia
and Argentina totaling $40.
These decreases were partially offset by increases in service revenues totaling
$29 at our operations in Colombia and Ecuador, attributable to growth in the
customer bases of those operations. Revenues from complementary business
ventures in Venezuela, primarily wholesale long distance voice, data access and
transport and Internet access also increased by $27.
Segment operating expenses
Operational and support expenses
Operational and support expenses decreased $152 compared to first quarter 2001.
Changes in foreign currency exchange rates favorably affected this change;
absent changes in foreign currency exchange rates, operational and support
expenses would have been $87 higher in first quarter 2002. The remaining
reductions in expenses were primarily attributable to a 17.5% decline in gross
customer additions and reductions in administrative costs.
Depreciation and amortization
Depreciation expense decreased $17 quarter over quarter as a result of lower
depreciation in Colombia due to a true-up of depreciation on network assets.
Amortization expense decreased $19 quarter over quarter as a result of the
cessation of amortization of goodwill under the guidance of SFAS No. 142.
Net losses of equity affiliates
Net losses from our Latin America equity affiliates improved $7 to $(6) in first
quarter 2002, primarily the result of operational improvements at our operations
in Brazil.
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Domestic Advertising and Publishing
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Our domestic advertising and publishing segment is comprised of companies in the
U.S. that publish, print, sell advertising in and perform related services
concerning alphabetical and classified telephone directories and electronic
product offerings.
The first quarter 2002 segment results exclude the effect of a correction to
unbilled accounts receivable.
For the Three Months
Ended March 31, %
2001 2002 Change
Segment operating revenues $437 $383 (12.4)
Segment operating expenses:
Operational and support expenses 204 205 0.5
Depreciation and amortization 7 6 (14.3)
Total segment operating expenses 211 211 0.0
Segment operating income 226 172 (23.9)
Segment net income $137 $104 (24.1)
Segment operating revenues
Revenues decreased $54 during first quarter 2002 when compared to the same 2001
period. The decrease is principally a result of changes in directory publication
dates. Excluding the effects of changes in directory publishing dates, revenue
growth for the segment would have approximated negative 2%. Negative growth is
attributable to continued slow economic conditions.
Segment operating expenses
Operational and support expenses remained relatively flat in first quarter 2002
as volume and timing related decreases were offset by increases in bad debt
expense.
Depreciation and amortization remained relatively flat.
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All Other Businesses
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All other businesses primarily consist of a captive insurance subsidiary and
equity investments in wireless operations in Israel, Denmark and our former
operations in Germany. While the operating results for this segment include the
results of the German operations for first quarter 2001 and first quarter 2002,
the results for this segment for first quarter 2002 exclude the gains and losses
associated with the conversion of our ownership in Germany to ownership in KPN.
For the Three Months
Ended March 31, %
------------------------
2001 2002 Change
Segment operating revenues $33 $25 (24.2)
Segment operating expenses 27 16 (40.7)
Segment operating income 6 9 50.0
Net earnings of equity affiliates (20) 13 N/M*
Segment net income (loss) $(17) $19 N/M
* - Not Meaningful.
Segment operating results
Revenues and expenses were derived primarily from the sale of insurance on
customer premises equipment and amortization of deferred revenues related to a
transaction with Crown Castle to monetize wireless towers in 1999. The decrease
in operating revenues and expenses is attributable to the discontinuance of
sales of insurance on wireless handsets effective first quarter 2002.
Net earnings of equity affiliates increased $33, attributable to improved
operating results at our former German operation as well as higher income from
the operations in both Denmark and Israel.
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Liquidity and Financial Condition
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Cash flows from operations are our primary source of cash for funding existing
operations, capital expenditures, debt interest and principal payments, and
dividend payments to shareholders. Should the need arise, however, we believe we
are well positioned to raise capital in the public debt markets. At March 31,
2002, our corporate debt rating was Aa3 from Moody's Investor Service and A+
from Standard and Poor's. Our short-term credit rating at March 31, 2002 was P-1
from Moody's and A-1 from Standard and Poor's. Our commercial paper program as
of March 31, 2002 was $8.0 billion, but only $2.0 billion was outstanding. We
believe that we have ready access to the commercial paper market in the event
funding in excess of our operating cash flows is needed. Furthermore, we have
$2.5 billion in unused committed back-up lines of credit available in case we
are unable to access the commercial paper market. We also have a registration
statement on file with the SEC under which $2.3 billion of long-term debt
securities could be issued. 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 next twelve months.
Net cash provided by (used for):
For the Three Months
Ended March 31,
2001 2002 Change
Operating activities $ 1,673 $ 2,065 $ 392 23.4%
Investing activities $ (940) $ 745 $ 1,685 N/M*
Financing activities $(1,082) $ (1,341) $ 259 23.9%
* Not Meaningful
Net cash provided by operating activities
Cash generated by operations increased $392 during first quarter 2002 compared
to first quarter 2001. The increase was driven primarily by payments in first
quarter 2001 of $200 related to the termination of a vendor contract and $115
related to the exiting of the wireless entertainment business.
Net cash provided by investing activities
During the first quarter 2002, we generated proceeds of $1,760 from the sale of
our investment in KPN and portions of our investments in Qwest and TCO as well
as proceeds from the repayment of our loan to KPN. Offsetting these proceeds
were the investment of $1,005 for capital expenditures to support our wireline
and wireless networks, to promote the introduction of new products and services
and to increase operating efficiency and productivity.
Net cash used for financing activities
During first quarter 2002 we reduced our short-term borrowings by almost $1
billion and paid dividends of $.19 per share totaling $357. Our debt to total
capitalization ratio of 49.8% at March 31, 2002 decreased from 52.0% at December
31, 2001.
Market Risk
For a complete discussion of our market risks, you should refer to the caption
"Quantitative and Qualitative Disclosure About Market Risk" in our 2001 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.
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Operating Environment and Trends of the Business
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Domestic Economic Trends
On average, the economy of our nine-state region tends to closely track the U.S.
economy. Real GDP growth for 2002 is expected to be 2.3 percent, increasing to 4
percent in 2003. Growth in the first half of the year will be driven largely by
consumer spending and by restocking of inventories. Business spending on plant
and equipment is not expected to contribute significantly until well into the
second half of the year when corporate profits begin to improve. Employment
growth in the region, which has been closely correlated with various measures of
BellSouth's business performance in the past, seems likely to remain sluggish in
the first half of the year, but is expected to gather pace in the second half of
2002. We expect 2002 employment growth in our region to be below one percent,
but improving to 3 percent next year.
Real personal income growth in our nine-state region is expected to average 2.9
percent in 2002 and 5 percent in 2003. Residential construction activity, which
did not slump in the recession, will stay at a strong pace. Housing starts will
top 450 thousand in both 2002 and 2003. Historically, our business has generally
followed the timing of the cycle in the overall economy, so if past is prologue,
we should see signs of recovery in our operations. Those signs have not appeared
yet and may not appear at all this year.
Latin American Economic Trends
Poor economic conditions continued in most of the region during the first
quarter 2002. Growth is expected to be sluggish to modest in much of the region
this year. We expect Latin America to grow at a faster pace in 2003 if the
recession has ended in the United States by the end of 2002. However, Argentina
and Venezuela are likely to be exceptions. In the wake of its financial crisis,
Argentina's economy is expected to contract sharply this year, perhaps as much
as 10 percent. No recovery is in sight and the country's troubles are expected
to extend into 2003 before the downturn ends. Following Venezuela's currency
devaluation this winter, the economy is expected to contract in 2002 with a
return to moderate growth in 2003. High oil prices should help to keep the
economy afloat. However, recent political events in the country have
significantly increased the downside risk to this forecast. We believe inflation
rates upward of 20 percent are likely in both Argentina and Venezuela this year.
Colombia's civil war remains a drain on its economy, resulting in outflows of
both money and human capital. Sluggish growth of 1.5 percent is expected this
year, improving in 2003 to over 3.5 percent.
Argentina. In early 2002, the Argentine government announced economic reforms,
including a devaluation of the peso. As a result of the devaluation, our
Argentine operation violated covenants on $350 of its U.S. Dollar-denominated
debt. The debt is classified as current in the March 31, 2002 balance sheet. The
devaluation, resulting new laws and regulations instituted, and the instability
of the government make it difficult to anticipate the long-term impacts of the
economic situation in Argentina. Due to the rapidly changing environment, we are
closely monitoring the situation and cannot anticipate the ultimate outcome.
Brazil. On March 28, 2002, BCP, our Brazilian investment, defaulted on a
principal payment. We continue to discuss possible funding solutions with our
principal partner and BCP's lenders. The parties have not reached any agreement
to date. There can be no assurance that an agreement will be reached. See note E
to our consolidated interim financial statements.
Venezuela. On February 12, 2002, Venezuela's government floated its currency,
ending a five-year-old regime that permitted the bolivar to trade only within a
fixed-band against the U.S. Dollar. As a result, devaluation occurred. It is
uncertain what the long-term impacts of the devaluation will have on our
operations. Based on the current monetary asset position of this operation, we
recorded a benefit of $27, or $14 after taxes and minority partner interests, in
the first quarter of 2002.
Regulatory Developments
Beginning in late 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 statute,
adopted subsequent to the Commission's approval of the earlier plan. The new
statute allows telephone companies in South Carolina to operate under price
regulation without obtaining approval from the Commission. The election became
effective during August 1999. The South Carolina Consumer Advocate petitioned
the Commission seeking review of the level of our earnings during the 1996 -
1998 period when we operated under the subsequently invalidated price regulation
plan. The Commission voted to dismiss the petition in November 1999 and issued
orders confirming the vote in February and June of 2000. In July 2000, the
Consumer Advocate appealed the Commission's dismissal of the petition. If the
Consumer Advocate prevails, the case could be remanded to the South Carolina
PSC, which could, after considering evidence, order refunds to customers in
South Carolina. At this time, we are unable to determine the impact, if any,
this may have on future earnings.
Also in 2000, the Florida Public Service Commission issued a proposed agency
action stating 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 approximately $65 should be
refunded. We protested the decision. On August 30, 2001, the Commission issued
an order adopting its proposed action. We have appealed to the Florida Supreme
Court and continue to collect the charges subject to refund. The total amount as
of March 31, 2002 subject to potential refund was $91, including accrued
interest. No accrual has been recorded in these financial statements related to
this matter.
In October 2001, we filed applications with the FCC to offer long distance
service to customers in Louisiana and Georgia. These filings, which followed the
unanimous approval by the Public Service Commissions (PSC) in Louisiana and
Georgia, were withdrawn in December 2001. We refiled applications with the FCC
to offer long distance service to customers in those states in February 2002. In
October 2001, the Mississippi Public Service Commission unanimously endorsed
BellSouth's state-level filing to provide long distance service. In November
2001, the South Carolina Public Service Commission unanimously endorsed
BellSouth's state-level filing to provide long distance service. In April 2002,
the Kentucky Public Service Commission unanimously endorsed BellSouth's
state-level filing to provide long distance service. We have also made filings
with the PSCs in each of Alabama, Florida, North Carolina and Tennessee to
review our compliance with the requirements for obtaining long distance
authority. We expect to file an application with the FCC for each state at the
appropriate point in the state commission's consideration. We do not know if the
FCC will require further changes in our network interconnection elements and
operating systems before it will approve such petitions. Any such changes could
result in significant additional expense and increased local service competition
from CLECs that use our network.
We are involved in numerous legal proceedings associated with state and federal
regulatory matters. While complete assurance cannot be given as to the outcome
of these matters, we believe that any financial impact would not be material to
our results of operations, financial position or cash flows. See note M to our
consolidated interim financial statements.
Foreign Risks
Our reporting currency is the U.S. Dollar. However, most of our international
revenues are generated in the currencies of the countries in which we operate.
In addition, many of our international 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 in local currency. 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 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: 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. Our Latin American business could be materially
adversely affected if the recent political and economic crisis in Argentina and
Venezuela worsen, continue for a sustained period or spread to other Latin
American countries.
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 limit
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.
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Cautionary Language Concerning Forward-Looking Statements
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In addition to historical information, this document contains forward-looking
statements regarding events, financial trends and critical accounting policies
that may affect our future operating results, financial position and cash flows.
These statements are based on our assumptions and estimates and are subject to
risks and uncertainties. For these statements, we claim the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
There are possible developments that could cause our actual results to differ
materially from those forecast or implied in the forward-looking statements. You
are cautioned not to place undue reliance on these forward-looking statements,
which are current only as of the date of this filing. We disclaim any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
While the below list of cautionary statements is not exhaustive, some factors
that could affect future operating results, financial position and cash flows
and could cause actual results to differ materially from those expressed in the
forward-looking statements are:
o a change in economic conditions in domestic or international markets where
we operate or have material investments which would affect demand for our
services;
o changes in U.S. or foreign laws or regulations, or in their
interpretations, which could result in the loss, or reduction in value, of
our licenses, concessions or markets, or in an increase in competition,
compliance costs or capital expenditures;
o a decrease in the growth rate of demand for the services which we offer;
o the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
o protracted delay in our entry into the interLATA long distance market;
o significant deterioration in foreign currencies relative to the U.S. Dollar
in foreign countries in which we operate;
o the potential unwillingness or inability of our partners to fund their
obligations to our international joint ventures due to deteriorating
economic conditions or other facts;
o the potential unwillingness of banks or other lenders to lend to our
international joint ventures due to deteriorating economic conditions and
tightening credit standards;
o higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
o the outcome of pending litigation;
o unanticipated higher capital spending from, or delays in, the deployment of
new technologies;
o the impact of terrorist attacks on our business; and
o the impact and the success of the wireless joint venture with SBC
Communications, known as Cingular Wireless, including marketing and product
development efforts, technological change and financial capacity.
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4a No instrument which defines the rights of holders of our long-
and intermediate-term debt is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, we agree to furnish a copy of any such instrument
to the SEC upon request.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K:
None.
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
(Principal Accounting Officer)
May 3, 2002
EXHIBIT INDEX
Exhibit
Number
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.