Br.small Co.2 Regulatory News (BSC)

25 Oct 2006 07:00

Bellsouth Corp24 October 2006 For Immediate Release BellSouth Reports Third Quarter Earnings • Continued growth in earnings per share• DSL customers total 3.4 million• Strong revenue growth and margins at Cingular• Cingular customers total 58.7 million ATLANTA, Oct. 24, 2006 - BellSouth Corporation (NYSE: BLS) announced thirdquarter 2006 earnings per share (EPS) from continuing operations of 58 cents, up31.8 percent compared to the third quarter of 2005. Normalized EPS fromcontinuing operations of 65 cents increased 27.5 percent compared to the thirdquarter of 2005. A list of normalizing items is provided in the table below. Normalized Results from Continuing Operations Normalized results from continuing operations include BellSouth's 40 percentproportionate share of Cingular's revenues and expenses that are recognized asequity earnings for purposes of GAAP reporting. Normalized results exclude theimpact of significant nonoperational or nonrecurring items. Normalized operating income before depreciation and amortization (OIBDA) grew to$3.6 billion representing a 40.1 percent OIBDA margin. Revenue growth and costcontainment drove OIBDA margin up 290 basis points year-over-year and 140 basispoints sequentially. Normalized revenue increased 5.4 percent year-over-yeardriven by growth in wireless, wireline and yellow pages. Normalized revenueswere nearly $9.0 billion for the third quarter of 2006. Normalized net incomeof $1.2 billion grew 25.8 percent compared to the third quarter of 2005. Reported Results from Continuing Operations For the third quarter of 2006, BellSouth's consolidated reported revenues fromcontinuing operations were $5.2 billion, up 2.9 percent compared to the samequarter of 2005. Income from continuing operations was approximately $1.1billion, up 29.6 percent compared to the same quarter of the previous year. For the third quarter of 2006, operating free cash flow (defined as net cashprovided by operating activities less capital expenditures) was $976 million.Capital expenditures for the quarter were $730 million, a decline compared tothe first and second quarters of 2006. Year-to-date capital expenditures were$2.8 billion and included $265 million in expenditures for Hurricane Katrinarestoration efforts. Proposed Merger with AT&T On March 5, 2006, BellSouth and AT&T announced an agreement to merge the twocompanies in a combination that will create a more effective and efficientprovider of communications services. BellSouth and AT&T firmly believe that noconditions on this merger are necessary for this combination to be a publicbenefit. Nevertheless, in response to an inquiry from the FederalCommunications Commission staff, AT&T indicated that, in the interest offacilitating the speediest possible approval of the merger, it would not objectto the imposition of certain merger conditions. The FCC has scheduled an openmeeting for Nov. 3, 2006 to consider the merger in the event the Commission hasnot completed its review prior to that date. Communications Group In the third quarter of 2006, Communications Group revenues were $4.7 billion, a2.4 percent increase over the third quarter of 2005. Adjusting for the one-timecustomer credits of $44 million issued during the third quarter of 2005, revenuegrowth was 1.4 percent. Revenue growth in mass-market broadband and longdistance services and growth in emerging data services offset revenue declinesfrom traditional access line services. Revenue growth, increased penetration inbroadband and long distance services and continued focus on cost containmentdrove Communications Group operating margin to 25.7 percent, an increase of 340basis points year-over-year and 80 basis points sequentially. Network data revenues exceeded $1.3 billion, a 12.8 percent increase over thethird quarter of 2005, due to improvements in both retail and wholesale dataservices. Retail data revenues grew 19.5 percent year-over-year driven byretail DSL revenues and continued momentum from emerging retail data services.Wholesale data revenues grew 3.3 percent as growth in wireless transport morethan offset declines in general transport services. During the third quarter, BellSouth added 176,000 new DSL customers, reaching atotal of more than 3.4 million broadband DSL customers. The vast majority ofnew customers chose BellSouth's higher speed offers -- FastAccess(R) DSL Xtremeand FastAccess(R) DSL Xtreme 6.0. Year-over-year the average revenue per uniton DSL was up slightly as improved customer mix offset revenue impacts from thediscontinuance of regulatory recovery fees. BellSouth customers continued to choose more services and save with multipleservice discounts by adding long distance and DIRECTV(R) service to theirBellSouth Answers(R) bundles. During the third quarter, BellSouth added 118,000long distance subscribers. At the end of the third quarter, BellSouth served7.6 million long distance customers representing approximately 63 percent of itsmass-market customer base. Nearly 65,000 customers added DIRECTV(R) service totheir bundle, resulting in a total of 756,000 customers who included DIRECTV(R)service in their BellSouth Answers(R) bundles. As of Sept. 30, 2006, total access lines were 19.0 million down 6.9 percentyear-over-year. For the quarter, total access lines declined 301,000. Retailresidential access lines declined 135,000 reflecting losses to wirelesssubstitution and cable telephony service. Retail small business access linegains were 20,000, offset by a decline in retail large business access lines of13,000 lines. Wholesale lines declined 174,000 compared to June 30, 2006. Cingular Wireless Cingular Wireless was a significant contributor to BellSouth's results withstrong revenue growth and robust margin expansion. The nation's largestwireless provider delivered strong customer growth, improved ARPU trends, andcompleted the integration of its GSM network. During the quarter, Cingular added 1.4 million new customers, totaling 58.7million customers at the end of September. Postpaid customer additions were928,000. Overall monthly churn for the quarter was 1.8 percent and postpaidchurn remained at 1.5 percent. In the third quarter of 2006, Cingular's revenues were $9.6 billion, increasing9.2 percent over the same quarter a year ago and up 3.6 percent sequentially.Service revenues, which exclude revenues from sales of handsets and accessories,were $8.7 billion up 12.2 percent year-over-year and 4.4 percent sequentially. Cingular's average revenue per user (ARPU) was $49.76. This compares to $49.65in the same quarter last year and $48.84 in the second quarter of 2006. ARPUfrom data services continued its robust growth in the third quarter of 2006,increasing 46.0 percent to $6.32 year-over-year and up 9.5 percent sequentially. For the third quarter of 2006, Cingular accelerated its margin improvementdriven by operational improvements and successful merger integration activities.Normalized operating income before depreciation and amortization (OIBDA)margin was 35.6 percent, up 400 basis points compared to the third quarter of2005 and up 300 basis points sequentially. This performance was driven byrevenue acceleration from customer growth and ARPU stabilization coupled withoperational and merger related synergies. During the third quarter, Cingular completed its GSM network integration. With45,000 cell sites around the country, customers benefit from improved coverageand call quality while the company benefits from lower churn. In addition, thecompany continued its aggressive deployment of 3G UMTS/HSDPA network throughoutthe country. The 3G service is available in 115 cities (with populations of 100thousand or more) in and around 52 major markets in 28 states and the Districtof Columbia. Advertising & Publishing Advertising & Publishing maintained its momentum growing revenue 5.5 percent to$537 million. Adjusting for one-time customer credits issued in the thirdquarter 2005 for Hurricane Katrina, revenue growth was 4.1 percent. Theseresults reflect continued market penetration of online advertising and growth inprint advertising revenue. Operating margins were 45.6 percent for the thirdquarter of 2006. Normalizing Items For the third quarter of 2006, the difference between reported (GAAP) EPS fromcontinuing operations and normalized EPS is shown in the following table. Fullincome statement reconciliation is included in the attached exhibits. 3Q06 GAAP Diluted EPS - Income from continuing operations $0.58 Wireless merger integration costs $0.02Wireless merger intangible amortization $0.04AT&T Merger Costs $0.01 Normalized Diluted EPS - Income from continuing operations $0.65 Wireless merger integration costs - Represents BellSouth's 40 percent share ofwireless merger integration costs incurred in connection with the Cingular/AT&TWireless merger. Integration costs include one-time cash outlays or specifiednon-cash charges, including accelerated depreciation, directly related torationalization of the wireless network, sales distribution channels, theworkforce, information technology systems and real estate. Wireless merger intangible amortization - Represents BellSouth's 40 percentshare of the non-cash amortization of intangibles, primarily customer lists thatwere created in Cingular's acquisition of AT&T Wireless. AT&T Merger Costs - Represents specific deal-related costs directly associatedwith the pending merger with AT&T. Costs include legal and regulatory fees,costs of filing and printing the joint proxy statement and expense associatedwith employee retention awards. About BellSouth Corporation BellSouth Corporation is a Fortune 500 communications company headquartered inAtlanta, Georgia. BellSouth has joint control and 40 percent ownership ofCingular Wireless, the nation's largest wireless voice and data provider with58.7 million customers. Backed by award-winning customer service, BellSouth offers the mostcomprehensive and innovative package of voice and data services available in themarket. Through BellSouth Answers(R), residential and small business customerscan bundle their local and long distance service with dial-up and high-speed DSLInternet access, satellite television and Cingular(R) Wireless service. Forbusinesses, BellSouth provides secure, reliable local and long distance voiceand data networking solutions. BellSouth also offers print and online directoryadvertising through The Real Yellow Pages(R) and YELLOWPAGES.COM(TM) fromBellSouth. BellSouth believes that diversity and fostering an inclusive environment arecritical in maintaining a competitive advantage in today's global marketplace.More information about BellSouth can be found at http://www.bellsouth.com. Further information about BellSouth and Cingular's third quarter earnings can beaccessed at www.bellsouth.com/investor. The press release, financial statementsand Investor News summarizing highlights of the quarter are available atwww.bellsouth.com/investor starting today at 8 a.m. Eastern Time (ET). BellSouth will host a conference call with investors today at 10 a.m. (ET).Dial-in information for the conference call is as follows:Domestic: 888-370-1863International: 706-634-1735 The conference call will also be webcast live beginning at 10 a.m. (ET) on ourWeb site, www.bellsouth.com/investor. The webcast will be archived on our Website. A replay of the call will be available through Oct. 31, 2006, and can beaccessed by dialing: Domestic: 800-642-1687 - Conference ID: 7061516International: 706-645-9291 - Conference ID: 7061516 For More Information Contact: Brent Fowler, Media Relations, 404-249-2839BellSouth Investor Relations, 800-241-3419 In addition to historical information, this document may contain forward-lookingstatements regarding events and financial trends. Factors that could affect ourfuture results and could cause our actual results to differ materially fromthose expressed or implied in the forward-looking statements include: (i) achange in economic conditions in markets where we operate or have materialinvestments which would affect demand for our services; (ii) the intensity ofcompetitive activity and its resulting impact on pricing strategies and newproduct offerings; (iii) higher than anticipated cash requirements forinvestments, new business initiatives and acquisitions; (iv) unfavorableregulatory actions and (v) those factors contained in the Company's periodicreports. Factors that could prevent or delay completion of the proposed merger with AT&T,could affect the future results of the merged company and could cause the mergedcompany's actual results to differ from those expressed in the forward-lookingstatements include: (i) our and AT&T's ability to obtain governmental approvalsof the proposed merger on the proposed terms and contemplated schedule; (ii) therisk that the businesses of AT&T and BellSouth will not be integratedsuccessfully or as quickly as expected; (iii) the risk that the cost savings andany other synergies from the merger, including any savings and other synergiesrelating to the resulting sole ownership of Cingular Wireless LLC, may not befully realized or may take longer to realize than expected; (iv) disruption fromthe merger making it more difficult to maintain relationships with customers,employees or suppliers; and (v) those factors contained in the proxy statementrelating to the proposed merger filed with the SEC. The forward-looking information in this document is given as of this date only,and BellSouth assumes no duty to update this information. This document may also contain certain non-GAAP financial measures. The mostdirectly comparable GAAP financial measures, and a full reconciliation ofnon-GAAP to GAAP financial information, are attached hereto and provided on theCompany's investor relations web site, www.bellsouth.com/investor. BellSouth Corporation Consolidated Statements of Income - Reported Basis (unaudited) (amounts in millions, except per share data) Note to Readers: See Normalization Earnings Summary and Reconciliation to GAAPresults on pages 3 and 4 for a summary of unusual items included in ReportedBasis results. Year-to-Date 3Q06 3Q05 Growth 2Q06 Growth 2006 2005 Growth Operating Revenues Communications group $4,669 $4,558 2.4% $4,647 0.5% $13,969 $13,749 1.6% Advertising and publishing 535 506 5.7% 543 -1.5% 1,581 1,521 3.9% All other 14 8 75.0% 16 -12.5% 45 35 28.6% Total Operating Revenues 5,218 5,072 2.9% 5,206 0.2% 15,595 15,305 1.9%Operating Expenses Cost of services and 1,905 2,017 -5.6% 1,960 -2.8% 5,974 5,862 1.9%products Selling, general, & 967 996 -2.9% 970 -0.3% 2,868 2,833 1.2%administrative expenses Depreciation and 894 922 -3.0% 898 -0.4% 2,685 2,756 -2.6%amortization Provision for restructuring 7 166 * 73 * 72 181 *and asset impairments Total Operating Expenses 3,773 4,101 -8.0% 3,901 -3.3% 11,599 11,632 -0.3%Operating Income 1,445 971 48.8% 1,305 10.7% 3,996 3,673 8.8%Interest Expense 302 274 10.2% 279 8.2% 860 850 1.2%Other Income (Expense), net 432 512 -15.6% 280 54.3% 906 612 48.0%Income from Continuing 1,575 1,209 30.3% 1,306 20.6% 4,042 3,435 17.7%Operations before Income Taxes Provision for Income Taxes 516 392 31.6% 419 23.2% 1,312 1,140 15.1%Income from Continuing 1,059 817 29.6% 887 19.4% 2,730 2,295 19.0%Operations Income (Loss) from - - * - * - 381 *Discontinued Operations, net of tax Net Income $1,059 $817 29.6% $887 19.4% $2,730 $2,676 2.0% Diluted: Weighted Average Common 1,822 1,836 -0.8% 1,813 0.5% 1,813 1,835 -1.2%Shares Outstanding Earnings Per Share: Income from Continuing $0.58 $0.44 31.8% $0.49 18.4% $1.51 $1.25 20.8%Operations Income from Discontinued $0.00 $0.00 * $0.00 * $0.00 $0.21 *Operations Net Income $0.58 $0.44 31.8% $0.49 18.4% $1.51 $1.46 3.4%* - Not meaningful. Selected Financial and Operating Data Operating income $1,445 $971 48.8% $1,305 10.7% $3,996 $3,673 8.8%Operating margin 27.7% 19.1% 860 bps 25.1% 260 bps 25.6% 24.0% 160 bps Declared dividends per share $0.29 $0.29 0.0% $0.29 0.0% $0.87 $0.85 2.4%Capital expenditures $730 $864 -15.5% $821 -11.1% $2,496 $2,443 2.2%excluding Hurricane Katrina Total capital expenditures $730 $886 -17.6% $950 -23.2% $2,761 $2,465 12.0% Common shares outstanding 1,822 1,831 -0.5% 1,812 0.6% Book value per share $13.96 $13.28 5.1% $13.56 2.9% BellSouth CorporationConsolidated Statements of Income - Normalized Basis (unaudited)(amounts in millions, except per share data) Note to Readers: Our reported results, as shown on page 1, are prepared inaccordance with generally accepted accounting principles (GAAP). The normalizedresults presented below exclude the impact of certain non-recurring ornon-operating items, the details of which are provided on pages 3 and 4 of thisrelease. In addition, the normalized results reflect our 40% proportionate shareof Cingular's results, the presentation of which is not allowed under GAAP.Normalized results exclude discontinued operations from all periods. Certainreclassifications have been made to prior periods to conform to the currentpresentation. Year-to-Date 3Q06 3Q05 Growth 2Q06 Growth 2006 2005 Growth Operating Revenues Communications group $4,583 $4,480 2.3% $4,569 0.3% $13,726 $13,538 1.4% Wireless 3,821 3,499 9.2% 3,687 3.6% 11,100 10,234 8.5% Advertising and publishing 535 506 5.7% 543 -1.5% 1,581 1,521 3.9% All other 15 9 66.7% 16 -6.3% 46 35 31.4% Total Operating Revenues 8,954 8,494 5.4% 8,815 1.6% 26,453 25,328 4.4% Operating Expenses Cost of services and products 3,288 3,250 1.2% 3,360 -2.1% 10,041 9,749 3.0% Selling, general, & 2,079 2,084 -0.2% 2,047 1.6% 6,163 6,234 -1.1% administrative expenses Depreciation and amortization 1,377 1,343 2.5% 1,372 0.4% 4,103 4,080 0.6% Total Operating Expenses 6,744 6,677 1.0% 6,779 -0.5% 20,307 20,063 1.2%Operating Income 2,210 1,817 21.6% 2,036 8.5% 6,146 5,265 16.7%Interest Expense 405 374 8.3% 379 6.9% 1,165 1,169 -0.3%Other Income (Expense), net 57 38 50.0% 31 83.9% 111 170 -34.7%Income Before Income Taxes 1,862 1,481 25.7% 1,688 10.3% 5,092 4,266 19.4%Provision for Income Taxes 682 543 25.6% 606 12.5% 1,847 1,570 17.6% Net Income $1,180 $938 25.8% $1,082 9.1% $3,245 $2,696 20.4% Diluted: Weighted Average Common Shares 1,822 1,836 -0.8% 1,813 0.5% 1,813 1,835 -1.2% Outstanding Earnings Per Share $0.65 $0.51 27.5% $0.60 8.3% $1.79 $1.47 21.8%* - Not meaningful. Selected Financial and Operating Data Operating income $2,210 $1,817 21.6% $2,036 8.5% $6,146 $5,265 16.7%Operating margin 24.7% 21.4% 330 bps 23.1% 160 bps 23.2% 20.8% 240 bps Declared dividends per share $0.29 $0.29 0.0% $0.29 0.0% $0.87 $0.85 2.4%Capital expenditures excluding $730 $864 -15.5% $821 -11.1% $2,496 $2,443 2.2%Hurricane Katrina Total capital expenditures $730 $886 -17.6% $950 -23.2% $2,761 $2,465 12.0% Common shares outstanding 1,822 1,831 -0.5% 1,812 0.6% Book value per share $13.96 $13.28 5.1% $13.56 2.9% Total employees 59,745 63,049 -5.2% 61,284 -2.5% BellSouth Corporation Normalized Earnings Summary and Reconciliation to Reported Results (amounts in millions, except per share data) Third Quarter 2006 Normalizing Items ---------------------------------------------- Wireless Wireless Merger Merger Discontinued Continuing Integration Intangible AT&T Merger Operations Operations Cingular Costs Amortization Costs GAAP A (GAAP - A) B C D H Normalized Operating Revenues $5,218 $0 $5,218 $3,736 $0 $0 $0 $8,954Operating Expenses 3,773 - 3,773 3,169 (55) (126) (17) 6,744Operating Income 1,445 - 1,445 567 55 126 17 2,210Interest Expense 302 - 302 103 - - - 405Other Income 432 - 432 (375) - - - 57(Expense), net Income from Continuing Operations before Income Taxes 1,575 - 1,575 89 55 126 17 1,862Provision for 516 - 516 89 22 51 4 682Income Taxes Income from 1,059 - 1,059 - 33 75 13 1,180Continuing Operations Income (Loss) from - - - - - - - -Discontinued Operations, net of tax Net Income $1,059 $0 $1,059 $0 $33 $75 $13 $1,180 Diluted Earnings $0.58 $0.00 $0.58 $0.00 $0.02 $0.04 $0.01 $0.65Per Share Year-to-Date 2006 Normalizing Items --------------------------------------------------------------- Wireless Con Wireless Merger Hurri Discon tinuing Merger Intan cane- AT&T tinued Opera Inte gible related Seve Merger Opera tions gration Amor Expenses rance Costs tions (GAAP - Cingular Costs tization Normal GAAP A A) B C D E G H ized Operating $15,595 $0 $15,595 $10,858 $0 $0 $0 $0 $0 $26,453Revenues Operating 11,599 - 11,599 9,562 (214) (404) (119) (73) (44) 20,307Expenses Operating 3,996 - 3,996 1,296 214 404 119 73 44 6,146Income Interest 860 - 860 305 - - - - - 1,165Expense Other Income 906 - 906 (795) - - - - - 111(Expense), net Income from Continuing Operations before Income Taxes 4,042 - 4,042 196 214 404 119 73 44 5,092Provision 1,312 - 1,312 196 87 164 46 28 14 1,847for Income Taxes Income from 2,730 - 2,730 - 127 240 73 45 30 3,245Continuing Operations Income - - - - - - - - - -(Loss) from Discontinued Operations, net of tax Net Income $2,730 $0 $2,730 $0 $127 $240 $73 $45 $30 $3,245 Diluted $1.51 $0.00 $1.51 $0.00 $0.07 $0.13 $0.04 $0.02 $0.02 $1.79Earnings Per Share Third Quarter 2005 Normalizing Items -------------------------------------------------------------- Wireless Discon Con Wireless Merger tinued tinuing Merger Intang Hurri Opera Opera Inte ible cane- Debt Sale tions tions gration Amorti related Exting. of (GAAP - Cingular Costs zation Expenses Costs Cellcom Normal GAAP A A) B C D E F I ized Operating $5,072 $0 $5,072 $3,422 $0 $0 $0 $0 $0 $8,494Revenues Operating 4,101 - 4,101 3,158 (96) (158) (328) - - 6,677Expenses Operating 971 - 971 264 96 158 328 - - 1,817Income Interest 274 - 274 100 - - - - - 374Expense Other Income 512 - 512 (123) - - - - (351) 38(Expense), net Income from Continuing Operations before Income Taxes 1,209 - 1,209 41 96 158 328 - (351) 1,481Provision 392 - 392 41 40 65 128 - (123) 543for Income Taxes Income from 817 - 817 - 56 93 200 - (228) 938Continuing Operations Income - - - - - - - - - -(Loss) from Discontinued Operations, net of tax Net Income $817 $0 $817 $0 $56 $93 $200 $0 ($228) $938 Diluted $0.44 $0.00 $0.44 $0.00 $0.03 $0.05 $0.11 $0.00 ($0.12) $0.51Earnings Per Share Year-to-Date 2005 Normalizing Items --------------------------------------------------------------- Wireless Con Wireless Merger Discon tinuing Merger Intan Hurri tinued Opera Inte gible cane- Debt Sale Opera tions gration Amor related Exting. of tions (GAAP - Cingular Costs tization Expenses Costs Cellcom Normal GAAP A A) B C D E F I ized Operating $15,305 $0 $15,305 $10,023 $0 $0 $0 $0 $0 $25,328Revenues Operating 11,632 - 11,632 9,511 (219) (533) (328) - - 20,063Expenses Operating 3,673 - 3,673 512 219 533 328 - - 5,265Income Interest 850 - 850 319 - - - - - 1,169Expense Other Income 612 - 612 (133) - - - 42 (351) 170(Expense), net Income from Continuing Operations before Income Taxes 3,435 - 3,435 60 219 533 328 42 (351) 4,266Provision 1,140 - 1,140 60 100 249 128 16 (123) 1,570for Income Taxes Income from 2,295 - 2,295 - 119 284 200 26 (228) 2,696Continuing Operations Income 381 (381) - - - - - - - -(Loss) from Discontinued Operations, net of tax Net Income $2,676 ($381) $2,295 $0 $119 $284 $200 $26 ($228) $2,696 Diluted $1.46 ($0.21) $1.25 $0.00 $0.06 $0.15 $0.11 $0.01 ($0.12) $1.47Earnings Per Share * * Normalized earnings per share for year-to-date 2005 does not sum due torounding. BellSouth Corporation Notes to Normalized Financial and Operating Data (pages 3 and 4) (amounts in millions, except per share data) Our normalized earnings have been adjusted for the following: (a) Discontinued Operations - In March 2004, we announced our intention to sellour 10 Latin American properties. Accordingly, results of the Latin Americanoperations are shown as Discontinued Operations and thus excluded fromnormalized results. The year-to-date 2005 results include an after-tax gain of$390 related to the final 2 properties that were closed in January. (b) The periods presented have been adjusted to include our 40% proportionalshare of Cingular Wireless' operating results, net of eliminations for amountscharged by other BellSouth companies to Cingular. (c) Wireless Merger Integration Costs - Represents BellSouth's 40% share ofwireless merger integration costs incurred in connection with the Cingular/AT&TWireless merger. Integration costs include one-time cash outlays or specifiednon-cash charges, including accelerated depreciation, directly related torationalization of the wireless network, sales distribution channels, theworkforce, information technology systems and real estate. (d) Wireless Merger Intangible Amortization - Represents BellSouth's 40% shareof the non-cash amortization of intangibles, primarily customer lists, that werecreated in Cingular's acquisition of AT&T Wireless. (e) Hurricane Katrina-related Expenses - Represents incremental labor andmaterial costs primarily related to service restoration and network repairs inBellSouth's wireline business. These expenses have been reduced by partialinsurance recoveries during the 1st and 2nd quarters of 2006. (f) Debt extinguishment costs - Represents one-time expenses associated with theearly extinguishment of $400 of long-term debt in the 1st quarter of 2005 andone-time expenses associated with the early extinguishment of $300 of long-termdebt in the 2nd quarter of 2005. (g) Severance - Represents the net severance-related costs recorded in the 2ndquarter of 2006 associated with voluntary management workforce reductions. (h) AT&T Merger Costs - Represents specific deal-related costs directlyassociated with the pending merger with AT&T. Costs include legal and regulatoryfees, costs of filing and printing the joint proxy statement and expenseassociated with employee retention awards. (i) Gain related to the sale of Cellcom, a cellular communications operator inIsrael. BellSouth Corporation Consolidated Balance Sheets (unaudited) (amounts in millions, except per share data) September December 31, Change June 30, Change vs. 30, vs. 2006 2005 Prior 2006 Prior Year Quarter Assets Current Assets: Cash and cash equivalents $731 $427 $304 $259 $472 Short-term investments 1,327 - 1,327 483 844 Accounts receivable, net of allowance for 2,562 2,555 7 2,472 90 uncollectibles of $244, $289 and $274 Material and supplies 383 385 (2) 408 (25) Other current assets 928 842 86 932 (4) Total Current Assets 5,931 4,209 1,722 4,554 1,377 Investment in and advances to Cingular Wireless 22,357 21,274 1,083 22,108 249Property, plant and equipment, net 21,820 21,723 97 21,920 (100)Other assets 8,725 7,814 911 8,250 475Intangible assets, net 1,540 1,533 7 1,606 (66)Total Assets $60,373 $56,553 $3,820 $58,438 $1,935 Liabilities and Shareholders' Equity Current Liabilities: Debt maturing within one year $3,926 $4,109 ($183) $4,325 ($399) Accounts payable 909 1,040 (131) 911 (2) Other current liabilities 4,047 3,505 542 4,131 (84) Total Current Liabilities 8,882 8,654 228 9,367 (485) Long-Term Debt 14,278 13,079 1,199 13,047 1,231 Noncurrent Liabilities: Deferred income taxes 6,818 6,607 211 6,713 105 Other noncurrent liabilities 4,959 4,679 280 4,740 219 Total Noncurrent Liabilities 11,777 11,286 491 11,453 324 Shareholders' Equity: Common stock, $1 par value 2,020 2,020 - 2,020 - Paid-in capital 8,130 7,960 170 7,919 211 Retained earnings 21,525 20,383 1,142 20,965 560 Accumulated other comprehensive income 35 (14) 49 19 16 Shares held in trust and treasury (6,274) (6,815) 541 (6,352) 78 Total Shareholders' Equity 25,436 23,534 1,902 24,571 865Total Liabilities and Shareholders' Equity $60,373 $56,553 $3,820 $58,438 $1,935 BellSouth Corporation Consolidated Statements of Cash Flows (unaudited) (amounts in millions, except per share data) Year-to-Date 3Q06 3Q05 2Q06 2006 2005 Cash Flows from Operating Activities: Income from Continuing Operations $1,059 $817 $887 $2,730 $2,295Adjustments to income from continuing operations: Depreciation and amortization 894 922 898 2,685 2,756 Provision for uncollectibles 83 93 60 230 258 Net losses (earnings) of equity (342) (97) (213) (694) (85) affiliates Deferred income taxes 107 (66) (1) 165 51 Asset impairments - 166 - - 166 Pension income (130) (133) (131) (391) (399) Stock-settled compensation expense 14 22 15 46 70 Loss on extinguishment of debt - - - - 42 (Gain) loss on sale/disposal of - (351) - - (351) operations Net change in: Accounts receivable and other current (120) (11) (76) (275) (174) assets Accounts payable and other current 37 618 332 447 1,009 liabilities Deferred charges and other assets (52) (39) 26 (49) (79) Other liabilities and deferred credits 137 133 117 332 337Other reconciling items, net 19 40 16 42 38Net cash provided by operating activities 1,706 2,114 1,930 5,268 5,934 Cash Flows from Investing Activities: Capital expenditures (730) (886) (950) (2,761) (2,465)Purchase of short-term investments (4,122) (76) (797) (5,227) (88)Proceeds from sale of short-term 3,279 76 368 3,901 104investments Investments in debt and equity securities (476) (53) (143) (819) (156)Proceeds from sale of securities and 154 656 132 289 1,600operations Net (advances to) repayments from Cingular 61 949 (11) (416) 1,736Other investing activities, net (10) (25) (7) (32) (37)Net cash provided by (used for) investing (1,844) 641 (1,408) (5,065) 694activities Cash Flows from Financing Activities: Net borrowings (repayments) of short-term (399) (480) (80) 234 (2,110)debt Proceeds from issuance of long-term debt 1,200 - - 1,200 -Repayments of long-term debt (4) (233) (12) (433) (1,500)Dividends paid (526) (532) (525) (1,572) (1,520)Purchase of treasury shares - (54) (2) (52) (137)Proceeds from issuing common stock 274 22 120 654 60Other financing activities, net 65 67 (11) 70 44Net cash provided by (used for) financing 610 (1,210) (510) 101 (5,163)activities Net Increase/(Decrease) in Cash from 472 1,545 12 304 1,465Continuing Operations Net Increase/(Decrease) in Cash from - - - - (115)Discontinued Operations Net Increase/(Decrease) in Cash and Cash 472 1,545 12 304 1,350Equivalents Cash and Cash Equivalents at Beginning of 259 485 247 427 680Period Cash and Cash Equivalents at End of Period $731 $2,030 $259 $731 $2,030 BellSouth CorporationResults by Segment (amounts in millions) (unaudited)Communications Group (1) Year-to-Date 3Q06 3Q05 Growth 2Q06 Growth 2006 2005 Growth Operating Revenues Voice $3,058 $3,136 -2.5% $3,102 -1.4% $9,289 $9,445 -1.7% Data 1,315 1,166 12.8% 1,282 2.6% 3,861 3,491 10.6% Other 323 286 12.9% 289 11.8% 898 895 0.3% Total Operating Revenues 4,696 4,588 2.4% 4,673 0.5% 14,048 13,831 1.6%Operating Expenses Cost of services and products 1,833 1,860 -1.5% 1,848 -0.8% 5,627 5,563 1.2% Selling, general, & 772 793 -2.6% 771 0.1% 2,285 2,306 -0.9% administrative expenses Depreciation and amortization 886 914 -3.1% 890 -0.4% 2,662 2,734 -2.6% Total Operating Expenses 3,491 3,567 -2.1% 3,509 -0.5% 10,574 10,603 -0.3%Segment Operating Income 1,205 1,021 18.0% 1,164 3.5% 3,474 3,228 7.6%Interest Expense 111 94 18.1% 111 0.0% 329 292 12.7%Other Income (Expense), net 23 14 64.3% 12 91.7% 42 45 -6.7%Income Before Income Taxes 1,117 941 18.7% 1,065 4.9% 3,187 2,981 6.9%Provision for Income Taxes 397 330 20.3% 367 8.2% 1,115 1,046 6.6% Segment Net Income(1) $720 $611 17.8% $698 3.2% $2,072 $1,935 7.1% * - Not meaningful. Selected Financial and Operating Data (amounts in millions) Segment operating income $1,205 $1,021 18.0% $1,164 3.5% $3,474 $3,228 7.6%Segment operating margin 25.7% 22.3% 340 bps 24.9% 80 bps 24.7% 23.3% 140 bps DSL revenues $405 $305 32.8% $400 1.3% $1,187 $885 34.1%Long distance revenues $662 $608 8.9% $645 2.6% $1,946 $1,766 10.2% Switched Access MOUs 14,810 15,511 -4.5% 14,954 -1.0% 45,088 47,279 -4.6%BSLD MOUs 6,703 6,660 0.6% 6,548 2.4% 19,877 18,972 4.8%Total Access minutes of use 21,513 22,171 -3.0% 21,502 0.1% 64,965 66,251 -1.9% Capital expenditures excluding $725 $856 -15.3% $817 -11.3% $2,478 $2,424 2.2%Hurricane Katrina Total capital expenditures $725 $878 -17.4% $946 -23.4% $2,743 $2,446 12.1%(amounts in thousands) Wholesale lines 1,732 2,454 -29.4% 1,906 -9.1% DSL customers 3,449 2,678 28.8% 3,273 5.4% LD customers 7,596 6,993 8.6% 7,478 1.6% Consumer ARPU (3) $63.26 $58.53 8.1% $62.81 0.7% BellSouth Corporation Results by Segment (unaudited) Supplemental Operating Data (in thousands) Communications Group - Network Access Lines In Service Reported (a) 3Q06 3Q05 Growth 2Q06 GrowthAccess lines Residence Retail Primary 10,932 11,465 -4.6% 11,022 -0.8% Additional 1,044 1,206 -13.4% 1,089 -4.1% Total 11,976 12,671 -5.5% 12,111 -1.1% Residence Retail Residence Wholesale Voice 1,121 1,674 -33.0% 1,251 -10.4% Lines Total Residence 13,097 14,345 -8.7% 13,362 -2.0% Business Business 5,305 5,294 0.2% 5,301 0.1% Retail Business Wholesale Voice 553 712 -22.3% 590 -6.3% Lines Total Business 5,858 6,006 -2.5% 5,891 -0.6% Other Retail/Wholesale Lines Retail 25 27 -7.4% 21 19.0% Wholesale 58 68 -14.7% 65 -10.8% Total Other Retail/Wholesale Lines 83 95 -12.6% 86 -3.5% Total Access Lines in Service 19,038 20,446 -6.9% 19,339 -1.6% ISDN line equivalents Residence 5 7 -28.6% 6 -16.7% Business 1,425 1,440 -1.0% 1,420 0.4% Total ISDN Adjusted ALIS 20,468 21,893 -6.5% 20,765 -1.4%Access Line Equivalents (b) Selected digital data services: Unbundled 376 279 34.8% 373 0.8% Loops DS0 & ADSL 20,940 16,333 28.2% 19,886 5.3% DS1 8,478 8,163 3.9% 8,344 1.6% DS3 & higher 35,287 33,639 4.9% 35,267 0.1% Total digital data lines in service 65,081 58,414 11.4% 63,870 1.9% Total equivalent access lines in service 85,549 80,307 6.5% 84,635 1.1% * - Not meaningful. (a) Prior period operating data are often revised at later dates to reflectupdated information. The above information reflects the latest data availablefor the periods indicated. (b) Access line equivalents represent a conversion of non-switched data circuitsto a switched access line basis and is presented for comparability purposes.Equivalents are calculated by converting high-speed/high-capacity circuits to the equivalent of a switched access line based on transport capacity. While the revenues generated by access line equivalents have a directional relationship with these counts, revenue growth rates cannot be compared to line growth rates on an equivalent basis. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Wireless Segment (1)(a) Year-to-Date 3Q06 3Q05 Growth 2Q06 Growth 2006 2005 Growth Operating Revenues Service revenues (2) $3,464 $3,089 12.1% $3,318 4.4% $9,984 $9,144 9.2% Equipment and other revenues 357 410 -12.9% 369 -3.3% 1,116 1,090 2.4% Total Operating Revenues 3,821 3,499 9.2% 3,687 3.6% 11,100 10,234 8.5%Operating Expenses Cost of services and products 1,464 1,395 4.9% 1,511 -3.1% 4,427 4,171 6.1% Selling, general, & administrative 1,125 1,128 -0.3% 1,097 2.6% 3,341 3,438 -2.8% expenses Depreciation and amortization 484 421 15.0% 473 2.3% 1,418 1,324 7.1% Total Operating Expenses 3,073 2,944 4.4% 3,081 -0.3% 9,186 8,933 2.8%Segment Operating Income 748 555 34.8% 606 23.4% 1,914 1,301 47.1%Interest Expense 122 122 0.0% 119 2.5% 360 387 -7.0%Other Income (Expense), net (16) (9) * (15) * (43) (9) *Income Before Income Taxes 610 424 43.9% 472 29.2% 1,511 905 67.0%Provision for Income Taxes 250 182 37.4% 196 27.6% 632 428 47.7% Segment Net Income (1) $360 $242 48.8% $276 30.4% $879 $477 84.3% Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $748 $555 34.8% $606 23.4% $1,914 $1,301 47.1%Segment operating margin 19.6% 15.9% 370 bps 16.4% 320 bps 17.2% 12.7% 450 bpsCellular/PCS Operating Metrics (100% Cingular)**: Total Customers (7) 58,666 52,292 12.2% 57,308 2.4% 58,666 52,292 12.2% Net Customer Additions (7) 1,358 867 56.6% 1,498 -9.3% 4,535 3,186 42.3% M&A Activity, Partitioned Customers - (17) * - * (13) (26) 50.0% and/or Adjs (7) Churn (8) 1.8% 2.3% -50 bps 1.7% 10 bps 1.8% 2.2% -40 bps Wireless Service ARPU (3) $49.76 $49.65 0.2% $48.84 1.9% $49.04 $49.92 -1.8% Minutes Of Use Per Subscriber (4) 755 698 8.2% 741 1.9% 732 673 8.8% Licensed POPs (5) 296 294 0.7% 296 0.0% 296 294 0.7% Penetration (6) 20.8% 18.3% 250 bps 20.0% 80 bps 20.8% 18.3% 250 bps * - Not meaningful. ** - These metrics and calculations are not impacted by the normalization ofwireless merger integration costs and wireless merger intangible amortization. (a) The wireless segment is comprised of BellSouth's 40% share of the reportedresults of Cingular Wireless. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Advertising & Publishing (1) Year-to-Date 3Q06 3Q05 Growth 2Q06 Growth 2006 2005 Growth Operating Revenues Advertising and publishing $502 $477 5.2% $494 1.6% $1,483 $1,433 3.5% revenues Commission revenues 35 32 9.4% 53 -34.0% 107 98 9.2% Total Operating Revenues 537 509 5.5% 547 -1.8% 1,590 1,531 3.9%Operating Expenses Cost of services 96 94 2.1% 97 -1.0% 286 283 1.1% Selling, general, & 188 175 7.4% 191 -1.6% 558 518 7.7% administrative expenses Depreciation and amortization 8 7 14.3% 7 14.3% 23 21 9.5% Total Operating Expenses 292 276 5.8% 295 -1.0% 867 822 5.5%Segment Operating Income 245 233 5.2% 252 -2.8% 723 709 2.0%Interest Expense 4 3 33.3% 4 0.0% 13 8 62.5%Other Income (Expense), net - - * (3) * (5) - *Income Before Income Taxes 241 230 4.8% 245 -1.6% 705 701 0.6%Provision for Income Taxes 87 84 3.6% 89 -2.2% 255 260 -1.9% Segment Net Income(1) $154 $146 5.5% $156 -1.3% $450 $441 2.0% Segment operating income $245 $233 5.2% $252 -2.8% $723 $709 2.0%Segment operating margin 45.6% 45.8% -20 bps 46.1% -50 bps 45.5% 46.3% -80 bps * - Not meaningful. BellSouth CorporationNotes (1) Segment net income (loss) is based on normalized results which excludecertain one-time transactions and certain corporate intercompany billings.Certain intersegment revenues are not eliminated for purposes of managementreporting. (2) Wireless service revenues include activation fees, access, airtime, roaming,long distance and value added services. Roaming revenues are included on a grossbasis for the Wireless segment. (3) Management uses average revenue per unit (ARPU) as an indicator of operatingperformance of the business. Consumer ARPU is defined as consumer revenues during the period divided byaverage primary access lines during the period. Wireless Service ARPU is defined as Cellular/PCS service revenues during theperiod divided by average Cellular/PCS subscribers during the period. Thismetric is used to compare the recurring revenue amounts being generated on ournetwork to prior periods and internal targets. We believe that each of thesemetrics provides useful information concerning the performance of ourinitiatives to attract and retain high value customers and the use of ournetwork. (4) Effective with the 1Q05 reporting period, the Total Minutes of Use perCellular/PCS Subscriber (MOUs) definition has been revised to exclude ShortMessage Service (SMS) activity and include Local MOUs and Outcollect MOUs in thenumerator. (5) Licensed POPs refers to the number of people residing in areas whereCingular and its partners have licenses to provide cellular or PCS service,including areas where Cingular has not yet commenced service. (6) Penetration calculation for 3Q06 is based on licensed "operational" POPs of282 million. (7) Cellular/PCS customers include customers served through reseller agreements. (8) Cellular/PCS churn is calculated by dividing the aggregate number ofCellular/PCS customers who cancel service during each month in a period by thetotal number of Cellular/PCS customers at the beginning of each month in thatperiod. BellSouth Corporation Non-GAAP Measures - Reconciliation (amounts in millions) (unaudited) Segment Net Income Reconciliation to GAAP Net Income Year-to-Date 3Q06 3Q05 2Q06 2006 2005Communications Group segment Net Income $720 $611 $698 $2,072 $1,935Wireless segment Net Income 360 242 276 879 477Advertising and Publishing Group segment 154 146 156 450 441Net Income Corporate, eliminations and other (54) (61) (48) (156) (157)Normalized Net Income 1,180 938 1,082 3,245 2,696Add back Excluded non-recurring or (121) (121) (195) (515) (20)non-operational items (a) Consolidated GAAP Net Income $1,059 $817 $887 $2,730 $2,676 Free Cash Flow Year-to-Date 3Q06 3Q05 2Q06 2006 2005Net cash provided by Operating Activities $1,706 $2,114 $1,930 $5,268 $5,934Less Capital Expenditures (730) (886) (950) (2,761) (2,465)Operating Free Cash Flow $976 $1,228 $980 $2,507 $3,469 Net Debt September 30, December 31, June 30, 2006 2005 2006 Total Debt $18,204 $17,188 $17,372 Less Cash (731) (427) (259) Net Debt $17,473 $16,761 $17,113 Consolidated Normalized Operating Income Year-to-Date before Depreciation and Amortization 3Q06 3Q05 2Q06 2006 2005Operating Revenues $8,954 $8,494 $8,815 $26,453 $25,328Operating Income 2,210 1,817 2,036 6,146 5,265Add back Depreciation and Amortization 1,377 1,343 1,372 4,103 4,080Operating Income before Depreciation and $3,587 $3,160 $3,408 $10,249 $9,345Amortization Margin 40.1% 37.2% 38.7% 38.7% 36.9% Communications Group Operating Income Year-to-Date before Depreciation and Amortization 3Q06 3Q05 2Q06 2006 2005Operating Revenues $4,696 $4,588 $4,673 $14,048 $13,831Operating Income 1,205 1,021 1,164 3,474 3,228Add back Depreciation and Amortization 886 914 890 2,662 2,734Operating Income before Depreciation and $2,091 $1,935 $2,054 $6,136 $5,962Amortization Margin 44.5% 42.2% 44.0% 43.7% 43.1% Wireless Operating Income before Year-to-Date Depreciation and Amortization 3Q06 3Q05 2Q06 2006 2005Service Revenues $3,464 $3,089 $3,318 $9,984 $9,144Equipment and Other Revenues 357 410 369 1,116 1,090Operating Revenues 3,821 3,499 3,687 11,100 10,234Operating Income 748 555 606 1,914 1,301Operating Margin (Operating Income divided 19.6% 15.9% 16.4% 17.2% 12.7%by Operating Revenues) (b) Add back Depreciation and Amortization 484 421 473 1,418 1,324Operating Income before Depreciation and $1,232 $976 $1,079 $3,332 $2,625Amortization Margin (Operating Income before Depr & 35.6% 31.6% 32.6% 33.4% 28.7%Amort divided by Service Revenues) (b) Advertising & Publishing Operating Income Year-to-Date before Depreciation and Amortization 3Q06 3Q05 2Q06 2006 2005Operating Revenues $537 $509 $547 $1,590 $1,531Operating Income 245 233 252 723 709Add back Depreciation and Amortization 8 7 7 23 21Operating Income before Depreciation and $253 $240 $259 $746 $730Amortization Margin 47.1% 47.2% 47.3% 46.9% 47.7% (a) See pages 3 and 4 for detail of excluded items. (b) Margin calculations for our wireless segment represent 40% of Cingular'smargin calculations adjusted for the related normalized items as presented onpages 3-4. BellSouth Corporation Hurricane Katrina Revenue Impacts (amounts in millions, except per share data) Communications Group: 3Q06 3Q05 Growth As reported (with Katrina customer bill credits): Operating revenues $ 4,696 $4,588 2.4% Pro forma (without Katrina customer bill credits): Operating revenues $ 4,696 $4,632 1.4% Impact of Hurricane Katrina bill credits on: Operating revenues $ - $(44) 100 bps Advertising & Publishing: 3Q06 3Q05 Growth As reported (with Katrina customer bill credits): Operating revenues $ 537 $509 5.5% Pro forma (without Katrina customer bill credits): Operating revenues $ 537 $516 4.1% Impact of Hurricane Katrina bill credits on: Operating revenues $ - $ (7) 140 bps BellSouth Corporation Cingular Amortization Reconciliation (amounts in millions, except per share data) Consolidated 4Q04 2004 1Q05 2Q05 3Q05 Normalized D&A - as $1,472 $4,868 $1,588 $1,524 $1,501originally disclosed Wireless merger intangible amortization ($159) ($159) ($196) ($179) ($158)Normalized D&A $1,313 $4,709 $1,392 $1,345 $1,343 Normalized Operating Income - as originally disclosed $1,270 $6,272 $1,439 $1,634 $1,659 Wireless merger intangible amortization $159 $159 $196 $179 $158Normalized Operating Income $1,429 $6,431 $1,635 $1,813 $1,817 Normalized Operating Margin - as originally disclosed 16.0% 22.4% 17.3% 19.2% 19.5% Wireless merger intangible amortization 2.0% 0.6% 2.4% 2.1% 1.9%Normalized Operating Margin 18.0% 23.0% 19.7% 21.3% 21.4% Normalized Earnings Per Share - as originally disclosed $0.35 $1.83 $0.39 $0.46 $0.46 Wireless merger intangible amortization $0.04 $0.04 $0.06 $0.05 $0.05Normalized Earnings Per Share $0.39 $1.87 $0.45 $0.51 $0.51 Wireless Segment 4Q04 2004 1Q05 2Q05 3Q05 Normalized D&A - as $556 $1,232 $670 $608 $579originally disclosed Wireless merger intangible amortization ($159) ($159) ($196) ($179) ($158)Normalized D&A $397 $1,073 $474 $429 $421 Normalized Operating Income - as originally disclosed $27 $736 $88 $283 $397 Wireless merger intangible amortization $159 $159 $196 $179 $158Normalized Operating Income $186 $895 $284 $462 $555 Normalized Operating Margin - as originally disclosed 0.9% 9.4% 2.7% 8.2% 11.3% Wireless merger intangible amortization 5.6% 2.0% 5.9% 5.2% 4.6%Normalized Operating Margin 6.5% 11.4% 8.6% 13.4% 15.9% Wireless merger intangible amortization - Represents BellSouth's 40 percentshare of the non-cash amortization of intangibles, primarily customer lists,that were created in Cingular's acquisition of AT&T Wireless. 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