FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 | ||
OR | ||
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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
A GEORGIA CORPORATION
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I.R.S. EMPLOYER NO. 58-1533433 |
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1155 Peachtree Street, N.E., Room 15G03,
Atlanta, Georgia 30309-3610 Telephone number 404-249-2000 |
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: | ||
TITLE OF EACH CLASS
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NAME OF EACH EXCHANGE ON WHICH REGISTERED |
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See Attachment.
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See Attachment. | |
SECURITIES REGISTERED PURSUANT TO SECTION
12(g) OF THE ACT: None. |
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No
At January 31, 2004, 1,831,522,713 shares of Common Stock and Preferred Stock Purchase Rights were outstanding.
At June 30, 2003, the aggregate market value of the voting and non-voting stock held by nonaffiliates was $49,193,148,101.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement dated March 10, 2004, issued in connection with the 2004
Name of Each Exchange | |||
Title of Each Class | On Which Registered | ||
Common Stock (par value $1 per share) and | |||
Preferred Stock Purchase Rights
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New York Stock Exchange | ||
Debt Securities:
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New York Stock Exchange | ||
Issued by BellSouth Capital Funding
Corporation(a)
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7.12% Debentures due 2097
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7 3/8% Quarterly Interest Bonds due 2039
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Issued by BellSouth Telecommunications, Inc.
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Fifteen Year 5 7/8% Debentures, due
January 15, 2009
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Forty Year 6 3/4% Debentures, due
October 15, 2033
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Forty Year 7 5/8% Debentures, due
May 15, 2035
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Thirty Year 7% Debentures, due October 1,
2025
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Fifty Year 5.85% Debentures, due
November 15, 2045
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One Hundred Year 7% Debentures, due
December 1, 2095
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Twenty Year 6.30% Amortizing Debentures, due
December 15, 2015
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Principal Amount of One Hundred Year 6.65%
Zero-To-Full Debentures, due December 15, 2095
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Twelve Year 7% Notes, due February 1, 2005
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Eleven Year 6 3/8% Notes, due June 15,
2004
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Ten Year 6 1/2% Notes, due June 15, 2005
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Thirty Year 6 3/8% Debentures, due
June 1, 2028
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(a) Subsequently merged with and into BellSouth Corporation.
Item | Page | |||
PART I
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Cautionary Language Concerning
Forward-Looking Statements |
3 | |||
1. Business
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3 | |||
Communications
Group
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4 | |||
Domestic
Wireless
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10 | |||
Latin
America Group
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13 | |||
Advertising
and Publishing Group
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15 | |||
Intellectual
Property
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16 | |||
Research
and Development
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16 | |||
Employees
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16 | |||
2. Properties
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16 | |||
3. Legal
Proceedings
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17 | |||
4. Submission
of Matters to
a
Vote of Shareholders |
18 | |||
Additional Information
Description of BellSouth Stock |
18 | |||
Executive Officers
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20 | |||
Website Access
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20 | |||
PART II
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5. Market
for Registrants Common
Equity,
Related Shareholder Matters and Issuer Purchases of Equity Securities |
21 | |||
6. Selected
Financial and
Operating
Data |
22 | |||
7. Managements
Discussion
and
Analysis of Financial Condition and Results of Operations |
23 | |||
Overview
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23 | |||
Consolidated
Results of Operations
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24 | |||
Results
by Segment
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29 | |||
Communications
Group
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30 | |||
Domestic
Wireless
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33 | |||
Latin
America Group
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36 | |||
Advertising
and Publishing Group
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39 | |||
Liquidity
and Financial Condition
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41 | |||
Off-Balance
Sheet Arrangements
and
Aggregate Contractual Obligations |
44 | |||
Quantitative
and
Qualitative
Disclosure About Market Risk |
45 | |||
Operating
Environment
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47 | |||
Critical
Accounting Policies
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51 | |||
Cautionary
Language
Concerning
Forward-Looking Statements |
52 | |||
8. Consolidated
Financial Statements
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54 | |||
Report
of Management
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54 | |||
Reports
of Independent Auditors
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55 | |||
Consolidated
Statements of Income
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56 | |||
Consolidated
Balance Sheets
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57 | |||
Consolidated
Statements of Cash Flows
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58 | |||
Consolidated
Statements
of Shareholders Equity and Comprehensive Income |
59 | |||
Notes
to Consolidated
Financial
Statements |
60 | |||
9. Changes
in and
Disagreements
with Auditors on Accounting and Financial Disclosure |
90 | |||
9a. Controls
and Procedures
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90 | |||
PART III
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*10. Directors
and Executive
Officers
of the Registrant |
90 | |||
*11. Executive
Compensation
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90 | |||
*12. Security
Ownership of
Certain
Beneficial Owners and Management and Related Shareholder Matters |
90 | |||
*13. Certain
Relationships
and
Related Transactions |
90 | |||
*14. Principal
Auditor
Fees
and Services |
90 | |||
PART IV
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15. Exhibits,
Financial Statement
Schedules
and Reports on Form 8-K |
91 | |||
Signatures
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95 |
* | All or a portion of the referenced sections have been included in BellSouth Corporations definitive proxy statement dated March 10, 2004 and incorporated herein by reference. |
PART I
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.
| a change in economic conditions in domestic or international markets where we operate or have material investments which could affect demand for our services; | |
| changes in US 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; | |
| continued pressures on the telecommunications industry from a financial, competitive and regulatory perspective; | |
| the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; | |
| changes in the federal and state regulations governing the terms on which we offer wholesale services to our competitors; | |
| continued successful penetration of the interLATA long distance market; | |
| the unwillingness of banks or other lenders to lend to our international operations or to restructure existing debt, particularly in Latin America; | |
| consolidation in the wireline and wireless industries in which we operate; | |
| higher than anticipated start-up costs or significant up-front investments associated with new business initiatives; | |
| the outcome of pending litigation; | |
| unanticipated higher capital spending from, or delays in, the deployment of new technologies; | |
| continued deterioration in foreign currencies relative to the US Dollar in foreign countries in which we operate, particularly in Latin America; | |
| the impact of terrorist attacks on our business; | |
| the impact and the success of the wireless joint venture with SBC Communications, Inc., known as Cingular Wireless, including marketing and product development efforts, technological changes, financial capacity and closing and integration of the pending acquisition of AT&T Wireless Services, Inc.; and | |
| Cingular Wireless failure to realize, in the amounts and within the timeframe contemplated, the capital and expense synergies and other financial benefits expected from its proposed acquisition of AT&T Wireless as a result of technical, logistical, regulatory and other factors. |
Business
OVERVIEW
In this document, BellSouth Corporation and its subsidiaries are referred to as we or BellSouth.
| Communications Group; | |
| Domestic Wireless; | |
| Latin America Group; and | |
| Advertising and Publishing Group. |
See Note O to our consolidated financial statements for financial data on each of our segments.
Communications Group
OVERVIEW
We are the predominant telecommunications service provider in the southeastern US, serving substantial portions of the population within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. BellSouth Telecommunications, Inc. (BST), a wholly owned subsidiary, provides wireline communications services, including local exchange, network access, intraLATA long distance services and Internet services. BellSouth Long Distance (BSLD), our long distance subsidiary, provides intraLATA and interLATA long distance services in our nine southeastern states, wholesale long distance primarily to wireless communications providers, smaller wireline telecommunications providers and unaffiliated long distance providers, and prepaid calling card services through agreements with unaffiliated long distance providers. Communications Group operations generated 81% of our total operating revenues for 2003 and 2002 and 79% for 2001.
Consumer. This unit serves the largest segment of the market within our region, the residential customer. While traditional local and long distance telephone service remains the core of this market, customer demands are rapidly broadening to include an expanded range of services, from convenience features such as caller ID, call forwarding and voice mail, to dial-up access to the Internet, high-speed DSL and video services. During 2003, the consumer unit represented 43% of Communications Group revenues. | |
Small Business. This unit focuses on providing, in addition to traditional local and long distance voice services, advanced voice, data, Internet and networking solutions to small and medium-sized businesses. It offers a full selection of standard and customized communications services to this market. During 2003, the small business unit represented 12% of Communications Group revenues. | |
Large Business. This unit provides a wide range of standard and highly specialized services and products to large and complex business customers. In addition to traditional local and long distance voice services, product and service offerings to these customers include Internet access, private networks, high-speed data equipment and transmission, conferencing and industry specific communications arrangements for industries such as banking, healthcare and manufacturing. During 2003, the large business unit represented 18% of Communications Group revenues. | |
Interconnection Services. This unit provides interconnection to our network and other related wholesale services to telecommunications carriers for use in providing services to their customers. Interconnection refers to the link between our telecommunications network and the telecommunications network of other telecommunications carriers, such as AT&T, Sprint, MCI (formerly known as WorldCom) and other long distance and competitive local exchange carriers. In addition to interconnection services, we provide services such as voice and data transport services. During 2003, the interconnection services unit represented 24% of Communications Group revenue and generated 48% of our reported data revenues. The unit provides services to both affiliated and nonaffiliated customers in six different carrier markets: wireless service providers, competitive local exchange carriers, competitive switched and special access providers, long distance carriers, information service providers and public payphone service providers. |
BUSINESS STRATEGY
Our business strategy is to solidify BellSouth as the leading choice of customers in the southeast for an expanding array of voice, data and Internet services and to meet our customers needs through teaming or wholesale service arrangements with other companies.
We intend to:
| optimize our portfolio of retail and wholesale products and services by utilizing marketing approaches |
targeted to our different customer segments, by providing superior service and by offering flexible packages of voice, data and multimedia applications through improved distribution channels and systems; | |
| become the leading provider of local broadband/Internet Protocol (IP) services in the southeast by deploying new broadband/IP platforms that support both voice and data services as well as applications; and |
| reduce our cost structure by managing the utilization of existing assets and redirecting spending to focus new investment on high-growth products and services. |
BUSINESS OPERATIONS
VOICE SERVICES
Voice services include basic dial-tone telephone service and switching services provided through the regular switched network. In addition, we offer various standard convenience features, such as caller ID, call waiting, call return and 3-way calling on a monthly subscription or for some, on a per-use basis. Additional voice related revenues are derived from charges for inside wire maintenance contracts, voice messaging services, directory assistance and operator services. Voice revenues also include amounts received from the universal service fund for support of high cost areas.
BROADBAND AND DATA SERVICES
As use of the Internet grows and as corporate data applications increase in sophistication and scope, the market for broadband and data services is expanding and evolving. BellSouth will continue to expand its capabilities in order to maintain a leadership position in the broadband and data communications market. Investment in service infrastructure is strategically managed to enable delivery of services offering increasing capacity and functionality. In parallel, we continue to use new advances in digital technology to bolster the broadband capabilities of our entire network. The emergence of high-performance broadband and digital infrastructure offers the ability to use these networks for real-time communications including voice and video using various technologies such as softswitches (software-based switching platforms) and voice over Internet protocol (VoIP).
OTHER COMMUNICATIONS GROUP REVENUES
Other Communications Group revenues are comprised primarily of charges for billing and collection services for long distance carriers, enhanced white pages listings, customer late payment fees and customer premises equipment sales and maintenance services. Other revenue also includes charges for permitting our competitors to set up their equipment in our facilities (referred to as collocation). Historically, revenues from local payphone services were included in this category. By the end of 2003, we had ceased offering local payphone services through a separate subsidiary of BST. Due to our gradual phase-out of the business, we do not expect any material financial impact on results of operations with respect to exiting this business. BellSouth also provides wholesale long distance services, primarily to wireless communications providers and smaller wireline telecommunications providers, as well as to unaffiliated long distance providers, and we offer prepaid calling card services through agreements with an unaffiliated long distance provider. Other Communications Group services provided approximately 6% of BellSouths total operating revenues for 2003 and 8% for 2002 and 2001.
REGULATORY ENVIRONMENT
Our wireline business is regulated by the FCC and state public commissions.
FEDERAL REGULATORY MATTERS
The FCC regulates rates and other aspects of our provision of interstate telecommunications services. In addition, pursuant to the Telecommunications Act of 1996, the FCC has authority to establish policies for pricing and terms of interconnection between local exchange carriers such as BellSouth. Prior to 1996, this activity had been mostly the exclusive jurisdiction of the state regulatory commissions. The states now set the rates and establish terms for interconnection within the policy framework ordered by the FCC. We expect the FCC to continue policies that promote local service competition.
FCC interconnection rules
Under the 1996 Act, the FCC is obliged to consider the extent to which we must make elements of our network available to other providers of local service. The FCC can require access to proprietary network elements only when necessary. For non-proprietary elements, the FCC can order access only when failure to do so will impair the ability of the requesting carrier to provide services.
Pricing of network elements
The FCC also establishes the pricing policy for elements. The policy currently in effect is TELRIC (an acronym for
Price regulation
The FCC regulates interstate prices using a price regulation plan, generally known as a price cap plan. The FCCs price cap plan limits aggregate price changes to the rate of inflation, minus productivity offset, plus or minus other cost changes recognized by the FCC. The productivity factor can vary among services. Interstate prices have been decreasing over the last few years as a result of low inflation in the US economy.
Access charge reform
The FCC has favored access reform, through which the historical subsidy for residential local service contained in network access charges paid by long distance carriers is funded instead by the end-user, by universal service funds, or both. As a result of a May 2000 FCC order implementing access charge reform (referred to as the CALLS order), we have reduced the interstate network access charges paid by long distance carriers and increased interstate subscriber line charges paid by end-users. These rate changes better align our cost recovery with the way in which we incur costs.
Universal service
Historically, network access charges paid by other carriers were set at levels that subsidized the cost of providing local residential service. The Telecommunications Act of 1996 requires that the FCC identify and remove the historical implicit local service subsidy from network access rates, arrange for a universal service fund to ensure the continuation of service to high-cost, low-income service areas and develop the arrangements for payments into that fund by all carriers. The FCCs universal service order established funding mechanisms for high-cost and low-income service areas. We began contributing to the new funds in 1998 and are recovering our contributions through increased interstate charges to retail end-users.
Number portability
In 1996, the FCC ordered certain local number portability requirements for both wireline and wireless carriers. The order required wireline carriers to enable customers remaining in the same location to choose a different wireline carrier while retaining their same telephone number. This wireline requirement was implemented in 1997. Wireless number portability received several extensions, and was implemented in November 2003.
Reciprocal compensation
Following the enactment of the 1996 Act, our telephone company subsidiary, 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. These agreements were the subject of litigation before various regulatory commissions. After an FCC ruling in April 2001 prescribing new rates, BellSouth settled its claims with competitors for traffic occurring through mid-June 2001, and entered into agreements that contained the FCC rates for traffic occurring from mid-June 2001 forward. The District of Columbia Circuit Court of Appeals, in the second quarter of 2002, remanded the ruling to the FCC to implement a rate methodology consistent with the Courts opinion. The FCCs previous rules and rates remain in effect while it reconsiders them. A change in the rules or rates could increase our expenses.
Broadband regulation
In the Triennial Review Order, the FCC eliminated the high frequency portion of the loop (HFPL) as a UNE. Competitive local exchange carriers have used the HFPL to provide DSL over the same loop on which the incumbent local exchange carrier provides voice services. This is known as Line Sharing. The FCC grandfathered existing Line Sharing arrangements, and allowed new Line Sharing arrangements to exist for one additional year. The FCC also clarified that packet switching is not a UNE.
STATE REGULATORY MATTERS
We are subject to regulation of our local and intrastate long distance services by a state authority in each state where we provide intrastate telecommunications services. Such regulation covers prices, services, competition and other issues.
Price regulation
We currently operate under price regulation plans in all states in our wireline territory. Under these plans, the state regulatory commissions or state legislatures have established maximum prices that can be charged for certain telecommunications services. While such plans limit the amount of increases in prices for specific services, they enhance our ability to adjust prices and service options to respond more effectively to changing market conditions and competition. Price regulation also provides an opportunity to benefit more fully from productivity enhancements. The majority of these plans have limitations on raising prices for basic local exchange services during the early years with provisions for inflation-based price increases in later years.
Other state regulatory matters
In each of our states, we are subject to performance measurement plans that measure our service performance to competitors against certain benchmarks and our own retail performance. When we do not meet the relevant standards, we make payments to the competitors or the States treasury. In some states, if we continuously fail to meet certain criteria, we also would suspend our marketing and sale of long distance services. We made payments in all states in 2002 and 2003, and likely will make payments in 2004. The plans are reviewed regularly for necessary changes.
COMPETITION
We face significant competition from traditional telecommunications providers. Further, we are increasingly seeing competition from wireless, cable and other providers that have not historically competed with us for telecommunications customers.
TRADITIONAL TELECOMMUNICATION SERVICE PROVIDERS
The state public service commissions with jurisdiction over our services have granted numerous applications to competitive local exchange carriers for authority to offer local telephone service. As a result, substantial competition has developed in the marketplace. We compete for customers based principally on service offerings, price and customer service. Increasing competition has resulted in innovative packaging and services that strive to simplify the customers experience. Pricing pressures in the market have increased resulting in opportunities for the customer to purchase value based packages and services. Competitive pressures across the board have resulted in an increase in advertising and promotional spending. Competitors, including major carriers, resell our local services, use separate unbundled network elements (UNE) or provide services over their own facilities.
BROADBAND SERVICE PROVIDERS
We continue to face intense competition from cable broadband providers who are not subject to the same rigorous regulatory scrutiny for their broadband services. Recent state regulatory rulings requiring BellSouth to provide FastAccess® (DSL) over UNE lines adds costs and complexity to delivery of service that inhibits our efforts to compete with cable on a level playing field.
OTHER TYPES OF COMPETITORS
An increasing number of voice and data communications networks utilizing fiber optic lines have been constructed by communications providers in all major metropolitan areas throughout our wireline service territory. Furthermore, wireless voice and paging services increasingly compete with wireline communications services to provide both voice and data services. In addition, technological developments have made it feasible for cable television networks to carry data and voice communications. We are seeing new competition as a result of the development of commercial applications using Internet Protocol technology. This medium could attract substantial traffic because of its lower cost structure due to the fact that FCC rules do not currently impose access charges on most communications carried over this technology.
FRANCHISES AND LICENSES
Our local exchange business is typically provided under certificates of public convenience and necessity granted pursuant to state statutes and public interest findings of the various public utility commissions of the states in which we do business. These certificates provide for franchises of indefinite duration, subject to the maintenance of satisfactory service at reasonable rates. The Telecommunications Act of 1996 provides that these franchises must be non-exclusive.
Domestic Wireless
OVERVIEW
Our domestic wireless business consists of our proportionate share of Cingular Wireless. Cingular is a joint venture that was formed by the combination of most of the former domestic wireless operations of BellSouth and SBC Communications. We have an approximate 40 percent economic interest in Cingular, and SBC has an approximate 60 percent economic interest. Cingular is operated independently from both parents, currently with a four-seat Board of Directors comprised of two directors from each parent. BellSouth and SBC share control of Cingular. Cingular is a SEC registrant by virtue of its publicly traded debt securities. Accordingly, it files separate reports with the SEC.
| Cingular has access to licenses, either through owned licenses or licenses owned by joint ventures and affiliates, to provide cellular or PCS wireless communications services covering an aggregate of 236 million in population (POPs), or approximately 81% of the US population, including in 45 of the 50 largest US metropolitan areas. | |
| Cingular provides cellular or PCS services in 43 of the 50 largest US metropolitan areas. | |
| 100% of Cingulars networks utilize digital technology. | |
| At December 31, 2003, 95% of Cingulars cellular and PCS customers were using digital service, and in December 2003, over 99% of Cingulars cellular and PCS minutes of use were digital. |
Cingular provides a wide array of wireless services for individual, business and governmental users. Cingulars data services are offered over its cellular/PCS networks and its separate Mobitex network. On a combined basis, Cingular had approximately 5.5 million active users of its data services at December 31, 2002 and approximately 6.6 million at December 31, 2003.
BUSINESS STRATEGY
Cingulars business strategy is to:
| expand its customer base profitably by continuing to promote the Cingular brand, by expanding and taking advantage of its extensive distribution capabilities and by cross-selling its products and services through bundling arrangements with its parents; | |
| capture economies through its large scale and national scope, allowing it to further realize the significant revenue and cost synergies offered by its formation; | |
| increase the capacity, speed and functionality of its cellular and PCS networks by deploying common voice and high-speed data technologies throughout its network; | |
| develop and promote advanced wireless data applications over multiple communications devices; and | |
| expand its existing footprint and its network capacity where economical by obtaining access to additional spectrum, primarily through acquisitions, ventures, alliances, spectrum exchanges and purchases and possible industry consolidation. |
NETWORK
Licenses
Cingular has licenses to provide cellular and PCS wireless services on the 850 MHz and 1900 MHz portions of the radio spectrum. Cingular provides both analog and digital cellular services on the 850 MHz band and digital services on the 1900 MHz band. Cingular also has 900 MHz licenses to provide data services.
Coverage
Cingular has access to wireless licenses to provide voice and data services over cellular/PCS networks in 45 of the 50 top wireless markets across the country. Cingular has also signed roaming agreements to ensure its customers can receive such wireless service in virtually all areas in the United States where cellular/PCS wireless service is available. Cingulars cellular/PCS networks are substantially built out. Cingular also provides wireless data services over its 900 MHz network, covering over 90% of the US metropolitan POPs, including the 50 largest US metropolitan areas.
Technology
Cingular uses both Global System for Mobile Communication (GSM) and Time Division Multiple Access (TDMA) technology. These are digital technologies that allow for numerous advantages over analog service, including extended battery life, improved voice quality, greater call security and lower per-minute costs. Digital service also enables enhanced features and services, such as interactive messaging, facsimile, e-mail and wireless connections to computer/data networks and the Internet. Further, GSM offers three to four times the voice capacity of TDMA digital technology and provides economies of scale due to its predominant global use.
COMPETITION
There is substantial and increasing competition in all aspects of the wireless communications industry. Cingular competes for customers based principally on its service offerings, price, call quality, coverage area and customer service.
| by participating in FCC auctions, such as the auction that ended in January 2001 that resulted in Cingular acquiring access, through Salmon PCS LLC, to an additional 45 licenses; | |
| by acquiring licenses from other carriers, either by direct purchases, as in Salt Lake City and the pending acquisition of licenses from NextWave, or by swaps for licenses, as in the New York metropolitan markets, in exchange for licenses for spectrum where Cingular has excess capacity; and | |
| by joint venturing with other carriers to pool spectrum or share network infrastructure, as in Cingulars AT&T and T-Mobile ventures. |
In addition, because Cingular is in the process of overlaying its TDMA network with GSM/GPRS/EDGE technology and in the process of transitioning its TDMA customers to that new technology, Cingular will operate at somewhat of a disadvantage to other carriers (e.g., Verizon Wireless, Sprint PCS, Nextel and T-Mobile) that utilize a common technology throughout their networks. Cingular is meeting these challenges by offering cellular and PCS phones that will operate on both TDMA and GSM networks as well as the standard GSM and TDMA only handsets and negotiating roaming agreements to allow its customers to use TDMA or GSM networks of other carriers. At the end of 2003, Cingular had 93% of its operational POPs covered by GSM/GPRS and 20% covered by EDGE.
| reduce prices for its services and products; | |
| restructure its service packages to provide more services without increasing prices; | |
| further upgrade its network infrastructure and the handsets Cingular offers; | |
| increase its advertising, promotional spending, commissions and other customer acquisition costs; and | |
| increase its spending to retain customers. |
As previously discussed, on February 17, 2004, Cingular announced an agreement to acquire AT&T Wireless. We expect that this acquisition will enhance Cingulars ability to compete by strengthening its network coverage and quality and improving customer service and offerings.
REGULATORY ENVIRONMENT
The FCC regulates the licensing, construction, operation, acquisition and transfer of wireless systems in the United States pursuant to the Communications Act of 1934 and its associated rules, regulations and policies.
| regulate Cingulars ability to acquire and hold radio spectrum licenses; | |
| impose technical obligations on the operation of Cingulars network; | |
| impose requirements on the ways Cingular provides service to and communicates with its customers; | |
| regulate the interconnection of its network with the networks of other carriers; | |
| obligate Cingular to serve roaming customers of other wireless carriers; and | |
| impose a variety of fees and charges on its business that are used to finance numerous regulatory programs and part of the FCCs budget. |
Licenses are issued for only a fixed period of time, typically 10 years. Consequently, Cingular must periodically seek renewal of those licenses. The FCC will award a renewal expectancy to a wireless licensee that has provided substantial service during its past license term and has substantially complied with applicable FCC rules and policies and the Communications Act of 1934. The FCC has routinely renewed wireless licenses in the past. However, the Communications Act provides that licenses may be revoked for cause and license renewal applications denied if the FCC determines that a renewal would not serve the public interest. Violations of FCC rules may also result in monetary penalties or other sanctions. FCC rules provide that competing renewal applications for licenses will be considered in comparative hearings, and establish the qualifications for competing applications and the standards to be applied in hearings.
Latin America Group
OVERVIEW
Our Latin America Group operations consist primarily of wireless service providers operating in 10 countries. We own less than 100% of most of these companies; adjusting customer data to reflect this partial ownership, our licensed service areas had a population of approximately 144.2 million and provided wireless services to approximately 8.4 million customers, each as of November 30, 2003. The operations in Latin America generated 10% of our total operating revenues in 2003 and 2002 and 12% of our total operating revenues in 2001.
BellSouth | ||||||||||||
Ownership in | Total | Total | ||||||||||
Operating | Population | Customers | ||||||||||
Country | Company | Served | Served | |||||||||
(Percent) | (In millions) | (In thousands) | ||||||||||
Argentina
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86.7 | 37.4 | 1,487 | |||||||||
Chile
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100.0 | 15.3 | 1,301 | |||||||||
Colombia
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66.0 | 40.3 | 1,915 | |||||||||
Ecuador
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89.4 | 13.2 | 816 | |||||||||
Guatemala
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60.0 | 13.0 | 252 | |||||||||
Nicaragua
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89.0 | 2.9 | 229 | |||||||||
Panama
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43.7 | 2.8 | 420 | |||||||||
Peru
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97.4 | 27.5 | 642 | |||||||||
Uruguay
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46.0 | 2.1 | 146 | |||||||||
Venezuela
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78.2 | 24.0 | 3,307 | |||||||||
Total Latin America |
178.5 | 10,515 | ||||||||||
In structuring our investments, we typically exercise operating influence through board representation, the right to appoint certain key members of management and consent rights with respect to significant matters, including amounts of capital contributions. In addition, we try to assure our ability to maintain a position of influence in the venture, if not outright control, by obtaining rights of first refusal on future sales of our partners interests and on equity issuances by the venture. From time to time, we may buy out local partners who wish to sell, increasing our ownership stake and influence in those companies. The particular governance rights vary from venture to venture, and often are dependent upon the size of our investment relative to that of other investors. Under the governing documents for some of these ventures, certain key matters such as the approval of business plans and debt financings and decisions as to the timing and amount of capital contributions and cash distributions require the consent of our partners.
BUSINESS STRATEGY
Over the long term, we expect wireless communications to grow in Latin America. We plan to grow profitably in this market by pursuing the following strategies:
| grow the core wireless business by offering innovative voice and data services like fixed wireless, short messaging and mobile Internet applications to our existing customer base and by profitably increasing penetration in the markets we serve; |
| improve profitability through cost and capital efficiencies from integration, scale and new technology; and | |
| increase focus on value generation by building our competitive position and reducing debt. |
During 2002 and much of 2003, Latin America economies were impacted by negative economic and difficult political conditions. Much of this is attributed to currency devaluations and sharp recessions in Argentina, Uruguay and Venezuela, civil unrest in Venezuela, declines in gross domestic product within specific countries, as well as economic conditions within the US market. These deteriorating conditions made it difficult for us to continue to meet our strategic and financial goals. Many of these conditions continued to exist at the end of 2003, particularly in Venezuela. However, economic conditions began to improve in much of Latin America in 2003. In particular, Argentinas currency rebounded 16% by the end of 2003 and several countries in the region are projected to have had modest GDP growth for 2003. Nonetheless, there are still significant economic risks in 2004. See Managements Discussion and Analysis of Financial Condition and Results of Operations Operating Environment Latin America Economic Trends and Foreign Risks.
TECHNOLOGY
All of our international wireless markets utilize digital technology in their wireless service offerings. We select the type of digital technology for each international market based on cost, quality and capacity available at the time in that part of the world. CDMA2000 (Code Division Multiple Access 2000) has been selected for our Latin America affiliates migration to third generation cellular networks. CDMAs spectrum efficiency provides higher capacity for voice services and provides a wide array of new services like wireless data and high-speed Internet access. Four of our Latin America operations (Argentina, Uruguay, Venezuela and Guatemala) already had CDMA technology in place. CDMA 2000 overlays were completed during 2002 in Ecuador and Panama and during 2003 in Colombia, Nicaragua, Peru and Chile. In addition, Venezuela, Argentina and Guatemala were upgraded to CDMA2000 in 2003. As a result of these activities, we have the latest technology available in nine out of the ten countries we serve. We plan to upgrade Uruguay to CDMA2000 in the first quarter of 2004.
COMPETITION
Each of our international wireless operations is subject to competition, generally from at least one other wireless provider and, increasingly, from new PCS providers and resellers.
LICENSES AND REGULATION
Our ability to introduce new products and services depends to a large extent upon whether the new products and services are permitted by the local laws and regulatory authorities. As countries have encouraged foreign investment in telecommunications and have privatized their government owned wireless telephone companies, the general trend has been toward deregulation of telecommunications. In several of our markets, our operating companies offer or plan to offer international long distance services either to their wireless subscriber bases or, in some cases, to the entire population. In addition, we offer domestic long distance service in certain markets through our nationwide wireless facilities and backbone networks. We either offer or plan to offer fixed wireless services and public telephony in several markets.
FOREIGN RISKS
Our reporting currency is the US Dollar. However, most of our Latin America revenues are generated in the currencies of the countries in which we operate. In addition, many of our operations and equity investees hold US Dollar denominated short- and long-term debt. The currencies of many Latin America countries have recently experienced substantial volatility and depreciation. Specifically, Venezuela experienced significant currency devaluation in 2003. The Venezuelan Bolivar devalued an additional 17% in 2003 after having devalued 44% in 2002. The Argentine Peso, which had devalued in 2002 by 71%, rebounded in 2003, strengthening 16%. Also in 2002, the Uruguayan Peso devalued 49% and the Brazilian Real devalued 30%.
Advertising and Publishing Group
OVERVIEW
We own a group of companies that publish, print, sell advertising and perform related services concerning alphabetical and classified telephone directories in both paper and electronic formats. Advertising and Publishing Group revenues are derived primarily from sales of directory advertising, and represented approximately 9% of our total operating revenues in each of 2003, 2002 and 2001.
BUSINESS STRATEGY
We are committed to providing a comprehensive source for linking buyers and sellers in the local marketplace. To achieve this objective, we intend to:
| maintain product leadership by reinvesting in our products and making strategic investments to promote our products; | |
| grow revenues through new products and product enhancements, including the development and increased distribution of Internet and niche products and by expanding our existing markets through new market overlays and traditional market re-scoping; | |
| attract new customers and retain our existing customer base by offering competitive pricing and incentive programs to encourage new customers and to reward current customers for their tenure; and | |
| achieve optimal operational efficiency by improving sales force effectiveness. |
COMPETITION
Competition in the yellow pages industry continues to intensify. Industry consolidation and market expansion of other publishers was at an all time high in 2002 and 2003. Major markets are seeing multiple competitors, with many different media competing for advertising revenue. Within the print yellow pages, we compete primarily with Yellow Book USA, White Publishing, and R.H. Donnelly, while new competitors, such as Verizon, continue to enter our markets. Competition for directory sales agency contracts for the sale of advertising in publications of nonaffiliated companies also continues to be strong. We continue to respond to the increasing competition and the dynamic media environment with investments in product enhancements, multiple delivery options, localized pricing changes and promotions, increased advertising, and sales enhancements.
Intellectual Property
BellSouths intellectual property portfolio is a major component of our ability to be a leading and innovative telecommunications services provider. We diligently protect and work to build our intellectual property rights through patent, copyright, trademark and trade secret laws. We also use various licensed intellectual property to conduct our business.
Research and Development
Research and development in our industry is primarily driven by equipment manufacturers. In addition, we conduct research and development activities internally and through external vendors, primarily Telcordia Technologies. Telcordia provides research and development and other services to us and other telecommunications companies. We have contracted with Telcordia for ongoing support of engineering and systems. In addition, we are a member of the National Telecommunications Alliance, an organization that supports our commitment to national security and emergency preparedness.
Employees
At December 31, 2003, we employed almost 76,000 individuals. About 60% of BellSouths employees at December 31, 2003 were represented by the Communications Workers of America (CWA), which is affiliated with the AFL-CIO. Collective bargaining agreements with the CWA were last ratified in September 2001. These three-year contracts cover approximately 45,000 employees. The contracts included basic wage increases totaling 13% compounded over a three year term. In addition, the agreements provided for a standard incentive award of two percent of base salary and overtime compensation, which is subject to adjustment based on company performance measures. Other terms of the agreements included pension band increases and pension plan cash balance improvements for active employees.
Properties
Our properties do not lend themselves to description by character or location of principal units. Our investment in
2002 | 2003 | |||||||
Outside plant
|
40.4 | % | 40.5 | % | ||||
Central office equipment
|
40.1 | 39.7 | ||||||
Operating and other equipment
|
7.8 | 7.9 | ||||||
Land and buildings
|
7.5 | 7.7 | ||||||
Furniture and fixtures
|
3.7 | 3.8 | ||||||
Plant under construction
|
0.5 | 0.4 | ||||||
100 | % | 100 | % | |||||
These properties are divided among our operating segments as follows: Communications Group, 93.8%; Latin America Group, 4.8%; Advertising and Publishing Group, 0.5%; and other, 0.9%.
Legal Proceedings
EMPLOYMENT CLAIM
On April 29, 2002 five African-American employees filed a putative class action lawsuit, captioned Gladys Jenkins et al. v. BellSouth Corporation, against the Company in the United States District Court for the Northern District of Alabama. The complaint alleges that BellSouth discriminated against current and former African-American employees with respect to compensation and promotions in violation of Title VII of the Civil Rights Act of 1964 and 42 USC. Section 1981. Plaintiffs purport to bring the claims on behalf of two classes: a class of all African-American hourly workers employed by BellSouth at any time since April 29, 1998, and a class of all African-American salaried workers employed by BellSouth at any time since April 29, 1998 in management positions at or below Job Grade 59/Level C. The plaintiffs are seeking unspecified amounts of back pay, benefits, punitive damages and attorneys fees and costs, as well as injunctive relief. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of the amount of loss, if any, be made.
SECURITIES CLAIMS
From August through October 2002 several individual shareholders filed substantially identical class action lawsuits against BellSouth and three of its senior officers alleging violations of the federal securities laws. The cases have been consolidated in the United States District Court for the Northern District of Georgia and are captioned In re BellSouth Securities Litigation. Pursuant to the provisions of the Private Securities Litigation Reform Act of 1995, the court has appointed a Lead Plaintiff. The Lead Plaintiff filed a Consolidated and Amended Class Action Complaint on or about July 15, 2003 and named four outside directors as additional defendants. The Consolidated and Amended Class Action Complaint alleges that during the period November 7, 2000 through February 19, 2003, the Company (1) overstated the unbilled receivables balance of its advertising and publishing subsidiary; (2) failed to properly implement SAB 101 with regard to its recognition of advertising and publishing revenues; (3) improperly billed competitive local exchange carriers (CLEC) to inflate revenues; (4) failed to take a reserve for refunds that ultimately came due following litigation over late payment charges; and (5) failed to properly write down goodwill of its Latin American operations. The plaintiffs are seeking an unspecified amount of damages, as well as attorneys fees and costs. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of loss, if any, be made.
ANTITRUST CLAIMS
In October 2002, a number of antitrust class action lawsuits were filed against BellSouth in federal district courts in Atlanta, Georgia and Ft. Lauderdale, Florida. The plaintiffs purport to represent putative classes consisting of all BellSouth local telephone service subscribers and/or all subscribers of competitive local exchange carriers in nine southeastern states since 1996. The plaintiffs allege that BellSouth engaged in unlawful anticompetitive conduct in violation of state and federal antitrust laws by, among other things, (1) denying competitors access to certain essential facilities necessary for competitors to provide local telephone service; (2) using its monopoly power in the wholesale market for local telephone service as leverage to maintain a monopoly in the retail market; and (3) failing to provide the same quality of service, access and billing to competitors that it provides its own retail customers. The plaintiffs are seeking an unspecified amount of treble damages, injunctive relief, as well as attorneys fees and costs. At this time, the likely outcome of the cases cannot be predicted, nor can a reasonable estimate of loss, if any, be made.
ENVIRONMENTAL MATTERS
We are subject to a number of environmental matters as a result of our operations and the shared liability provisions related to the breakup of the Bell System. At December 31, 2003, our recorded liability related to these matters was approximately $15 million. We continue to believe that expenditures in connection with additional remedial actions under the current environmental protection laws or related matters would not be material to our results of operations, financial position or cash flows.
OTHER MATTERS
We are also 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 any legal claims, we believe that any financial impact would not be material to our results of operations, financial position or cash flows. See Note Q to our consolidated financial statements.
Submission of Matters to a Vote of Shareholders
No matter was submitted to a vote of shareholders in the fourth quarter of the fiscal year ended December 31, 2003.
Additional Information Description of BellSouth Stock
GENERAL
Our Articles of Incorporation authorize the issuance of 8,650,000,000 shares of common stock, par value $1 per share, and 100,000,000 shares of cumulative, first preferred stock, par value $1 per share. Our Board of Directors is authorized to create from the unissued common stock one or more series, and, prior to the issuance of any shares in any particular series, to fix the voting powers, preferences, designations, rights, qualifications, limitations or restrictions of such series. The Board has not created any series of common stock. The Board is also authorized to provide for the issuance, from time to time, of the first preferred stock in series and, as to each series, to fix the number of shares in such series and the voting, dividend, redemption, liquidation, retirement and conversion provisions applicable to the shares of such series. No shares of first preferred stock are outstanding. The Board has created Series B First Preferred Stock consisting of 30 million shares, the Series B Preferred Stock, for possible issuance under the BellSouth Shareholder Rights Plan. The Series A First Preferred Stock was created for a previous shareholder rights plan, which has expired. See Preferred Stock Purchase Rights and Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
DIVIDEND RIGHTS
The holders of common stock are entitled to receive, from funds legally available for the payment thereof, dividends
VOTING RIGHTS
Except in connection with the business combinations and fair price provisions discussed below, holders of shares of common stock are entitled to one vote, in person or by proxy, for each share held on the applicable record date with respect to each matter submitted to a vote at a meeting of shareholders, but such holders do not have cumulative voting rights. The holders of any series of preferred stock, when issued, may receive the right to vote as a class on certain amendments to the Articles of Incorporation and on certain other matters, including the election of directors in the event of certain defaults, which may include nonpayment of preferred stock dividends.
LIQUIDATION RIGHTS
In the event of voluntary or involuntary liquidation of BellSouth, holders of the common stock will be entitled to receive, after creditors have been paid and the holders of the preferred stock, if any, have received their liquidation preferences and accumulated and unpaid dividends, all the remaining assets of BellSouth.
PRE-EMPTIVE RIGHTS; CONVERSION RIGHTS; REDEMPTION
No shareholders of any class shall be entitled to any preemptive rights to subscribe for or purchase any shares or other securities issued by BellSouth. The common stock has no conversion rights and is not subject to redemption.
PREFERRED STOCK PURCHASE RIGHTS
Each share of common stock outstanding includes one preferred stock purchase right (Right). Under certain circumstances, each Right will entitle the holder to purchase one one-thousandth of a share of Series B Preferred Stock, $1 par value (Common Equivalent Preferred Stock), which unit is substantially equivalent in voting and dividend rights to one whole share of the common stock, at a price of $200 per unit (the Purchase Price). The Rights are not presently exercisable and may be exercised only if a person or group (Acquiring Person) acquires 10% of the outstanding voting stock of BellSouth without the prior approval of the Board or announces a tender or exchange offer that would result in ownership of 10% or more of the common stock.
BUSINESS COMBINATIONS
The Georgia legislature has enacted legislation which generally prohibits a corporation which has adopted a By-law electing to be covered thereby, which BellSouth has done, from engaging in any business combination, that is a merger, consolidation or other specified corporate transaction, with an interested shareholder, a 10% shareholder or an affiliate of the corporation which was a 10% shareholder at any time within the preceding two years, for a period of five years from the date such person becomes an interested shareholder, unless the interested shareholder (a) prior to becoming an interested shareholder, obtained the approval of the Board of Directors for either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder, (b) becomes the owner of at least 90% of the outstanding voting stock of the corporation in the same transaction in which the interested shareholder became an interested shareholder, excluding for purposes of determining the number of shares outstanding those shares owned by officers, directors, subsidiaries and certain employee stock plans of the corporation or (c) subsequent to the acquisition of 10% or more of the outstanding voting stock of the corporation, acquires additional shares resulting in ownership of at least 90% of the outstanding voting stock of the corporation and obtains approval of the business combination by the holders of a majority of the shares of voting stock of the corporation, other than those shares held by an interested shareholder, officers, directors, subsidiaries and certain employee stock plans of the corporation. BellSouths business combinations By-law may be repealed only by an affirmative vote of two-thirds of the continuing directors and a majority of the votes entitled to be cast by the shareholders, other than interested shareholders, and shall not be effective until 18 months after such shareholder vote. The Georgia statute provides that a domestic corporation which has thus repealed such a By-law may not thereafter readopt the By-law as provided therein.
FAIR PRICE PROVISIONS
Fair price provisions contained in the Articles of Incorporation require, generally, in connection with a merger or similar transaction between BellSouth and an interested shareholder, the unanimous approval of BellSouths directors not affiliated with the interested shareholder or the affirmative vote of two-thirds of such directors and a majority of the outstanding shares held by disinterested shareholders, unless (a) within the past three years the shareholder has been an interested shareholder and has not increased its shareholdings by more than one percent in any 12-month period or (b) all shareholders receive at least the same consideration for their shares as the
BOARD CLASSIFICATION; REMOVAL OF DIRECTORS
Board classification provisions adopted by the shareholders and contained in the By-laws prescribe a shareholder vote for approximately one-third of the directors, instead of all directors, at each annual meeting of shareholders for a three-year term. The proxy statement dated March 10, 2004 includes a management proposal that asks the shareholders to amend the By-laws to eliminate the classified board structure. The By-laws also provide that shareholders may remove directors from office only for cause, and can amend the By-laws with respect to the number of directors or amend the board classification provisions only by the affirmative vote of the holders of at least 75% of the outstanding shares entitled to vote for the election of directors.
LIMITATION ON SHAREHOLDERS PROCEEDINGS
Our By-laws require that notice of shareholder nominations for directors and of other matters to be brought before annual shareholders meetings must be provided in writing to the Corporate Secretary of BellSouth not later than the 75th day nor earlier than the 120th day prior to the date which is the anniversary of the annual meeting of shareholders held in the prior year. Such By-laws also provide that a special shareholders meeting may be called by shareholders only upon written request signed by the holders of at least three-quarters of the outstanding shares entitled to vote at the meeting.
Executive Officers
The executive officers of BellSouth Corporation are listed below:
This | ||||||||||||||||
Officer | Office | |||||||||||||||
Name | Age | Office | Since | Since | ||||||||||||
F. Duane Ackerman
|
61 |
Chairman of the Board, President and Chief Executive Officer |
1983 | 1997 | ||||||||||||
Richard A. Anderson
|
45 | President Customer Markets | 1993 | 2000 | ||||||||||||
Francis A. Dramis, Jr.
|
55 | Chief Information, E-Commerce and Security Officer | 1998 | 2000 | ||||||||||||
Ronald M. Dykes
|
57 | Chief Financial Officer | 1988 | 1995 | ||||||||||||
Mark L. Feidler
|
47 | Chief Staff Officer | 2004 | 2004 | ||||||||||||
Isaiah Harris, Jr.
|
51 | President BellSouth Enterprises | 1997 | 2004 | ||||||||||||
Charles R. Morgan
|
57 | General Counsel | 1998 | 1998 | ||||||||||||
W. Patrick Shannon
|
41 | Vice President Finance | 1997 | 2000 | ||||||||||||
All of the executive officers of BellSouth, other than Mr. Feidler, have for at least the past five years held high level management or executive positions with BellSouth or its subsidiaries. Prior to joining BellSouth in January 2004, Mr. Feidler had been Chief Operating Officer of Cingular since October 2000. Prior to that, he held various senior positions with BellSouths domestic wireless operations.
Website Access
Our website address is www.bellsouth.com. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports at our investor relations website, www.bellsouth.com/investor/, under the heading SEC Filings. These reports are available on our investor relations website as soon as reasonably practicable after we electronically file them with the SEC.
The principal market for trading in BellSouth common stock is the New York Stock Exchange, Inc. (NYSE). BellSouth common stock is also listed on the London, Frankfurt, Amsterdam and Swiss exchanges. The ticker symbol for BellSouth common stock is BLS. At January 31, 2004, there were 730,185 holders of record of BellSouth common stock. Market price data was obtained from the NYSE Composite Tape, which encompasses trading on the principal United States stock exchanges as well as off-board trading. High and low prices represent the highest and lowest sales prices for the periods indicated.
Per Share | ||||||||||||
Market Prices | Dividends | |||||||||||
High | Low | Declared | ||||||||||
2002
|
||||||||||||
First Quarter
|
$ | 40.90 | $ | 36.81 | $ | .19 | ||||||
Second Quarter
|
37.00 | 28.00 | .20 | |||||||||
Third Quarter
|
32.65 | 18.32 | .20 | |||||||||
Fourth Quarter
|
28.90 | 18.37 | .20 | |||||||||
2003
|
||||||||||||
First Quarter
|
$ | 30.00 | $ | 19.79 | $ | .21 | ||||||
Second Quarter
|
27.98 | 21.00 | .23 | |||||||||
Third Quarter
|
27.92 | 23.15 | .23 | |||||||||
Fourth Quarter
|
28.37 | 22.19 | .25 |
The following table contains information about our purchases of equity securities during the fourth quarter of 2003.
Issuer Purchases of Equity Securities
Total Number of Shares | Approximate Dollar | |||||||||||||||
Total Number of | Average Price | Purchased as Part of a | Value that May Yet Be | |||||||||||||
Period | Shares Purchased(1) | Paid per Share | Publicly Announced Plan | Purchased Under the Plan | ||||||||||||
October 1-31, 2003
|
| | | $ | 1,322,083,000 | |||||||||||
November 1-30, 2003
|
9,419,000 | $ | 25.72 | 9,419,000 | 1,079,843,000 | |||||||||||
December 1-31, 2003
|
10,826,200 | 27.19 | 10,826,200 | 785,532,000 | ||||||||||||
Total
|
20,245,200 | 20,245,200 | ||||||||||||||
In July 2002, we announced our intention to purchase up to $2 billion of our outstanding common stock through December 31, 2003. Since the announcement, we have purchased 49.8 million shares for an aggregate of $1,214 million and an average price per share of $24.39. We will not purchase any additional shares under that repurchase program.
Stock Transfer Agent and Registrar
Mellon Investor Services, LLC is our stock transfer agent and registrar.
Selected Financial and Operating Data
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The comparability of the following Selected Financial and Operating Data is significantly impacted by various changes in accounting principle and merger, acquisition and disposition activity. The more significant items include the formation of Cingular in October 2000, which resulted in a reduction in revenues and expenses caused by the contribution of our wireless operations to Cingular; the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, which resulted in the cessation of amortization of goodwill; and the adoption of SFAS No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003, which resulted in a reduction in depreciation expense.
At December 31 or for the year ended | 1999 | 2000 | 2001 | 2002 | 2003 | ||||||||||||||||||
Income Statement
Data:
|
|||||||||||||||||||||||
Operating revenues
|
$ | 25,224 | $ | 26,151 | $ | 24,130 | $ | 22,440 | $ | 22,635 | |||||||||||||
Operating expenses
|
18,902 | 19,434 | 17,992 | 17,694 | 16,729 | ||||||||||||||||||
Operating income
|
6,322 | 6,717 | 6,138 | 4,746 | 5,906 | ||||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
3,379 | 4,118 | 2,447 | 2,608 | 3,589 | ||||||||||||||||||
Cumulative effect of changes in accounting
principle, net of tax
|
| | | (1,285 | ) | 315 | |||||||||||||||||
Net income
|
3,379 | 4,118 | 2,447 | 1,323 | 3,904 | ||||||||||||||||||
Operating income margin
|
25.1% | 25.7% | 25.4% | 21.1% | 26.1% | ||||||||||||||||||
Diluted earnings per share of common stock:
|
|||||||||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
$ | 1.76 | $ | 2.18 | $ | 1.30 | $ | 1.39 | $ | 1.94 | |||||||||||||
Net income
|
$ | 1.76 | $ | 2.18 | $ | 1.30 | $ | 0.71 | $ | 2.11 | |||||||||||||
Diluted weighted-average shares of common
stock
outstanding (millions) |
1,916 | 1,893 | 1,888 | 1,876 | 1,852 | ||||||||||||||||||
Dividends declared per share of common stock
|
$ | .76 | $ | .76 | $ | .76 | $ | .79 | $ | .92 | |||||||||||||
Balance Sheet Data:
|
|||||||||||||||||||||||
Total assets
|
43,453 | 50,925 | 52,046 | 49,479 | 49,702 | ||||||||||||||||||
Long-term debt
|
9,113 | 12,463 | 15,014 | 12,283 | 11,489 | ||||||||||||||||||
Shareholders equity
|
14,831 | 16,993 | 18,758 | 17,906 | 19,712 | ||||||||||||||||||
Other:
|
|||||||||||||||||||||||
Operating cash flow
|
8,199 | 8,590 | 7,998 | 8,246 | 8,529 | ||||||||||||||||||
Investing cash flow
|
(9,888 | ) | (9,303 | ) | (7,039 | ) | (1,707 | ) | (1,698 | ) | |||||||||||||
Financing cash flow
|
(167 | ) | 487 | (1,428 | ) | (4,649 | ) | (4,757 | ) | ||||||||||||||
See Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations for a discussion of unusual items affecting the results for 2001, 2002 and 2003.
BELLSOUTH CORPORATION
THROUGHOUT THIS SECTION, DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED.
Overview
We are a Fortune 100 company with annual revenues of nearly $23 billion. Our core business is wireline communications and our largest customer segment is the retail consumer. We have significant interests in wireless communications through our ownership of approximately 40 percent of Cingular Wireless (Cingular), the nations second largest wireless company, and wireless operations in 10 countries in Latin America. We also operate one of the largest directory advertising businesses in the United States. The great majority of our revenues are generated based on monthly recurring services.
INDUSTRY DYNAMICS
The telecommunications industry has experienced a very difficult period of contraction brought on by over-investment in the late 1990s that created significant excess capacity and too many companies competing for the same business. Demand in the traditional voice business has been negatively impacted by the proliferation of wireless services led by one-rate pricing plans that include a large bucket of minutes and free roaming and long-distance, the popularity of e-mail and instant messaging, technological advances such as cable and DSL that obviate the need for additional telephone lines and stagnant job growth. After a period of significant growth in the 1990s, access lines, a key driver of our business, have declined steadily since 2001.
REGULATION AND COMPETITION
The wireline communications business is heavily influenced by government regulation. Historically, we operated as a monopoly in our geographic area with rates determined by state service commissions based on cost plus a rate of return. Although we now operate under price regulation in all of our markets, where prices for regulated products are monitored by the service commissions, historical prices and policies still influence todays business. For example, we continue to operate as a provider of last resort, which carries with it requirements for a minimum level of capital spend and network maintenance support.
HIGHLIGHTS AND OUTLOOK
Consolidated revenues for 2003 were essentially flat compared to 2002 reflecting top line pressures caused by the loss of 1.5 million retail access lines to UNE-P competitors and technology substitution. Revenue contraction due to line loss and pricing pressures to remain competitive were offset by solid revenue growth in long distance and DSL, which together generated nearly $800 in new revenue in 2003. Beyond our traditional wireline business, wireless operations at Cingular and in Latin America both experienced accelerating growth in 2003 and have potential for future growth with upgrades to their networks in process. We remain cautious regarding the political situation in Venezuela, where we have our largest operation in Latin America, and its effect on the value of the local currency and our ability to repatriate capital.
BELLSOUTH CORPORATION
to offer telephone service bundled with other services. We also expect increased competitive pressures as cable providers begin expected launches of voice over Internet protocol (VoIP) telephony to complement their video and data bundle. We will respond by continuing to offer a portfolio of services enhanced by bundling strategies enabling us to retain, acquire and reacquire customers. This ability will be further strengthened in 2004 as we add a video component to our product portfolio by offering satellite television.
Consolidated Results of Operations
Key selected financial and operating data for the three years ended December 31, 2001, 2002 and 2003 are as follows. All references to earnings per share are on a diluted basis. The following consolidated Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with results by segment.
Percent Change | |||||||||||||||||||||
2002 vs. | 2003 vs. | ||||||||||||||||||||
2001 | 2002 | 2003 | 2001 | 2002 | |||||||||||||||||
Results of operations: | |||||||||||||||||||||
Total operating revenues
|
$ | 24,130 | $ | 22,440 | $ | 22,635 | (7.0 | ) | 0.9 | ||||||||||||
Cost of services and products
|
8,049 | 7,512 | 7,988 | (6.7 | ) | 6.3 | |||||||||||||||
Selling, general, and administrative expenses
|
4,803 | 4,542 | 4,353 | (5.4 | ) | (4.2 | ) | ||||||||||||||
Depreciation and amortization
|
4,782 | 4,643 | 4,179 | (2.9 | ) | (10.0 | ) | ||||||||||||||
Provision for restructuring and asset impairments
|
358 | 997 | 209 | 178.5 | (79.0 | ) | |||||||||||||||
Total operating expenses
|
17,992 | 17,694 | 16,729 | (1.7 | ) | (5.5 | ) | ||||||||||||||
Operating income
|
6,138 | 4,746 | 5,906 | (22.7 | ) | 24.4 | |||||||||||||||
Interest expense
|
1,315 | 1,188 | 1,048 | (9.7 | ) | (11.8 | ) | ||||||||||||||
Net (losses) earnings of equity affiliates
|
465 | 80 | 465 | (82.8 | ) | * | |||||||||||||||
Gain (loss) on sale of operations
|
38 | 1,261 | (229 | ) | * | (118.2 | ) | ||||||||||||||
Foreign currency transaction gains (losses)
|
(81 | ) | (679 | ) | 159 | * | 123.4 | ||||||||||||||
Other income (expense), net
|
(1,431 | ) | 196 | 347 | 113.7 | 77.0 | |||||||||||||||
Income before taxes and cumulative effect of
changes in accounting principle, net of tax
|
3,814 | 4,416 | 5,600 | 15.8 | 26.8 | ||||||||||||||||
Provision for income taxes
|
1,367 | 1,808 | 2,011 | 32.3 | 11.2 | ||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
2,447 | 2,608 | 3,589 | 6.6 | 37.6 | ||||||||||||||||
Cumulative effect of changes in accounting
principle, net of tax
|
| (1,285 | ) | 315 | * | 124.5 | |||||||||||||||
Net income
|
$ | 2,447 | $ | 1,323 | $ | 3,904 | (45.9 | ) | 195.1 |
* | Not meaningful |
2003 COMPARED TO 2002
Operating revenues
The increase in total operating revenues is attributable to revenue growth in long distance and DSL, which together generated nearly $800 in new revenue in 2003. Growth from these new products was substantially offset by lower voice revenues caused by the loss of 1.5 million retail access lines to UNE-P competitors and technology substitution. Voice revenues were also impacted by pricing strategies in our effort to remain competitive. Revenues from the sale of wholesale data transport services declined 7.8% in 2003 primarily due to reductions in leased circuits by large inter-exchange carriers as they rationalized their capacity needs in relation to current demand. The exit from our payphone business and the elimination of certain products within the wholesale long distance portfolio also negatively impacted year-over-year comparisons.
Operating expenses
Operating expenses declined by nearly $1 billion in 2003 driven by:
| $788 in lower charges related to restructuring and asset impairments as we rationalized our business in 2002; | |
| $492 of lower depreciation expense associated with the declines in capital expenditures and a change in accounting for plant retirements; | |
| $287 of improvements in uncollectibles expense due to a steadily improving economy, lower bankruptcy rates and operational improvements; | |
| $86 of lower cost of goods related to equipment sales in the Communications Group due to a change in the presentation for drop shipments from gross to net, which had no impact on operating margin, and $53 of lower cost of goods related to the de-emphasis of paging equipment and wholesale long distance; and | |
| $121 in lower labor related costs in the Communications Group due to a nearly 12% reduction in our workforce since the beginning of 2002 driven by weak demand and increased productivity. |
These decreases were partially offset by:
| $373 of incremental expense associated with pension and postretirement benefits plans (pension and retiree medical costs) driven by rising health care costs, unfavorable returns on pension assets due to weak capital markets over the past few years, changes to plan assumptions regarding expected asset returns, and a lower discount rate used to calculate service and interest cost; | |
| $350 of customer acquisition costs related to competitive response in the Communications Group; | |
| $155 of volume-related increases in the Latin America Group associated with customer growth partially offset by the currency devaluation in Venezuela; and | |
| $108 of variable cost of goods for the provision of long distance service in the Communications Group. |
Interest expense
Interest expense declined $140 in comparison to the prior year, reflecting reductions in average debt of approximately $2.6 billion, as rates were relatively stable.
Gain (loss) on sale of operations
Gain (loss) on sale of operations in 2003 relates to losses incurred from the sale of our interests in two Brazilian wireless companies. The gain in 2002 includes $1,335 related to the exit from E-Plus partially offset by a loss of $74 associated with the disposal of Listel, our Brazilian advertising and publishing company.
Net earnings (losses) of equity affiliates
For the Year Ended | ||||||||||||||
December 31, | ||||||||||||||
Equity in Earnings | 2002 | 2003 | Change | |||||||||||
Cingular
|
$ | 497 | $ | 408 | (89 | ) | ||||||||
Brazilian wireless affiliates
|
(402 | ) | | 402 | ||||||||||
Other equity investees
|
(15 | ) | 57 | 72 | ||||||||||
Total
|
$ | 80 | $ | 465 | $ | 385 | ||||||||
Earnings from Cingular in 2003 were down compared to 2002 primarily due to significant growth in customers and
BELLSOUTH CORPORATION
the costs related to that growth and due to slightly lower average revenue per customer (see Results by Segment Domestic Wireless for further discussion of Cingular results). Losses from our Brazilian wireless affiliates in 2002 include recognition of other-than-temporary impairments of $383. Earnings from other equity investees increased $72 in 2003 as compared to 2002. The increase is the result of an other-than-temporary impairment during 2002 of $62 related to our investment in a Guatemalan wireless partnership.
Other income (expense), net
For the Year Ended | |||||||||||||||
December 31, | |||||||||||||||
Gain (loss) on sales and impairments of cost method investments: | 2002 | 2003 | Change | ||||||||||||
Qwest
|
$ | (336 | ) | $ | | $ | 336 | ||||||||
TCO
|
22 | 50 | 28 | ||||||||||||
Other
|
| (9 | ) | (9 | ) | ||||||||||
Subtotal
|
(314 | ) | 41 | 355 | |||||||||||
Interest Income
|
496 | 364 | (132 | ) | |||||||||||
Minority Interest, income (loss)
|
74 | (47 | ) | (121 | ) | ||||||||||
Loss on early extinguishment of debt
|
(40 | ) | (18 | ) | 22 | ||||||||||
Other
|
(20 | ) | 7 | 27 | |||||||||||
Total Other Income (Expense), net
|
$ | 196 | $ | 347 | $ | 151 | |||||||||
During 2002 we recorded other than temporary impairments to reduce the carrying value of our Qwest investment driven by continued weak market conditions, particularly in technology and communications stocks. We also incurred losses on sales of our Qwest investment and gains on sales of Telecentro Oeste Celular Participacoes SA (TCO) shares. See Note D to our consolidated financial statements for additional details on these investments. As of December 31, 2003, we no longer hold any interest in Qwest or TCO.
Foreign currency transaction gains and losses
Foreign currency transaction activity of consolidated subsidiaries, which relate primarily to US dollar-denominated debt in Latin America, improved $838 in 2003. Gains in 2003 were primarily driven by improvement in the Argentine Peso and the Chilean Peso. The majority of the losses in 2002 were driven by the devaluation of the Argentine Peso.
Provision for income taxes
The effective tax rate decreased to 35.9% in 2003 from 40.9% in 2002. The recording of a foreign tax valuation allowance, deferring recognition of the tax benefits generated by losses at our operations in Argentina, substantially increased the rate in 2002. In 2003, partial reversal of this valuation allowance decreased the effective rate as foreign currency gains were realized in Argentina. The 2003 rate was further decreased by reversal of valuation allowances on net operating losses in Ecuador and by income tax benefits relating to inflation adjustments deductible for Venezuelan tax purposes. The decreases were partially offset by additional book losses on the sale of our Brazilian investments for which no tax benefit was recognized.
Cumulative effect of changes in accounting principle
Asset retirement obligations
Effective January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). In connection with the adoption of this standard, we recorded the cumulative effect of accounting change that increased 2003 net income by $816. See Note C to our consolidated financial statements for further discussion of this change.
Revenue recognition for publishing revenues
Effective January 1, 2003, we changed our method for recognizing revenues and expenses related to our directory publishing business from the publication and delivery method to the deferral method. The cumulative effect of the change in accounting method is reflected in the income statement as a decrease to 2003 net income of $501. See Note C to our consolidated financial statements for further discussion of this change.
2002 COMPARED TO 2001
Operating revenues
The decrease in total operating revenues in 2002 is attributable to lower voice revenues caused by the loss of 1.5 million retail access lines to UNE-P competitors and technology substitution. Voice revenues were also impacted by pricing strategies in our effort to remain competitive. These decreases were slightly offset by revenue
growth in DSL which generated nearly $250 in incremental revenue in 2002.
Operating expenses
Operating expenses declined by nearly $300 in 2002 driven by:
| a decline in total operating expenses of $708 in the Latin America Group almost entirely attributable to local currency devaluation; | |
| $185 decrease in labor related costs at the Communications Group due to a reduction in our workforce since the beginning of 2002 driven by weak demand and increased productivity; and | |
| $215 in one-time charges in 2001 related to an accrual for reciprocal compensations and curtailment related to the transfer of employees to Cingular. |
These decreases were partially offset by:
| $639 of higher charges related to restructuring and asset impairments as we rationalized our business in 2002; and | |
| $263 of higher uncollectibles expense due to customer bankruptcies and non-paying customers associated with a weak economy. |
Interest expense
Interest expense decreased $127 in 2002. The decrease in 2002 was the result of both lower short-term interest rates and lower average principal amounts outstanding on short-term and long-term borrowings.
Gain (loss) on sale of operations
The gain in 2002 includes $1,335 related to the exit from E-Plus partially offset by a loss of $74 associated with the disposal of Listel, our Brazilian advertising and publishing company. In 2001, we recognized a gain of $24 from the sale of a 24.5% ownership interest in Skycell, an Indian wireless venture, and $14 from the sale of BellSouth International Wireless Services, an international wireless roaming clearinghouse.
Net earnings (losses) of equity affiliates
For the Year Ended | |||||||||||||||
December 31, | |||||||||||||||
Equity in Earnings | 2001 | 2002 | Change | ||||||||||||
Cingular
|
$ | 673 | $ | 497 | $ | (176 | ) | ||||||||
Brazilian wireless affiliates
|
(231 | ) | (402 | ) | (171 | ) | |||||||||
Other equity investees
|
23 | (15 | ) | (38 | ) | ||||||||||
Total
|
$ | 465 | $ | 80 | $ | (385 | ) | ||||||||
Cingular
Earnings from Cingular in 2002 were down compared to 2001 due to higher total operating expenses impacted by higher network usage and high uncollectible expense. (See Results by Segment Domestic Wireless for further discussion of Cingular results.)
Brazilian wireless affiliates
Losses from our Brazilian wireless affiliates in 2002 include a pre-tax loss of $383 related to the recognition of other-than-temporary impairments. Earnings excluding the impairments were $(19) which represents an improvement of $212 compared to 2001, primarily resulting from cessation of losses subsequent to the impairment.
Other equity investees
Earnings from other equity investees declined $38 in 2002 as compared to 2001. The decline is the result of an other-than-temporary impairment of $62 related to our investment in a Guatemalan wireless partnership partially offset by the cessation of losses related to E-Plus that resulted in year-over-year improvement of $39.
BELLSOUTH CORPORATION
Other income (expense), net
For the Year Ended | |||||||||||||||
December 31, | |||||||||||||||
Gain (loss) on sales and impairments of cost method investments: | 2001 | 2002 | Change | ||||||||||||
Qwest
|
$ | (1,648 | ) | $ | (336 | ) | $ | 1,312 | |||||||
TCO
|
(138 | ) | 22 | 160 | |||||||||||
Crown Castle
|
(86 | ) | | 86 | |||||||||||
Other
|
(76 | ) | | 76 | |||||||||||
Subtotal
|
$ | (1,948 | ) | $ | (314 | ) | $ | 1,634 | |||||||
Interest Income
|
$ | 462 | $ | 496 | $ | 34 | |||||||||
Minority Interest
|
(25 | ) | 74 | 99 | |||||||||||
Loss on early extinguishment of debt
|
| (40 | ) | (40 | ) | ||||||||||
Other
|
80 | (20 | ) | (100 | ) | ||||||||||
Total Other Income (Expense), net
|
$ | (1,431 | ) | $ | 196 | $ | 1,627 | ||||||||
During 2001 we recorded other-than-temporary impairments to reduce the carrying value of our cost investments driven by continued weak market conditions, particularly in technology and communications stocks. This trend continued during 2002, as we recorded both impairments and losses on sales of our Qwest investment.
Foreign currency transaction gains and losses
Foreign currency transaction losses of consolidated subsidiaries, which relate primarily to US dollar-denominated debt in Latin America, increased $598 in 2002. The majority of the losses in 2002 were driven by the devaluation of the Argentine peso.
Provision for income taxes
The provision for income taxes increased $441 during 2002. Our effective tax rate was 40.9% in 2002 and 35.8% in 2001.
Cumulative effect of change in accounting principle
Goodwill and other intangible assets
On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). 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 reflect the impact of adopting this new accounting standard on the operations of our equity investments (the most significant of which is our investment in Cingular Wireless).
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:
| Communications Group; | |
| Domestic Wireless; | |
| Latin America Group; and | |
| Advertising and Publishing Group. |
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 adjust historical operating information to reflect the current business structure. See Note N to our consolidated financial statements for a reconciliation of segment results to the consolidated financial information.
BELLSOUTH CORPORATION
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.
During 2003, the Communications Group emphasized interLATA long distance and FastAccess® DSL, encouraging customers to purchase packages containing multiple telecommunications services. We continue to experience retail access line market share loss due to competition and technology substitution, and we expect these trends to continue into 2004.
Percent Change | ||||||||||||||||||||||||||
2002 vs. | 2003 vs. | |||||||||||||||||||||||||
2001 | 2002 | 2003 | 2001 | 2002 | ||||||||||||||||||||||
Segment operating revenues:
|
||||||||||||||||||||||||||
Voice
|
$ | 13,138 | $ | 12,498 | $ | 12,622 | (4.9 | ) | 1.0 | |||||||||||||||||
Data
|
4,124 | 4,276 | 4,371 | 3.7 | 2.2 | |||||||||||||||||||||
Other
|
1,809 | 1,715 | 1,455 | (5.2 | ) | (15.2 | ) | |||||||||||||||||||
Total segment operating revenues
|
19,071 | 18,489 | 18,448 | (3.1 | ) | (0.2 | ) | |||||||||||||||||||
Segment operating expenses:
|
||||||||||||||||||||||||||
Cost of services and products
|
6,520 | 6,464 | 6,755 | (0.9 | ) | 4.5 | ||||||||||||||||||||
Selling, general, and administrative expenses
|
2,826 | 2,948 | 3,079 | 4.3 | 4.4 | |||||||||||||||||||||
Depreciation and amortization
|
4,114 | 4,161 | 3,771 | 1.1 | (9.4 | ) | ||||||||||||||||||||
Total segment operating expenses
|
13,460 | 13,573 | 13,605 | 0.8 | 0.2 | |||||||||||||||||||||
Segment operating income
|
5,611 | 4,916 | 4,843 | (12.4 | ) | (1.5 | ) | |||||||||||||||||||
Segment net income
|
$ | 3,208 | $ | 2,751 | $ | 2,829 | (14.2 | ) | 2.8 | |||||||||||||||||
Segment net income including unusual items
|
$ | 3,006 | $ | 2,237 | $ | 3,505 | (25.6 | ) | 56.7 | |||||||||||||||||
Key
Indicators:(000s except where noted)
|
||||||||||||||||||||||||||
Access lines:(1)
|
||||||||||||||||||||||||||
Residence retail:
|
||||||||||||||||||||||||||
Primary
|
13,974 | 13,260 | 12,479 | (5.1 | ) | (5.9 | ) | |||||||||||||||||||
Additional
|
2,256 | 1,926 | 1,601 | (14.6 | ) | (16.9 | ) | |||||||||||||||||||
Total Retail Residence
|
16,230 | 15,186 | 14,080 | (6.4 | ) | (7.3 | ) | |||||||||||||||||||
Residential wholesale:
|
||||||||||||||||||||||||||
Resale
|
542 | 342 | 177 | (36.9 | ) | (48.2 | ) | |||||||||||||||||||
UNE-P
|
185 | 934 | 1,696 | 404.9 | 81.6 | |||||||||||||||||||||
Total Wholesale Residence
|
727 | 1,276 | 1,873 | 75.5 | 46.8 | |||||||||||||||||||||
Total residence
|
16,957 | 16,462 | 15,953 | (2.9 | ) | (3.1 | ) | |||||||||||||||||||
Business retail
|
7,653 | 7,254 | 6,857 | (5.2 | ) | (5.5 | ) | |||||||||||||||||||
Business wholesale:
|
||||||||||||||||||||||||||
Resale
|
186 | 94 | 79 | (49.5 | ) | (16.0 | ) | |||||||||||||||||||
UNE-P
|
417 | 611 | 693 | 46.5 | 13.4 | |||||||||||||||||||||
Total Wholesale Business
|
603 | 705 | 772 | 16.9 | 9.5 | |||||||||||||||||||||
Total business
|
8,256 | 7,959 | 7,629 | (3.6 | ) | (4.1 | ) | |||||||||||||||||||
Other Retail/Wholesale Lines (primarily public)
|
209 | 182 | 147 | (12.9 | ) | (19.2 | ) | |||||||||||||||||||
Total access lines
|
25,422 | 24,603 | 23,729 | (3.2 | ) | (3.6 | ) | |||||||||||||||||||
DSL customers
|
621 | 1,021 | 1,462 | 64.4 | 43.2 | |||||||||||||||||||||
Long distance customers
|
| 1,002 | 3,960 | * | 295.2 | |||||||||||||||||||||
Access minutes of use (millions)
|
110,106 | 98,571 | 92,141 | (10.5 | ) | (6.5 | ) | |||||||||||||||||||
Capital expenditures
|
$ | 5,125 | $ | 3,337 | $ | 2,824 | (34.9 | ) | (15.4 | ) | ||||||||||||||||
* | Not meaningful | |
(1) | Access lines include an adjustment to convert ISDN lines to a switched access line basis for comparability. |
2003 COMPARED TO 2002
Segment operating revenues
Voice
Voice revenues increased $124 driven by significant growth in interLATA long distance substantially offset by continued access line share loss and conversion to wholesale lines. Total switched access lines declined 3.6% with retail line losses being partially offset by increases in wholesale lines. The access line decline was the result of share loss, technology substitution and a continued weak economy.
Data
Data revenues increased $95 in 2003. The overall growth was driven by revenues from the sale of FastAccess® DSL service. Combined wholesale and retail DSL revenues were up $248 in 2003 due to a larger customer base. As of December 31, 2003, we had over 1.46 million DSL customers, an increase of 441,000 customers.
Other
Other communications revenue decreased $260 primarily due to a decline of $123 in sales to second and third tier long distance carriers due to our decision to eliminate certain products within the wholesale long distance portfolio and due to the continuing phase-out of our payphone business which created a decline of $59. We completed our exit of the payphone business as of December 31, 2003. Other revenues decreased $86 due to a change in the presentation for drop shipments of equipment from gross to net, which lowered both revenues and expenses.
Segment operating expenses
Cost of services and products
Cost of services and products increased $291 compared to the same periods in 2002. The increase reflects higher pension and retiree medical costs of $315. Costs of service associated with providing retail interLATA long distance increased $183 driven by higher volumes related to more
BELLSOUTH CORPORATION
customers while costs associated with the provision of long distance services to Cingular increased $34 driven by higher volumes. In addition, installation and activation expense increased $239 as compared to the prior period reflecting lower expense deferrals related to lower installation and activation service revenue.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased $131 in 2003 compared to 2002. The periods presented were impacted by increases in advertising of $111 associated with higher spending related to a more competitive environment and increases in outside sales commissions of $55 primarily related to the long distance launch. The periods presented were also impacted by increased pension and retiree medical costs of $33.
Depreciation and amortization
Depreciation and amortization expense decreased $390. The primary driver of the year-over-year decline in depreciation expense relates to lower depreciation rates under the group life method of depreciation. The lower rates were caused primarily by the significant reductions in capital expenditures over the past several years. In addition, depreciation expense was lower due to the adoption of SFAS No. 143. In connection with the adoption of this standard, we no longer accrue for net cost of removal in our depreciation rates causing lower depreciation expense. Amortization expense increased slightly due to higher levels of capitalized software.
2002 COMPARED TO 2001
Segment operating revenues
Voice
Voice revenues decreased $640 driven primarily by continued access line share loss. Total switched access lines declined 3.2% with retail line losses being partially offset by increases in wholesale lines. The access line decline was the result of share loss and, to a lesser extent, technology substitution and a weak economy.
Data
Data revenues increased $152 in 2002. The overall growth was driven by strong retail growth, primarily revenues from the sale of FastAccess® DSL service. Combined wholesale and retail DSL revenues were up $243 in 2002 due to a larger customer base. As of December 31, 2002, we had over one million customers, an increase of over 400,000 customers.
capacity lines) were lower, driven by special access rate reductions effective July 2002.
Other
Other communications revenue decreased $94 primarily due to the continuing phase-out of our payphone business which created a decline of $71. Collocation revenues decreased $73 from 2001, driven by lower volumes. Billing and collection revenues continued to decrease resulting in a year-over-year decline of $20 reflecting additional carriers utilizing their own billing systems and the loss of carrier billing revenues as retail customers change from other carriers to our long distance services. Wholesale long distance revenues increased $50 driven by increased sales to second and third tier long distance carriers and UNE.
Segment operating expenses
Cost of services and products
Cost of services and products decreased $56 compared to 2001. The decrease reflects work force reductions, primarily as a result of reduced business volumes and increased productivity that resulted in decreased labor-related expenses of $153. Materials expense decreased $91 driven by lower volumes reflecting lower demand and increased competitive impacts. Also, gross receipts tax decreased $64 primarily impacted by regulatory billing changes in North Carolina.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased $122 compared to 2001. Uncollectible expense increased $111 due to bankruptcies of telecom sector wholesale customers and weak economic conditions. Advertising expense increased $45 associated with higher spending related to a more competitive environment and our long distance launch.
Depreciation and amortization
Depreciation and amortization expense increased $47. The increases are primarily attributable to increased amortization expense associated with higher levels of capitalized software partially offset by lower depreciation expense. The primary driver of the depreciation expense decline relates to lower depreciation rates under the group life method of depreciation. The lower rates were caused by the significant reductions in capital expenditures.
Unusual items excluded from segment net income
Unusual items which were excluded from this segments results consisted of the following: in 2003, $676 for the cumulative effect of a change in accounting principle related to the adoption of FAS 143 offset by restructuring charges, costs associated with the early extinguishment of debt, and an asset impairment; in 2002, $(514) related to restructuring costs, including pension settlements, costs associated with the early extinguishment of debt, costs associated with service curtailments and asset impairments and refund of customer late fees in Florida; in 2001, $(202) related to reciprocal compensation and restructuring costs were excluded from results.
Domestic Wireless
We own an approximate 40% economic interest in Cingular, a joint venture with SBC Communications. Because we exercise influence over the financial and operating policies of Cingular, we use the equity method of accounting for this investment. Under the equity method of accounting, we record our proportionate share of Cingulars earnings in our consolidated statements of income. These earnings are included in the caption Net earnings (losses) of equity affiliates. For management purposes, we evaluate our Domestic wireless segment based on our proportionate share of Cingulars results. Accordingly, results for our Domestic wireless segment reflect the proportional consolidation of approximately 40% of Cingulars financial and non-financial results.
BELLSOUTH CORPORATION
important role in revenue composition in 2003, and those impacts are expected to increase in 2004. Further, competition continues to be intense, with up to six competitors in most of the significant markets.
Percent Change | ||||||||||||||||||||||||
2002 vs. | 2003 vs. | |||||||||||||||||||||||
2001 | 2002 | 2003 | 2001 | 2002 | ||||||||||||||||||||
Segment operating revenues:
|
||||||||||||||||||||||||
Service revenues
|
$ | 5,291 | $ | 5,569 | $ | 5,689 | 5.3 | 2.2 | ||||||||||||||||
Equipment revenues
|
416 | 392 | 504 | (5.8 | ) | 28.6 | ||||||||||||||||||
Total segment operating revenues
|
5,707 | 5,961 | 6,193 | 4.5 | 3.9 | |||||||||||||||||||
Segment operating expenses:
|
||||||||||||||||||||||||
Cost of services and products
|
1,826 | 1,965 | 2,273 | 7.6 | 15.7 | |||||||||||||||||||
Selling, general, and administrative expenses
|
2,094 | 2,170 | 2,170 | 3.6 | 0.0 | |||||||||||||||||||
Depreciation and amortization
|
767 | 740 | 835 | (3.5 | ) | 12.8 | ||||||||||||||||||
Total segment operating expenses
|
4,687 | 4,875 | 5,278 | 4.0 | 8.3 | |||||||||||||||||||
Segment operating income
|
1,020 | 1,086 | 915 | 6.5 | (15.7 | ) | ||||||||||||||||||
Segment net income
|
$ | 425 | $ | 357 | $ | 261 | (16.0 | ) | (26.9 | ) | ||||||||||||||
Segment net income including unusual items
|
$ | 378 | $ | 301 | $ | 261 | (20.4 | ) | (13.3 | ) | ||||||||||||||
Key Indicators:
|
||||||||||||||||||||||||
Cellular/PCS Customers (000s)
|
8,638 | 8,770 | 9,611 | 1.5 | 9.6 | |||||||||||||||||||
Wireless average monthly revenue per
customer
Cellular/PCS (whole dollars)(a) |
$ | 53 | $ | 52 | $ | 51 | (1.9 | ) | (1.9 | ) | ||||||||||||||
Capital Expenditures
|
$ | 1,262 | $ | 1,234 | $ | 1,094 | (2.2 | ) | (11.3 | ) | ||||||||||||||
(a) | Management uses average revenue per user (ARPU) as an indicator of operating performance of the business. Wireless ARPU Cellular/PCS is defined as Cellular/PCS service revenues during the period divided by average Cellular/PCS subscribers during the period. This metric is used to compare the recurring revenue amounts being generated on Cingulars network to prior periods and internal targets. We believe that this metric provides useful information concerning the performance of Cingulars initiatives to attract and retain high value customers and the use of its network. |
2003 COMPARED TO 2002
Segment operating revenues
Cellular/PCS customers increased 9.6% during 2003. Net cellular/PCS additions in 2003 increased 702,000 compared to 2002. Improvement in customer additions is attributable to several business initiatives Cingular implemented earlier in 2003: (1) reorganization of Cingulars marketing, sales and operations activities from a national to a regional basis to more effectively address local market needs; (2) introduction of a more meaningful brand message; (3) increased emphasis on Cingulars affiliation with its parents and co-branding and more effectively utilizing the parents sales channels in those areas where Cingulars wireless markets overlap with the parents wireline markets; and (4) more effective marketing execution such as the Family Talk rate plan offer introduced in the third quarter of 2003. Prepaid subscriber growth was impacted positively in 2003 by the KIC (Keep in Contact) prepaid plan launched in the fourth quarter of 2002. The reseller subscriber base is higher due to aggressive growth by Cingulars primary reseller during 2003 and to a loss of 148,000 WorldCom (currently known as MCI) reseller customers in 2002, principally when WorldCom made the decision to exit the wireless reseller business in the second half of 2002. The cellular/PCS churn rate was 2.7% in 2003 compared with a 2.8% churn rate in 2002.
with major roaming partners to support all-inclusive rate plans. Additionally, the increase was offset partially by the effects of Emerging Issues Task Force Issue No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables, adopted July 1, 2003. Implementation of EITF 00-21 resulted in a reclassification of certain direct channel activation revenues from service revenues to equipment revenues on a prospective basis only. As a result, service revenue growth was reduced by approximately $14 for the year.
Segment operating expenses
Cost of services and products
Cost of services primarily includes expenses to monitor, maintain and service Cingulars network, landline facilities expense, incollect roaming charges from other carriers, cost of equipment sales, and long distance expense. Cost of services and products increased $308 during 2003. The primary driver of the increase of cost of services was the increase in the cost of equipment sales of $198. This increase was driven primarily by higher unit sales associated with the large increase in gross customer additions and upgrade unit sales. Overall, the increased cost of equipment sales was also impacted by higher per unit handset costs for upgrade units driven by a shift to more advanced handsets, such as the dual mode TDMA/GSM handsets in use during Cingulars GSM system conversion and newly introduced feature-rich GSM-only handsets. Other increases in cost of services include increases in local system costs of $164, partially offset by decreases in third party system costs. Local systems costs continue to be driven by growth in system minutes of use, system expansion and the increased costs of redundant TDMA and GSM networks required during the current GSM system overlay. System minutes of use increased 19.1% in 2003. The increase in local system costs includes a $64 increase in costs related to payments into the USF and other regulatory funds. The primary contributor to lower third party system costs was a decrease in incollect roaming costs, which decreased $53 in 2003. These reductions were a result of lower negotiated roaming rates and cost reductions associated with the Mobile Telecommunications Sourcing Act.
Selling, general, and administrative expenses
Selling, general, and administrative expenses remained flat in 2003. Increases in Cingulars selling expenses were offset by decreases in costs related to maintaining and supporting its customer base and other administrative costs. Higher commissions and advertising expenses were partially offset by reduced employee-related costs as a result of the sales operation reorganization in 2002.
Depreciation and amortization
Depreciation and amortization increased $95 in 2003. The increase in depreciation expense of $106 was attributable to higher levels of gross property, plant and equipment plus accelerated depreciation on TDMA assets that began in 2003. Amortization expense declined $11 due to certain finite-lived intangibles becoming fully amortized during 2002.
2002 COMPARED TO 2001
Segment operating revenues
Segment operating revenues grew $254, or 4.5%, during 2002 while cellular/PCS customers increased 1.5%. Net cellular/PCS customer additions in 2002 were down 81.3% from net customer additions in 2001. The decrease in net customer additions was primarily a function of a 12.3% reduction in gross customer additions in 2002. The decreases in 2002 were a result of intense industry competition, impacts of the economic slowdown, lower than expected sales performance and the continued decline in our prepaid and reseller customer bases, which was exacerbated by the bankruptcy of WorldCom (currently known as MCI), a major reseller of Cingulars wireless services.
BELLSOUTH CORPORATION
of $24. Although service revenues increased in 2002 compared to 2001, the rate of increase declined during 2002, reflecting slower customer growth and lower prices for Cingulars services driven by increasing competition. Service revenue increases were primarily the result of higher local service revenues associated with growth in the customer base and the attraction of all-inclusive rate plans that offer larger numbers of included minutes and bundling of roaming and long distance offerings. Also included in the 2002 service revenues growth were revenues derived from the first quarter 2002 addition of a wireless handset captive insurance subsidiary. These insurance fees contributed $62 to the increase for 2002. The September 2001 consolidation of Puerto Rico wireless properties also contributed to the 2002 increase. These increases were partially offset by a decline in roaming and long distance revenues reflecting the migration of customers to regional and national rate plans and a reduction in roaming rates with major roaming partners to support all-inclusive rate plans and the formation of a venture to share infrastructure with T-Mobile USA, Inc., which reduced roaming charges to both carriers customers.
Segment operating expenses
Cost of services and products
Cost of services and products increased $139, or 7.6%, during 2002. Cingulars expense growth was driven by increased service costs of $263 in 2002 resulting from a rise in minutes of use, higher roaming and long distance costs driven by customer movement toward all-inclusive rate plans which include more minutes, free long distance calling, and free roaming. Minutes of use on the network were up 36% in 2002. Slightly offsetting these increases were lower equipment costs due to slower customer growth and efficiencies attributable to greater digital usage.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased $76, or 3.6%, during 2002. The increase was impacted by an increase in uncollectible expense related to a WorldCom write-off. Further impacting 2002 expense growth were higher costs attributable to higher residual and upgrade commissions, costs associated with the launch of service in New York City, customer retention costs and restructuring-related severance costs. Slightly offsetting these increases were declines in branding expenses associated with the introduction of the Cingular brand name in 2001.
Depreciation and amortization
Depreciation and amortization of $740 decreased $27, or 3.5%, in 2002. Depreciation expense increased $60 and was comprised primarily of increased depreciation associated with new capital assets partially offset by a reduction in depreciation as a result of the transfer of assets to Cingulars network infrastructure venture with T-Mobile. Amortization expense decreased by $87 compared with the prior year. This was primarily attributable to the January 1, 2002 adoption of SFAS No. 142 and the resultant cessation of the amortization of goodwill and of most wireless licenses.
Unusual items excluded from segment net income
Unusual items which were excluded from this segments results consisted of the following: in 2003, no unusual items were excluded; in 2002, $(56) related to impairment losses; in 2001, $(47) related to pension and postretirement losses.
Latin America Group
The Latin America Group is comprised of our investments in wireless businesses in ten countries in Latin America. Consolidated operations include our businesses in Argentina, Chile, Colombia, Ecuador, Nicaragua, Peru and Venezuela. All other businesses are accounted for under the equity method, and accordingly their results are reported as Net earnings (losses) of equity affiliates.
related risks to continue in 2004, particularly in Venezuela. See Operating Environment Latin America Economic Trends and Foreign Risks.
Percent Change | ||||||||||||||||||||||
2002 vs. | 2003 vs. | |||||||||||||||||||||
2001 | 2002 | 2003 | 2001 | 2002 | ||||||||||||||||||
Segment operating revenues:
|
||||||||||||||||||||||
Service revenues
|
$ | 2,439 | $ | 1,878 | $ | 1,928 | (23.0 | ) | 2.7 | |||||||||||||
Equipment revenues
|
187 | 140 | 171 | (25.1 | ) | 22.1 | ||||||||||||||||
Other revenues
|
223 | 180 | 199 | (19.3 | ) | 10.6 | ||||||||||||||||
Advertising and publishing revenues
|
86 | 40 | 0 | (53.5 | ) | (100.0 | ) | |||||||||||||||
Total segment operating revenues
|
2,935 | 2,238 | 2,298 | (23.7 | ) | 2.7 | ||||||||||||||||
Segment operating expenses:
|
||||||||||||||||||||||
Cost of services and products
|
1,061 | 841 | 996 | (20.7 | ) | 18.4 | ||||||||||||||||
Selling, general, and administrative expenses
|
1,001 | 678 | 606 | (32.3 | ) | (10.6 | ) | |||||||||||||||
Depreciation and amortization
|
605 | 440 | 367 | (27.3 | ) | (16.6 | ) | |||||||||||||||
Total segment operating expenses
|
2,667 | 1,959 | 1,969 | (26.5 | ) | 0.5 | ||||||||||||||||
Segment operating income
|
268 | 279 | 329 | 4.1 | 17.9 | |||||||||||||||||
Net earnings (losses) of equity affiliates
|
(36 | ) | (10 | ) | 18 | 72.2 | 280.0 | |||||||||||||||
Segment net income (loss)
|
$ | (46 | ) | $ | 108 | $ | 161 | * | 49.1 | |||||||||||||
Segment net income (loss) including unusual
items
|
$ | (392 | ) | $ | (2,090 | ) | $ | 41 | * | 102.0 | ||||||||||||
Key Indicators:
|
||||||||||||||||||||||
Customers(a) (000s)
|
7,585 | 8,172 | 9,696 | 7.7 | 18.6 | |||||||||||||||||
Average monthly revenue per customer (whole
dollars)(b)
|
$ | 25 | $ | 19 | $ | 18 | (24.0 | ) | (5.3 | ) | ||||||||||||
Total Billed MOUs (millions)
|
12,072 | 13,538 | 17,111 | 12.1 | 26.4 | |||||||||||||||||
Capital Expenditures
|
$ | 500 | $ | 247 | $ | 268 | (50.6 | ) | 8.5 | |||||||||||||
* | Not meaningful | |
(a) | The amounts shown are for our consolidated properties and do not include customer data for our unconsolidated properties. | |
(b) | Average monthly revenue per customer is calculated by dividing average monthly service revenue by average customers. |
2003 COMPARED TO 2002
Segment operating revenues
Service revenues in the Latin America Group increased $50 in 2003. The increase in service revenue was primarily driven by an increase in Ecuador of $80, reflecting a 29% increase in its customer base as well as a $26 increase associated with a settlement reached with another wireless carrier over disputed interconnect fees. An increase of $39 was generated in Colombia primarily due to a 42% increase in its customer base substantially offset by an overall decrease in rates and the impact of an average currency devaluation of 15%. The increases were offset by service revenue declines in Venezuela of $96, driven by the 30% average devaluation of the Venezuelan Bolivar.
Segment operating expenses
Cost of services and products
Cost of services and products increased $155 in 2003. The increase was primarily caused by cost of equipment increases from higher gross additions and upgraded handsets. Increases in cost of services also reflect higher interconnect costs driven by $39 of additional expense recorded in Ecuador associated with an interconnect settlement previously described, as well as growth in minutes of use, partially offset by devaluation in Venezuela.
BELLSOUTH CORPORATION
resolved. We plan to defend our position, in the courts if necessary. We cannot predict how long it will take to resolve this issue, however we do not expect the impact, if any, to be material to our results of operations, financial position or cash flows.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased $72 in 2003. The decrease in US Dollar terms was caused primarily by the currency devaluation in Venezuela, which recorded a decline of $31, and by a decrease of $33 related to the exit from the advertising and publishing business in 2002.
Depreciation and amortization
Depreciation and amortization expense decreased $73 in 2003, reflecting the impact of currency devaluations on the amortizable basis of tangible and intangible assets and the impact of certain customer intangibles becoming fully amortized.
Net earnings (losses) of equity affiliates
Net earnings from our Latin America Group equity affiliates improved from a loss of ($10) in 2002 to income of $18 in 2003, primarily as a result of the cessation of recording losses from our equity investments in Brazil during the second quarter of 2002.
2002 COMPARED TO 2001
Segment operating revenues
Segment operating revenues decreased $697, or 23.7%, in 2002. The decrease was almost entirely attributable to the continued weakening of our Latin America operations local currencies against the US Dollar. Significant economic challenges continued in Argentina and Venezuela, two of BellSouths largest Latin America markets. The currency devaluations that began during the first quarter continued to worsen throughout the year. As of November 30, 2002, the Argentine Peso had devalued approximately 71% relative to the US Dollar and the Venezuelan Bolivar had depreciated approximately 44% since the beginning of 2002. The decreases in Argentina and Venezuela were partially offset by increases in service revenues totaling $118 at our operations in Colombia and Ecuador, attributable to growth in the customer bases of those operations.
Segment operating expenses
Cost of services and products
Cost of services and products decreased $220, or 20.7%, in 2002. The 2002 decrease was almost entirely attributable to the declining value of most Latin American currencies against the US Dollar. Reductions in expenses are also being driven by lower customer acquisition costs.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased $323, or 32.3%, in 2002. The 2002 decrease was almost entirely attributable to the declining value of most Latin American currencies against the US Dollar. Reductions in expenses are also being driven by targeted reductions in administrative costs through headcount reductions.
Depreciation and amortization
Depreciation expense decreased $86 in 2002 as a result of currency devaluations and true-ups of depreciation on network assets in Chile and Colombia. Amortization expense decreased $79 during 2002 primarily as a result of the cessation of amortization of goodwill due to the adoption of SFAS No. 142, and to a lesser extent, to the effect of foreign currency translation.
Net earnings (losses) of equity affiliates
Net losses from our Latin America Group equity affiliates improved $26 to $(10) in 2002. The 2002 improvement was primarily due to the cessation of recording losses in our Brazil investments during the second quarter of 2002.
Unusual items excluded from segment net income
Unusual items which were excluded from this segments results consisted of the following: in 2003, $(120) related to loss on disposal of our wireless property in Brazil-Sao Paulo, bond impairment, loan write-off and severance costs, partially offset by foreign currency transaction gains, gain on sale of stock and gain on sale of our wireless property in Brazil NE; in 2002, $(2,198) related to impairment losses under SFAS No. 142, foreign currency transaction losses, Brazil loan impairment, losses on the sale of Brazilian yellow
pages operation, asset impairments and severance costs, partially offset by gain on sale of stock; in 2001, $(346) related to foreign currency transaction losses, asset impairments and restructuring costs, partially offset by a gain from the sale of our investment in BellSouth International Wireless Services.
Advertising and Publishing Group
Our Advertising and Publishing Group is comprised of companies in the US that publish, print, sell advertising in and perform related services concerning alphabetical and classified telephone directories and electronic product offerings.
Percent Change | |||||||||||||||||||||
2002 vs. | 2003 vs. | ||||||||||||||||||||
2001 | 2002 | 2003 | 2001 | 2002 | |||||||||||||||||
Segment operating revenues
|
|||||||||||||||||||||
Advertising and publishing revenues
|
$ | 1,966 | $ | 2,010 | $ | 1,906 | 2.2 | (5.2 | ) | ||||||||||||
Commission revenues
|
124 | 147 | 144 | 18.5 | (2.0 | ) | |||||||||||||||
Total segment operating revenues
|
2,090 | 2,157 | 2,050 | 3.2 | (5.0 | ) | |||||||||||||||
Segment operating expenses:
|
|||||||||||||||||||||
Cost of services and products
|
390 | 351 | 345 | (10.0 | ) | (1.7 | ) | ||||||||||||||
Selling, general, and administrative expenses
|
689 | 879 | 706 | 27.6 | (19.7 | ) | |||||||||||||||
Depreciation and amortization
|
29 | 29 | 26 | 0.0 | (10.3 | ) | |||||||||||||||
Total segment operating expenses
|
1,108 | 1,259 | 1,077 | 13.6 | (14.5 | ) | |||||||||||||||
Segment operating income
|
982 | 898 | 973 | (8.6 | ) | 8.4 | |||||||||||||||
Segment net income
|
$ | 596 | $ | 545 | $ | 600 | (8.6 | ) | 10.1 | ||||||||||||
Segment net income including unusual items
|
$ | 593 | $ | 428 | $ | 96 | (27.8 | ) | (77.6 | ) | |||||||||||
Capital Expenditures
|
$ | 63 | $ | 29 | $ | 28 | (54.0 | ) | (3.4 | ) | |||||||||||
2003 COMPARED TO 2002
Segment operating revenues
The overall industry environment continues to reflect weak economic conditions and increasing competitive activity. Segment operating revenues decreased $107 from 2002 to 2003. The decrease includes a reduction in print revenues due to lower overall spending by our advertisers. The decline in print revenue was partially offset by an increase in revenues from electronic media offerings, resulting from increased penetration of the print customer base. Sales agency commission revenues decreased slightly as the result of a discontinued line of business.
Segment operating expenses
Cost of services and products decreased $6 in 2003, primarily reflecting the impact of manufacturing cost reduction efforts. Selling, general, and administrative expenses decreased $173 in 2003. Uncollectible expense was the primary driver of the reductions, decreasing $141. The decrease reflects the impact of improved collection performance in 2003. In addition, variable costs associated with selling decreased as the result of the reduction in revenues. Depreciation and amortization expenses were relatively flat in 2003.
BELLSOUTH CORPORATION
2002 COMPARED TO 2001
Segment operating revenues
Segment operating revenues increased $67 during 2002. The improvement was attributable to several factors, including improvements in print customer adjustment activity and an increase in revenues from electronic media offerings resulting from further penetration of the print customer base. Print revenues were relatively flat, reflecting the impact on the overall industry of weak economic conditions and increased competitive activity. Sales agency commission revenues increased as the result of new agency agreements generated outside of the Southeastern US.
Segment operating expenses
Cost of services and products decreased $39 in 2002. The decrease primarily reflects the impact of cost reduction efforts in manufacturing and distribution expenses. Selling, general, and administrative expenses increased $190 in 2002. This increase is primarily due to a higher provision for uncollectible receivables expense that increased $181 for 2002. The higher provision was primarily due to weak economic conditions and increased bankruptcies of our advertisers. Depreciation and amortization remained flat in 2002.
Unusual items excluded from segment net income
Unusual items which were excluded from this segments results consisted of the following: in 2003, $(504) included the cumulative effect of a change in accounting principle and severance and pension costs; in 2002, $(117) related to an unbilled receivable adjustment, severance costs and employee benefits related to workforce reduction; in 2001, $(3) related to restructuring costs.
Liquidity and Financial Condition
DESCRIPTION OF CASH FLOWS
Net cash provided by (used for):
Percent Change | ||||||||||||||||||||
2002 vs. | 2003 vs. | |||||||||||||||||||
2001 | 2002 | 2003 | 2001 | 2002 | ||||||||||||||||
Operating activities
|
$ | 7,998 | $ | 8,246 | $ | 8,529 | 3.1 | 3.4 | ||||||||||||
Investing activities
|
(7,039 | ) | (1,707 | ) | (1,698 | ) | 75.7 | 0.5 | ||||||||||||
Financing activities
|
(1,428 | ) | (4,649 | ) | (4,757 | ) | (225.6 | ) | (2.3 | ) | ||||||||||
Net cash provided by operating activities
Cash generated by operations increased $283 during 2003 compared to the prior year. The increase was driven primarily by lower severance payments and better receivables collections. Severance payments of $125 in 2003 declined $369 as compared to $494 of payments in 2002. We have enhanced our processes with respect to receivable collection management resulting in improved collections as net accounts receivable decreased $356 (excluding the accounts receivable decrease impacted by the advertising and publishing accounting change). Decreases in interest income, due to lower rates on our advance to Cingular and the loss of income on an advance to KPN were substantially offset by lower interest expense due to lower borrowings. Operating cash flows for the next few years will be negatively impacted by higher federal income tax payments as the timing of accelerated tax deprecation in 2002 and 2003 begins to reverse.
Net cash used for investing activities
Capital expenditures
Capital expenditures consist primarily of (a) gross additions to property, plant and equipment having an estimated service life of one year or more, plus the incidental costs of preparing the asset for its intended use, and (b) gross additions to capitalized software.
Millions | % of Revenue | |||||||||
1999
|
$ | 6,200 | 24.6 | |||||||
2000
|
$ | 6,995 | 26.7 | |||||||
2001
|
$ | 5,997 | 24.9 | |||||||
2002
|
$ | 3,785 | 16.9 | |||||||
2003
|
$ | 3,200 | 14.1 | |||||||
Decreases in capital spending levels in 2002 and 2003 reflect continued decreases in demand and targeted capital deployment. We project 2004 capital expenditures to be between 13 and 15 percent of revenue. A majority of the expenditures will be to expand, enhance and modernize current wireline operating systems.
Other investing activities
Other 2003 investing activities include net proceeds of $1,458 resulting from an early repayment by KPN of the entire outstanding balance of the loan we had extended to them and the settlement of related currency swaps. In addition, we received proceeds of $35 from the exercise of a loan put agreement with our Colombian partner, proceeds of $70 related to the sale of two equity investments in Brazil, and proceeds of $105 related to the sale of equity securities. In June 2003, we sold our entire interest in two real estate partnerships for net proceeds of $26. In conjunction with the sale, we received proceeds of $97 for the repayment of loans we had extended to the partnerships. During 2003, we purchased $261 in debt and equity securities.
BELLSOUTH CORPORATION
Other 2002 investing activities include receipt of $2,358 in proceeds from the sale of shares in Qwest, KPN and portions of our investment in TCO as well as proceeds from a principal payment related to a loan to KPN. In addition, we contributed a total of $309 to equity affiliates, including $200 to Cingular and $94 to Brazil. The $200 contribution related to income tax benefits realized by BellSouth associated with our investment in Cingular.
Net cash used for financing activities
Cash used for financing activities increased $108 during 2003 compared to 2002 due primarily to an increase in dividends paid of $148 and an increase in purchases of treasury shares of $267, partially offset by a reduction in debt pay downs of $256. During 2003, we paid dividends of $.87 per share totaling $1,608 and purchased 35.0 million shares of our common stock for $858. During 2002, we paid dividends of $.78 per share totaling $1,460 and purchased 22.3 million shares of our common stock for $591. Dividends paid in 2001 were $.76 per share totaling $1,424.
Anticipated sources and uses of funds
Cash flows from operations are our primary source of cash for funding existing operations, capital expenditures, interest and principal payments on debt, and dividend payments to shareholders. Should the need arise, however, we believe we are well positioned to raise capital in the public debt markets. As of December 31, 2003 our consolidated cash balance was $4,556.
We have committed to funding our proportionate share of the all cash transaction. We expect our funding requirement will be approximately $16 billion. Funding will be achieved through a combination of existing cash on hand, cash generated from our operations prior to closing and potential asset sales. We plan to access the public debt markets for the remainder. At the time of closing, we currently anticipate our likely external funding needs to be in the $9.5 to $10.5 billion range.
CASH MANAGEMENT
BellSouths primary source of cash flow is dividends from its subsidiaries. Generally, we do not permit our subsidiaries to accumulate cash, requiring them to pay out either net income or cash flow available in the form of dividends. BellSouth Telecommunications pays dividends in the amount of net income. For all other wholly owned domestic subsidiaries, companies must pay out cash flow available (less interest expense) if it exceeds net income. Any funding requirements for wholly owned domestic subsidiaries are filled by BellSouth Corporation. Cingular pays dividends to BellSouth in an amount equal to cash taxes paid by BellSouth on behalf of Cingular. Latin American subsidiaries dividend policies vary by company and are dependent upon financing needs and ownership structure. All Latin America Group dividends are invested in the region and funds may be loaned from one subsidiary to another to facilitate funding needs.
DEBT INSTRUMENTS
Publicly held indebtedness
BellSouth and BellSouth Telecommunications currently have debt outstanding under various indentures that we have entered into over the past eleven years. None of these indentures contain any financial covenants. They do contain limitations that restrict the companys (or the affiliate of the company that is a party to the indenture) ability to create liens on their properties or assets (but not the properties or assets of their subsidiaries) except in specified circumstances. None of these indentures contains any provisions that are tied to the ratings assigned to the company or its affiliates by an external debt rating agency. Further, none of these indentures contains cross-default provisions.
International operations
Our Latin American operations generally have local credit facilities denominated in local currency and other facilities denominated in US dollars. We are seeking, where feasible, to replace our dollar denominated debt with local currency facilities to reduce the impact of currency fluctuations on our operations. Except as noted below, these facilities are generally non-recourse to BellSouth. The facilities have customary terms and financial covenants for non-recourse obligations of this type.
Line of credit
We have a syndicated line of credit in the amount of $1,500 that we would use in the event we are unable to access the commercial paper market. We do not have any balances outstanding under the line of credit. Except as described in this paragraph, the line of credit contains no financial covenants or requirements for compensating balances. The line of credit does not contain any provisions that are tied to the ratings assigned to us or our affiliates
BELLSOUTH CORPORATION
by an external debt rating agency. At our election, any outstanding borrowings may be converted to a one-year term, in which case the debt of the company and its consolidated subsidiaries are not permitted to exceed 300% of consolidated earnings before interest, taxes, depreciation and amortization on a rolling four-quarter basis. In addition, the line of credit prohibits the company and its significant subsidiaries from permitting liens to be placed on their properties or assets except in specified circumstances. If BellSouth or any of our subsidiaries, except for our Latin American entities, defaults on any outstanding debt in excess of $200, this will cause an event of default to occur under the line of credit. If we draw on this line of credit, a similar event of default clause will be brought into certain of our Latin American credit facilities. If the line of credit is not drawn and the term conversion is not exercised, the line of credit will expire on April 30, 2004. We expect to enter into a new line of credit on substantially similar terms.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
OFF-BALANCE SHEET ARRANGEMENTS
We have guaranteed approximately $30 of the long-term debt of our Guatemalan entity. We own 60% of that company and we account for it using the equity method.
In most of our sale and divestiture transactions we indemnify the purchaser for various items including labor and general litigation as well as certain tax matters. Generally, the terms last one to five years for general and specific indemnities and for the statutory review periods for tax matters. The events or circumstances that would require us to perform under the indemnity are transaction and circumstance specific. We regularly evaluate the probability of having to incur costs associated with these indemnifications and have accrued for expected losses that are probable. In addition, in the normal course of business, we indemnify counter parties in certain agreements. The nature and terms of these indemnities vary by transaction. Historically, we have not incurred significant costs related to performance under these types of indemnities.
We do not have transactions, arrangements or relationships with special purpose entities, and we do not have any off-balance sheet debt.
CONTRACTUAL OBLIGATIONS
The following table discloses aggregate information about our contractual obligations and the periods in which payments are due:
Payments Due by Period | |||||||||||||||
Less than | |||||||||||||||
Total | 1 year | 2005-2007 | 2008-2010 | After 2010 | |||||||||||
Debt maturing within 1 year
|
$ | 1,637 | $1,637 | $ | $ | $ | |||||||||
Long-term debt(1)
|
13,742 | 1,897 | 3,314 | 1,990 | 6,541 | ||||||||||
Operating leases
|
988 | 160 | 363 | 210 | 255 | ||||||||||
Unconditional purchase obligations(2)
|
3,563 | 807 | 2,156 | 600 | | ||||||||||
Interest rate swaps(3)
|
77 | 38 | 31 | 8 | | ||||||||||
Total contractual cash obligations
|
$ | 20,007 | $4,539 | $5,864 | $2,808 | $6,796 | |||||||||
(1) | The long-term debt amount above excludes $(116) of unamortized discounts and premiums included in long-term debt on the balance sheet as of December 31, 2003. Payments after the year 2010 include the final principal amount of $500 for the Zero-to-Full Debentures due in 2095, which have a carrying value of $217 as of December 31, 2003. | |
(2) | The total unconditional purchase obligation includes $323 related to agreements with Qwest and Accenture that do not stipulate annual minimum purchases. The agreement with Qwest expires in 2006 and the Accenture agreement expires in 2007. These amounts are included in the 2005 - 2007 column. | |
(3) | The amounts due for the interest rate swaps and forward contracts are based on market valuations at December 31, 2003. Actual payments, if any, may differ at settlement date. |
Pensions and other retiree benefits
As of December 31, 2003, our defined benefit pension plans were fully funded. Therefore, we do not currently anticipate any cash funding needs to meet minimum required funding thresholds. Other retiree benefits, primarily health and life benefits, are generally funded to cover current year claims. Over the past three years, funding for other retiree benefits was $425 in 2001, $493 in 2002, and $563 in 2003. We anticipate funding in 2004 to be in the range of $475 to $525.
OTHER POTENTIAL OBLIGATIONS
Debt put options
Several issues of long-term debt included in the table above contain embedded options which may require us to repurchase the debt or which alter the interest rate associated with that debt. Please refer to Note H to our consolidated financial statements for further information on these instruments. Those issues, their amounts and the date of the related options, are as follows:
Issue | Amount | Date of Put Option | |||||
20-put-1 Securities | $1,000 | Annually in April | |||||
Extendible Liquidity | |||||||
Securities
|
745 | Quarterly | |||||
Putable debentures
|
281 | November 2006 |
Venezuelan put-call provision
We own a 78.2% interest in Telcel, our Venezuelan operation. Telcels other major shareholder holds an indirect 21% interest in Telcel. Under a Stock Purchase Agreement, that shareholder has the right to initiate a process that could require us to purchase (the puts), and we have the right to initiate a process that could require that shareholder to sell (the calls) to us, the shareholders interest in Telcel. Notice of the initiation of the process with respect to approximately half of that shareholders interest was to be given in 2000 and notice with respect to the remaining balance was to be given in 2002. If we exercise our call right, we would purchase that shareholders interest at between 100% and 120% of its appraised fair value. If we are required to purchase the interest, we would do so at between 80% and 100% of its appraised fair value.
Colombian put-call provision
We own approximately 66% of BellSouth Colombia. Our principal partner holds approximately 34%. We have agreed with our partner to a series of related put and call agreements where by we can acquire, or could be compelled by our partner to acquire, additional shares of the Colombian operation currently held by our partner for a price equal to the appraised fair value. During the first put/call period, we have the right, but not the obligation, to call and our partner has the right, but not the obligation, to put to us approximately one-third of our partners holding in the Colombian operation. In February 2004, we exercised our call right with respect to the first put/call provision. As a result, we agreed to purchase 11.6% of the Colombian operation from our partner. The purchase price for the additional interest is $32 and will be funded from cash on hand. Under a second put/call option, the remaining balances of our partners shares (100% of the partners shares if the first put/call expires unexercised) can be called by us or put to us beginning in 2006 until 2009. We cannot predict if either party will exercise its rights under the second put/call option provision.
RELATED PARTY TRANSACTIONS
We own an approximate 40% interest in Cingular. We generated revenues of approximately $426 in 2003, $386 in 2002, and $304 in 2001 from the provision of local interconnect, long distance and complex business services to Cingular and agent commissions for selling wireless services for Cingular. We also earned $256 in 2003, $284 in 2002, and $287 in 2001 from interest income on advances to Cingular.
As of December 31, | ||||||||
2002 | 2003 | |||||||
Receivable from Cingular
|
$49 | $57 | ||||||
Payable to Cingular
|
$23 | $33 | ||||||
Quantitative and Qualitative Disclosure About Market Risk
DESCRIPTION OF RISK
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, changes in equity investment prices and foreign currency exchange rate fluctuations. To manage this exposure, we employ risk management strategies including the use of derivatives such as interest rate swap agreements, foreign currency forwards and currency swap
BELLSOUTH CORPORATION
agreements. We do not hold derivatives for trading purposes.
Interest rate risk
Our objective in managing interest rate risk is to maintain a balance of fixed and variable rate debt that will lower our overall borrowing costs within reasonable risk parameters. Interest rate swaps are used to convert a portion of our debt portfolio from a variable rate to a fixed rate or from a fixed rate to a variable rate.
Foreign currency translation
The functional currency for most of our foreign operations is the local currency. The translation of income statement and balance sheet amounts of these entities into US Dollars gives rise to cumulative translation adjustments, which are included in accumulated other comprehensive income (loss) in our consolidated statements of shareholders equity and comprehensive income. We have not hedged our accounting translation exposure to foreign currency fluctuations relative to these investments.
Foreign exchange risk
Our objective in managing foreign exchange risk is to protect against cash flow and earnings volatility resulting from changes in foreign exchange rates. Short-term foreign currency transactions and commitments expose us to changes in foreign exchange rates. We occasionally enter into forward contracts and similar instruments to mitigate the potential impacts of such risks. The success of these strategies, however, depends on many factors and, as a result, such hedging may be ineffective.
Risk sensitivity
Our use of derivative financial instruments is designed to mitigate foreign currency and interest rate risks, although to some extent they expose us to credit risks. The credit risks associated with these instruments are controlled through the evaluation and continual monitoring of the creditworthiness of the counter parties. In the event that a counter party fails to meet the terms of a contract or agreement, our exposure is limited to the current value at that time of the currency rate or interest rate differential and not the full notional or contract amount. Such contracts and agreements have been executed with credit worthy financial institutions, and as such, we consider the risk of nonperformance to be remote.
The following table provides information, by maturity date, about our interest rate sensitive financial instruments, which consist of fixed and variable rate debt obligations and, other than indicated below, includes the debt of our consolidated Latin America operations. Fair values for the majority of our long-term debt obligations are based on quotes from dealers.
Maturity Dates | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Total Book | Underlying | Associated | ||||||||||||||||||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Value | Debt | Derivative | Total | |||||||||||||||||||||||||||||||||
Debt:(1) | ||||||||||||||||||||||||||||||||||||||||||
Fixed rate debt
|
$ | 1,261 | 501 | 1,310 | 25 | 629 | 7,549 | $ | 11,275 | $ | 12,189 | (5 | ) | $ | 12,184 | |||||||||||||||||||||||||||
Average interest rate
|
4.55 | % | 6.65 | % | 5.25 | % | 6.33 | % | 5.78 | % | 6.92 | % | 6.39 | % | ||||||||||||||||||||||||||||
Variable rate debt
|
$ | 1,785 | 440 | 1,035 | | | | $ | 3,260 | $ | 3,673 | 80 | $ | 3,753 | ||||||||||||||||||||||||||||
Average interest rate
|
1.52 | % | 4.49 | % | 2.64 | % | | | | 2.28 | % | |||||||||||||||||||||||||||||||
(1) | CRM, our subsidiary in Argentina, is in default on $490 of its US Dollar-denominated debt; therefore we have excluded the debt from the table. |
PROPORTIONAL DEBT
Our consolidated debt at December 31, 2003 was $14,980, which represented the debt of all consolidated subsidiaries. We have minority partners in various consolidated wireless properties as well as significant investments in other wireless properties that are not consolidated for accounting pur-
poses due to the fact that we do not exercise control over those operations. The following table presents our proportionate share of total debt for all of our investments adjusting our share of debt in each of our consolidated subsidiaries or equity method investments based on ownership percentages.
Consolidated debt
|
$ | 14,980 | ||||
Less: debt attributable to minority partners
|
(129 | ) | ||||
Plus: debt associated with unconsolidated
investments (excluding shareholder loans)
|
1,682 | |||||
Proportional debt
|
$ | 16,533 | ||||
Debt attributable to minority partners represents our minority partners share of external debt included in our consolidated balance sheet at December 31, 2003. Debt associated with unconsolidated investments relates primarily to our interest in Cingular. This is non-recourse debt.
Operating Environment
DOMESTIC ECONOMIC TRENDS
On average, the economy of the nine-state region tends to closely track the US economy. Real gross domestic product (GDP) grew at an average annual rate of 2 percent in the first quarter of 2003, 3.1 percent in the second quarter, and 8.2 percent in the third quarter. The improvement in the economy was widespread, with business fixed investment spending, government purchases, personal consumption, and exports all registering strong gains. Nonagricultural employment increased in the second half of 2003, but at a very slow pace, and the unemployment rate was at a relatively high 5.7 percent at the end of the year. The economys momentum is expected to carry over into 2004 with GDP growth near 4.5 percent. Employment gains are expected to reduce the unemployment rate to near 5.2 percent by the end of 2004.
REGULATORY DEVELOPMENTS
The FCC regulates rates and other aspects of carriers provision of interstate (across states) telecommunications services while state regulatory commissions have jurisdiction over carriers provision of intrastate (within states) telecommunications services. Our future operations and financial results will be substantially influenced by developments in a number of federal and state regulatory proceedings. Adverse results in these proceedings could materially affect our revenues, expenses and ability to compete effectively against other telecommunications carriers.
Price regulation
The FCC regulates interstate prices using a price regulation plan, which limits aggregate price changes to the rate of inflation, minus a productivity offset, plus or minus other cost changes recognized by the FCC. The productivity factor can vary among services. Interstate prices have been decreasing over the last few years as a result of low inflation in the US economy.
BELLSOUTH CORPORATION
affirmed the PSCs decision. An appeal of this decision to the South Carolina Supreme Court is probable. If the Consumer Advocate eventually prevails, the case could be remanded to the PSC, which could, after considering evidence, order refunds to customers in South Carolina, which in the aggregate may be material to the company. At this time, we are unable to predict the outcome of this possible appeal and, therefore, cannot determine the impact, if any, this matter may have on future earnings.
Access charge reform
The FCC has favored access reform, through which the historical subsidy for residential local service contained in network access charges paid by long distance carriers is funded instead by the end-user, by universal service funds, or both. As a result of a May 2000, FCC order implementing access reform, we have reduced the interstate network access charges paid by long distance carriers and increased interstate subscriber line charges paid by end-users. These rate changes better align our cost recovery with the way in which we incur costs.
Universal service
Historically, network access charges paid by other carriers were set at levels that subsidized the cost of providing local residential service. The Telecommunications Act of 1996 requires that the FCC identify and remove the historical implicit local service subsidy from network access rates, arrange for a universal service fund to ensure the continuation of service to high-cost, low-income service areas and develop the arrangements for payments into that fund by all carriers. The FCCs universal service order established funding mechanisms for high-cost and low-income service areas. We began contributing to the new funds in 1998 and are recovering our contributions through increased interstate charges to retail end-users. We are receiving support for service to residents in Alabama, Kentucky and Mississippi.
FCC interconnection order
Under the Telecommunications Act of 1996, the FCC is obliged to consider the extent to which we must make elements of our network available to other providers of local service. The FCC can require access to proprietary network elements only when necessary. For non-proprietary elements, the FCC can order access only when failure to do so will impair the ability of the requesting carrier to provide services.
provide, or if the appeal, reconsideration or state decisions allow competitors greater ability to substitute unbundled elements for special access services, or contain other negative decisions, we could experience a material adverse effect on revenues and results of operation.
Other state regulatory matters
In each of our states, we are subject to performance measurement plans that measure our service performance to competitors against certain benchmarks and our own retail performance. When we do not meet the relevant standards, we make payments to the competitors or the States treasury. In some states, if we continuously fail to meet certain criteria, we also would suspend our marketing and sale of long distance services. We made payments in all states in 2002 and 2003, and likely will make payments in 2004. The plans are reviewed regularly for necessary changes.
PENSION AND RETIREE MEDICAL COSTS
In 2003 equity markets rebounded from recent declines, resulting in improvements to the funded status of our pension and other postretirement benefit plans which will translate into lower expense in 2004. Expense related to retiree medical costs in 2004 will also benefit from the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). BellSouth remeasured its obligation as of December 1, 2003 to incorporate the impact of the Act which resulted in a reduction to the accumulated benefit obligation of $572. Specific authoritative guidance on the accounting for the federal Medicare subsidy is pending and that guidance, when issued, could require BellSouth to change its estimated impact on 2004 results.
LATIN AMERICA ECONOMIC TRENDS
Economic conditions improved in much, but not all, of Latin America during 2003. Argentinas economy began to recover after four years of contraction, with the economic data available at the end of the year implying that real GDP grew 7 to 8 percent during 2003. The recovery is fragile, however, and the risk of instability in 2004 is significant.
FOREIGN RISKS
Our reporting currency is the US Dollar. However, most of our Latin America Group revenues are generated in the currencies of the countries in which we operate. In addition, many of our operations and equity investees hold US Dollar-denominated short- and long-term debt. The currencies of many Latin America countries have experienced substantial volatility and depreciation. Declines in the value of the local currencies in which we are paid relative to the US Dollar will cause local currency-denominated revenues and expenses to decrease in US Dollar terms and dollar-denominated assets and liabilities, as well as interest expense, to increase in local currency terms. 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.
BELLSOUTH CORPORATION
Economic, social and political conditions in Latin America are, in some countries, unfavorable and volatile, which have adversely affected our operations. Many of these conditions continued to exist at the end of 2003, particularly in Venezuela. However, economic conditions began to improve in much of Latin America in 2003. In particular, Argentinas currency rebounded 16% by the end of 2003 and several countries in the region are projected to have had modest GDP growth for 2003. Nonetheless, there are still significant economic risks in 2004.
COMPETITION
There are many competitive forces that impact our businesses. The Telecommunications Act of 1996 removed the regulatory barriers to local service competition in the wireline market and required incumbent carriers such as us to open our networks to other carriers. In the wireless market, the auction of PCS licenses has created as many as six new wireless competitors in domestic markets in addition to resellers, and the deregulation of international communications markets has introduced new global competitors to nearly all of our international businesses.
TECHNOLOGY
We are continually upgrading our networks with digital and optical technologies, making them capable of delivering a full complement of voice and data services. This modernization of the network is critical to our success in providing the data connectivity demanded by customers and to compete with fiber networks being constructed or currently utilized by start-ups and cable companies. This continuing effort will require investment of significant amounts of capital in the future.
LEGAL MATTERS
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 Q to our consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
See Note B to our consolidated financial statements for new accounting pronouncements.
Critical Accounting Policies
We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used, would have a material impact on our financial condition or results of operations.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
See Note G to our consolidated financial statements for more information regarding costs and assumptions for Property, Plant and Equipment.
Nature of estimates required
We use the group life method to depreciate the assets of our telephone subsidiary. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. Due to rapid changes in technology and new competitors, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. We also utilize studies performed by outside consultants to assist us in our determination. We have not made any changes to the lives of assets resulting in a material impact in the three years presented.
Sensitivity analysis
The effect of a one year change in the useful lives of our telephone plant accounts is shown below:
2004 Depreciation Expense | ||||
Higher/(Lower) | ||||
Increasing economic life by one year
|
$(250 | ) | ||
Decreasing economic life by one year
|
350 |
PENSIONS
See Note K to our consolidated financial statements for more information regarding costs associated with employee retirement benefits.
Nature of estimates required
The measurement of our pension obligations, costs and liabilities is dependent on a variety of assumptions including estimates of the present value of projected future pension payments to plan participants, consideration of the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions, if any. Additionally, the plan trustee conducts an independent valuation of the fair value of pension plan assets. During 2002, we reduced our estimated return on plan assets to 8.5% reflecting lower expected long-term market returns.
Assumptions and approach used
The assumptions in developing the required estimates include the following key factors:
| Discount rates | |
| Salary growth | |
| Retirement rates | |
| Inflation | |
| Expected return on plan assets | |
| Mortality rates |
The discount rate enables us to state expected future cash flows at a present value on the measurement date. We have little latitude in selecting this rate, as it is required to represent the market rate for high-quality fixed income investments. A lower discount rate increases the present value of benefit obligations. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. The expected return on plan assets reflects asset allocations, investments strategy and the views of investment managers and other large pension plan sponsors. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized into the income statement in future periods.
Sensitivity analysis
The effect of the change in the selected assumptions is shown below:
Percentage | December 31, 2003 | |||||
Point | Obligation | 2004 Expense | ||||
Assumption | Change | Higher/(Lower) | Higher/(Lower) | |||
Discount rate
|
+/- 0.5 pts. | $(452)/$470 | $15/$(18) | |||
Expected return on assets
|
+/- 1.0 pts. | | (155)/155 |
BELLSOUTH CORPORATION
OTHER POSTRETIREMENT BENEFITS
See Note K to our consolidated financial statements for more information regarding costs associated with postretirement benefits.
Nature of estimates required
We provide certain medical, dental and life insurance benefits to substantially all retired employees under various plans and accrue actuarially determined postretirement benefit costs as active employees earn these benefits. For postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation, the actuarial present value as of a date of all future benefits attributed under the terms of the postretirement benefit plan to employee service rendered to that date. The measurement of our obligations associated with postretirement benefits (e.g., retiree health care) is dependent on a variety of assumptions. This includes estimating the present value of projected future payments to plan participants and consideration of the likelihood of potential future events such as demographic experience. These assumptions may have an effect on the amount and timing of future payments. Additionally, the plan trustee conducts an independent valuation of the fair value of plan assets. For the periods presented we have adjusted the discount rate used to determine the obligation based on declining interest rates in the market.
Assumptions and approach used
The assumptions used in developing the required estimates include the following key factors:
| Discount rates | |
| Health care cost trends | |
| Retirement rates | |
| Inflation | |
| Expected return on plan assets | |
| Mortality rates |
The discount rate enables us to state expected future cash flows at a present value on the measurement date. We have little latitude in selecting this rate, as it is required to represent the market rate for high-quality fixed income investments. A lower discount rate increases the present value of benefit obligations. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Our inflation assumption is based on an evaluation of external market indicators. The expected return on plan assets reflects asset allocations, investments strategy and the views of investment managers and other large plan sponsors. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized into the income statement in future periods.
Sensitivity analysis
The effect of the indicated increase/decrease in the selected assumptions is shown below:
Percentage | December 31, 2003 | |||||
Point | Obligation | 2004 Expense | ||||
Assumption | Change | Higher/(Lower) | Higher/(Lower) | |||
Discount rate
|
+/- 0.5 pts. | $(362)/$384 | $(20)/$18 | |||
Health care cost trend
|
+/- 1.0 pts. | 487/(411) | 70/(58) |
OTHER LOSS CONTINGENCIES
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Other significant accounting polices, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies related to revenue recognition, stock-based compensation, uncollectible reserves and tax valuation allowances require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under re-examination by accounting standard setters and regulators. Although no specific conclusions reached by these standard setters appear likely to cause a material change in our accounting policies, outcomes cannot be predicted with confidence. Also see Note A to our consolidated financial statements, which discusses accounting policies that we have selected from acceptable alternatives.
Cautionary Language Concerning
Forward-Looking Statements
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.
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.
| a change in economic conditions in domestic or international markets where we operate or have material investments which could affect demand for our services; | |
| changes in US 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; | |
| continued pressures on the telecommunications industry from a financial, competitive and regulatory perspective; | |
| the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; | |
| changes in the federal and state regulations governing the terms on which we offer wholesale services to our competitors; | |
| continued successful penetration of the interLATA long distance market; | |
| the unwillingness of banks or other lenders to lend to our international operations or to restructure existing debt, particularly in Latin America; | |
| consolidation in the wireline and wireless industries in which we operate; | |
| higher than anticipated start-up costs or significant up-front investments associated with new business initiatives; | |
| the outcome of pending litigation; | |
| unanticipated higher capital spending from, or delays in, the deployment of new technologies; | |
| continued deterioration in foreign currencies relative to the US Dollar in foreign countries in which we operate, particularly in Latin America; | |
| the impact of terrorist attacks on our business; | |
| the impact and the success of the wireless joint venture with SBC, known as Cingular Wireless, including marketing and product development efforts, technological change, financial capacity and closing and integration of the pending acquisition of AT&T Wireless; and | |
| Cingular Wireless failure to realize, in the amounts and within the timeframe contemplated, the capital and expense synergies and other financial benefits expected from its proposed acquisition of AT&T Wireless as a result of technical, logistical, regulatory and other factors. |
BELLSOUTH CORPORATION
To the Shareholders of BellSouth Corporation:
These financial statements have been prepared in conformity with generally accepted accounting principles and have been audited by PricewaterhouseCoopers LLP, independent auditors, whose report is contained herein. The integrity and objectivity of the data in these financial statements, including estimates and judgments relating to matters not concluded by the end of the year, are the responsibility of the management of BellSouth. Management has also prepared all other information included therein unless indicated otherwise.
February 23, 2004
BELLSOUTH CORPORATION
In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and shareholders equity and comprehensive income present fairly, in all material respects, the financial position of BellSouth Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United State of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Cingular Wireless, LLC, an equity method investee. BellSouths consolidated financial statements include an investment of $3,618 million and $3,202 million as of December 31, 2003 and 2002, respectively, and equity method income of $408 million, $497 million and $675 million, respectively, for each of the three years in the period ended December 31, 2003. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Cingular Wireless, LLC, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
REPORT OF INDEPENDENT AUDITORS
BELLSOUTH CORPORATION
Board of Directors and Shareowners
We have audited the consolidated balance sheets of Cingular Wireless LLC as of December 31, 2002 and 2003, and the related consolidated statements of income, changes in members capital and cash flows for each of the three years in the period ended December 31, 2003 (not presented separately herein). These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
BELLSOUTH CORPORATION
For the years ended December 31, | ||||||||||||||||
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) | 2001 | 2002 | 2003 | |||||||||||||
Operating Revenues:
|
||||||||||||||||
Communications Group
|
$ | 18,984 | $ | 18,226 | $ | 18,255 | ||||||||||
Latin America Group
|
2,910 | 2,233 | 2,294 | |||||||||||||
Advertising and Publishing Group
|
2,073 | 1,921 | 2,033 | |||||||||||||
All other
|
163 | 60 | 53 | |||||||||||||
Total Operating Revenues
|
24,130 | 22,440 | 22,635 | |||||||||||||
Operating Expenses:
|
||||||||||||||||
Cost of services and products (excludes
depreciation
and amortization shown separately below) |
8,049 | 7,512 | 7,988 | |||||||||||||
Selling, general, and administrative expenses
|
4,803 | 4,542 | 4,353 | |||||||||||||
Depreciation and amortization
|
4,782 | 4,643 | 4,179 | |||||||||||||
Provisions for restructuring and asset impairments
|
358 | 997 | 209 | |||||||||||||
Total Operating Expenses
|
17,992 | 17,694 | 16,729 | |||||||||||||
Operating income
|
6,138 | 4,746 | 5,906 | |||||||||||||
Interest expense
|
1,315 | 1,188 | 1,048 | |||||||||||||
Net earnings of equity affiliates
|
465 | 80 | 465 | |||||||||||||
Gain (loss) on sale of operations
|
38 | 1,261 | (229 | ) | ||||||||||||
Foreign currency transaction gains (losses)
|
(81 | ) | (679 | ) | 159 | |||||||||||
Other income (expense), net
|
(1,431 | ) | 196 | 347 | ||||||||||||
Income Before Income Taxes and Cumulative Effect
of
Changes in Accounting Principle |
3,814 | 4,416 | 5,600 | |||||||||||||
Provision for Income Taxes
|
1,367 | 1,808 | 2,011 | |||||||||||||
Income Before Cumulative Effect of Changes in
Accounting Principle
|
2,447 | 2,608 | 3,589 | |||||||||||||
Cumulative Effect of Changes in Accounting
Principle, Net of Tax
|
| (1,285 | ) | 315 | ||||||||||||
Net Income
|
$ | 2,447 | $ | 1,323 | $ | 3,904 | ||||||||||
Weighted-Average Common Shares Outstanding:
|
||||||||||||||||
Basic
|
1,875 | 1,870 | 1,848 | |||||||||||||
Diluted
|
1,888 | 1,876 | 1,852 | |||||||||||||
Basic Earnings Per Share:
|
||||||||||||||||
Income Before Cumulative Effect of Changes in
Accounting Principle
|
$ | 1.31 | $ | 1.39 | $ | 1.94 | ||||||||||
Net Income
|
$ | 1.31 | $ | .71 | $ | 2.11 | ||||||||||
Diluted Earnings Per Share:
|
||||||||||||||||
Income Before Cumulative Effect of Changes in
Accounting Principle
|
$ | 1.30 | $ | 1.39 | $ | 1.94 | ||||||||||
Net Income
|
$ | 1.30 | $ | .71 | $ | 2.11 | ||||||||||
Dividends Declared Per Common Share
|
$ | .76 | $ | .79 | $ | .92 |
The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION
December 31, | ||||||||||
(IN MILLIONS) | 2002 | 2003 | ||||||||
ASSETS
|
||||||||||
Current Assets:
|
||||||||||
Cash and cash equivalents
|
$ | 2,482 | $ | 4,556 | ||||||
Accounts receivable, net of
allowance for uncollectibles of $476 and $438
|
4,129 | 2,928 | ||||||||
Material and supplies
|
313 | 375 | ||||||||
Other current assets
|
938 | 990 | ||||||||
Total current
assets
|
7,862 | 8,849 | ||||||||
Investments and advances
|
9,741 | 8,552 | ||||||||
Property, plant and equipment, net
|
23,445 | 23,807 | ||||||||
Deferred charges and other assets
|
5,726 | 5,855 | ||||||||
Goodwill
|
347 | 342 | ||||||||
Intangible assets, net
|
2,358 | 2,297 | ||||||||
Total assets
|
$ | 49,479 | $ | 49,702 | ||||||
LIABILITIES AND
SHAREHOLDERS EQUITY
|
||||||||||
Current Liabilities:
|
||||||||||
Debt maturing within one year
|
$ | 5,114 | $ | 3,491 | ||||||
Accounts payable
|
1,572 | 1,339 | ||||||||
Other current liabilities
|
2,897 | 3,628 | ||||||||
Total current
liabilities
|
9,583 | 8,458 | ||||||||
Long-term debt
|
12,283 | 11,489 | ||||||||
Noncurrent liabilities:
|
||||||||||
Deferred income taxes
|
4,452 | 5,349 | ||||||||
Other noncurrent liabilities
|
5,255 | 4,694 | ||||||||
Total
noncurrent liabilities
|
9,707 | 10,043 | ||||||||
Shareholders equity:
|
||||||||||
Common stock, $1 par value
(8,650 shares authorized;
1,860 and 1,830 shares outstanding) |
2,020 | 2,020 | ||||||||
Paid-in capital
|
7,546 | 7,729 | ||||||||
Retained earnings
|
14,531 | 16,540 | ||||||||
Accumulated other comprehensive
income (loss)
|
(740 | ) | (585 | ) | ||||||
Shares held in trust and
treasury
|
(5,372 | ) | (5,992 | ) | ||||||
Guarantee of ESOP debt
|
(79 | ) | | |||||||
Total
shareholders equity
|
17,906 | 19,712 | ||||||||
Total
liabilities and shareholders equity
|
$ | 49,479 | $ | 49,702 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION
For the years ended December 31, | |||||||||||||||
(IN MILLIONS) | 2001 | 2002 | 2003 | ||||||||||||
Cash Flows from Operating
Activities:
|
|||||||||||||||
Net Income
|
$ | 2,447 | $ | 1,323 | $ | 3,904 | |||||||||
Adjustments to net income:
|
|||||||||||||||
Depreciation and amortization
|
4,782 | 4,643 | 4,179 | ||||||||||||
Provision for uncollectibles
|
587 | 850 | 563 | ||||||||||||
Net losses (earnings) of equity affiliates
|
(465 | ) | (80 | ) | (465 | ) | |||||||||
Dividends received from equity affiliates
|
369 | | | ||||||||||||
Minority interests in income (loss) of
subsidiaries
|
25 | (74 | ) | 47 | |||||||||||
Deferred income taxes and investment tax credits
|
(244 | ) | 1,179 | 958 | |||||||||||
Net losses (gains) on sale or impairment of
equity securities
|
1,937 | 349 | (42 | ) | |||||||||||
Pension income
|
(797 | ) | (826 | ) | (535 | ) | |||||||||
Pension settlement losses
|
| 167 | 47 | ||||||||||||
Stock-based compensation expense
|
215 | 171 | 137 | ||||||||||||
Curtailment and termination benefit charges
|
97 | 60 | | ||||||||||||
Unbilled receivable adjustment
|
| 163 | | ||||||||||||
Asset impairments
|
89 | 302 | 52 | ||||||||||||
Foreign currency transaction (gains) losses
|
81 | 679 | (159 | ) | |||||||||||
Cumulative effect of changes in accounting
principles
|
| 1,285 | (539 | ) | |||||||||||
(Gain) loss on sale of operations
|
(38 | ) | (1,261 | ) | 229 | ||||||||||
Net change in:
|
|||||||||||||||
Accounts receivable and other current assets
|
(756 | ) | (204 | ) | (213 | ) | |||||||||
Accounts payable and other current liabilities
|
(452 | ) | (463 | ) | 280 | ||||||||||
Deferred charges and other assets
|
(22 | ) | 30 | 290 | |||||||||||
Other liabilities and deferred credits
|
41 | 4 | (284 | ) | |||||||||||
Other reconciling items, net
|
102 | (51 | ) | 80 | |||||||||||
Net cash provided by operating activities
|
7,998 | 8,246 | 8,529 | ||||||||||||
Cash Flows from Investing
Activities:
|
|||||||||||||||
Capital expenditures
|
(5,997 | ) | (3,785 | ) | (3,200 | ) | |||||||||
Investments in and advances to equity affiliates
|
(2,032 | ) | (309 | ) | | ||||||||||
Investments in debt and equity securities
|
(319 | ) | (36 | ) | (261 | ) | |||||||||
Proceeds from sale of debt and equity securities
|
1,210 | 1,473 | 166 | ||||||||||||
Proceeds from sale of operations
|
47 | | 70 | ||||||||||||
Purchase of short-term investments
|
(77 | ) | | | |||||||||||
Proceeds from disposition of short-term
investments
|
96 | 2 | | ||||||||||||
Proceeds from repayment of loans and advances
|
17 | 885 | 1,899 | ||||||||||||
Settlement of derivatives on advances
|
| 85 | (352 | ) | |||||||||||
Other investing activities, net
|
16 | (22 | ) | (20 | ) | ||||||||||
Net cash used for investing activities
|
(7,039 | ) | (1,707 | ) | (1,698 | ) | |||||||||
Cash Flows from Financing
Activities:
|
|||||||||||||||
Net repayments of short-term debt
|
(3,990 | ) | (1,408 | ) | (427 | ) | |||||||||
Proceeds from long-term debt
|
4,603 | 17 | 1 | ||||||||||||
Repayments of long-term debt
|
(759 | ) | (1,223 | ) | (1,932 | ) | |||||||||
Dividends paid
|
(1,424 | ) | (1,460 | ) | (1,608 | ) | |||||||||
Purchase of treasury shares
|
| (591 | ) | (858 | ) | ||||||||||
Other financing activities, net
|
142 | 16 | 67 | ||||||||||||
Net cash used by financing activities
|
(1,428 | ) | (4,649 | ) | (4,757 | ) | |||||||||
Net (decrease) increase in cash and cash
equivalents
|
(469 | ) | 1,890 | 2,074 | |||||||||||
Cash and cash equivalents at beginning of period
|
1,061 | 592 | 2,482 | ||||||||||||
Cash and cash equivalents at end of period
|
$ | 592 | $ | 2,482 | $ | 4,556 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION
Number of Shares | Amount | ||||||||||||||||||||||||||||||||||||||
Accum. | |||||||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||||||
Shares | Compre- | Shares | Guar- | ||||||||||||||||||||||||||||||||||||
Held in | hensive | Held in | antee | ||||||||||||||||||||||||||||||||||||
Common | Trust and | Common | Paid-in | Retained | Income | Trust and | of ESOP | ||||||||||||||||||||||||||||||||
(IN MILLIONS) | Stock | Treasury(a) | Stock | Capital | Earnings | (Loss) | Treasury(a) | Debt | Total | ||||||||||||||||||||||||||||||
Balance at December 31,
2000
|
2,020 | (148 | ) | $ | 2,020 | $ | 7,030 | $ | 13,865 | $ | (488 | ) | $ | (5,222 | ) | $ | (212 | ) | $ | 16,993 | |||||||||||||||||||
Net Income
|
2,447 | 2,447 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax
|
|||||||||||||||||||||||||||||||||||||||
Foreign currency translation
adjustment(b)
|
(30 | ) | (30 | ) | |||||||||||||||||||||||||||||||||||
Net unrealized losses on securities(c)
|
(277 | ) | (277 | ) | |||||||||||||||||||||||||||||||||||
Adjustments for other-than- temporary losses
included in income
|
595 | 595 | |||||||||||||||||||||||||||||||||||||
Net unrealized gains on derivatives
|
(71 | ) | (71 | ) | |||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment
|
(23 | ) | (23 | ) | |||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income
|
2,641 | ||||||||||||||||||||||||||||||||||||||
Dividends declared
|
(1,424 | ) | (1,424 | ) | |||||||||||||||||||||||||||||||||||
Share issuances for employee
benefit plans
|
5 | (4 | ) | (85 | ) | 230 | 141 | ||||||||||||||||||||||||||||||||
Purchase of stock by grantor
trusts
|
(4 | ) | (4 | ) | |||||||||||||||||||||||||||||||||||
Stock-based compensation
|
215 | 215 | |||||||||||||||||||||||||||||||||||||
Tax benefit related to stock
options
|
127 | 127 | |||||||||||||||||||||||||||||||||||||
ESOP activities and related tax
benefit
|
2 | 67 | 69 | ||||||||||||||||||||||||||||||||||||
Balance at December 31,
2001
|
2,020 | (143 | ) | $ | 2,020 | $ | 7,368 | $ | 14,805 | $ | (294 | ) | $ | (4,996 | ) | $ | (145 | ) | $ | 18,758 | |||||||||||||||||||
Net Income
|
1,323 | 1,323 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax
|
|||||||||||||||||||||||||||||||||||||||
Foreign currency translation
adjustment(b)
|
(430 | ) | (430 | ) | |||||||||||||||||||||||||||||||||||
Net unrealized losses on securities(c)
|
(38 | ) | (38 | ) | |||||||||||||||||||||||||||||||||||
Net unrealized gains on derivatives(d)
|
13 | 13 | |||||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment
|
9 | 9 | |||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income
|
877 | ||||||||||||||||||||||||||||||||||||||
Dividends declared
|
(1,477 | ) | (1,477 | ) | |||||||||||||||||||||||||||||||||||
Share issuances for employee
benefit plans
|
5 | (33 | ) | (104 | ) | 197 | 60 | ||||||||||||||||||||||||||||||||
Purchase of treasury stock
|
(22 | ) | (591 | ) | (591 | ) | |||||||||||||||||||||||||||||||||
Purchase of stock by grantor
trusts
|
(18 | ) | 18 | | |||||||||||||||||||||||||||||||||||
Stock-based compensation
|
171 | 171 | |||||||||||||||||||||||||||||||||||||
Tax benefit related to stock
options
|
40 | 40 | |||||||||||||||||||||||||||||||||||||
ESOP activities and related tax
benefit
|
2 | 66 | 68 | ||||||||||||||||||||||||||||||||||||
Balance at December 31,
2002
|
2,020 | (160 | ) | $ | 2,020 | $ | 7,546 | $ | 14,531 | $ | (740 | ) | $ | (5,372 | ) | $ | (79 | ) | $ | 17,906 | |||||||||||||||||||
Net Income
|
3,904 | 3,904 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax
|
|||||||||||||||||||||||||||||||||||||||
Foreign currency translation
adjustment(b)
|
165 | 165 | |||||||||||||||||||||||||||||||||||||
Net unrealized losses on securities(c)
|
7 | 7 | |||||||||||||||||||||||||||||||||||||
Net unrealized gains on derivatives(d)
|
1 | 1 | |||||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment
|
(18 | ) | (18 | ) | |||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income
|
4,059 | ||||||||||||||||||||||||||||||||||||||
Dividends declared
|
(1,696 | ) | (1,696 | ) | |||||||||||||||||||||||||||||||||||
Share issuances for employee
benefit plans
|
5 | (19 | ) | (89 | ) | 169 | 61 | ||||||||||||||||||||||||||||||||
Purchase of treasury stock
|
(35 | ) | (858 | ) | (858 | ) | |||||||||||||||||||||||||||||||||
Purchases and sales of treasury
stock with grantor trusts
|
43 | (112 | ) | 69 | | ||||||||||||||||||||||||||||||||||
Stock-based compensation
|
137 | 137 | |||||||||||||||||||||||||||||||||||||
Tax benefit related to stock
options
|
22 | 22 | |||||||||||||||||||||||||||||||||||||
ESOP activities and related tax
benefit
|
2 | 79 | 81 | ||||||||||||||||||||||||||||||||||||
Balance at December 31,
2003
|
2,020 | (190 | ) | $ | 2,020 | $ | 7,729 | $ | 16,540 | $ | (585 | ) | $ | (5,992 | ) | $ | | 19,712 | |||||||||||||||||||||
(a) | Trust and treasury shares are not considered to be outstanding for financial reporting purposes. As of December 31, 2003, there were approximately 37 shares held in trust and 153 shares held in treasury. | |
(b) | Net unrealized foreign currency translation adjustments include realized gains of $1 in 2001 and $96 in 2002 and realized losses of $268 in 2003. | |
(c) | Net unrealized losses on securities include adjustments for realized losses of $129 in 2001, realized gains of $19 in 2002, and realized gains of $26 in 2003. | |
(d) | Net unrealized gains on derivatives include an adjustment for realized gains of $33 in 2002 and $20 in 2003. |
The accompanying notes are an integral part of these consolidated financial statements.
BELLSOUTH CORPORATION
In this report, BellSouth Corporation and its subsidiaries are referred to as we or BellSouth.
ORGANIZATION
We are an international telecommunications company headquartered in Atlanta, Georgia. For management purposes, our operations are organized into four reportable segments: Communications Group; Domestic Wireless; Latin America Group; and Advertising and Publishing Group.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of BellSouths wholly-owned subsidiaries and subsidiaries in which we have a controlling financial interest. Investments in businesses that we do not control, but have the ability to exercise significant influence over operations and financial policies, are accounted for using the equity method. We report our results on a calendar-year basis, except for our international operations that we report on a one-month lag basis to facilitate timely reporting of the consolidated results of BellSouth. All significant intercompany transactions and accounts have been eliminated. We own an approximate 40% economic interest in Cingular Wireless, the nations second largest wireless company, and share control with SBC Communications. Accordingly, we account for this investment under the equity method. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current years presentation.
USE OF ESTIMATES
Our consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (US GAAP). We are required to make estimates and assumptions that affect amounts reported in our financial statements and the accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Investments with an original maturity of over three months to one year are not considered cash equivalents and are included as other current assets in the consolidated balance sheets. Interest income on cash equivalents and temporary cash investments was $82 for 2001, $95 for 2002, and $76 for 2003.
MATERIAL AND SUPPLIES
New and reusable material held at our telephone subsidiary is carried in inventory, principally at average original cost, except that specific costs are used in the case of large individual items. Non-reusable material is carried at estimated salvage value. Inventories of our other subsidiaries are stated at the lower of cost or market, with cost determined principally on either an average cost or first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
The investment in property, plant and equipment is stated at original cost. For plant dedicated to providing regulated telecommunications services, depreciation is based on the group remaining life method of depreciation and straight-line rates determined on the basis of equal life groups of certain categories of telephone plant acquired in a given year. This method requires the periodic revision of depreciation rates. When depreciable telephone plant is disposed of, the original cost less any net salvage proceeds is charged to accumulated depreciation. We perform inventories of the Telephone Plant to verify the existence of these assets and reconcile these inventories to our property records. In addition, the inventory reconciliation results allow us to correct our records for investment moved from one location to another and to account for delayed retirements. The cost of other property, plant and equipment is depreciated using either straight-line or accelerated methods over the estimated useful lives of the assets. Depreciation of property, plant and equipment was $4,195 for 2001, $4,039 for 2002, and $3,546 for 2003.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets, including property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The communications industry is rapidly evolving and therefore it is reasonably possible that our long-lived assets could become impaired as a result of technological or
other industry changes. For assets we intend to hold for use, if the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, we recognize a loss for the difference between the fair value and carrying value of the asset. For assets we intend to dispose of, we recognize a loss for the amount that the estimated fair value, less costs to sell, is less than the carrying value of the assets. We principally use the discounted cash flow method to estimate the fair value of long-lived assets.
FOREIGN CURRENCY
Assets and liabilities of foreign subsidiaries and equity investees with a functional currency other than US Dollars are translated into US Dollars at exchange rates in effect at the end of the reporting period. Foreign entity revenues and expenses are translated into US Dollars at the average rates that prevailed during the period. The resulting net translation gains and losses are reported as foreign currency translation adjustments in shareholders equity as a component of accumulated other comprehensive income (loss). Operations in countries with hyperinflationary economies consider the US Dollar the functional currency. Foreign currency translation gains (losses) of $1 in 2001, $96 in 2002 and $(268) in 2003 were recognized in gains (losses) on sale of operations.
DERIVATIVE FINANCIAL INSTRUMENTS
We generally enter into derivative financial instruments only for hedging purposes. In hedging the exposure to variable cash flows or foreign currency impacts on forecasted transactions, deferral accounting is applied when the derivative reduces the risk of the underlying hedged item effectively as a result of high inverse correlation with the value of the underlying exposure. If a derivative instrument either initially fails or later ceases to meet the criteria for deferral accounting, any subsequent gains or losses are recognized currently in income. In hedging the exposure to changes in the fair value of a recognized asset or liability, the change in fair value of both the derivative financial instrument and the hedged item are recognized currently in income.
REVENUE RECOGNITION
Revenues are recognized when earned. Certain revenues derived from local telephone and wireless services are billed monthly in advance and are recognized the following month when services are provided. Revenues derived from other telecommunications services, principally network access, long distance and wireless airtime usage, are recognized monthly as services are provided. Marketing incentives, including cash coupons, package discounts and free service are recognized as revenue reductions and are accrued in the period the service is provided. With respect to coupons, accruals are based on historical redemption experience. While cash is generally received at the time of sale, revenues from installation and activation activities are deferred and recognized over the life of the customer relationship, which is generally four years. Print advertising and publishing revenues and related directory costs are recognized ratably over the life of the related directory, generally 12 months. Allowances for uncollectible accounts are determined based on analysis of history and future expectations. The provision for such uncollectible accounts was $587 for 2001, $850 for 2002, and $563 for 2003.
ADVERTISING
We expense advertising costs as they are incurred. These expenses include production, media and other promotional and sponsorship costs. Our total advertising expense was $268 for 2001, $309 for 2002, and $412 for 2003.
INCOME TAXES
The consolidated balance sheets reflect deferred tax balances associated with the anticipated tax impact of future income or deductions implicit in the consolidated balance sheets in the form of temporary differences. Temporary differences primarily result from the use of accelerated methods and shorter lives in computing depreciation for tax purposes.
EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted-average number of common shares outstanding during each year. Diluted earnings per share are 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
BELLSOUTH CORPORATION
reconciliation of the weighted-average share amounts (in millions) used in calculating earnings per share:
2001 | 2002 | 2003 | ||||||||||||
Basic common shares outstanding
|
1,875 | 1,870 | 1,848 | |||||||||||
Incremental shares from stock options and benefit
plans
|
13 | 6 | 4 | |||||||||||
Diluted common shares outstanding
|
1,888 | 1,876 | 1,852 | |||||||||||
GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist primarily of capitalized software, wireless licenses and customer related intangibles. Goodwill represents the excess of consideration paid over the fair value of net assets acquired in purchase business combinations. In 2001, goodwill, embedded goodwill related to equity investments and certain wireless licenses were amortized using the straight-line method over periods of benefit that did not exceed 40 years. Effective with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 as of January 1, 2002, no amortization was recognized on these assets in 2002 and 2003. Customer-related intangible assets represent values placed on customer lists, contracts and non-contractual relationships of acquired businesses and are amortized over periods up to eight years using the sum-of-the-years digits method. Capitalized software costs are being amortized ratably over periods of three to five years. Amortization of goodwill and intangibles was $587 for 2001, $604 for 2002, and $633 for 2003.
Note B | Recently Issued Accounting Pronouncements |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This standard amends and clarifies the accounting for and definition of derivative instruments and hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. This Statement was effective beginning July 1, 2003.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 clarified the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. We have completed an evaluation of this guidance as it applies to our business and concluded that we do not have business arrangements with entities, including our interest in Cingular Wireless, that qualify as a variable interest entity as described in FIN 46. Accordingly, these entities did not qualify for consolidation under FIN 46 and our accounting treatment of these entities remains unchanged.
REVENUE RECOGNITION FOR MULTI-ELEMENT DELIVERABLES
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Element Deliverables. The issue addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. The issue also supersedes certain guidance set forth in Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. The final consensus is applicable to agreements entered into in quarters beginning after June 15, 2003, with early adoption permitted. Additionally, companies are permitted to apply the consensus guidance to all existing arrangements as a cumulative effect of a change in accounting principle. We adopted this new pronouncement effective July 1, 2003 on a prospective basis. The impact of adoption did not have a material impact on our results of operations, financial position and cash flows.
EXIT COSTS AND DISPOSAL ACTIVITIES
In January 2003, we adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3). The principal difference between SFAS No. 146 and EITF 94-3 relates to SFAS No. 146s requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as generally defined in EITF 94-3 was recognized at the date of an entitys commitment to an exit plan.
Note C | Changes in Accounting Principle |
ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). This statement 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 part of the book value of the long-lived asset. SFAS No. 143 also precludes companies from accruing removal costs that exceed gross salvage in their depreciation rates and accumulated depreciation balances if there is no legal obligation to remove the long-lived assets. For our outside plant accounts, such as telephone poles and cable, estimated cost of removal does exceed gross salvage.
REVENUE RECOGNITION FOR PUBLISHING REVENUES
Effective January 1, 2003, we changed our method for recognizing revenues and expenses related to our directory publishing business from the publication and delivery method to the deferral method. Under the publication and delivery method, we recognized 100% of the revenues and direct expenses at the time the directories were published and delivered to end-users. Under the deferral method,
BELLSOUTH CORPORATION
revenues and direct expenses are recognized ratably over the life of the related directory, generally 12 months. The change in accounting method is reflected in the income statement as a cumulative effect of accounting change adjustment and on the balance sheet as a decrease to accounts receivable of $845, increase to other current assets of $166, increase to current liabilities of $129, and a decrease to deferred income taxes of $307. The cumulative effect of the change resulted in a decrease to net income of $501 for 2003. Absent this one-time adjustment, the change in accounting did not materially affect our annual results.
PRO FORMA IMPACT OF ACCOUNTING CHANGES
The following table presents our 2002 and 2001 results adjusted to reflect the changes in accounting for asset retirement obligations and revenue recognition for publishing revenues:
For the Year Ended December 31, | ||||||||||||||||||||||||
SFAS No. | Directory | 2001 | 2002 | |||||||||||||||||||||
2001 | 143 | Publishing | Pro Forma | Pro Forma | ||||||||||||||||||||
(As reported) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||
Total Operating Revenue
|
$ | 24,130 | $ | | $ | (1 | ) | $ | 24,129 | $ | 22,489 | |||||||||||||
Operating Expenses
|
||||||||||||||||||||||||
Cost of services and products
|
8,049 | 34 | 29 | 8,112 | 7,642 | |||||||||||||||||||
Selling, general, and administrative expenses
|
4,803 | | 12 | 4,815 | 4,494 | |||||||||||||||||||
Depreciation and amortization
|
4,782 | (138 | ) | | 4,644 | 4,510 | ||||||||||||||||||
Provision for restructuring and asset impairments
|
358 | | | 358 | 997 | |||||||||||||||||||
Total operating expenses
|
17,992 | (104 | ) | 41 | 17,929 | 17,643 | ||||||||||||||||||
Operating income
|
6,138 | 104 | (42 | ) | 6,200 | 4,846 | ||||||||||||||||||
Non-operating income (expense), net
|
(2,324 | ) | | | (2,324 | ) | (330 | ) | ||||||||||||||||
Income before income taxes and cumulative effect
of changes in accounting principle
|
3,814 | 104 | (42 | ) | 3,876 | 4,516 | ||||||||||||||||||
Provision for income taxes
|
1,367 | 40 | (15 | ) | 1,392 | 1,847 | ||||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
2,447 | 64 | (27 | ) | 2,484 | 2,669 | ||||||||||||||||||
Cumulative effect of changes in accounting
principle, net of tax
|
| | | | (1,285 | ) | ||||||||||||||||||
Net Income
|
$ | 2,447 | $ | 64 | $ | (27 | ) | $ | 2,484 | $ | 1,384 | |||||||||||||
Basic earnings per share*:
|
||||||||||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
$ | 1.31 | $ | 0.03 | $ | (0.01 | ) | $ | 1.32 | $ | 1.43 | |||||||||||||
Net income
|
$ | 1.31 | $ | 0.03 | $ | (0.01 | ) | $ | 1.32 | $ | 0.74 | |||||||||||||
Diluted earnings per share*:
|
||||||||||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
$ | 1.30 | $ | 0.03 | $ | (0.01 | ) | $ | 1.32 | $ | 1.42 | |||||||||||||
Net income
|
$ | 1.30 | $ | 0.03 | $ | (0.01 | ) | $ | 1.32 | $ | 0.74 |
For the Year Ended December 31, | ||||||||||||||||||||||
SFAS No. | Directory | 2002 Pro | ||||||||||||||||||||
2002 | 143 | Publishing | Forma | |||||||||||||||||||
(As reported) | (Unaudited) | (Unaudited) | (Unaudited) | 2003 | ||||||||||||||||||
Total Operating Revenue
|
$ | 22,440 | $ | | $ | 49 | $ | 22,489 | $ | 22,635 | ||||||||||||
Operating Expenses
|
||||||||||||||||||||||
Cost of services and products
|
7,512 | 32 | 37 | 7,581 | 7,988 | |||||||||||||||||
Selling, general, and administrative expenses
|
4,542 | | 13 | 4,555 | 4,353 | |||||||||||||||||
Depreciation and amortization
|
4,643 | (133 | ) | | 4,510 | 4,179 | ||||||||||||||||
Provision for restructuring and asset impairments
|
997 | | | 997 | 209 | |||||||||||||||||
Total operating expenses
|
17,694 | (101 | ) | 50 | 17,643 | 16,729 | ||||||||||||||||
Operating income
|
4,746 | 101 | (1 | ) | 4,846 | 5,906 | ||||||||||||||||
Non-operating income (expense), net
|
(330 | ) | | | (330 | ) | (306 | ) | ||||||||||||||
Income before income taxes and cumulative effect
of changes in accounting principle
|
4,416 | 101 | (1 | ) | 4,516 | 5,600 | ||||||||||||||||
Provision for income taxes
|
1,808 | 39 | | 1,847 | 2,011 | |||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
2,608 | 62 | (1 | ) | 2,669 | 3,589 | ||||||||||||||||
Cumulative effect of changes in accounting
principle, net of tax
|
(1,285 | ) | | | (1,285 | ) | 315 | |||||||||||||||
Net Income
|
$ | 1,323 | $ | 62 | $ | (1 | ) | $ | 1,384 | $ | 3,904 | |||||||||||
Basic earnings per share*:
|
||||||||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
$ | 1.39 | $ | 0.03 | $ | 0.00 | $ | 1.43 | $ | 1.94 | ||||||||||||
Net income
|
$ | 0.71 | $ | 0.03 | $ | 0.00 | $ | 0.74 | $ | 2.11 | ||||||||||||
Diluted earnings per share*:
|
||||||||||||||||||||||
Income before cumulative effect of changes in
accounting principle
|
$ | 1.39 | $ | 0.03 | $ | 0.00 | $ | 1.42 | $ | 1.94 | ||||||||||||
Net income
|
$ | 0.71 | $ | 0.03 | $ | 0.00 | $ | 0.74 | $ | 2.11 |
*Earnings per share amounts do not sum due to rounding.
Note D Investments and Advances
We hold investments in various domestic and international partnerships and ventures that are accounted for under the equity method. We also hold investments in equity securities that are accounted for under the cost method. Investments and advances at December 31 consist of the following:
2002 | 2003 | |||||||
Investments accounted for under the equity method
|
$ | 3,502 | $ | 3,988 | ||||
Investments accounted for under the cost method
|
134 | 382 | ||||||
Advances to and notes receivable
|
5,772 | 3,932 | ||||||
Other investments
|
333 | 250 | ||||||
Investments and advances
|
$ | 9,741 | $ | 8,552 | ||||
EQUITY METHOD INVESTMENTS
Ownership in equity investments at December 31 is as follows:
2002 | 2003 | |||||||||||||||
Ownership | Investment | Ownership | Investment | |||||||||||||
Percentage | Balance | Percentage | Balance | |||||||||||||
Abiatar (Uruguay)
|
46.0% | $ | 25 | 46.0% | $ | 26 | ||||||||||
BellSouth Guatemala(1)
|
60.0% | 10 | 60.0% | 7 | ||||||||||||
BellSouth Panama
|
43.7% | 73 | 43.7% | 86 | ||||||||||||
BCP São Paulo (Brazil)
|
45.4% | | | | ||||||||||||
BSE Northeast (Brazil)
|
47.6% | | | | ||||||||||||
Cellcom (Israel)
|
34.8% | 144 | 34.8% | 191 | ||||||||||||
Cingular Wireless
|
40.0% | 3,202 | 40.0% | 3,618 | ||||||||||||
Sonofon (Denmark)
|
46.5% | 39 | 46.5% | 57 | ||||||||||||
Other
|
| 9 | | 3 | ||||||||||||
$ | 3,502 | $ | 3,988 | |||||||||||||
(1) | This investment is accounted for under the equity method due to the existence of significant minority rights that limit our ability to exercise unilateral control over the operation. |
Cingular
We own an approximate 40% economic interest in Cingular Wireless, and share joint control of the venture with SBC Communications, Inc. The following table presents 100% of
BELLSOUTH CORPORATION
Cingulars assets, liabilities, and results of operations for the years ended December 31:
2002 | 2003 | |||||||||
Balance Sheet
Information:
|
||||||||||
Current assets
|
$ | 2,731 | $ | 3,300 | ||||||
Noncurrent assets
|
$ | 21,391 | $ | 22,226 | ||||||
Current liabilities
|
$ | 2,787 | $ | 3,187 |