item 14 exhibits financial statement schedules reports form 8k financial statement schedules listed omitted required information contained financial statements notes thereto schedules required applicable b reports form 8k bellsouth corporation third quarter earnings release date report october 21 1993 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation ronald dykes ronald dykes vice president comptroller march 28 1994 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer john l clendenin chairman board chief executive officer principal financial officer earle mauldin executive vice president chief financial officer principal accounting officer ronald dykes vice president comptroller directors f duane ackerman reuben v anderson james h blanchard andrew f brimmer j hyatt brown john l clendenin armando codina marshall criser gordon b davidson phyllis burke davis william mccoy john g medlin jr c dixon spangler jr ronald terry thomas r williams j tylee wilson ronald dykes ronald dykes individually attorneyinfact march 28 1994 report consent independent accountants report consolidated financial statements bellsouth corporation included page 38 form 10k connection audits financial statements also audited related financial statement schedules listed index page 61 form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein coopers lybrand atlanta georgia february 3 1994 consent incorporation reference registration statements bellsouth corporation form s3 nos 3329411 3322785 3348929 3349461 3351449 form s8 nos 3338265 3338264 3338263 3330773 3330772 3326518 3312165 294802 3349459 reports dated february 3 1994 audits consolidated financial statements financial statement schedules bellsouth corporation december 31 1993 1992 years ended december 31 1993 1992 1991 reports included annual report form 10k coopers lybrand atlanta georgia march 28 1994 bellsouth corporation schedule ii amounts receivable related parties underwriters promoters employees related parties millions bellsouth corporation schedule v property plant equipment year ended december 31 1993 dollars millions year ended december 31 1992 dollars millions notes page 70 integral part schedule bellsouth corporation schedule v property plant equipment continued year ended december 31 1991 dollars millions bellsouth corporation schedule vi accumulated depreciation year ended december 31 1993 dollars millions year ended december 31 1992 dollars millions notes page 72 integral part schedule bellsouth corporation schedule vi accumulated depreciation year ended december 31 1991 dollars millions bellsouth corporation schedule viii valuation qualifying accounts allowance uncollectibles dollars millions bellsouth corporation schedule x supplementary income statement information three years ended december 31 1993 dollars millionsitem 14 exhibits financial statement schedules reports form 8k 2 financial statement schedules omitted required information contained financial statements notes thereto schedules required applicable 3 exhibits identified parentheses file sec incorporated herein reference exhibits hereto management contracts compensatory plans arrangements required filed exhibits form 10k report pursuant item 14c filed exhibits 10a 10aa inclusive b reports form 8k october 20 1994 bellsouth corporation third quarter 1994 earnings release january 23 1995 bellsouth corporation fourth quarter 1994 earnings release signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation ronald dykes ronald dykes vice president chief financial officer comptroller march 6 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer john l clendenin chairman board chief executive officer principal financial officer principal accounting officer ronald dykes vice president chief financial officer comptroller directors f duane ackerman gordon b davidson reuben v anderson phyllis burke davis james h blanchard john g medlin jr andrew f brimmer robin b smith j hyatt brown c dixon spangler jr john l clendenin ronald terry armando codina thomas r williams marshall criser j tylee wilson ronald dykes ronald dykes individually attorneyinfact march 6 1995 consent independent accountants consent incorporation reference registration statements bellsouth corporation form s3 nos 3329411 3322785 3348929 3349461 3351449 form s8 nos 3338265 3338264 3338263 3330773 3330772 3326518 3312165 294802 3349459 report dated february 3 1995 audits consolidated financial statements bellsouth corporation december 31 1994 1993 years ended december 31 1994 1993 1992 report included annual report form 10k coopers lybrand llp atlanta georgia march 6 1995item 14 exhibits financial statement schedules reports form 8k 2 financial statement schedules omitted required information contained financial statements notes thereto schedules required applicable 3 exhibits identified parentheses file sec incorporated herein reference exhibits hereto management contracts compensatory plans arrangements required filed exhibits form 10k report pursuant item 14c filed exhibits 10a 10w inclusive b reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation ronald dykes ronald dykes executive vice president chief financial officer comptroller february 27 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer john l clendenin chairman board president chief executive officer principal financial officer principal accounting officer ronald dykes executive vice president chief financial officer comptroller directors f duane ackerman phyllis burke davis reuben v anderson john g medlin jr james h blanchard robin b smith j hyatt brown c dixon spangler jr john l clendenin ronald terry armando codina thomas r williams marshall criser j tylee wilson ronald dykes ronald dykes individually attorneyinfact february 27 1996 consent independent accountants consent incorporation reference registration statements bellsouth corporation form s3 nos 3329411 3322785 3348929 3349461 3351449 3363173 form s8 nos 3338265 3338264 3338263 3330773 3330772 3326518 3312165 294802 3349459 report dated february 5 1996 includes explanatory paragraph stating company discontinued accounting operations bellsouth telecommunications inc accordance statement financial accounting standards 71 accounting effects certain types regulation effective june 30 1995 changed method accounting postretirement benefits pensions income taxes postemployment benefits 1993 audits consolidated financial statements bellsouth corporation december 31 1995 1994 three years period ended december 31 1995 report included annual report form 10k coopers lybrand llp atlanta georgia february 27 1996item 14 exhibits financial statement schedules reports form 8k b reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation ronald dykes ronald dykes executive vice president chief financial officer february 25 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer f duane ackerman president chief executive officer principal financial officer ronald dykes executive vice president chief financial officer principal accounting officer w patrick shannon vice president controller ronald dykes individually attorneyinfact february 25 1997 consent independent accountants consent incorporation reference registration statements bellsouth corporation form s3 nos 3329411 3348929 3349461 3351449 3363173 33321233 form s8 nos 3338265 3338264 3338263 3330773 3330772 3326518 3312165 294802 3349459 33301427 33301429 33313783 report dated february 3 1997 includes explanatory paragraph stating company discontinued accounting operations bellsouth telecommunications inc accordance statement financial accounting standards 71 accounting effects certain types regulation effective june 30 1995 audits consolidated financial statements bellsouth corporation december 31 1996 1995 three years period ended december 31 1996 report included annual report form 10k coopers lybrand llp atlanta georgia february 25 1997item 14 exhibits financial statement schedules reports form 8k b reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation w patrick shannon w patrick shannon vice president controller february 25 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer f duane ackerman chairman board president chief executive officer principal financial officer ronald dykes executive vice president chief financial officer principal accounting officer w patrick shannon vice president controller w patrick shannon individually attorneyinfact february 25 1998 consent independent accountants consent incorporation reference registration statements bellsouth corporation form s3 nos 3329411 3348929 3349461 3351449 3363173 33321233 33331301 33345607 form s8 nos 3338265 3338264 3338263 3330773 3330772 3326518 3312165 294802 3349459 33301427 33301429 33313783 33338295 report dated february 3 1998 includes explanatory paragraph stating company discontinued accounting operations bellsouth telecommunications inc accordance statement financial accounting standards 71 accounting effects certain types regulation effective june 30 1995 audits consolidated financial statements bellsouth corporation december 31 1997 1996 three years period ended december 31 1997 report included annual report form 10k coopers lybrand llp atlanta georgia february 25 1998item 14 exhibits financial statement schedules reports form 8k b reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation w patrick shannon w patrick shannon vice president controller february 24 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer f duane ackerman chairman board president chief executive officer principal financial officer ronald dykes executive vice president chief financial officer principal accounting officer w patrick shannon vice president controller w patrick shannon individually attorneyinfact february 24 1999 consent independent accountants consent incorporation reference report dated february 3 1999 audits consolidated financial statements bellsouth corporation december 31 1998 1997 three years period ended december 31 1998 report included annual report form 10k following registration statements form s3 file 3351449 form s3 file 3363173 form s3 file 33321233 form s3 file 33331301 form s3 file 33345607 form s8 file 3338265 form s8 file 3338264 form s8 file 3349459 form s8 file 33313783 form s8 file 33349045 form s8 file 33349047 form s8 file 33349169 pricewaterhousecoopers llp atlanta georgia february 24 1999nannanitem 14 controls procedures maintain disclosure controls procedures designed ensure information required disclosed exchange act reports recorded processed summarized reported within time periods specified secs rules forms information accumulated communicated management including chief executive officer chief financial officer appropriate allow timely decisions regarding required disclosure management necessarily applied judgment assessing costs benefits controls procedures nature provide reasonable assurance regarding managements control objectives also investments certain unconsolidated entities control manage entities disclosure controls procedures respect entities necessarily limited maintain respect consolidated subsidiaries within 90 days prior date filing report carried evaluation supervision participation management including chief executive officer along chief financial officer effectiveness design operation disclosure controls procedures pursuant exchange act rule 13a14 based upon foregoing chief executive officer along chief financial officer concluded disclosure controls procedures effective material respects timely alerting material information relating bellsouth including consolidated subsidiaries required included exchange act reports significant changes internal controls factors could significantly affect internal controls subsequent date carried evaluation part iv item 15nanitem 14 principal accountant fees services information headings “audit committee report fees paid independent registered public accounting firm” “ preapproval services independent registered public accounting firm” contained company’s definitive proxy statement dated march 11 2005 incorporated herein reference bellsouth 2004 87 exhibits financial statement schedules bellsouth corporation part iv item 15item 14 principal accountant fees services information required item contained company’s definitive proxy statement issued connection 2006 annual meeting shareholders filed sec within 120 days december 31 2005 incorporated herein reference 86 bellsouth 2005 part iv item 15nan item 7 managements discussion analysis results operations financial condition dollars millions except per share amounts bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange toll communications services within 38 courtdefined geographic areas called local access transport areas latas network access services enable interlata communications using longdistance facilities interexchange carriers bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing domestic wireless international communications services advertising publishing services products prior january 1 1992 majority operations bellsouth telecommunications conducted south central bell telephone company south central bell southern bell telephone telegraph company southern bell effective midnight december 31 1991 south central bell merged southern bell southern bells name changed bellsouth telecommunications results operations net income earnings per share 1993 decreased 7376 153 respectively compared previous year decreases due primarily charge 6966 140 per share restructuring bellsouths telephone operations see note k charges 1993 contributed decreases 866 17 per share debt refinancings bellsouth telecommunications see note e 674 14 per share adoption statement financial accounting standards sfas 112 see notes h n 47 09 per share initial impact regulatory settlement florida approximately 45 09 per share related increase federal statutory income tax rate corporations exclusive tax benefit associated restructuring charge approximately 25 05 per share associated severe weather conditions first quarter 1993 decreases also attributable part inclusion 1992s results gains 395 08 per share 329 07 per share respectively settlement federal income tax matter settlement prior year regulatory issues 1993 decreases partially offset overall growth operating revenues driven improvement key business volumes inclusion 1992 charges debt refinancing hurricane andrew net income earnings per share 1992 increased 1462 26 respectively compared 1991 factors contributing increases include gains settlement federal income tax matter settlement prior year regulatory issues expense reductions attributable salary savings since implementation early retirement program inclusion 1991 charge associated early retirement program inclusion 1991 onetime charge cumulative effect change accounting principle cellular service sales commissions see note n also contributing increases growth business volumes bellsouth telecommunications partially offset rate reductions wireless businesses bellsouth enterprises 1992 increases partially offset charges 407 08 per share associated refinancing lower interest rates certain longterm debt issues bellsouth telecommunications see note e approximately 28 06 per share associated hurricane andrew costs attributable investments certain startup operations operating revenues total operating revenues increased 6787 45 1993 compared increase 7561 52 1992 increases resulted growth revenues bellsouths wireline telephone businesses coupled significant increase revenues wireless communications businesses traditionally bellsouths local access toll services offered bellsouth telecommunications primarily accounted increases operating revenues bellsouth however continues experience increasing shift relative contributions revenue sources see volumes business local service revenues reflect amounts billed customers local exchange services include connection network secondary central office feature services custom calling features custom dialing packages local service revenues 1993 increased 3413 55 compared increase 3898 67 1992 1993 increase primarily attributable increase 683000 access lines since december 31 1992 420 increase secondary central office services addition discussed effects 279 refund florida 1992 changes expansion local area calling plans including plan implemented louisiana 1992 contributed increase 1993 increase 1992 attributable addition 614900 access lines year revenue shifts toll local due expanded local area calling plans increase secondary central office services 514 1991 increase revenues local area calling plans primarily attributable access line growth addition implementation new expanded local area calling plan louisiana effective march 1992 positively impacted 1992 local service revenue see toll increase also due part inclusion 1991 639 refund florida previously deferred services revenues increase 1992 partially offset related refund 279 1992 pertaining amounts set aside 1991 disposition florida public service commission since deferred set aside amounts originally accrued services impact net income interstate access revenues result provision access services interexchange carriers provide telecommunications services states interstate access revenues increased 456 15 compared increase 875 31 1992 increase 1993 reflects increased rates effective july 1 1993 conjunction bellsouth telecommunications selection 33 productivity offset factor federal communications commissions fcc price cap plan growth minutes use increases end user charges attributable growth number access lines service effect increases substantially offset decreased net settlements national exchange carriers association revenue deferrals fccs price cap plan since bellsouth telecommunications earnings currently sharing range fccs price cap plan factors significant revenue growth category likely 1992 increase interstate access revenues primarily attributable growth minutes use increase end user charges attributable access line growth effect increases partially offset rate reductions since december 31 1991 including implementation lower tariff rates effective july 1 1992 associated bellsouth telecommunications selection 43 productivity offset factor reduced interstate revenues fccs price cap plan see operating environment trends business intrastate access revenues result provision access services interexchange carriers provide telecommunications services latas within state revenues increased 101 12 1993 compared increase 51 06 1992 increases due primarily growth minutes use respective prior year substantially offset rate reductions 1993 1992 toll revenues received provision longdistance services within latas services include intralata service beyond local calling area wide area telecommunications service wats 800 services customers highly concentrated demand special services transport voice data video toll revenues decreased 293 23 1993 compared decrease 1249 91 1992 decrease 1993 reflects rate reductions since december 31 1992 decline toll message volumes largely attributable expansion local area calling plans effect shifting revenues toll local service decrease partially offset revenue increases due optional calling plans independent company settlements 1992 decrease resulted rate reductions since december 31 1991 decrease toll messages due competition expanded local area calling plans including plan implemented louisiana 1992 overall decline toll revenues expected continue long term directory advertising publishing revenues include revenues derived publishing printing selling advertising performing related services concerning alphabetical classified telephone directories directory advertising publishing revenues increased 556 38 1993 compared 335 23 increase 1992 increase 1993 primarily attributable increases prices volume advertising sold 1992 increase due primarily growth volume independent directory contracts wireless communications revenues include revenues consolidated wireless communications businesses primarily cellular paging within bellsouth enterprises well revenues interconnections unaffiliated cellular carriers bellsouth telecommunications bellsouths interests net income loss unconsolidated wireless businesses within bellsouth enterprises accounted equity method accounting recorded income wireless communications revenues increased 3578 299 1993 compared increase 4211 544 1992 1993 increase resulted continued growth customer base wireless services domestic international markets increase 1992 resulted growth customer base acquisitions made late 1991 increases roamer revenues services revenues principally comprised revenues customer premises equipment sales maintenance services billing collection services nonregulated services primarily inside wire services offered bellsouth telecommunications services revenues decreased 1024 82 1993 compared decrease 560 43 1992 decrease 1993 attributable effect reclassifying 1992 279 florida refund ratepayers services local service inclusion 1992 527 settlement prior year regulatory issues sale subsidiary late 1992 decrease partially offset increased revenues nonregulated services due part higher demand addition billing collection revenues increased due effect nonrecurring adjustments however revenues expected decline long term due interexchange carriers assuming direct billing services decrease 1992 partially attributable decrease 186 due dissolution business 1991 reclassification 1991 revenue deferral 639 florida partially offset certain florida set aside amounts totaling 279 prior years included local service rate reductions 1992 deferral set aside amounts initially recorded reductions services revenues prior 1992 see local service also contributing 1992 decrease 343 decrease billing collection revenues decreased revenues certain bellsouth enterprises subsidiaries decrease partially offset settlement prior year regulatory issues related services described required recorded services resulting onetime increase 527 operating expenses operating expenses increased 15523 129 1993 compared increase 4051 35 1992 1993 increase primarily attributable pretax charge 11364 restructuring bellsouths telephone operations adjusted effect restructuring charge operating expenses increased 4159 35 1993 increase adjusted due expenses associated improved business volumes bellsouth telecommunications wireless businesses bellsouth enterprises higher levels salaries wages regulatory settlement florida expenses attributable severe weather conditions first quarter 1993 increase partially offset decreased overtime compensation inclusion 1992 expenses related hurricane andrew 1992 increase due expenses associated higher business volumes higher levels salaries wages portion resulted new threeyear working agreement communications workers america cwa 1992 hurricane andrew remedial actions related underground fuel storage tanks increase 1992 partially offset inclusion 1991 expenses associated early retirement program 1992 expense reductions attributable salary savings since implementation program cost services products includes operating expenses associated network support maintenance bellsouth telecommunications property plant equipment material supplies expense cost tangible goods sold expenses associated cost providing services cost services products increased 1838 32 1993 compared decrease 579 10 1992 increase 1993 due increased expenses associated volume growth wireline wireless communications directory businesses approximately 40 expenses related severe weather conditions first quarter 1993 network service improvement activities higher levels base salary wage expenses resulting annual increases management craft employees increase employee benefits expense increase employee benefits expense driven higher overall cost medical services increase 38 due adoption sfas 106 employers accounting postretirement benefits pensions partially offset 46 decrease pension expense pension expense expected decrease 1994 due primarily effect modifying benefit level recently adopted cash balance pension plan management employees reevaluating certain actuarial assumptions see note h postretirement benefit expenses 1994 expected increase due effect changes certain actuarial assumptions overall expense increase 1993 partially offset reduced expenses overtime compensation rents software license fees sale subsidiary late 1992 expenses related hurricane andrew reflected 1992 decrease due reclassification 2240 expenses certain businesses within bellsouth enterprises selling general administrative adjusting effect reclassification cost services products increased 1661 29 1992 compared 1991 adjusted 1992 increase attributable growth volumes business bellsouth telecommunications growth wireless communications customer base including effect acquisition wireless businesses 1991 higher levels salary wage expenses portion resulted new threeyear working agreement cwa 1992 increased pension benefit expenses approximately 45 expenses net insurance recovery state regulatory deferrals related hurricane andrew also contributing increased expenses rents contracted services adjusted increase partially offset expense reductions attributable salary savings implementation early retirement program 1991 inclusion 1991 201 inventory writedowns depreciation expense increased 716 24 1993 compared 668 23 increase 1992 1993 increase partially attributable higher levels property plant equipment since december 31 1992 resulting continued growth customer base approximately 20 additional depreciation expense related extraordinary property retirements conjunction regulatory settlement florida higher intrastate depreciation rates mississippi higher interstate depreciation rates alabama kentucky louisiana mississippi tennessee retroactive january 1 1993 also contributed increase 1993 increase partially offset continued expiration inside wire reserve deficiency amortizations reduced depreciation expense florida alabama resulting represcription 1992 increase also due part higher levels property plant equipment since december 31 1991 resulting primarily growth customer base also contributing increase new interstate depreciation rates retroactive january 1 1992 florida georgia north carolina south carolina new intrastate depreciation rates north carolina south carolina also retroactive january 1 1992 additional reserve deficiency amortization approved north carolina increase 1992 partially offset expiration inside wire reserve deficiency amortizations selling general administrative expenses include operating expenses related sales activities salaries commissions benefits travel marketing advertising expenses also included amortization intangibles research development costs provision uncollectibles selling general administrative increased 1605 48 1993 3962 135 1992 increase 1993 primarily attributable increased expenses associated growth wireless communications customer base approximately 55 initial impact regulatory settlement florida higher levels salaries wages taxes income taxes increase 11 due adoption sfas 112 employers accounting postemployment benefits 1993 increase partially offset decrease advertising expense bellsouth telecommunications 1992 increase due reclassification 224 expenses certain businesses within bellsouth enterprises cost services products adjusting effect reclassification selling general administrative increased 1722 59 1992 compared 1991 adjusted 1992 increase attributable growth business volumes bellsouth telecommunications growth wireless communications customer base including effect acquisition wireless businesses 1991 higher levels salary wage expenses portion resulted new threeyear working agreement cwa 1992 increased pension benefit expenses approximately 241 expenses remedial actions related underground fuel storage tanks adjusted increase partially offset decrease provision uncollectibles inclusion 1991 686 expenses associated early retirement program expense reductions 1992 attributable salary savings since implementation program 1993 bellsouth recognized business restructuring charge 11364 restructuring undertaken redesign streamline fundamental processes work activities bellsouth telecommunications telephone operations better respond increasingly competitive business environment restructuring expected improve overall responsiveness customer needs permit rapid introduction new products services reduce costs part restructuring bellsouth plans consolidate centralize existing operations bellsouth plans establish single point contact accountability receipt analysis resolution customer installation repair activities service activation result 288 existing operations centers consolidated 80 locations data management centers used support company operations reduced 11 6 addition customer service processes systems designed provide onenumber access specific appointment times online realtime access customer records immediate service activation facilities already place material components 11364 charge relate downsizing existing workforce 10200 employees 1996 components include 3682 separation payments relocations remaining employees 3428 consolidation elimination certain operations facilities 4254 enabling changes information systems primarily used provide services existing customers bellsouth telecommunications reduced overall workforce approximately 1300 employees 1993 following implementation restructuring plan workforce reductions 1994 1995 1996 expected approximately 3700 2900 2300 respectively bellsouth expects restructuring result cost savings beginning 1994 due initial workforce reductions specific future financial impacts bellsouths earnings uncertain depend upon regulatory treatment restructuring charge related cost savings restructuring completed annual cost savings expected approximately 600 due primarily reduced employeerelated expenses interest expense includes interest debt certain accrued liabilities capital leases offset allowance funds used construction capitalized cost installing equipment constructing plant interest expense decreased 574 77 1993 557 69 1992 decreases 1993 1992 due primarily declines interest rates borrowings short long term including impact refinancings longterm debt lower interest rates decreases partially offset higher average levels shortterm borrowings see notes e l income includes interest income dividend income earnings losses unconsolidated subsidiaries business ventures partnerships minority interests gains losses sale miscellaneous ventures income decreased 1700 957 1993 751 297 1992 1993 decrease resulted part decline 808 interest dividend income due inclusion 1992 566 attributable tax settlement internal revenue service lower interest rates minority interests contributed 116 decrease overall earnings unconsolidated affiliates also decreased 657 due primarily costs expenses associated investments certain new operations including cellular venture germany business venture ram broadcasting corporation optus communications pty ltd year 1993 earnings per share reduced approximately 27 per share result business ventures decrease 1992 attributable 556 decrease earnings unconsolidated affiliates due part investments several startup operations 338 increase related minority interests inclusion 1991 400 gains certain directory wireless operations sold decrease partially offset 462 increase interest dividend income reflects settlement internal revenue service summary tax assessment resulted 566 interest income lower interest rates income tax expense decreased 3619 388 1993 compared increase 1801 239 1992 decrease 1993 due impact restructuring charge reduced tax expense 4398 decrease partially offset impact omnibus budget reconciliation act 1993 including increase federal statutory income tax rate corporations exclusive tax benefit associated restructuring charge increased tax expense approximately 45 bellsouths effective tax rates 356 360 333 1993 1992 1991 respectively reconciliation federal statutory income tax rates effective tax rates provided note discussion adoption sfas 109 accounting income taxes also included therein increase 1992 attributable increase income taxes higher effective tax rates resulting decreasing investment tax credit amortization financial condition bellsouth used net cash generated operations shortterm financing fund capital expenditures pay dividends invest operate new business ventures bellsouth believes funds provided operations addition readily available sources external financing sufficient meet needs business foreseeable future although 1993 net income decreased 456 due primarily restructuring charge bellsouths cash flow operations decreased 32 1993 47862 49468 1992 1993 impact restructuring cash flow operations minimal however substantially restructuring charge expected require cash payments future periods exclusive capital requirements cash payments related restructuring 1994 1995 1996 expected approximately 500 350 220 respectively addition future capital expenditures associated overall restructuring estimated approximately 650 cash requirements associated restructuring activities including related capital expenditures provided primarily bellsouths operations necessary external sources bellsouths primary use capital funds continues capital expenditures support network development activities capital expenditures bellsouth companies increased 93 34859 31893 1992 substantially funds supporting construction activity provided internally trend expected continue 1994 expenditures projected approximately 3500 1994 cash used investments advances unconsolidated affiliates 1993 decreased 3195 5625 1992 approximately 70 cash invested ventures ram broadcasting corporation optus communications pty ltd bellsouth plans aggressively pursue corporate strategy expanding offerings beyond traditional businesses new offerings may include information services interactive communications cable television entertainment services significant capital would required order execute strategy bellsouth believes financing future investing activities provided funds generated internal operations bellsouths access external sources effort pursue opportunities interactive programming television shopping advanced services bellsouth agreed invest approximately 2000 qvc network inc qvc contingent qvc successfully completing acquisition paramount communications inc paramount also received option acquire approximately 500 qvc stock purchase price 60 per share event qvc unsuccessful proposed acquisition paramount qvcs bid paramount terminated february 14 1994 bellsouth six months thereafter determine whether exercise option cash dividends paid bellsouths common shareholders totaled 13074 1993 compared 10825 1992 increase due fact 1993 common shares issued lieu cash dividends shareholder dividend reinvestment stock purchase plan drspp increasingly purchased open market rather new issuances bellsouth 1993 new common shares issued lieu cash dividends drspp 664 compared 2689 1992 1993 bellsouth telecommunications refinanced 2760 longterm debt favorable interest rates bellsouth expects refinancings positive impact future cash flows bellsouths debt total capitalization ratio increased 402 december 31 1993 compared 390 december 31 1992 increase due higher levels debt primarily short term decrease shareholders equity operating environment trends business regulatory environment providing telecommunications services bellsouth telecommunications subject regulation state federal regulators respect rates services issues states bellsouth telecommunications service area currently provide form regulation earnings discussed bellsouth believes existing regulatory framework appropriate increasingly competitive telecommunications environment accordingly bellsouths primary regulatory focus continues directed toward modifying regulatory process one closely aligned changing market conditions overall public policy objectives alternative current regulatory process bellsouth believes price regulation whereby prices basic local exchange service directly regulated prices products services based market factors logical progression regulatory flexibility fair consumers bellsouth telecommunications intends pursue implementation price regulation plans filings state regulatory commissions legislative initiatives state regulation seven nine states bellsouth telecommunications operates alternative form regulation traditional rate return regulation seven states alabama florida georgia kentucky louisiana mississippi tennessee state plans designed provide bellsouth telecommunications economic incentives improve cost controls general efficiency form shared earnings benchmark rates return plans georgia kentucky scheduled expire 1994 bellsouth telecommunications attained earnings sharing range alabama kentucky louisiana mississippi certain times 1993 part 1993 south carolina also operated form alternative regulation however august 1993 south carolina supreme court ruled south carolina public service commission scpsc lacked statutory authority approve incentive regulation plans type bellsouth telecommunications operating since 1992 legislation proposed south carolina would permit scpsc adopt alternative forms regulation including price regulation interim traditional rate return regulation effect south carolina january 1994 florida public service commission approved settlement reached bellsouth telecommunications floridas office public counsel related pending rate proceedings initially filed bellsouth telecommunications july 1992 consolidated matters settlement ended outstanding rate case consolidated issues florida extended incentive regulation plan least 1996 terms settlement bellsouth telecommunications required recognize 1993 business remaining deferred expenses related hurricane andrew record expenses associated extraordinary asset retirements also related hurricane andrew aggregate impact items approximately 75 reduced bellsouths net income 1993 approximately 47 09 per share terms settlement also required bellsouth telecommunications reduce rates 55 february 1994 require reductions additional 60 july 1994 80 october 1995 84 october 1996 settlement provides changes service offerings tariffs including approximately 21 revenue reductions increased expenses certain service rates capped current levels 1997 bellsouth telecommunications agreed propose local measured service statewide basis time period federal regulation national level bellsouth telecommunications operating price cap regulation since january 1 1991 contrast regulation limits rate return achieved price cap regulation limits prices telephone companies charge use services current fcc plan allows sharing earnings benchmark range earnings benchmark dependent upon productivity offset factor chosen annually carrier price cap plans annual election period 1993 bellsouth telecommunications selected productivity offset factor 33 increased access rates would otherwise 43 factor selected however selection lower productivity factor provides lower allowed return sharing required december 31 1993 bellsouths recorded liability estimated sharing 456 february 1994 fcc initiated review current price cap plan notice proposed rulemaking fcc identified examination three broad sets issues including related basic goals price cap regulation operation price caps transition local exchange services fully competitive market bellsouth believes advocate revised price cap plan structured provide increased pricing flexibility services competition evolves telecommunications markets changes current plan expected effective january 1 1995 soon thereafter economy ninestate region served bellsouth telecommunications wireline telephone business whole posted solid economic gains 1993 continuing economic slumps west coast northeast kept national economy sluggish much year employment growth averaged 21 region 1993 slower 4 annual rate experienced 1980s still national average 16 manufacturing employment region grew slightly 1993 nation lost approximately 180000 manufacturing jobs services employment increased 4 lead regions growth employment growth expected improve 1994 residential construction growth moved back prerecession levels housing starts region 12 year housing demand expected remain strong 1994 regions relatively strong economy along attractive climate kept net inmigration near 400000 per year boosting demand telecommunications services however increasing competition faced bellsouth telecommunications growing percentage revenues bellsouth enterprises makes bellsouths financial performance susceptible changes economy previously operations reflect competitive environment greater elasticity demands products services volumes business network access lines service december 31 thousands total number access lines service increased 683000 1992 representing 37 increase improvement 34 rate increase 1992 1991 overall increase led growth florida georgia north carolina tennessee primarily attributable continued economic improvement including expanding employment bellsouth telecommunications ninestate region increase number second lines residences overall growth rate residence lines remained constant growth rate business lines continued increase reaching 59 1993 compared 51 1992 access minutes use millions access minutes use represent volume traffic carried interexchange carriers latas interstate intrastate using bellsouth telecommunications local facilities total access minutes use increased 40653 million 63 1993 compared 67 increase 1992 1993 increase access minutes use partially attributable access line growth also intralata toll competition effect increasing access minutes use reducing toll messages carried bellsouth telecommunications facilities growth rate total minutes use continues negatively impacted effects bypass migration interexchange carriers categories service eg special access fixed charge opposed volumedriven charge high capacity services causes decrease minutes use toll messages comprised message telecommunications service wide area telecommunications service decreased 293 million 23 compared 77 decrease 1992 lower rate decrease 1993 attributable inclusion impact louisiana area calling plan 1992 beginning march 1993 competition intralata toll market effects expanded local area calling plans continue adverse impact toll message volumes plans effects competition effect shifting calls toll local service access respectively corresponding revenues generally shifted commensurate rates decline toll message volumes expected continue foreseeable future wireless customers equity basis bellsouths wireless communications businesses continue significant contributor companys operations primarily due continued expansion customer base mobile communications services domestic cellular customers increased 441000 394 1559100 since december 31 1992 rate increase declined since 1992 overall penetration rate number customers percentage total population service territory increased 298 december 31 1992 401 december 31 1993 total minutes use also continued increase although average minutes use per cellular customer declined since 1992 due trend increased penetration loweruser market segments also domestic paging customers increased 255000 261 1232200 since december 31 1992 due successful retail distribution program aggressive pricing strategies reseller market number international cellular customers grew 192200 increase 114600 1477 since december 31 1992 growth minutes use international cellular properties remained strong due part demand stimulated competitive programs enhanced services underdeveloped landline service competition recent developments telecommunications marketplace indicate technological convergence occurring telephone cable broadcast television computer entertainment information services industries technologies utilized developed industries enable multiple communications offerings several large companies recently announced proposed acquisitions business alliances consummated could intensify expand competition local communications services currently provided bellsouths networks competitors announced plans build local phone connections would permit business residential customers bypass facilities local telephone companies including bellsouth telecommunications certain cities service territory addition legislative activities congress could affect bellsouths businesses competitive position bellsouth undertaken plan streamline telephone operations improve overall cost structure part competitive strategy see results operations notwithstanding risks associated increased competition bellsouth opportunity benefit entry new business markets bellsouth believes order remain competitive future must aggressively pursue corporate strategy expanding offerings beyond traditional businesses may include information services interactive communications cable television entertainment services bellsouth plans enter businesses acquisitions investments strategic alliances established companies industries development capabilities internally transactions accomplished could initially reduce earnings require substantial capital financing business opportunities provided funds generated internal operations external sources accounting sfas 71 bellsouths regulated enterprise bellsouth telecommunications continues account economic effects regulation sfas 71 accounting effects certain types regulation bellsouth strategic business planning purposes continuously monitors evaluates impacts existing potential competitive factors bellsouths judgment changes competitive structure telecommunications industry dictate could charge prices customers provide recovery costs sfas 71 would longer apply bellsouth currently believes existing anticipated levels competition still permit prices based costs charged collected customers however rapid pace change industry making increasingly likely bellsouth required discontinue accounting sfas 71 future bellsouth believes existing regulatory framework appropriate increasingly competitive telecommunications environment accordingly bellsouth intends pursue implementation price regulation plans jurisdictions filings state regulatory commissions legislative initiatives since price regulation plans provide recovery specific costs sfas 71 would longer apply bellsouth successful altering existing regulatory framework achieving price regulation bellsouth would required discontinue accounting sfas 71 bellsouth discontinue accounting sfas 71 due overall level competition changes regulatory frameworks effect bellsouths financial condition results operations would material specific financial impacts would depend timing magnitude changes marketplace overall regulatory framework matters accounting pronouncements effective january 1 1993 bellsouth adopted three new accounting standards issued financial accounting standards board sfas 106 employers accounting postretirement benefits pensions requires employers accrue cost providing postretirement benefits pensions period employees expected earn benefit bellsouth recognizing related transition benefit obligation 15 years result adoption sfas 106 operating expenses 1993 38 higher would using former accounting method accordingly net income reduced approximately 23 05 per share see note h sfas 109 accounting income taxes requires companies compute deferred income taxes using liability approach rather deferred method previously required accounting principles board opinion 11 adoption sfas 109 materially affect tax expense net income 1993 see note sfas 112 employers accounting postemployment benefits requires employers accrue cost postemployment benefits provided former inactive employees employment retirement onetime charge 674 14 per share net deferred tax benefit 425 related adoption sfas 112 recognized accounting change see note h pronouncements issued authoritative accounting bodies yet adopted bellsouth adoption standards future periods required expected material impact bellsouths operating results financial condition environmental issues bellsouth subject number environmental matters result operations subsidiaries shared liability provisions plan reorganization related modification final judgment result bellsouth expects required expend funds remedy certain facilities including superfund sites bellsouth named potentially responsible party also remediation sites underground fuel storage tanks expenses associated environmental compliance december 31 1993 bellsouths recorded liability related primarily remediation sites 355 bellsouth continually monitors operations respect potential environmental issues including changes legally mandated standards remediation technologies bellsouths recorded liability reflects specific issues remediation activities currently deemed probable cost remediation estimable bellsouth continues believe expenditures connection additional remedial actions current environmental protection laws related matters material impact bellsouths operating results financial condition subsequent events first quarter 1994 bellsouth sold 36 interest cellular telephone business guadalajara mexico result gain 675 14 per share recognized period bellsouth communication systems inc whollyowned subsidiary also entered agreement sell customer premise equipment sales service operations outside ninestate region served bellsouth telecommunications transaction expected close end april 1994 item 8item 7 managements discussion analysis results operations financial condition dollars millions except per share amounts bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange service toll communications services within courtdefined geographic areas called local access transport areas latas provides network access services enable interlata communications using longdistance facilities interexchange carriers subsidiaries telecommunications services products provided inside outside ninestate bellsouth telecommunications region bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing wireless international communications services advertising publishing products approximately 72 73 74 bellsouths total operating revenues years ended december 31 1994 1993 1992 respectively greater portion net income wireline services provided bellsouth telecommunications charges local service access services toll year ended december 31 1994 accounted approximately 57 33 10 respectively wireline revenues discussed revenues wireless communications services directory advertising publishing services accounted approximately 12 9 respectively total operating revenues year ended december 31 1994 remainder revenues derived principally nonregulated services provided bellsouth telecommunications results operations net income earnings per share 1994 increased 12797 258 respectively compared 1993 increases attributable part revenue growth driven continued growth access lines cellular customer base cost control measures bellsouth telecommunications including salary wage savings attributable restructuring plan implemented 1993 gains 675 14 per share 401 08 per share related sale two international cellular investments increases also due effect charges 1993 aggregate reduced net income earnings per share 9382 188 respectively year 1993 charges include 6966 140 per share restructuring bellsouths telephone operations see note k 866 17 per share refinancing certain longterm debt issues lower interest rates bellsouth telecommunications see note e 674 14 per share retroactive adoption statement financial accounting standards sfas 112 employers accounting postemployment benefits see note n 47 09 per share initial impact regulatory settlement florida approximately 25 05 per share associated severe 1993 winter weather conditions 156 03 per share related federal income tax legislation enacted 1993 net income earnings per share 1993 decreased 7376 153 respectively compared previous year decreases due primarily impact restructuring charges discussed additional charge approximately 30 06 per share related 1993 federal income tax legislation inclusion gains 1992s results 395 08 per share 329 07 per share respectively settlements federal income tax matter prior year regulatory issues 1993 decreases partially offset overall growth operating revenues reflecting improvement key business volumes effect charges 1992 407 08 per share refinancing certain longterm debt issues lower interest rates bellsouth telecommunications see note e approximately 28 06 per share associated hurricane andrew volumes business network access lines service december 31 thousands rate growth access lines continued particularly strong 46 1994 compared 37 rate increase 1993 number access lines service since december 31 1993 increased approximately 887400 overall increase led growth georgia north carolina florida primarily attributable continued economic improvement including expanding employment bellsouth telecommunications ninestate region increase number second residential lines second residential lines accounted approximately 402 228 overall increases residence access lines total access lines respectively since december 31 1993 growth rates 1994 total residence business lines 37 71 respectively improved compared growth rates 30 59 respectively 1993 access minutes use millions access minutes use represent volume traffic carried interexchange carriers latas interstate intrastate using bellsouth telecommunications local facilities 1994 total access minutes use increased 60600 million 88 compared increase 63 1993 1994 increase access minutes use partially attributable access line growth promotions interexchange carriers intralata toll competition effect increasing access minutes use reducing toll messages carried bellsouth telecommunications network growth rate total minutes use continues negatively impacted effects bypass migration interexchange carriers categories service eg special access fixed charge opposed volumedriven charge high capacity services causes decrease minutes use toll messages comprised message telecommunications service wide area telecommunications service also effective 1994 toll messages include messages completed optional calling plans ocps provide reduced rates toll calls within lata prior period toll message volumes restated reflect change pricing services provided ocps stimulated volume growth accordingly trend declining toll message volumes prior periods reversed inclusion messages completed plans toll messages increased 472 million 31 compared restated increase 34 1993 1994 increase attributable part growth messages completed ocps stimulation resulting access line growth partially offset effect optional extended area calling plans based customers election provide wider tollfree calling area september 1994 south carolina implemented expanded local area calling plan south carolina plans impact 1994 toll message volumes negligible plan future implementation plans bellsouth telecommunications service region coupled competition intralata toll market adversely impact future toll message volumes local area optional extended area calling plans effects competition result transfer calls toll local service access categories respectively corresponding revenues generally shifted commensurate rates wireless customers equity basis wireless communications businesses become significant contributor bellsouths operations primarily due continued expansion customer base mobile communications services domestic cellular customers increased 596700 383 since december 31 1993 rate increase declined since 1993 overall penetration rate number customers percentage total population service territory increased 401 december 31 1993 550 december 31 1994 total minutes use also continued increase although average minutes use per cellular customer declined slightly due trend increased penetration lowerusage market segments number international cellular customers increased 169100 880 since december 31 1993 growth total minutes use international cellular properties remained strong due demand stimulated competitive programs underdeveloped landline service development operations australia denmark domestic paging customers increased 381900 310 since december 31 1993 due primarily acquisition remaining 50 ownership interest paging business effective august 1 1994 also continued success retail distribution program aggressive pricing strategies reseller market overall growth approximately 210000 customers attributable acquisition excluding effect acquisition domestic paging customers increased approximately 171900 140 since december 31 1993 operating revenues total operating revenues increased 9642 61 compared increase 6787 45 1993 increases resulted growth revenues bellsouths wireline telephone businesses coupled significant increase revenues wireless communications businesses traditionally local access toll services offered bellsouth telecommunications primarily accounted increases operating revenues bellsouth however continues experience gradually increasing shift relative contributions revenue sources toward wireless services components total operating revenues follows local service revenues reflect amounts billed customers local exchange services include connection network secondary central office feature services custom calling features custom dialing packages local service revenues 1994 increased 2858 43 compared increase 3413 55 1993 increase 1994 due primarily increase 887400 access lines since december 31 1993 also contributing increase growth attributable optional extended area calling plans increase 1994 partially offset rate reductions principally louisiana also florida alabama 1993 increase primarily attributable increase 684600 access lines since december 31 1992 growth optional extended area calling plans 420 increase secondary central office services addition effects 279 refund florida 1992 changes expansion local area calling plans primarily plan implemented louisiana 1992 contributed increase 1993 interstate access revenues result provision access services interexchange carriers provide telecommunications services states interstate access revenues increased 1360 45 1994 compared increase 456 15 1993 1994 increase attributable growth minutes use additional end user charges due primarily access line growth effect billing adjustments recorded 1993 reduced revenues period approximately 20 increases partially offset effect rate reductions effective july 1994 october 1994 additional revenue deferrals federal communications commissions fcc price cap plan decreased net settlements national exchange carriers association increase 1993 reflects increased rates effective july 1993 growth minutes use increases end user charges attributable growth number access lines service effect increases substantially offset decreased net settlements national exchange carriers association revenue deferrals fccs price cap plan billing adjustments reduced revenues approximately 20 see operating environment trends business intrastate access revenues result provision access services interexchange carriers provide telecommunications services latas within state 1994 intrastate access revenues increased 264 30 compared increase 101 12 1993 1994 increase attributable growth minutes use reclassification 1994 independent company settlements certain states would previously reduced revenues operating expenses increase partially offset impact rate reductions primarily alabama florida increase 1993 due primarily growth minutes use substantially offset rate reductions states served bellsouth telecommunications toll revenues received provision longdistance services within latas services include intralata service beyond local calling area wide area telecommunications service wats 800 services customers highly concentrated demand special services transport voice data video toll revenues decreased 294 24 1994 compared decrease 293 23 1993 1994 decrease primarily attributable several settlements independent companies reclassification certain settlements intrastate access revenue net rate reductions since december 31 1993 impact optional extended area calling plans decrease partially offset growth toll message volumes reflecting improvements related part ocps decrease 1993 resulted rate reductions since december 31 1992 impacts optional extended area calling plans expansion local area calling plans decrease partially offset revenue increases attributable independent company settlements growth toll message volumes overall decline toll revenues expected continue long term directory advertising publishing revenues include revenues derived publishing printing selling advertising performing related services concerning alphabetical classified telephone directories directory advertising publishing revenues increased 406 27 1994 compared 556 38 increase 1993 increases primarily attributable increases volume prices advertising sold wireless communications revenues include revenues consolidated wireless communications businesses primarily cellular paging within bellsouth enterprises well revenues interconnections unaffiliated cellular carriers bellsouth telecommunications network bellsouths interests net income loss unconsolidated wireless businesses within bellsouth enterprises accounted equity method accounting recorded income wireless communications revenues increased 5129 330 1994 compared increase 3578 299 1993 increases years resulted continued growth customer base wireless services domestic international markets consistent anticipated growth overall cellular industry bellsouths wireless communications revenues expected continue increase however rate growth revenues could adversely affected competitive pressures service pricing market penetration effect diversified customer base lower average usage development new technologies personal communications service pcs services revenues principally comprised revenues customer premises equipment cpe sales maintenance services billing collection services nonregulated services primarily inside wire services offered bellsouth telecommunications services revenues decreased 81 07 1994 compared decrease 1024 82 1993 slight decrease 1994 primarily attributable increased revenue deferrals related potential sharing certain state regulatory plans sale april 1994 bellsouth telecommunications outofregion cpe sales service operations decrease substantially offset higher demand unregulated products services including cpe residential customers voice messaging inside wire services effects adjustments reclassifications related services certain state regulatory plans billing collection services revenues derived billing collection expected decline long term due interexchange carriers assuming direct billing services decrease 1993 attributable effect reclassifying 1992 279 florida refund services local service inclusion 1992 527 settlement prior year regulatory issues sale subsidiary late 1992 decrease partially offset increased revenues nonregulated services due part higher demand addition billing collection revenues increased due effect nonrecurring adjustments operating expenses primarily result effect 1993 restructuring charge total operating expenses decreased 8065 59 1994 compared increase 15523 129 1993 components total operating expenses follows depreciation amortization increased 965 31 1994 compared 622 20 increase 1993 increase 1994 due higher levels property plant equipment since december 31 1993 resulting continued growth customer base wireless wireline services continued modernization networks special reserve deficiency amortization 204 north carolina increase period partially offset expiration reserve deficiency amortizations louisiana discussed inclusion 1993 20 impact florida regulatory settlement 1993 increase partially attributable higher levels property plant equipment since december 31 1992 resulting continued growth customer base approximately 20 additional depreciation expense related extraordinary property retirements conjunction regulatory settlement florida higher intrastate depreciation rates mississippi higher interstate depreciation rates alabama kentucky louisiana mississippi tennessee retroactive january 1 1993 also contributed increase 1993 increase partially offset expiration inside wire reserve deficiency amortizations reduced depreciation expense florida alabama resulting represcription operating expenses comprised cost services products selling general administrative 1993 restructuring charge cost services products includes employee employeerelated expenses associated network repair maintenance material supplies expense cost tangible goods sold expenses associated providing services selling general administrative includes expenses related sales activities salaries commissions benefits travel marketing advertising expenses administrative expenses operating expenses decreased 9030 87 1994 compared increase 14901 167 1993 excluding 11364 restructuring charge 1993 operating expenses increased 2334 25 1994 3537 40 1993 adjusted 25 increase 1994 primarily attributable increased expenses related sustained growth wireless communications customer base including additional marketing operational costs associated higher levels sales expanded operations also contributing increase additional expenses software license fees materials related volume growth network modernization wireline business effect reclassifying settlements independent telephone companies certain states intrastate access revenues operating expenses 1994 lesser extent volume growth directory advertising publishing businesses total employeerelated costs also increased reflecting annual compensation increases management represented employees increased overtime attributable volume growth network service activities higher expenses employee benefits partially offset salary wage savings employee reductions attributable restructuring plan begun 1993 bellsouth telecommunications reduction pension expense see note h adjusted expense increase 1994 partially offset sale 1994 outofregion cpe sales service operations inclusion 1993 approximately 55 40 respectively related regulatory settlement florida severe 1993 weather conditions adjusted 40 increase 1993 due increased expenses associated volume growth wireline wireless communications directory businesses approximately 40 expenses related severe weather conditions first quarter 1993 network service improvement activities higher levels base salary wage expenses resulting annual increases management represented employees increase employee benefits expense increase employee benefits expense driven higher overall cost medical services increase 38 due adoption sfas 106 employers accounting postretirement benefits pensions increase 11 due adoption sfas 112 employers accounting postemployment benefits partially offset 46 decrease pension expense adjusted increase 1993 partially offset reduced expenses overtime compensation rents software license fees sale subsidiary late 1992 45 expenses net insurance recovery state regulatory deferrals related hurricane andrew reflected 1992 income statement items interest expense includes interest debt certain accrued liabilities capital leases offset allowance funds used construction capitalized cost installing equipment constructing plant interest expense decreased 229 33 1994 574 77 1993 decrease 1994 resulted primarily interest savings attributable refinancings 1993 longterm debt lower interest rates decrease partially offset higher average levels shortterm borrowings higher average interest rates decrease 1993 due primarily declines interest rates borrowings short long term including impact refinancings longterm debt lower interest rates decreases partially offset higher average levels shortterm borrowings see notes e l income net includes earnings losses unconsolidated subsidiaries businesses partnerships gains losses sale operations interest dividend income minority interests income net increased 34 447 1994 decreased 1700 957 1993 increase 1994 reflects aggregate gain 1076 sale two international cellular investments 217 increase interest income increase partially offset 291 increase income attributable minority interests equity earnings losses unconsolidated affiliates 1098 1994 compared 110 1993 overall 1994 loss reflects increased losses attributable developing operations principally mobile data communications businesses lesser extent cellular business germany long distance telecommunications business chile increased losses partially offset improvement earnings unconsolidated domestic international wireless businesses see note b 1993 decrease resulted part decline 808 interest income due inclusion 1992 566 attributable tax settlement internal revenue service lower interest rates minority interests contributed 116 decrease overall earnings unconsolidated affiliates also decreased 657 due primarily costs expenses associated investments certain developing operations including mobile data communications businesses german cellular business optus communications pty ltd australia provision income taxes increased 6713 1174 1994 decreased 3619 388 1993 bellsouths effective tax rates 365 356 360 1994 1993 1992 respectively reconciliation statutory federal income tax rates effective tax rates provided note discussion adoption sfas 109 accounting income taxes also included therein financial condition bellsouth uses net cash generated operations external financing fund capital expenditures pay dividends invest operate existing operations new businesses bellsouth believes funds provided operations readily available sources external financing sufficient meet needs business foreseeable future operating activities net cash provided operating activities increased 4858 104 1994 decreased 2269 46 1993 increase 1994 attributable part higher level net income partially offset cash expenditures exclusive capital 3902 related restructuring plan begun 1993 decrease 1993 due part timing difference collection accounts receivable inclusion 1992 909 related tax settlement internal revenue service slight decline net income adjusted exclude impact noncash restructuring charge investing activities bellsouths primary use capital resources continues capital expenditures support development wireline wireless networks net cash used investing activities increased 5007 146 1994 decreased 1569 44 1993 increase 1994 attributable increases cash investments advances unconsolidated affiliates capital expenditures cash used investments advances unconsolidated affiliates increased 3905 1222 7100 total approximately 42 investments advances mobile data communications businesses german venezuelan cellular businesses 26 loaned prime south diversified inc indirectly wholly owns community cable tv las vegas cable operation managed prime cable remainder invested businesses bellsouth interest capital expenditures consolidated bellsouth companies increased 1144 33 36003 including approximately 2036 related restructuring activities substantially cash required capital expenditures 1994 provided internally 1995 capital expenditures expected financed primarily internally generated funds extent necessary external sources capital expenditures projected approximately 4200 1995 decrease 1993 reflected declines investments advances unconsolidated affiliates investing activities partially offset increase 2966 93 capital expenditures support network development activities financing activities net cash used financing activities increased 1161 114 1994 decreased 3678 266 1993 increase 1994 attributable increases 615 cash dividends paid shareholders 34471 debt repayments primarily shortterm borrowings effect increases substantially offset increase 34260 proceeds borrowings decrease 1993 attributable increase 50372 proceeds borrowings partially offset increase debt repayments 44161 increase 2249 cash dividends paid shareholders higher levels proceeds repayments borrowings 1993 reflect refinancing 2760 longterm debt lower interest rates bellsouth telecommunications increase cash dividends 1993 due use higher levels common shares newly issued bellsouth 1992 payment lieu cash dividends shareholder dividend reinvestment stock purchase plan bellsouths debt total capitalization ratio decreased 402 december 31 1993 393 december 31 1994 operating environment trends business regulatory environment providing telecommunications services bellsouth telecommunications subject regulation state federal regulators respect rates services issues north carolina south carolina subject traditional rate return regulation bellsouth telecommunications operating form incentive regulation plan state federal levels whereby earnings certain levels within given range must shared customers form credits refunds prospective rate reductions plans provide incentives reduce costs retain portion earnings sharing point cases earnings top range must returned customers since bellsouth telecommunications earnings fell close within sharing range incentive plans 1994 ability increase earnings long run plans even productivity enhancements constrained december 31 1994 bellsouth telecommunications estimated sharing obligation related interstate access services 1416 furthermore ability change rates effectively respond competition limited current regulatory plans require general rates charged provided tariff filings accordingly bellsouths primary regulatory focus directed toward modifying regulatory process one closely aligned changing market conditions overall public policy objectives alternative current regulatory processes bellsouth believes price regulation whereby prices basic local exchange services directly regulated irrespective rate return tests prices products services based market factors logical progression competitive fairness provides advantages consumers local regulatory plan implemented ninestate service area tennessee public service commission subject certain governmental authorizations enactment enabling legislation adopted rules allow local exchange competition including provision whereby bellsouth telecommunications could elect operate price regulation plan addition proposed plans filed bellsouth telecommunications kentucky georgia mississippi alabama currently review respective commissions states florida georgia north carolina tennessee legislatures considering bills would provide allow price regulation andor local exchange competition proposed plan filed louisiana public service commission rejected november 1994 fcc reviewing regulatory plan changes plan expected effective mid1995 bellsouth telecommunications continue pursue implementation price regulation plans louisiana states federal level filings regulatory commissions legislative initiatives economy nations gross domestic product grew 4 1994 strongest annual growth current economic expansion employment nonfarm businesses grew 26 year unemployment rate dropped 56 fourth quarter growth ninestate region served bellsouth telecommunications even stronger number jobs nonfarm businesses grew 30 annual rate unemployment also dropped 56 fourth quarter real income expanded estimated 44 net inmigration added 450000 regions population 1994 every state except louisiana recording gain four states florida georgia north carolina tennessee among top ten nationally 1994 numerical population gains demand telecommunications services reflected strength economic population growth region higher interest rates 1995 may dampen residential construction durable goods manufacturing projected net inmigration near 400000 would help keep regional demand telecommunications services rising however increasing competition faced bellsouth telecommunications growing percentage revenues bellsouth enterprises make bellsouths financial performance susceptible changes economy previously operations reflect competitive business environment greater elasticities products services competition developments telecommunications marketplace continue indicate technological convergence occurring telephone cable broadcast television computer entertainment information services industries technologies utilized developed industries able provide multiple integrated communications offerings number large companies including att corp major interexchange carriers bell holding companies cable video entertainment companies completed acquisitions entered business alliances ultimately intensify expand competition local toll communications services currently provided bellsouths networks competitors announced plans build certain locations begun construction local phone connections private networks would permit business residential customers bypass facilities local telephone companies including bellsouth telecommunications certain cities service territory legislative regulatory judicial developments facilitate competition local long distance video markets notwithstanding risks associated increased competition bellsouth opportunities new business markets bellsouth believes order remain competitive future must aggressively pursue corporate strategy expanding offerings beyond traditional businesses may include information services interactive communications cable television entertainment services part strategy bellsouth granted permission fcc conduct trial video dial tone services acquired auction one nationwide narrowband pcs licenses participated ongoing fcc auction broadband pcs licenses carolinas eastern tennessee formed business alliances partnerships domestically internationally related provision interactive traditional video programming services well wireless wireline communications services another part competitive strategy bellsouth undertaken plan streamline telephone operations improve overall cost structure see matters restructuring telephone operations coincident existing restructuring plan bellsouth telecommunications continuing seek additional ways better enhance customer service productivity improve cost structure result ongoing efforts additional changes fundamental business processes work activities well employee reductions expected bellsouth may consider acquisitions investments strategic alliances established companies provide information services interactive communications cable television entertainment services development services capabilities internally transactions accomplished could initially reduce earnings require substantial capital financing business opportunities provided funds generated internal operations external sources accounting sfas 71 bellsouths regulated enterprise bellsouth telecommunications continues account economic effects regulation sfas 71 accounting effects certain types regulation appropriate provisions sfas 71 give recognition effect actions regulators provide reasonable assurance existence asset reduce eliminate value asset impose eliminate liability regulated entity result actions regulators bellsouths balance sheet december 31 1994 reflects net deferred charges regulatory assets 1865 related primarily compensated absences unamortized issuance costs debt refinanced net deferred credits regulatory liabilities 3040 related income tax issues virtually current regulatory assets liabilities arose connection incorporation new accounting standards ratemaking process transitory nature magnitude regulatory assets liabilities decreasing time due ongoing amortization prescribed part adoption 1988 fccs current uniform system accounts additional regulatory assets liabilities may arise future long bellsouth telecommunications remains subject provisions sfas 71 various forms earningsbased regulation remain effect federal level nine states served bellsouth telecommunications however recent legislative regulatory initiatives suggest fully competitive markets telecommunications services eventually established 1994 united states congress considered legislation designed specifically open telecommunications services full competition although legislation enacted law congress considering legislation type similar initiatives also emerging state level furthermore regulatory arena bellsouth telecommunications continues pursue modification existing regulatory framework price regulation plans whereby prices basic local exchange service directly regulated prices telecommunications products services based market factors proposed implementation review several states service area fcc bellsouth telecommunications would required discontinue accounting sfas 71 existing anticipated levels competition longer allow service product pricing provides recovery costs additionally sfas 71 would longer apply bellsouth telecommunications successful altering existing regulatory framework achieving price regulation since plans provide recovery specific costs accounting sfas 71 currently appropriate increasingly likely bellsouth telecommunications discontinue accounting sfas 71 due effect one conditions event impact bellsouths financial position results operations would material circumstances bellsouth telecommunications would required reduce recorded value telephone plant equipment recognition amounts would recoverable would overstated due longer regulatorprescribed asset lives bellsouth telecommunications overall depreciation reserve december 31 1994 approximately 44 total depreciable plant broad industry analysis telecommunications companies recently discontinued accounting sfas 71 indicates unregulated telecommunications enterprises similar bellsouth telecommunications overall depreciation reserve ratio approximates 52 57 total depreciable plant bellsouth telecommunications required discontinue sfas 71 revalue telephone plant using similar assumptions methodology net recorded book value telephone plant would reduced 4000 6000 addition bellsouth telecommunications would required eliminate regulatory assets liabilities adjust level unamortized investment tax credits fully adopt issue basis accounting directory publishing fees specific financial impacts discontinuing sfas 71 would depend timing magnitude changes marketplace overall regulatory framework matters restructuring telephone operations previously reported 1993 bellsouth telecommunications recognized 11364 restructuring charge connection plan redesign consolidate streamline fundamental processes work activities telephone operations restructuring undertaken response increasingly competitive business environment upon completion restructuring telephone operations expected improve overall responsiveness customer needs reduce costs part restructuring bellsouth telecommunications consolidating centralizing existing operations bellsouth telecommunications establishing single point contact accountability receipt analysis resolution customer installation repair activities service activation efforts involve redesign key work processes designing new processes facilitate consolidation service functions reduction 10200 employees projected costs year component charge follows december 31 1994 bellsouth telecommunications substantially plan respect projected expenditures employee reductions see progress plan consolidation elimination operations approximately 3428 charge consisted costs associated consolidating eliminating operations result reengineering way service delivered customers restructuring period 288 existing operations centers consolidated 73 locations data management centers used support company operations reduced 11 6 comptrollers offices reduced 48 11 collection process improvements made reduce operating costs uncollectibles redundancies eliminated number steps decreased product planning provisioning process addition customer service processes systems designed provide onenumber access specific appointment times online realtime access customer records immediate service activation facilities already place systems approximately 4254 charge systems development information management systems use prior restructuring effort inadequate deal increased competition changing technology accordingly integral part restructuring plan major redesign information systems throughout bellsouth telecommunications undertaken attain systems framework facilitates targeted employee reductions correlates increasingly competitive business environment effort entails significant changes overall computing platform architecture corporate systems structure employee separation approximately 3682 charge separation costs employees leaving bellsouth telecommunications 1996 relocation certain employees bellsouth telecommunications targeted employee reduction 10200 employees end restructuring period result future cost savings result expected improve bellsouth telecommunications competitive position projected work force reductions year plan follows employee separation costs include severance payments health care coverage education benefits costs relocating employees new job locations well net curtailment expenses severance payments health care coverage education benefits costs management employees paid provisions current bellsouth management separation plans severance payments health care coverage education benefit costs craft employees paid provisions collective bargaining agreements relocation costs move personnel different locations result work center consolidations charges paid bellsouth telecommunications relocation guidelines terms collective bargaining agreements net curtailment expenses charged accordance provisions accounting pronouncements sfas nos 88 106 progress plan since inception restructuring plan fourth quarter 1993 cumulative employee reductions 5200 1300 1993 3900 1994 total amounts charged restructuring liability 5217 summary costs incurred december 31 1994 plan follows year ended december 31 1994 cash expenditures related ongoing implementation restructuring plan approximately 3902 noncash expenses primarily comprised pension curtailments charges related elimination certain business operations subsidiaries capital expenditures 1994 related restructuring approximately 2036 expenditures reflected tables remaining restructuring liability december 31 1994 approximately 6147 classified current 1995 bellsouth telecommunications plans accelerate restructuring activities employee reductions expenditures originally projected plan substantially completed end 1995 accordingly employee reductions 1995 plan projected approximately 5000 capital expenditures reflected tables projected 300 cumulative reduction employees december 31 1994 resulted estimated 100 reduction 1994 operating expenses currently projected result 300 400 reduction 1995 operating expenses restructuring plan completed annual cost savings expected approximately 600 due primarily reduced employeerelated expenses item 8item 7 managements discussion analysis results operations financial condition dollars millions except per share amounts bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange service toll communications services within geographic areas called local access transport areas latas provides network access services enable interlata communications using longdistance facilities interexchange carriers subsidiaries telecommunications services products provided primarily within ninestate bellsouth telecommunications region bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing wireless international communications services advertising publishing products approximately 70 72 73 bellsouths total operating revenues years ended december 31 1995 1994 1993 respectively wireline services provided bellsouth telecommunications charges local access toll services year ended december 31 1995 accounted approximately 59 33 8 respectively wireline revenues discussed revenues wireless communications services directory advertising publishing services accounted approximately 14 9 respectively total operating revenues year ended december 31 1995 remainder revenues derived principally nonregulated services provided bellsouth telecommunications results operations per share amounts herein reflect twoforone stock split effective november 1995 see note h consolidated financial statements discussion extraordinary losses 1995 1993 see extraordinary losses change accounting principle 1993 resulted retroactive adoption statement financial accounting standards sfas 112 employers accounting postemployment benefits discussed note consolidated financial statements income extraordinary losses cumulative effect change accounting principle 1995 decreased 596 276 61 per share 280 respectively compared 1994 decreases primarily due work force reduction charge 1995 663 67 per share discussion charge see operating expenses work force reductionrestructuring charges also contributing decreases effects gains 1994 aggregating 108 11 per share related sale two international cellular investments decreases partially offset revenue growth driven continued growth access lines cellular customer base cost control measures bellsouth telecommunications including salary wage savings attributable restructuring plan initiated 1993 income extraordinary losses cumulative effect change accounting principle 1994 increased 1126 1089 114 per share 1096 respectively compared previous year increases attributable part growth key business volumes expense savings attributable bellsouth telecommunications restructuring plan initiated 1993 discussed gains sale two international cellular investments increases also due effect charges 1993 totaled 785 79 per share 1993 charges comprised 697 71 per share restructuring bellsouths telephone operations see operating expenses work force reductionrestructuring charges 47 05 per share initial impact regulatory settlement florida approximately 25 02 per share associated severe 1993 winter weather conditions 16 01 per share related federal income tax legislation enacted 1993 volumes business network access lines service december 31 thousands total number access lines service since december 31 1994 increased approximately 913000 45 21133000 compared 46 rate increase 1994 business residence access lines increased 79 32 respectively compared growth rates 71 37 1994 number second residence lines included total residence lines increased 220000 209 1271000 accounted approximately 480 241 overall increase residence access lines total access lines respectively since december 31 1994 second residence lines generally used home office purposes access online computer services childrens phones growth categories access lines primarily attributable continued economic improvement southeast successful marketing programs access minutes use millions access minutes use represent volume traffic carried interexchange carriers latas interstate intrastate using bellsouth telecommunications local facilities 1995 total access minutes use increased 6942 million 93 compared increase 88 1994 1995 increase access minutes use primarily attributable access line growth promotions interexchange carriers intralata toll competition effect increasing access minutes use reducing toll messages carried bellsouth telecommunications network growth rate total minutes use continues negatively impacted competition migration interexchange carriers categories service eg special access fixed charge opposed volumedriven charge high capacity services causes decrease minutes use toll messages comprised message telecommunications service wide area telecommunications service toll messages decreased 185 million 119 1995 compared increase 32 1994 decrease 1995 primarily attributable expansion local area calling plans florida georgia south carolina north carolina mississippi plans future implementation plans bellsouth telecommunications service region coupled competition interexchange carriers intralata toll market adversely impact future toll message volumes local area calling plans effects competition result transfer calls toll local service access categories respectively corresponding revenues generally shifted commensurate rates cellular paging customers equity basis thousands wireless communications businesses significant contributor bellsouths operations primarily due continued expansion customer base cellular communications services domestic cellular customers increased 691000 321 since december 31 1994 rate increase declined since 1994 overall penetration rate number customers percentage total population service territory increased 55 december 31 1994 71 december 31 1995 total minutes use also continued increase although average minutes use per cellular customer declined due trend increased penetration lowerusage market segments since december 31 1994 number international cellular customers increased 294000 814 655000 growth total minutes use international cellular properties remained strong due demand stimulated competitive programs enhanced services underdeveloped landline service paging customers increased 163000 101 since december 31 1994 due primarily continued success retail distribution program january 1996 bellsouth sold paging subsidiary see note c consolidated financial statements operating revenues total operating revenues increased 1041 62 1995 compared increase 965 61 1994 increases resulted growth revenues bellsouths wireline telephone businesses coupled significant increase revenues cellular communications businesses traditionally local access toll services offered bellsouth telecommunications primarily accounted increases operating revenues bellsouth however continues experience gradually increasing shift relative contributions revenue sources toward wireless services components total operating revenues follows local service revenues reflect amounts billed customers local exchange services include connection network secondary central office feature services custom calling features custom dialing packages local service revenues 1995 increased 431 63 compared increase 286 43 1994 1995 increase due primarily increase 913000 access lines since december 31 1994 increase 107 due higher customer demand touchstarregistered trademark custom calling services effect expanded local area calling plans increase 1995 partially offset net rate reductions since december 31 1994 approximately 46 increase 1994 due primarily increase 887000 access lines since december 31 1993 also contributing increase growth attributable optional extended area calling plans increase 1994 partially offset rate reductions principally louisiana also florida alabama interstate access revenues result provision access services interexchange carriers provide telecommunications services states interstate access revenues increased 148 47 1995 compared increase 136 45 1994 increase 1995 due primarily growth minutes use 80 increase enduser charges 52 attributable growth number access lines service increase 42 due higher demand special access services 1995 increase partially offset net rate reductions since december 31 1994 approximately 58 1994 increase primarily attributable growth minutes use additional end user charges due access line growth effect billing adjustments recorded 1993 reduced revenues period approximately 20 increase partially offset effect net rate reductions since december 31 1993 decreased net settlements national exchange carriers association see operating environment trends business intrastate access revenues result provision access services interexchange carriers provide telecommunications services latas within state 1995 intrastate access revenues decreased 24 26 compared increase 26 29 1994 1995 decrease due primarily net rate reductions 100 partially offset 137 growth minutes use 1994 increase attributable growth minutes use reclassification beginning 1994 independent telephone company settlements certain states would previously reduced revenues operating expenses increase partially offset impact rate reductions primarily alabama florida toll revenues received provision longdistance services within latas services include intralata service beyond local calling area wide area telecommunications service wats 800 services customers highly concentrated demand special services transport voice data video toll revenues decreased 181 152 1995 compared decrease 30 25 1994 1995 decrease due primarily decline toll messages 119 decline toll messages reflects expansion local area calling plans increased competition interexchange carriers 1994 decrease primarily attributable several settlements independent companies reclassification certain settlements intrastate access revenue net rate reductions since december 31 1993 impact optional extended area calling plans decrease partially offset growth toll message volumes reflecting improvements related part optional calling plans overall decline toll revenues expected continue long term wireless communications revenues include revenues consolidated wireless communications businesses primarily cellular paging within bellsouth enterprises well revenues interconnections unaffiliated cellular carriers bellsouth telecommunications network bellsouths interests net income loss unconsolidated wireless businesses within bellsouth enterprises accounted equity method accounting recorded income wireless communications revenues increased 525 254 1995 compared increase 514 331 1994 increases years resulted primarily continued growth customer base wireless services domestic international markets discussed note c consolidated financial statements bellsouth sold domestic paging subsidiary january 1996 revenues paging services included component wireless communications revenues 349 276 207 1995 1994 1993 respectively consistent anticipated growth overall cellular industry bellsouths revenues cellular services expected continue increase however rate growth revenues could adversely affected competitive pressures service pricing market penetration continuing effect increasingly diversified customer base lower average usage development new technologies personal communications service pcs directory advertising publishing revenues include revenues derived publishing printing selling advertising performing related services concerning alphabetical classified telephone directories directory advertising publishing revenues increased 121 78 1995 compared 41 27 increase 1994 1995 increase due primarily increases volume advertising sold impact bellsouth telecommunications adoption issue basis accounting directory revenues connection discontinuance statement financial accounting standards sfas 71 accounting effects certain types regulation discussed note b consolidated financial statements 1994 increase primarily attributable increases volume prices advertising sold services revenues principally comprised revenues customer premises equipment cpe sales maintenance services billing collection services nonregulated services primarily inside wire services offered bellsouth telecommunications services revenues increased 21 19 1995 compared decrease 8 07 1994 increase 1995 due primarily reduced levels revenue reduction accruals related potential sharing certain state regulatory plans coupled reclassification certain accruals local service revenues combined effect increased services revenues approximately 76 increase also due approximately 41 resulting higher demand voice messaging inside wire services increase partially offset reduction 37 revenues billing collection services approximately 33 related sale april 1994 bellsouth telecommunications outofregion cpe sales service operations slight decrease 1994 primarily attributable increased revenue reduction accruals related potential sharing certain state regulatory plans sale april 1994 bellsouth telecommunications outofregion cpe sales service operations decrease substantially offset higher demand unregulated products services including cpe residential customers voice messaging inside wire services effects adjustments reclassifications related services certain state regulatory plans billing collection services operating expenses primarily result work force reduction charge 1995 restructuring charge 1993 total operating expenses increased 1807 141 1995 compared decrease 806 59 1994 components total operating expenses follows depreciation amortization increased 196 60 1995 compared 97 31 increase 1994 1995 increase due primarily higher levels property plant equipment since december 31 1994 resulting sustained growth customer base wireless wireline services continued modernization networks discussion impact discontinuance sfas 71 depreciation expense 1995 1996 see extraordinary losses discontinuance sfas 71 increase 1994 due primarily higher levels property plant equipment since december 31 1993 resulting continued growth customer base wireless wireline services continued modernization networks increase period partially offset expiration reserve deficiency amortizations louisiana inclusion 1993 20 related extraordinary property retirements conjunction regulatory settlement florida operating expenses comprised cost services products selling general administrative cost services products includes employee employeerelated expenses associated network repair maintenance material supplies expense cost tangible goods sold expenses associated providing services selling general administrative includes expenses related sales activities salaries commissions benefits travel marketing advertising expenses administrative expenses operating expenses increased 529 56 1995 compared increase 233 25 1994 1995 increase due primarily increased expenses approximately 310 related sustained growth wireless communications customer base reflecting additional marketing operational costs associated higher levels sales expanded operations bellsouth telecommunications operating expenses increased 114 reflected volume growth partially offset decrease approximately 130 labor costs including expenses employee benefits decrease labor costs reflects employee reductions attributable restructuring plan begun 1993 partially offset annual compensation increases management represented employees 1995 increase operating expenses also attributable approximately 55 related growth volume directory advertising sold increase 1994 primarily attributable increased expenses related growth wireless communications customer base also contributing increase expenses related volume growth network modernization core wireline business lesser extent volume growth directory advertising publishing businesses total employeerelated costs also increased reflecting annual compensation increases management represented employees increased overtime attributable volume growth network service activities higher expenses employee benefits partially offset salary wage savings employee reductions attributable restructuring plan begun 1993 bellsouth telecommunications 94 reduction pension expense see note expense increase 1994 partially offset sale 1994 outofregion cpe sales service operations inclusion 1993 approximately 55 40 respectively related regulatory settlement florida severe 1993 weather conditions work force reductionrestructuring charges fourth quarter 1995 bellsouth recognized pretax charge 1082 663 tax comprised 942 577 tax related planned work force reductions end 1997 85 52 tax expected severance benefit payments 1997 55 34 tax additional net curtailment losses related employee reductions restructuring plan initiated 1993 component overall 1995 work force reduction charge well 1993 restructuring charge discussed 1995 work force reduction charge connection previouslydisclosed plan significantly reduce work force end 1997 bellsouth recorded pretax charge 942 fourth quarter 1995 plan bellsouth expects reduce work force core wireline business approximately 11300 employees end 1997 including reduction 800 employees occurred december 1995 work force reduction accomplished separation approximately 13200 employees partially offset planned hiring new employees primarily replace expected relocate connection consolidation work locations 942 pretax charge comprised approximately 561 provisions sfas 112 employers accounting postemployment benefits related employees expected receive severance benefits preexisting separation plans approximately 381 curtailment losses provisions sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers accounting postretirement benefits pensions substantially curtailment losses relate postretirement benefits pensions plan reduce 11300 employees completed annual employee cost savings estimated approximately 560 annual savings partially offset increased costs approximately 60 outsourced services postemployment benefits charge pretax charge 85 represents estimated future postemployment severance benefits paid 1997 also accordance provisions sfas 112 component based bellsouths belief work force reductions continue existing separation plans although reduced separation benefit levels 1993 restructuring telephone operations 1993 bellsouth telecommunications recognized 1136 restructuring charge connection plan redesign consolidate streamline fundamental processes work activities telephone operations consistent previouslydisclosed expectations restructuring completed 1995 one year earlier initially planned part restructuring bellsouth telecommunications consolidated centralized existing operations efforts involved redesign key work processes design new processes facilitated consolidation service functions reduction 10200 employees since inception restructuring plan total employee reductions approximately 10200 including 5000 since december 31 1994 result employee reductions 1994 1995 employeerelated expenses included component operating expenses year 1995 reduced approximately 180 compared 1994 level cumulative reduction 10200 employees since inception plan reduced 1995 employeerelated expenses approximately 375 year 1996 cumulative employee reductions plan projected reduce employeerelated expenses approximately 600 summary employee reductions expenditures december 31 1995 1993 restructuring plan follows total expenditures 1248 include 55 additional net curtailment losses resulting greater number retirementeligible employees separating plan originally expected additional net curtailment losses included 1995 work force reduction charge discussed inception restructuring plan 1993 projected employee reductions expenditures component charge year follows income statement items interest expense includes interest debt certain accrued liabilities capital leases partially offset interest capitalized cost installing equipment constructing plant interest expense increased 58 87 1995 compared decrease 23 33 1994 1995 increase primarily attributable higher average interest rates shortterm borrowings higher average debt levels longterm borrowings average interest rate longterm borrowings slightly lower 1995 compared 1994 reflecting initial impact 1995 debt refinancings favorable interest rates decrease 1994 resulted primarily interest savings attributable refinancings 1993 longterm debt lower interest rates decrease partially offset higher average levels shortterm borrowings higher average interest rates income net includes earnings losses unconsolidated subsidiaries businesses partnerships gains losses sale operations interest dividend income minority interests income net increased 9 818 1995 compared increase 3 375 1994 increase 1995 included 43 increase interest income 18 lower net minority interest deductions equity losses unconsolidated affiliates 86 1995 compared 110 1994 lower 1995 losses reflect reduction losses mobile data communications businesses higher income domestic cellular operations partially offset increased losses certain developing international businesses principally operations germany israel increase income also attributable 34 increase miscellaneous income related nonstrategic business activities increases income partially offset gain 108 1994 discussed increase 1994 reflected aggregate gain 108 sale two international cellular investments 22 increase interest income increases partially offset 29 increase net minority interest deductions equity earnings losses unconsolidated affiliates 110 1994 compared 11 1993 overall 1994 loss reflects increased losses attributable developing operations principally mobile data communications businesses lesser extent cellular business germany long distance telecommunications business chile increased losses partially offset improvement earnings unconsolidated domestic international wireless businesses provision income taxes decreased 219 176 1995 compared increase 671 1173 1994 bellsouths effective tax rates 396 365 356 1995 1994 1993 respectively reconciliation statutory federal income tax rates effective tax rates provided note l discussion 1993 adoption sfas 109 accounting income taxes also included therein extraordinary losses discontinuance sfas 71 result continuing regulatory marketplace assessments bellsouth telecommunications concluded longer appropriate prepare external financial results using accounting method required regulated enterprises bellsouth telecommunications believes based recent changes regulatory framework increasing level competition required discontinue sfas 71 financial reporting purposes discontinuance required bellsouth telecommunications revenues generated costbased regulation doubtful regulated rates sufficient recover net book value telephone plant could charged collected customers due expected levels future competition accordingly second quarter 1995 bellsouth telecommunications discontinued application sfas 71 recorded noncash extraordinary charge 2718 net deferred tax benefit 1731 extraordinary charge reflects 3002 tax reduce recorded value long lived telephone plant equipment within regulatory framework level appropriate nonregulated enterprises overall charge partially offset 194 related method bellsouth telecommunications reports directory publishing revenues 71 related elimination regulatory assets liabilities 19 partial acceleration unamortized investment tax credits associated reductions asset carrying values asset lives recent changes regulatory framework simultaneous elimination legal regulatory barriers competitors support discontinuance sfas 71 regulatory arena implementation price regulation continues cornerstone bellsouth telecommunications corporate strategy due part strategy changes regulatory framework implemented see operating environment trends business result changes significant portion bellsouth telecommunications revenue longer regulated based recovery specific costs furthermore bellsouth telecommunications expects competition local exchange markets accelerate removal legal regulatory barriers expected encourage potential competitors accelerate deployment competing networks either compete directly local service bypass bellsouth telecommunications network long distance access potential competitors continued make investments wireless licenses cable properties enhanced interexchange networks serves evidence increased competition connection discontinuance sfas 71 average depreciable lives significant categories long lived telephone plant reduced closely reflect economic technological lives application shorter lives result material increase depreciation expense see note b consolidated financial statements early extinguishment debt 1995 1993 bellsouth telecommunications recognized extraordinary losses 78 net current tax benefit 49 87 net current tax benefit 59 respectively related early extinguishment outstanding debt issues see note f consolidated financial statements financial condition bellsouth uses net cash generated operations external financing fund capital expenditures pay dividends invest operate existing operations new businesses current liabilities exceeded current assets december 31 1995 1994 bellsouths sources funds primarily operations extent necessary readily available external financing arrangements sufficient meet current obligations timely basis bellsouth believes sources funds sufficient meet needs business foreseeable future operating activities net cash provided operating activities increased 271 52 1995 compared increase 485 103 1994 increase 1995 primarily attributable 512 increase operating income excluding depreciation amortization work force reduction charges increase 1995 operating income partially offset higher cash expenditures 258 related restructuring plan begun 1993 increase 1994 primarily attributable higher level net income partially offset cash expenditures 390 related restructuring plan begun 1993 investing activities bellsouths primary use capital resources continues capital expenditures support development wireline wireless networks net cash used investing activities increased 449 114 1995 compared increase 500 146 1994 increase 1995 primarily due higher capital expenditures 603 related substantially wireline wireless network development partially offset higher cash proceeds 188 investment dispositions repayment advances capital expenditures 4203 1995 projected approximately 4000 4300 1996 capital expenditures 1995 financed internally 1996 expected financed primarily internally generated funds extent necessary external sources increase 1994 primarily attributable increases cash investments advances unconsolidated affiliates capital expenditures cash used investments advances unconsolidated affiliates increased 321 1063 623 total approximately 48 investments advances mobile data communications businesses german venezuelan cellular businesses 30 loaned prime south diversified inc indirectly wholly owns community cable tv las vegas cable operation managed prime cable remainder invested businesses bellsouth interest capital expenditures consolidated bellsouth companies increased 114 33 3600 substantially cash required capital expenditures 1994 provided internally financing activities 1995 financing activities provided cash 46 1994 financing activities used cash 1132 change 1994 1995 1178 primarily reflects higher levels net proceeds borrowing activities 1995 compared 1994 september 1995 bellsouths board directors raised quarterly dividend 015 per share total 36 per share declared 36 per share dividend november 1995 increase 1994 primarily attributable increases 62 cash dividends paid shareholders 3447 debt repayments primarily shortterm borrowings effect increases substantially offset increase 3427 proceeds borrowings debt activities 1995 bellsouth issued 500 longterm debt net proceeds refinanced outstanding shortterm debt also 1995 bellsouth issued approximately 1900 longterm debt refinance 1885 outstanding longterm debentures including 485 debentures redeemed january 1996 funds redeem 485 debentures january 1996 included cash equivalents consolidated balance sheet december 31 1995 addition cash equivalents includes 500 used redeem commercial paper january 2 1996 bellsouth committed credit lines aggregating 1539 various banks borrowings committed credit lines totaled 21 december 31 1995 bellsouth also maintains uncommitted lines credit 650 december 31 1995 borrowings uncommitted lines february 15 1996 shelf registration statements file securities exchange commission 2227 debt securities could publicly offered bellsouths debt total capitalization ratio adjusted exclude 485 debentures redeemed january 1996 increased 467 december 31 1995 393 december 31 1994 increase mostly caused reduction equity due extraordinary loss discontinuance sfas 71 derivative activities bellsouth party foreign exchange forward contracts currency swap agreements interest rate swap agreements normal course business hedging purposes financial instruments used mitigate foreign currency interest rate risks although extent expose company market credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited currency rate interest rate differential full notional amount contracts agreements executed creditworthy financial institutions whose credit ratings generally aaaa higher bellsouth considers risk nonperformance remote see note consolidated financial statements additional information operating environment trends business regulatory environment providing telecommunications services bellsouth telecommunications subject regulation state federal regulators respect rates services issues bellsouths primary regulatory focus continues directed toward modifying regulatory process one closely aligned changing market conditions overall public policy objectives bellsouth believes price regulation whereby prices basic local exchange services regulated based factors rate return prices products services based market factors logical progression competitive fairness provides advantages consumers price regulation plans limit amount increases prices specified services plans enhance companys ability adjust prices service options effectively respond changing market conditions competition enable fully benefit productivity enhancements price regulation plans approved authorized requisite legislative regulatory bodies alabama florida although sharing requirement exists least 1996 georgia kentucky mississippi south carolina tennessee approval plan pending north carolina addition bellsouth telecommunications filed proposed price regulation plan louisiana federal level bellsouth telecommunications operating interim price regulation plan established federal communications commission fcc 1995 plan provided productivity option bellsouth telecommunications selected eliminated earnings limitations sharing requirements fcc expected consider interim rules well issues related competition streamlined regulation matters contained telecommunications act 1996 act final order expected issued 1996 economy nations output goods services grew 4 1994 expanded 32 1995 employment nonfarm business establishments grew 23 year unemployment rate averaged 56 ninestate region served bellsouth telecommunications wireline telephone business outperformed nation 1995 number jobs nonfarm businesses grew 28 unemployment rate averaged 51 year real income expanded estimated 45 rate net inmigration added approximately 375000 persons accounting half regions population growth demand telecommunications services region reflected strength economic population growth economic expansion expected continue 1996 boosted georgia particular olympic games held july august tight labor markets slow labor force growth modest productivity growth likely result slower output growth cost advantages strong net inmigration promise keep regions economic performance comparatively better nations bring increased demand telecommunications services increasing competition faced bellsouth telecommunications growing percentage revenues bellsouth enterprises make bellsouths financial performance susceptible changes economy previously operations reflect competitive business environment greater demand elasticities products services competition developments telecommunications marketplace continue indicate technological convergence occurring telephone cable broadcast television computer entertainment information services industries technologies utilized developed industries able provide multiple integrated communications offerings number large companies including att corp att major interexchange carriers bell holding companies cable video entertainment companies completed acquisitions entered business alliances ultimately intensify expand competition local toll communications services currently provided bellsouths networks competitors announced plans build certain locations begun construction local phone connections private networks would permit business residential customers bypass facilities local telephone companies including bellsouth telecommunications certain cities service territory conjunction approval state price regulation plans competition local service authorized legislative regulatory action alabama florida georgia north carolina tennessee proceedings consider local service competition pending kentucky louisiana mississippi addition 1996 act preempts state legislative regulatory barriers competition local telephone service subject competitively neutral requirements assure quality service consistent public safety convenience consumer welfare att mci telecommunications corporation mci u west inc u west number carriers filed applications announced intent provide local service many areas bellsouth telecommunications provides service new legislation allows bell holding companies including bellsouth compete interlata toll business states outside local service territories prior time companies offer interlata toll services states within local service territories bellsouth expects bell holding companies interexchange carriers including att mci compete interlata toll service local service business competitors choose provide local service predominantly facilities may bundle local toll service offerings services could provided bellsouth becomes eligible provide interlata service within states region notwithstanding risks associated increased competition bellsouth opportunities benefit entry new business markets example presence competition allow entry bellsouth interlata wireline businesses provisions contained new federal telecommunications legislation bellsouth believes order remain competitive future must aggressively pursue corporate strategy expanding offerings beyond traditional businesses markets offerings may include interlata services information services video electronic commerce services part strategy bellsouth conducting trial video dial tone services acquiring broadband pcs licenses certain areas wireline territories forming business alliances partnerships domestically internationally related provision interactive traditional video programming services well wireless wireline communications services result 1996 act bellsouth freed many laws regulations judicial restrictions including modification final judgment constrained provision voice data video communications throughout wireline service territory elsewhere fcc commenced rulemaking proceedings relating provision interlata service bell holding companies necessary federal state proceedings bellsouth may apply fcc offer interlata wireline services within ninestate region fcc must act application within 90 days fcc must grant application determines bellsouth met competitive checklist b shown presence facilitiesbased competition residential business local service ii absence thereof statement terms would willing interconnect competitive local carrier c operate consistently separate subsidiary requirement meet 1996 acts public interest requirement offering services foregoing conditions bellsouth required obtain fcc approval prior offering outofregion interlata wireline nationwide interlata wireless services bellsouth begun offer interlata wireless service bellsouth plans begin offering interlata wireline service within ninestate territory soon possible completion fcc state regulatory proceedings expected concluded late 1996 early 1997 however assurance provided respect bellsouth authorized initiate interlata wireline service bellsouth plans offer outofregion interlata wireline services significant scale modifications network operating systems wireline wireless interlata services offered bellsouth however many telecommunications services bellsouth bell holding companies may provide may subject extensive regulations adopted fcc state regulatory commissions 1996 act allows without additional approval bellsouth market wireless services jointly wireline local exchange services separate marketing required cellular services addition joint marketing include interlata wireline services ninestate territory authorized bellsouth expects begin joint marketing trial wireline local exchange cellular services later 1996 another part competitive strategy bellsouth completed 1993 restructuring plan streamline telephone operations improve overall cost structure undertaken plan reduce work force end 1997 bellsouth telecommunications continuing seek additional ways better enhance customer service productivity improve cost structure result ongoing efforts additional changes fundamental business processes work activities expected bellsouth may consider investments strategic alliances acquisitions established companies provide interlata services information services video electronic commerce services b development services capabilities internally transactions accomplished could initially reduce earnings require substantial capital financing business opportunities would provided funds generated internal operations external sources matters cwa contracts october 1995 members communications workers america cwa ratified new threeyear contracts bellsouth contracts effective august 1995 contracts include basic wage increases 109 compounded three years addition agreement provided cash payment one thousand one hundred dollars eligible employee upon ratification provides payments one thousand one hundred dollars per eligible employee either cash bellsouth stock option employee 1996 1997 contract anniversary dates terms agreement include discontinuance annual wage adjustments based cost living increases discontinuance annual incentive payments accounting pronouncements march 1995 financial accounting standards board fasb issued sfas 121 accounting impairment longlived assets longlived assets disposed bellsouth required adopt effective january 1 1996 sfas 121 establishes accounting standards impairment longlived assets certain identifiable intangibles goodwill adoption sfas 121 expected material impact bellsouths financial position annual operating results cash flows october 1995 fasb issued sfas 123 accounting stockbased compensation bellsouth required adopt effective january 1 1996 sfas 123 establishes optional alternative accounting methods stockbased compensation well new required disclosures bellsouth elected account stockbased compensation previouslyexisting accounting guidance sfas 123 adopted 1996 disclosure purposes impact bellsouths financial position annual operating results cash flows item 8item 7 managements discussion analysis results operations financial condition dollars millions except per share amounts bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange service toll communications services within geographic areas called local access transport areas latas provides network access services enable interlata communications using longdistance facilities interexchange carriers subsidiaries telecommunications services products provided primarily within ninestate bellsouth telecommunications region bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing wireless international communications services advertising publishing products approximately 70 72 bellsouths total operating revenues years ended december 31 1996 1995 1994 respectively wireline services provided bellsouth telecommunications charges local access toll services year ended december 31 1996 accounted approximately 61 33 6 respectively wireline revenues discussed revenues consolidated wireless communications services directory advertising publishing services accounted approximately 15 9 respectively total operating revenues year ended december 31 1996 remainder revenues derived principally sales maintenance customer premises equipment nonregulated services provided bellsouth telecommunications results operations per share amounts herein reflect twoforone stock split effective november 1995 see note g consolidated financial statements discussion extraordinary losses 1995 see extraordinary losses income extraordinary losses 1996 increased 1299 831 131 per share 834 respectively compared 1995 increases primarily attributable effect aftertax work force reduction charge 1995 663 67 per share discussion charge see operating expenses work force reduction charge also contributing increases 344 35 per share aftertax gain sale bellsouths paging business see note b consolidated financial statements well growth key business volumes driven continued growth access lines cellular customer base cost control measures bellsouth telecommunications including salary wage savings attributable work force reduction restructuring plans initiated 1995 1993 respectively income extraordinary losses 1995 decreased 596 276 61 per share 280 respectively compared 1994 decreases primarily due aftertax work force reduction charge 663 67 per share also contributing decreases effects gains 1994 aggregating 108 11 per share related sale two international cellular investments decreases partially offset revenue growth driven continued growth access lines cellular customer base cost control measures bellsouth telecommunications including salary wage savings attributable restructuring plan initiated 1993 completed 1995 volumes business network access lines service december 31 thousands total number access lines service increased approximately 1002000 47 22135000 since december 31 1995 compared 45 rate increase 1995 business residence access lines increased 81 33 respectively compared growth rates 79 32 1995 number second residence lines included total residence lines increased 285000 224 1556000 accounted 590 284 overall increase residence access lines total access lines respectively since december 31 1995 second residence lines generally used home office purposes access online computer services childrens phones growth categories access lines primarily attributable continued economic improvement southeast successful marketing programs access minutes use millions access minutes use represent volume traffic carried interexchange carriers latas interstate intrastate using bellsouth telecommunications local facilities 1996 total access minutes use increased 7253 million 89 compared increase 93 1995 increases access minutes use primarily attributable access line growth promotions interexchange carriers intralata toll competition effect increasing access minutes use reducing toll messages carried bellsouth telecommunications network growth rate total minutes use continues negatively impacted competition migration interexchange carriers categories service eg special access fixed charge opposed volumedriven charge high capacity services causes decrease minutes use toll messages comprised message telecommunications service wide area telecommunications service toll messages decreased 351 million 255 1996 compared decrease 119 1995 decrease 1996 primarily attributable expansion local area calling plans lacps florida georgia north carolina lesser extent increased competition interexchange carriers intralata toll market respective impacts factors cannot precisely quantified bellsouth estimates 70 decline toll messages attributable expanded lacps 30 due increased competition decrease 1995 also attributable lacps florida georgia north carolina well south carolina mississippi plans future implementation plans bellsouth telecommunications service region coupled competition interexchange carriers intralata toll market adversely impact future toll message volumes expansion lacps effects competition result transfer calls toll local service access categories respectively corresponding revenues generally shifted commensurate rates cellular paging customers equity basis thousands domestic cellular customers increased 765000 269 since december 31 1995 rate increase declined since 1995 overall penetration rate number customers percentage total population service territory increased 71 december 31 1995 89 december 31 1996 total minutes use also continued increase although average minutes use per cellular customer remained relatively flat 1996 since december 31 1995 number international cellular customers increased 589000 899 1244000 growth total minutes use international cellular properties remained strong due demand stimulated competitive programs enhanced services underdeveloped landline service january 1996 bellsouth sold paging business mobile media communications inc see note b consolidated financial statements operating revenues discussion impact impending local service competition revenues volumes business see operating environment trends business total operating revenues increased 1154 65 1996 compared increase 1041 62 1995 increases resulted growth revenues bellsouths wireline telephone business coupled significant increases revenues cellular communications business increase 1996 partially offset effect january 1996 sale bellsouths paging business excluding paging revenues 1995 total operating revenues increased 1503 86 1996 components total operating revenues follows local service revenues reflect amounts billed customers local exchange services include connection network optional services custom calling features custom dialing packages local service revenues 1996 increased 788 108 compared increase 431 63 1995 increase 1996 due primarily increase 1002000 access lines since december 31 1995 also contributing increase 248 due higher customer demand optional services net rate increases 88 include benefits related effects expanded lacps 1995 increase due primarily increase 913000 access lines since december 31 1994 increase 107 due higher customer demand optional services increase 1995 partially offset net rate reductions since december 31 1994 approximately 46 net benefits related effects expanded lacps interstate access revenues result provision access services interexchange carriers provide telecommunications services states enduser charges collected residential business customers interstate access revenues increased 278 85 1996 compared increase 148 47 1995 1996 increase due primarily growth minutes use 85 increase 69 due higher demand special access services increase enduser charges 58 attributable growth number access lines service increases offset net rate reductions since december 31 1995 25 increase 1995 due primarily growth minutes use 80 increase enduser charges 52 attributable growth number access lines service increase 42 due higher demand special access services 1995 increase partially offset net rate reductions since december 31 1994 approximately 58 intrastate access revenues result provision access services interexchange carriers provide telecommunications services latas within state 1996 intrastate access revenues decreased 72 81 compared decrease 24 26 1995 decreases 1996 1995 due primarily net rate reductions 160 100 respectively partially offset growth minutes use 103 137 respectively toll revenues received provision longdistance services within latas services include intralata service beyond local calling area wide area telecommunications service wats 800 services customers highly concentrated demand special services transport voice data video toll revenues decreased 215 213 1996 compared decrease 181 152 1995 decrease 1996 primarily attributable expansion lacps increased competition interexchange carriers effects reduced toll messages 255 decrease partially offset retroactive independent company settlement 1995 reduced revenues 31 period 1995 decrease due primarily decline toll messages 119 decline toll messages reflects expansion lacps increased competition interexchange carriers decrease also includes effect retroactive independent company settlement overall decline intralata toll revenues expected continue long term wireless communications revenues include revenues consolidated wireless communications businesses primarily domestic cellular prior 1996 paging within bellsouth enterprises well revenues interconnections unaffiliated cellular carriers bellsouth telecommunications network bellsouths interests net income loss unconsolidated wireless businesses within bellsouth enterprises accounted equity method accounting recorded income net wireless communications revenues increased 207 80 1996 compared increase 525 254 1995 increases years resulted primarily continued growth customer base wireless services domestic international markets 1996 increase partially offset effect january 1996 sale bellsouths paging business revenues paging services 349 276 respectively 1995 1994 excluding paging revenues 1995 wireless communications revenues increased 248 1996 consistent anticipated growth overall wireless industry bellsouths revenues wireless services expected continue increase however rate growth revenues bellsouths existing cellular businesses could adversely affected competitive pressures service pricing continuing effect increasingly diversified customer base lower average usage emergence new wireless service providers offering personal communications service pcs directory advertising publishing revenues include revenues derived publishing printing selling advertising performing related services concerning alphabetical classified telephone directories directory advertising publishing revenues increased 65 39 1996 compared 121 78 increase 1995 increase 1996 primarily due increases volume prices advertising sold increase partially offset effect bellsouth telecommunications adoption issue basis accounting directory revenues increased revenues 1995 41 connection discontinuance statement financial accounting standards sfas 71 accounting effects certain types regulation see note l consolidated financial statements 1995 increase due primarily increases volume advertising sold impact bellsouth telecommunications adoption issue basis accounting directory revenues services revenues principally comprised revenues customer premises equipment cpe sales maintenance services nonregulated services primarily inside wire billing collection voice messaging services offered bellsouth telecommunications services revenues increased 103 89 1996 compared increase 21 19 1995 1996 increase primarily attributable higher demand prices nonregulated services product sales fees totalling 132 addition increase also due incremental rate impacts related potential sharing certain state regulatory plans increase partially offset sale 1996 subsidiary performed computer maintenance increase 1995 due primarily reduced levels revenue reduction accruals related potential sharing certain state regulatory plans coupled reclassification certain accruals local service revenues combined effect increased services revenues approximately 76 increase also due approximately 41 resulting higher demand voice messaging inside wire services increase partially offset reduction 37 revenues billing collection services approximately 33 related sale april 1994 bellsouth telecommunications outofregion cpe sales service operations operating expenses total operating expenses decreased 333 23 1996 compared increase 1807 141 1995 1996 decrease primarily attributable effects 1995 work force reduction charge 1082 sale bellsouths paging business january 1996 excluding effects total operating expenses increased 1049 79 1996 components total operating expenses follows depreciation amortization increased 264 76 1996 compared 196 60 increase 1995 increase 1996 due primarily higher levels property plant equipment shorter depreciable lives subsequent discontinuance sfas 71 higher levels property plant equipment resulted continued growth customer base wireless wireline services modernization networks increase partially offset sale bellsouths paging business january 1996 depreciation amortization 44 1995 increase due primarily higher levels property plant equipment since december 31 1994 resulting sustained growth customer base wireless wireline services continued modernization networks operating expenses comprised cost services products selling general administrative cost services products includes employee employeerelated expenses associated network repair maintenance material supplies expense cost tangible goods sold expenses associated providing services selling general administrative includes expenses related sales activities salaries commissions benefits travel marketing advertising expenses administrative expenses operating expenses increased 485 48 1996 compared increase 529 56 1995 increase 1996 primarily related growth wireless wireline businesses partially offset effect january 1996 sale bellsouths paging business excluding pagingrelated expenses 1995 operating expenses increased 741 76 1996 expenses related cellular pcs businesses increased 342 69 respectively result sustained growth cellular customer base initiation pcs services bellsouth telecommunications operating expenses increased 202 due principally higher business volumes new service offerings intensified marketing advertising increase partially offset decrease approximately 162 employeerelated costs wireline telephone operations sale 1996 subsidiary performed computer maintenance decrease employeerelated costs reflects employee reductions attributable restructuring work force reduction plans partially offset annual compensation increases management represented employees 1996 increase operating expenses also included increase approximately 50 expenses related directory advertising publishing business 1995 increase due primarily increased expenses approximately 310 related sustained growth cellular customer base reflecting additional marketing operational costs associated higher levels sales expanded operations bellsouth telecommunications operating expenses increased 114 reflected volume growth partially offset decrease approximately 130 employeerelated costs decrease attributable restructuring plan begun 1993 partially offset annual compensation increases management represented employees 1995 increase operating expenses also attributable approximately 55 related growth volume directory advertising sold work force reduction charge fourth quarter 1995 bellsouth recognized pretax charge 1082 663 tax comprised 942 577 tax related planned work force reductions end 1997 85 52 tax expected severance benefit payments 1997 55 34 tax additional net curtailment losses related employee reductions restructuring plan initiated 1993 completed 1995 work force reduction 942 pretax charge comprised approximately 561 provisions sfas 112 employers accounting postemployment benefits related employees expected receive severance benefits preexisting separation plans approximately 381 curtailment losses provisions sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers accounting postretirement benefits pensions substantially curtailment losses relate postretirement benefits pensions plan bellsouth telecommunications expects reduce work force wireline telephone operations approximately 11300 employees end 1997 work force reduction accomplished separation approximately 13200 employees partially offset planned hiring new employees primarily replace expected relocate connection consolidation work locations including reduction approximately 800 employees occurred december 1995 bellsouth telecommunications reduced work force approximately 7000 employees 1995 plan december 31 1996 plan reduce 11300 employees completed annual net employee cost savings estimated approximately 500 considering increased costs outsourced services postemployment benefits charges pretax charge 85 represented estimated future postemployment severance benefits paid 1997 also accordance provisions sfas 112 component based bellsouths belief work force reductions continue existing separation plans although reduced separation benefit levels pretax charge 55 also recorded related additional net curtailment losses connection restructuring plan initiated 1993 completed 1995 charge resulted primarily greater number retirementeligible employees separating plan originally expected income statement items interest expense includes interest debt certain accrued liabilities capital leases partially offset interest capitalized cost installing equipment constructing plant interest expense decreased 3 04 1996 compared increase 58 87 1995 decrease 1996 primarily attributable lower average interest rates borrowings due part refinancings 1995 partially offset higher average debt balances 1996 1995 increase primarily attributable higher average interest rates shortterm borrowings higher average debt levels longterm borrowings average interest rate longterm borrowings slightly lower 1995 compared 1994 reflecting initial impact 1995 debt refinancings favorable interest rates gain sale paging business represents pretax gain sale bellsouths paging business january 1996 income net includes earnings losses unconsolidated subsidiaries businesses partnerships income losses sale operations interest dividend income minority interests nonoperating items income net increased 88 1996 compared increase 9 1995 1996 increase resulted primarily 55 increase interest income lower net minority interest deductions 35 equity losses 76 1996 improvement 10 since 1995 lower 1996 losses primarily attributable improved operating results unconsolidated domestic cellular operations certain international businesses principally operations israel venezuela improvements partially offset increased losses attributable continuing development german cellular operations increase income net 1995 included 43 increase interest income improvement 24 equity losses 18 lower net minority interest deductions increase income net also attributable 34 increase miscellaneous income related nonstrategic business activities increases income partially offset effect gain 108 1994 sale two international cellular investments equity losses unconsolidated affiliates 86 1995 compared 110 1994 lower 1995 losses reflect reduction losses mobile data communications businesses higher income unconsolidated domestic cellular operations partially offset increased losses certain developing international businesses principally operations germany israel provision income taxes increased 721 704 1996 compared decrease 219 176 1995 bellsouths effective tax rates 379 396 365 1996 1995 1994 respectively lower effective tax rate 1996 compared 1995 due primarily higher tax book basis paging business resulted lower gain sale computing tax expense reconciliation statutory federal income tax rates effective tax rates provided note k consolidated financial statements extraordinary losses discontinuance sfas 71 1995 result continuing regulatory marketplace assessments bellsouth telecommunications concluded required discontinue sfas 71 financial reporting purposes accordingly bellsouth telecommunications recorded noncash extraordinary charge 2718 net deferred tax benefit 1731 extraordinary charge reflects 3002 tax reduce recorded value longlived telephone plant equipment within regulatory framework level appropriate nonregulated enterprises overall charge partially offset 194 related method bellsouth telecommunications reported directory publishing revenues 71 related elimination regulatory assets liabilities 19 partial acceleration unamortized investment tax credits associated reductions asset carrying values asset lives see note l consolidated financial statements early extinguishment debt 1995 bellsouth telecommunications recognized extraordinary losses 78 net current tax benefit 49 related early extinguishment outstanding debt issues see note e consolidated financial statements financial condition bellsouth uses net cash generated operations external financing invest operate existing new businesses pay dividends current liabilities exceeded current assets december 31 1996 1995 bellsouths sources funds primarily operations extent necessary readily available external financing arrangements sufficient meet current obligations timely basis bellsouth believes sources funds sufficient meet needs business foreseeable future operating activities net cash provided operating activities increased 420 77 1996 compared increase 271 52 1995 increase 1996 primarily attributable 669 increase operating income excluding depreciation amortization work force reduction charge 1996 increase partially offset higher cash expenditures reductions accounts payable increase 1995 primarily attributable 512 increase operating income excluding depreciation amortization work force reduction charge 1995 increase partially offset higher cash expenditures 258 related restructuring plan begun 1993 investing activities bellsouths primary use capital resources continues capital expenditures support development wireline wireless networks net cash used investing activities decreased 185 42 1996 compared increase 449 114 1995 decrease 1996 primarily due 930 cash received sale paging business decrease partially offset higher capital expenditures 252 related substantially wireline wireless network development decrease 324 proceeds investment dispositions repayment advances capital expenditures 4455 1996 projected approximately 4700 5200 1997 capital expenditures 1996 financed internally 1997 expected financed primarily internally generated funds extent necessary external sources increase 1995 primarily attributable higher capital expenditures 603 related substantially wireline wireless network development partially offset higher cash proceeds 188 investment dispositions repayment advances substantially cash required capital expenditures 1995 provided internally financing activities 1996 financing activities used cash 2197 1995 financing activities provided cash 46 increased use cash 1995 1996 2243 primarily reflects higher levels net proceeds borrowing activities 1995 compared 1996 september 1995 bellsouths board directors raised quarterly dividend 015 per share total 36 per share declared 36 per share dividend november 1995 quarter 1996 change cash used financing activities 1994 1995 primarily attributable higher levels net proceeds borrowing activities 1995 compared 1994 debt activities 1996 bellsouth issued 300 long term debt net proceeds well cash hand redeemed outstanding shortterm debt longterm debentures 417 485 respectively 1995 bellsouth issued 500 longterm debt net proceeds refinanced outstanding shortterm debt also 1995 bellsouth issued approximately 1900 longterm debt refinance 1885 outstanding longterm debentures including 485 debentures redeemed january 1996 funds redeem 485 debentures january 1996 included cash equivalents consolidated balance sheet december 31 1995 addition cash equivalents december 31 1995 includes 500 used reduce commercial paper january 2 1996 bellsouth committed credit lines aggregating 1951 various banks borrowings committed credit lines totaled 92 december 31 1996 bellsouth also maintains uncommitted lines credit 650 december 31 1996 borrowings uncommitted lines february 14 1997 shelf registration statements file securities exchange commission 1927 debt securities could publicly offered bellsouths debt total capitalization ratio adjusted 1995 exclude 485 debentures redeemed january 1996 decreased 435 december 31 1996 467 december 31 1995 decrease primarily caused reduction shortterm borrowings increase shareholders equity due earnings 1996 derivative activities bellsouth enters foreign exchange forward contracts currency swap agreements interest rate swap agreements normal course business hedging purposes financial instruments used mitigate foreign currency interest rate risks although limited extent expose company market credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited current value currency rate interest rate differential full notional amount contracts agreements executed creditworthy financial institutions whose credit ratings generally aaaa higher bellsouth considers risk nonperformance remote see note n consolidated financial statements additional information operating environment trends business regulatory environment providing telecommunications services bellsouth subject regulation state federal regulators respect rates services competition issues bellsouths primary regulatory focus directed toward modifying regulatory process one closely aligned changing market conditions overall public policy objectives alternative regulation intrastate earnings bellsouth sought price regulation whereby prices basic service regulated pricing products services based market factors price regulation plans provide direct recovery basic service rates cost increases extraordinary expenses generally provide flexibility meet competitive pricing levels bellsouth telecommunications price regulation plans approved authorized states wireline territory although implementation tennessee plan stayed court pending resolution number issues federal level bellsouth telecommunications operating price regulation plan established federal communications commission fcc 1995this plan provided productivity option bellsouth telecommunications selected eliminated earnings limitations sharing requirements economy nations output goods services grew 20 1995 grew moderate rate 23 1996 employment nonfarm business establishments grew 22 year unemployment rate averaged 54 economy ninestate region served bellsouth telecommunications wireline telephone business grew slightly faster national economy number jobs nonfarm businesses grew 23 unemployment rate averaged 50 year real income expanded estimated 37 net migration added approximately 400000 persons accounting half regions population growth demand telecommunications services region reflected strength economic population growth moderate economic expansion expected 1997 tight labor markets slow labor force growth modest productivity growth act constrain pace growth regions cost advantages strong net migration bring economic growth rate comparatively better nations increase demand telecommunications services increased competition faced bellsouth telecommunications growing percentage revenues unregulated businesses make bellsouths financial performance susceptible changes economy previously operations reflect competitive business environment greater demand elasticities products services competition bellsouth subject increasing competition areas business regulatory legislative judicial actions technological developments expanded types available services products number companies may offer increasingly competition large companies substantial capital technological marketing resources 1996 act 1996 act requires elimination state legislative regulatory barriers competition local telephone service subject competitively neutral requirements preserve advance universal service protect public safety welfare maintain quality telecommunications services safeguard rights customers 1996 act also includes requirements bellsouth negotiate carriers interconnection use network elements unbundled basis resale local services negotiated agreement cannot reached either party may seek arbitration state regulatory authority fcc state fails act rates disputed arbitrator must set rates access network elements unbundled basis based cost may include reasonable profit bellsouth also required negotiate provide retail services wholesale rates purposes resale competing carriers agreement cannot reached arbitrator shall set wholesale rates bellsouths retail rates less costs avoided bellsouth telecommunications executed 40 interconnection resale agreements carriers currently involved arbitration proceedings number carriers including att mci sprint arbitration results wholesale discount rates vary state approximately 15 21 connection requirements 1996 act august 1996 fcc released order adopting rules governing interconnection open competition local telephone service industry order among issues specifically addressed order network elements bellsouth must make available pricing standards followed states setting rates interconnection access network elements unbundled basis resold services bellsouth several incumbent local exchange carriers ilecs joined appeal order united states court appeals eighth circuit court upon request several state commissions ilecs court stayed order part pending appeal stay relates pricing prescriptions certain terms court heard oral arguments january 1997 decision pending notwithstanding developments however discussed bellsouth telecommunications number carriers negotiated interconnection agreements state regulatory commissions arbitrating approved various terms interconnection bellsouth telecommunications carriers terms may revised depending among things outcome appeal order 1996 act also requires fcc identify local service subsidy provided access charges provide removal subsidy access rates order access charges reflect underlying costs arrange universal service fund ensure continuation universal service develop arrangements payments fund carriers fcc currently engaged proceeding addition fcc commenced proceeding revise access charge rules final orders issued fcc judicial appeals concluded possible determine impact access charge revenues however interim access charge plan provides lower access charges paid carriers purchase unbundled network elements ilecs connect wireless communications wireline networks ilecs attempting comply technical requirements interconnection bellsouth expects incur significant costs associated development modification systems necessary make interconnection possible example bellsouth telecommunications required provide longterm number portability whereby customers switching competing local carriers able retain telephone numbers without interruption unclear degree bellsouth able recover costs fcc issues final orders matters access reform universal service number portability well matters judicial appeals concluded possible determine impact 1996 act bellsouths financial position annual operations results cash flows wireless services fccs pcs licensing process allows multiple new competitors bellsouths businesses licenses provide pcs services auction att bell holding company consortia large wellcapitalized entities pcs provide competition bellsouths local wireline wireless telephone businesses several competitive pcs systems operational many markets competing cellular service provided businesses owned controlled bell holding company att major telephone company addition bell atlantic corporation nynex corporation combined cellular businesses u west inc airtouch communications announced plan merge cellular businesses four companies also formed joint venture provide pcs many domestic markets bellsouth competitive strategy bellsouth developed three main strategies govern business decisions increasingly competitive telecommunications industry first bellsouth strengthen leadership position throughout ninestate wireline territory enhancing building brand strength distribution channels b providing fullservice offerings including wireline wireless local longdistance video electronic commerce services c controlling costs second bellsouth continue grow profitably domestic wireless business deploying valueadded products services competitive technology b strengthening expanding distribution channels including joint marketing bellsouth telecommunications c expanding inregion wireless coverage successful bidding pcs licenses acquisitions third bellsouth continue grow develop latin american international operations new services notwithstanding inevitable loss local service customers risks associated increased competition bellsouth opportunity benefit entry new business markets example presence competition among things allow bellsouth qualify offer interlata wireline service provisions contained 1996 act bellsouth believes order remain competitive future must aggressively pursue corporate strategy expanding offerings beyond traditional businesses markets offerings include interlata services information services video electronic commerce services bellsouth entered businesses investments strategic alliances acquisitions established companies industries development services capabilities internally example among initiatives bellsouth acquired several cable tv rights conducting trial cable tv service providing internet access bellsouth also intends continue pursue certain foreign telecommunications licenses offered bellsouth plans begin offering interlata wireline service inregion states soon fcc approves application state bellsouth filed documents georgia public service commission requesting georgia commission approve statement generally available terms conditions provided 1996 act establish terms conditions meet competitive checklist bellsouth file application state soon believes conditions met proceedings required obtain approval potential challenges competitors others uncertain bellsouth authorized commence interlata service inregion states 1996 act requires inregion interlata service provided subsidiary separate bellsouth telecommunications joint marketing 1996 act allows bellsouth market wireless services jointly wireline local exchange services previously separate marketing required change enabled bellsouth efficiently offer provide integrated telecommunications march 1996 bellsouth began joint marketing wireless wireline services selected markets addition permitted 1996 act bellsouth intends jointly market services video internet access eventually interlata service wireline wireless services 1995 work force reduction another part competitive strategy bellsouth telecommunications announced 1995 plan reduce work force approximately 11300 employees end 1997 also 1995 bellsouth telecommunications completed restructuring telephone operations announced 1993 item 8item 7 managements discussion analysis results operations financial condition dollars millions except per share amounts bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange service toll communications services within geographic areas called local access transport areas latas ii exchange access services enable interlata communications using longdistance facilities interexchange carriers subsidiaries telecommunications services products provided primarily within ninestate bellsouth telecommunications region bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing wireless international communications services advertising publishing products approximately 67 70 bellsouths total operating revenues years ended december 31 1997 1996 1995 respectively network related services provided bellsouth telecommunications charges local access toll services year ended december 31 1997 accounted approximately 62 33 5 respectively network related revenues discussed revenues wireless communications services directory advertising publishing services accounted approximately 17 9 respectively total operating revenues year ended december 31 1997 remainder revenues derived principally sales maintenance customer premises equipment nonregulated services provided bellsouth telecommunications results operations discussion extraordinary losses 1997 1995 see extraordinary losses income extraordinary losses 1997 increased 407 142 basic earnings per share increased 42 146 compared 1996 increases primarily attributable aftertax gains sale 1997 optus communications 352 itt world directories 128 see note b consolidated financial statements addition increases due continued strong growth key business volumes expense savings due employee reductions bellsouth telecommunications work force reduction plan initiated 1995 increases partially offset 344 aftertax gain sale bellsouths paging business first quarter 1996 increases offset aftertax charge 47 related regulatory settlement south carolina second quarter 1997 income extraordinary losses 1996 increased 1299 831 basic earnings per share increased 131 834 compared 1995 increases primarily attributable effect aftertax work force reduction charge 1995 663 discussion charge see operating expenses work force reduction charge also contributing increases 344 aftertax gain sale bellsouths paging business see note b consolidated financial statements well growth key business volumes driven continued growth access lines cellular customer base cost control measures bellsouth telecommunications including salary wage savings attributable work force reduction restructuring plans initiated 1995 1993 respectively volumes business network access lines service december 31 thousands total number access lines service increased approximately 1066000 48 23201000 since december 31 1996 compared 47 rate increase 1996 business residence access lines increased 53 46 respectively compared growth rates 81 33 1996 decrease growth rate business lines primarily due migration business customers traditional business line services highcapacity service arrangements included business access line counts lesser degree growth rate business lines also affected increased presence facilitiesbased competition many residential customers order additional access lines home office purposes access online computer services childrens phones number additional residence lines included total residence lines increased 328000 211 1884000 accounted 468 308 overall increase residence access lines total access lines respectively since december 31 1996 growth categories access lines continues reflect economic improvement southeast successful marketing programs access minutes use millions access minutes use represent volume traffic carried interexchange carriers latas interstate intrastate using bellsouth telecommunications local facilities 1997 total access minutes use increased 8245 million 93 compared increase 89 1996 increases access minutes use primarily attributable access line growth promotions interexchange carriers intralata toll competition effect increasing access minutes use reducing toll messages carried bellsouth telecommunications facilities growth rate total minutes use continues negatively impacted competition migration interexchange carriers categories service eg special access fixed charge opposed volumedriven charge highcapacity services toll messages comprised message telecommunications service wide area telecommunications service toll messages decreased 129 million 126 1997 compared decrease 255 1996 decrease 1997 primarily attributable continued competition interexchange carriers intralata toll market well continuing expansion local area calling plans lacps effects competition expansion lacps result transfer calls toll access local service categories respectively corresponding revenues generally shifted commensurate rates competition interexchange carriers intralata toll market adversely impact future toll message volumes cellular personal communications service pcs customers served december 31 equity basis thousands excluding customers optus communications periods number international cellular customers equityweighted increased 971 1066 477 1099 respectively years ended december 31 1997 1996 domestic cellular customers equityweighted increased 493000 136 since december 31 1996 moderation customer growth rate reflects impact increased competition bellsouths penetration rate number equitybasis customers percentage equitybasis population service territory increased 89 december 31 1996 102 december 31 1997 total minutes use continued increase average minutes use per cellular customer declined due continuing trends increased penetration lowerusage market segments increased competition highusage customers bellsouth expects trends continue international cellular customers increased 638000 513 since december 31 1996 1882000 growth reflects increased demand wireless services international markets bellsouth serves impact acquisitions cellular properties nicaragua ecuador peru partially offset sale optus communications growth total minutes use international cellular properties remained strong primarily due demand stimulated marketdriven pricing programs enhanced services underdeveloped landline service however average minutes use per international customer declined due addition customers lowerusage market segments domestic pcs customers equityweighted totaled 88000 december 31 1997 compared 31000 customers december 31 1996 operating revenues discussion impact local service competition revenues volumes business see operating environment trends business total operating revenues increased 1521 80 1997 compared increase 1154 65 1996 increases resulted primarily significant increases revenues wireless communications businesses coupled growth revenues bellsouths wireline telephone business addition revenues positively impacted consolidation certain bellsouths international operations 122 previously accounted equity method included income net increases partially offset 72 reduction revenues related regulatory settlement south carolina increase 1996 partially offset effect january 1996 sale bellsouths paging business excluding paging revenues 1995 total operating revenues increased 1503 86 1996 components total operating revenues follows local service revenues reflect amounts billed customers local exchange services include connection network optional services custom calling features local service revenues 1997 increased 417 52 compared increase 788 108 1996 increase 1997 due primarily 48 growth access lines since december 31 1996 also contributing increase 241 due higher customer demand optional services increases partially offset rate impacts reduced revenues 252 primarily due revenue sharing accruals recorded 1997 nonrecurring revenue reduction 64 related local service portion regulatory settlement south carolina increase 1996 due primarily 47 growth access lines since december 31 1995 also contributing increase 251 due higher customer demand optional services net rate increases 88 include benefits related effects expanded lacps interstate access revenues result provision access services interexchange carriers provide telecommunications services states enduser charges collected residential business customers interstate access revenues increased 120 34 1997 compared increase 278 85 1996 increase 1997 attributable primarily growth minutes use 88 increase 97 due higher demand special access services increase enduser charges 99 attributable growth number access lines increases partially offset rate reductions decreased revenues 161 since december 31 1996 increase due primarily growth minutes use 85 increase 69 due higher demand special access services increase enduser charges 58 attributable growth number access lines service increases offset net rate reductions since december 31 1995 25 intrastate access revenues result provision access services interexchange carriers provide telecommunications services latas within state 1997 intrastate access revenues decreased 2 02 compared decrease 72 81 1996 decreases 1997 1996 due primarily rate reductions 82 160 respectively partially offset growth minutes use 109 103 respectively toll revenues received provision long distance services within latas services include intralata service beyond local calling area wide area telecommunications service wats 800 services customers highly concentrated demand special services transport voice data video toll revenues decreased 60 76 1997 compared decrease 215 213 1996 decrease 1997 primarily attributable continuing competition interexchange carriers intralata toll market well continuing expansion lacps effect reduced toll messages 126 decrease partially offset 62 related revenues interexchange carriers beginning second quarter 1997 toll messages originating bellsouth telecommunications public telephones decrease 1996 primarily attributable expansion lacps increased competition interexchange carriers effects reduced toll messages 255 decrease partially offset retroactive independent company settlement 1995 reduced revenues 31 period overall decline intralata toll revenues expected continue long term wireless communications revenues include revenues domestic international cellular communications pcs businesses well revenues interconnections unaffiliated cellular pcs carriers bellsouth telecommunications network bellsouths interests net income loss unconsolidated wireless businesses within bellsouth enterprises accounted equity method accounting recorded income net wireless communications revenues increased 756 270 1997 compared increase 207 80 1996 1997 increase includes revenues certain bellsouths international operations previously accounted equity method consolidated first time 1997 excluding revenues wireless communications revenues would increased approximately 227 1996 increase partially offset effect january 1996 sale bellsouths paging business revenues paging services 349 1995 excluding paging revenues 1995 wireless communications revenues increased 248 1996 increases years adjusted primarily attributable continued growth customer bases domestic international wireless markets number bellsouths proportional domestic cellular customers grown 136 269 321 proportional domestic cellular revenues grown 90 225 289 years ended december 31 1997 1996 1995 respectively penetration rate grown 102 december 31 1997 89 71 december 31 1996 1995 respectively customer revenue growth rates likely continue declining reflecting increasing penetration rates competition wireless customers additional pcs carriers see operating environment trends business wireless service competition directory advertising publishing revenues include revenues derived publishing printing selling advertising performing related services concerning alphabetical classified telephone directories directory advertising publishing revenues increased 192 110 1997 compared 65 39 increase 1996 increase 1997 primarily reflects volume growth price increases reclassification operating expenses commissions associated national accounts previously reduced revenues revenue growth rate associated increases volume pricing 1997 67 increase 1996 primarily due increases volume prices advertising sold increase partially offset effect bellsouth telecommunications adoption issue basis accounting directory revenues increased revenues 1995 41 connection discontinuance statement financial accounting standards sfas 71 accounting effects certain types regulation see note consolidated financial statements services revenues principally comprised revenues customer premises equipment cpe sales maintenance services nonregulated services primarily inside wire billing collection voice messaging services offered bellsouth telecommunications services revenues increased 98 78 1997 compared increase 103 89 1996 increase 1997 reflects increased demand prices nonregulated services higher billingrelated fees bellsouth telecommunications totaling 138 increase partially offset effect 1996 positive rate impacts sale subsidiary performed computer maintenance 1996 increase primarily attributable higher demand prices nonregulated services product sales fees totaling 132 addition increase also due incremental rate impacts related potential sharing certain state regulatory plans increase partially offset sale 1996 subsidiary performed computer maintenance operating expenses total operating expenses increased 924 65 1997 compared decrease 333 23 1996 1997 increase primarily attributable growth within bellsouths domestic international cellular businesses well increases associated initiation pcs service 1997 increase also includes expenses certain international operations previously accounted equity method accounting consolidated first time 1997 excluding effect international operations total operating expenses increased approximately 57 1997 decrease 1996 primarily attributable effects 1995 work force reduction charge 1082 sale bellsouths paging business january 1996 excluding effects total operating expenses increased 1049 79 1996 components total operating expenses follows depreciation amortization increased 245 66 1997 compared 264 76 increase 1996 1997 increase due primarily higher levels property plant equipment since december 31 1996 resulting continued growth customer base wireless wireline services continued modernization networks increase 1996 due primarily higher levels property plant equipment shorter depreciable lives subsequent discontinuance sfas 71 higher levels property plant equipment resulted continued growth customer base wireless wireline services modernization networks increase partially offset sale bellsouths paging business january 1996 depreciation amortization 44 1995 operating expenses comprised cost services products selling general administrative cost services products includes employee employeerelated expenses associated network repair maintenance material supplies expense cost tangible goods sold expenses associated providing services selling general administrative includes expenses related sales activities salaries commissions benefits travel marketing advertising expenses administrative expenses operating expenses increased 679 64 1997 compared increase 485 48 1996 increases 1997 1996 primarily related growth wireless wireline businesses increase 1996 partially offset effect january 1996 sale bellsouths paging business excluding pagingrelated expenses 1995 operating expenses increased 741 76 1996 1997 increase due primarily increased expenses 149 277 related domestic international cellular customer bases respectively reflecting additional marketing operating costs associated higher sales expanded operations increase related international operations includes 76 expenses related operations consolidated first time 1997 previously accounted equity method increase operating expenses also reflects higher expenses associated expansion pcs services 84 increased expenses 126 directory publishing operations bellsouth telecommunications operating expenses increased 12 due principally costs associated 1996 act compliance 230 well increased costs due higher business volumes new service offerings intensified marketing advertising efforts increase partially offset estimated reduction 232 employeerelated costs core wireline business including expenses employee benefits decrease employeerelated costs reflected net employee reductions bellsouth telecommunications telephone operations approximately 4800 since december 31 1996 partially offset annual compensation increases management represented employees employee reductions primarily attributable previously disclosed work force reduction plan increase operating expenses bellsouth telecommunications offset april 1996 sale subsidiary performed computer maintenance 1996 expenses related domestic international cellular businesses increased 342 result sustained growth cellular customer bases increase 1996 also reflects higher expenses associated initiation pcs services 69 bellsouth telecommunications operating expenses increased 202 due principally higher business volumes new service offerings intensified marketing advertising increase partially offset decrease approximately 162 employeerelated costs wireline telephone operations sale 1996 subsidiary performed computer maintenance decrease employeerelated costs reflects employee reductions attributable restructuring work force reduction plans partially offset annual compensation increases management represented employees 1996 increase operating expenses also included increase approximately 50 expenses related directory advertising publishing business work force reduction charge fourth quarter 1995 bellsouth recognized pretax charge 1082 663 tax comprised 942 577 tax related planned work force reductions end 1997 85 52 tax expected severance benefit payments 1997 55 34 tax additional net curtailment losses related employee reductions restructuring plan initiated 1993 completed 1995 plan substantially completed 1997 resulted reduction wireline telephone operations work force approximately 11600 employees term plan see note l consolidated financial statements income statement items interest expense includes interest debt certain accrued liabilities capital leases partially offset interest capitalized cost installing equipment constructing plant interest expense increased 40 55 1997 compared decrease 3 04 1996 increase 1997 primarily attributable higher average debt balances interest rates shortterm borrowings decrease 1996 primarily attributable lower average interest rates borrowings due part refinancings 1995 partially offset higher average debt balances 1996 gain sales operations 1997 represents pretax gains sales bellsouths investments optus communications itt world directories totaled 578 209 respectively pretax gain 1996 represents sale bellsouths paging business january 1996 income net includes earnings losses unconsolidated affiliates income losses sale investments interest dividend income minority interests nonoperating items income net decreased 89 1997 compared increase 88 1996 decrease income net 1997 primarily attributable increased equity losses unconsolidated affiliates net partially offset income sale bellcore increase interest income nonoperating items equity losses unconsolidated affiliates 242 1997 compared 76 1996 higher overall equity losses unconsolidated affiliates reflects losses incurred recently acquired startup international businesses principally latin america well increased losses mobile data communications business lower earnings unconsolidated domestic cellular operations increased losses partially offset favorable results unconsolidated international operations principally israel germany panama 1996 increase resulted primarily 55 increase interest income lower net minority interest deductions 35 equity losses 76 1996 improvement 10 1995 lower 1996 losses primarily attributable improved operating results unconsolidated domestic cellular operations certain international businesses principally operations israel venezuela improvements partially offset increased losses attributable continuing development german cellular operations provision income taxes increased 406 233 1997 compared increase 721 704 1996 bellsouths effective tax rates 397 379 396 1997 1996 1995 respectively lower effective tax rate 1996 compared 1997 1995 due primarily higher tax book basis paging business resulted lower gain sale computing tax expense reconciliation statutory federal income tax rates effective tax rates provided note j consolidated financial statements extraordinary losses early extinguishment debt 1997 1995 bellsouth recognized extraordinary losses 9 78 net current tax benefits 6 49 respectively related early extinguishment outstanding debt issues see note e consolidated financial statements discontinuance sfas 71 1995 result continuing regulatory marketplace assessments bellsouth telecommunications concluded required discontinue application sfas 71 accordingly bellsouth telecommunications recorded noncash extraordinary charge 2718 net deferred tax benefit 1731 extraordinary charge reflected 3002 tax reduce recorded value longlived telephone plant equipment within regulatory framework level appropriate nonregulated enterprises overall charge partially offset 194 related method bellsouth telecommunications reported directory publishing revenues 71 related elimination regulatory assets liabilities 19 partial acceleration unamortized investment tax credits associated reductions asset carrying values asset lives see note consolidated financial statements financial condition bellsouth uses net cash generated operations external financing invest operate existing new businesses pay dividends current liabilities exceeded current assets december 31 1997 1996 bellsouths sources funds primarily operations extent necessary readily available external financing arrangements sufficient meet current obligations timely basis bellsouth believes sources funds sufficient meet needs business foreseeable future operating activities net cash provided operating activities increased 1176 201 1997 compared increase 420 77 1996 increase 1997 primarily due decrease 1288 cash expenditures accounts payable current liabilities increase also due 842 increase operating income depreciation amortization increases partially offset decrease 494 liabilities deferred credits increase 1996 primarily attributable 669 increase operating income excluding depreciation amortization work force reduction charge 1996 increase partially offset higher cash expenditures reductions accounts payable investing activities bellsouths primary use capital resources continues capital expenditures support development wireline wireless networks net cash used investing activities increased 750 179 1997 compared decrease 185 42 1996 increase 1997 primarily due investments unconsolidated international affiliates specifically latin america decrease 1996 primarily due 930 cash received sale bellsouths paging business decrease partially offset higher capital expenditures 252 related substantially wireline wireless network development decrease 324 proceeds investment dispositions repayment advances capital expenditures 4858 1997 projected approximately 50 billion 55 billion 1998 addition capital expenditures related consolidated operations bellsouth also makes significant investments unconsolidated affiliates significant commitment operations 1998 bellsouths brazilian operations bellsouths share projected license fee commitments capital expenditure requirements brazilian operations 1998 approximately 900 capital expenditures 1997 financed internally funds investments unconsolidated international operations generated internally external sources 1998 capital expenditures funds unconsolidated international investments expected financed primarily internally generated funds extent necessary external sources cash used investing activities 1997 1996 partially offset significant proceeds sales various bellsouth interests proceeds 1000 1997 consisted sale bellsouths interests optus communications 735 itt world directories 265 proceeds 1996 930 represented sale bellsouths paging business financing activities 1997 1996 financing activities used cash 698 2197 respectively decrease cash used 1997 primarily reflects higher net proceeds 1997 issuance shortterm borrowings increased use cash 1995 1996 2243 primarily reflected higher levels net proceeds borrowing activities 1995 compared 1996 debt activities 1997 bellsouth issued 500 longterm debt purpose issuance fund investments international affiliates retire commercial paper general corporate purposes also 1997 bellsouth telecommunications called redeemed three series debentures totaling 600 1996 bellsouth issued 300 longterm debt net proceeds well cash hand redeemed outstanding shortterm debt longterm debentures 417 485 respectively bellsouth committed credit lines aggregating 1498 various banks borrowings committed credit lines totaled 241 december 31 1997 bellsouth also maintains uncommitted lines credit 1020 december 31 1997 borrowings uncommitted lines february 9 1998 shelf registration statements file securities exchange commission 1927 debt securities could publicly offered 500 registered february 9 1998 september 1997 bellsouth announced plan repurchase 1 billion common stock 1998 bellsouths debt total capitalization ratio decreased 421 december 31 1997 435 december 31 1996 decrease primarily caused increase shareholders equity due earnings 1997 market rate risk sensitivity bellsouth subject market rate risks due fluctuations interest rates majority bellsouths debt form longterm fixedrate notes debentures original maturities ranging ten one hundred years accordingly fluctuations interest rates lead significant fluctuations fair value debt instruments time bellsouth enters interest rate swap agreements designed mitigate exposure interest rate risks however activity immaterial 1997 bellsouth also exposed foreign currency risk virtue international operations specifically bellsouths foreign currency exposure relates primarily foreign currency denominated balance sheet positions international ventures commitments limited extent longterm debt denominated foreign currencies bellsouth time party currency swap agreements foreign exchange forward contracts designed mitigate exposure foreign currency risks activity generally limited hedging specific future commitments longterm debt denominated foreign currencies immaterial 1997 bellsouth engaged significant hedging foreign currency denominated balance sheet positions international ventures bellsouths use derivative financial instruments designed mitigate foreign currency interest rate risks although extent expose bellsouth credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited current value currency rate interest rate differential full notional amount contracts agreements executed creditworthy financial institutions bellsouth considers risk nonperformance remote following table provides information maturity date bellsouths interest rate sensitive financial instruments consist fixed variable rate longterm debt obligations fair values majority bellsouths longterm debt obligations based quotes dealers operating environment trends business economy nations output goods services grew 28 1996 grew rapid rate 38 1997 employment nonfarm business establishments grew 23 year unemployment rate averaged 50 slower economic growth expected 1998 increased foreign imports tight labor markets slow labor force growth modest productivity growth act constrain pace growth economy ninestate region served bellsouth telecommunications wireline telephone business grew pace national economy number jobs nonfarm businesses grew 22 unemployment rate averaged 47 year real income expanded estimated 40 net migration added approximately 400000 persons accounting half regions population growth demand telecommunications services region reflected strength economic population growth regions cost advantages strong net migration bring economic growth rate comparatively better nations increase demand telecommunications services increased competition faced bellsouth telecommunications growing percentage revenues unregulated businesses make bellsouths financial performance susceptible changes economy previously operations reflect competitive business environment greater demand elasticities products services bellsouth minimal exposure asia expect businesses materially adversely affected recent decline value currencies various asian countries consequent inability many substantial businesses countries pay debts mature unless events result significant general decline business activity united states areas world bellsouth business bellsouths operations abroad particularly latin america sensitive changes value currencies conduct business material decline one currencies us dollar could adverse impact upon bellsouths financial position annual operating results cash flows see financial condition market rate risk sensitivity discussion bellsouths foreign currency risks regulatory competitive environment providing telecommunications services bellsouth subject regulation state federal regulators respect rates services competition issues bellsouths primary regulatory focus directed toward seeking modification regulatory process one closely aligned changing market conditions overall public policy objectives alternative regulation intrastate earnings bellsouth successfully sought price regulation whereby prices basic services regulated pricing products services based market factors price regulation plans provide direct recovery basic service rates cost increases extraordinary expenses generally provide flexibility meet competitive pricing levels state level bellsouth telecommunications subject price regulation plans states wireline territory except tennessee court order implement price regulation appealed federal level bellsouth telecommunications operating price regulation plan established federal communications commission fcc 1995 fccs price cap plan limits aggregate price changes rate inflation minus productivity offset plus minus exogenous cost changes recognized fcc mandated increase price cap productivity factor 53 65 reducing access charges new rates went effect beginning july 1 1997 computed 65 productivity factor effect since july 1 1996 gross domestic product price index increases less 65 annual period price reductions occur bellsouth subject increasing competition areas business regulatory legislative judicial actions technological developments expanded types available services products number companies may offer increasingly competition large companies joint ventures substantial capital technological marketing resources local service competition telecommunications act 1996 act requires elimination state legislative regulatory barriers competition local telephone service subject competitively neutral requirements preserve advance universal service protect public safety welfare maintain quality telecommunications services safeguard rights customers 1996 act also includes requirements incumbent local exchange carriers ilecs bellsouth telecommunications negotiate carriers interconnection use network elements unbundled basis resale local services negotiated agreement cannot reached either party may seek arbitration state regulatory authority fcc state fails act rates disputed arbitrator must set rates access network elements unbundled basis based cost may include reasonable profit ilecs also required negotiate provide retail services wholesale rates purpose resale competing carriers agreement cannot reached arbitrator set wholesale rates bellsouths retail rates less costs avoided bellsouth telecommunications executed 300 interconnection resale agreements carriers arbitration results wholesale discount rates vary state approximately 148 218 business residential service connection requirements 1996 act august 1996 fcc released order adopting rules governing interconnection open competition local telephone service industry among issues specifically addressed order network elements bellsouth must make available pricing standards followed states setting rates interconnection access network elements unbundled basis resold services bellsouth several ilecs several state regulatory bodies appealed order united states court appeals eighth circuit july 1997 court ruled state commissions fcc exclusive jurisdiction set prices local service interconnection unbundled network elements local service resale addition court vacated aspects order including fccs pick choose rule allowed competing local carriers select terms different interconnection agreements negotiating interconnection agreements court also rejected fccs requirement ilecs submit pre1996 interconnection agreements state commissions approval presumption network element technically unbundled must unbundled finally court rejected fccs requirement ilecs physically recombine unbundled network elements competing local carriers required elements made available rebundling certain aspects order upheld court including ability competing local carriers recombine network elements produce complete telecommunications services without providing facilities court also affirmed fccs classification operations support systems operator services directory assistance vertical switching features unbundled network elements addition court upheld fccs definition technically feasible interconnection exclude economic considerations finally court declined rule whether total element long run incremental cost telric pricing methodology inconsistent 1996 act leaving state commissions make decision reconsideration court clarified 1996 act require ilecs provide recombined unbundled network elements united states supreme court agreed review courts decision ruling expected mid1999 subsequent order eighth circuit held fcc may impose pricing standards condition granting permission operating telephone companies provide interlata communications notwithstanding developments however bellsouth telecommunications number carriers negotiated interconnection agreements state regulatory commissions arbitrated approved various terms interconnection bellsouth telecommunications carriers changes may made agreements judicial appeals concluded attempting comply technical requirements interconnection bellsouth incurring expects continue incur significant costs associated facilitation interconnection bellsouth incurred approximately 400 costs associated efforts year ended december 31 1997 amount approximately 230 expensed incurred remainder capitalized remains unclear degree bellsouth compensated costs result changes regulation discussed substantial competition developed bellsouth telecommunications business customers provide greater concentration higher margin revenues residential customers competitors include interexchange carriers att mci smaller competitive local exchange carriers clecs resell local services bellsouth telecommunications ilecs provide service facilities fact significant residential local service competition would improve bellsouths prospects obtaining regulatory authority offer interlata long distance service bellsouth believes interexchange carriers slow enter local residential market therefore development competition local residential service customers continue much slower business local service customers access service historically access charges set levels subsidize cost providing local residential service 1996 act also requires fcc identify local service subsidy implicitly provided access charges provide removal subsidy access rates order access charges reflect underlying costs arrange universal service fund ensure continuation universal service develop arrangements payments fund carriers may 1997 fcc adopted orders regarding revisions price cap plan access charge reform establishment universal service fund orders price cap plan access charge reform resulted access rate reductions related perminuteofuse charges increases perline charges addition access charge reform order resulted several changes existing interstate access rate structure designed move access charges time economically efficient levels create efficient rate structures nontrafficsensitive costs previously recovered perminuteofuse basis changed recovered flatrate perline basis part plan subscriber line charges slcs increased new presubscribed interexchange carrier charge picc established slc picc charges increased time usage charges reduced universal service order established new funding mechanisms highcost lowincome service areas bellsouth telecommunications began contributing new funds january 1 1998 allowed recovery contributions increased interstate access charges major changes support mechanism subsidize provision services highcost areas occur january 1 1999 new support mechanism implemented 1999 based forwardlooking economic costs however cost model yet adopted new proceeding initiated june 1997 select cost model final fcc action expected 1998 foregoing orders appealed united states courts appeal several different circuits result legal requirement offer expanded interconnection interstate special switched access transport bellsouth telecommunications must permit competitive carriers customers terminate transmission lines bellsouth telecommunications facilities collocation arrangements effects rules increase competition access transport furthermore interexchange carriers increasingly connecting lines directly customers facilities bypassing networks bellsouth telecommunications thereby avoiding access charges entirely addition commercial applications internet telephony developed medium could attract substantial long distance traffic lower cost structure fcc rules currently impose access charges internet communications wireless service competition bellsouths wireless communications businesses face increasing competition additional providers bellsouths markets number bellsouths proportional domestic cellular customers grown 136 269 321 proportional domestic cellular revenues grown 90 225 289 years ended december 31 1997 1996 1995 respectively penetration rate bellsouths domestic cellular services grown 102 december 31 1997 89 71 december 31 1996 1995 respectively growth likely continue declining reflecting increasing penetration rates competition wireless customers additional pcs carriers fccs pcs licensing process created multiple new competitors bellsouths businesses licenses provide pcs services auction att holding company consortia large wellcapitalized entities pcs competes compete bellsouths local wireline wireless telephone businesses throughout bellsouths service territories several competitive pcs systems operational bellsouths international wireless operations generally subject competition least one wireless service provider competing wireless service providers generally supported partners least wellcapitalized bellsouth partners cases competing provider operated governmentowned telephone company may access substantial financial resources bellsouth believes number companies privatized within next years may result formidable competition number bellsouths proportional international cellular customers excluding customers optus communications periods grown 1066 1099 904 years ended december 31 1997 1996 1995 respectively bellsouths proportional share international cellular revenues excluding revenues optus communications increased 764 590 593 respectively years ended december 31 1997 1996 1995 bellsouth competitive strategy bellsouth developed three main strategies govern business decisions increasingly competitive telecommunications industry first bellsouth strengthen leadership position throughout ninestate wireline territory enhancing building brand strength distribution channels b providing fullservice offerings including wireline wireless local long distance video internet services c controlling costs second bellsouth continue grow profitably domestic wireless businesses deploying valueadded products services competitive technology b strengthening expanding distribution channels including joint marketing bellsouth telecommunications c expanding inregion wireless coverage development businesses covered licenses third bellsouth continue grow develop latin american international operations new services opening bellsouth telecommunications local service markets competition allow bellsouth qualify entry new business markets loss local service customers risks associated increased competition inevitable bellsouth opportunity offer interlata wireline service provisions contained 1996 act bellsouth believes order remain competitive must aggressively pursue corporate strategy expanding offerings beyond traditional businesses markets offerings include interlata services information services video services internet services bellsouth entered businesses investments strategic alliances acquisitions established companies industries development services capabilities internally bellsouth acquired several cable tv wireless video rights providing cable tv wireless video services limited basis certain metropolitan areas providing internet access bellsouth also intends continue pursue certain foreign telecommunications licenses offered bellsouth plans begin offering interlata wireline service inregion states soon fcc approves application state bellsouth received favorable determinations regulatory commissions several states wireline service territory fcc rejected applications provide inregion interlata service ruled applicants appealed denials united states court appeals district columbia circuit addition united states district court northern district texas ruled provisions 1996 act prohibiting holding companies providing interlata service effect unconstitutional bill attainder unenforceable ruling stayed pending appeal bellsouth continue seek approvals fcc state commissions judicial review adverse decisions believes erroneous however scrutiny applications fcc justice department time required obtain judicial review adverse decisions possible challenges interexchange carriers approved applications uncertain bellsouth authorized commence interlata service inregion states year 2000 compliance bellsouth initiated companywide program identify address issues associated ability datesensitive information telephony business systems properly recognize year 2000 order avoid interruption operation systems turn century program conducted management team coordinating efforts internal resources well third party vendors making necessary changes bellsouths systems changes made part larger systems upgrades bellsouth plans conversion initial testing completed end 1998 complete testing deployment mid1999 costs associated efforts incurred 1997 remainder incurred next two years bellsouth estimates costs efforts 100 200 life project bellsouth expects avoid disruption information telephony business systems result efforts new accounting pronouncements segment reporting june 1997 fasb issued sfas 131 disclosures segments enterprise related information superseding sfas 14 financial reporting segments business enterprise sfas 131 establishes new standards reporting operating segment information annual interim financial statements new standard requires reporting operating segment information based way financial information entity organized senior management evaluating performance allocating resources standard effective yearend 1998 need applied interim financial statements year comparative information earlier years basis segmentation must also reported present bellsouth presents operations one business segment financial statements however based preliminary assessment requirements new standard bellsouth anticipates reporting operating segment information multiple reportable segments determination reportable segments however finalized capitalization internal use software 1996 aicpa issued statement position sop exposure draft dealing costs internal use software treatment accorded costs past diverse practice proposed sop require capitalization costs certain preliminary development efforts made costs capitalized direct costs interest costs related development efforts proposed sop expected issued early 1998 require adoption bellsouth later january 1 1999 earlier adoption permitted years financial statements issued adoption proposed sop result temporary increase earnings year adoption result capitalization costs previously expensed expenditures remain consistent level earnings impact decline year following change decline continue amortization expense related capitalized software costs equals level software costs treated expense prior change addition adoption proposed sop result higher levels capitalized software costs balance sheet safe harbor statement certain information contained reports addresses known trends uncertainties affecting bellsouths business prospects may constitute forwardlooking statements within meaning private securities litigation reform act 1995 bellsouths expectations contained underlying forwardlooking statements based number assumptions including limited 1 economic growth demand wireline wireless communications services continues bellsouths service territories 2 final resolution access reform universal service orders fcc resultant customer impacts reasonably earningsneutral 3 local wireline wireless service competition significantly increasing adverse impacts earnings 4 continuing costs implement network changes operating systems necessary satisfy regulatory conditions bellsouths provision interlata service materially greater currently projected 5 bellsouths expectations cost success efforts year 2000 compliance including success key suppliers customers reasonably accurate 6 current level economic monetary political stability continues foreign countries bellsouth significant investments operations developments significantly deviating assumptions could cause actual results differ materially forecast implied aforementioned forwardlooking statements item 8item 7 managements discussion analysis results operations financial condition dollars millions except per share amounts bellsouth corporation bellsouth holding company headquartered atlanta georgia bellsouth two principal whollyowned subsidiaries bellsouth telecommunications inc bellsouth telecommunications bellsouth enterprises inc bellsouth enterprises management purposes operations subsidiaries organized five operating segments wireline communications domestic wireless international operations advertising publishing wireline communications comprised primarily operations bellsouth telecommunications bellsouth telecommunications operates nine southeastern states primarily provides local exchange long distance service within geographic areas called local access transport areas latas ii network access services enable interlata communications using facilities long distance carriers approximately 71 74 77 bellsouths total operating revenues years ended december 31 1998 1997 1996 respectively wireline communications business charges local service network access long distance service year ended december 31 1998 accounted approximately 57 28 4 respectively revenues wireline communications business remainder revenues derived principally sales maintenance customer premises equipment nonregulated services provided bellsouth telecommunications domestic wireless comprised cellular personal communications service pcs businesses within us approximately 12 13 12 bellsouths total operating revenues years ended december 31 1998 1997 1996 respectively domestic wireless business addition bellsouth enterprises noncontrolling financial interests number wireless businesses whose revenues reflected operating revenues method accounting investments international operations comprised primarily cellular pcs businesses nine countries latin america well china denmark germany india israel approximately 9 5 3 bellsouths total operating revenues years ended december 31 1998 1997 1996 respectively international operations addition bellsouth enterprises noncontrolling financial interests number international businesses whose revenues reflected total operating revenues method accounting investments bellsouths advertising publishing business comprised companies publish print sell advertising perform related services concerning alphabetical classified telephone directories advertising publishing revenues accounted approximately 8 9 respectively bellsouths total operating revenues years ended december 31 1998 1997 1996 bellsouths operating segment comprised primarily companies providing internet access wireless data entertainment various startup operations results operations net income earnings per share 1997 include extraordinary loss early extinguishment debt 9 net income 1998 increased 266 82 compared 1997 diluted earnings per share increased 14 85 basic earnings per share increased 15 91 compared 1997 increases due primarily continued strong growth key business volumes bellsouths wireline communications business improved results bellsouths international operations increases also include aftertax gain 110 resulting sale 1998 bellsouth new zealand aftertax gain 96 resulting additional proceeds received 1998 connection sale itt world directories additional income 62 resulted early repayment loan see note b consolidated financial statements net income 1997 reduced aftertax charge 47 related regulatory settlement south carolina increases partially offset gains sales optus communications 352 tax itt world directories 128 tax occurred 1997 net income 1997 increased 398 139 diluted earnings per share increased 20 139 compared 1996 increases primarily attributable aftertax gains sale 1997 optus communications 352 itt world directories 128 see note b consolidated financial statements addition increases due continued strong growth key business volumes expense savings within wireline communications business due employee reductions bellsouth telecommunications work force reduction plan initiated 1995 increases partially offset 344 aftertax gain sale bellsouths paging business first quarter 1996 increases offset aftertax charge 47 related regulatory settlement south carolina second quarter 1997 volumes business wireline communications volumes equivalent access lines service december 31 thousands prior period operating data often revised later dates reflect updated information reflects latest data available periods indicated b access line equivalents based conversion factors result estimated capacity one switched access line conversion factors used follows basic rate isdn 251 primary rate isdn 241 ds0 11 ds1 241 ds3 6721 basic rate isdn lines included bellsouth telecommunications switched access line count equaling one line amounts shown access line equivalents estimated incremental equivalent access lines resulting lines c revenues associated digital data services derived sale specific highbandwidth products provisioned transmission lines ds0 greater capacity access line equivalent counts directional relationship digital data revenues growth rates cannot compared equivalent basis switched residence lines increased 39 period ended december 31 1998 compared growth rate 46 1997 addition continued economic growth region growth rate reflects demand additional lines related home office purposes access online computer services childrens phones number additional lines increased 375000 199 2259000 accounted approximately 61 overall increase switched residence access lines since december 31 1997 slower growth rate 1998 primarily reflects higher penetration rates residential market switched business lines increased 29 period ended december 31 1998 compared growth rate 53 1997 decrease growth rate primarily due migration business customers traditional business line services digital data services lesser degree increased presence facilitiesbased competition access line equivalents increased 428 1998 compared increase 497 1997 increase attributable continued growth demand digital data lines provide services bulk data transmission video conferencing atms checkcredit card authentication multimedia interconnection wireless networks total equivalent access lines december 31 1998 include 520000 resold lines increase 299000 prior year access minutes use represent volume traffic carried long distance carriers latas interstate intrastate using bellsouth telecommunications local facilities 1998 access minutes use increased 7267 million 75 compared increase 93 1997 increases access minutes use primarily attributable access line growth promotions long distance carriers intralata long distance competition effect increasing access minutes use reducing long distance messages carried bellsouth telecommunications facilities growth rate access minutes use continues negatively impacted competition migration long distance carriers categories service eg special access fixed charge opposed volumedriven charge highcapacity services long distance messages comprised message telecommunications service wide area telecommunications service within latas long distance messages decreased 110 million 123 1998 compared decrease 126 1997 decrease 1998 primarily attributable continued competition long distance carriers intralata long distance market well increased penetration local area calling plans lacps existing calling plan areas effects competition increasing penetration existing lacps result transfer calls long distance access local service categories respectively corresponding revenues generally shifted commensurate rates competition intralata long distance market continue adversely impact long distance message volumes domestic wireless volumes cellular pcs customers served december 31 equity basis thousands domestic wireless customers equity basis increased 603000 144 1998 compared 550000 151 1997 decrease growth rate primarily due reorganization bellsouths ownership interests los angeles houstongalveston cellular investments periods adjusted effects ownership changes domestic wireless customers would increased 186 154 respectively 1998 1997 average revenue per wireless customer decreased 1997 1998 decrease due primarily continuing shifts lowerpriced usage plans existing customers response competition increased penetration lowerusage market segments bellsouth expects trends continue international operations volumes international wireless customers served december 31 equity basis thousands international cellular customers december 31 1998 includes 247000 net customer additions resulting bellsouths purchase additional ownership interests several latin american markets excludes customers bellsouth new zealand sold 1998 international cellular customers december 31 1997 excludes customers optus communications sold 1997 b excluding customers resulting 1998 purchases see note excluding customers optus communications bellsouth new zealand periods number international cellular customers equity basis increased 75 1089 respectively years ended december 31 1998 1997 international cellular customers equity basis increased 1557000 827 since december 31 1997 3439000 growth reflects increased demand wireless services international markets bellsouth serves well effect bellsouths purchase additional ownership interests several latin american markets growth also included increase 350000 equitybasis customers resulting startup operations brazil mid1998 increases offset sale bellsouths 65 ownership interest operations new zealand fourth quarter 1998 excluding effects purchases additional ownership interest 1998 period well customers bellsouth new zealand 1997 period equitybasis customers increased 75 1997 1998 growth equitybasis customers total minutes use international cellular properties remained strong primarily due demand stimulated successful marketing programs prepaid cellular service enhanced services due underdeveloped landline service average minutes use per international customer however declined due increased penetration lowerusage market segments international cellular customers increased 638000 513 december 31 1996 1882000 december 31 1997 growth reflects increased demand wireless services international markets bellsouth serves impact acquisitions cellular properties nicaragua ecuador peru partially offset sale optus communications growth total minutes use international cellular properties remained strong primarily due demand stimulated marketdriven pricing programs enhanced services underdeveloped landline service however average minutes use per international customer declined due addition customers lowerusage market segments operating revenues total operating revenues increased 2562 125 1998 compared increase 1521 80 1997 increases resulted primarily increases revenues bellsouths wireline communications segment coupled significant increases revenues bellsouths international operations increase revenues includes revenues certain businesses bellsouths international operations services previously accounted equity method consolidated first time either fourth quarter 1997 first quarter 1998 operations consolidated periods presented excluding effect south carolina settlement 1997 total operating revenues would increased approximately 2020 96 1998 1754 91 1997 components total operating revenues follows local service revenues reflect amounts billed customers local exchange services include connection network optional services custom calling features certain digital data services local service revenues 1998 increased 900 106 compared increase 417 52 1997 increase 1998 due primarily 36 increase switched access lines since december 31 1997 increase 246 due higher customer demand optional services custom calling features increase revenues provision digital data services also contributing net rate impacts 161 impacts due primarily revenue sharing accruals recorded 1997 well nonrecurring revenue reduction 64 1997 related local service portion regulatory settlement south carolina increase 1997 due primarily 48 growth switched access lines since december 31 1996 also contributing increase 241 due higher customer demand optional services increases partially offset rate impacts reduced revenues 252 primarily due revenue sharing accruals recorded 1997 nonrecurring revenue reduction 64 related local service portion regulatory settlement south carolina network access revenues result provision network access services long distance carriers provide telecommunications services latas interstate intrastate enduser charges collected residential business customers network access revenues also include special access charges provision certain digital data services network access revenues increased 149 33 1998 compared increase 118 27 1997 increase 1998 attributable primarily increase 148 due higher demand special access services increases enduser charges attributable increases switched access lines special access revenues comprised primarily revenues provision digital data services increases partially offset rate reductions decreased revenues 122 since december 31 1997 increase 1997 attributable primarily growth access minutes use 93 increase 97 due higher demand special access services increase enduser charges attributable growth number switched access lines increases partially offset rate reductions decreased revenues 243 long distance revenues received provision long distance services within latas services include intralata service beyond local calling area wide area telecommunications service wats 800 services customers highly concentrated demand special services transport voice data video long distance revenues decreased 21 29 1998 compared decrease 60 76 1997 decrease 1998 primarily attributable continuing competition long distance carriers intralata long distance market well increased penetration lacps existing calling plan areas decreases partially offset increases charges long distance carriers messages originating bellsouths public payphones well increased revenues provision digital data services decrease 1997 primarily attributable continuing competition long distance carriers intralata long distance market well continuing expansion lacps effect reduced long distance messages 126 decrease partially offset 62 related revenues long distance carriers beginning second quarter 1997 long distance messages originating bellsouth telecommunications public payphones overall decline intralata long distance revenues expected continue long term wireline revenues principally comprised revenues customer premises equipment sales maintenance services primarily inside wire billing collection voice messaging services offered bellsouth telecommunications wireline revenues also include billings interconnections unaffiliated wireless carriers bellsouth telecommunications network wireline revenues increased 195 133 1998 compared increase 79 57 1997 increase 1998 primarily reflects increased demand prices nonregulated services totaling 162 increase 1997 reflects increased demand prices nonregulated services higher billingrelated fees bellsouth telecommunications totaling 138 increase partially offset effect 1996 positive rate impacts sale subsidiary performed computer maintenance domestic wireless revenues include revenues domestic cellular pcs businesses bellsouths interests net income loss unconsolidated domestic wireless businesses within bellsouth enterprises accounted equity method accounting recorded income net domestic wireless revenues increased 142 55 1998 compared increase 377 171 1997 increases years primarily due continued growth domestic customer base decline growth rate 1998 primarily attributable decreases percustomer revenue resulted increased use lowerpriced usage plans existing higher usage customers response competition increased penetration lowerusage market segments international operations revenues result primarily wireless businesses latin america bellsouths interests net income loss unconsolidated international businesses within bellsouth enterprises accounted equity method accounting recorded income net international operations revenues increased 1047 1104 1998 compared increase 401 733 1997 increases include revenues certain operations previously accounted equity method consolidated first time either first quarter 1998 fourth quarter 1997 operations consolidated periods presented international operations revenues would increased approximately 608 438 553 663 respectively 1998 1997 increases primarily due continued growth customer bases bellsouths established latin american markets 1998 1997 well acquisition 1997 wireless operations peru ecuador advertising publishing revenues include revenues derived publishing printing selling advertising performing related services concerning alphabetical classified telephone directories advertising publishing revenues increased 54 29 1998 compared 186 113 increase 1997 increase 1998 primarily reflects volume growth price increases partially offset effects onetime adjustments 1997 revenue growth rate associated increases volume pricing 1998 41 increase 1997 primarily reflects volume growth price increases reclassification operating expenses commissions associated national accounts previously reduced revenues revenue growth rate associated increases volume pricing 1997 67 operating expenses total operating expenses increased 2034 134 1998 compared increase 924 65 1997 increases include expenses certain businesses bellsouths international operations segments previously accounted equity method operations consolidated first time either first quarter 1998 fourth quarter 1997 operations consolidated periods presented total operating expenses would increased 1501 95 1094 75 1998 1997 respectively 1998 increase primarily attributable growth within bellsouths wireline communications international operations 1997 increase primarily attributable growth within bellsouths domestic wireless international operations components total operating expenses follows depreciation amortization increased 393 99 1998 compared 245 66 increase 1997 adjusted effects expenses related operations previously accounted equity method growth rates depreciation amortization 1998 1997 would 270 66 247 64 respectively 1998 increase primarily due higher levels property plant equipment international operations domestic wireless segments resulting continued growth related customer bases continued modernization networks utilized increase also includes additional amortization expense related goodwill resulting bellsouths purchase additional ownership interests several latin american operations well amortization new wireless licenses 1997 increase due primarily higher levels property plant equipment since december 31 1996 resulting continued growth customer base international operations domestic wireless businesses continued modernization networks operating expenses comprised cost services products selling general administrative cost services products includes employee employeerelated expenses associated network repair maintenance material supplies expense cost tangible goods sold expenses associated providing services selling general administrative include expenses related sales activities salaries commissions benefits travel marketing advertising expenses administrative expenses operating expenses increased 1641 146 1998 compared increase 679 64 1997 adjusted effects expenses related operations previously accounted equity method growth rate operating expenses 1998 1997 would 1231 106 847 79 respectively 1998 increase primarily due increased expenses wireline communications business 561 increases primarily attributable increased labor costs 263 telephone operations associated higher customer service staffing levels increased expenses 164 unregulated subsidiaries associated higher business volumes payments fund universal service fund provided telecommunications act 1996 act also contributing 1998 increase growth expenses within bellsouths international operations domestic wireless businesses 375 112 increases reflect additional marketing customer acquisition operational costs associated higher levels sales expanded operations increase operating expenses also reflects expenses related startup operations 1997 increase due primarily increased expenses 436 234 related international domestic wireless customer bases respectively reflecting additional marketing operating costs associated higher sales expanded operations increase operating expenses also reflects increased expenses 167 advertising publishing operations wireline communications business operating expenses 1997 increased 12 due principally costs associated 1996 act compliance 230 well increased costs due higher business volumes new service offerings intensified marketing advertising efforts increases partially offset estimated reduction 232 employeerelated costs core wireline communications business including expenses employee benefits decrease employeerelated costs reflected net employee reductions bellsouth telecommunications telephone operations approximately 4800 since december 31 1996 partially offset annual compensation increases employee reductions primarily attributable work force reduction plan initiated 1995 substantially completed 1997 increase operating expenses bellsouth telecommunications offset 1996 sale subsidiary performed computer maintenance income statement items interest expense includes interest debt certain accrued liabilities capital leases partially offset interest capitalized cost installing equipment constructing plant interest expense increased 76 100 1998 compared increase 40 55 1997 increase 1998 due primarily higher average debt balances partially offset increase interest capitalized investments developed increase average debt balances related interest expense primarily reflects consolidation several international operations previously accounted equity method increase 1997 primarily attributable higher average debt balances interest rates shortterm borrowings gain sale operations 1998 represents pretax gains sale bellsouth new zealand additional proceeds received sale itt world directories 180 155 respectively gain sale operations 1997 represents pretax gains sales bellsouths investments optus communications itt world directories totaled 578 209 respectively income net includes earnings losses unconsolidated affiliates income losses sale investments interest dividend income minority interests nonoperating items income net increased 330 1998 compared decrease 89 1997 increase 1997 1998 primarily attributable improved equity earnings unconsolidated affiliates increased interest income additional income settlement loan see note b consolidated financial statements increase partially offset decrease nonoperating items equity earnings losses 92 1998 compared 242 1997 improvement overall equity earnings primarily reflects 1 firsttime consolidation 1998 wireless data communications business 2 favorable results unconsolidated international operations 3 following sale july 1997 cessation recording losses incurred optus communications improvement partially offset expenses associated startup operations brazil 1998 decrease income net 1997 primarily attributable increased equity losses unconsolidated affiliates net partially offset income sale bellcore increase interest income nonoperating items equity losses unconsolidated affiliates 242 1997 compared 76 1996 higher overall equity losses unconsolidated affiliates reflects losses incurred recently acquired startup international businesses principally latin america well increased losses wireless data communications business lower earnings unconsolidated domestic wireless operations increased losses partially offset favorable results unconsolidated international operations principally israel germany panama provision income taxes increased 73 34 1998 compared increase 406 233 1997 bellsouths effective tax rates 387 397 379 1998 1997 1996 respectively lower effective tax rate 1998 resulted primarily improved results foreign equitymethod subsidiaries recorded net tax benefits expense effective rate reduced change mix income among taxing jurisdictions decreases partially offset reduction benefit investment tax credits higher effective tax rate 1997 compared 1996 due primarily higher tax book basis paging business sold 1996 difference basis resulted lower gain sale computing tax expense reconciliation statutory federal income tax rates effective tax rates provided note j consolidated financial statements results segment operations bellsouths reportable segments reflect strategic business units offer products services andor serve different customers managed differently business requires different technologies andor marketing strategies bellsouth evaluates performance based net income exclusive certain intercompany certain nonoperating transactions strategic business unit wireline communications segment income 1998 increased 437 189 compared 309 154 1997 increase years primarily attributable significant increases revenues driven increasing demand digital data services optional unregulated services provided unregulated subsidiaries increase 1998 revenues partially offset increases operating expenses 561 due primarily increased staffing levels within customer service functions increased costs unregulated subsidiaries 1997 expenses relatively flat increases costs associated 1996 act compliance offset reduced employee costs addition segment income 1997 reduced aftertax charge 47 relating regulatory settlement south carolina domestic wireless segment income 1998 decreased 50 150 compared increase 30 99 1997 strong customer growth drove increases revenues years although revenue per customer decreased result increased competition increased penetration lowerusage market segments increased use package pricing plans existing higherusage customers total expenses increased years due marketing costs driven competitive initiatives customer acquisition costs depreciation associated continuing buildout upgrade network 1998 expenses compared 1997 increased due primarily new marketing initiatives customer acquisition costs associated higher customer additions expenses related buildout pcs network 1997 expenses compared 1996 increased primarily due costs associated startup pcs operations international operations losses segment 62 1998 compared 187 1997 190 1996 overall improvement 1997 1998 primarily reflects 1 improved operating results bellsouths operations germany venezuela argentina denmark 2 following sale july 1997 cessation recording losses optus communications improvement offset losses associated startup bellsouths brazilian operations well lower results bellsouths chilean operations results 1997 flat compared 1996 included improved results bellsouths operations israel new zealand offset losses associated startup several operations latin america strong customer growth years partially offset effect lower average monthly revenue per customer advertising publishing segment income remained relatively flat 530 543 526 1998 1997 1996 respectively external revenues increased 1998 1997 primarily due increases related volume pricing operating expenses increased due primarily volume increases losses within segment 210 1998 compared 182 1997 116 1996 increased loss 1998 primarily attributable losses associated wireless cable startup operations offset improved results wireless data business increased loss 1997 compared 1996 primarily attributable continuing losses within wireless data business well expenses related preparations entry interlata long distance business financial condition bellsouth uses net cash generated operations external financing invest operate existing new businesses pay dividends current liabilities exceeded current assets december 31 1998 1997 bellsouths sources funds primarily operations extent necessary readily available external financing arrangements sufficient meet current obligations timely basis bellsouth believes sources funds sufficient meet needs business foreseeable future operating activities net cash provided operating activities increased 702 100 1998 compared increase 1176 201 1997 1998 increase primarily attributable 921 increase operating income depreciation amortization increase 1997 primarily due decrease 1288 cash expenditures accounts payable current liabilities increase also due 842 increase operating income depreciation amortization increases partially offset decrease 494 liabilities deferred credits investing activities bellsouths primary use funds continues capital expenditures support expansion development networks wireline communications domestic wireless international operations segments capital expenditures 5212 1998 4858 4455 1997 1996 respectively bellsouth expects capital expenditures 1999 aggregate approximately 5000 net cash used investing activities increased 678 137 1998 compared 1997 increase primarily due purchase additional ownership interests bellsouths wireless operations venezuela ecuador brazil 1998 well capital expenditures increase partially offset cash proceeds repayment loan 1998 see note b consolidated financial statements net cash used investing activities increased 750 179 1997 compared 1996 increase 1997 primarily due investments unconsolidated international affiliates specifically latin america cash used investing activities 1998 1997 partially offset proceeds sales various bellsouth interests proceeds 410 1998 consisted sale bellsouths interest bellsouth new zealand 255 well additional proceeds associated sale itt world directories 155 proceeds 1000 1997 consisted sale bellsouths interests optus communications 735 itt world directories 265 financing activities 1998 1997 cash used financing activities totaled 1681 698 respectively dividends paid 1998 1420 compared 1428 1430 1997 1996 respectively december 1998 bellsouth announced quarterly dividend payment 19 per share annual rate 76 per share cash dividends declared first second third quarters 1998 18 per share 1997 1996 cash dividends 18 per share quarter 72 year bellsouth increased longterm debt shortterm borrowings approximately 1115 1998 approximately 361 increase relates first time consolidation certain businesses bellsouths international operations segments compares increase 814 1997 1996 balances bellsouth committed credit lines aggregating 2536 various banks borrowings committed credit lines totaled 634 241 respectively december 31 1998 1997 bellsouth also maintains uncommitted lines credit aggregating 169 december 31 1998 borrowings uncommitted lines credit totaled 45 borrowings uncommitted lines december 31 1997 february 3 1999 shelf registration statements file securities exchange commission 927 debt securities could publicly offered treasury share purchases totaled 1261 1998 november 1998 bellsouth announced intent repurchase 3000 common stock 1999 bellsouth expects finance 1999 repurchase primarily cash generated operations bellsouths debt total capitalization ratio 430 december 31 1998 compared 421 december 31 1997 435 december 31 1996 market risk bellsouth exposed various types market risk normal course business including impact interest rate changes foreign currency exchange rate fluctuations manage exposure bellsouth employs risk management strategies including use derivatives interest rate swap agreements foreign currency forwards currency swap agreements bellsouth hold derivatives trading purposes interest rate risk bellsouths objective managing interest rate risk maintain balance fixed variable rate debt lower overall borrowing costs within reasonable risk parameters interest rate swaps used convert portion bellsouths debt portfolio variable rate fixed rate fixed rate variable rate foreign exchange risk bellsouths objective managing foreign exchange risk protect earnings cash flow volatility resulting changes foreign exchange rates shortterm foreign currency transactions commitments expose bellsouth changes foreign exchange rates bellsouth occasionally enters forward contracts similar instruments mitigate potential impacts risks bellsouths equity investments brazil hold approximately 2300 us dollardenominated liabilities recognize foreign currency gains losses converting liabilities local currency bellsouths equity income related investments subject fluctuations us dollarbrazilian real exchange rate see mdaoperating environmentinternational operations bellsouth subject risk changes foreign exchange rates international operations use foreign currency functional currency translated us dollars changes result cumulative translation adjustments included shareholders equity december 31 1998 bellsouth translation exposure various foreign currencies significant brazilian real german mark operations countries hyperinflationary economies consider us dollar functional currency reflect translation gains losses determination net income risk sensitivity bellsouths use derivative financial instruments designed mitigate foreign currency interest rate risks although extent expose bellsouth credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited current value currency rate interest rate differential full notional contract amount contracts agreements executed creditworthy financial institutions bellsouth considers risk nonperformance remote following table provides information maturity date bellsouths interest rate sensitive financial instruments consist fixed variable rate debt obligations fair values majority bellsouths longterm debt obligations based quotes dealers operating environment trends business regulation bellsouths future operations financial results substantially influenced developments number federal state regulatory proceedings adverse results proceedings could materially affect bellsouths revenues expenses ability compete effectively telecommunications carriers federal policies implemented federal communications commission fcc strongly favor access reform whereby historical subsidy local service contained network access charges paid long distance carriers eliminated unless compensatory changes adopted universal service fund contribution mandates bellsouths revenues source constituted 20 revenues 1998 risk addition aspects access charge regulation universal service fund contribution requirements applicable local service carriers bellsouth also consideration could result greater expense levels reduced revenues result litigation challenging number fccs rulings 1996 act us supreme court ruled fcc considerable authority establish many pricing interconnection policies considered within exclusive jurisdiction state public service commissions bellsouth expects fcc accelerate growth local service competition aggressively utilizing power require interconnection competing carriers sale network elements competitors wish provide communications services customers bellsouths region bellsouth petitioned fcc permission 1996 act offer full long distance services fcc denied bellsouths petitions bellsouth expects fcc require changes bellsouths network interconnection elements operating systems approve petitions changes result significant additional expenses promote local service competition bellsouths intrastate prices regulated price regulation plans provided statute approved state public service commissions appeals approvals plans south carolina tennessee pending plans subject periodic review require renewal several plans scheduled renewal 1999 commissions generally required price reductions concessions bellsouth condition approving plans assurance commissions require modifications consider renewal bellsouth telecommunications involved numerous legal proceedings associated state federal regulatory matters disposition could materially impact operating results prospects see note n consolidated financial statements competition many competitive forces impact bellsouths businesses 1996 act removed regulatory barriers local service competition required bellsouth open network carriers auction pcs licenses created many six new wireless competitors bellsouths markets deregulation international communications markets introduced new global competitors nearly bellsouths international businesses bellsouth expects local service competition steadily increase particularly respect business customers competition local service revenues could adversely affect bellsouths results operations opening local markets lead qualification offer inregion interlata long distance wireline services presence multiple aggressive competitors bellsouths domestic international wireless markets makes difficult attract new customers retain existing ones furthermore bellsouth compete primarily basis price low prices offered competitors attempting obtain market share pressured bellsouth reduce prices develop pricing plans attractive lower usage customers trends expected continue could adversely affect bellsouths results operations future bellsouth plans compete aggressive marketing competitive pricing technical innovation offer consumers full range serviceslocal long distance internet access wireless morewhile remaining committed high level customer service value technology bellsouth continually upgrading networks digital optical technologies making capable delivering full complement voice data services modernization network critical bellsouths success providing data connectivity demanded customers compete fiber networks constructed currently utilized startups cable companies effort require investment significant amounts capital future bellsouth believes dualmode network extended coverage currently provides significant competitive advantage pcs providers digital wireless technology however rapidly evolving development common roaming platform digital wireless technologies could reduce advantage would result intense competition could adverse effect bellsouths results operations international operations bellsouth owns significant interests number foreign operations primarily latin america subject greater political monetary economic regulatory risks domestic businesses particular bellsouth holds equity interests two wireless communications consortia brazil accounted equity method accounting december 31 1998 brazilian operations incurred approximately 2300 us dollardenominated liabilities january 1999 brazilian government allowed currency trade freely currencies resulting immediate devaluation brazilian real january 1999 latest internal financial reporting period bellsouth recognize foreign exchange rate loss resulting devaluation approximately 364 recording share equity earnings brazilian equity investments aforementioned exchange loss subject upward downward adjustment based fluctuations us dollarbrazilian real exchange rate impact devaluation operation depends devaluations effect local economy ability operation raise prices andor reduce expenses additionally economies countries latin america could adversely impacted brazils economic monetary problems likelihood extent devaluation deteriorating economic conditions brazil latin american countries resulting impacts bellsouths results operations financial position cash flows known year 2000 readiness disclosure bellsouth initiated companywide program identify address issues associated ability datesensitive information telephony business systems certain equipment properly recognize year 2000 result century change january 1 2000 program also designed assess readiness entities bellsouth business inability reach substantial year 2000 compliance bellsouths systems integral third party systems could result interruption telecommunications services interruption failure bellsouths customer billing operating information systems failure certain datesensitive equipment failures could result substantial claims customers well loss revenue due service interruption delays bellsouths ability bill customers accurately timely increased expenses associated litigation stabilization operations following failures execution contingency plans year 2000 program conducted management team coordinating efforts internal resources well third party providers vendors identifying making necessary changes bellsouths systems hardware software datesensitive equipment program also includes international domestic companies bellsouth holds interest changes necessary bellsouths operations made part ongoing systems upgrades bellsouths year 2000 program divided six phases planning inventory impact analysis conversion testing implementation bellsouth monitors progress within six phases based number inventoried items addressed managements target date completion phases mission critical applications june 30 1999 mission critical applications include 1 directly affect delivery primary services bellsouths customers 2 directly affect bellsouth revenue recognition collection 3 would create noncompliance statutes laws 4 would require significant costs address event noncompliance bellsouth identified three main areas focus year 2000 program focus area includes hardware software embedded chips third party vendors suppliers well third party networks associated identified systems first focus area network components consists switches transmission systems associated software comprise core bellsouths telephony systems including landline wireless domestic international services outside suppliers provide hardware software comprise bellsouths networks components remediated third party suppliers testing components year 2000 compliance performed vendors bellsouth industry groups telco year 2000 forum december 31 1998 planning inventory impact analysis phases bellsouth telecommunications 100 complete remaining phases approximately 65 complete planning inventory impact analysis phases bellsouths domestic operations almost 100 complete remaining phases 25 complete planning inventory impact analysis phases bellsouths international operations approximately 70 complete remaining phases approximately 50 complete second focus area information technology systems consists systems primarily support customer care operations order taking billing software systems developed bellsouth vendors remediated tested december 31 1998 planning inventory impact analysis phases bellsouth telecommunications approximately 95 complete remaining phases approximately 70 complete planning inventory impact analysis phases bellsouths domestic operations almost 100 complete remaining phases approximately 75 complete planning inventory impact analysis phases bellsouths international operations approximately 70 complete remaining phases approximately 25 complete building environmental systems third focus area includes various products systems used support network customer care functions building environmental systems primarily provided third parties include building operations office equipment utilities etc december 31 1998 planning inventory impact analysis phases bellsouth telecommunications almost 100 complete remaining phases approximately 15 complete planning inventory impact analysis phases bellsouths domestic operations almost 100 complete remaining phases approximately 10 complete bellsouths international operations currently planning inventory impact analysis phases environmental systems bellsouth developed numerous contingency plans conducting business operations event crises including system outages natural disasters part year 2000 compliance efforts bellsouth chartered year 2000 business continuity project ensure tested contingency plans place event planned year 2000 compliance activities mission critical applications successfully accomplished effort limited risks posed potential year 2000 failures internal information systems infrastructures also includes potential secondary impact bellsouth year 2000 failures including potential systems failures business partners infrastructure service providers master year 2000 contingency planning guide associated workbook developed internal training completed major milestones contingency planning project include assessments end first quarter 1999 completion testing signoff contingency plans third quarter 1999 additionally bellsouth member together large telecommunications companies several industry groups addressing year 2000 issue related contingency plans costs associated bellsouths year 2000 compliance efforts incurred 1997 1998 remainder incurred 1999 2000 costs incurred equally phases project increase time bellsouth anticipates conversion testing phases require increase spending earlier phases project december 31 1998 approximately 87 external costs expended towards year 2000 compliance bellsouth estimates total external cost compliance efforts 250 350 life project bellsouth intends continually reassess estimated costs status year 2000 remediation efforts bellsouth currently anticipates mission critical applications year 2000 compliant june 30 1999 however assurance given unforeseen circumstances arise performance testing implementation phases would adversely affect year 2000 compliance bellsouths systems furthermore year 2000 compliance status integral third party suppliers networks could adversely impact bellsouths mission critical applications cannot fully known result bellsouth unable determine impact system interruption would results operations financial position cash flows cwa contracts september 1998 members communications workers america cwa ratified new threeyear contracts bellsouth effective august 9 1998 contracts include basic wage increases totaling 1239 three years covered contracts addition agreement provides standard award 2 25 base salary overtime compensation subject adjustment based company performance measures plan years 1999 2000 terms agreement include pension band increases pension plan cash balance improvements active employees new accounting pronouncements accounting derivative instruments hedging activities june 1998 financial accounting standards board issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities standard requires derivative instruments 1 recognized assets liabilities 2 adjusted fair value period bellsouth adopt sfas 133 january 1 2000 currently assessing impact adoption results operations financial position capitalization internal use software march 1998 aicpa issued statement position 981 sop 981 accounting costs computer software developed obtained internal use sop 981 requires capitalization certain direct costs interest costs preliminary development efforts made bellsouth adopted sop 981 january 1 1999 adoption sop 981 result temporary increase earnings year adoption compared prior period result capitalization costs previously expensed bellsouth currently believes increase approximately 375 425 225 250 tax 1999 expenditures remain consistent level comparative earnings impact decline year following change decline continue amortization expense related capitalized software costs equals level software costs treated expense prior change addition adoption sop 981 result higher levels capitalized software costs consolidated balance sheets safe harbor statement statements address historical performance forwardlooking statements within meaning private securities litigation reform act 1995 based number assumptions including limited 1 continued domestic economic growth demand bellsouths services 2 economic monetary regulatory political stability bellsouth conducts international operations 3 reasonable accuracy bellsouths expectations impact international operations weakening currencies latin america compared us dollar 4 reasonable accuracy bellsouths expectations results regulatory actions well costs recoveries respect access reform universal service interconnection 5 reasonable accuracy bellsouths estimate regulatory authorization provide wireline long distance services impact competition markets 6 satisfactory identification completion year 2000 software hardware revisions bellsouth entities business developments significantly deviating assumptions could cause actual results differ materially forecast implied aforementioned forwardlooking statements item 8nannannannannanitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts otherwise indicated bellsouth corporation overview fortune 100 company annual revenues 20 billion core businesses wireline wireless communications largest customer segment retail consumer interests wireless communications ownership 40 percent cingular wireless nation’s largest wireless company based number customers revenue also operate one largest directory advertising businesses united states great majority revenues generated based monthly recurring services operate much wireline business one country’s strongest regional economies population increasing real income growth outpacing national average diverse mix businesses require advanced information communication technology solutions southeast positive net migration region net migration averaging almost 500000 annually region’s real income growth expected exceed national average next five years industry dynamics demand traditional voice business negatively impacted proliferation wireless services led onerate pricing plans include large bucket minutes free roaming longdistance popularity email instant messaging technological advances broadband period significant growth 1990s access lines key driver business declined steadily since 2001 last mile connectivity customer remains essential communications industry beginning transition networkcentric circuitbased infrastructure applicationscentric ip infrastructure could create uncertainty around traditional business models industry consolidation recent combinations sbc att verizon mci sprint nextel creating large competitors global reach economies scale based comparisons penetration rates parts world still significant growth potential wireless market united states currently four national wireless companies engaging aggressive competition growing market intense competition driven pricing increased costs due customer churn increased wireless usage companies attempt differentiate service plans meanwhile significant capital invested networks meet increasing demand upgrade capabilities anticipation development new data applications regulation competition wireless wireline businesses subject vigorous competition subject regulation changes federal law early 1990s generally preempted states regulating market entry rates wireless carrier allowing states regulate terms conditions wireless service wireless carriers also subject regulation federal communications commission fcc allocates enforces spectrum used wireless carriers adopts enforces policies relating wireless services wireline business subject dual state federal regulation fcc historically engaged heavy regulation interstate services recent years granted increasing pricing flexibility interstate telecommunications services additional competition services subject though nearly services remain subject tariffing requirements separately response telecommunications act 1996 fcc initially required us share network extensively local service competitors prescribed pricing policy telric permitted fair cost recovery sharing unbundling rules invalidated courts three separate occasions invalid policies generally implemented contracts competitors february 2005 fcc issued rules cut back significantly anticompetitive sharing requirements new rules essentially eliminated unbundled network platform unep combination unbundled elements replicate local service unfairly low prices 2005 transitioned many former unep customers similar platform service provided commercially negotiated terms prices fccordered transition phase unep scheduled complete march 11 2006 though conduct state commission litigation concerning unep terms earlier contracts may cause delay implementation phaseout fcc provided additional relief released new broadband rules effective november 2005 responded recent us supreme court decision new rules designed provide high speed internet access services regulation equivalent competition particularly cable modem providers new rules scheduled fully phased third quarter 2006 although fcc reserved right extend transition states region continue exert economic regulation much revenue generated traditional narrowband wireline telecommunications services though regulation lessening past two years state legislatures state regulatory commissions taken action moved regulation toward equivalence telecommunications competi bellsouth 2005 21 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation tors prohibiting state regulation broadband services rebalancing rates reducing regulation service bundles despite successes wireline business remains regulated competing businesses use cable wireless nonfacilities based technologies welcome reforms transition wireline business regulation comprehensive utilitylike regulation previous years standard business regulation complete adjusting individual change requires significant management attention accordingly continue encourage regulatory reform every appropriate forum acquisitions dispositions last 18 24 months completed exit international operations increased investment domestic wireless market cingular wireless’ acquisition att wireless addition att wireless filled cingular wireless’ national coverage footprint added depth licensed spectrum position added size scale compete effectively cingular wireless’ new advertising campaigns combined improvements customer service network coverage driving customer loyalty growth customer churn reduced appreciably integration efforts well underway cost synergies contributing margin expansion acquisition substantially increases bellsouth’s participation domestic wireless industry bringing wireless 40 percent proportional revenues including cingular wireless cingular completes integration att wireless executes strategy expect contribution bellsouth’s earnings increase next two years highlights outlook august 29 2005 hurricane katrina caused catastrophic damage areas louisiana mississippi alabama causing significant incremental expense network restoration customer dislocation despite challenges hurricane katrina bellsouth maintained focus key growth areas business delivering continued customer growth broadband long distance services consolidated revenues include share cingular wireless increased slightly 2005 growth long distance dsl small business services effectively offset revenue declines residential access line loss large business services added 11 million mass market long distance customers 2005 total nearly 72 million december 31 2005 dsl net subscriber additions 786000 brought total nearly 29 million december 31 2005 wireless substitution continued drive access line losses 2005 retail access lines 579000 included positive retail business line growth 64000 wholesale access lines 740000 compared yearend 2004 influenced change regulatory position towards unep cost structure heavily weighted towards labor fixed asset related costs order sustain margins adjust workforce market share access lines shifts since beginning 2001 reduced domestic workforce slightly 17000 employees 22 percent december 2005 announced reduction 1500 management employees maintaining current operating margin levels going forward challenging competition intensifies pressuring revenue must achieve continued increases productivity manage costs encouraging developments regulatory front events increasing healthcare costs continued loss lines wireless substitution rollout voip telephony cable providers likely continue put pressure margins operating cash flow relatively flat 2005 expected decline next two years due primarily higher income tax payments cingular wireless cingular wireless added 5 million customers 2005 bringing nationwide customer base 541 million customers customer churn 22 percent 2005 decreased 50 basis points compared prior year revenue growth exceeded 6 percent pro forma basis driven customer growth partially offset decline average revenue per user arpu operating margin improving due revenue growth operating efficiencies improved customer acquisition cost structure headcount reductions systems rationalization 22 bellsouth 2005 consolidated results operations key financial operating data three years ended december 31 2003 2004 2005 set forth references earnings per share diluted basis following consolidated management’s discussion analysis financial condition results operations read conjunction results segment directly following section following generally accepted accounting principles gaap use equity method accounting investment cingular wireless record present proportionate share cingular wireless’ earnings net earnings equity affiliates consolidated income statements additionally financial statements reflect results latin american operations discontinued operations operational results activity associated latin american segment presented one line item income statement separate continuing operations meaningful 2005 compared 2004 hurricane katrina negatively impacted operating income 2005 causing reduced revenues increased expenses revenues impacted 99 proactive billing credits issued order address service outages significant customer dislocation hardesthit areas incurred expenses 360 including network restoration costs increase allowance uncollectibles cover estimated incremental uncollectible accounts receivable due customer displacement recovery costs also recognized asset impairment charge 166 hurricane damage company’s property plant equipment addition operating income impacts incurred incremental 211 capital expenditures network restoration company estimates approximately 100000 access lines disconnected result hurricane seen trend inward movement wire centers presumably customers relocating within markets businesses migrating new orleans participate reconstruction difficult estimate extent impact year incremental expenditures wireline network restoration capital approximately 500 january 25 2006 company estimated total cost bellsouth 2005 23 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation network restoration including capital expense 700 900 expect portion cost associated hurricane katrina recovery effort covered insurance exact amount determined current estimate amount covered losses net deductible approximately 250 actual recovery vary depending outcome insurance loss adjustment effort operating revenues consolidated operating revenues increased 247 2005 compared 2004 reflecting growth dsl long distance products combined revenues dsl long distance increased 673 2005 compared 2004 increases substantially offset impact revenue declines associated competitive access line losses retail wholesale sectors along related pricing pressures additionally 97 yearoveryear increase attributable onetime revenue adjustments communications group 50 reduction 2004 related regulatory settlement 47 increase 2005 related current recognition previously deferred revenue advertising publishing revenues continued grow 2005 driven higher core print revenues growing sales electronic media products higher sales agency commissions revenue trends discussed detail communications group advertising publishing group segment results sections operating expenses total operating expenses increased 866 2005 compared 2004 major driver 447 incremental increase hurricanerelated expense hurricanes katrina wilma rita eclipsed expense associated four major hurricanes 2004 season another primary driver 260 increase labor driven overtime associated higher dsl volumes network maintenance severancerelated costs expansion growth advertising publishing business higher expenses associated pension postretirement benefit plans specifically retiree medical expense increased 150 primarily result full year impact calculating obligation nonmanagement retiree medical costs caps partially offset reductions retiree benefits change accounting nonmanagement caps effective ratification contract cwa third quarter 2004 partially offsetting increase 48 higher pension income primarily due lower interest rates factors driving 2005 increase include volumedriven increases 112 primarily provision long distance services associated growth subscribers 109 incremental expense universal service fund contributions due increases fund contribution rates higher assessment base driven growth dsl long distance increases partially offset 72 decline uncollectible expense associated improved economic conditions trends operating expenses discussed detail communications group advertising publishing group segment results sections interest expense 1 average debt balances exclude amounts related discontinued operations interest expense associated interestbearing debt 157 2005 compared 2004 reflecting higher average debt balances due incremental borrowings associated equity contributions cingular wireless fund acquisition att wireless effective interest rate remained flat yearoveryear result increasing commercial paper rates offset refinancing higherrate longterm debt lowerrate longterm debt increase interest expenseother relates primarily reversal interest accruals prior year related tax contingencies based audit settlements net earnings equity affiliates increase earnings cingular wireless 2005 attributable contribution att wireless operations acquired october 2004 growth customer base 2005 cingular wireless’ earnings steadily grown since acquisition merger synergies associated increased scale integration former att wireless operations realized partially offsetting growth earnings integration costs higher expenses associated significant customer growth increase depreciation amortization expense driven increased capital investment reduction remaining useful life tdma network assets amortization acquired intangible assets integration costs incurred cingular wireless began 24 bellsouth 2005 execute plans fully integrate acquired operations exit certain activities dispose certain assets att wireless including redundant facilities interests certain foreign operations plans affect many areas combined company including sales marketing network information technology customer care supply chain general administrative functions decline earnings equity investees relates sale interest cellcom gain sale operations gain sale operations 2005 related sale 3475 percent interest cellcom cellular communications operator israel 625 gross proceeds result sale recorded gain 351 228 net tax included recognition cumulative foreign currency translation losses 10 income expense net decline interest income 2005 compared period 2004 primarily due lower invested cash balances decline interest advances cingular wireless due principal repayments 2005 interest advances cingular wireless offset like amount interest expense recorded cingular wireless reported financial statements caption “net earnings equity affiliates” gain loss sale assets years primarily due sales land buildings net 2005 primarily dividend income investments provision income taxes lower rate 2005 primarily due release valuation allowance recorded due capital gains associated sale cellcom additionally recognized cumulative benefit related reduction state income tax rates tax rate also positively impacted change assumptions regarding medicare part subsidy nontaxable associated retiree medical expense benefits 2005 included permanent tax benefit realized dividends received deduction related investment cingular wireless lower projected taxable income 2005 due primarily hurricane katrina costs benefits partially offset recognition tax liabilities excess book basis tax basis cellcom sale bellsouth shares grantor trust income discontinued operations net tax 2005 sold final two ten latin american properties resulted 390 gain net tax 2004 sold first eight ten properties resulted 850 gain net tax addition sale 2004 included 336 tax benefit related excess tax book basis latin america investments 2004 compared 2003 operating revenues consolidated revenues declined 41 2004 compared 2003 communications group revenues decreased 13 compared 2003 reflecting impact revenue declines associated competitive line losses related pricing pressures substantially offset growth dsl long distance products revenues dsl long distance combined increased 863 2004 compared 2003 addition 2004 negatively affected 50 customer refund accrual associated settlement agreement south carolina consumer advocate decline revenue exit payphone business offset higher revenues sale wholesale long distance advertising publishing group revenues 28 2004 compared 2003 reduction print revenues due lower overall spending advertisers operating expenses total operating expenses increased 227 2004 compared prior year significant expense change driver increased labor costs 463 includes incremental overtime related service restoration network repairs due four major hurricanes hit third quarter 2004 higher expense associated pension postretirement benefit plans pension retiree medical costs driven changes associated contract agreement cwa significant changes change calculation obligation nonmanagement retiree medical costs caps lower contractual limits life insurance coverage increases annual salary wage rates higher incentive compensation adjustments workers compensation longterm disability accruals partially offset lower average employees due continued workforce reductions addition higher labor costs goods sold increased 207 primarily provision long distance services associ bellsouth 2005 25 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation ated growth subscribers information technology expenses contract services increased 51 connection projectrelated spending materials supplies increased 55 attributable increased utilities usage weatherrelated restorations increases partially offset lower depreciation amortization expense 175 attributable lower depreciation rates lower uncollectible expense 139 driven improved economic conditions improved collection processes lower access fees 96 driven clec interconnect volume declines 166 decline restructuring charges asset impairments attributable incrementally smaller workforce reductions 52 asset impairment charge related abandoned software project 2003 interest expense 1 average debt balances exclude amounts related discontinued operations interest expense decreased 31 2004 compared 2003 interest expense associated interestbearing debt 28 2004 compared 2003 reflecting higher average debt balances impacted higher incremental borrowings associated equity contributions cingular wireless fund acquisition att wireless lower effective interest rate due interest rate swap program refinancing higherrate debt lowerrate debt offset partially increase shortterm interest rates change interest expenseother relates primarily reversal interest accruals related tax contingencies based audit settlements net earnings equity affiliates earnings cingular wireless 2004 lower compared 2003 primarily due impacts att wireless acquisition included integration costs higher depreciation expense associated increased capital investments reduction useful life tdma assets gain sale operations gain sale operations 2004 related sale interest danish wireless provider sonofon 368 billion danish kroner telenor asa result sale recorded gain 462 295 net tax included recognition cumulative foreign currency translation gains 13 income expense net increase interest income due higher invested cash balances partially offset loss income advance dutch telecommunications provider royal kpn nv kpn due early repayment 2003 decrease interest advances cingular wireless due lower rate 2004 foreign currency transaction gains 2003 relate primarily advance kpn 2003 recognized 33 gains related sale interests two real estate partnerships sale building addition recognized 9 loss sales impairments costmethod investments provision income taxes effective tax rates 2004 reduced favorable permanent difference medicare part subsidy nontaxable associated retiree medical expense adjustment taxes payable associated divested operations income discontinued operations net tax income discontinued operations net tax increased 1263 2004 compared period 2003 primarily due sale eight ten latin american properties resulted 850 gain net tax net income increases included 336 tax benefit related excess tax basis book basis latin america investments 177 cessation depreciation beginning second quarter 2004 234 loss sale interests two brazilian wireless companies 2003 26 bellsouth 2005 higher revenues partially offsetting increases net income 190 charge related settlement arbitration venezuela foreign exchange gain decreases 99 33 loss second quarter 2004 related purchase additional ownership share argentina operational perspective latin america business generated strong growth customers revenue despite october 2004 sale eight properties resulted ten months revenues 2004 properties operating revenue latin america operations 2004 increased 165 72 percent 2003 due growth customers traffic throughout portfolio excluding decrease operating expenses cessation depreciation beginning second quarter 2004 operating income 76 higher prior year cumulative effect changes accounting principle asset retirement obligations effective january 1 2003 adopted sfas 143 “accounting asset retirement obligations” sfas 143 connection adoption standard recorded cumulative effect accounting change increased 2003 net income 816 revenue recognition publishing revenues effective january 1 2003 changed method recognizing revenues expenses related directory publishing business publication delivery method deferral method cumulative effect change accounting method reflected income statement decrease 2003 net income 501 results segment reportable segments reflect strategic business units offer similar products services andor serve similar customers three reportable operating segments • communications group • wireless • advertising publishing group company’s chief decision makers evaluate performance business unit based net income exclusive internal charges use intellectual property adjustments unusual items may arise unusual items transactions events included reported consolidated results excluded segment results due nonrecurring nonoperational nature items listed table summary results segment addition changes business affect comparability current versus historical results adjust historical operating information reflect current business structure see note p consolidated financial statements reconciliation segment results consolidated financial information following discussion highlights performance context segments complete understanding industry drivers business current period results read discussion conjunction consolidated financial statements including related notes communications group communications group includes core domestic businesses including domestic wireline voice data broadband long distance internet services advanced voice features group provides services array customers including consumer small business large business wholesale first quarter 2005 bellsouth began include various corporate entities largest bellsouth technologies group inc communications group segment financial reporting purposes entities previously billed substantially costs communications group change aligns financial reporting management’s current view business principally timing nature affect consolidated financial statements prior period segment operating results recast reflect reporting change marketing strategy penetrate existing base customers new products interlata long distance bellsouth® fastaccess® dsl encouraging customers purchase packages containing multiple communications services continue experience retail access line market share loss due competition technology substitution expect trends continue 2006 bellsouth 2005 27 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation meaningful 1 prior period operating data often revised later dates reflect updated information reflects latest data available periods indicated 28 bellsouth 2005 compared 2004 segment operating revenues revenue growth 2005 consumer small business units driven increased penetration long distance dsl customer reacquisition retention programs revenue large business unit declined 21 percent growth complex long distance services overshadowed competitive pricing pressure wholesale revenue declined 14 percent due revenue declines transport services sold interexchange carriers unep switched access nearly offset growth wireless transport revenue also contributing decrease revenue declines dialup internet service provider isp traffic billing credits associated service outages hurricane katrina reduced revenue approximately 76 voice revenues relatively flat declining 33 2005 compared 2004 driven diverging factors access linerelated revenues declined 417 compared periods 2004 total switched access lines declined 1319000 62 percent yearoveryear access line decline result continued share loss driven primarily volume declines wireless broadband technology substitution much lesser extent access line losses voip providers wholesale lines 740000 lines yearoveryear wholesale lines consist primarily grandfathered service provided invalidated fcc rules unep services provided successor commercial contracts negotiated rates commercial contracts covered 74 percent wholesale lines december 31 2005 amortization deferred installation activation revenues declined 81 2005 compared 2004 revenues subject deferral declined past two years result higher promotional activity efforts combat share loss continue grow package services bellsouth answers® signature residential package offering combines various wireline wireless internet services andor directv® digital satellite television services primary package combines complete choice® calling plan local service multiple convenience calling features bellsouth long distance bellsouth® fastaccess® dsl dialup internet cingular wireless services also offer directv® digital satellite television service sales channels part bellsouth answers® portfolio agency relationship directv® provides us key competitive product insignificant cost capital requirements ended 2005 49 million residential packages representing 44 percent penetration retail primary line residence base december 31 2005 86 percent answers customers long distance package almost 47 percent either fastaccess dsl bellsouth® dialup internet long distance voice revenue increased 435 2005 compared 2004 driven primarily growth interlata retail services includes 53 wholesale long distance services provided cingular wireless driven wireless customer growth interlata retail revenues increased 372 yeartodate reflecting continued market share gains driven marketing efforts bellsouth® unlimited long distance plans included increase 31 related growth long distance offerings complex business december 31 2005 nearly 72 million retail long distance customers massmarket penetration rate almost 58 percent retail customer base switched access revenue essentially flat 2005 compared 2004 switched access local minutes use declined 107 percent 2005 due access line losses alternative communications services primarily wireless email volume decline principally offset increased usage data revenues increased 230 2005 compared 2004 data revenues driven growth sale bellsouth®fastaccess® dsl service partially offset decreases revenue data products combined wholesale retail dsl revenues 1238 2005 253 compared periods 2004 due primarily larger customer base partially offset lower average revenue per user arpu december 31 2005 nearly 29 million dsl customers increase 786000 customers compared december 31 2004 driven simplified pricing promotional activity july 2005 bellsouth announced straightforward consumer broadband pricing reduced number fastaccess dsl® price points 21 3 2005 net subscriber additions bellsouth’s three highestspeed dsl products made 69 percent total dsl net customer additions revenue retail data products increased 27 2005 compared 2004 revenue long distance offerings complex business increased 65 yeartodate compared periods 2004 increases offset declines 38 2005 large business segment due continued price pressures revenues sale wholesale data transport services including sales long distance companies clecs declined 26 percent 2005 compared 2004 decreases due declines data transport sold interexchange carriers continue reduce network costs response declining volumes additional lower revenue related dialup isp traffic partially offset revenue growth transport sold wireless carriers wireless subscribers volumes continue expand bellsouth 2005 29 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation revenues decreased 98 2005 compared 2004 reflecting 80 wholesale long distance volume declines reduced revenues billing collections late payments 10 customer premise equipment 22 payphone service providers 18 partially offset wireless sales agency fee growth 13 segment operating expenses cost services products cost services products increased 382 2005 compared 2004 increase includes 146 related labor costs due primarily increases retiree medical costs overtime costs associated restoration service damage severe weather increased technician dispatches dsl volumes impact annual wage increases workforce additions additionally increase includes 112 costs goods sold principally driven higher volumes long distance services 109 universal service fund contributions due higher fund contribution rates larger assessment base driven growth dsl long distance revenues 45 materials supplies driven primarily dsl modem cost associated customer growth increased fleet fuel costs increases partially offset 41 decline access fees due lower volumes 39 decline penalties associated clec service parity requirements selling general administrative expenses selling general administrative expenses increased 35 2005 compared 2004 increase reflects increase 73 labor costs driven incremental retiree medical benefit costs annual wage increases 70 increase contract services related information technology platform development increases partially offset 31 lower advertising expense due specific 2004 campaigns 47 decline uncollectible expense driven lower writeoffs associated improved economic conditions depreciation amortization depreciation amortization expense increased 24 2005 compared 2004 reflecting increased capital spending partially offset reduced depreciation rates group life method depreciation 2004 compared 2003 segment operating revenues growth consumer long distance dsl revenue offset retail residential access line losses resulting flat consumer revenue 2004 compared 2003 revenue small business unit increased 43 percent 2004 compared 2003 driven increased penetration long distance dsl customer reacquisition retention programs revenue large business segment decreased 26 percent 2004 compared 2003 reflecting competitive pricing pressure weak demand access lines wholesale revenue stable 2004 compared 2003 revenue declines switched access revenue offset growth wireless transport unep revenue voice revenues decreased 92 2004 compared 2003 driven primarily continued access line loss offset growth interlata long distance total switched access lines declined 907000 41 percent period retail line losses slightly offset increases wholesale lines access line decline result continued share loss technology substitution primarily wireless wholesale lines consist primarily unbundled network element platform unep lines totaled almost 30 million december 31 2004 273000 lines year vast majority unep additions residential lines provide retail services converted unep lose revenue margin average revenue provision unep permit us recover fully allocated costs incur provide mitigate loss actively seeking reform pricing rules regulators use set unep prices previously discussed heading “overview” judicial decision became effective june 2004 invalidated certain fcc rules governed provision wholesale access network local service competitors believe change regulatory environment influenced loss unep lines experienced second half 2004 efforts combat share loss continued grow package services bellsouth answers® signature residential package offering combines various wireline wireless internet services andor directv® digital satellite television services primary package combines complete choice calling plan local service multiple convenience calling features bellsouth long distance bellsouth® fastaccess® dsl dialup internet cingular wireless services 2004 began offering directv® digital satellite television service sales channels part bellsouth answers® portfolio agency relationship directv® provides us key competitive product insignificant cost capital requirements addition video bellsouth answers® package one comprehensive competitively priced bundles markets today ended 2004 almost 44 million residential packages representing 37 percent penetration retail primary line residence base almost 84 percent answers customers long distance package 30 bellsouth 2005 almost 45 percent either fastaccess dsl bellsouth dialup internet service long distance voice revenue increased 578 2004 compared 2003 driven primarily growth interlata wireless long distance interlata revenues increased 640 reflecting continued large market share gains driven marketing efforts bellsouth unlimited long distance plans december 31 2004 60 million retail long distance customers massmarket penetration rate approximately 48 percent customer base also continued grow long distance offerings complex business recorded 209 complex long distance revenue 2004 compared 71 2003 december 31 2004 complex long distance backlog stood 624 backlog represents estimated value complex long distance business sold yet booked revenue wholesale long distance services provided cingular wireless increased 55 compared 2003 increase caused higher volumes associated proliferation wireless package plans include long distance partially offset slightly lower rates switched access revenues declined 62 2004 compared 2003 due volume rate decreases entry interlata long distance shifted switched access minutes carriers service resulting transfer wholesale switched access revenues retail long distance revenue switched access local minutes use decreased 147 percent compared 2003 decrease due impact entry interlata long distance access line losses including shift unep lines alternative communications services primarily wireless email switched access rates slightly lower 2004 due july 1 2003 rate reduction calls program fcc access reform initiative decline rates however substantially offset higher subscriber line charges also included voice revenues data revenues increased 160 2004 compared 2003 data revenues driven strong growth sale bellsouth® fastaccess® dsl service partially offset decreases revenue data products combined wholesale retail dsl revenues 241 2004 compared 2003 due primarily larger customer base december 31 2004 almost 21 million dsl customers increase 634 thousand customers compared december 31 2003 retail data services grew 115 percent 2004 compared 2003 driven primarily growth sale fastaccess dsl service 2004 added 653 thousand net retail customers offer three broadband downstream connection speeds meet varying needs massmarket customers original version bellsouth fastaccess dsl ultra runs downstream connection speeds 15 megabits since mid2003 offered lower speed version bellsouth® fastaccess® dsl lite running downstream connection speeds 256 kilobits fastaccess dsl lite accounted approximately onefourth dsl customers december 31 2004 april 2004 began offering bellsouth® fastaccess® dsl xtreme delivering downstream connection speeds 30 megabits upstream connection speeds 384 kilobits believe broadband offers among competitively priced markets late september 2004 launched additional incentives introduced new pricing fastaccess® dsl ultra service designed increase longterm market penetration retail fastaccess customer additions offset somewhat wholesale dsl disconnects continue see shift customer mix retail revenue retail data products flat 2004 compared 2003 revenues sale wholesale data transport services wholesale dsl communications providers including long distance companies clecs declined 35 percent 2004 compared 2003 primarily due lingering impacts soft enterprise market segment demand continued network grooming consolidation large interexchange carriers revenues decreased 62 2004 compared 2003 decrease reflects decreases revenues payphone business 77 billing late payment fees 29 partially offset increases equipment revenues 33 increases wholesale long distance revenues 12 increases equipment revenues reflect increased demand due improved economic conditions customer upgrades newer technology segment operating expenses cost services products cost services products increased 345 2004 compared 2003 cost services increase impacted increases 207 costs goods sold principally driven increases provision long distance service volumes increases 104 labor costs impacted pay increases driven union contract raises higher costs retiree medical benefits slightly offset lower average workforce increases 49 contract services related network planning projects equipment installations increases materials supplies 39 associated increased utilities usage partially offset decreases 96 access fees due volume declines settlements significant reductions charges associated access carriers customer name databases selling general administrative expenses selling general administrative expenses increased 55 2004 compared 2003 selling general administrative expense reflected represents increase bellsouth 2005 31 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation 209 labor costs driven higher costs retiree medical benefits incentive awards reduced use contractors pay increases partially offset lower headcount also included labor increase 40 increase annual adjustment workers compensation longterm disability accruals increase partially offset decrease uncollectibles expense 90 driven continued improvements collection process improved economic conditions decrease contract services 26 decrease outside sales commissions 16 depreciation amortization depreciation amortization expense decreased 178 2004 compared 2003 primary driver decline depreciation expense relates lower depreciation rates group life method depreciation lower depreciation rates precipitated primarily reductions capital expenditures past several years amortization expense increased due higher levels capitalized software wireless 40 percent economic interest cingular wireless joint venture att exercise influence financial operating policies cingular wireless use equity method accounting investment equity method accounting record proportionate share cingular wireless’ earnings consolidated statements income earnings included caption “net earnings equity affiliates” management purposes evaluate wireless segment based proportionate share cingular wireless’ results accordingly results wireless segment reflect proportional consolidation 40 percent cingular wireless’ financial results october 26 2004 cingular wireless completed acquisition att wireless creating largest wireless carrier united states based number customers revenue data revenue played increasingly important role revenue composition growth expected accelerate 2006 launch new high speed data network despite industry consolidation competition continues intense cingular wireless’ competitors principally national providers wireless communications services well regional carriers niche carriers resellers management uses average revenue per user arpu indicator operating performance business average monthly cellularpcs revenue per user defined cellularpcs service revenues period divided average cellularpcs customers period metric used compare recurring revenue amounts generated cingular wireless’ network prior periods internal targets believe metric provides useful information concerning performance cingular wireless’ initiatives attract retain high value customers use network meaningful 32 bellsouth 2005 compared 2004 segment operating revenues cingular wireless 541 million cellularpcs customers december 31 2005 representing growth approximately 50 million cellularpcs customer base year ago additionally cingular wireless’ cellularpcs customer net additions 50 million 2005 33 million 2004 strong customer gross additions 2005 185 million 58 million 2004 driven larger distribution network combined cingular wireless att wireless company attractive service offerings including popularity cingular wireless’ familytalk® plans cingular wireless’ rollover® plan feature continued high levels advertising combined company offsetting increases decrease cingular wireless’ reported reseller gross additions primarily due change methodology calculating reseller churn implemented first quarter 2005 monthly cellularpcs churn rate 22 2005 27 prior year decline cingular wireless’ churn resulted primarily lower churn rate postpaid customer base change methodology calculating churn related reseller customers offsetting declines increase churn rate among legacy prepaid customers postpaid churn 2005 19 23 prior year cingular wireless believes decline postpaid churn resulted combined company providing compelling value proposition cingular wireless able provide acquisition including affordable rate plans broader network coverage higher network quality exclusive devices mobiletomobile calling 541 million cingular wireless customers change methodology calculation reseller churn resulted improvement reported churn 2005 32 basis points total operating revenues increased 5947 13773 2005 compared 2004 primary driver behind yearoveryear increase cingular wireless’ acquisition att wireless october 2004 additionally total operating revenues continue favorably impacted growth service revenue result higher average cellularpcs customer base continued growth data revenues higher regulatory fee revenues equipment sales contributed 733 increase total operating revenue 2005 compared 2004 service revenues service revenues increased 5214 2005 compared 2004 local service component total service revenues includes recurring monthly access charges airtime usage including prepaid service charges optional features services voice mail mobiletomobile calling roadside assistance caller id handset insurance also includes billings cingular wireless’ customers usf regulatory fees passthrough taxes primary driver increase 4088 local service revenues 2005 increase 758 percent average number cellularpcs customers including nearly 22 million customers acquired att wireless transaction increase local service revenues partially offset decline cingular wireless’ monthly access charges airtime usage due increase number customers rollover® plans allow customers carry unused minutes one year free mobiletomobile minutes allow cingular wireless customers call cingular wireless customers charge data revenue growth also favorably impacted total service revenues 714 increase data revenues 2005 compared 2004 driven increased data service penetration usage sms short messaging data services cingular wireless’ cellularpcs customers including data customers assumed att wireless acquisition partially offsetting increases loss revenues mobitex data business cingular wireless sold fourth quarter 2004 roaming revenues including incollect outcollect revenues increased 262 2005 compared prior year increases resulted higher roaming revenues acquired att wireless customer base offset elimination intracompany roaming former att wireless cingular wireless markets reduction roaming rates long distance revenues increased 100 prior year due revenue associated acquired att wireless customers increase international long distance revenues traditional cingular wireless customer base customers continue migrate gsm network allows access international calling tdma technology cellularpcs arpu 2005 4965 relatively flat compared arpu 4968 2004 continued increases arpu related higher customer usage data regulatory fee revenue higher arpu former att wireless customers offset impact larger embedded customer base postpaid customers lower arpu familytalk® rate plans allinclusive rate plans include “free” minutes thereby reducing overages chargeable airtime also exerting downward pressure change mix cellularpcs customer base include higher percentage lower arpu reseller customers former att wireless customers migrating popular rollover® rate plans decreases roaming arpu largely result acquisition att wireless equipment revenues equipment sales increased 733 2005 compared 2004 increase driven primarily incremental revenues new customers former att wireless markets higher volumes equipment sales traditional cingular wireless markets increased equipment sales former att wireless customers migrating cingular bellsouth 2005 33 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation wireless common service offerings additionally equipment revenues increased due shift advanced handsets following gsmgprsedge network overlay segment operating expenses cost services products cost services products increased 2606 2005 compared 2004 resulting primarily increase costs larger business attributable att wireless acquisition increased network usage higher cost sales customer handsets local network systems costs interconnect costs increase 514 322 respectively prior period resulted primarily incremental network activity due acquisition att wireless additionally interconnect expenses increased yearoveryear due slight increases minutes use per customer thirdparty network systems costs include reseller services incollect roaming long distance usf fees increased 839 reseller services increased 348 primarily incremental amount acquisition increased costs associated californianevada network sold tmobile first quarter 2005 usf fees increased 207 primarily due incremental activity acquisition incollect roaming long distance grew 149 135 respectively yeartoyear increases driven higher volumes minutes including minutes associated acquired att wireless customers offset rate decreases incollect minutes long distance minutes elimination intracompany roaming former att wireless customers cingular wireless equipment sales expenses increased 878 prior year driven primarily higher unit sales higher unit sales resulted 461 percent increase gross customer additions well increased upgrade activity due migration former att wireless customers cingular wireless common service offerings shift advanced handsets following cingular wireless’ gsmgprsedge network overlay selling general administrative selling general administrative expenses 2005 increased 1720 compared prior year driven primarily att wireless acquisition selling expenses include sales marketing advertising commission expenses increased compared prior year due selling expenses related increased sales personnel costs associated acquired att wireless sales force higher advertising promotions expenses increased commissions expenses related 461 percent increase gross customers yearoveryear costs maintaining supporting cingular wireless’ customer base 2005 increased due higher customer service expenses increase upgrade commissions increase billing bad debt expenses customer service expenses increased due increased headcount employeerelated expenses acquired att wireless support cingular wireless’ larger customer base well customer retention customer service improvement initiatives increases upgrade commissions primarily driven increase handset upgrade activity higher commission incentives related migration cingular wireless’ att wireless customers cingular wireless common service offerings since acquisition att wireless cingular wireless successfully migrated approximately 7 million former att wireless customers cingular wireless service offerings including approximately 5 million 2005 maintenance cost increases include higher billing bad debt related expenses related growth cingular wireless’ customer base administrative costs increased result incremental expenses associated acquired att wireless administrative personnel depreciation amortization depreciation expense 1758 increased 738 compared prior year primarily due incremental depreciation associated property plant equipment acquired att wireless acquisition depreciation related cingular wireless’ ongoing capital spending associated gsm umts network additionally depreciation expense increased prior year result reduction estimated useful lives certain legacy cingular wireless tdma assets amortization expense 2005 decreased 33 primarily due amortization associated intangible assets became fully amortized 2004 compared 2003 segment operating revenues cingular wireless 491 million cellularpcs customers december 31 2004 representing growth 251 million cellularpcs customer base year ago growth primarily due 217 million cellularpcs customer base increase related cingular wireless’ acquisition att wireless october 2004 additionally 2004 cingular wireless’ cellularpcs customer net additions 33 million 21 million year ago 17 million current year’s cellularpcs customer net additions occurring fourth quarter year fourth quarter increase represented highest cellularpcs customer net additions total ever compared combined historical results cingular wireless att wireless strong performance cellularpcs customer net additions fourth quarter driven relaunch cingular wireless brand offering new common rate plans larger distribution network newly combined cingular wirelessatt wireless company subsequent acquisition also favorably impacting customer net additions throughout 34 bellsouth 2005 2004 promotion success cingular wireless’ new gsm service offerings continued promotion familytalk® service offering rollover® rate plans excluding impact prepaid customer base due att wireless acquisition prepaid customer count reduced prior year part due successful promotion postpaid familytalk® plan competes customers similar price point enhanced services increase reseller customer net additions compared prior year attributed continued growth cingular wireless’ primary reseller monthly cellularpcs churn rate 27 2004 included results att wireless since acquisition flat compared churn rate prior year lower churn rate cingular wireless’ postpaid customer base offset higher churn rates prepaid reseller customer bases fourth quarter 2004 cingular wireless experienced significant improvement postpaid customer base churn rate compared prior periods customers responded positively launch new cingular wireless broad network coverage attractive gsm service offerings also fourth quarter 2004 conformity issues related calculation churn cingular wireless att wireless reduced churn subsequent acquisition 13 basis points date cingular wireless believe wireless local number portability materially impacted customer churn rate total operating revenues consisting service revenue equipment sales increased 1595 2004 primary driver behind yearoveryear increases almost every component total operating revenues cingular wireless’ acquisition att wireless late october 2004 inclusion 67 days att wireless operating results additionally total operating revenues continue favorably impacted growth service revenue result higher average cellularpcs customer base continued growth data revenues equipment sales contributed 281 increase total operating revenues driven strong customer growth handset upgrade activity service revenues service revenue comprised local voice data services roaming long distance revenue increased 1314 2004 compared 2003 local service component total service revenue includes recurring monthly access charges airtime usage including prepaid service charges optional features services voice mail mobiletomobile calling roadside assistance caller id handset insurance data services also includes billings customers universal service fund usf regulatory fees primary driver increase local service revenue 2004 inclusion former att wireless operating results result cingular wireless’ acquisition late october 2004 aside impact increases local service revenue function higher average customer base partially offset impact lower average revenue per user arpu strong growth data revenue including impact att wireless acquisition continues favorably impact local service revenue driven primarily increased data service penetration usage text messaging data services cellularpcs customers incollect outcollect roaming revenues essentially flat compared corresponding prior year roaming revenue continues unfavorably impacted bundling “free” roaming minutes allinclusive regional national rate plans lower negotiated rates cingular wireless’ roaming partners prior acquisition att wireless cingular wireless’ largest national roaming partner effective acquisition cingular wireless’ consolidated outcollect revenue reflects elimination roaming revenue combined cingular wireless former att wireless properties along corresponding elimination incollect roaming costs although net income neutral elimination significantly reduce new combined company outcollect revenue compared combination prior historical standalone results increase long distance revenue compared 2003 primarily related incremental impact additional long distance revenue contributed result att wireless acquisition higher international long distance revenue 2004 also contributed lesser extent overall increase compared prior year cellularpcs arpu 2004 4968 decrease 199 39 percent compared 5167 2003 although contribution higher arpu att wireless customer base last 67 days 2004 slightly positive impact overall 2004 arpu compared 2003 main drivers changes arpu remained consistent prior periods continued increases arpu related higher customer usage increased data revenue regulatory fee revenue offset impact larger embedded customer base postpaid customers lower arpu familytalk® rate plans allinclusive rate plans include “free” minutes thereby reducing overages chargeable airtime also exerting downward pressure arpu compared prior year change mix cellularpcs customer base include higher percentage lower arpu reseller customers decreases roaming revenue largely result acquisition att wireless equipment revenues 2004 equipment sales increased 281 2004 compared 2003 primarily driven overall higher handset sales including impact significant increase customer gross additions due acquisition att wireless customer migrations new cingular wireless rate bellsouth 2005 35 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation plans result merger also favorably impacted handset upgrade revenue segment operating expenses cost services products cost services products increase 721 2004 compared 2003 due increases local network system costs third party system costs ie roaming long distance costs half increase local network system costs attributed incremental costs related acquired att wireless network excluding impact overall drivers increased local network costs primarily related increased network system usage associated network system expansion costs increased local network system costs 2004 versus prior year attributable historical premerger cingular wireless activities included increased costs billed customers related payments usf certain regulatory funds higher costs related handset insurance program due increased claims 2004 thirdparty network system costs lower continued decreases incollect roaming costs partially offset higher long distance costs lower incollect roaming costs result lower negotiated roaming rates cingular wireless’ roaming partners offset increased volumes roaming minutes also result att wireless acquisition cingular wireless’ consolidated incollect expenses reflect elimination intracompany incollect roaming costs combined cingular wireless former att wireless properties along corresponding elimination outcollect revenue although net income neutral elimination significantly reduce new combined company incollect roaming expenses compared combination prior historical standalone results increase long distance costs primarily volume driven impacted inclusion “free long distance” many cingular wireless’ regional national rate plan offerings addition approximately onethird increase long distance costs versus 2003 related incremental long distance expenses incurred result att wireless acquisition 2004 cost equipment sales increased primarily driven overall higher handset sales including impact significant increase customer gross additions customer migration cingular wireless rate plans due acquisition att wireless selling general administrative expenses selling general administrative expenses 2004 increased 656 compared prior year primarily due incremental expense impact resulting addition att wireless selling general administrative expenses fourth quarter 2004 selling general administrative expenses 2004 also included cost increases associated increased customer gross additions customer service support initiatives selling expenses include sales marketing advertising commission expenses increased 2004 compared prior year primarily due addition incremental att wireless selling expenses fourth quarter 2004 higher sales advertising promotion costs commissions expenses also function increased customer gross additions 2004 costs maintaining supporting customer base also increased 2004 compared prior year primarily due addition att wireless expenses fourth quarter costs maintaining supporting customer base also impacted higher bad debt expense customer service expenses support ongoing customer retention service improvement initiatives higher commission expenses associated handset upgrades bad debt expense increased primarily due higher customer net writeoffs result prior relaxed credit policies selected areas subsequently changed well residual impacts related implementation wireless local number portability late 2003 additionally 2003 included net recovery prior mci writeoffs upgrade commission expenses impacted one million customer migrations new rate plans result merger depreciation amortization depreciation expense increased 249 2004 compared 2003 included incremental 130 related assets acquired att wireless increases depreciation expense primarily due ongoing capital spending including gsmgprsedge network overlay addition increased depreciation tdma assets 2004 result review estimated service lives amortization expense decreased 12 2004 compared 2003 due certain historical cingular wireless finitelived intangible assets becoming fully amortized 2004 advertising publishing group advertising publishing group comprised companies publish print sell advertising perform related services concerning alphabetical classified telephone directories electronic product offerings november 2004 bellsouth att formerly sbc entered joint venture purchased yellowpagescom® late 2005 36 bellsouth 2005 launched yellowpagescomtm bellsouth electronic product offering enables us expand national advertising base diversify traffic relationships discussed fully note c consolidated financial statements effective january 1 2003 changed method recognizing revenues expenses related directory publishing business publication delivery method issue basis deferral method deferral basis issue basis recognized 100 percent revenues direct expenses time directories published delivered deferral basis amortize recognize ratably revenues direct expenses life related print directory generally 12 months compared issue basis method deferral method causes trends currentperiod operating results recognized income statement longer period time cross fiscal years 2003 early 2004 advertising publishing group negatively affected weak economic conditions competition improving economy combined execution business strategies resulted moderate revenue growth 2005 expect trend continue 2006 meaningful 2005 compared 2004 segment operating revenues operating revenues 2005 grew 41 2 percent compared 2004 however print internet revenues negatively affected billing credits 22 1 respectively given customers areas devastated hurricane katrina excluding hurricane impacts total operating revenue would increased 64 32 percent 2005 compared 2004 increase includes 24 increase print revenues 29 increase electronic media revenue sales agency commission revenue increased 11 print revenue increase driven growth directory sales 2004 2005 positive growth result continuation product offering expansion successful marketing programs sales execution well stable economy internet revenue driven significant increase issue sales particular realsearchsm product issue sales grew 120 percent 2005 sales agency commission revenue grew result new contract outofregion telecom company segment operating expenses cost services increased 21 2005 compared 2004 driven manufacturing distribution costs print product expansion well distribution costs resulting growth internet business selling general administrative expenses increased 20 2005 compared 2004 driven primarily higher variable selling costs associated increased sales revenue employee benefits particularly postretirement benefits also increased 2005 partially offsetting increases decline uncollectible expense associated decreased writeoffs resulting improved collections process stable economic conditions bellsouth 2005 37 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation 2004 compared 2003 segment operating revenues segment operating revenues decreased 31 2004 compared 2003 decreases include reduction print revenues partially offset increase electronic media revenues sales agency commission revenues declined 3 2004 compared 2003 print revenue decline periods primarily driven amortization revenues directories issued latter half 2003 decline revenues 2003 directories attributable lingering effects weak economic conditions 2003 affected directory advertising environment continued impact online offline media competition factors also caused revenues directories issued first half 2004 flat compared 2003 issues revenues directories issued second half 2004 however achieved positive growth result expanded product offerings increased distribution growth internet sales improving economy 3 decline sales agency commission revenues result discontinuance line business partially offset growth core sales segment operating expenses cost services products increased 8 2004 compared 2003 driven impact increased distribution selling general administrative expenses decreased 22 2004 compared 2003 driven primarily 49 decrease uncollectible expense result improved collection performance periods variable costs associated selling also decreased result reduction revenues partially offsetting decreases increases employee healthcare pension postretirement medical costs well increased spending advertising response competitive environment depreciation amortization expense increased 2 2004 reflecting increase capitalized software liquidity financial condition bellsouth’s cash generation financial position enable reinvest business distributing substantial cash shareholders bellsouth’s priorities use cash fund investment opportunities maintain capital structure balances low weighted average cost capital appropriate level financial flexibility distribute cash shareholders form dividends share repurchases sources uses cash primary source cash flow dividends consolidated operating subsidiaries generate sufficient cash flow fund capital expenditures generally permit subsidiaries accumulate cash require distribute cash us form dividends subsidiaries longer issue external debt redeem existing debt matures subsidiary financing needs provided bellsouth either available cash external financing addition funding capital expenditures redeeming maturing debt cingular wireless distributes 40 percent remaining cash reflecting ownership percentage bellsouth sources funds primarily operations extent necessary readily available external financing arrangements sufficient meet current obligations timely basis believe sources funds sufficient meet operating needs business least next twelve months information company’s cash flows category presented consolidated statement cash flows meaningful cash generated operations decreased 93 2005 compared prior year due primarily higher incremental cash expenses associated network restoration hurricane damage higher interest payments associated increases average debt balances partially offset decline income tax payments 2004 cash generated operations decreased 1082 compared prior year due primarily 601 increase income tax payments 2004 previously accrued payment approximately 81 mci related bankruptcy settlement 77 payment associated ratification contract cwa 160 cash expenses associated network restoration 38 bellsouth 2005 hurricane damage 2004 partially offsetting increased payments decreases prior year 141 postretirement benefit funding 45 severance payments operating cash flows next years negatively impacted higher federal income tax payments timing accelerated tax deprecation recent years begins reverse capital expenditures capital expenditures consist primarily gross additions property plant equipment estimated service life one year plus incidental costs preparing asset intended use b gross additions capitalized software capital expenditures continuing operations 2001 2005 follows trend capital spending levels past five years reflects targeted capital deployment better unit pricing due technological advances capitalized software purchases increased periods driven system enhancements increase efficiencies introduce new products 2005 expenditures also included 211 incremental spending result damages hurricane katrina excluding effects hurricane katrina periods expect spending levels 2006 similar 2005 expect continue focus capital expenditures toward broadband nextgeneration technologies fiber optics dsl expect expenditures 2006 financed substantially internal sources extent necessary external financing sources wireless general cingular wireless funds capital operating cash requirements operations extent additional funding required bellsouth att provide unsubordinated shortterm financing pro rata basis december 31 2005 bellsouth outstanding advances line credit 204 2006 expect cingular utilize operating cash flow capital expenditures primarily pay maturing thirdparty debt distributions shareholders dividends board directors considers cash dividend quarterly basis objective maintain competitive dividend giving consideration cash flow projections potential uses cash would increase shareholder value bellsouth paid dividend quarter since began operations 1984 last three years bellsouth increased quarterly dividend 45 percent 20 cents per common share 29 cents per common share repurchases bellsouth uses share repurchases help manage cash distributions shareholders october 2005 bellsouth’s board directors authorized repurchase 2 billion bellsouth’s common shares 2007 repurchased nearly 1 billion december 31 2005 external financing credit ratings december 31 2005 longterm debt rating a2 moody’s investor service standard poor’s shortterm debt rating december 31 2005 p1 moody’s a1 standard poor’s moody’s maintains negative outlook short longterm debt ratings negative ratings outlook reflects moody’s concern significant expanded competitive challenges especially wireline business may erode bellsouth’s ability reduce debt levels restore balance sheet strength sufficiently offset increasing business risk january 2006 standard poor’s placed bellsouth’s short longterm credit ratings creditwatch negative implications standard poor’s indicated action resulted concern increasing uncertainty business prospects local wireline business financing arrangements december 31 2005 authorized commercial paper program 105 billion 14 billion outstanding believe ready access commercial paper market event need funding excess operating cash flows also effective registration statement file securities exchange commission could issue 31 billion longterm debt securities bellsouth telecommunications currently debt outstanding various indentures entered past twelve years none indentures contain financial covenants contain limitations restrict company’s affiliate company party indenture ability create liens properties assets bellsouth 2005 39 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation properties assets subsidiaries except specified circumstances none indentures contains provisions tied ratings assigned company affiliates external debt rating agency none indentures contains crossdefault provisions effective april 29 2005 entered syndicated line credit amount 30 billion line credit serves backup facility commercial paper program expire april 29 2008 balances outstanding line credit except described paragraph line credit contains financial covenants requirements compensating balances line credit contain provisions tied ratings assigned us affiliates external debt rating agency line credit limits debt company consolidated subsidiaries 300 percent consolidated earnings interest taxes depreciation amortization preceding four quarters 2005 debt earnings ratio approximately 210 percent addition line credit prohibits company significant subsidiaries permitting liens placed properties assets except specified circumstances bellsouth subsidiaries defaults outstanding debt excess 200 event default occur line credit offbalance sheet arrangements aggregate contractual obligations offbalance sheet arrangements transactions arrangements relationships “special purpose” entities offbalance sheet debt sale divestiture transactions indemnify purchaser various items including labor general litigation well certain tax matters generally terms last one five years general specific indemnities statutory review periods tax matters events circumstances would require us perform indemnity transaction circumstance specific regularly evaluate probability incur costs associated indemnifications accrued expected losses probable addition normal course business indemnify counter parties certain agreements nature terms indemnities vary transaction historically incurred significant costs related performance types indemnities contractual obligations following table discloses aggregate information contractual obligations december 31 2005 periods payments due 1 longterm debt amount excludes 61 unamortized discounts premiums included longterm debt balance sheet december 31 2005 payments year 2012 include final principal amount 500 zerotofull debentures due 2095 carrying value 248 december 31 2005 2 contracts place outsource certain services principally information technology also various commitments vendors purchase telecommunications equipment software services unconditional purchase obligations include annual estimated expenditures based anticipated volumes 3 amounts due interest rate swaps forward contracts based market valuations december 31 2005 actual payments may differ settlement date putable obligations two issues longterm debt included less one year column table contain embedded options may require us repurchase debt may alter interest rate associated debt please refer note h consolidated financial statements information instruments 40 bellsouth 2005 issues amounts date related options follows potential obligations december 31 2005 qualified defined benefit pension plans fully funded therefore currently anticipate cash funding needs meet minimum required funding thresholds past three years funding retiree benefits 563 2003 422 2004 401 2005 currently expect funding 2006 range 350 400 related party transactions 40 percent interest cingular wireless see note e consolidated financial statements description relationship cingular wireless item 7anan nannannannannannannannannannannanitem 7a quantitative qualitative disclosure market risk description risk exposed various types market risk normal course business including impact interest rate changes equity investment prices employ risk management strategies including use derivatives interest rate swap agreements diversification equity investment portfolio hold derivatives trading purposes interest rate risk objective managing interest rate risk maintain balance fixed variable rate debt lower overall borrowing costs within reasonable risk parameters interest rate swaps traditionally used convert portion debt portfolio variable rate fixed rate fixed rate variable rate risk sensitivity use derivative financial instruments designed mitigate foreign currency interest rate risks although extent expose us credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counter parties event counterparty fails meet terms contract agreement exposure limited current value time currency rate interest rate differential full notional contract amount contracts agreements executed credit worthy financial institutions consider risk nonperformance remote summary 2004 market risk december 31 2004 longterm debt 17357 fair value 18394 addition fair value interest rate derivatives carried liability 24 derivatives notional amount 2400 following table provides information maturity date interest rate sensitive financial instruments consist fixed variable rate debt obligations related interest rate derivatives fair values majority longterm debt obligations interest rate swaps based quotes dealers 1 fair value amounts include accrued interest accrued interest classified current liability balance sheet bellsouth 2005 41 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation proportional debt 40 percent interest cingular wireless share joint control venture att therefore consolidate operations proportional debt including share face value cingular wireless’ nonaffiliate debt capitalized leases december 31 2005 shown table operating environment domestic economic trends real gross domestic product gdp increased growth rate 35 percent 2005 consumer prices rose 34 percent 2005 energy costs accounting much rise economy expected continue expansion 2006 slower pace average economy bellsouth’s ninestate region tended closely track cycles us economy however hurricanes katrina rita significantly disrupted economies gulf coast states late 2005 november louisiana’s payroll employment 107 percent year ago 200000 lost jobs consequence region’s employment growth november 08 percent half rate would achieved without storms region’s unemployment rate 53 percent near end 2005 region experienced strong net migration several years trend likely sustained residential construction activity strong result home building pace accelerated annual rate 615000 first three quarters 2005 region posted 599000 housing starts 2004 rebuilding hurricane damage expected keep residential construction gulf region strong 2006 economy ninestate region overall expected expand moderate pace 2006 subject risk slowdown us economy wireline regulatory environment fcc regulates rates aspects provision interstate telecommunications services including international rates interstate access charges fcc also defines network elements establishes telecommunications policies including policies related broadband services state regulatory commissions jurisdiction provision intrastate telecommunications services including traditional local voice service intrastate long distance intrastate access services extent defined state law access charges designed compensate wireline subsidiary use networks carriers future operations financial results substantially influenced developments number federal state regulatory proceedings adverse results proceedings could materially affect revenues expenses ability compete effectively telecommunications carriers regulatory reform traditional telecommunications providers bellsouth subject significantly regulatory requirements competitors encourage reform efforts legislatures regulatory agencies competition increases need regulatory requirements whose burdens nearly equal competitors increases encourage state federal legislators regulators adopt reforms prevent greater rate service quality regulation services imposed competitors expect significant regulatory reform debate continue jurisdictions provide traditional telecommunications service cannot predict outcome reform efforts continued imposition unequal regulatory burdens could adverse affect results operations federal regulatory matters fcc regulates rates aspects provision interstate telecommunications services addition pursuant telecommunications act 1996 fcc authority establish policies pricing terms interconnection local exchange carriers incumbent local exchange carriers bellsouth prior 1996 activity mostly exclusive jurisdiction state regulatory commissions states set rates establish terms interconnection within policy framework ordered fcc expect fcc continue policies promote local service competition various dockets fcc urged accord broadband internet protocol offerings regulatory treatment nearly like accords broadband offerings cable industry forbear old requirements assume telecommunications business monopoly also asked fcc forbear applying affiliate transactions rules cost allocation assignment rules accounting requirements apply bellsouth handful telecommunications providers september 2005 fcc adopted rules designed provide regulatory treatment highspeed internet access services use digital subscriber line dsl technology equivalent regulatory treatment provided highspeed internet access provided cable modems new rules apply regulatory definition service cable modems effectively remove earlier requirements caused us tariff 42 bellsouth 2005 offer separately underlying telecommunications transport associated service addition new rules prescribed equivalent treatment service cable modems respect contribution fcc’s universal service fund universal service fund change phased 2006 subject fcc review fcc interconnection unbundling pricing rules 1996 act fcc required consider extent must make elements network available providers local service fcc require access proprietary network elements “necessary” nonproprietary network elements fcc order access failure impair ability requesting carrier provide services elements provided requirements known unbundled network elements “unes” fcc also establishes pricing policy elements policy currently effect telric acronym total element long run incremental cost assumes hypothetical lowest cost efficient network purposes establishing prices elements states set prices elements policy since 1996 fcc’s unbundling pricing requirements caused us provide service competitors deeply discounted artificial prices often actual costs fcc adopted une rules 1996 1999 2003 occasion rules required significant unbundling loop switching transmission facilities although implemented unbundling requirements adopted also participated appeals challenged validity courts generally invalidated unbundling requirements occasion implemented rules courts found invalid still contracts continue provide unes contracts include unbundled network element platforms unep rules invalidated pursued options provided law options provided contracts reform une offers recently also offered competitors commercial tariff services would replace services required invalidated rules offerings commercially negotiated prices require longer term commitments currently approximately 190 commercial agreements clec customers former unep service replaced mutually acceptable commercial offering recent invalidation fcc rules became effective june 16 2004 fcc later issued rules effectively relieved us obligation accept new unep orders march 10 2005 order also provided 12month transition period phase unep service existing march 10 2005 fcc order also generally requires us offer unes certain high capacity loop transport services competitors use serve business customers obligation provide services unes apply wire centers meet certain thresholds small percentage wire centers region meet thresholds finally order permits competitors convert qualifying higherpriced special access tariff services lowerpriced une services certain conditions depending extent competitors choose order unes convert existing tariff services unes could experience material adverse effect operations believe action requiring unbundling high capacity loop transport services violation earlier court orders along incumbent carriers challenged action dc circuit court appeals parties challenged order contending fcc required maintain unep provide additional unbundling expect decision dc circuit court second third quarter 2006 outcome appeal requires us increase number scope unes must provide competitors permits competitors greater ability substitute unes special access services could face material adverse effect revenues results operations fcc pending proceeding consider modifications telric pricing policy participating proceeding encouraging adoption methodology allows appropriate recovery cost operating actual network extent rules resulting proceeding fail permit recovery costs operating actual network continue experience adverse effect revenues results operations fcc also pending rulemaking addressing special access pricing flexibility rules general regulation special access services federal price cap regulation potential revenue loss adverse decision could material price regulation fcc regulates interstate prices using price regulation plan limits aggregate price changes rate inflation minus productivity offset plus minus cost changes recognized fcc productivity factor vary among services interstate prices decreasing last years result low inflation us economy access charge reform access charge reform refers process historical subsidy residential local service contained network access charges paid long distance carriers funded instead endusers universal service funds combination two past five years implemented fcc order reduced interstate network access charges long distance carriers increased interstate subscriber line charges paid end bellsouth 2005 43 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation users rate changes better aligned cost recovery way incur costs continue participate fcc examinations access reform fcc ongoing comprehensive examination intercarrier compensation payments among telecommunications carriers resulting use respective interconnecting networks general three classes intercarrier compensation 1 reciprocal compensation applies local calls 2 access charges apply long distance calls 3 compensation transit calls wherein convey call originating carrier terminating carrier fcc’s examination could lead permanent changes methods carriers use compensate one another way carriers receive compensation enduser customers fcc multiple policy models consideration would significantly reform current intercarrier compensation methods expect new methodology address rates reciprocal compensation aspects access charges universal service fund contribution requirements continue considered state federal regulators could result greater expense levels reduced revenues universal service fcc established universal service fund telecommunications companies required pay specific percentage interstate international revenues fund support programs established fcc began contributing fund 1998 2005 wireline operations contributed 430 universal service fund fcc require contributing companies recover contributions directly customers like many companies however bellsouth chosen recover universal service fund costs directly endusers fcc’s universal service mechanism nonrural carriers serving highcost lowincome areas designed ensure customers areas receive telephone service affordable rates bellsouth receives highcost support service residents alabama kentucky mississippi universal service fund also establishes significant discounts services provided eligible schools libraries telecommunications services internal connections internet access addition provides support rural health care providers may pay rates comparable paid urban health care providers industrywide annual costs entire universal service program estimated approximately 7 billion funded federal universal service fund ipenabled services regulation fcc pending dockets continues consider regulatory classification various ipenabled services fcc various state public service commissions also considering rules regulations apply various voice internet protocol voip services unable predict outcome proceedings wireline telephony transitioning toward broadband services materiality outcome proceedings us increasing time state regulatory matters subject regulation local intrastate long distance services intrastate access services state authority state provide intrastate telecommunications services regulation covers prices services competition issues recent years various states either action legislatures commissions reformed regulations operate taken action exempt modern services regulation broadband services removed state commission jurisdiction alabama florida kentucky mississippi north carolina south carolina alabama south carolina tennessee removed service bundles state commission jurisdiction commissions georgia north carolina removed tariffing requirements service bundles alabama’s legislature removed state commission jurisdiction telecommunications service except basic services features kentucky mississippi legislatures considering similar legislation even reforms enacted greater regulatory burdens provision telecommunications services competitors continuing imposition burdens imposition new burdens could material adverse effect results operations price regulation currently operate price regulation plans states wireline territory plans state regulatory commissions state legislatures established maximum prices charged certain telecommunications services plans limit amount increases prices specific services enhance ability adjust prices service options respond effectively changing market conditions competition price regulation also provides opportunity benefit fully productivity enhancements plans subject either review renewal plans contain specified termination dates review periods upon review renewal regulatory commission could attempt require substantial modifications prices terms plans 2005 state commission north carolina prescribed changes price regulation plan material results operations 44 bellsouth 2005 state regulatory matters states subject performance measurement plans measure service performance competitors certain benchmarks retail performance meet relevant standards make payments competitors state’s treasury states continuously fail meet certain criteria also would required suspend marketing sale long distance services made immaterial payments states 2004 2005 likely make immaterial payments 2006 plans underwent revisions eight states 2005 revisions pending ninth state wireless regulatory environment overview fcc regulates licensing construction operation acquisition transfer wireless systems us pursuant communications act 1934 communications act associated rules regulations policies obtain authority exclusive use radio frequency spectrum provide commercial mobile radio service cmrs area subject jurisdiction wireless communications systems must licensed fcc operate wireless network wireless devices assigned spectrum segments must comply rules policies governing use spectrum adopted fcc rules policies among things • regulate cingular wireless’ ability acquire hold radio spectrum licenses lease spectrum • impose technical obligations operation cingular wireless’ network • impose requirements ways cingular wireless provides service communicates customers • regulate interconnection cingular wireless’ network networks carriers • obligate cingular wireless permit resale services resellers offers resale opportunities serve roaming customers wireless carriers • impose variety fees charges cingular wireless’ business used finance numerous regulatory programs substantial part fcc’s budget licenses issued fixed period time typically 10 years cmrs licenses consequently cingular wireless must periodically seek renewal licenses fcc award renewal expectancy cmrs wireless licensee provided substantial service past license term substantially complied applicable fcc rules policies communications act fcc routinely renewed wireless licenses past however communications act provides licenses may revoked cause license renewal applications denied fcc determines renewal would serve public interest violations fcc rules may also result monetary penalties sanctions fcc rules provide applications competing license renewal application may considered comparative hearings establish qualifications competing applications standards applied hearings cmrs wireless systems subject federal aviation administration fcc regulations governing location lighting construction antenna structures cingular wireless’ antennas associated equipment located also subject regulation federal environmental laws fcc’s environmental regulations including limits radio frequency radiation wireless handsets antennas towers zoning land use regulations including compliance historic preservation requirements also apply tower siting construction activities regulatory developments fcc eliminated rules limiting amount spectrum wireless carrier market effective january 1 2003 except casebycase analysis individual transactions yet replaced spectrum limits published rules guidelines setting forth fcc review carriers’ spectrum aggregations fcc also eliminated prohibition ownership cellular licenses single entity except review casebycase basis applications authority cellular licenses rural area certain acquisitions spectrum would remain subject approval us department justice fcc imposed rules requiring carriers provide emergency 911 services including enhanced 911 services provide local public safety dispatch agencies caller’s communications number approximate location providers required transmit geographic coordinates customer’s location within accuracy parameters set forth fcc either means networkbased handsetbased technologies providers may demand cost recovery condition although permitted negotiate cost recovery mandated state local governments delayed availability vendor equipment could reasonably relied upon comply fcc’s location accuracy rules cingular wireless carriers negotiated settlement arrangements fcc established increasingly rigorous compliance standards deadlines fcc established federal universal service requirements affect cmrs operators fcc’s rules cmrs providers potentially eligible receive universal service subsidies however also required contribute federal universal service fund may required contribute state universal service funds contributions federal fund based bellsouth 2005 45 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation interstate international revenues generated properties owned cmrs provider 2005 cingular wireless payment obligations federal universal service fund approximately 710 amount cingular wireless required pay fund based revenues generated properties anticipate amount continue increase time cingular wireless recovers expense customers many states also moving forward develop state universal service fund programs number state funds require contributions varying greatly state cmrs providers programs expand impose correspondingly growing expense cingular wireless’ business mentioned cmrs providers eligible receive universal service subsidies federal state conditions met cingular wireless pursuing funding states corresponding regulatory burdens exceed benefits subsidies november 2003 fcc’s rules wireless local number portability became operative enabling wireless customers keep wireless number switching another carrier rules increased competition costs customer churn across industry fcc adopted rules requiring wireless providers provide functions facilitate electronic surveillance law enforcement officials pursuant communications assistance law enforcement act 1995 obligations likely result significant costs cingular wireless purchase installation maintenance network software equipment needed communications act fcc’s rules grant various rights impose various obligations cmrs providers interconnect facilities local exchange carriers generally cmrs providers entitled “reciprocal compensation” connection termination wirelineoriginated local traffic entitled collect charges terminating wirelinetowireless local traffic system similar charges local exchange carriers levy terminating wirelesstowireline local calls interconnection agreements typically negotiated carriers event dispute state public utility commissions courts fcc role enforcing interconnection provisions communications act although cingular wireless interconnection agreements place major local exchange carriers virtually service areas agreements subject modification expiration termination accordance terms moreover cingular wireless negotiating must continue negotiate interconnection agreements number independent telephone companies service areas agreements concluded cingular wireless must accrue contractual liabilities associated resulting unpaid invoices companies additionally cingular wireless expands coverage footprint cingular wireless required negotiate interconnection arrangements wireline carriers state regulation local approvals rapid growth penetration wireless services come commensurate surge interest part state legislatures state public utility commissions local governmental authorities regulating domestic wireless industry interest taken form efforts regulate customer billing termination service arrangements advertising filing “informational” tariffs certification operation use handsets driving service quality sales practices many areas anticipate trend continue require cingular wireless devote legal resources working states respond concerns minimizing preventing new regulation could increase cingular wireless’ costs business communications act generally preempts state local governments regulating entry rates charged wireless carriers also permits state petition fcc allow impose cmrs rate regulation market conditions fail adequately protect customers service replacement substantial portion telephone wireline exchange service within state currently petition file addition communications act expressly preempt states regulating “terms conditions” wireless service several states invoked “terms conditions” authority impose propose various consumer protection regulations wireless industry california’s recently enacted currently suspended rules potentially quite costly state attorneys general become active enforcing state consumer protection laws sales practices services wireless carriers consent decrees negotiated imposed attorneys general effect indirectly regulating targeted wireless carrier states also may impose universal service support requirements wireless communications carriers similar contribution requirements established fcc states become active imposing new taxes wireless carriers gross receipts taxes fees items use public rights way taxes fees generally passed cingular wireless’ customers result higher costs customers local level wireless facilities typically subject zoning land use regulation neither local state governments may categorically prohibit construction wireless facilities community take actions indefinite moratoria effect prohibiting construction nonetheless securing state local government approvals new tower sites likely continue difficult lengthy costly 46 bellsouth 2005 competition wireline services wireline voice services face significant competition wireless cable telecommunications service providers voip providers competition within wireless industry created lower price point service offerings include larger buckets anytime local long distance minutes resulting many customers choosing wireless service primary sole voice communications option wireless companies expand offerings include high speed data services expect migration trend continue also facing increasing competition cable companies entities mass market broadband internet access service voice services technological developments made feasible cable television networks carry data voice communications cable competitors increasingly targeting mass market broadband internet access service new competition voice services also resulting development commercial applications using internet protocol technology voip cable companies independent providers offer voip services public compete telecommunication service providers wireline customers based principally service offerings price customer service local long distance services subject competition increasing competition resulted innovative packaging services strive simplify customer’s experience pricing pressures market increased resulting opportunities customer purchase value based packages services competitive pressures across board resulted increase advertising promotional spending competitors able resell local services enter commercial contracts us lease separate unbundled network elements unes also resell long distance services bulk rates provide services facilities addition increasing number voice data communications networks utilizing fiber optic lines constructed communications providers major metropolitan areas throughout wireline service territory fcc rules require us offer expanded interconnection interstate special switched network access transport result must permit competitive carriers terminate transmission lines facilities central office buildings locations collocation arrangements effects rules increase competition network access transport furthermore long distance carriers increasingly connecting lines directly customers’ facilities bypassing networks thereby avoiding network access charges entirely wireless services substantial increasing competition aspects wireless communications industry cingular wireless expects continue consolidation industry continues cingular competes customers based principally reputation network quality customer service price service offerings cingular wireless’ competitors principally national providers cellular pcs wireless communications services together cingular serve 90 percent us wireless customers cingular wireless’ competitors also include regional carriers niche carriers resellers indirect retailers sell cingular wireless services also sell competitors’ services regulatory policies favor robust competition wireless markets wireless local number portability wlnp implemented fcc late 2003 also increased level competition industry wlnp allows subscribers switch carriers without change telephone numbers consolidation alliances business ventures increase competition consolidation formation alliances business ventures within wireless communications industry occurred cingular wireless expects trend continue consolidation may create larger bettercapitalized competitors substantial financial technical marketing distribution resources compete product service offerings addition combinations wireless carriers may give domestic competitors better access international technologies marketing expertise strategies diversified sources capital large national wireless carriers affiliations number smaller regional wireless carriers offer wireless services national brand thereby expanding national carrier’s perceived national scope cingular wireless’ ability compete successfully depend part quality network customer service sales distribution channels well marketing efforts ability anticipate respond various competitive factors affecting industry factors include introduction new services technologies changes consumer preferences demographic trends economic conditions pricing strategies competitors cingular wireless’ ability take advantage relationship bellsouth att advertising publishing competition yellow pages industry continues intensify major markets seeing multiple competitors print yellow pages business many different media competing advertising revenue addition online yellow pages see competition large small internet search engines competition directory sales agency contracts sale advertising publications nonaffiliated companies also continues strong bellsouth 2005 47 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation respond increasing competition dynamic media environment investments product enhancements multiple delivery options local promotions customer value plans increased advertising sales execution technology wireline portion telecommunications industry rapidly transforming circuit switched voice environment broadband services network transformation fiber optic cable internet protocol ip ethernet evolving digital subscriber line dsl technologies core bellsouth well positioned transformation due high level fiber network advanced nature ip network approximately half homes bellsouth region expected within 5000 feet fiber served gigabit ethernetfed ip aware dsl technology december 31 2007 achieved reasonable economic cost due company’s history fiber investment deployment short distances data speeds 12mbps single lines 24mbps two “bonded” lines possible adsl2 technology evolution dsl technology completion even advanced standards 2005 referred vdsl2 even higher speeds expected possible shorter distances 2007 transformation complete allow single converged ip network provide voice data video services example potential new services voice ip voip may enable cost savings differentiated feature capabilities voip also provide basis converged wirelesswireline services conjunction cingular capability would combine best wireless wireline networks handset operates cell phone away home “voip cordless” home voice data services business markets bellsouth successful ip ethernet virtual private network data services regional internet backbone built support services potentially used transport voip video services demonstrating power converged ip networking wireless us wireless telecommunications industry two principal frequency bands currently licensed fcc transmitting twoway voice data signals 850 mhz band 1900 mhz band services provided two frequency bands commonly referred cellular pcs respectively pcs infrastructure characterized shorter transmission distances need closer spacing cells towers cellular network accommodate different characteristics pcs radio signals however pcs service differ functionally user digital cellular service handsets contain receivers transmitters allow user seamlessly access 850 1900 mhz networks utilizing technology network infrastructure cingular wireless’ primary network technology global system mobile communication gsm 95 minutes carried gsm network december 31 2005 hardware software enhancements referred general packet radio service gprs enhanced data rates gsm evolution edge allow higherspeed data communications delivers two three times higher data rates gprs technology provides cingular wireless’ customers greater connectivity communications capabilities including faster speeds accessing wireless internet although many advances still underway enhanced capacity performance features gsm gprs edge deployed technologies cingular wireless building network offering 3g technology using universal mobile telephone system umts standard support significantly higher data speeds capacity umts also supports voice building 3g network obviate need separately augment voice infrastructures network voice usage grows cingular wireless’ deployed 3g umts systems currently allow user average data download speeds 220320 kbps providing capability variety services streaming audio video simultaneous voice data applications much like cingular wireless’ edge technology umts allows packet data enabling “always on” connectivity useful receiving email arrives versus need set aside time email download allowing billing based amount data transferred rather amount time given device connected january 2005 cingular wireless field tested higher speed downlink component umts called “high speed downlink packet access” hsdpa average mobile data throughput speed 400700 kbps range theoretical data speeds 14 mbps development deployment umts hsdpa continued throughout 2005 december 2005 cingular wireless commercially launched 3g networks following markets austin baltimore boston chicago dallas houston las vegas phoenix portland salt lake city san diego san francisco san jose seattle tacoma washington dc cingular wireless currently expects deploy umts hsdpa major metropolitan areas end 2006 new accounting pronouncements see note b consolidated financial statements description new accounting pronouncements 48 bellsouth 2005 critical accounting policies consider accounting estimate critical 1 accounting estimate requires us make assumptions matters highly uncertain time accounting estimate made 2 changes estimate reasonably likely occur period use different estimates reasonably could used would material impact financial condition results operations senior management regularly discusses development selection critical accounting estimates audit committee board directors depreciation property plant equipment see note g consolidated financial statements information regarding costs assumptions property plant equipment nature estimates required use group life method depreciate assets telephone subsidiary telephone plant acquired given year grouped similar categories depreciated remaining estimated useful life group due rapid changes technology new competitors selecting estimated economic life telecommunications plant equipment requires significant amount judgment periodically review data expected utilization new equipment asset retirement activity net salvage values determine adjustments depreciation rates also utilize studies performed outside consultants assist us determination made changes lives assets resulting material impact three years presented sensitivity analysis effect one year change useful lives telephone plant accounts shown pensions postretirement benefit plans measurement pension postretirement benefit obligations costs dependent variety assumptions including estimates present value projected future payments plan participants net projected government prescription drug subsidy receipts consideration likelihood potential future events salary medical cost increases changes demographic experience assumptions may effect amount timing future contributions measurements generate unrecognized gains losses include changes economic assumptions discount rates medical trends inflation examples include limited differences actual experience assumptions • asset returns • medical claims activity • compensation increases • employee separations retirements mortality etc gains losses reflect refinements estimates well real changes economic values gains one period may offset losses another vice versa required recognize gains losses period occur instead gains losses exceed 10 percent threshold defined accounting literature amortize excess average remaining service period active employees expected receive benefits plan generally 10 15 years complete description assumptions used measurement pension postretirement benefit obligations cost refer note l consolidated financial statements sensitivity analysis effect change selected assumptions pension plans effect change selected assumptions benefits plans accounting pension postretirement benefits currently topic reexamination organizations set accounting standards setters decisions tentatively reached standard setters would require significant changes way account defined benefit plans including way record funded status however final outcome standard setters’ deliberations yet determined bellsouth 2005 49 management’s discussion analysis financial condition results operations continued dollars millions except per share amounts otherwise indicated bellsouth corporation loss contingencies loss contingencies recorded liabilities probable liability incurred amount loss reasonably estimable disclosure required reasonable possibility ultimate loss exceed recorded provision contingent liabilities often resolved long time periods estimating probable losses requires analysis multiple forecasts often depend judgments potential actions third parties regulators significant accounting policies significant accounting polices involving level measurement uncertainties discussed nevertheless important understanding financial statements policies related revenue recognition stockbased compensation uncollectible reserves tax valuation allowances require difficult judgments complex matters often subject multiple sources authoritative guidance certain matters among topics currently reexamination accounting standard setters regulators specific conclusions reached standard setters outcomes cannot predicted confidence also see note consolidated financial statements discusses accounting policies selected acceptable alternatives cautionary language concerning forwardlooking statements addition historical information document contains forwardlooking statements regarding business prospects financial trends accounting policies may affect future operating results financial position cash flows time also may provide oral written forwardlooking statements materials release public forwardlooking statements give current expectations forecasts future events identify statements fact relate strictly historic current facts use words “will” “anticipate” “estimate” “expect” “project” “intend” “plan” “believe” “target” “forecast” words terms similar meaning connection discussion future operating financial performance particular include statements relating future actions prospective products services future performance results current anticipated products services sales efforts capital expenditures expenses interest rates outcome contingencies legal proceedings financial results statements based assumptions estimates subject risks uncertainties statements claim protection safe harbor forwardlooking statements provided private securities litigation reform act 1995 possible developments could cause actual results differ materially forecast implied forwardlooking statements cautioned place undue reliance forwardlooking statements current date filing disclaim intention obligation update revise forwardlooking statements whether result new information future events otherwise list cautionary statements exhaustive factors addition contained throughout document could affect future operating results financial position cash flows could cause actual results differ materially expressed forwardlooking statements • impact success cingular wireless joint venture att including marketing product development efforts technological changes financial capacity • cingular wireless’ failure realize amounts within timeframe contemplated capital expense synergies financial benefits expected acquisition att wireless result technical logistical regulatory factors • changes laws regulations interpretations could result loss reduction value licenses concessions markets increase competition compliance costs capital expenditures • continued pressures telecommunications industry financial competitive regulatory perspective • intensity competitive activity resulting impact pricing strategies new product offerings • changes federal state regulations governing terms offer retail wholesale services • impact business consolidation wireline wireless industries operate • impact network business adverse weather conditions • issuance financial accounting standards board accounting bodies new accounting standards changes existing standards • changes available technology increase likelihood customers choosing alternate technology products technology substitution • higher anticipated startup costs significant upfront investments associated new business initiatives • outcome pending litigation • unanticipated higher capital spending delays deployment new technologies detailed discussion certain risks facing company see “risk factors” 50 bellsouth 2005 consolidated statements income bellsouth corporation net income per share may sum due rounding accompanying notes integral part consolidated financial statements bellsouth 2005 51 consolidated balance sheets bellsouth corporation accompanying notes integral part consolidated financial statements 52 bellsouth 2005 consolidated statements cash flows bellsouth corporation accompanying notes integral part consolidated financial statements bellsouth 2005 53 consolidated statements shareholders’ equity comprehensive income bellsouth corporation trust treasury shares considered outstanding financial reporting purposes december 31 2005 approximately 17 shares held trust 205 shares held treasury accompanying notes integral part consolidated financial statements 54 bellsouth 2005 notes consolidated financial statements dollars millions except per share amounts otherwise indicated bellsouth corporation note accounting policies report bellsouth corporation subsidiaries referred “we” “company” “bellsouth” organization communications company headquartered atlanta georgia management purposes operations organized three reportable segments communications group wireless advertising publishing group basis presentation consolidated financial statements include accounts bellsouth’s whollyowned subsidiaries controlling financial interest investments businesses control ability exercise significant influence operations financial policies accounted using equity method significant intercompany transactions accounts eliminated 40 percent economic interest cingular wireless share control att accordingly account investment equity method certain amounts prior period consolidated financial statements reclassified conform current year’s presentation accordance statement financial accounting standards sfas 144 “accounting impairment disposal longlived assets” sfas 144 classified results latin american segment discontinued operations presentation discontinued operations includes revenues expenses latin american operations one line item income statement periods presented latin america related balance sheet items december 31 2004 presented assets liabilities discontinued operations line items use estimates consolidated financial statements prepared accordance generally accepted accounting principles gaap required make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents consider highly liquid investments original maturity three months less cash equivalents investments original maturity three months one year considered cash equivalents included current assets consolidated balance sheets interest income cash equivalents temporary cash investments continuing operations 76 2003 60 2004 23 2005 included december 31 2004 cash balance 680 cash balances 148 held discontinued operations latin america shortterm investments shortterm investments represent auction rate securities highly liquid variablerate debt securities underlying security longterm nominal maturity interest rate reset dutch auctions typically held every 7 28 35 days creating shortterm instrument securities trade par callable par interest payment date option issuer interest paid end auction period material supplies new reusable material held telephone subsidiary carried inventory principally average cost except specific costs used case large individual items nonreusable material carried estimated salvage value inventories subsidiaries stated lower cost market cost determined principally either average cost firstin firstout basis property plant equipment investment property plant equipment stated original cost plant dedicated providing regulated telecommunications services depreciation based group remaining life method depreciation straightline rates determined basis equal life groups certain categories telephone plant acquired given year method requires periodic revision depreciation rates depreciable telephone plant disposed original cost less net salvage proceeds charged accumulated depreciation perform inventories telephone plant verify existence assets reconcile inventories property records addition inventory reconciliation results allow us correct records investment moved one location another account delayed retirements cost property plant equipment depreciated using either straightline accelerated methods estimated useful lives assets depreciation property plant equipment continuing operations 3257 2003 3039 2004 3058 2005 gains losses disposal depreciable property plant equipment recognized year disposition element income expense net cost maintenance repairs plant including cost replacing minor items resulting substantial betterments charged operating expenses interest expense network engineering costs incurred bellsouth 2005 55 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation construction phase networks capitalized part property plant equipment projects completed placed service valuation longlived assets longlived assets including property plant equipment intangible assets finite lives reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable communications industry rapidly evolving therefore reasonably possible longlived assets could become impaired result technological industry changes assets intend hold use total expected future undiscounted cash flows less carrying amount asset recognize loss difference fair value carrying value asset assets intend dispose recognize loss amount estimated fair value less costs sell less carrying value assets principally use discounted cash flow method estimate fair value longlived assets account equity security investments exercise significant influence equity method accounting accordance accounting principles board apb opinion 18 equity method accounting investments common stock periodically review equity method investments impairment reviews performed determine whether decline fair value investment carrying value deemed temporary foreign currency assets liabilities foreign subsidiaries equity investees functional currency us dollars translated us dollars exchange rates effect end reporting period foreign entity revenues expenses translated us dollars average rates prevailed period resulting net translation gains losses reported foreign currency translation adjustments shareholders’ equity component accumulated comprehensive income loss cost method investments marketable securities primarily common stocks accounted cost method securities classified availableforsale sfas 115 “accounting certain investments debt equity securities” carried fair value unrealized gains losses net income taxes recorded accumulated comprehensive income loss statement changes shareholders’ equity comprehensive income fair values individual investments marketable securities determined based market quotations gains losses calculated based original cost specific investment periodically review cost method investments impairment reviews performed determine whether decline fair value investment carrying value deemed temporary equity securities restricted one year publicly traded recorded cost derivative financial instruments generally enter derivative financial instruments hedging purposes hedging exposure variable cash flows foreign currency impacts forecasted transactions deferral accounting applied derivative reduces risk underlying hedged item effectively result high inverse correlation value underlying exposure derivative instrument either initially fails later ceases meet criteria deferral accounting subsequent gains losses recognized currently income hedging exposure changes fair value recognized asset liability change fair value derivative financial instrument hedged item recognized currently income cash flows resulting derivative financial instruments classified category cash flows items hedged revenue recognition revenues recognized earned certain revenues derived local telephone services billed monthly advance recognized following month services provided revenues derived telecommunications services principally network access long distance wireless airtime usage recognized monthly services provided marketing incentives including cash coupons package discounts free service recognized revenue reductions accrued period service provided respect coupons accruals based historical redemption experience cash generally received time sale revenues installation activation activities deferred recognized life customer relationship generally four years print advertising publishing revenues related directory costs recognized ratably life related directory generally 12 months allowances uncollectible accounts determined based analysis history future expectations provision uncollectible accounts continuing operations 523 2003 384 2004 348 2005 deferred activation installation expenses defer certain expenses associated installation activation activities expense deferred extent associated revenues deferred service costs excess 56 bellsouth 2005 revenues recognized period incurred deferred costs recognized approximately 4 years advertising expense advertising costs incurred expenses include production media promotional sponsorship costs total advertising expense continuing operations 300 2003 328 2004 298 2005 income taxes consolidated balance sheets reflect deferred tax balances associated anticipated tax impact future income deductions implicit consolidated balance sheets form temporary differences temporary differences primarily result use accelerated methods shorter lives computing depreciation tax purposes basis differential related equity investment cingular wireless interest payable settlement prior years’ tax returns included component interest expense consolidated income statement earnings per share basic earnings per share computed based weightedaverage number common shares outstanding year nonvested restricted stock carries dividend voting rights accordance gaap included weighted average number common shares outstanding used compute basic earnings per share diluted earnings per share based weightedaverage number common shares outstanding plus net incremental shares arising employee stock compensation benefit plans earnings amounts used pershare calculations basic diluted methods following reconciliation weightedaverage share amounts millions used calculating earnings per share options exercise price greater average market price common stock antidilutive effect computation excluded calculation diluted earnings per share intangible assets intangible assets comprised capitalized software intellectual property fcc wireless spectrum licenses company capitalizes certain costs incurred connection developing obtaining internal use software accordance american institute certified public accountants statement position 981 accounting costs computer software developed obtained internal use capitalized costs include direct development costs associated internal use software including internal direct labor costs external costs materials services capitalized software costs amortized straightline basis generally periods three five years costs incurred preliminary project stage well maintenance training costs expensed incurred intellectual property consists primarily capitalized costs associated patents copyright trademarks licenses wireless spectrum represent authorizations provide service specific geographic services areas wcs mmds spectrum company determined fcc spectrum licenses treated indefinitelived intangible assets amortization intangibles continuing operations 554 2003 597 2004 603 2005 test indefinitelived intangible assets impairment annual basis additionally indefinitelived intangible assets tested annual tests events changes circumstances indicate asset might impaired events circumstances would include significant change business climate legal factors operating performance indicators competition sale disposition significant portion business factors note b recently issued accounting pronouncements sharebased payments december 2004 fasb issued sfas 123 revised 2004 “sharebased payment” standard amends clarifies accounting stock compensation plans sfas 123 “accounting stockbased compensation” adopted effective january 1 2003 effective january 1 2006 adopted revised statement adoption material impact results operations financial position cash flows conditional asset retirement obligations march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations” fin 47 fin 47 clarifies term conditional asset retirement obligation used fasb statement 143 “accounting asset retirement obligations” sfas 143 refers legal obligation perform asset retirement activity timing method settlement conditional future event may within control entity obligation perform asset retirement activity unconditional even though uncertainty exists timing bellsouth 2005 57 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation method settlement uncertainty timing method settlement conditional asset retirement obligation factored measurement liability sufficient information exists fin 47 also clarifies entity would sufficient information reasonably estimate fair value asset retirement obligation adopted provisions interpretation effective december 31 2005 material impact results operations financial position cash flows note c changes accounting principle asset retirement obligations sfas 143 provides accounting cost legal obligations associated retirement longlived assets sfas 143 requires companies recognize fair value liability asset retirement obligations period obligations incurred capitalize amount part book value longlived asset sfas 143 also precludes companies accruing removal costs exceed gross salvage depreciation rates accumulated depreciation balances legal obligation remove longlived assets outside plant accounts telephone poles cable estimated cost removal exceed gross salvage although legal obligation remove assets historically included group depreciation rates estimated net removal costs associated outside plant assets estimated cost removal exceeds gross salvage costs reflected calculation depreciation expense results greater periodic depreciation expense recognition accumulated depreciation future removal costs existing assets actually retired removal costs expended net removal costs recorded reduction accumulated depreciation connection adoption standard removed existing accrued net costs removal excess related estimated salvage accumulated depreciation accounts adjustment reflected 2003 income statement cumulative effect accounting change adjustment balance sheet increase net plant equipment 1334 increase deferred income taxes 518 cumulative effect change increased net income 816 year ended december 31 2003 revenue recognition publishing revenues effective january 1 2003 changed method recognizing revenues expenses related directory publishing business publication delivery method deferral method publication delivery method recognized 100 percent revenues direct expenses time directories published delivered endusers deferral method revenues direct expenses recognized ratably life related directory generally 12 months change accounting method reflected 2003 income statement cumulative effect accounting change adjustment balance sheet decrease accounts receivable 845 increase current assets 166 increase current liabilities 129 decrease deferred income taxes 307 cumulative effect change resulted decrease net income 501 2003 absent onetime adjustment change accounting materially affect annual results note discontinued operations march 2004 signed agreement telefónica móviles sa wireless affiliate telefónica sa sell interests latin america october 2004 closed sale 8 10 properties venezuela colombia ecuador peru guatemala nicaragua uruguay panama january 2005 closed sale operations remaining two latin american countries argentina chile summary sale transactions 2004 gain includes recognition cumulative foreign currency translation losses 421 2005 gain includes recognition cumulative foreign currency translation losses 68 summary financial information summarized results discontinued operations follows 58 bellsouth 2005 cash flow information 2005 company separately disclosed operating investing financing portions cash flows attributable discontinued operations prior periods reported combined basis single amount note e investments advances cingular wireless investment 40 percent economic interest cingular wireless share joint control venture att following table presents 100 percent cingular wireless’ assets liabilities results operations year ended december 31 december 31 2004 2005 book investment exceeded proportionate share net assets cingular wireless 497 456 respectively december 31 2005 1510 consolidated retained earnings represented undistributed earnings cingular wireless october 26 2004 cingular wireless completed acquisition att wireless creating largest wireless carrier united states based number customers revenue cingular wireless’ cash purchase price att wireless shares totaled approximately 41 billion amount funded equity contributions cingular wireless’ two owners proportion equity ownership cingular wireless 60 percent att formerly sbc 40 percent bellsouth remainder provided cash hand att wireless bellsouth’s portion funding reflected increase investment cingular wireless approximately 144 billion advance cingular wireless 3792 december 31 2004 2622 december 31 2005 advance bears interest 6 per annum maturity date june 30 2008 cingular wireless may generally prepay advance time obligated prepay advance extent excess cash defined pursuant revolving line credit advance subordinated cingular wireless’ senior notes including senior notes att borrowings external parties defined agreement cingular wireless revolving line credit effective august 1 2004 bellsouth att formerly sbc agreed finance respective pro rata shares cingular wireless’ capital operating cash requirements based upon cingular wireless’ budget forecasted cash needs borrowings agreement bear interest 1month libor plus 005 payable monthly conjunction signing agreement cingular wireless terminated bank credit facilities ceased issuing commercial paper longterm debt available cash defined generated cingular wireless applied last day month repayment advances bellsouth att regard interim loans cingular wireless makes bellsouth time bellsouth pays cingular wireless interest excess cash 1month libor line credit terminates july 31 2007 december 31 2004 2005 balance outstanding revolving credit line including interest 668 204 respectively provision services also generate revenues cingular wireless ordinary course business provision local interconnection services long distance services sales agency fees customer billing collection fees bellsouth 2005 59 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation summary financial transactions cingular interest income advances offset like amount interest expense recorded cingular wireless reported financial statements caption “net earnings equity affiliates” receivables payables incurred ordinary course business recorded balance sheets follows note f assets december 31 consist following deferred activation installation expenses equity method investments cingular ownership equity investments cingular wireless december 31 follows investment cellcom may 2005 signed agreement discount investment corp ltd discount sell 50 percent interest teleman netherlands bv teleman holds 695 percent interest cellcom israel ltd cellcom cellular communications operator israel book basis investment exceeded tax basis approximately 263 us tax expense previously recognized income generated israeli operations due essentially permanent duration investment agreement discount provided evidence temporary difference would reverse foreseeable future accordingly recognized tax liability 92 2005 september 2005 closed transaction received gross proceeds 625 recorded gain 351 228 net tax gain includes recognition cumulative foreign currency translation losses 10 cost method investments marketable securities primarily common stocks accounted cost method investments held grantor trusts captive insurance subsidiary grantor trusts designed provide funding benefits payable certain nonqualified benefit plans trusts irrevocable assets contributed trusts used pay benefits subject claims general creditors company event company’s insolvency 60 bellsouth 2005 components cost investments follows since held welldiversified portfolio single common stock comprises material unrealized loss evaluate nearterm prospects investment holdings relation severity duration unrealized losses based evaluation ability intent hold investments reasonable period time sufficient forecasted recovery fair value consider investments otherthantemporarily impaired december 31 2005 note g supplemental balance sheet cash flow information property plant equipment property plant equipment summarized follows december 31 intangible assets intangible assets summarized follows december 31 following table presents current expected amortization expense existing intangible assets december 31 2005 following periods aggregate amortization expense year ended december 31 2005 603 expected amortization expense bellsouth 2005 61 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation current liabilities current liabilities summarized follows december 31 noncurrent liabilities noncurrent liabilities summarized follows december 31 supplemental cash flow continuing operations information investment advance sonofon february 12 2004 sold interest danish wireless provider sonofon 368 billion danish kroner telenor asa received 305 billion danish kroner 525 465 percent equity stake 630 million danish kroner 109 shareholder loan accrued interest reduced settlement 17 associated foreign currency swap contracts result transactions recorded gain 462 295 net tax included recognition cumulative foreign currency translation gains 13 note h debt maturing within one year debt maturing within one year summarized follows december 31 weightedaverage interest rate end period credit lines end period significant commitment fees requirements compensating balances associated lines credit longterm debt interest rates maturities table amounts outstanding december 31 1 debt maturities affected fas 133 accounting requirements mark hedged debt fair value several issues longterm debt contain embedded options may require us repurchase debt 62 bellsouth 2005 may alter interest rate associated debt issues related options follows holders remarketing agreement 20put1 remarketable securities require us repurchase securities interest rates securities reset based current market conditions since 20put1 securities put us annually balance included current maturities longterm debt balance sheet holders 604 bond maturing november 15 2026 onetime ability put bond back us november 15 2006 therefore balance 281 included current maturities longterm debt balance sheet amortizing debentures pay principal semiannual basis issued original principal balance 375 zerotofull debentures accrete total principal balance 500 2015 time begin paying interest maturity 2095 maturities longterm debt outstanding principal amounts december 31 2005 summarized maturities year 2010 include final principal amount 500 zerotofull debentures due 2095 issue longterm debt 2005 table summarizes longterm debt repayments made 2005 connection early redemptions recognized 42 loss included 18 associated fully expensing remaining discount deferred debt issuance costs december 31 2005 shelf registration statement file securities exchange commission 3100 debt securities could publicly offered note income taxes consolidated balance sheets reflect anticipated tax impact future taxable income deductions implicit consolidated balance sheets form temporary differences temporary differences reflect difference basis assets liabilities measured consolidated financial statements measured tax laws using enacted tax rates provision income taxes attributable continuing operations summarized follows temporary differences gave rise deferred tax assets liabilities december 31 follows balance sheet classification december 31 valuation allowance established reduce deferred tax assets associated excess us capital losses state operating losses state credits may utilized carryforward period carryforward periods excess capital losses expire 2007 2008 operating losses relate state losses credit carryforwards expiring various years beginning 2006 bellsouth 2005 63 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation december 31 2005 net deferred tax liabilities include deferred tax asset 360 relating compensation expense recognized sfas 123 accounting stockbased compensation full realization deferred asset requires stock options exercised price equaling sum strike price plus fair value grant date significant number options tax benefit recognized combined strike price fair value grant date excess 45 accordingly assurance stock price bellsouth rise levels sufficient realize entire tax benefit currently reflected balance sheet provisions sfas 123 prohibit us recording valuation allowance deferred tax asset related options full value deferred tax asset realized either exercise expiration options deferred tax asset reverse equity extent previously recognized excess tax benefits otherwise income tax expense december 31 2005 accumulated excess tax benefits 75 recorded equity amount accumulated excess tax benefits may increase upon adoption sfas 123 revised 2004 reconciliation federal statutory income tax rate effective tax rate attributable continuing operations follows decrease valuation allowance deferred tax assets 2005 relates primarily greater expected capital loss utilization connection gain sale investment cellcom benefit partially offset recognition deferred tax liability excess book basis tax basis cellcom note j hurricane katrina august 29 2005 hurricane katrina caused catastrophic damage areas louisiana mississippi alabama financial impacts storm company included lower revenue issued 99 proactive billing credits address service outages significant customer dislocation hardesthit areas addition increased allowance uncollectibles 36 cover estimated incremental uncollectible accounts receivable due customer displacement incurred 43 recovery costs year incurred 281 expense 211 capital associated wireline network restoration quarter ended september 30 2005 management reached conclusion extent damage company’s property plant equipment hurricanedamaged areas require recognition asset impairment accordance generally accepted accounting principles management estimated impairment based best available information utilizing damage assessments result recorded charge 166 2005 charge reduced carrying value communication group’s impaired assets primarily outside plant estimated salvage value expect portion cost associated hurricane katrina recovery effort covered insurance exact amount determined current estimate covered losses net deductible approximately 250 actual recovery vary depending outcome insurance loss adjustment effort accordingly offsetting benefit insurance recoveries recorded loss 2005 results note k workforce reduction restructuring workforce reduction charges based competitive activity telecom industry continued economic pressures realignment business productivity improvements initiated workforce reductions recorded charges related approximately 7100 employees last three years downsizings implemented voluntary nonvoluntary basis positions management nonmanagement primarily network operations volume work substantially decreased charges earnings recognized accordance provisions sfas 112 “employer’s accounting postemployment benefits” consisted primarily cash severance payroll taxes separation pay plans following table summarizes number employees affected related charges year restructuring liability december 31 2005 aggregate liability related charges described excluding postretirement pension impacts 100 64 bellsouth 2005 adjustments employee separations accrual due estimated demographics different actual demographics employees separated company deductions accrual exit costs consist primarily changes prior estimates note l employee benefit plans december 31 2005 pensions postretirement benefit plans covered following active retired employees pension plans substantially employees covered noncontributory defined benefit pension plans benefit obligation projected benefit obligation represents actuarial present value date benefits attributed pension benefit formula employee service rendered date maintain trust fund pension benefits compliance erisa regulations currently pension benefits fully funded pension plan covering management employees cash balance plan provides pension benefits determined combination compensationbased service additional credits individual accountbased interest credits written plan require additional interest credits additional credits discretionary based past practices benefit obligation determined assuming annual additional interest credits 1 percent nonmanagement employees pension benefits earned prior 1999 based specified benefit amounts years service 1998 benefits earned 1999 subsequent years calculated cash balance plan based initial cash balance amount negotiated pension band increases interest credits due past practice nonmanagement pension obligation includes expectation future pension band increases postretirement benefits provide certain medical dental life insurance benefits substantially retired employees various plans accrue actuarially determined postretirement benefit costs active employees earn benefits management employees hired january 1 2001 provided access medical benefits retirement required pay 100 percent cost december 31 2005 approximately 4400 active management employees access benefits maintain voluntary employee beneficiary association veba trusts partially fund postretirement benefits however erisa regulations requiring postretirement benefit plans funded annually postretirement benefit plans benefit obligation accumulated postretirement benefit obligation represents actuarial present value date future benefits attributed terms postretirement benefit plan employee service rendered date management health care plan provides annual dollar value limits companyfunded portion retiree medical costs also referred caps eligible employees retired december 31 1991 historically made discretionary increases caps portion medical cost increases requiring company absorb portion increasing costs previously accounted substantive plan determining benefit obligation thus increasing expected future liability effective january 1 2006 current cap frozen requiring management retirees absorb future medical inflation change resulted reduction obligation 380 recognized income remaining years future service full eligibility active plan participants approximately 9 years nonmanagement labor contract cwa contains caps companyfunded portion retiree medical costs current labor agreement cwa reached 2004 included increase amount caps concurrent agreement determined increase caps combined bellsouth’s history increasing caps prior agreements created substantive plan accordingly changed calculation obligation assume company increase caps future periods thus absorbing future increases cost due medical inflation change resulted bellsouth 2005 65 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation increase obligation approximately 35 billion 2004 recognized income remaining years future service full eligibility active plan participants approximately 14 years medicare prescription drug improvement modernization act 2003 december 2003 medicare prescription drug act signed law act allows companies provide certain prescription drug benefits retirees receive federal subsidy beginning 2006 accordance final fasb guidance accounted government subsidy provided medicare act actuarial gain determining post retirement benefit obligations based preliminary guidance previously calculated benefit subsidy using actuarial equivalence tests individual benefit plans separately january 21 2005 centers medicare medicaid services released final federal regulations regarding calculation actuarial equivalence eligibility subsidy result final regulations calculated actuarial equivalence based weighted average benefits premiums medicare eligible participants whole rather calculating equivalence separately group retirees basis plans projected satisfy actuarial equivalence participants future years present value subsidy 14 billion december 31 2005 assumptions approach used discount rate selected annually measure present value benefit obligations determining selection discount rate estimated timing amounts expected future benefit payments applied yield curve developed reflect yields available highquality bonds yield curve based externally published index specifically designed meet criteria gaap discount rates selected december 31 2005 525 pension 550 benefits reflect results yield curve analysis unchanged december 31 2004 assumption regarding expected return plan assets reflects asset allocations investment strategy views investment managers well historical experience use assumed return 85 pension trusts represent nearly 80 invested assets actual asset returns trusts approximately 15 2004 11 2005 december 2005 5year average return pension assets 63 10year average return 95 average return since inception 109 health care cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends due differing demographics developed separate inflation rates pre postage 65 retirees well medical claims prescription drugs health care cost trend rates assumed decline 75 150 basis points per year reach ultimate rate 5 2011 average health care cost trend rates latest five year period line initial year trend rate assumptions recent trend rates decline anticipated changes trend assumptions made 2005 valuation assumed health care cost trend rates significant effect amounts reported health care plan onepercentage point change assumed health care cost trend rates would following effects december 31 2005 significant assumptions include inflation salary growth retirement rates mortality rates inflation assumption based evaluation external market indicators salary growth assumptions reflect longterm actual experience nearterm outlook assumed inflation compensation increases latest five year period line assumptions retirement mortality rates based actual plan experience 66 bellsouth 2005 measurement results following tables summarize benefit obligations changes plan assets funded status well assumptions years ended december 31 company uses december 31 measurement date plans unrecognized prior service cost relates primarily removal substantive plan pension cost living adjustments changes substantive commitments associated caps medical plans discussed unrecognized gains losses primarily generated changes discount rates previous years asset return differences preceding five years changes medical trend rates contrast projected benefit obligation accumulated benefit obligation represents actuarial present value benefits based employee service compensation certain date include assumption future compensation levels accumulated benefit obligation qualified defined benefit pension plans 11486 11717 december 31 2004 2005 respectively bellsouth 2005 67 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation benefits funded status includes plan positive funded status 461 546 december 31 2004 2005 respectively remaining plans unfunded status comprised following table summarizes benefit costs years ended december 31 benefit costs included operating expenses cost sales selling general administrative expenses accompanying consolidated statements income approximately 10 percent costs capitalized property plant equipment labor related network construction plan assets bellsouth’s weightedaverage target allocations actual asset allocations asset category bellsouth established maintains separate investment policies assets held employee benefit trust investment strategies longterm nature designed meet following objectives • ensure funds available pay benefits become due • maximize trusts total return subject prudent risk taking • preserve andor improve funded status trusts time investment policies strategies periodically reviewed ensure objectives trusts met considering changes benefit plan design market conditions material items derivatives permitted investment portfolio gain investment exposure substitute physical securities manage risk derivatives permitted speculative leverage purposes trust investments bellsouth securities immaterial cash flows contributions due funded status pension plans expect make contributions plans 2006 consistent prior years expect contribute cash 68 bellsouth 2005 veba trusts fund benefit payments contributions 2006 estimated range 350 400 estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid next ten years based current business conditions expect necessary cash flows fund obligations cash balance pension plan july 2003 federal district court illinois ruled benefit formula used international business machines corporation’s ibm cash balance pension plan violated age discrimination provisions adea ibm decision conflicts decisions least three district courts including november 2005 decision federal district court pennsylvania congress presently considering legislation would clarify legal status cash balance plans age discrimination rules time unclear effect decisions possible congressional action may taxqualified cash balance pension plans financial condition supplemental executive retirement plan pension amounts reported include supplemental executive retirement plan serp unfunded nonqualified pension plan unfunded assets provide benefits grantor trust net periodic benefit cost associated plan 53 2003 53 2004 61 2005 additional information plan accumulated benefit obligation excess plan assets projected benefit payments plan 66 51 86 2006 2007 2008 respectively defined contribution plans maintain several contributory savings plans cover substantially employees bellsouth retirement savings plan bellsouth savings security plan collectively savings plans taxqualified defined contribution plans assets plans held two trusts turn part bellsouth master savings trust match portion employees’ eligible contributions savings plans rates determined annually board directors following summary compensation expense associated company matching obligations year ended december 31 note financial instruments recorded amounts cash equivalents temporary cash investments bank loans commercial paper approximate fair value due shortterm nature instruments fair value estimates longterm debt interest rate swaps based quotes dealers since judgment required develop estimates estimated amounts presented herein may indicative amounts could realize current market exchange bellsouth 2005 69 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation following summary financial instruments comparing fair values recorded amounts december 31 1 amounts include accrued interest accrued interest classified current liability balance sheet derivative financial instruments time party interest rate swap agreements normal course business purposes trading financial instruments used mitigate interest rate risks although extent expose us market risks credit risks control credit risks associated instruments evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement exposure limited current value time currency rate interest rate differential full notional contract amount believe contracts agreements executed creditworthy financial institutions consider risk nonperformance remote interest rate swaps enter interest rate swap agreements exchange fixed variable rate interest payment obligations without exchange underlying principal amounts party various interest rate swaps qualify hedge accounting believe 100 effective following table summarizes weighted average rates notional amounts agreements change fair market value derivatives designated hedging exposure variable cash flows forecasted transaction recognized component comprehensive income net tax impacts change fair market value derivatives designated hedging exposure changes fair value recognized asset liability recognized earnings period change due effectiveness fair value hedges resulted impact net income cash flow swap matured 2005 fair value swaps mature 20082010 concentrations credit risk financial instruments potentially subject us credit risk consist principally trade accounts receivable concentrations credit risk respect receivables long distance carriers limited due composition customer base includes large number individuals businesses accounts receivable long distance carriers totaled 315 december 31 2004 295 december 31 2005 note n shareholders’ equity common stock authorized articles incorporation authorize issuance 8650000000 shares common stock par value 1 per share board directors authorized create unissued common stock one series prior issuance shares particular series fix voting powers preferences designations rights qualifi 70 bellsouth 2005 cations limitations restrictions series board created series common stock preferred stock authorized articles incorporation authorize 100 million shares cumulative first preferred stock par value 1 per share 30 million shares reserved designated series b possible issuance shareholder rights plan december 31 2005 preferred shares issued series first preferred stock created previous shareholder rights plan expired shareholder rights plan 1999 adopted shareholder rights plan declaring dividend one right share common stock outstanding issued thereafter plan amended 2005 right entitles shareholders buy one onethousandth share series b first preferred stock 20000 per share rights may exercised person group acquires 15 common stock bellsouth without prior approval board directors announces tender exchange offer would result ownership 15 common stock person group acquires 15 bellsouth’s stock without prior board approval shareholders allowed purchase bellsouth common stock units preferred stock voting economic characteristics half price rights currently trade bellsouth common stock may redeemed board directors one cent per right become exercisable thereafter certain circumstances rights expire december 2009 shares held trust treasury shares held trust treasury cost december 31 comprised following treasury shares held trust treasury include treasury share purchases made company primarily open market transactions repurchase plans satisfy shares issued connection employee share plans following table summarizes activity respect share repurchases periods presented reissued 45 million shares 2003 70 million shares 2004 79 million shares 2005 connection various employee benefit plans grantor trusts accordance emerging issues task force issue “eitf” 9714 accounting deferred compensation arrangements amounts held rabbi trust invested assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified shareholders’ equity generally accounted manner similar treasury stock therefore bellsouth shares held grantor trusts presented reduction shareholders’ equity considered computation shares outstanding financial reporting purposes comprehensive income accumulated comprehensive income loss comprised following components december 31 accumulated comprehensive income loss discontinued operations included amounts 77 december 31 2004 total comprehensive income details presented table bellsouth 2005 71 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation 1 foreign currency translation amounts tax impacts 2003 2004 adjustments net tax 42 tax impacts 2004 sale foreign entities 2005 sale foreign entities net tax 42 tax adjustments note stock compensation plans granted stockbased compensation awards key employees several plans april 2004 bellsouth shareholders approved adoption bellsouth corporation stock incentive compensation plan stock plan provides various types grants including stock options restricted stock performancebased awards one share bellsouth common stock underlying security award maximum number shares available future grants stock plan limited 80 million reduced awards granted increased shares tendered option exercises prior adoption stock plan stock options stockbased awards granted bellsouth corporation stock plan bellsouth corporation stock option plan account stockbased compensation fair value recognition provisions sfas 123 given trends longterm compensation awards market conditions last years moved toward granting mix restricted stock performance share units lieu stock options table summarizes total compensation cost type award included results operations december 31 2005 148 total unrecognized compensation cost related nonvested awards amortized remaining applicable vesting period award stock option awards stock options granted plans entitle recipients purchase shares bellsouth common stock within prescribed periods price either equal excess fair market value date grant options generally become exercisable end three five years term ten years provide accelerated vesting change control defined plans summary option activity plans presented value received employees options exercised years ended december 31 2003 2004 2005 40 million 48 million 41 million respectively 72 bellsouth 2005 fair value option grant estimated grant date using blackscholes optionpricing model following weightedaverage assumptions following table summarizes information stock options outstanding december 31 2005 weightedaverage remaining contractual life years restricted stock awards restricted stock awards granted key employees plans settled issuing shares common stock vesting date generally restrictions lapse full third anniversary grant date pro rata basis first three anniversaries grant date case retirement eligible employees vesting restricted stock accelerates following involuntary separation employment defined plans occurring within two years change control defined plans grant date fair value restricted stock expensed period restrictions lapse shares represented restricted stock awards considered outstanding grant date recipients entitled dividends voting rights total fair value restricted stock vested years ended december 31 2003 2004 2005 13 11 49 respectively summary restricted stock activity plans presented performance share unit awards performance share units granted key employees settled cash based average stock price end threeyear performance period multiplied number units earned number performance share units actually earned recipients based achievement certain performance goals defined terms awards range 0 150 number units granted end performance period recipients also receive cash payment equal dividends paid share bellsouth stock performance period performance share unit earned event change control defined plans performance period modified participants receive prorated payments based modified performance period performance share unit expense recognized performance period based stock price reporting date expected outcome performance condition expense also recognized dividends accrued performance period total cash payment performance share liabilities paid employees 2005 13 related performance period ended december 31 2004 payments made shares vested earlier performance periods summary performance share unit activity plans presented bellsouth 2005 73 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation note p segment information three reportable operating segments 1 communications group 2 wireless 3 advertising publishing group 40 percent economic interest cingular wireless share joint control venture att account investment equity method management purposes evaluate wireless segment based proportionate share cingular wireless’ results accordingly results wireless segment reflect proportional consolidation 40 percent cingular wireless’ results following table provides information operating segment year ended december 31 reconciliation consolidated financial information 74 bellsouth 2005 cingular wireless proportional consolidation shown represents amount necessary reconcile proportional results cingular wireless gaap results reconciling items transactions events included reported consolidated results excluded segment results due nonrecurring nonoperational nature net gain ownership transactions include 2004 gain sale operations denmark 2005 gain sale operations israel net revenues external customers based location customer customers reportable operating segments principally united states note q commitments contingencies leases entered operating leases facilities equipment used operations rental expense operating leases 288 2003 286 2004 285 2005 capital leases currently effect significant following table summarizes approximate future minimum rentals noncancelable operating leases effect december 31 2005 outside plant currently selfinsure outside plant casualty losses outside plant located nine southeastern states served bst susceptible damage severe weather conditions perils net book value outside plant 8530 december 31 2004 8549 december 31 2005 guarantees sale divestiture transactions indemnify purchaser various items including labor general litigation well certain tax matters generally terms last one five years general specific indemnities statutory review periods tax matters events circumstances would require us perform indemnity transaction circumstance specific regularly evaluate probability incur costs associated indemnifications accrued expected losses probable addition normal course business indemnify counterparties certain agreements nature terms indemnities vary transaction historically incurred significant costs related performance types indemnities purchase obligations december 31 2005 contracts place outsource certain services principally information technology substantially two vendors also various commitments vendors purchase telecommunications equipment software services following table discloses aggregate information purchase obligations periods payments due 1 unconditional purchase obligations include annual estimated expenditures based anticipated volumes regulatory matters may 2005 sued att us district court northern district georgia unpaid access charges associated att’s prepaid calling cards “ip middle” services use internet protocol technology internal call processing use public switched network originate terminate calls lawsuit follows two separate rulings fcc one april 2004 concerning “ip middle” services one february 2005 concerning prepaid card services service telecommunications service subject access charges att estimated securities filings “saved” 340 access charges prepaid card services 250 access charges “ip middle” services believe improperly avoided access charges paid us use network lawsuit progresses expect obtain information att sources determine amount bellsouth access charges att avoided att appealed fcc’s decision related prepaid card services court deciding appeal held hearing first quarter 2006 addition att asserted certain defenses bellsouth asserted claim described effort reduce amount may owe bellsouth 2005 75 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation time likely outcome case cannot predicted reasonable estimate gain made accordingly revenue recognized respect matter consolidated financial statements november 4 2005 att sued bellsouth long distance inc bsld qwest communications corporation qwest us district court southern district new york att asserted claims breach contract fraudulent misrepresentation unjust enrichment bsld related claims qwest att’s claims arise contract bsld pursuant bsld purchased wholesale long distance minutes resold qwest complaint specify amount damages sought att time likely outcome case cannot predicted reasonable estimate amount loss made legal proceedings employment claim april 29 2002 five africanamerican employees filed putative class action lawsuit captioned gladys jenkins et al v bellsouth corporation company us district court northern district alabama complaint alleges bellsouth discriminated current former africanamerican employees respect compensation promotions violation title vii civil rights act 1964 42 usc section 1981 plaintiffs purport bring claims behalf two classes class africanamerican hourly workers employed bellsouth telecommunications time since april 29 1998 class africanamerican salaried workers employed bellsouth telecommunications time since april 29 1998 management positions job grade 59level c plaintiffs seeking unspecified amounts back pay benefits punitive damages attorneys’ fees costs well injunctive relief time likely outcome case cannot predicted reasonable estimate amount loss made securities erisa claims august october 2002 several individual shareholders filed substantially identical class action lawsuits bellsouth three senior officers alleging violations federal securities laws cases consolidated us district court northern district georgia captioned bellsouth securities litigation pursuant provisions private securities litigation reform act 1995 court appointed lead plaintiff lead plaintiff filed consolidated amended class action complaint july 2003 behalf two putative classes 1 purchasers bellsouth stock period november 7 2000 february 19 2003 class period alleged violations sections 10b 20 securities exchange act 1934 2 participants bellsouth’s direct investment plan class period alleged violations sections 11 12 15 securities act 1933 four outside directors named additional defendants consolidated amended class action complaint alleged class period company 1 overstated unbilled receivables balance advertising publishing subsidiary 2 failed properly implement sab 101 regard recognition advertising publishing revenues 3 improperly billed competitive local exchange carriers clec inflate revenues 4 failed take reserve refunds ultimately came due following litigation late payment charges 5 failed properly write goodwill latin american operations february 8 2005 district court dismissed exchange act claims except relating writedown latin american goodwill date district court also dismissed securities act claims except relating writedown latin american goodwill allegations relating unbilled receivables company’s advertising publishing subsidiary implementation sab 101 regarding recognition advertising publishing revenues alleged improper billing clecs plaintiffs seeking unspecified amount damages well attorneys’ fees costs time likely outcome case cannot predicted reasonable estimate loss made february 2003 similar complaint filed superior court fulton county georgia behalf participants bellsouth’s direct investment plan alleging violations section 11 securities act defendants removed action federal court pursuant provisions securities litigation uniform standards act 1998 july 2003 federal court issued ruling case remanded fulton county superior court fulton county superior court stayed case pending resolution federal case plaintiffs seeking unspecified amount damages well attorneys’ fees costs time likely outcome case cannot predicted reasonable estimate loss made september october 2002 three substantially identical class action lawsuits filed us district court northern district georgia bellsouth directors three senior officers individuals alleging violations employee retirement income security act erisa cases consolidated april 21 2003 consolidated complaint filed plaintiffs seek represent putative class participants beneficiaries bellsouth’s 401k plans plan allege consolidated complaint company individual defendants breached fiduciary duties violation erisa among things 1 failing provide accurate information plans’ participants beneficiaries 2 failing ensure plans’ assets invested properly 3 failing monitor plans’ fiduciaries 4 failing disregard plan 76 bellsouth 2005 directives defendants knew known imprudent 5 failing avoid conflicts interest hiring independent fiduciaries make investment decisions plaintiffs seeking unspecified amount damages injunctive relief attorneys’ fees costs certain underlying factual allegations regarding bellsouth’s advertising publishing subsidiary former latin american operation substantially similar allegations putative securities class action captioned bellsouth securities litigation described time likely outcome cases cannot predicted reasonable estimate loss made antitrust claims december 2002 consumer class action alleging antitrust violations section 1 sherman antitrust act filed bellsouth verizon sbc qwest captioned william twombly et al v bell atlantic corp et al us district court southern district new york complaint alleged defendants conspired restrain competition agreeing compete one another impede competition others plaintiffs seeking unspecified amount treble damages injunctive relief well attorneys’ fees expenses october 2003 district court dismissed complaint failure state claim october 2005 second circuit court appeals reversed district court’s decision remanded case district court proceedings time likely outcome case cannot predicted reasonable estimate loss made june 2004 us court appeals 11th circuit affirmed district court’s dismissal antitrust state law claims brought plaintiff clec case captioned covad communications company et al v bellsouth corporation et al appellate court however permitted price squeeze claim certain state tort claims proceed november 2005 covad dismissed prejudice civil action contemporaneously filed complaints public service commissions florida georgia filed informal complaint federal communications commission complaints allege breaches interconnection contracts approved state commissions including failure provide collocation mishandling orders ineffective support systems failure provide unbundled loops complaints also allege improper solicitation covad customers claims similar claims raised civil action dismissed covad complaints seek credits equitable relief covad asked state commissions stay proceedings complaints pending resolutions fcc complaint time likely outcome case cannot predicted reasonable estimate loss made claims subject claims arising ordinary course business involving allegations personal injury breach contract anticompetitive conduct employment law issues regulatory matters actions bst also subject claims attributable predivestiture events including environmental liabilities rates contracts certain contingent liabilities predivestiture events shared att inc complete assurance cannot given outcome claims believe financial impact would material results operations financial position cash flows note r subsidiary financial information fully unconditionally guaranteed outstanding debt securities bellsouth telecommunications inc bst 100 owned subsidiary bellsouth accordance sec rules providing following condensed consolidating financial information bst listed separately debt securities registered sec guaranteed column represents wholly owned subsidiaries excluding bst subsidiaries adjustments column includes necessary amounts eliminate intercompany balances transactions bst parent consolidate wholly owned subsidiaries reconcile consolidated financial information bellsouth 2005 77 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation condensed consolidating statements income 78 bellsouth 2005 condensed consolidating balance sheets bellsouth 2005 79 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation condensed consolidating cash flow statements supplemental data 80 bellsouth 2005 note quarterly financial information unaudited following summary quarterly financial information adjustments necessary fair presentation period included due rounding sum quarterly earnings per share amounts may agree yeartodate earnings per share amounts quarters shown affected items listed items specific net income • first quarter included gain related sale operations denmark increased net income 295 016 per share • first quarter also included charge settlement south carolina consumer advocate decreased net income 33 002 per share • recorded losses related service repairs wireline business due hurricanes charley frances ivan jeanne reduced net income 23 001 per share third quarter 77 004 per share fourth quarter • equity earnings cingular wireless included losses related wireless merger integration costs cingular wirelessatt wireless merger fair value adjustment sale cingular wireless interactive lease accounting adjustments reduced net income 17 001 per share third quarter 92 005 per share fourth quarter addition equity earnings cingular wireless included amortization intangibles primarily customer lists acquired part cingular’s merger att wireless charges reduced net income 80 004 per share fourth quarter • fourth quarter also included charges related severance lease termination payments reduced net income 18 001 per share • recorded income losses related discontinued operations impacted net income 449 024 per share first quarter 57 003 per share second quarter 53 003 per share third quarter 911 050 per share fourth quarter • first quarter included income 381 021 per share related discontinued operations • recorded charges related early extinguishment debt reduced net income 14 001 per share first quarter 12 001 per share second quarter bellsouth 2005 81 notes consolidated financial statements continued dollars millions except per share amounts otherwise indicated bellsouth corporation • third quarter included gain related sale operations israel increased net income 228 012 per share • recorded losses related asset impairments service repairs wireline business due hurricane katrina reduced net income 177 010 per share third quarter 145 008 per share fourth quarter • equity earnings cingular wireless included losses related wireless merger integration costs cingular wireless att wireless merger hurricane costs reduced net income 21 001 per share first quarter 42 002 per share second quarter 79 004 per share third quarter 82 005 per share fourth quarter addition equity earnings cingular wireless included amortization intangibles primarily customer lists acquired part cingular’s merger att wireless charges reduced net income 100 005 per share first quarter 91 005 per share second quarter 94 005 per share third quarter 90 005 per share fourth quarter • fourth quarter included deferred revenue adjustment corrected system coding error resulting underreporting revenues prior periods adjustment increased net income 29 002 per share • fourth quarter also included charges related severance reduced net income 59 003 per share 82 bellsouth 2005 report independent registered public accounting firm bellsouth corporation shareholders bellsouth corporation completed integrated audits bellsouth corporation’s 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion based audits report auditors accompanying consolidated balance sheets related consolidated statements income cash flows shareholders’ equity comprehensive income present fairly material respects financial position bellsouth corporation subsidiaries “bellsouth” december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits audit financial statements cingular wireless llc “cingular” equity method investee bellsouth’s consolidated financial statements include investment 18447 million 18311 million december 31 2005 2004 respectively equity method income 135 million 24 million 408 million respectively three years period ended december 31 2005 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included cingular based solely report auditors conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note c consolidated financial statements 2003 bellsouth adopted financial accounting standards board statement 143 “accounting asset retirement obligations” changing method accounting asset retirement costs bellsouth also changed accounting publication revenues publication delivery method deferral method january 1 2003 internal control financial reporting also opinion management’s assessment included accompanying report management internal control financial reporting company maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate atlanta georgia february 27 2006 bellsouth 2005 83 report independent registered public accounting firm bellsouth corporation board directors shareowners cingular wireless corporation manager cingular wireless llc audited consolidated balance sheets cingular wireless llc december 31 2004 2005 related consolidated statements income changes members’ capital comprehensive income cash flows three years period ended december 31 2005 presented separately herein financial statements responsibility company’s management responsibility express opinion financial statements based audits financial statements omnipoint facilities network ii llc omnipoint wholly owned subsidiary gsm facilities llc equity investee company approximate 60 interest december 31 2004 audited auditors whose report furnished us insofar opinion consolidated financial statements relates 2003 2004 amounts included omnipoint based solely report consolidated financial statements company’s indirect investment omnipoint stated 880 million december 31 2004 company’s equity net losses omnipoint stated 100 million year ended december 31 2003 135 million year ended december 31 2004 conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors 2003 2004 provide reasonable basis opinion based audits report auditors 2003 2004 consolidated financial statements referred present fairly material respects consolidated financial position cingular wireless llc december 31 2004 2005 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles atlanta georgia february 24 2006 report management internal control financial reporting bellsouth corporation management bellsouth corporation responsible establishing maintaining adequate internal control financial reporting assessment effectiveness internal control financial reporting internal control financial reporting defined rules 13a15f 15d15f adopted securities exchange act 1934 bellsouth’s management assessed effectiveness company’s internal control financial reporting december 31 2005 making assessment bellsouth’s management used criteria set forth internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management concluded bellsouth maintained effective internal control financial reporting december 31 2005 pricewaterhousecoopers llp bellsouth’s independent registered public accounting firm audited management’s assessment effectiveness company’s internal control financial reporting december 31 2005 stated report appears page 83 february 27 2006 84 bellsouth 2005 item 9nan item 8 consolidated financial statements supplementary data report management shareholders bellsouth corporation financial statements prepared conformity generally accepted accounting principles audited coopers lybrand independent accountants whose report contained herein integrity objectivity data financial statements including estimates judgments relating matters concluded end year responsibility management bellsouth management also prepared information included therein unless indicated otherwise management maintains system internal accounting controls continuously reviewed evaluated however inherent limitations recognized considering assurances provided system internal accounting controls concept reasonable assurance recognizes cost system internal accounting controls exceed managements judgment benefits derived management believes bellsouths system provide reasonable assurance transactions executed accordance managements general specific authorizations recorded properly maintain accountability assets permit preparation financial statements conformity generally accepted accounting principles management also believes system provides reasonable assurance access assets permitted accordance managements authorizations recorded accountability assets compared existing assets reasonable intervals appropriate action taken respect differences management also seeks assure objectivity integrity financial data careful selection managers organizational arrangements provide appropriate division responsibility communications programs aimed assuring policies standards managerial authorities understood throughout organization management also aware changes operating strategy organizational structure give rise disruptions internal controls special attention given controls changes implemented management maintains strong internal auditing program independently assesses effectiveness internal controls recommends possible improvements thereto addition part audit financial statements coopers lybrand completed review accounting controls establish basis reliance thereon determining nature timing extent audit tests applied management considered internal auditors coopers lybrands recommendations concerning system internal controls taken actions believes costeffective circumstances respond appropriately recommendations management believes december 31 1993 system internal controls adequate accomplish objectives discussed herein management also recognizes responsibility fostering strong ethical climate bellsouths affairs conducted according highest standards personal corporate conduct responsibility communicated employees policies guidelines addressing issues conflict interest safeguarding bellsouths real intellectual properties providing equal employment opportunities ethical relations customers suppliers governmental representatives bellsouth maintains program assess compliance policies designated officer vice presidentcorporate responsibility compliance reporting directly chairman board john l clendenin ronald dykes chairman board vice president comptroller chief executive officer february 3 1994 audit committee chairmans letter january 31 1994 audit committee board directors consisted four directors neither officers employees bellsouth corporation discussion reorganization committees board effective february 1 1994 including audit committee see bellsouths 1994 proxy statement information persons well scope duties audit committee provided proxy statement audit committee met five times 1993 reviewed chief corporate auditor coopers lybrand management various audit activities plans together results selected internal audits audit committee also reviewed financial reporting process adequacy internal controls audit committee recommends subject shareholder ratification appointment independent public accountants considers factors relating independence chief corporate auditor coopers lybrand met privately audit committee occasion encourage confidential discussions auditing matters thomas r williams chairman audit committee january 31 1994 report independent accountants shareholders bellsouth corporation atlanta georgia audited accompanying consolidated balance sheets bellsouth corporation december 31 1993 1992 related consolidated statements income shareholders equity cash flows three years period ended december 31 1993 financial statements responsibility bellsouths management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position bellsouth corporation december 31 1993 1992 consolidated results operations cash flows three years period ended december 31 1993 conformity generally accepted accounting principles discussed notes h consolidated financial statements bellsouth changed method accounting postretirement benefits pensions postemployment benefits income taxes 1993 coopers lybrand atlanta georgia february 3 1994 bellsouth corporation consolidated statements income millions except per share amounts accompanying notes integral part financial statements bellsouth corporation consolidated balance sheets millions accompanying notes integral part financial statements bellsouth corporation consolidated statements shareholders equity millions accompanying notes integral part financial statements bellsouth corporation consolidated statements cash flows millions accompanying notes integral part financial statements bellsouth corporation notes consolidated financial statements dollars millions except per share amounts note accounting policies basis presentation consolidated financial statements include accounts bellsouth corporation bellsouth subsidiaries controlling financial interest bellsouth operates predominantly telecommunications service industry bellsouth telecommunications inc bellsouth telecommunications bellsouths largest subsidiary provides primarily regulated telephone services investments certain partnerships joint ventures subsidiaries accounted using equity method significant intercompany transactions accounts eliminated except otherwise required generally accepted accounting principles applicable regulated entities certain amounts prior period consolidated financial statements reclassified conform current years presentation basis accounting bellsouths consolidated financial statements prepared accordance generally accepted accounting principles including provisions statement financial accounting standards sfas 71 accounting effects certain types regulation appropriate sfas 71 gives accounting recognition actions regulators actions provide reasonable assurance existence asset reduce eliminate value asset impose eliminate liability regulated entity cash equivalents bellsouth considers highly liquid investments original maturity three months less cash equivalents investments original maturity three months one year considered cash equivalents included temporary cash investments consolidated balance sheets property plant equipment investment property plant equipment stated original cost depreciation based remaining life method depreciation straightline composite rates determined basis equal life groups certain categories telephone plant acquired given year depreciation expense also includes amortization certain classes telephone plant identified depreciation reserve deficiencies periods allowed regulatory authorities depreciable plant disposed original cost less net salvage value charged accumulated depreciation cost property plant equipment bellsouth telecommunications depreciated using either straightline accelerated methods estimated useful lives assets gains losses disposal depreciable property plant equipment recognized year disposition element nonoperating income material supplies new reusable material carried inventory principally average original cost except specific costs used case large individual items nonreusable material carried estimated salvage value investments advances investments advances substantially consist investments advances affiliated companies also included caption longterm investments intangible assets intangible assets substantially consist excess consideration paid net assets acquired business combinations also included caption acquired licenses customer lists intangible assets amortized using straightline sumoftheyears digits methods periods benefit periods exceed 40 years amortization intangibles 584 678 509 years ended december 31 1993 1992 1991 respectively december 31 1993 1992 accumulated amortization intangibles 1692 1979 respectively see note b maintenance repairs cost maintenance repairs plant including cost replacing minor items effecting substantial betterments charged operating expenses bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued revenue recognition revenues recognized earned certain revenues derived local telephone wireless access services billed monthly advance recognized following month services provided directory advertising publishing revenues related directory costs recognized upon publication directories except regulatory authorities recognize different treatment revenues derived telecommunications services principally network access toll cellular airtime usage recognized monthly services provided allowance funds used construction regulatory authorities allow bellsouth telecommunications accrue interest cost constructing certain plant item income interest charged construction income realized cash currently realized service life related plant resulting higher depreciation expense plant investment recovered form increased revenues income taxes effective january 1 1993 bellsouth adopted sfas 109 accounting income taxes accordance standard balance sheet reflects deferred tax balances associated anticipated tax impact future income deductions implicit balance sheet form temporary differences temporary differences primarily result use accelerated methods shorter lives computing depreciation tax purposes prior 1993 bellsouth accounted income taxes provisions accounting principles board opinion 11 financial reporting purposes bellsouth telecommunications amortizing deferred investment tax credits earned prior 1986 repeal investment tax credit also transitional credits earned repeal credits amortized reduction provision income taxes estimated useful lives assets credits relate earnings per share earnings per common share computed basis weighted average number shares common stock common stock equivalents outstanding year note b investments advances investments advances consist primarily bellsouths investment unconsolidated affiliates accounted equity method total investments 18067 7401 december 31 1993 1992 respectively investments advances increased approximately 1000 december 31 1992 result reclassification amounts previously reported intangible assets adoption sfas 109 earnings related investments accounted equity method totaled 110 767 1323 three years ended december 31 1993 1992 1991 respectively reported component income significant equity method investments bellsouths various domestic cellular properties business venture ram broadcasting corporation rbc optus communications pty ltd optus certain investments international cellular properties domestic cellular bellsouths domestic cellular investments consist primarily 60 noncontrolling financial interest los angeles cellular telephone company 4375 interest houston cellular telephone company december 31 1993 bellsouths investment mentioned entities exceeded underlying book value investees net assets 9650 excess consideration paid net assets acquired along intangible assets amortized using either straight line accelerated methods periods benefit exceed 40 years rbc january 1992 bellsouth rbc formed business venture operate certain mobile data communications networks worldwide well certain cellular paging operations united states mobile data portion venture gives bellsouth 49 interest united states bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances continued mobile data operations operated rbc following interests foreign mobile data operations venture australia 90 netherlands 72 belgium 72 united kingdom 375 france 1125 addition bellsouth 50 interest domestic paging segment venture optus bellsouth 245 participant optus international consortium provides full spectrum telecommunications services australia including switched network enhanced services wireless satellite based services international cellular december 1993 bellsouth increased ownership interest telcel cellular ca telcel cellular telephone company providing service major cities venezuela 44 5326 bellsouth accounts investment telcel using equity method company control requisite voting percentage required control board decisions outcome ordinary matters requiring shareholder approval bellsouth approximately 21 participant eplus mobilfunk consortium 1993 became successful bidder second private german gsm pcn license investment activity 1993 1992 bellsouth made several small acquisitions principally related cellular telephone business results operations included consolidated financial statements respective dates acquisition effect acquisitions bellsouths consolidated results operations significant acquisitions recorded using purchase method accounting purchase price excess underlying fair value identifiable net assets acquired amortized period exceed 40 years addition 1993 bellsouth disposed minor investments various portions business effect dispositions bellsouths consolidated results operations significant bellsouth investments accounted using cost method addition various advances affiliated companies december 1993 bellsouth entered credit agreement prime south diversified inc prime south diversified indirectly wholly owns community cable tv las vegas cable operation managed prime cable provide 250 financing loan transaction closed january 1994 funding initial advance 135 loan collateralized stock prime south diversified whollyowned subsidiary prime south holdings inc prime south holdings loan bears variable rate 10 11 matures 2001 connection credit agreement bellsouth entered option agreements shareholders prime south diversified acquire stock prime south diversified prime south holdings various dates term loan concurrent credit agreement bellsouth enterprises entered agreement acquire 225 interest prime cables management company provides management services five affiliated cable systems nationwide closing transaction expected late 1994 subject regulatory approval agreement also grants bellsouth option acquire remaining interest management company loan period subsequent event first quarter 1994 bellsouth disposed 36 interest cellular telephone business guadalajara mexico result gain 675 recognized bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note c property plant equipment property plant equipment summarized follows december 31 note current liabilities current liabilities summarized follows december 31 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt maturing within one year debt maturing within one year summarized follows december 31 bellsouth committed credit lines aggregating 13756 various banks borrowings committed lines totaling 484 december 31 1993 bellsouth also maintains uncommitted lines credit 6650 december 31 1993 borrowings uncommitted lines totaled 720 significant commitment fees requirements compensating balances associated lines credit bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt continued longterm debt consists primarily debentures notes issued bellsouth telecommunications interest rates maturities amounts outstanding summarized follows december 31 maturities longterm debt outstanding december 31 1993 summarized discussed note h bellsouth incorporated employee stock ownership plan esop feature certain existing savings plans 1990 esop trusts borrowed 8500 aggregate principal amount issuance amortizing notes although obligations owed trusts guaranteed bellsouth thus reflected addition longterm debt reduction shareholders equity trusts service debt contributions bellsouth dividends paid shares held trusts esop obligations repaid amount guaranteed decreases longterm debt reduced accordingly notes issued bellsouth capital funding corporation capital funding used finance businesses bellsouth enterprises unregulated subsidiaries bellsouth telecommunications bellsouth agreed ensure timely payment principal premium interest capital fundings debt securities 1993 1992 bellsouth telecommunications refinanced certain longterm debt issues favorable interest rates result early extinguishment issues charges 866 17 per share net taxes 588 407 08 per share net taxes 300 recognized extraordinary losses 1993 1992 respectively december 31 1993 shelf registration statements filed securities exchange commission bellsouth telecommunications capital funding 7250 10503 respectively additional amount debt securities could offered bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note f liabilities deferred credits liabilities deferred credits summarized follows december 31 note g shareholders equity preferred stock authorized bellsouths articles incorporation authorize 100 million shares cumulative first preferred stock par value 1 per share 30 million shares reserved designated series possible issuance bellsouths shareholder rights plan december 31 1993 preferred shares issued shareholder rights plan 1989 bellsouth adopted shareholder rights plan declaring dividend one right share common stock outstanding issued thereafter right entitles shareholders buy one onehundredth share series first preferred stock 175 per share rights may exercised person group acquires 10 common stock bellsouth without prior approval board directors announces tender exchange offer would result ownership 25 common stock person group acquires 10 bellsouths stock without prior board approval shareholders allowed purchase bellsouth common stock half price rights currently trade bellsouth common stock may redeemed board directors one cent per right become exercisable thereafter certain circumstances rights expire ten years guarantee employee stock ownership plan esop debt financial reporting practices require amount equivalent bellsouths guarantee amortizing notes issued esop trusts presented reduction shareholders equity well increase debt amount recorded decrease shareholders equity represents value unallocated bellsouth common stock purchased proceeds amortizing notes timing difference resulting shares allocated accounting method esop notes repaid amount debt guaranteed decreases shareholders equity increases accordingly see notes e h shares held trust 1993 bellsouth issued shares grantor trusts provide partial funding benefits payable certain nonqualified benefit plans trusts irrevocable assets contributed trusts used pay benefits certain exceptions december 31 1993 assets held trusts consist cash 5464920 shares bellsouth common stock total cost bellsouth shares date funding trusts included common stock paidin capital however shares held trust considered outstanding financial reporting purposes shares reflected separately shares held trust reduction shareholders equity accordingly earnings per share impact plan benefits paid trusts shareholders equity increase accordingly bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans pension plans substantially employees bellsouth covered noncontributory defined benefit pension plans plan covering nonrepresented employees prior july 1993 provided benefit based years credited service employees average compensation specified period effective july 1993 bellsouth converted plan cash balance plan pension benefit determined combination compensationbased service additional credits individual accountbased interest credits new cash balance plan subject minimum benefit determined prior plans formula employees retiring 2005 december 31 1993 projected benefit obligation assumes interest additional credits greater minimum levels specified written plan conversion nonrepresented pension plan material impact 1993 pension cost estimated impact 1994 projected pension cost reduction 65 pension benefits provided represented employees based specified benefit amounts years service consistent past practice plan includes effect future bargainedfor improvements bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay pension benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations pension plan assets consist primarily equity securities fixed income investments components net periodic pension cost summarized following table sets forth funded status plans december 31 projected benefit obligation 1993 1992 determined using discount rate 75 775 respectively years expected longterm rate return plan assets 8 longterm assumed weighted average rate compensation increase 57 economic related benefit assumptions nonrepresented represented plans changed reflect past experience managements best estimate future benefit increases aggregate assumption changes impact reducing projected 1994 pension cost 20 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued 1991 bellsouth offered early retirement option nonrepresented employees approximately 3100 employees elected retire option allowed employee accept present value pension benefit lumpsum payment receive special payment equivalent 5 base pay times full years service exceed 100 base pay retirement option accounted accordance sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits bellsouth recognized expense 686 1991 related option postretirement benefits pensions bellsouth sponsors defined benefit postretirement health life insurance plans nonrepresented represented employees effective january 1 1993 bellsouth adopted sfas 106 employers accounting postretirement benefits pensions account plans bellsouths transition benefit obligation 1486 amortized 15 years average remaining service period active plan participants accounting health care plan anticipate future adjustments costsharing arrangements provided written plan result adoption sfas 106 net income 1993 reduced approximately 23 05 per share january 1993 accumulated postretirement health benefit obligation nonrepresented retirees funded average remaining service period currently active nonrepresented employees accumulated postretirement benefit obligation prejanuary 1 1990 represented retirees funded 10year period accumulated postretirement benefit obligation represented retirees funded average remaining service period currently active represented employees postretirement benefit cost year ending december 31 1993 composed following prior 1993 bellsouth recognized cost providing postretirement benefits based funded amounts cost providing health life benefits active retired employees 5746 5506 1992 1991 respectively bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued following table sets forth plans funded status december 31 1993 accumulated postretirement benefit obligation accrued prepaid postretirement benefit costs included liabilities deferred credits deferred charges assets respectively measurement purposes 115 annual rate increase per capita cost covered health care benefits assumed 1994 rate assumed decrease gradually 5 2007 remains level health care cost trend rate assumption significantly affects amounts reported one percentagepoint increase assumed health care cost trend rates future year would increase accumulated postretirement benefit obligation 171 estimated aggregate service interest cost components 1993 postretirement benefit cost 15 purposes valuing postretirement life insurance obligation 57 rate future increase compensation december 31 1993 used discount rate used determining accumulated postretirement benefit obligation 75 30 tax reduction nonrepresented employees trust combined expected longterm rate return plan assets used 8 impact reducing discount rate 9 75 increase 1994 postretirement benefit expense approximately 30 regulatory jurisdictions accepted bellsouths sfas 106 implementation plan however one states commission requiring 20year amortization transition benefit obligation another state pending issues outcome expected material impact recovery effect restructuring pensions postretirement benefits result restructuring see note k bellsouth recognized 88 estimated net curtailment losses expected impact bellsouths pension postretirement benefit plans amount recognized 16 realized 1993 defined contribution plans bellsouth maintains several contributory savings plans cover substantially employees bellsouth management savings employee stock ownership plan bellsouth savings security plan collectively esop plans cover largest portion employees effective 1990 leveraged esop feature incorporated esop plans shares purchased trusts proceeds esop notes see note e allocated participants accounts throughout 13year debt repayment period leveraged esop program described bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued bellsouth matches participants eligible contributions respective plans based defined percentages determined annually board directors match consists bellsouth common shares purchased trusts proceeds esop notes shares released allocation loan payments made accordance esop guidelines purchased trusts open market time required bellsouth contributes amount addition esop dividends sufficient service esop loan payments purchase additional shares required meet match obligation effective incorporation esop feature plans 1990 bellsouth began recognizing expense attributable leveraged esops based cost shares allocated period plus interest incurred reduced dividends used service esop debt shares allocated method bellsouth recognized esop expense 1993 1992 1991 follows bellsouth also maintains certain defined contribution plans employees covered esop plans company contributions included amounts approximately 125 88 20 1993 1992 1991 respectively postemployment benefits effective january 1 1993 bellsouth adopted sfas 112 employers accounting postemployment benefits sfas 112 requires employers accrue cost postemployment benefits provided former inactive employees employment retirement including limited workers compensation disability continuation health care benefits previously bellsouth used cash method account costs onetime charge related adoption sfas 112 recognized change accounting principle effective january 1 1993 charge 674 14 per share net deferred tax benefit 425 effect change bellsouths 1993 operating results material future expense levels dependent upon actual claim experience expected differ materially expense recognized former accounting method note employee stock option plan bellsouth corporation stock option plan provides grant stock options related stock appreciation rights sars key employees determined board directors purchase shares bellsouth common stock within prescribed periods prices equal fair market value date grant sars entitle optionee surrender unexercised stock options cash stock equal excess fair market value surrendered shares option price shares 3654142 shares covered outstanding options plan december 31 1993 489590 accompanied sars bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note employee stock option plan continued following table summarizes activity stock options outstanding note j leases bellsouth entered operating leases facilities equipment used operations rental expenses operating leases 3003 3289 2888 1993 1992 1991 respectively capital leases currently effect significant following table summarizes approximate future minimum rentals noncancelable operating leases effect december 31 1993 note k restructuring charge results operations year ended december 31 1993 include 11364 restructuring charge reduced net income 6966 restructuring undertaken redesign streamline fundamental processes work activities bellsouth telecommunications telephone operations better respond increasingly competitive business environment restructuring expected improve overall responsiveness customer needs permit rapid introduction new products services reduce costs material components charge relate downsizing existing workforce 10200 employees 1996 components include provisions separation payments relocations remaining employees consolidation elimination certain operations facilities enabling changes information systems primarily used provide services existing customers bellsouth corporation notes consolidated financial statements continued dollars millions except per shares amounts note l additional income statement data interest dividend income 1992 includes 566 relating settlement internal revenue service summary assessment tax years 1979 1980 revenues services provided american telephone telegraph company bellsouths largest customer approximately 14 15 consolidated operating revenues 1993 1992 1991 respectively note income taxes effective january 1 1993 bellsouth adopted sfas 109 accounting income taxes applies balance sheet approach income tax accounting accordance new standard balance sheet reflects anticipated tax impact future taxable income deductions implicit balance sheet form temporary differences temporary differences reflect difference basis assets liabilities measured financial statements measured tax laws using enacted tax rates cumulative effect january 1 1993 adoption sfas 109 recorded 78 reduction income tax expense permitted new standard prior years financial statements restated accordance provisions sfas 71 accounting effects certain types regulation bellsouth regulated operations reflected balance sheet impact adoption statement specifically bellsouth telecommunications recorded net regulatory liability 5380 coincidental reduction deferred tax reserves higher historical lower current tax rates balance liability december 31 1993 included liabilities deferred credits 3789 regulatory liability adjusted related temporary differences reverse bellsouth corporation notes consolidated financial statements continued dollars millions except per shares amounts note income taxes continued provision income taxes summarized follows temporary differences carryforwards give rise deferred tax assets liabilities december 31 1993 follows valuation allowance primarily represents federal state net operating losses utilized carryforward period net deferred tax liability december 31 1993 1744 current 34653 noncurrent deferred tax expense 1992 1991 resulting timing differences recognition revenue expense items tax financial reporting purposes follows bellsouth corporation notes consolidated financial statements continued dollars millions except per shares amounts note income taxes continued reconciliation federal statutory income tax rate bellsouths effective tax rate follows note n cumulative effect accounting change sfas 112 fully discussed note h bellsouth adopted effective january 1 1993 sfas 112 employers accounting postemployment benefits onetime charge 674 14 per share net deferred tax benefit 425 related adoption statement recognized change accounting principle cellular sales commissions third quarter 1991 bellsouth mobility inc changed policy capitalizing certain thirdparty cellular service sales commissions amortizing average customer lives accordingly amounts expensed period earned agent bellsouth effected change standardize accounting treatment sales commissions throughout recently consolidated cellular operations including properties acquired 1991 effect change accounting principle bellsouths 1991 results operations material cumulative effect change 354 07 per share included 1991 net income note supplemental cash flow information following supplemental information presented accordance provisions sfas 95 statement cash flows bellsouth corporation notes consolidated financial statements continued dollars millions except per shares amounts note p financial instruments following disclosure estimated fair value financial instruments presented accordance provisions sfas 107 disclosures fair value financial instruments estimated fair value amounts determined using available market information described since judgment required develop estimates estimated amounts presented herein may indicative amounts bellsouth could realize current market exchange cash equivalentstemporary cash investments december 31 1993 1992 recorded amounts cash equivalents temporary cash investments respectively approximate fair value due shortterm nature instruments debt december 31 1993 1992 recorded amounts debt maturing within one year approximate fair value due shortterm nature liabilities estimates fair value bellsouth telecommunications debentures notes based closing market prices issue december 31 1993 1992 respectively fair value estimates guarantee esop debt bellsouth capital funding corporation notes based quotes dealers offbalancesheet financial instruments bellsouth party interest rate swap agreements currency swap agreements forward contracts derivatives normal course business financial instruments used mitigate foreign currency interest rate risks although extent expose company offbalancesheet risks credit risks credit risks associated interest rate swap agreements foreign exchange contracts controlled evaluation continual monitoring creditworthiness counterparties net fair value offbalance sheet financial instruments december 31 1993 significant bellsouth also issued letters credit financial guarantees approximate 175 december 31 1993 due number diverse nature instruments estimate fair value could practicably determined bellsouth corporation notes consolidated financial statements continued dollars millions except per shares amounts note q quarterly financial information unaudited following summary quarterly financial information adjustments necessary fair presentation period included results first quarter 1993 restated reflect onetime noncash charge retroactive adoption sfas 112 supplementary data bellsouth corporation domestic cellular paging operations proportionate operating data dollars thousands unaudited following table sets forth unaudited supplemental financial data bellsouths domestic cellular paging operations reflecting proportionate consolidation entities bellsouth interest presentation differs consolidation metholodology used prepare bellsouths principal financial statements accordance generally accepted accounting principles proportionate operating data reflect bellsouths ownership percentage entities consolidated financial reporting purposes bellsouths ownership percentage entities accounted equity method financial reporting purposes item 9item 8 consolidated financial statements supplementary data report management shareholders bellsouth corporation financial statements prepared conformity generally accepted accounting principles audited coopers lybrand llp independent accountants whose report contained herein integrity objectivity data financial statements including estimates judgments relating matters concluded end year responsibility management bellsouth management also prepared information included therein unless indicated otherwise management maintains system internal accounting controls continuously reviewed evaluated however inherent limitations recognized considering assurances provided system internal accounting controls concept reasonable assurance recognizes cost system internal accounting controls exceed managements judgment benefits derived management believes bellsouths system provide reasonable assurance transactions executed accordance managements general specific authorizations recorded properly maintain accountability assets permit preparation financial statements conformity generally accepted accounting principles management also believes system provides reasonable assurance access assets permitted accordance managements authorizations recorded accountability assets compared existing assets reasonable intervals appropriate action taken respect differences management also seeks assure objectivity integrity financial data careful selection managers organizational arrangements provide appropriate division responsibility communications programs aimed assuring policies standards managerial authorities understood throughout organization management also aware changes operating strategy organizational structure give rise disruptions internal controls special attention given controls changes implemented management maintains strong internal auditing program independently assesses effectiveness internal controls recommends possible improvements thereto addition part audit financial statements coopers lybrand llp completed review accounting controls establish basis reliance thereon determining nature timing extent audit tests applied management considered internal auditors coopers lybrand llps recommendations concerning system internal controls taken actions believes costeffective circumstances respond appropriately recommendations management believes december 31 1994 system internal controls adequate accomplish objectives discussed herein management also recognizes responsibility fostering strong ethical climate bellsouths affairs conducted according highest standards personal corporate conduct responsibility communicated employees policies guidelines addressing issues conflict interest safeguarding bellsouths real intellectual properties providing equal employment opportunities ethical relations customers suppliers governmental representatives bellsouth maintains program assess compliance policies ethical standards vice president corporate responsibility compliance designated ombudsmanethics officer reporting directly chairman board february 3 1995 audit committee chairmans letter audit committee board directors consists four members neither officers employees bellsouth corporation information persons well duties provided proxy statement audit committee met six times 1994 reviewed chief corporate auditor coopers lybrand llp management current audit activities plans results selected internal audits audit committee also reviewed objectivity financial reporting process adequacy internal controls audit committee recommended subject shareholder ratification appointment independent accountants considered factors relating independence addition audit committee provided guidance matters regarding ethical considerations business conduct reviewed operations political action committees monitored compliance laws affecting external involvement chief corporate auditor coopers lybrand llp met privately audit committee occasion encourage confidential discussions auditing matters marshall criser chairman audit committee february 3 1995 report independent accountants shareholders bellsouth corporation atlanta georgia audited accompanying consolidated balance sheets bellsouth corporation december 31 1994 1993 related consolidated statements income shareholders equity cash flows three years period ended december 31 1994 financial statements responsibility bellsouths management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position bellsouth corporation december 31 1994 1993 consolidated results operations cash flows three years period ended december 31 1994 conformity generally accepted accounting principles discussed notes h n consolidated financial statements bellsouth changed method accounting postretirement benefits pensions income taxes postemployment benefits 1993 coopers lybrand llp atlanta georgia february 3 1995 bellsouth corporation consolidated statements income millions except per share amounts accompanying notes integral part financial statements bellsouth corporation consolidated balance sheets millions accompanying notes integral part financial statements bellsouth corporation consolidated statements shareholders equity millions accompanying notes integral part financial statements bellsouth corporation consolidated statements cash flows millions accompanying notes integral part financial statements bellsouth corporation notes consolidated financial statements dollars millions except per share amounts note accounting policies basis presentation consolidated financial statements include accounts bellsouth corporation bellsouth subsidiaries controlling financial interest bellsouth operates predominantly telecommunications service industry bellsouth telecommunications inc bellsouth telecommunications bellsouths largest subsidiary provides primarily regulated telephone services investments certain partnerships joint ventures subsidiaries accounted using equity method significant intercompany transactions accounts eliminated except otherwise required generally accepted accounting principles applicable regulated entities certain amounts prior period consolidated financial statements reclassified conform current years presentation basis accounting bellsouths consolidated financial statements prepared accordance generally accepted accounting principles including provisions statement financial accounting standards sfas 71 accounting effects certain types regulation appropriate sfas 71 gives accounting recognition actions regulators actions provide reasonable assurance existence asset reduce eliminate value asset impose eliminate liability regulated entity result actions regulators consolidated balance sheets december 31 1994 1993 reflect net deferred charges regulatory assets 1865 2359 respectively related primarily compensated absences unamortized issuance costs debt refinanced net deferred credits regulatory liabilities included consolidated balance sheets 3040 3789 respectively related income tax issues telephone plant equipment depreciated using regulatorprescribed asset lives telecommunications companies recently discontinued accounting sfas 71 revalued telephone plant bellsouth telecommunications revalue telephone plant using similar assumptions methodology net recorded book value telephone plant would reduced approximately 4000 6000 cash equivalents bellsouth considers highly liquid investments original maturity three months less cash equivalents investments original maturity three months one year considered cash equivalents included temporary cash investments consolidated balance sheets material supplies new reusable material carried inventory principally average original cost except specific costs used case large individual items nonreusable material carried estimated salvage value investments advances investments advances consist primarily investments advances unconsolidated affiliated companies accounted equity method property plant equipment investment property plant equipment stated original cost plant dedicated providing regulated telecommunications services depreciation based remaining life method depreciation straightline composite rates determined basis equal life groups certain categories telephone plant acquired given year depreciation expense also includes amortization certain classes telephone plant identified depreciation reserve deficiencies periods allowed regulatory authorities depreciable telephone plant disposed original cost less net salvage value charged accumulated depreciation cost property plant equipment depreciated using either straightline accelerated methods estimated useful lives assets gains losses disposal depreciable property plant equipment recognized year disposition element nonoperating income intangible assets intangible assets consist excess consideration paid net assets acquired business combinations acquired licenses customer lists intangible assets amortized using straightline accelerated methods periods benefit periods exceed 40 years carrying value intangible assets periodically reviewed basis whether intangibles fully bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued recoverable projected discounted net cash flows related business unit amortization intangibles 526 584 678 years ended december 31 1994 1993 1992 respectively december 31 1994 1993 accumulated amortization intangibles 2121 1692 respectively derivative financial instruments bellsouth manages risk arising fluctuations interest rates currency exchange rates using derivative financial instruments foreign exchange forward contracts currency swaps interest rate swaps foreign exchange forward contracts carried fair value consolidated balance sheets gains losses foreign exchange forward contracts used currency hedges existing assets liabilities deferred offset deferred losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures gains losses related qualifying hedges firm commitments also deferred recognized income adjustments carrying amounts hedged transaction occurs currency swap contracts entered hedges existing assets liabilities carried fair value consolidated balance sheets gains losses currency swaps deferred offset deferred currency losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures interest rate swap agreements treated offbalance sheet financial instruments receipts payments resulting instruments recognized adjustments interest expense received paid revenue recognition revenues recognized earned certain revenues derived local telephone wireless access services billed monthly advance recognized following month services provided directory advertising publishing revenues related directory costs recognized upon publication directories except regulatory authorities recognize different treatment revenues derived telecommunications services principally network access toll cellular airtime usage recognized monthly services provided maintenance repairs cost maintenance repairs plant including cost replacing minor items effecting substantial betterments charged operating expenses allowance funds used construction regulatory authorities allow bellsouth telecommunications recognize cost capital debt equity components associated construction certain plant income realized cash currently realized service life related plant resulting higher depreciation expense plant investment recovered form increased revenues income taxes effective january 1 1993 bellsouth adopted sfas 109 accounting income taxes accordance standard balance sheet reflects deferred tax balances associated anticipated tax impact future income deductions implicit balance sheet form temporary differences temporary differences primarily result use accelerated methods shorter lives computing depreciation tax purposes prior 1993 bellsouth accounted income taxes provisions accounting principles board opinion 11 financial reporting purposes bellsouth telecommunications amortizing deferred investment tax credits earned prior 1986 repeal investment tax credit also transitional credits earned repeal credits amortized reduction provision income taxes estimated useful lives assets credits relate earnings per share earnings per common share computed basis weighted average number shares common stock common stock equivalents outstanding year bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances investments advances december 31 consist following bellsouths equity method investments primarily include various partnerships domestic cellular properties mobile data communications investments international cellular properties international communications consortiums earnings losses related investments accounted equity method 1098 110 767 three years ended december 31 1994 1993 1992 respectively included component income domestic cellular bellsouths domestic cellular investments consist primarily 600 noncontrolling financial interest los angeles cellular telephone company 438 interest houston cellular telephone company december 31 1994 bellsouths aggregate investment entities exceeded underlying book value investees net assets 9347 excess consideration paid net assets acquired along intangible assets amortized using either straightline accelerated methods periods benefit exceed 40 years mobile data communications january 1992 bellsouth ram broadcasting corporation rbc formed investment operate certain mobile data communications networks worldwide well certain cellular paging operations united states mobile data portion investment gives bellsouth 49 interest united states mobile data operations operated rbc various interests foreign mobile data operations ranging 54 90 july 1994 bellsouth acquired rbcs 50 interest paging segment investment giving bellsouth 100 interest entity bellsouth note receivable advances mobile data affiliates totaling 1346 430 december 31 1994 1993 respectively receivables bear interest rate threemonth libor plus 3 12 instruments collateralized assets affiliates international communications bellsouth equity investments international cellular operations latin america europe asiapacific region international markets ownership ranging 214 533 largest investments telcel cellular ca telcel bellsouth noncontrolling 533 interest provides cellular telephone service venezuela bellsouth 214 participant eplus mobilfunk consortium provides cellular telephone service germany january 1994 bellsouth disposed 364 interest cellular telephone business mexico november 1994 bellsouth sold 4 interest company providing cellular service france result dispositions bellsouth recognized gains 675 401 respectively included income bellsouth 245 participant optus international consortium provides full spectrum telecommunications services australia including switched network enhanced services wireless satellite based services investment activity bellsouth noncontrolling financial interests ranging 70 80 csl ventures 1155 peachtree associates real estate partnerships bellsouth notes receivable advances partnerships totaling 1861 2081 1358 included current assets december 31 1994 1993 respectively notes bear interest rates ranging 788 931 advances bear interest federal funds rate plus 30 principal amounts outstanding december 31 1994 due payable bellsouth december 31 1996 august 8 2002 instruments require periodic payments interest collateralized various real estate holdings bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances continued december 1993 bellsouth entered credit agreement prime south diversified inc prime provide 250 financing 1850 borrowed prime december 31 1994 loan collateralized stock prime south diversified indirectly wholly owns community cable tv las vegas whollyowned subsidiary prime south holdings inc loan bears variable rate 10 11 matures 2001 note c property plant equipment property plant equipment summarized follows december 31 depreciation telephone plant equipment percentage average depreciable telephone plant 720 751 767 1994 1993 1992 respectively note current liabilities current liabilities summarized follows december 31 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt maturing within one year debt maturing within one year summarized follows december 31 bellsouth committed credit lines aggregating 14934 various banks borrowings committed lines totaled 161 december 31 1994 bellsouth also maintains uncommitted lines credit 6750 december 31 1994 borrowings uncommitted lines significant commitment fees requirements compensating balances associated lines credit longterm debt consists primarily debentures notes issued bellsouth telecommunications interest rates maturities amounts outstanding summarized follows december 31 maturities longterm debt outstanding face amounts december 31 1994 summarized discussed note h bellsouth incorporated employee stock ownership plan esop feature certain existing savings plans 1990 esop trusts borrowed 8500 aggregate principal amount issuance amortizing notes although obligations owed trusts guaranteed bellsouth thus reflected addition longterm debt bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt continued reduction shareholders equity trusts service debt contributions bellsouth dividends paid shares held trusts esop obligations repaid amount guaranteed decreases longterm debt reduced accordingly notes issued bellsouth capital funding corporation capital funding used finance businesses bellsouth enterprises unregulated subsidiaries bellsouth telecommunications bellsouth agreed ensure timely payment principal premium interest capital fundings debt securities 1993 1992 bellsouth telecommunications refinanced certain longterm debt issues favorable interest rates result early extinguishment issues charges 866 17 per share net taxes 588 407 08 per share net taxes 300 recognized extraordinary losses 1993 1992 respectively december 31 1994 shelf registration statements filed securities exchange commission bellsouth telecommunications capital funding 7250 10273 respectively debt securities could offered note f liabilities deferred credits liabilities deferred credits summarized follows december 31 note g shareholders equity preferred stock authorized bellsouths articles incorporation authorize 100 million shares cumulative first preferred stock par value 1 per share 30 million shares reserved designated series possible issuance bellsouths shareholder rights plan december 31 1994 preferred shares issued shareholder rights plan 1989 bellsouth adopted shareholder rights plan declaring dividend one right share common stock outstanding issued thereafter right entitles shareholders buy one onehundredth share series first preferred stock 175 per share rights may exercised person group acquires 10 common stock bellsouth without prior approval board directors announces tender exchange offer would result ownership 25 common stock person group acquires 10 bellsouths stock without prior board approval shareholders allowed purchase bellsouth common stock half price rights currently trade bellsouth common stock may redeemed board directors one cent per right become exercisable thereafter certain circumstances rights expire ten years guarantee esop debt financial reporting practices require amount equivalent bellsouths guarantee amortizing notes issued esop trusts presented reduction shareholders equity well increase debt amount recorded decrease shareholders equity represents cost unallocated bellsouth common stock purchased proceeds bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note g shareholders equity continued amortizing notes timing difference resulting shares allocated accounting method esop shares considered outstanding financial reporting purposes included computation earnings per share esop notes repaid amount debt guaranteed decreases shareholders equity increases accordingly see notes e h shares held trust 1993 1994 bellsouth issued shares grantor trusts provide partial funding benefits payable certain nonqualified benefit plans trusts irrevocable assets contributed trusts used pay benefits certain exceptions december 31 1994 1993 assets held trusts consist cash 6262087 5464920 shares respectively bellsouth common stock total cost bellsouth shares date funding trusts included common stock paidin capital however shares held trust considered outstanding financial reporting purposes shares reflected separately shares held trust reduction shareholders equity accordingly earnings per share impact note h employee benefit plans pension plans substantially employees bellsouth covered noncontributory defined benefit pension plans principal plans discussed plans significant individually aggregate plan covering nonrepresented employees cash balance plan provides pension benefits determined combination compensationbased service additional credits individual accountbased interest credits cash balance plan subject minimum benefit determined plan existence nonrepresented employees prior july 1 1993 provided benefits based upon credited service employees average compensation specified period minimum benefit prior plan applicable employees retiring 2005 1994 1993 projected benefit obligations assume interest additional credits greater minimum levels specified written plan pension benefits provided represented employees based specified benefit amounts years service includes projected effect future bargainedfor improvements bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay pension benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations pension plan assets consist primarily equity securities fixed income investments components net periodic pension cost summarized effective january 1 1994 nonrepresented cash balance plan divided one four cash balance plans allowed costs accounted precisely based upon specific company demographic information plan division material impact bellsouth 1994 decrease 1994 pension expense primarily result reduction assumed benefit levels partially offset decrease discount rate assumption consolidated net pension expense amounts reflected exclusive curtailment gains reflected restructuring activities discussed bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued following table sets forth funded status plans december 31 significant actuarial assumptions december 31 1994 1993 follows postretirement benefits pensions bellsouth sponsors postretirement health life insurance welfare plans nonrepresented represented employees effective january 1 1993 bellsouth adopted sfas 106 employers accounting postretirement benefits pensions account plans bellsouths transition benefit obligation amortized 15 years average remaining service period active plan participants adoption accounting health care plan anticipate future adjustments costsharing arrangements provided written plan employees retire december 31 1991 bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay health life benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations assets health life plans consist primarily equity securities fixed income investments postretirement benefit costs years ending december 31 1994 1993 respectively composed following bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued consolidated net postretirement benefit cost amounts reflected exclusive curtailment losses reflected restructuring activities discussed prior 1993 bellsouth recognized cost providing postretirement benefits based funded amounts cost providing health life benefits active retired employees 5746 1992 following table sets forth plans funded status december 31 1994 1993 respectively significant actuarial assumptions december 31 1994 1993 follows health care cost trend rate assumption affects amounts reported onepercentagepoint increase assumed health care cost trend rates future year would increase accumulated postretirement benefit obligation 108 december 31 1994 estimated aggregate service interest cost components 1994 postretirement benefit cost 14 regulatory jurisdictions accepted bellsouths sfas 106 implementation plan however two states requiring 20year 30year amortization transition benefit obligation impact material bellsouth effect restructuring pensions postretirement benefits part restructuring charge 1993 see note k bellsouth recorded liability 88 estimated net curtailment losses expected impact bellsouths pension postretirement benefit plans amount recognized 32 16 realized charged restructuring liability 1994 1993 respectively defined contribution plans bellsouth maintains several contributory savings plans cover substantially employees bellsouth savings employee stock ownership plan bellsouth savings security plan collectively esop plans taxqualified employee stock ownership plans cover largest portion employees assets plans held two trusts bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued turn part bellsouth master savings trust 1990 leveraged esop feature incorporated esop plans proceeds esop notes see note e trusts purchased shares bellsouth common stock open market used part fulfill bellsouths matching contribution obligation 13year debt repayment period leveraged esop program employee participants contribute part annual compensation via payroll deductions esop plans portion matched bellsouth matching amount stated percentage terms applied certain eligible amounts determined annually board directors match consists shares bellsouth common stock purchased trusts proceeds esop notes purchased trusts market time insufficient shares available trust shares allocated participants account based market price shares time allocation shares released allocation semiannual loan payment made none shares held esop plans subject repurchase bellsouth makes annual contributions trusts fund esops debt service plus amount required purchase additional shares allocated participant accounts less dividends received trusts dividends received trusts used debt service 1993 new authoritative guidance became effective created new accounting requirements certain esops elective others bellsouth elected continue existing accounting guidance adopted new disclosure requirements applicable esops leveraged esop bellsouth recognizes expense using shares allocated accounting method combines cost shares allocated period plus interest incurred reduced dividends used service esop debt dividends esop shares recorded reduction retained earnings esop shares included computation earnings per share bellsouth also maintains certain defined contribution plans employees covered esop plans bellsouths contributions approximately 153 127 93 1994 1993 1992 respectively note employee stock option plan bellsouth corporation stock option plan provides grant stock options related stock appreciation rights sars key employees determined board directors purchase shares bellsouth common stock within prescribed periods either price equal fair market value date grant heightened incentive price excess stock price date grant sars entitle optionee surrender unexercised stock options cash stock equal excess fair market value surrendered shares option price shares options granted 1994 become vested end fiveyear vesting period determined date grant 5172962 shares covered outstanding options plan december 31 1994 352096 accompanied sars bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note employee stock option plan continued following table summarizes activity stock options outstanding note j leases bellsouth entered operating leases facilities equipment used operations rental expense operating leases 3113 3003 3289 1994 1993 1992 respectively capital leases currently effect significant following table summarizes approximate future minimum rentals noncancelable operating leases effect december 31 1994 note k restructuring charge results operations year ended december 31 1993 include 11364 restructuring charge reduced net income 6966 restructuring undertaken redesign streamline fundamental processes work activities bellsouth telecommunications telephone operations better respond increasingly competitive business environment restructuring expected improve overall responsiveness customer needs reduce costs material components charge related reduction workforce 10200 employees december 31 1994 cumulative employee reductions related restructuring plan 5200 consisting 1300 1993 3900 1994 components charge consisted provisions 3682 separation payments relocations remaining employees 3428 consolidation elimination certain operations facilities 4254 enabling changes information systems primarily used provide services existing customers december 31 1994 remaining liability associated restructuring plan 6147 current bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note l additional income statement data interest dividend income 1992 includes 566 relating settlement internal revenue service summary assessment tax years 1979 1980 revenues services provided att corp bellsouths largest customer approximately 11 14 consolidated operating revenues 1994 1993 1992 respectively note income taxes effective january 1 1993 bellsouth adopted sfas 109 accounting income taxes applies balance sheet approach income tax accounting accordance new standard balance sheet reflects anticipated tax impact future taxable income deductions implicit balance sheet form temporary differences temporary differences reflect difference basis assets liabilities measured financial statements measured tax laws using enacted tax rates cumulative effect january 1 1993 adoption sfas 109 recorded 78 reduction income tax expense accordance provisions sfas 71 accounting effects certain types regulation bellsouth regulated operations reflected balance sheet impact adoption sfas 109 specifically bellsouth telecommunications 1993 recorded net regulatory liability 5380 correspond net reduction deferred tax liabilities reduction resulted changes tax rates temporary differences previously flowed balance net liability december 31 1994 included liabilities deferred credits 3040 net regulatory liability adjusted related temporary differences reverse bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note income taxes continued provision income taxes summarized follows temporary differences carryforwards gave rise deferred tax assets liabilities december 31 follows valuation allowance primarily represents federal state net operating losses utilized carryforward period net deferred tax liability december 31 1994 1993 2323 1744 respectively current 36469 34653 respectively noncurrent prior 1993 deferred tax expense resulted timing differences recognition revenue expense items tax financial reporting purposes follows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note income taxes continued reconciliation federal statutory income tax rate bellsouths effective tax rate follows note n cumulative effect accounting change bellsouth adopted effective january 1 1993 sfas 112 employers accounting postemployment benefits sfas 112 requires employers accrue cost postemployment benefits provided former inactive employees employment retirement including limited workers compensation disability continuation health care benefits previously bellsouth used cash method account costs onetime charge 674 14 per share net deferred tax benefit 425 related adoption statement recognized change accounting principle effect change bellsouths 1993 operating results material note supplemental cash flow information following supplemental information presented accordance provisions sfas 95 statement cash flows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note p financial instruments following disclosure estimated fair value financial instruments presented accordance provisions sfas 107 disclosures fair value financial instruments estimated fair value amounts determined using available market information described since judgment required develop estimates estimated amounts presented herein may indicative amounts bellsouth could realize current market exchange cash equivalentstemporary cash investments december 31 1994 1993 recorded amounts cash equivalents temporary cash investments respectively approximate fair value due shortterm nature instruments debt december 31 1994 1993 recorded amounts bank loans commercial paper approximate fair value due shortterm nature liabilities estimates fair value bellsouth telecommunications debentures notes estimated based closing market prices issue december 31 1994 1993 respectively fair value estimates guarantee esop debt bellsouth capital funding corporation notes based quotes dealers financial instruments bellsouth party foreign exchange forward contracts currency swap agreements interest rate swap agreements normal course business purposes trading financial instruments used mitigate foreign currency interest bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note p financial instruments continued rate risks although extent expose company market risks credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited currency rate interest rate differential contracts agreements executed creditworthy financial institutions bellsouth considers risk nonperformance remote foreign exchange forward contracts foreign exchange forward contracts delivery purchase foreign currencies specified future dates fair values contracts estimated based quotes brokers bellsouth enters foreign exchange forward contracts primarily hedges relating identifiable currency exposures financial instruments designed minimize exposure reduce risk exchange rate fluctuations normal course business summarized major currency contractual amounts bellsouths foreign exchange forward contracts us dollars foreign currency amounts translated rates december 31 1994 1993 respectively buy amounts represent us dollar equivalent commitments purchase foreign currencies sell amounts represent us dollar equivalent commitments sell foreign currencies currency swap currency swap contracts provide exchange defined cash flows two currencies specified times fair value currency swap estimated based quotes brokers bellsouth entered currency swap 1994 hedge european currency units ecu 125000000 debt issued capital funding currency swap matures february 1999 december 31 1994 net currency swap receivable 113 related net interest receivable 05 included accounts receivable consolidated balance sheet december 31 1994 interest rate ecu debt 525 currency swap effectively converts interest rate ecu debt 525 payable ecus 5247 payable us dollars interest rate swaps interest rate swap agreements require counterparties exchange interest cash flows specified amount debt defined period fair values interest rate swap agreements estimated based quotes dealers order manage exposure interest rate changes bellsouth enters interest rate swap agreements exchange fixed variable rate interest payment obligations without exchange underlying principal amounts agreements used adjust interest certain fixed variable rate obligations bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note p financial instruments continued summarized types interest rate swaps outstanding related weightedaverage interest rates swaps mature either 1996 2002 bellsouth also issued letters credit financial guarantees approximate 157 december 31 1994 since market instruments practicable estimate fair value concentrations credit risk financial instruments potentially subject bellsouth credit risk consist principally trade accounts receivable concentrations credit risk respect receivables limited due composition customer base includes large number individuals businesses december 31 1994 approximately 448 trade accounts receivable interexchange carriers bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note q quarterly financial information unaudited following summary quarterly financial information adjustments necessary fair presentation period included results first quarter 1993 restated reflect onetime noncash charge retroactive adoption sfas 112 results fourth quarter 1993 include restructuring charge 11364 reduced net income 6966 supplementary data bellsouth corporation domestic cellular proportionate operating data dollars thousands unaudited following table sets forth unaudited supplemental financial data bellsouths domestic cellular operations reflecting proportionate consolidation entities bellsouth interest presentation differs consolidation metholodology used prepare bellsouths principal financial statements accordance generally accepted accounting principles proportionate operating data reflect bellsouths ownership percentage entities consolidated financial reporting purposes bellsouths ownership percentage entities accounted equity method financial reporting purposes 1 includes equipment revenue net cost item 9item 8 consolidated financial statements supplementary data report management shareholders bellsouth corporation financial statements prepared conformity generally accepted accounting principles audited coopers lybrand llp independent accountants whose report contained herein integrity objectivity data financial statements including estimates judgments relating matters concluded end year responsibility management bellsouth management also prepared information included therein unless indicated otherwise management maintains system internal accounting controls continuously reviewed evaluated however inherent limitations recognized considering assurances provided system internal accounting controls concept reasonable assurance recognizes cost system internal accounting controls exceed managements judgment benefits derived management believes bellsouths system provide reasonable assurance transactions executed accordance managements general specific authorizations recorded properly maintain accountability assets permit preparation financial statements conformity generally accepted accounting principles management also believes system provides reasonable assurance access assets permitted accordance managements authorizations recorded accountability assets compared existing assets reasonable intervals appropriate action taken respect differences management also seeks assure objectivity integrity financial data careful selection managers organizational arrangements provide appropriate division responsibility communications programs aimed assuring policies standards managerial authorities understood throughout organization management also aware changes operating strategy organizational structure give rise disruptions internal controls special attention given controls changes implemented management maintains strong internal auditing program independently assesses effectiveness internal controls recommends possible improvements thereto addition part audit financial statements coopers lybrand llp completed review accounting controls establish basis reliance thereon determining nature timing extent audit tests applied management considered internal auditors coopers lybrand llps recommendations concerning system internal controls taken actions believes costeffective circumstances respond appropriately recommendations management believes december 31 1995 system internal controls adequate accomplish objectives discussed herein management also recognizes responsibility fostering strong ethical climate bellsouths affairs conducted according highest standards personal corporate conduct responsibility communicated employees policies guidelines addressing issues conflict interest safeguarding bellsouths real intellectual properties providing equal employment opportunities ethical relations customers suppliers governmental representatives bellsouth maintains program assess compliance policies ethical standards vice president corporate responsibility compliance designated ombudsmanethics officer reports directly chairman board matters february 5 1996 audit committee chairmans letter audit committee board directors consists four members neither officers employees bellsouth corporation information persons well duties provided proxy statement audit committee met seven times 1995 reviewed chief corporate auditor coopers lybrand llp management current audit activities plans results selected internal audits audit committee also reviewed objectivity financial reporting process adequacy internal controls audit committee recommended subject shareholder ratification appointment independent accountants considered factors relating independence addition audit committee provided guidance matters regarding ethical considerations business conduct reviewed operations political action committees monitored compliance laws regulations chief corporate auditor coopers lybrand llp met privately audit committee occasion encourage confidential discussions auditing matters marshall criser chairman audit committee february 5 1996 report independent accountants shareholders bellsouth corporation atlanta georgia audited accompanying consolidated balance sheets bellsouth corporation december 31 1995 1994 related consolidated statements income shareholders equity cash flows three years period ended december 31 1995 financial statements responsibility bellsouths management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position bellsouth corporation december 31 1995 1994 consolidated results operations cash flows three years period ended december 31 1995 conformity generally accepted accounting principles discussed note b consolidated financial statements bellsouth discontinued accounting operations bellsouth telecommunications inc accordance statement financial accounting standards 71 accounting effects certain types regulation effective june 30 1995 also discussed notes l consolidated financial statements bellsouth changed method accounting postretirement benefits pensions income taxes postemployment benefits 1993 coopers lybrand llp atlanta georgia february 5 1996 bellsouth corporation consolidated statements income millions except per share amounts accompanying notes integral part financial statements bellsouth corporation consolidated balance sheets millions except per share amounts accompanying notes integral part financial statements bellsouth corporation consolidated statements shareholders equity millions except per share amounts accompanying notes integral part financial statements bellsouth corporation consolidated statements cash flows millions except per share amounts accompanying notes integral part financial statements bellsouth corporation notes consolidated financial statements dollars millions except per share amounts note accounting policies organization bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange service toll communications services within geographic areas called local access transport areas latas provides network access services enable interlata communications using longdistance facilities interexchange carriers subsidiaries telecommunications services products provided primarily within ninestate bellsouth telecommunications region bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing wireless international communications services advertising publishing products substantially bellsouths operating revenues derived domestic operations year ended december 31 1995 approximately 70 bellsouths operating revenues wireline network services 14 wireless communications services 9 directory advertising publishing services remainder operating revenues derived principally nonregulated services provided bellsouth telecommunications basis presentation consolidated financial statements include accounts bellsouth subsidiaries controlling financial interest investments certain partnerships joint ventures subsidiaries accounted using equity method significant intercompany transactions accounts eliminated certain amounts prior period consolidated financial statements reclassified conform current years presentation basis accounting bellsouths consolidated financial statements prepared accordance generally accepted accounting principles financial statements include estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities amounts revenues expenses actual results could differ estimates effective june 30 1995 bellsouth discontinued application statement financial accounting standards sfas 71 accounting effects certain types regulation see note b discussion impacts discontinuance sfas 71 cash equivalents bellsouth considers highly liquid investments original maturity three months less cash equivalents investments original maturity three months one year considered cash equivalents included temporary cash investments consolidated balance sheets interest income cash equivalents temporary cash investments interestbearing instruments 108 65 43 years ended december 31 1995 1994 1993 respectively material supplies new reusable material carried inventory principally average original cost except specific costs used case large individual items nonreusable material carried estimated salvage value property plant equipment investment property plant equipment stated original cost plant dedicated providing regulated telecommunications services depreciation based remaining life method depreciation straightline composite rates determined basis equal life groups certain categories telephone plant acquired given year depreciable telephone plant disposed original cost less net salvage value charged accumulated depreciation bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued cost property plant equipment depreciated using either straightline accelerated methods estimated useful lives assets gains losses disposal depreciable property plant equipment recognized year disposition element nonoperating income intangible assets intangible assets consist excess consideration paid net assets acquired business combinations acquired licenses customer lists intangible assets amortized using straightline accelerated methods periods benefit periods exceed 40 years carrying value intangible assets periodically reviewed basis whether intangibles fully recoverable projected discounted net cash flows related business unit amortization intangibles 50 53 58 years ended december 31 1995 1994 1993 respectively december 31 1995 1994 accumulated amortization intangibles 228 212 respectively foreign currency assets liabilities foreign subsidiaries equity investees functional currency us dollars translated us dollars exchange rates effect end reporting period foreign entity revenues expenses translated us dollars average rates prevailed period resulting net translation gains losses reported foreign currency translation adjustments shareholders equity component paidin capital exchange gains losses transactions company equity investees denominated currency functional currency generally included results operations incurred unless transactions hedged see derivative financial instruments exchange gains losses years ended december 31 1995 1994 1993 material derivative financial instruments bellsouth manages risk arising fluctuations interest rates currency exchange rates using derivative financial instruments foreign exchange forward contracts currency swaps interest rate swaps foreign exchange forward contracts carried fair value consolidated balance sheets gains losses foreign exchange forward contracts used currency hedges existing assets liabilities deferred offset deferred losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures gains losses related qualifying hedges firm commitments also deferred recognized income adjustments carrying amounts hedged transaction occurs currency swap contracts entered hedges existing assets liabilities carried fair value consolidated balance sheets gains losses currency swaps deferred offset deferred currency losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures interest rate swap agreements treated offbalance sheet financial instruments receipts payments resulting instruments recognized adjustments interest expense received paid revenue recognition revenues recognized earned certain revenues derived local telephone wireless services billed monthly advance recognized following month services provided directory advertising publishing revenues related directory costs recognized upon publication directories revenues derived telecommunications services principally network access toll cellular airtime usage recognized monthly services provided allowances uncollectible billed services adjusted monthly provision uncollectible accounts 213 175 198 years ended december 31 1995 1994 1993 respectively revenues services provided att corp bellsouths largest customer approximately 10 11 14 consolidated operating revenues 1995 1994 1993 respectively bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued maintenance repairs cost maintenance repairs plant including cost replacing minor items effecting substantial betterments charged operating expenses income taxes balance sheet reflects deferred tax balances associated anticipated tax impact future income deductions implicit balance sheet form temporary differences temporary differences primarily result use accelerated methods shorter lives computing depreciation tax purposes financial reporting purposes bellsouth amortizing deferred investment tax credits earned prior 1986 repeal investment tax credit also transitional credits earned repeal credits amortized reduction provision income taxes estimated useful lives assets credits relate earnings per share earnings per common share computed basis weighted average number shares common stock outstanding year earnings per share restated reflect twoforone stock split approved bellsouths board directors september 1995 see note h additional information note b discontinuance sfas 71 result continuing regulatory marketplace assessments bellsouth telecommunications concluded second quarter 1995 longer appropriate prepare external financial results using accounting method required regulated enterprises bellsouth telecommunications believes based recent changes regulatory framework increasing level competition required discontinue sfas 71 accounting effects certain types regulation financial reporting purposes discontinuance required bellsouth telecommunications revenues generated costbased regulation doubtful regulated rates sufficient recover net book value telephone plant could charged collected customers due expected levels future competition accordingly second quarter bellsouth telecommunications discontinued application sfas 71 recorded noncash extraordinary charge 2718 net deferred tax benefit 1731 components charge follows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b discontinuance sfas 71 continued reduction telephone plant 4896 pretax recorded increase related accumulated depreciation accounts categories amounts follows reduction plant determined impairment analysis identified estimated amounts recoverable future discounted cash flows analysis considered projected effects future competition well changes technology capital requirements plantrelated charge related assets within regulatory framework supported depreciation studies identified inadequate levels accumulated depreciation certain asset categories studies give recognition historical underdepreciation assets resulting primarily regulatorprescribed asset lives exceeded estimated economic asset lives financial reporting purposes average depreciable lives affected categories long lived telephone plant reduced closely reflect economic technological lives differences regulatorapproved asset lives current estimated economic asset lives follows remaining components extraordinary charge partially offset plantrelated portion overall charge include 194 tax related method bellsouth telecommunications reports directory publishing revenues bellsouths unregulated subsidiaries recognize directory publishing revenues production expenses using issue basis accounting issue basis accounting revenues product expenses recognized directories published rather lives directories generally one year prescribed regulatory accounting framework bellsouth telecommunications reporting using issue basis accounting consistent bellsouths unregulated subsidiaries publishing companies general overall extraordinary charge also reduced 71 tax reflect removal regulatory assets liabilities recorded result previous actions regulators virtually regulatory assets liabilities arose connection incorporation new accounting standards ratemaking process transitory nature magnitude regulatory assets liabilities decreasing time due ongoing amortization prescribed part adoption 1988 federal communications commissions current uniform system accounts addition overall extraordinary charge reduced 19 tax partial acceleration unamortized investment tax credits associated reductions asset carrying values asset lives bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note c investments advances sales operations investments advances december 31 consist following bellsouths equity method investments primarily include various partnerships domestic cellular properties mobile data communications investments international cellular properties international communications consortiums earnings losses related investments accounted equity method 86 110 11 three years ended december 31 1995 1994 1993 respectively included component income domestic cellular bellsouths domestic cellular investments consist primarily 600 noncontrolling financial interest los angeles cellular telephone company 438 interest houston cellular telephone company december 31 1995 bellsouths aggregate investment entities exceeded underlying book value investees net assets 907 excess consideration paid net assets acquired along intangible assets amortized using either straightline accelerated methods periods benefit exceed 40 years mobile data communications january 1992 bellsouth ram broadcasting corporation rbc formed investment operate certain mobile data communications networks worldwide well certain cellular paging operations united states mobile data portion investment gives bellsouth 49 interest united states mobile data operations operated rbc various interests foreign mobile data operations ranging 6 725 july 1994 bellsouth acquired rbcs 50 interest paging segment investment giving bellsouth 100 interest entity acquisition investment consolidated bellsouth note receivable advances mobile data affiliates totaling 220 135 december 31 1995 1994 respectively receivables bear interest rate threemonth libor plus 3 12 instruments collateralized assets affiliates international communications bellsouth equity investments international cellular operations latin america europe asiapacific region international markets ownership ranging 214 533 telcel cellular ca telcel bellsouth noncontrolling 533 interest provides cellular telephone service venezuela bellsouth 245 participant optus international consortium provides full spectrum telecommunications services australia including switched network enhanced services wireless satellite based services bellsouth 214 participant eplus mobilfunk consortium eplus provides cellular telephone service germany bellsouth agreed guarantee eplus borrowings 400 million german marks us dollar equivalent 280 december 31 1995 us dollar equivalent outstanding balance guaranteed debt december 31 1995 110 subsequent december 31 1995 bellsouth purchased additional interest eplus raised percentage ownership 225 january 1994 bellsouth disposed 364 interest cellular telephone business mexico november 1994 bellsouth sold 4 interest company providing cellular service france result dispositions bellsouth recognized gains aggregating 108 included income investment activity bellsouth noncontrolling financial interests ranging 70 80 csl ventures 1155 peachtree associates real estate partnerships bellsouth notes receivable advances partnerships totaling 188 186 december 31 1995 1994 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note c investments advances sales operations continued respectively notes bear interest rates ranging 788 931 advances bear interest federal funds rate plus 30 principal amounts outstanding december 31 1995 due payable bellsouth december 31 1996 august 8 2002 instruments require periodic payments interest collateralized various real estate holdings bellsouth credit agreement prime south diversified inc prime provide 250 financing 185 borrowed prime december 31 1995 1994 loan collateralized stock prime south diversified indirectly wholly owns community cable tv las vegas whollyowned subsidiary prime south holdings inc loan bears interest variable rate 10 11 matures 2001 minority interests consolidated subsidiaries included component income 62 80 51 years ended december 31 1995 1994 1993 respectively subsequent event january 1996 bellsouth sold mobilemedia communications inc paging subsidiary mobile communications corporation america mcca twoway nationwide narrowband personal communications services license total approximately 930 pretax gain sale approximately 442 mccas operating revenues operating expenses 349 300 respectively year ended december 31 1995 total assets december 31 1995 355 note property plant equipment property plant equipment summarized follows december 31 see note b discussion discontinuance sfas 71 effect property plant equipment bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e current liabilities current liabilities summarized follows december 31 note f debt maturing within one year debt maturing within one year summarized follows december 31 bellsouth committed credit lines aggregating 1539 various banks borrowings committed lines totaled 21 16 respectively december 31 1995 1994 bellsouth also maintains uncommitted lines credit 650 december 31 1995 borrowings uncommitted lines significant commitment fees requirements compensating balances associated lines credit bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note f debt continued longterm debt summarized consists primarily debentures notes issued bellsouth telecommunications interest rates maturities table amounts outstanding december 31 1995 maturities longterm debt outstanding principal amounts december 31 1995 summarized maturities year 2000 include 500 principal amount 665 debentures due 2095 december 31 1995 debentures accreted book value 126 discussed note h bellsouth incorporated employee stock ownership plan esop feature certain existing savings plans 1990 esop trusts borrowed 850 aggregate principal amount issuance amortizing notes although obligations owed trusts guaranteed bellsouth thus reflected addition longterm debt reduction shareholders equity trusts service debt contributions bellsouth dividends paid shares held trusts esop obligations repaid amount guaranteed decreases longterm debt reduced accordingly notes issued bellsouth capital funding corporation capital funding used finance businesses bellsouth enterprises unregulated subsidiaries bellsouth telecommunications bellsouth agreed ensure timely payment principal premium interest capital fundings debt securities 1995 bellsouth telecommunications refinanced certain longterm debt issues favorable interest rates approximate 1900 gross proceeds debentures issued year accomplish refinancings included longterm debt total 1885 aggregate principal amount debentures called redemption 1995 1400 actually redeemed december 31 1995 remaining 485 debentures redeemed january 1996 included consolidated balance sheet december 31 1995 separate component debt maturing within one year bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note f debt continued result early extinguishment issues including issues redeemed january 1996 extraordinary loss 78 08 per share net current tax benefit 49 recognized 1995 also 1993 extraordinary loss 87 09 per share net current tax benefit 59 recognized due early extinguishments debt year december 31 1995 shelf registration statements file securities exchange commission 1127 debt securities could offered note g liabilities deferred credits liabilities deferred credits summarized follows december 31 note h shareholders equity stock split september 1995 bellsouths board directors approved twoforone stock split effected form stock dividend whereby shareholder record october 11 1995 received november 8 1995 one additional share common stock share owned record date result split 503555084 shares issued 503 transferred paidin capital common stock also september 1995 bellsouths board directors approved increase number authorized shares common stock 2200000000 1100000000 weighted average common shares outstanding per share amounts periods presented restated reflect stock split preferred stock authorized bellsouths articles incorporation authorize 100 million shares cumulative first preferred stock par value 1 per share 30 million shares reserved designated series possible issuance bellsouths shareholder rights plan december 31 1995 preferred shares issued shareholder rights plan 1989 bellsouth adopted shareholder rights plan declaring dividend one right share common stock outstanding issued thereafter right entitles shareholders buy one onehundredth share series first preferred stock 175 per share rights may exercised person group acquires 10 common stock bellsouth without prior approval board directors announces tender exchange offer would result ownership 25 common stock person group acquires 10 bellsouths stock without prior board approval shareholders allowed purchase bellsouth common stock half price rights currently trade bellsouth common stock may redeemed board directors one cent per right become exercisable thereafter certain circumstances rights expire 1999 guarantee esop debt financial reporting practices require amount equivalent bellsouths guarantee amortizing notes issued esop trusts presented reduction bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h shareholders equity continued shareholders equity well increase debt amount recorded decrease shareholders equity represents cost unallocated bellsouth common stock purchased proceeds amortizing notes timing difference resulting shares allocated accounting method esop shares considered outstanding financial reporting purposes included computation earnings per share esop notes repaid amount debt guaranteed decreases shareholders equity increases accordingly see notes f shares held trust 1993 1994 1995 bellsouth issued shares grantor trusts provide partial funding benefits payable certain nonqualified benefit plans trusts irrevocable assets contributed trusts used pay benefits certain exceptions december 31 1995 1994 assets held trusts consist cash 13753204 12524174 shares respectively bellsouth common stock restated reflect twoforone stock split total cost bellsouth shares date funding trusts included common stock paidin capital however shares held trust considered outstanding financial reporting purposes shares reflected separately shares held trust reduction shareholders equity accordingly earnings per share impact note employee benefit plans pension plans substantially employees bellsouth covered noncontributory defined benefit pension plans principal plans discussed plans significant individually aggregate plan covering nonrepresented employees cash balance plan provides pension benefits determined combination compensationbased service additional credits individual accountbased interest credits cash balance plan subject minimum benefit determined plan existence nonrepresented employees prior july 1 1993 provided benefits based upon credited service employees average compensation specified period minimum benefit prior plan applicable employees retiring 2005 1995 1994 projected benefit obligations assume interest additional credits greater minimum levels specified written plan pension benefits provided represented employees based specified benefit amounts years service include projected effect future bargainedfor improvements bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay pension benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations pension plan assets consist primarily equity securities fixed income investments components net pension cost income summarized effective january 1 1994 nonrepresented cash balance plan divided one four cash balance plans allowed costs accounted precisely based upon specific company demographic information plan division material impact bellsouth 1994 net pension cost bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note employee benefit plans continued income affected changes discount rate actuarial assumptions consolidated net pension cost income amounts reflected exclusive curtailment effects reflected work force reduction restructuring activities discussed following table sets forth funded status plans december 31 significant actuarial assumptions december 31 1995 1994 follows postretirement benefits pensions bellsouth sponsors postretirement health life insurance welfare plans nonrepresented represented employees effective january 1 1993 bellsouth adopted sfas 106 employers accounting postretirement benefits pensions account plans bellsouths transition benefit obligation 1486 amortized 15 years average remaining service period active plan participants adoption accounting health care plan anticipate future adjustments costsharing arrangements provided written plan employees retire december 31 1991 result adoption sfas 106 net income 1993 reduced approximately 23 02 per share bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay health life benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations assets health life plans consist primarily equity securities fixed income investments bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note employee benefit plans continued net postretirement benefit cost income years ended december 31 1995 1994 1993 respectively composed following consolidated net postretirement benefit cost income amounts reflected exclusive curtailment effects reflected work force reduction restructuring activities discussed following table sets forth plans funded status december 31 1995 1994 respectively significant actuarial assumptions december 31 1995 1994 follows 1 trend rate used value accumulated postretirement obligation 1995 assumed decrease gradually 5 2003 trend rate used 1994 assumed decrease gradually 5 2007 2 rate net estimated 30 tax reduction nonrepresented employees trust 1995 1994 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note employee benefit plans continued health care cost trend rate assumption affects amounts reported onepercentagepoint increase assumed health care cost trend rates future year would increase accumulated postretirement benefit obligation 204 december 31 1995 estimated aggregate service interest cost components 1995 postretirement benefit cost 9 effect 1995 work force reduction 1993 restructuring pensions postretirement benefits part work force reduction charge 1995 see note k bellsouth recorded estimated liability 381 curtailment losses expected impact bellsouths pension postretirement health plans january 1 1996 december 31 1997 substantially losses relate postretirement health plans expected benefits curtailment gains recognized occur 1996 1997 part restructuring charge 1993 see note k bellsouth recorded liability 88 estimated net curtailment losses expected impact bellsouths pension postretirement health plans subsequently estimate revised actual results additional charges based upon revised projections recognized 1995 total net curtailments originally projected restructuring bellsouth reevaluated original estimate charged additional 55 net curtailment losses reflected income statement line item combined 1995 work force reduction charge additional net curtailment charge result greater number employees terminating retirement eligible status originally expected thus generating additional losses retiree health benefits reduced gains pensions defined contribution plans bellsouth maintains several contributory savings plans cover substantially employees bellsouth savings employee stock ownership plan bellsouth savings security plan collectively esop plans taxqualified employee stock ownership plans cover largest portion employees assets plans held two trusts turn part bellsouth master savings trust 1990 leveraged esop feature incorporated esop plans proceeds esop notes see note f trusts purchased shares bellsouth common stock open market used part fulfill bellsouths matching contribution obligation 13year debt repayment period leveraged esop program employee participants contribute part annual compensation via payroll deductions esop plans portion matched bellsouth matching amount stated percentage terms applied certain eligible amounts determined annually board directors match consists shares bellsouth common stock purchased trusts proceeds esop notes purchased trusts market time insufficient shares available trust shares allocated participants account based market price shares time allocation shares released allocation semiannual loan payment made none shares held esop plans subject repurchase bellsouth makes annual contributions trusts fund esops debt service plus amount required purchase additional shares allocated participant accounts less dividends received trusts dividends received trusts shares purchased proceeds esop notes used debt service 1993 new authoritative guidance became effective created new accounting requirements certain esops elective others bellsouth elected continue existing accounting guidance adopted new disclosure requirements applicable esops leveraged esop bellsouth recognizes expense using shares allocated accounting method combines cost bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note employee benefit plans continued shares allocated period plus interest incurred reduced dividends used service esop debt dividends esop shares recorded reduction retained earnings esop shares included computation earnings per share bellsouth also maintains certain defined contribution plans employees covered esop plans bellsouths contributions approximately 12 15 13 1995 1994 1993 respectively note j stock option plans april 1995 bellsouth shareholders approved adoption bellsouth corporation stock plan stock plan stock plan provides various types grants key employees including stock options stock appreciation rights sars restricted shares performancebased awards one share bellsouth common stock underlying security award aggregate number shares bellsouth common stock may granted calendar year shall exceed one percent shares outstanding time grant prior adoption stock plan awards granted bellsouth corporation stock option plan stock option plan stock options granted plans entitle optionee purchase shares bellsouth common stock within prescribed periods either price equal fair market value date grant price excess stock price date grant sars entitle optionee surrender unexercised stock options cash stock equal excess fair market value surrendered shares option price shares options granted plans generally become exercisable end five years term 10 years april 1995 bellsouth shareholders also approved adoption bellsouth corporation nonemployee director stock plan director stock plan director stock plan provides grants stock options sars nonemployee directors aggregate 300000 shares bellsouth common stock plan nonemployee director granted date annual shareholders meeting option purchase 1000 shares option granted include grant tandem sar option price per share equal fair market value date grant options granted director stock plan become exercisable end one year term 10 years total 14287748 shares covered outstanding options plans december 31 1995 488938 accompanied sars bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note j stock option plans continued following table summarizes activity stock options outstanding 1 reflects twoforone stock split occurred beginning earliest period presented note k work force reductionrestructuring charges 1995 work force reduction charge fourth quarter 1995 bellsouth recognized pretax charge 1082 related work force reductions primary component charge 942 planned work force reductions core wireline business end 1997 consists 561 provisions sfas 112 employers accounting postemployment benefits related employees expected receive severance benefits preexisting separation plans 381 curtailment losses provisions sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers accounting postretirement benefits pensions substantially curtailment losses relate postretirement benefits pensions remaining components charge 85 expected severance benefit payments 1997 also sfas 112 55 additional net curtailment losses related employee reductions 1993 restructuring plan 1993 restructuring charge results operations year ended december 31 1993 include 1136 restructuring charge restructuring completed 1995 undertaken redesign streamline fundamental processes work activities bellsouth telecommunications telephone operations better respond increasingly competitive business environment material components charge related reduction workforce 10200 employees december 31 1995 employee reductions related restructuring plan 1300 1993 3900 1994 5000 1995 components charge consisted provisions 368 separation payments relocations remaining employees 343 consolidation elimination certain operations facilities 425 enabling changes information systems primarily used provide services existing customers bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note l income taxes effective january 1 1993 bellsouth adopted sfas 109 accounting income taxes applies balance sheet approach income tax accounting accordance standard balance sheet reflects anticipated tax impact future taxable income deductions implicit balance sheet form temporary differences temporary differences reflect difference basis assets liabilities measured financial statements measured tax laws using enacted tax rates cumulative effect january 1 1993 adoption sfas 109 recorded 8 reduction 1993 income tax expense upon adoption 1993 bellsouth regulated operations reflected balance sheet impact sfas 109 accordance provisions sfas 71 specifically bellsouth telecommunications recorded net regulatory liability 538 correspond net reduction deferred tax liabilities reduction resulted changes tax rates temporary differences previously flowed balance net liability december 31 1994 included liabilities deferred credits 304 1995 net regulatory liability eliminated conjunction discontinuance sfas 71 provision income taxes summarized follows extraordinary losses 1995 presented consolidated statement income net tax benefits totaling 1780 49 current 1731 deferred 1993 extraordinary loss accounting change net tax benefits totaling 102 59 current 43 deferred bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note l income taxes continued temporary differences gave rise deferred tax assets liabilities december 31 follows decrease net deferred tax liability primarily due discontinuance sfas 71 valuation allowance primarily relates state net operating losses utilized carryforward period net deferred tax liability december 31 1995 1994 85 232 respectively current 1650 3647 respectively noncurrent reconciliation federal statutory income tax rate bellsouths effective tax rate follows note cumulative effect accounting change bellsouth adopted effective january 1 1993 sfas 112 employers accounting postemployment benefits sfas 112 requires employers accrue cost postemployment benefits provided former inactive employees employment retirement including limited workers compensation disability continuation health care benefits previously bellsouth used cash method account costs onetime charge 67 06 per share net deferred tax benefit 43 related adoption statement recognized change accounting principle effect change bellsouths 1993 operating results material bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note n supplemental cash flow information note financial instruments following disclosure estimated fair value financial instruments presented accordance provisions sfas 107 disclosures fair value financial instruments estimated fair value amounts determined using available market information described since judgment required develop estimates estimated amounts presented herein may indicative amounts bellsouth could realize current market exchange cash equivalentstemporary cash investments december 31 1995 1994 recorded amounts cash equivalents temporary cash investments respectively approximate fair value due shortterm nature instruments debt december 31 1995 1994 recorded amounts bank loans commercial paper approximate fair value due shortterm nature liabilities estimates fair value bellsouth telecommunications debentures notes estimated based closing market bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note financial instruments continued prices issue december 31 1995 1994 respectively fair value estimates guarantee esop debt bellsouth capital funding corporation notes based quotes dealers financial instruments bellsouth party foreign exchange forward contracts currency swap agreements interest rate swap agreements normal course business purposes trading financial instruments used mitigate foreign currency interest rate risks although extent expose company market risks credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited currency rate interest rate differential contracts agreements executed creditworthy financial institutions bellsouth considers risk nonperformance remote foreign exchange forward contracts foreign exchange forward contracts delivery purchase foreign currencies specified future dates fair values contracts estimated based quotes brokers bellsouth enters foreign exchange forward contracts primarily hedges relating identifiable currency exposures financial instruments designed minimize exposure reduce risk exchange rate fluctuations normal course business december 31 1995 bellsouth foreign exchange forward contracts buy 27 worth german marks december 31 1994 bellsouth foreign exchange forward contracts sell 67 worth german marks currency swap currency swap contracts provide exchange defined cash flows two currencies specified times fair value currency swap estimated based quotes brokers bellsouth entered currency swap 1994 hedge european currency units ecu 125000000 debt issued capital funding currency swap related debt mature february 1999 december 31 1995 net currency swap receivable 20 related net interest receivable 8 included accounts receivable consolidated balance sheet december 31 1995 interest rate ecu debt 525 currency swap effectively converts interest rate ecu debt 525 payable ecus 5247 payable us dollars interest rate swaps interest rate swap agreements require counterparties exchange interest cash flows specified amount debt defined period fair values interest rate swap agreements estimated based quotes dealers order manage exposure interest rate changes bellsouth enters interest rate swap agreements exchange fixed variable rate interest payment obligations without exchange underlying principal amounts agreements used adjust interest certain fixed variable rate obligations bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note financial instruments continued summarized types interest rate swaps outstanding related weightedaverage interest rates swaps mature either 1996 2002 bellsouth also issued letters credit financial guarantees approximate 340 december 31 1995 since market instruments practicable estimate fair value concentrations credit risk financial instruments potentially subject bellsouth credit risk consist principally trade accounts receivable concentrations credit risk respect receivables interexchange carriers limited due composition customer base includes large number individuals businesses december 31 1995 1994 approximately 520 448 respectively trade accounts receivable interexchange carriers note p commitments contingencies leases bellsouth entered operating leases facilities equipment used operations rental expense operating leases 252 311 300 1995 1994 1993 respectively capital leases currently effect significant following table summarizes approximate future minimum rentals noncancelable operating leases effect december 31 1995 outside plant bellsouth currently selfinsures outside plant casualty losses net book value outside plant 8080 10459 december 31 1995 1994 respectively outside plant located nine southeastern states served bellsouth telecommunications susceptible damage severe weather conditions perils including hurricanes legal actions bellsouth subsidiaries subject claims proceedings arising ordinary course business involving allegations personal injury breach contract anticompetitive conduct employment law issues matters bellsouth telecommunications also subject claims proceedings attributable predivestiture events involving environmental liabilities rates taxes contracts torts certain contingent liabilities predivestiture events shared att corp operating telephone companies complete assurance cannot given outcome pending threatened legal actions bellsouth believes financial impact would material financial position annual operating results cash flows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note q quarterly financial information unaudited following summary quarterly financial information adjustments necessary fair presentation period included results fourth quarter 1995 include work force reduction charge 1082 reduced net income 663 supplementary data bellsouth corporation domestic cellular proportionate operating data dollars millions unaudited following table sets forth unaudited supplemental financial data bellsouths domestic cellular operations reflecting proportionate consolidation entities bellsouth interest presentation differs consolidation methodology used prepare bellsouths principal financial statements accordance generally accepted accounting principles proportionate operating data reflect bellsouths ownership percentage entities consolidated financial reporting purposes bellsouths ownership percentage entities accounted equity method financial reporting purposes data exclude gains losses disposition property interests include equipment revenue net cost item 9item 8 consolidated financial statements supplementary data report management shareholders bellsouth corporation financial statements prepared conformity generally accepted accounting principles audited coopers lybrand llp independent accountants whose report contained herein integrity objectivity data financial statements including estimates judgments relating matters concluded end year responsibility management bellsouth management also prepared information included therein unless indicated otherwise management maintains system internal accounting controls continuously reviewed evaluated however inherent limitations recognized considering assurances provided system internal accounting controls concept reasonable assurance recognizes cost system internal accounting controls exceed managements judgment benefits derived management believes bellsouths system provide reasonable assurance transactions executed accordance managements general specific authorizations recorded properly maintain accountability assets permit preparation financial statements conformity generally accepted accounting principles management also believes system provides reasonable assurance access assets permitted accordance managements authorizations recorded accountability assets compared existing assets reasonable intervals appropriate action taken respect differences management also seeks assure objectivity integrity financial data careful selection managers organizational arrangements provide appropriate division responsibility communications programs aimed assuring policies standards managerial authorities understood throughout organization management also aware changes operating strategy organizational structure give rise disruptions internal controls special attention given controls changes implemented management maintains strong internal auditing program independently assesses effectiveness internal controls recommends possible improvements thereto addition part audit financial statements coopers lybrand llp completed review accounting controls establish basis reliance thereon determining nature timing extent audit tests applied management considered internal auditors coopers lybrand llps recommendations concerning system internal controls taken actions believes costeffective circumstances respond appropriately recommendations management believes december 31 1996 system internal controls adequate accomplish objectives discussed herein management also recognizes responsibility fostering strong ethical climate bellsouths affairs conducted according highest standards personal corporate conduct responsibility communicated employees policies guidelines addressing issues conflict interest safeguarding bellsouths real intellectual properties providing equal employment opportunities ethical relations customers suppliers governmental representatives bellsouth maintains program assess compliance policies ethical standards senior vice president executive staff officer corporate secretary february 3 1997 audit committee chairmans letter audit committee board directors consists four members neither officers employees bellsouth corporation information persons well duties provided proxy statement audit committee met six times 1996 reviewed chief corporate auditor coopers lybrand llp management current audit activities plans results selected internal audits audit committee also reviewed objectivity financial reporting process adequacy internal controls audit committee recommended subject shareholder ratification appointment independent accountants considered factors relating independence addition audit committee provided guidance matters regarding ethical considerations business conduct reviewed operations political action committees monitored compliance laws regulations chief corporate auditor coopers lybrand llp met privately audit committee occasion encourage confidential discussions auditing matters marshall criser marshall criser chairman audit committee february 3 1997 report independent accountants shareholders bellsouth corporation atlanta georgia audited accompanying consolidated balance sheets bellsouth corporation december 31 1996 1995 related consolidated statements income shareholders equity cash flows three years period ended december 31 1996 financial statements responsibility bellsouths management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position bellsouth corporation december 31 1996 1995 consolidated results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles discussed note l consolidated financial statements bellsouth discontinued accounting operations bellsouth telecommunications inc accordance statement financial accounting standards 71 accounting effects certain types regulation effective june 30 1995 coopers lybrand llp atlanta georgia february 3 1997 bellsouth corporation consolidated statements income millions except per share amounts accompanying notes integral part consolidated financial statements bellsouth corporation consolidated balance sheets millions except per share amounts accompanying notes integral part consolidated financial statements bellsouth corporation consolidated statements shareholders equity millions accompanying notes integral part consolidated financial statements bellsouth corporation consolidated statements cash flows millions accompanying notes integral part consolidated financial statements bellsouth corporation notes consolidated financial statements dollars millions except per share amounts note accounting policies organization bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange service toll communications services within geographic areas called local access transport areas latas provides network access services enable interlata communications using longdistance facilities interexchange carriers subsidiaries telecommunications services products provided primarily within ninestate bellsouth telecommunications region bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing wireless international communications services advertising publishing products substantially bellsouths operating revenues derived domestic operations year ended december 31 1996 approximately 70 bellsouths operating revenues wireline network services 15 wireless communications services 9 directory advertising publishing services remainder operating revenues derived principally nonregulated services provided bellsouth telecommunications basis presentation consolidated financial statements include accounts bellsouth subsidiaries controlling financial interest investments certain partnerships joint ventures subsidiaries accounted using equity method significant intercompany transactions accounts eliminated certain amounts prior period consolidated financial statements reclassified conform current years presentation basis accounting bellsouths consolidated financial statements prepared accordance generally accepted accounting principles financial statements include estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities amounts revenues expenses actual results could differ estimates effective june 30 1995 bellsouth discontinued application statement financial accounting standards sfas 71 accounting effects certain types regulation see note l discussion impacts discontinuance sfas 71 cash equivalents bellsouth considers highly liquid investments original maturity three months less cash equivalents investments original maturity three months one year considered cash equivalents included temporary cash investments consolidated balance sheets interest income cash equivalents temporary cash investments interestbearing instruments 163 108 65 years ended december 31 1996 1995 1994 respectively material supplies new reusable material carried inventory principally average original cost except specific costs used case large individual items nonreusable material carried estimated salvage value property plant equipment investment property plant equipment stated original cost plant dedicated providing regulated telecommunications services depreciation based remaining life method depreciation straightline composite rates determined basis equal life groups certain categories telephone plant acquired given year depreciable telephone plant disposed original cost less net salvage value charged accumulated depreciation cost property plant equipment depreciated using either bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued straightline accelerated methods estimated useful lives assets gains losses disposal depreciable property plant equipment recognized year disposition element nonoperating income intangible assets intangible assets consist excess consideration paid fair value net assets acquired business combinations acquired licenses customer lists intangible assets amortized using straightline accelerated methods periods benefit periods exceed 40 years carrying value intangible assets periodically reviewed basis whether intangibles fully recoverable projected discounted net cash flows related business unit amortization intangibles 49 50 53 years ended december 31 1996 1995 1994 respectively december 31 1996 1995 accumulated amortization intangibles 220 228 respectively foreign currency assets liabilities foreign subsidiaries equity investees functional currency us dollars translated us dollars exchange rates effect end reporting period foreign entity revenues expenses translated us dollars average rates prevailed period resulting net translation gains losses reported foreign currency translation adjustments shareholders equity component paidin capital exchange gains losses transactions company equity investees denominated currency functional currency generally included results operations incurred unless transactions hedged see derivative financial instruments exchange gains losses years ended december 31 1996 1995 1994 material derivative financial instruments foreign exchange forward contracts carried fair value consolidated balance sheets gains losses foreign exchange forward contracts used currency hedges existing assets liabilities deferred offset deferred losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures gains losses related qualifying hedges firm commitments also deferred recognized income adjustments carrying amounts hedged transaction occurs currency swap contracts entered hedges existing assets liabilities carried fair value consolidated balance sheets gains losses currency swaps deferred offset deferred currency losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures interest rate swap agreements treated offbalance sheet financial instruments receipts payments resulting instruments recognized adjustments interest expense received paid revenue recognition revenues recognized earned certain revenues derived local telephone wireless services billed monthly advance recognized following month services provided directory advertising publishing revenues related directory costs recognized upon publication directories revenues derived telecommunications services principally network access toll cellular airtime usage recognized monthly services provided allowances uncollectible billed services adjusted monthly provision uncollectible accounts 254 213 175 years ended december 31 1996 1995 1994 respectively revenues services provided att corp bellsouths largest customer approximately 9 10 11 consolidated operating revenues 1996 1995 1994 respectively bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued maintenance repairs cost maintenance repairs plant including cost replacing minor items effecting substantial betterments charged operating expenses income taxes balance sheet reflects deferred tax balances associated anticipated tax impact future income deductions implicit balance sheet form temporary differences temporary differences primarily result use accelerated methods shorter lives computing depreciation tax purposes financial reporting purposes bellsouth amortizing deferred investment tax credits earned prior 1986 repeal investment tax credit also transitional credits earned repeal credits amortized reduction provision income taxes estimated useful lives assets credits relate earnings per share earnings per common share computed basis weighted average number shares common stock outstanding year note b investments advances sales operations investments advances december 31 consist following bellsouths equity method investments primarily include various partnerships domestic international wireless properties international communications consortiums losses related investments accounted equity method 76 86 110 three years ended december 31 1996 1995 1994 respectively included component income net domestic cellular bellsouths domestic cellular investments consist primarily 600 noncontrolling financial interest los angeles cellular telephone company 438 interest houston cellular telephone company december 31 1996 bellsouths aggregate investment entities exceeded underlying book value investees net assets 880 excess consideration paid net assets acquired along intangible assets amortized using either straightline accelerated methods periods benefit exceed 40 years international communications bellsouth equity investments international cellular operations latin america europe asiapacific region international markets ownership ranging 225 533 telcel cellular ca telcel bellsouth noncontrolling 533 interest provides cellular telephone service venezuela bellsouth 245 participant optus international consortium provides full spectrum telecommunications services australia including switched network enhanced services wireless satellite based services bellsouth 225 participant eplus mobilfunk consortium eplus provides cellular telephone service germany investments bellsouth noncontrolling financial interests ranging 70 80 csl ventures 1155 peachtree associates real estate partnerships bellsouth notes receivable advances partnerships totaling 193 188 december 31 1996 1995 respectively notes bear interest rates ranging 631 931 advances bear bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances sales operations continued interest federal funds rate plus 30 principal amounts outstanding december 31 1996 due payable bellsouth january 15 1998 august 8 2002 instruments require periodic payments interest collateralized various real estate holdings bellsouth credit agreement prime south diversified inc prime provide 250 financing 250 185 borrowed prime december 31 1996 1995 respectively loan collateralized stock prime indirectly wholly owns community cable tv las vegas whollyowned subsidiary prime south holdings inc loan bears interest variable rate 10 11 matures 2001 bellsouth ram communications group inc partners entity owns operates certain mobile data communications networks investment bellsouth holds 49 interest united states mobile data operations various interests foreign mobile data operations ranging 6 725 1996 bellsouth initiated tender offer controlling interest entity provides cellular telephone service peru bellsouth deposited 148 escrow arrangements pending outcome tender offer amount included deferred charges assets accompanying consolidated balance sheet january 1997 bellsouth successfully completed tender offer acquiring 587 interest entity minority interests consolidated subsidiaries included component income net 27 62 80 years ended december 31 1996 1995 1994 respectively sales operations january 1996 bellsouth sold mobile media communications inc paging subsidiary mobile communications corporation america mcca twoway nationwide narrowband personal communications services license total approximately 930 pretax gain sale 442 mccas operating revenues 349 276 respectively years ended december 31 1995 1994 total operating expenses 300 245 respectively years ended december 31 1995 1994 total assets december 31 1995 355 1994 bellsouth disposed interests cellular telephone businesses mexico france bellsouth recognized gains dispositions aggregating 108 included income net note c property plant equipment property plant equipment summarized follows december 31 see note l discussion discontinuance sfas 71 effect property plant equipment bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note current liabilities current liabilities summarized follows december 31 note e debt maturing within one year debt maturing within one year summarized follows december 31 bellsouth committed credit lines aggregating 1951 various banks borrowings committed lines totaled 92 66 respectively december 31 1996 1995 bellsouth also maintains uncommitted lines credit aggregating 650 december 31 1996 borrowings uncommitted lines significant commitment fees requirements compensating balances associated lines credit bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt continued longterm debt summarized consists primarily debentures notes issued bellsouth telecommunications interest rates maturities table amounts outstanding december 31 1996 maturities longterm debt outstanding principal amounts december 31 1996 summarized maturities year 2001 include 500 principal amount 665 debentures due 2095 december 31 1996 debentures accreted book value 135 notes issued bellsouth capital funding corporation capital funding used finance businesses bellsouth enterprises unregulated subsidiaries bellsouth telecommunications bellsouth agreed ensure timely payment principal premium interest capital fundings debt securities 1995 bellsouth telecommunications refinanced certain longterm debt issues favorable interest rates approximate 1900 gross proceeds debentures issued year accomplish refinancings included longterm debt total 1885 aggregate principal amount debentures called redemption 1995 1400 actually redeemed december 31 1995 remaining 485 debentures redeemed january 1996 included consolidated balance sheet december 31 1995 debt maturing within one year result early extinguishment issues including issues redeemed january 1996 extraordinary loss 78 08 per share net current tax benefit 49 recognized 1995 december 31 1996 shelf registration statements file securities exchange commission 1927 debt securities could offered bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note f liabilities deferred credits liabilities deferred credits summarized follows december 31 note g shareholders equity stock split september 1995 bellsouths board directors approved twoforone stock split effected form stock dividend whereby shareholder record october 11 1995 received november 8 1995 one additional share common stock share owned record date result split 503555084 shares issued 503 transferred paidin capital common stock also september 1995 bellsouths board directors approved increase number authorized shares common stock 2200000000 1100000000 weighted average common shares outstanding per share amounts 1994 restated reflect stock split preferred stock authorized bellsouths articles incorporation authorize 100 million shares cumulative first preferred stock par value 1 per share 30 million shares reserved designated series possible issuance bellsouths shareholder rights plan december 31 1996 preferred shares issued shareholder rights plan 1989 bellsouth adopted shareholder rights plan declaring dividend one right share common stock outstanding issued thereafter right entitles shareholders buy one onehundredth share series first preferred stock 8750 per share rights may exercised person group acquires 10 common stock bellsouth without prior approval board directors announces tender exchange offer would result ownership 25 common stock person group acquires 10 bellsouths stock without prior board approval shareholders allowed purchase bellsouth common stock half price rights currently trade bellsouth common stock may redeemed board directors one cent per right become exercisable thereafter certain circumstances rights expire 1999 shares held trust treasury 1994 1995 1996 bellsouth issued shares grantor trusts provide partial funding benefits payable certain nonqualified benefit plans trusts irrevocable assets contributed trusts used pay benefits certain exceptions december 31 1996 1995 assets held trusts consist cash 15796782 13753204 shares respectively bellsouth common stock total shares bellsouth common stock held trusts 14586782 issued bellsouth directly trusts previously unissued shares 1210000 shares acquired open market transactions use trusts funds total cost shares issued bellsouth date funding trusts included common stock paidin capital however shares considered outstanding financial reporting purposes shares included within shares held trust treasury bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note g shareholders equity continued reduction shareholders equity addition earnings per share impact shares cost shares acquired open market purchases trust also included shares held trust treasury addition shares held grantor trusts shares held trust treasury includes treasury shares purchased connection bellsouths announced plans repurchase shares common stock 1996 bellsouth purchased 2207152 treasury shares aggregate 85 total 276168 shares reissued various employee benefit plans shares held trust treasury december 31 1996 1995 comprised following guarantee esop debt financial reporting practices require amount equivalent bellsouths guarantee amortizing notes issued esop trusts presented reduction shareholders equity amount recorded decrease shareholders equity represents cost unallocated bellsouth common stock purchased proceeds amortizing notes timing difference resulting shares allocated accounting method see note h note h employee benefit plans pension plans substantially employees bellsouth covered noncontributory defined benefit pension plans principal plans discussed plans significant individually aggregate plan covering nonrepresented employees cash balance plan provides pension benefits determined combination compensationbased service additional credits individual accountbased interest credits cash balance plan subject minimum benefit determined plan existence nonrepresented employees prior july 1 1993 provided benefits based upon credited service employees average compensation specified period minimum benefit prior plan applicable employees retiring 2005 1996 1995 projected benefit obligations assume interest additional credits greater minimum levels specified written plan pension benefits provided represented employees based specified benefit amounts years service include projected effect future bargainedfor improvements bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay pension benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations pension plan assets consist primarily equity securities fixed income investments bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued components net pension income cost summarized effective january 1 1994 nonrepresented cash balance plan divided one four cash balance plans allowed costs accounted precisely based upon specific company demographic information plan division material impact bellsouth 1994 net pension income cost affected changes discount rate actuarial assumptions consolidated net pension income cost amounts reflected exclusive curtailment effects reflected work force reduction restructuring activities see note j reflect curtailment gains amount 43 1996 following table sets forth funded status plans december 31 significant actuarial assumptions december 31 1996 1995 follows postretirement benefits pensions bellsouth sponsors postretirement health life insurance welfare plans nonrepresented represented employees bellsouths transition benefit obligation amortized 15 years average remaining service period active plan participants adoption accounting health care plan anticipate future adjustments costsharing arrangements provided written plan employees retire december 31 1991 bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay health life benefits bellsouth liable contributions bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued actuarially determined using aggregate cost method subject erisa internal revenue service limitations assets health life plans consist primarily equity securities fixed income investments net postretirement benefit cost income years ended december 31 1996 1995 1994 respectively composed following consolidated net postretirement benefit cost income amounts reflected exclusive curtailment effects reflected work force reduction restructuring activities discussed note j following table sets forth plans funded status december 31 1996 1995 respectively significant actuarial assumptions december 31 1996 1995 follows 1 trend rate used value accumulated postretirement obligation 1996 1995 assumed decrease gradually 5 2003 2 rate net estimated 30 tax reduction nonrepresented employees trust 1996 1995 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued health care cost trend rate assumption affects amounts reported onepercentagepoint increase assumed health care cost trend rates future year would increase accumulated postretirement benefit obligation 190 december 31 1996 estimated aggregate service interest cost components 1996 postretirement benefit cost 17 defined contribution plans bellsouth maintains several contributory savings plans cover substantially employees april 1996 bellsouth management savings employee stock ownership plan bellsouth enterprises retirement savings plan merged form bellsouth retirement savings plan bellsouth retirement savings plan bellsouth savings security plan collectively savings plans taxqualified defined contribution plans assets plans held two trusts turn part bellsouth master savings trust 1990 leveraged employee stock ownership plan esop incorporated savings plans trusts borrowed 850 issuing amortizing notes guaranteed bellsouth see note e trusts used loan proceeds purchase shares bellsouth common stock open market shares held suspense accounts trusts scheduled number shares released allocation participants semiannual loan payment made trusts service debt contributions bellsouth dividends paid shares held trusts none shares held trusts subject repurchase portion employees eligible contributions savings plans matched bellsouth rates determined annually board directors bellsouths matching obligation fulfilled shares released suspense accounts semiannually allocation participants number shares allocated participants account based market price shares time allocation shares released allocation fulfill bellsouths matching obligation bellsouth makes contributions trusts fund purchase additional shares open market fulfill remaining obligation bellsouth recognizes expense using shares allocated accounting method combines cost shares allocated period plus interest incurred reduced dividends used service esop debt dividends esop shares recorded reduction retained earnings esop shares included computation earnings per share bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note stock compensation plans december 31 1996 bellsouth stock options outstanding several stockbased compensation plans bellsouth corporation stock plan stock plan provides grants key employees stock options various stockbased awards one share bellsouth common stock underlying security award aggregate number shares bellsouth common stock may granted calendar year cannot exceed one percent shares outstanding time grant prior adoption stock plan stock options granted bellsouth corporation stock option plan stock options granted plans entitle optionee purchase shares bellsouth common stock within prescribed periods price either equal excess fair market value date grant options granted plans generally become exercisable end five years term 10 years bellsouth applies apb opinion 25 related interpretations accounting stock plans accordingly compensation cost recognized grants stock options compensation cost bellsouths stockbased compensation plans determined accordance provisions sfas 123 accounting stockbased compensation bellsouths net income earnings per share would reduced pro forma amounts indicated pro forma amounts reflected representative effects reported net income future years general options granted 1996 1995 vest several years additional awards made year following table summarizes activity stock options outstanding bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note stock compensation plans continued fair value option grant estimated grant date using blackscholes optionpricing model following weightedaverage assumptions following table summarizes information stock options outstanding december 31 1996 note j work force reduction charge fourth quarter 1995 bellsouth recognized pretax charge 1082 related work force reductions primary component charge 942 planned work force reductions core wireline business end 1997 consists 561 provisions sfas 112 employers accounting postemployment benefits related employees expected receive severance benefits preexisting separation plans 381 curtailment losses provisions sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers accounting postretirement benefits pensions substantially curtailment losses relate postretirement benefits pensions remaining components charge 85 expected severance benefit payments 1997 also sfas 112 55 additional net curtailment losses related employee reductions restructuring plan initiated 1993 completed 1995 work force reduction plan bellsouth telecommunications expects reduce work force wireline telephone operations approximately 11300 employees end 1997 work force reduction accomplished separation approximately 13200 employees partially offset planned hiring new employees primarily replace expected relocate connection consolidation work locations including reduction approximately 800 employees occurred december 1995 bellsouth telecommunications reduced work force approximately 7000 employees 1995 plan december 31 1996 note k income taxes accordance sfas 109 accounting income taxes balance sheet reflects anticipated tax impact future taxable income deductions implicit balance sheet form temporary differences temporary differences reflect difference basis assets liabilities measured financial statements measured tax laws using enacted tax rates bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note k income taxes continued provision income taxes summarized follows extraordinary losses 1995 presented consolidated statement income net tax benefits totaling 1780 49 current 1731 deferred temporary differences gave rise deferred tax assets liabilities december 31 follows valuation allowance increased 9 1996 primarily relates state net operating losses utilized carryforward period net deferred tax liability december 31 1996 1995 134 85 respectively current 1899 1650 respectively noncurrent bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note k income taxes continued reconciliation federal statutory income tax rate bellsouths effective tax rate follows note l discontinuance sfas 71 1995 result continuing regulatory marketplace assessments bellsouth telecommunications concluded required discontinue sfas 71 accounting effects certain types regulation financial reporting purposes accordingly bellsouth telecommunications recorded noncash extraordinary charge 2718 net deferred tax benefit 1731 components charge follows reduction telephone plant 4896 pretax recorded increase related accumulated depreciation accounts categories amounts follows reduction plant determined impairment analysis identified estimated amounts recoverable future discounted cash flows analysis considered projected effects future competition well changes technology capital requirements plantrelated charge related assets within regulatory framework supported depreciation studies identified inadequate levels accumulated depreciation certain asset categories studies give recognition historical underdepreciation assets resulting primarily regulatorprescribed asset lives exceeded estimated economic asset lives bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note l discontinuance sfas 71 continued financial reporting purposes average depreciable lives affected categories long lived telephone plant reduced closely reflect economic technological lives differences regulatorapproved asset lives current estimated economic asset lives follows remaining components extraordinary charge partially offset plantrelated portion overall charge include 194 tax related adoption bellsouth telecommunications issue basis accounting directory publishing revenues bellsouths unregulated subsidiaries already recognized directory publishing revenues production expenses using issue basis accounting overall extraordinary charge also reduced 71 tax reflect removal regulatory assets liabilities recorded result previous actions regulators virtually regulatory assets liabilities arose connection incorporation new accounting standards ratemaking process transitory nature addition overall extraordinary charge reduced 19 tax partial acceleration unamortized investment tax credits associated reductions asset carrying values asset lives note supplemental cash flow information note n financial instruments recorded amounts cash equivalents temporary cash investments bank loans commercial paper approximate fair value due shortterm nature instruments fair value bellsouth telecommunications debentures notes estimated based closing market prices issue december 31 1996 1995 fair value estimates guarantee esop debt bellsouth capital funding corporation notes foreign exchange contracts foreign currency swaps interest rate swaps based quotes dealers since judgment required develop estimates estimated amounts presented herein may indicative amounts bellsouth could realize current market exchange bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note n financial instruments continued following summary financial instruments fair values differ recorded amounts december 31 1996 1995 derivative financial instruments bellsouth time party currency swap agreements interest rate swap agreements foreign exchange forward contracts normal course business purposes trading financial instruments used mitigate foreign currency interest rate risks although extent expose company market risks credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited current value currency rate interest rate differential full notional amount contracts agreements executed creditworthy financial institutions bellsouth considers risk nonperformance remote currency swap bellsouth entered currency swap 1994 hedge european currency units ecu 125000000 debt issued capital funding currency swap related debt mature february 1999 december 31 1996 net currency swap receivable equals fair value swap 23 related net interest receivable 7 included accounts receivable consolidated balance sheet december 31 1996 interest rate swaps bellsouth enters interest rate swap agreements exchange fixed variable rate interest payment obligations without exchange underlying principal amounts december 31 1996 bellsouth party various interest rate swaps aggregate notional amount 120 swaps bellsouth paid fixed rates averaging 713 received variable rates averaging 552 swaps mature dates ranging 2001 2002 december 31 1995 bellsouth party two types interest rate swaps aggregate notional amounts 96 75 respectively 96 swaps bellsouth paid fixed rates averaging 738 received variable rates averaging 605 75 swaps bellsouth paid variable rates averaging 596 received fixed rates averaging 486 bellsouth also issued letters credit financial guarantees approximate 322 december 31 1996 total 169 represents us dollar equivalent outstanding balance eplus debt guaranteed bellsouth agreed guarantee eplus borrowings us dollar equivalent 341 530 million german marks december 31 1996 since market instruments practicable estimate fair value concentrations credit risk financial instruments potentially subject bellsouth credit risk consist principally trade accounts receivable concentrations credit risk respect bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note n financial instruments continued receivables interexchange carriers limited due composition customer base includes large number individuals businesses december 31 1996 1995 approximately 492 520 respectively trade accounts receivable interexchange carriers note commitments contingencies leases bellsouth entered operating leases facilities equipment used operations rental expense operating leases 269 252 311 1996 1995 1994 respectively capital leases currently effect significant following table summarizes approximate future minimum rentals noncancelable operating leases effect december 31 1996 outside plant bellsouth currently selfinsures outside plant casualty losses net book value outside plant 7621 8080 december 31 1996 1995 respectively outside plant located nine southeastern states served bellsouth telecommunications susceptible damage severe weather conditions perils including hurricanes legal claims bellsouth subsidiaries subject claims arising ordinary course business involving allegations personal injury breach contract anticompetitive conduct employment law issues regulatory matters actions bellsouth telecommunications also subject claims attributable predivestiture events involving environmental liabilities rates taxes contracts torts certain contingent liabilities predivestiture events shared att corp respect regulatory matters south carolina public service commission ordered bellsouth telecommunications refund approximately 29 plus interest based investigation 1992 earnings refund stayed pending judicial review decision 1996 south carolina court common pleas entered order affirming commissions order refund bellsouth telecommunications intends pursue appeal decision commission postponed review bellsouth telecommunications earnings 1993 1994 resolution 1992 period reached complete assurance cannot given outcome legal claims bellsouth believes financial impact would material financial position annual operating results cash flows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note p quarterly financial information unaudited following summary quarterly financial information adjustments necessary fair presentation period included results first quarter 1996 include gain sale paging business 442 increased net income 344 results fourth quarter 1995 include work force reduction charge 1082 reduced net income 663 supplementary data bellsouth corporation domestic cellular proportionate operating data dollars millions unaudited following table sets forth unaudited supplemental financial data bellsouths domestic cellular operations reflecting proportionate consolidation entities bellsouth interest presentation differs consolidation methodology used prepare bellsouths principal financial statements accordance generally accepted accounting principles proportionate operating data reflect bellsouths ownership percentage entities consolidated financial reporting purposes bellsouths ownership percentage entities accounted equity method financial reporting purposes data exclude gains losses disposition property interests include equipment revenue net cost item 9item 8 consolidated financial statements supplementary data report management shareholders bellsouth corporation financial statements prepared conformity generally accepted accounting principles audited coopers lybrand llp independent accountants whose report contained herein integrity objectivity data financial statements including estimates judgments relating matters concluded end year responsibility management bellsouth management also prepared information included therein unless indicated otherwise management maintains system internal accounting controls continuously reviewed evaluated however inherent limitations recognized considering assurances provided system internal accounting controls concept reasonable assurance recognizes cost system internal accounting controls exceed managements judgment benefits derived management believes bellsouths system provide reasonable assurance transactions executed accordance managements general specific authorizations recorded properly maintain accountability assets permit preparation financial statements conformity generally accepted accounting principles management also believes system provides reasonable assurance access assets permitted accordance managements authorizations recorded accountability assets compared existing assets reasonable intervals appropriate action taken respect differences management also seeks assure objectivity integrity financial data careful selection managers organizational arrangements provide appropriate division responsibility communications programs aimed assuring policies standards managerial authorities understood throughout organization management also aware changes operating strategy organizational structure give rise disruptions internal controls special attention given controls changes implemented management maintains strong internal auditing program independently assesses effectiveness internal controls recommends possible improvements thereto addition part audit financial statements coopers lybrand llp completed review accounting controls establish basis reliance thereon determining nature timing extent audit tests applied management considered internal auditors coopers lybrand llps recommendations concerning system internal controls taken actions believes costeffective circumstances respond appropriately recommendations management believes december 31 1997 system internal controls adequate accomplish objectives discussed herein management also recognizes responsibility fostering strong ethical climate bellsouths affairs conducted according highest standards personal corporate conduct responsibility communicated employees policies guidelines addressing issues conflict interest safeguarding bellsouths real intellectual properties providing equal employment opportunities ethical relations customers suppliers governmental representatives bellsouth maintains program assess compliance policies ethical standards senior vice presidentcorporate compliance corporate secretary february 3 1998 audit committee chairmans letter audit committee board directors consists four members neither officers employees bellsouth corporation information persons well duties provided proxy statement audit committee met six times 1997 reviewed chief corporate auditor coopers lybrand llp management current audit activities plans results selected internal audits audit committee also reviewed objectivity financial reporting process adequacy internal controls audit committee recommended subject shareholder ratification appointment independent accountants considered factors relating independence addition audit committee provided guidance matters regarding ethical considerations business conduct reviewed operations political action committees monitored compliance laws regulations chief corporate auditor coopers lybrand llp met privately audit committee occasion encourage confidential discussions auditing matters ronald terry ronald terry chairman audit committee february 3 1998 report independent accountants shareholders bellsouth corporation atlanta georgia audited accompanying consolidated balance sheets bellsouth corporation december 31 1997 1996 related consolidated statements income shareholders equity cash flows three years period ended december 31 1997 financial statements responsibility bellsouth corporations management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position bellsouth corporation december 31 1997 1996 consolidated results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles discussed note consolidated financial statements bellsouth corporation discontinued accounting operations bellsouth telecommunications inc accordance statement financial accounting standards 71 accounting effects certain types regulation effective june 30 1995 coopers lybrand llp atlanta georgia february 3 1998 bellsouth corporation consolidated statements income millions except per share amounts accompanying notes integral part consolidated financial statements bellsouth corporation consolidated balance sheets millions except per share amounts accompanying notes integral part consolidated financial statements bellsouth corporation consolidated statements shareholders equity millions accompanying notes integral part consolidated financial statements bellsouth corporation consolidated statements cash flows millions accompanying notes integral part consolidated financial statements bellsouth corporation notes consolidated financial statements dollars millions except per share amounts note accounting policies organization bellsouth corporation bellsouth holding company headquartered atlanta georgia whose operating telephone company subsidiary bellsouth telecommunications inc bellsouth telecommunications serves aggregate approximately twothirds population onehalf territory within alabama florida georgia kentucky louisiana mississippi north carolina south carolina tennessee bellsouth telecommunications primarily provides local exchange service toll communications services within geographic areas called local access transport areas latas ii network access services enable interlata communications using long distance facilities interexchange carriers subsidiaries telecommunications services products provided primarily within ninestate bellsouth telecommunications region bellsouth enterprises inc bellsouth enterprises another whollyowned subsidiary owns businesses providing wireless international communications services advertising publishing products substantially bellsouths total operating revenues derived domestic operations year ended december 31 1997 approximately 67 bellsouths total operating revenues network related services 17 wireless communications services 9 directory advertising publishing services remainder total operating revenues derived principally nonregulated services provided bellsouth telecommunications basis presentation consolidated financial statements include accounts bellsouth subsidiaries controlling financial interest investments certain partnerships joint ventures subsidiaries accounted using equity method significant intercompany transactions accounts eliminated certain amounts prior period consolidated financial statements reclassified conform current years presentation basis accounting bellsouths consolidated financial statements prepared accordance generally accepted accounting principles financial statements include estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities amounts revenues expenses actual results could differ estimates effective june 30 1995 bellsouth discontinued application statement financial accounting standards sfas 71 accounting effects certain types regulation see note discussion impacts discontinuance sfas 71 cash equivalents bellsouth considers highly liquid investments original maturity three months less cash equivalents investments original maturity three months one year considered cash equivalents included temporary cash investments consolidated balance sheets interest income cash equivalents temporary cash investments interestbearing instruments 193 163 108 years ended december 31 1997 1996 1995 respectively material supplies new reusable material carried inventory principally average original cost except specific costs used case large individual items nonreusable material carried estimated salvage value property plant equipment investment property plant equipment stated original cost plant dedicated providing regulated telecommunications services depreciation bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued based remaining life method depreciation straightline composite rates determined basis equal life groups certain categories telephone plant acquired given year depreciable telephone plant disposed original cost less net salvage value charged accumulated depreciation cost property plant equipment depreciated using either straightline accelerated methods estimated useful lives assets gains losses disposal depreciable property plant equipment recognized year disposition element income net intangible assets intangible assets consist excess consideration paid fair value net tangible assets acquired business combinations include acquired licenses customer lists intangible assets amortized using straightline accelerated methods periods benefit periods exceed 40 years carrying value intangible assets periodically reviewed basis whether intangibles fully recoverable projected net cash flows related business unit amortization intangibles 58 49 50 years ended december 31 1997 1996 1995 respectively december 31 1997 1996 accumulated amortization intangibles 321 220 respectively foreign currency assets liabilities foreign subsidiaries equity investees functional currency us dollars translated us dollars exchange rates effect end reporting period foreign entity revenues expenses translated us dollars average rates prevailed period resulting net translation gains losses reported foreign currency translation adjustments shareholders equity component paidin capital exchange gains losses transactions company equity investees denominated currency functional currency generally included results operations incurred unless transactions hedged see derivative financial instruments exchange gains losses years ended december 31 1997 1996 1995 material derivative financial instruments bellsouth generally enters derivative financial instruments hedging purposes deferral accounting applied derivative reduces risk underlying hedged item effectively result high inverse correlation value hedged item derivative instrument either initially fails later ceases meet criteria deferral settlement accounting subsequent gains losses recognized currently income foreign exchange forward contracts carried fair value consolidated balance sheets gains losses foreign exchange forward contracts used currency hedges existing assets liabilities deferred offset deferred losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures gains losses related qualifying hedges firm commitments also deferred recognized income adjustments carrying amounts hedged transaction occurs currency swap contracts entered hedges existing assets liabilities carried fair value consolidated balance sheets gains losses currency swaps deferred offset deferred currency losses gains underlying asset liability net effect ultimately recognized income underlying transaction matures bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued interest rate swap agreements treated offbalancesheet financial instruments receipts payments resulting instruments recognized adjustments interest expense received paid revenue recognition revenues recognized earned certain revenues derived local telephone wireless services billed monthly advance recognized following month services provided directory advertising publishing revenues related directory costs recognized upon publication directories revenues derived telecommunications services principally network access toll cellular airtime usage recognized monthly services provided allowances uncollectible billed services adjusted monthly provision uncollectible accounts 304 254 213 years ended december 31 1997 1996 1995 respectively revenues services provided att corp bellsouths largest customer approximately 8 9 10 total operating revenues 1997 1996 1995 respectively maintenance repairs cost maintenance repairs plant including cost replacing minor items affecting substantial betterments charged operating expenses income taxes balance sheet reflects deferred tax balances associated anticipated tax impact future income deductions implicit balance sheet form temporary differences temporary differences primarily result use accelerated methods shorter lives computing depreciation tax purposes financial reporting purposes bellsouth amortizing deferred investment tax credits earned prior 1986 repeal investment tax credit also transitional credits earned repeal credits amortized reduction provision income taxes estimated useful lives assets credits relate earnings per share 1997 bellsouth adopted sfas 128 earnings per share requires presentation basic diluted earnings per share basic earnings per share computed based weightedaverage number common shares outstanding year diluted earnings per share based sum weightedaverage number common shares outstanding plus common stock equivalents arising employee stock options benefit plans earnings per share information prior periods restated conform requirements standard common stock equivalents included calculation diluted earnings per share approximately 3 million 2 million 1 million respectively years ended december 31 1997 1996 1995 bellsouths earnings used per share calculations basic diluted methods bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances investments advances december 31 consist following bellsouths equity method investments primarily include various partnerships domestic international wireless properties international communications consortia losses related investments accounted equity method 242 76 86 three years ended december 31 1997 1996 1995 respectively included component income net domestic cellular bellsouths domestic cellular investments consist primarily 600 noncontrolling financial interest los angeles cellular telephone company 438 interest houston cellular telephone company december 31 1997 bellsouths aggregate investment entities exceeded underlying book value investees net assets 851 excess consideration paid net assets acquired along intangible assets amortized using either straightline accelerated methods periods benefit exceed 40 years international communications bellsouth equity investments international cellular operations latin america europe asiapacific region international markets ownership ranging 225 465 1997 two joint ventures bellsouth partner awarded licenses provide cellular services sao paulo brazil sixstate region northeastern brazil bellsouths ownership interests entities 410 425 respectively joint ventures bid approximately 2400 500 respectively licenses bellsouths proportionate shares remaining unpaid portion license fees required paid 1998 574 124 respectively investments bellsouth noncontrolling financial interests ranging 70 80 csl ventures 1155 peachtree associates real estate partnerships bellsouth notes receivable advances partnerships totaling 194 193 december 31 1997 1996 respectively notes bear interest rates ranging 631 931 advances bear interest federal funds rate plus 30 principal amounts outstanding december 31 1997 due payable bellsouth january 15 1998 august 8 2002 instruments require periodic payments interest collateralized various real estate holdings bellsouth credit agreement prime south diversified inc prime provide 250 financing 250 borrowed prime december 31 1997 1996 respectively loan collateralized stock prime indirectly wholly owns community cable tv las vegas whollyowned subsidiary prime south holdings inc loan bears interest variable rate 10 11 matures 2001 bellsouth ram communications group inc ram partners entity owns operates certain mobile data communications networks investment bellsouth holds 49 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances continued interest united states mobile data operations various interests foreign mobile data operations ranging 6 725 minority interests consolidated subsidiaries included component income net 34 27 62 years ended december 31 1997 1996 1995 respectively sales operations investments august 1997 bellsouth sold 245 interest optus communications cable wireless uk telecommunications company agreement bellsouth received approximately 735 cash 490 million shares optus communications addition bellsouth receive either 223 interest occidente caribe celular sa occel cellular communications company located colombia equivalent value interest cash bellsouths option cable wireless able transfer interest occel bellsouth within two years sale optus communications pretax gain sale 578 352 tax july 1997 bellsouth sold itt corporation 20 ownership interest itt world directories inc total proceeds 265 pretax gain sale 209 128 tax november 1997 bellsouth telecommunications sold science applications international corporation 143 interest bell communications research inc bellcore total proceeds 65 pretax gain sale included component income net 38 january 1996 bellsouth sold mobile media communications inc paging subsidiary mobile communications corporation america mcca twoway nationwide narrowband personal communications services license total approximately 930 pretax gain sale 442 344 tax mccas operating revenues expenses 349 300 respectively year ended december 31 1995 note c property plant equipment property plant equipment summarized follows december 31 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note current liabilities current liabilities summarized follows december 31 note e debt maturing within one year debt maturing within one year summarized follows december 31 bellsouth committed credit lines aggregating 1498 various banks borrowings committed lines totaled 241 92 respectively december 31 1997 1996 bellsouth also maintains uncommitted lines credit aggregating 1020 december 31 1997 borrowings uncommitted lines significant commitment fees requirements compensating balances associated lines credit bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt continued longterm debt summarized consists primarily debentures notes issued bellsouth telecommunications interest rates maturities table amounts outstanding december 31 1997 maturities longterm debt outstanding principal amounts december 31 1997 summarized maturities year 2002 include 500 principal amount 665 debentures due 2095 december 31 1997 debentures accreted book value 144 notes issued bellsouth capital funding corporation capital funding used finance businesses bellsouth enterprises unregulated subsidiaries bellsouth telecommunications bellsouth agreed ensure timely payment principal premium interest capital fundings debt securities 1997 1995 bellsouth telecommunications retired certain longterm debt issues totaling 600 1885 respectively result early extinguishment issues extraordinary losses 9 01 per share 78 08 per share net current tax benefits 6 49 respectively recognized 1997 1995 december 31 1997 shelf registration statements file securities exchange commission 1427 debt securities could offered bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note f liabilities deferred credits liabilities deferred credits summarized follows december 31 note g shareholders equity stock split september 1995 bellsouths board directors approved twoforone stock split effected form stock dividend whereby shareholder record october 11 1995 received november 8 1995 one additional share common stock share owned record date result split 503555084 shares issued 503 transferred paidin capital common stock also september 1995 bellsouths board directors approved increase number authorized shares common stock 2200000000 1100000000 preferred stock authorized bellsouths articles incorporation authorize 100 million shares cumulative first preferred stock par value 1 per share 30 million shares reserved designated series possible issuance bellsouths shareholder rights plan december 31 1997 preferred shares issued shareholder rights plan 1989 bellsouth adopted shareholder rights plan declaring dividend one right share common stock outstanding issued thereafter right entitles shareholders buy one onehundredth share series first preferred stock 8750 per share rights may exercised person group acquires 10 common stock bellsouth without prior approval board directors announces tender exchange offer would result ownership 25 common stock person group acquires 10 bellsouths stock without prior board approval shareholders allowed purchase bellsouth common stock half price rights currently trade bellsouth common stock may redeemed board directors one cent per right become exercisable thereafter certain circumstances rights expire 1999 shares held trust treasury 1995 1996 1997 bellsouth issued shares grantor trusts provide partial funding benefits payable certain nonqualified benefit plans trusts irrevocable assets contributed trusts used pay benefits certain exceptions december 31 1997 1996 assets held trusts consist cash 17156663 15796782 shares respectively bellsouth common stock total shares bellsouth common stock held trusts 15946663 issued bellsouth directly trusts previously unissued shares 1210000 shares acquired open market transactions use trusts funds total cost shares issued bellsouth date funding trusts included common stock paidin capital however shares considered outstanding bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note g shareholders equity continued financial reporting purposes shares included within shares held trust treasury reduction shareholders equity addition earnings per share impact shares cost shares acquired open market purchases trust also included shares held trust treasury addition shares held grantor trusts shares held trust treasury includes treasury shares purchased connection bellsouths announced plans repurchase shares common stock september 1997 bellsouth announced plan repurchase 1 billion common stock 1998 1997 1996 bellsouth purchased 3413989 2207152 treasury shares aggregate 157 85 respectively total 4124624 276168 shares respectively reissued various employee benefit plans purposes shares held trust treasury december 31 1997 1996 comprised following guarantee esop debt financial reporting practices require amount equivalent bellsouths guarantee amortizing notes issued esop trusts presented reduction shareholders equity amount recorded decrease shareholders equity represents cost unallocated bellsouth common stock purchased proceeds amortizing notes timing difference resulting shares allocated accounting method see note h note h employee benefit plans pension plans substantially employees bellsouth covered noncontributory defined benefit pension plans principal plans discussed plans significant individually aggregate plan covering nonrepresented employees cash balance plan provides pension benefits determined combination compensationbased service additional credits individual accountbased interest credits cash balance plan subject minimum benefit determined plan existence nonrepresented employees prior july 1 1993 provided benefits based upon credited service employees average compensation specified period minimum benefit prior plan applicable employees retiring 2005 1997 1996 projected benefit obligations assume interest additional credits greater minimum levels specified written plan pension benefits provided represented employees based specified benefit amounts years service include projected effect future bargainedfor improvements bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay pension benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations pension plan assets consist primarily equity securities fixed income investments bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued components net pension income summarized effective december 31 1997 nonrepresented cash balance plans recombined six one cash balance plan although one nonrepresented cash balance plan exists separate demographic pools maintained generate pension income based upon specific company information plan recombination material impact bellsouth 1998 change net pension income affected several variables including changes actuarial assumptions discount rate return plan assets plan amendments consolidated net pension income amounts reflected exclusive curtailment effects reflected work force reduction restructuring activities see note l reflect curtailment gains amount 36 43 1997 1996 respectively following table sets forth funded status plans december 31 accrued pension costs previous table consist 559 581 december 31 1997 1996 respectively classified liabilities deferred credits 350 172 respectively classified deferred charges assets significant actuarial assumptions december 31 1997 1996 follows postretirement benefits pensions bellsouth sponsors postretirement health life insurance welfare plans nonrepresented represented employees bellsouths transition benefit obligation amortized 15 years average remaining service period bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued active plan participants adoption accounting health care plan anticipate future adjustments costsharing arrangements provided written plan employees retire december 31 1991 bellsouths funding policy make contributions trust funds objective accumulating sufficient assets pay health life benefits bellsouth liable contributions actuarially determined using aggregate cost method subject erisa internal revenue service limitations assets health life plans consist primarily equity securities fixed income investments net postretirement benefit cost income years ended december 31 1997 1996 1995 respectively composed following bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued consolidated net postretirement benefit cost income amounts reflected exclusive curtailment effects reflected work force reduction restructuring activities discussed note l following table sets forth plans funded status december 31 1997 1996 respectively significant actuarial assumptions december 31 1997 1996 follows 1 trend rate used value accumulated postretirement obligation 1997 1996 assumed decrease 5 2003 2 rate net estimated 30 tax reduction nonrepresented employees trust 1997 1996 health care cost trend rate assumption affects amounts reported onepercentagepoint increase assumed health care cost trend rates future year would increase accumulated postretirement benefit obligation 258 december 31 1997 estimated aggregate service interest cost components 1997 postretirement benefit cost 18 defined contribution plans bellsouth maintains several contributory savings plans cover substantially employees bellsouth retirement savings plan bellsouth savings security plan collectively savings plans taxqualified defined contribution plans assets plans held two trusts turn part bellsouth master savings trust 1990 leveraged employee stock ownership plan esop incorporated savings plans trusts borrowed 850 issuing amortizing notes guaranteed bellsouth see note e trusts used loan proceeds purchase shares bellsouth common stock open market shares held suspense accounts trusts scheduled number shares released allocation participants semiannual loan payment made trusts service bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued debt contributions bellsouth dividends paid shares held trusts none shares held trusts subject repurchase portion employees eligible contributions savings plans matched bellsouth rates determined annually board directors bellsouths matching obligation fulfilled shares released suspense accounts semiannually allocation participants number shares allocated participants account based market price shares time allocation shares released allocation fulfill bellsouths matching obligation bellsouth makes contributions trusts fund purchase additional shares open market fulfill remaining obligation bellsouth recognizes expense using shares allocated accounting method combines cost shares allocated period plus interest incurred reduced dividends used service esop debt dividends esop shares recorded reduction retained earnings esop shares included computation earnings per share note stock compensation plans december 31 1997 bellsouth stock options outstanding several stockbased compensation plans bellsouth corporation stock plan stock plan provides grants key employees stock options various stockbased awards one share bellsouth common stock underlying security award aggregate number shares bellsouth common stock may granted stock plan calendar year cannot exceed one percent shares outstanding time grant prior adoption stock plan stock options granted bellsouth corporation stock option plan stock options granted plans entitle optionee purchase shares bellsouth common stock within prescribed periods price either equal excess fair market value date grant options granted plans generally become exercisable end three five years term 10 years bellsouth applies apb opinion 25 related interpretations accounting stock plans accordingly compensation cost recognized grants stock options compensation bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note stock compensation plans continued cost bellsouths stockbased compensation plans determined accordance provisions sfas 123 accounting stockbased compensation bellsouths net income loss earnings loss per share would changed pro forma amounts indicated pro forma amounts reflected representative effects reported net income future years general options granted 1997 1996 1995 vest several years additional awards made year following table summarizes activity stock options outstanding fair value option grant estimated grant date using blackscholes optionpricing model following weightedaverage assumptions bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note stock compensation plans continued following table summarizes information stock options outstanding december 31 1997 note j income taxes accordance sfas 109 accounting income taxes balance sheet reflects anticipated tax impact future taxable income deductions implicit balance sheet form temporary differences temporary differences reflect difference basis assets liabilities measured financial statements measured tax laws using enacted tax rates provision income taxes summarized follows extraordinary losses 1997 1995 presented consolidated statements income net tax benefits totaling 6 1780 respectively 1997 benefit current 1995 benefit 49 current 1731 deferred bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note j income taxes continued temporary differences gave rise deferred tax assets liabilities december 31 follows valuation allowance increased 8 9 1997 1996 respectively primarily relates state net operating losses may utilized carryforward period net deferred tax asset liability december 31 1997 1996 41 134 respectively current 2023 1899 respectively noncurrent reconciliation federal statutory income tax rate bellsouths effective tax rate follows note k supplemental cash flow information bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note k supplemental cash flow information continued 1997 bellsouth began consolidating certain international operations previously accounted equity method consolidation resulted increase assets 375 net 225 decrease equity investments corresponding increase liabilities note l work force reduction charge fourth quarter 1995 bellsouth recognized pretax charge 1082 related work force reductions primary component charge 942 planned work force reductions core wireline business end 1997 consisted 561 provisions sfas 112 employers accounting postemployment benefits related employees would receive severance benefits preexisting separation plans 381 curtailment losses provisions sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers accounting postretirement benefits pensions substantially curtailment losses relate postretirement benefits pensions remaining components charge 85 expected severance benefit payments 1997 also sfas 112 55 additional net curtailment losses related employee reductions restructuring plan initiated 1993 completed 1995 plan substantially completed 1997 resulted reduction wireline telephone operations work force approximately 11600 employees term plan note discontinuance sfas 71 1995 result continuing regulatory marketplace assessments bellsouth telecommunications concluded required discontinue application sfas 71 accounting effects certain types regulation financial reporting purposes accordingly bellsouth telecommunications recorded noncash extraordinary charge 2718 net deferred tax benefit 1731 components charge follows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note discontinuance sfas 71 continued reduction telephone plant 4896 pretax recorded increase related accumulated depreciation accounts categories amounts follows reduction plant determined impairment analysis identified estimated amounts recoverable future discounted cash flows analysis considered projected effects future competition well changes technology capital requirements plantrelated charge related assets within regulatory framework supported depreciation studies identified inadequate levels accumulated depreciation certain asset categories studies give recognition historical underdepreciation assets resulting primarily regulatorprescribed asset lives exceeded estimated economic asset lives financial reporting purposes average depreciable lives affected categories longlived telephone plant reduced closely reflect economic technological lives differences regulatorapproved asset lives current estimated economic asset lives follows remaining components extraordinary charge partially offset plantrelated portion overall charge include 194 tax related adoption bellsouth telecommunications issue basis accounting directory publishing revenues bellsouths unregulated subsidiaries already recognized directory publishing revenues production expenses using issue basis accounting overall extraordinary charge also reduced 71 tax reflect removal regulatory assets liabilities recorded result previous actions regulators virtually regulatory assets liabilities arose connection incorporation new accounting standards ratemaking process transitory nature addition overall extraordinary charge reduced 19 tax partial acceleration unamortized investment tax credits associated reductions asset carrying values asset lives bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note n financial instruments recorded amounts cash equivalents temporary cash investments bank loans commercial paper approximate fair value due shortterm nature instruments fair value bellsouth telecommunications debentures notes estimated based closing market prices issue december 31 1997 1996 fair value estimates guarantee esop debt bellsouth capital funding corporation notes foreign exchange contracts foreign currency swaps interest rate swaps based quotes dealers since judgment required develop estimates estimated amounts presented herein may indicative amounts bellsouth could realize current market exchange following summary financial instruments fair values differ recorded amounts december 31 1997 1996 derivative financial instruments bellsouth time party currency swap agreements interest rate swap agreements foreign exchange forward contracts normal course business purposes trading financial instruments used mitigate foreign currency interest rate risks although extent expose company market risks credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited current value currency rate interest rate differential full notional amount contracts agreements executed creditworthy financial institutions bellsouth considers risk nonperformance remote currency swap bellsouth entered currency swap 1994 hedge european currency units ecu 125000000 debt issued capital funding currency swap related debt mature february 1999 december 31 1997 net currency swap receivable equals fair value swap 0 related net interest receivable 7 included accounts receivable consolidated balance sheet december 31 1997 interest rate swaps bellsouth enters interest rate swap agreements exchange fixed variable rate interest payment obligations without exchange underlying principal amounts december 31 1997 1996 bellsouth party various interest rate swaps aggregate notional amount 120 swaps bellsouth paid fixed rates averaging 713 december 31 1997 1996 received variable rates averaging 569 552 december 31 1997 1996 respectively swaps mature dates ranging 2001 2002 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note n financial instruments continued bellsouth also issued letters credit financial guarantees approximate 356 december 31 1997 total 275 represents us dollar equivalent outstanding debt eplus partiallyowned wireless communications company located germany guaranteed bellsouth agreed guarantee eplus borrowings us dollar equivalent 397 705 million german marks december 31 1997 since market instruments practicable estimate fair value concentrations credit risk financial instruments potentially subject bellsouth credit risk consist principally trade accounts receivable concentrations credit risk respect receivables interexchange carriers limited due composition customer base includes large number individuals businesses december 31 1997 1996 approximately 485 492 respectively trade accounts receivable interexchange carriers note commitments contingencies leases bellsouth entered operating leases facilities equipment used operations rental expense operating leases 273 269 252 1997 1996 1995 respectively capital leases currently effect significant following table summarizes approximate future minimum rentals noncancelable operating leases effect december 31 1997 outside plant bellsouth currently selfinsures outside plant casualty losses net book value outside plant 7408 7621 december 31 1997 1996 respectively outside plant located nine southeastern states served bellsouth telecommunications susceptible damage severe weather conditions perils including hurricanes outsourcing contracts beginning 1997 bellsouth telecommunications contracted various entities outsource performance certain engineering functions well information technology operations application development contracts expire various dates 2008 generally renewable cancelable upon payment additional fees nonperformance future minimum payments contracts range 465 625 annually next ten years replace costs previously incurred bellsouth telecommunications employees facilities equipment costs legal claims bellsouth subsidiaries subject claims arising ordinary course business involving allegations personal injury breach contract anticompetitive conduct employment law issues regulatory matters actions bellsouth telecommunications also subject claims attributable predivestiture events involving environmental liabilities rates taxes contracts torts certain contingent liabilities predivestiture events shared att corp complete assurance cannot given outcome legal claims bellsouth believes financial impact would material financial position annual operating results cash flows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note p quarterly financial information unaudited following summary quarterly financial information adjustments necessary fair presentation period included results third quarter 1997 include pretax gains sales operations 787 increased net income 480 results first quarter 1996 include pretax gain sale paging business 442 increased net income 344 sum quarterly amounts equal annual amount due rounding supplementary data bellsouth corporation domestic cellular proportionate operating data dollars millions unaudited following table sets forth unaudited supplemental financial data bellsouths domestic cellular operations reflecting proportionate consolidation entities bellsouth interest presentation differs consolidation methodology used prepare bellsouths principal financial statements accordance generally accepted accounting principles proportionate operating data reflect bellsouths ownership percentage entities consolidated financial reporting purposes bellsouths ownership percentage entities accounted equity method financial reporting purposes data exclude gains losses disposition property interests unusual items include equipment revenue net cost item 9item 8 consolidated financial statements report management shareholders bellsouth corporation financial statements prepared conformity generally accepted accounting principles audited pricewaterhousecoopers llp independent accountants whose report contained herein integrity objectivity data financial statements including estimates judgments relating matters concluded end year responsibility management bellsouth management also prepared information included therein unless indicated otherwise management maintains system internal accounting controls continuously reviewed evaluated however inherent limitations recognized considering assurances provided system internal accounting controls concept reasonable assurance recognizes cost system internal accounting controls exceed managements judgment benefits derived management believes bellsouths system provide reasonable assurance transactions executed accordance managements general specific authorizations recorded properly maintain accountability assets permit preparation financial statements conformity generally accepted accounting principles management also believes system provides reasonable assurance access assets permitted accordance managements authorizations recorded accountability assets compared existing assets reasonable intervals appropriate action taken respect differences management also seeks assure objectivity integrity financial data careful selection managers organizational arrangements provide appropriate division responsibility communications programs aimed assuring policies standards managerial authorities understood throughout organization management also aware changes operating strategy organizational structure give rise disruptions internal controls special attention given controls changes implemented management maintains strong internal auditing program independently assesses effectiveness internal controls recommends possible improvements thereto addition part audit financial statements pricewaterhousecoopers llp completed review accounting controls establish basis reliance thereon determining nature timing extent audit tests applied management considered internal auditors pricewaterhousecoopers llps recommendations concerning system internal controls taken actions believes costeffective circumstances respond appropriately recommendations management believes december 31 1998 system internal controls adequate accomplish objectives discussed herein management also recognizes responsibility fostering strong ethical climate bellsouths affairs conducted according highest standards personal corporate conduct responsibility communicated employees policies guidelines addressing issues conflict interest safeguarding bellsouths real intellectual properties providing equal employment opportunities ethical relations customers suppliers governmental representatives bellsouth maintains program assess compliance policies ethical standards senior vice president corporate compliance corporate secretary february 3 1999 audit committee chairmans letter audit committee board directors consists four members neither officers employees bellsouth corporation information persons well duties provided proxy statement audit committee met six times 1998 reviewed chief corporate auditor pricewaterhousecoopers llp management current audit activities plans results selected internal audits audit committee also reviewed objectivity financial reporting process adequacy internal controls audit committee recommended subject shareholder ratification appointment independent accountants considered factors relating independence addition audit committee provided guidance matters regarding ethical considerations business conduct reviewed operations political action committees monitored compliance laws regulations chief corporate auditor pricewaterhousecoopers llp met privately audit committee occasion encourage confidential discussions auditing matters ronald terry ronald terry chairman audit committee february 3 1999 report independent accountants shareholders bellsouth corporation opinion accompanying consolidated balance sheets related consolidated statements income cash flows shareholders equity comprehensive income present fairly material respects financial position bellsouth corporation subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp atlanta georgia february 3 1999 bellsouth corporation consolidated statements income millions except per share amounts accompanying notes integral part consolidated financial statements bellsouth corporation consolidated balance sheets millions except per share amounts accompanying notes integral part consolidated financial statements bellsouth corporation consolidated statements cash flows millions accompanying notes integral part consolidated financial statements bellsouth corporation consolidated statements shareholders equity comprehensive income millions accompanying notes integral part consolidated financial statements bellsouth corporation notes consolidated financial statements dollars millions except per share amounts note accounting policies organization bellsouth corporation bellsouth holding company headquartered atlanta georgia bellsouth two principal whollyowned subsidiaries bellsouth telecommunications inc bellsouth telecommunications bellsouth enterprises inc bellsouth enterprises bellsouth telecommunications primarily provides local exchange long distance services within geographic areas called local access transport areas latas ii network access services bellsouth enterprises owns businesses providing domestic international wireless communications services well advertising publishing products management purposes operations organized five operating segments wireline communications domestic wireless international operations advertising publishing basis presentation consolidated financial statements include accounts bellsouth subsidiaries controlling financial interest investments certain partnerships joint ventures subsidiaries accounted using equity method significant intercompany transactions accounts eliminated certain amounts prior period consolidated financial statements reclassified conform current years presentation use estimates bellsouths consolidated financial statements prepared accordance generally accepted accounting principles financial statements include estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities amounts revenues expenses actual results could differ estimates cash equivalents bellsouth considers highly liquid investments original maturity three months less cash equivalents investments original maturity three months one year considered cash equivalents included temporary cash investments consolidated balance sheets interest income cash equivalents temporary cash investments interestbearing instruments 313 193 163 years ended december 31 1998 1997 1996 respectively material supplies new reusable material carried inventory principally average original cost except specific costs used case large individual items nonreusable material carried estimated salvage value property plant equipment investment property plant equipment stated original cost plant dedicated providing regulated telecommunications services depreciation based remaining life method depreciation straightline composite rates determined basis equal life groups certain categories telephone plant acquired given year depreciable telephone plant disposed original cost less net salvage value charged accumulated depreciation cost property plant equipment depreciated using either straightline accelerated methods estimated useful lives assets gains losses disposal depreciable property plant equipment recognized year disposition element income net intangible assets intangible assets consist excess consideration paid fair value net tangible assets acquired business combinations include acquired licenses customer lists intangible assets amortized using straightline accelerated methods periods benefit periods exceed 40 years carrying value intangible assets periodically reviewed determine whether intangibles fully recoverable projected net cash flows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued related business unit amortization intangibles 135 58 49 years ended december 31 1998 1997 1996 respectively december 31 1998 1997 accumulated amortization intangibles 462 321 respectively foreign currency assets liabilities foreign subsidiaries equity investees functional currency us dollars translated us dollars exchange rates effect end reporting period foreign entity revenues expenses translated us dollars average rates prevailed period resulting net translation gains losses reported foreign currency translation adjustments shareholders equity component accumulated comprehensive income operations countries hyperinflationary economies consider us dollar functional currency exchange gains losses transactions bellsouth equity investments denominated currency functional currency generally included results operations incurred unless transactions hedged see derivative financial instruments derivative financial instruments bellsouth generally enters derivative financial instruments hedging purposes deferral accounting applied derivative reduces risk underlying hedged item effectively result high inverse correlation value underlying exposure derivative instrument either initially fails later ceases meet criteria deferral settlement accounting subsequent gains losses recognized currently income revenue recognition revenues recognized earned certain revenues derived local telephone wireless services billed monthly advance recognized following month services provided advertising publishing revenues related directory costs recognized upon publication directories revenues derived telecommunications services principally network access long distance wireless airtime usage recognized monthly services provided allowances uncollectible billed services adjusted monthly provision uncollectible accounts 334 304 254 years ended december 31 1998 1997 1996 respectively maintenance repairs cost maintenance repairs plant including cost replacing minor items resulting substantial betterments charged operating expenses income taxes consolidated balance sheets reflect deferred tax balances associated anticipated tax impact future income deductions implicit consolidated balance sheets form temporary differences temporary differences primarily result use accelerated methods shorter lives computing depreciation tax purposes financial reporting purposes bellsouth amortizing deferred investment tax credits earned prior 1986 repeal investment tax credit also transitional credits earned repeal credits amortized reduction provision income taxes estimated useful lives assets credits relate earnings per share basic earnings per share computed based weightedaverage number common shares outstanding year diluted earnings per share based weightedaverage number common shares outstanding plus net incremental shares arising employee stock options benefit plans net incremental shares included calculation diluted earnings per share approximately 14 million 5 million 5 million respectively years bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note accounting policies continued ended december 31 1998 1997 1996 bellsouths earnings used per share calculations basic diluted methods new accounting pronouncements march 1998 aicpa issued statement position 981 sop 981 accounting costs computer software developed obtained internal use sop 981 requires capitalization certain direct costs interest costs preliminary development efforts made bellsouth adopted sop 981 january 1 1999 adoption sop 981 result temporary increase earnings year adoption compared prior period result capitalization costs previously expensed note b investments advances investments advances december 31 consist following bellsouths equity method investments primarily include various partnerships domestic international wireless properties international communications consortia equity earnings related investments accounted equity method 92 year ended december 31 1998 equity losses investments 242 76 two years ended december 31 1997 1996 respectively included component income net domestic wireless bellsouths domestic wireless equity method investments consist primarily noncontrolling interests partnerships serving los angeles houstongalveston metropolitan service areas november 1998 bellsouth att contributed respective interests partnerships att contributed approximately 1000 new joint venture bellsouths ownership share los angeles houston galveston changed 600 436 366 respectively 444 388 respectively result reorganization bellsouths proportionate share net assets new venture exceeded bellsouths aggregate book investment balance related excess amortized income using straightline method period approximately 30 years international operations bellsouth equity investments international wireless operations latin america europe international markets ownership ranging 225 468 1998 bellsouth purchased additional ownership interests wireless operations venezuela brazil ecuador approximately 536 purchases increased bellsouths ownership interest venezuela 249 782 interest ecuador 282 894 brazil purchases increased bellsouths investment sao paulo operating company 445 northeast operation 468 transactions excess respective purchase price net book value assets acquired assigned customer lists wireless licenses excess consideration paid net assets acquired along intangible assets amortized using either straightline accelerated methods periods benefit exceed 40 years bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances continued wireless data prior 1998 bellsouth ram broadcasting corporation ram partners entity owned operated certain wireless data communications networks us uk various countries 1998 bellsouth purchased issued outstanding stock ram result transaction bellsouth holds 900 interest united states operations 100 interest uk operations accordingly operations consolidated december 31 1998 summary financial information equity investees summary combined financial information reported equity investees bellsouth set forth advances notes receivable bellsouth noncontrolling financial interests ranging 70 80 csl ventures 1155 peachtree associates real estate partnerships bellsouth notes receivable advances partnerships totaling 161 194 december 31 1998 1997 respectively notes bear interest rates ranging 631 788 advances bear interest federal funds rate plus 30 principal amounts outstanding december 31 1998 due payable bellsouth november 14 2001 january 15 2038 instruments require periodic payments interest collateralized various real estate holdings 1993 bellsouth entered credit agreement prime south diversified inc prime provide 250 financing outstanding december 311997 loan collateralized stock prime indirectly owned community cable tv cctv las vegas loan bore interest variable rate 10 11 loan agreement specified event prime sold cctv bellsouth would repaid principal balance well additional amounts contingent interest prepayment penalties 1998 prime sold investment cctv specified loan agreement bellsouth repaid full principal balance well amounts contingent interest prepayment penalties regular interest result 1998 bellsouth recorded additional income 102 62 tax amount related proceeds contingent interest prepayment penalties sale operations investments october 30 1998 bellsouth sold vodafone group plc 65 ownership interest bellsouth new zealand total proceeds 254 pretax gain sale 180 110 tax bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note b investments advances continued 1997 bellsouth sold 245 interest optus communications cable wireless uk telecommunications company agreement bellsouth received approximately 735 cash 490 million shares optus communications addition bellsouth given option receive either ownership interest cellular communications company located colombia equivalent value interest cash pretax gain sale 578 352 tax 1998 bellsouth exercised option received additional 64 included investing activities consolidated statements cash flows 1997 bellsouth sold 20 interest itt world directories ittwd itt corporation itt total proceeds 265 pretax gain sale 209 128 tax sale agreement contained certain provisions called additional sales proceeds paid bellsouth event itt subsequently resold ittwd certain price result itts subsequent sale ittwd bellsouth received additional proceeds resulted pretax gain 155 96 tax first quarter 1998 1997 bellsouth telecommunications sold science applications international corporation 143 interest bell communications research inc bellcore total proceeds 65 pretax gain sale included component income net 38 note c property plant equipment property plant equipment summarized follows december 31 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note current liabilities current liabilities summarized follows december 31 note e debt maturing within one year debt maturing within one year summarized follows december 31 bellsouth committed credit lines aggregating 2536 various banks borrowings committed credit lines totaled 634 241 respectively december 31 1998 1997 bellsouth also maintains uncommitted lines credit aggregating 169 december 31 1998 borrowings uncommitted lines credit totaled 45 borrowings uncommitted lines december 31 1997 significant commitment fees requirements compensating balances associated lines credit bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt continued longterm debt longterm debt summarized consists primarily debentures notes issued bellsouth telecommunications interest rates maturities table amounts outstanding december 31 1998 maturities longterm debt outstanding principal amounts december 31 1998 summarized maturities year 2003 include 500 principal amount 665 debentures due 2095 december 31 1998 debentures accreted book value 154 debt issued bellsouths whollyowned subsidiary bellsouth capital funding corporation capital funding used finance businesses bellsouth enterprises unregulated subsidiaries bellsouth telecommunications bellsouth agreed ensure timely payment principal premium interest capital fundings debt securities december 1998 capital funding issued 300 5375 notes due december 22 2008 purpose issues retire commercial paper june 1998 bellsouth telecommunications issued 500 6 38 debentures due june 1 2028 addition june 1998 bellsouth telecommunications issued 500 6 reset put securities due june 15 2012 reps debt instrument embedded put call option features reps subject mandatory redemption existing holders june 15 2002 either exercise callholder right purchase reps ii repurchase reps bellsouth telecommunications call option exercised callholder based bellsouth telecommunications current credit spreads determine interest paid reps 1997 bellsouth telecommunications retired certain longterm debt issues totaling 600 result early extinguishment issues extraordinary losses 9 net current tax benefits 6 recognized 1997 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note e debt continued december 31 1998 shelf registration statements file securities exchange commission 927 debt securities could publicly offered note f liabilities deferred credits liabilities deferred credits summarized follows december 31 note g shareholders equity stock split november 1998 bellsouths board directors approved twoforone stock split effected form stock dividend whereby shareholder record december 3 1998 received december 24 1998 one additional share common stock share owned record date result split 1010156851 shares issued 1010 transferred paidin capital common stock also november 1998 bellsouths board directors approved increase number authorized shares common stock 4400000000 2200000000 amounts related common shares periods presented restated reflect stock split preferred stock authorized bellsouths articles incorporation authorize 100 million shares cumulative first preferred stock par value 1 per share 30 million shares reserved designated series possible issuance bellsouths shareholder rights plan december 31 1998 preferred shares issued shareholder rights plan 1989 bellsouth adopted shareholder rights plan declaring dividend one right share common stock outstanding issued thereafter right entitles shareholders buy one onehundredth share series first preferred stock 4375 per share rights may exercised person group acquires 10 common stock bellsouth without prior approval board directors announces tender exchange offer would result ownership 25 common stock person group acquires 10 bellsouths stock without prior board approval shareholders allowed purchase bellsouth common stock half price rights currently trade bellsouth common stock may redeemed board directors one cent per right become exercisable thereafter certain circumstances rights expire december 1999 shares held trust treasury 1996 1997 bellsouth issued shares grantor trusts provide partial funding benefits payable certain nonqualified benefit plans trusts irrevocable assets contributed trusts used pay benefits certain exceptions december 31 1998 1997 assets held trusts consist cash bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note g shareholders equity continued 35578926 34313326 shares respectively bellsouth common stock total shares bellsouth common stock held trusts 31893326 issued bellsouth directly trusts previously unissued shares 3685600 shares acquired open market transactions use trusts funds total cost shares issued bellsouth date funding trusts included common stock paidin capital however shares considered outstanding financial reporting purposes shares included within shares held trust treasury reduction shareholders equity addition earnings per share impact shares cost shares acquired open market purchases trusts also included shares held trust treasury addition shares held grantor trusts shares held trust treasury includes treasury shares purchased connection bellsouths announced plan repurchase shares common stock 1998 1997 bellsouth purchased 36170168 6827978 shares aggregate 1261 157 respectively total 4294072 8249248 shares respectively reissued various employee benefit plans purposes november 1998 bellsouth announced intent repurchase 3000 common stock 1999 shares held trust treasury cost december 31 1998 1997 comprised following guarantee esop debt amount equivalent bellsouths guarantee amortizing notes issued esop trusts presented reduction shareholders equity amount recorded decrease shareholders equity represents cost unallocated bellsouth common stock purchased proceeds amortizing notes timing difference resulting shares allocated accounting method see note h bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans pension postretirement benefit plans substantially nonrepresented represented employees bellsouth covered noncontributory defined benefit pension plans well postretirement health life insurance welfare plans principal plans discussed plans significant individually aggregate pension plan covering nonrepresented employees cash balance plan provides pension benefits determined combination compensationbased service additional credits individual accountbased interest credits cash balance plan subject minimum benefit determined plan existence nonrepresented employees prior july 1 1993 provided benefits based upon credited service employees average compensation specified period minimum benefit prior plan applicable employees retiring 2005 1998 1997 projected benefit obligations assumed interest additional credits greater minimum levels specified written plan pension benefits provided represented employees based specified benefit amounts years service 1998 bellsouth established cash balance plan represented employees based upon initial cash balance amount negotiated pension band increases interest credits effective january 1 1999 1998 1997 represented pension obligations included projected effect future bargainedfor improvements accounting health care plan anticipate future adjustments costsharing arrangements provided written plan employees retire december 31 1991 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued effective fiscal year 1998 bellsouth adopted sfas 132 employers disclosure pensions postretirement benefits new standard revises combines disclosures pensions postretirement benefits change measurement recognition plans accrued health care costs prepaid life assets combined following tables prepared accordance new standard reconcile changes obligations plan assets funded status december 31 amounts recognized consolidated balance sheets consist bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued components pension retiree health life income cost follows effective december 31 1997 nonrepresented cash balance plans recombined six one cash balance plan although one nonrepresented cash balance plan exists separate demographic pools maintained generate pension income based upon specific company information change net pension income net retiree health life costs affected several variables including changes actuarial assumptions discount rate return plan assets plan amendments consolidated net pension income postretirement cost amounts exclusive curtailment effects reflected work force reduction activity reflect pension curtailment gains amount 9 36 43 1998 1997 1996 respectively 1998 bellsouth modified presentation salary rate assumption reflect comparable weightedaverage compensation increase revised presentation included years impact bellsouths expenses obligations significant actuarial assumptions december 31 1998 1997 1996 follows health care cost trend rate used value accumulated postretirement obligation 1998 1997 assumed decrease 5 2003 assumed health care cost trend rates significant effect amounts reported health care plan onepercentagepoint change assumed health care cost trend rates would following effects december 31 1998 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note h employee benefit plans continued defined contribution plans bellsouth maintains several contributory savings plans cover substantially employees bellsouth retirement savings plan bellsouth savings security plan collectively savings plans taxqualified defined contribution plans assets plans held two trusts turn part bellsouth master savings trust 1990 leveraged employee stock ownership plan esop incorporated savings plans trusts borrowed 850 issuing amortizing notes guaranteed bellsouth trusts used loan proceeds purchase shares bellsouth common stock open market shares held suspense accounts trusts scheduled number shares released allocation participants semiannual loan payment made trusts service debt contributions bellsouth dividends paid shares held trusts none shares held trusts subject repurchase portion employees eligible contributions savings plans matched bellsouth rates determined annually board directors bellsouths matching obligation fulfilled shares released suspense accounts semiannually allocation participants number shares allocated participants account based market price shares time allocation shares released allocation fulfill bellsouths matching obligation bellsouth makes contributions trusts fund purchase additional shares open market fulfill remaining obligation bellsouth recognizes expense using shares allocated accounting method combines cost shares allocated period plus interest incurred reduced dividends used service esop debt dividends esop shares recorded reduction retained earnings esop shares included computation earnings per share note stock compensation plans december 31 1998 bellsouth stock options outstanding several stockbased compensation plans bellsouth corporation stock plan stock plan provides grants key employees stock options various stockbased awards one share bellsouth common stock underlying security award aggregate number shares bellsouth common stock may granted stock plan calendar year cannot exceed one percent shares outstanding time grant prior adoption stock plan stock options granted bellsouth corporation stock option plan stock options granted plans entitle optionee purchase shares bellsouth common stock within prescribed periods price bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note stock compensation plans continued either equal excess fair market value date grant options granted plans generally become exercisable end three five years term 10 years bellsouth applies apb opinion 25 related interpretations accounting stock plans accordingly compensation cost recognized grants stock options compensation cost bellsouths stockbased compensation plans determined accordance provisions sfas 123 accounting stockbased compensation bellsouths net income earnings per share would changed pro forma amounts indicated pro forma amounts reflected representative effects reported net income future years general options granted 1998 1997 1996 vest several years additional awards made year following table summarizes activity stock options outstanding bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note stock compensation plans continued fair value option grant estimated grant date using blackscholes optionpricing model following weightedaverage assumptions following table summarizes information stock options outstanding december 31 1998 note j income taxes accordance sfas 109 accounting income taxes consolidated balance sheets reflect anticipated tax impact future taxable income deductions implicit consolidated balance sheets form temporary differences temporary differences reflect difference basis assets liabilities measured consolidated financial statements measured tax laws using enacted tax rates bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note j income taxes continued provision income taxes summarized follows temporary differences gave rise deferred tax assets liabilities december 31 follows valuation allowance increased 9 8 1998 1997 respectively primarily relates state net operating losses may utilized carryforward period net deferred tax asset liability december 31 1998 1997 207 41 respectively current 2512 2023 respectively noncurrent bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note j income taxes continued reconciliation federal statutory income tax rate bellsouths effective tax rate follows note k supplemental cash flow information 1998 bellsouth contributed ownership interests certain domestic wireless operations new joint venture result transaction net assets increased approximately 300 corresponding increase liabilities 1998 well 1997 bellsouth began consolidating certain operations previously accounted equity method consolidation resulted increase assets 519 375 net decreases 228 225 investments advances respectively corresponding increases liabilities note l segment information bellsouth corporation four reportable operating segments 1 wireline communications 2 domestic wireless 3 international operations 4 advertising publishing wireline communications include local exchange access services business residential customers ninestate region located southeastern united states domestic wireless consists primarily cellular pcs businesses throughout bellsouths ninestate wireline service region certain markets international operations include variety communications services mainly wireless telephony areas within nine countries latin america well china denmark germany india israel advertising publishing businesses publish print sell advertising alphabetical classified telephone directories operations businesses fall reporting thresholds included segment includes entities providing internet access wireless data entertainment various startup operations bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note l segment information continued bellsouths reportable segments reflect strategic business units offer different products services andor serve different customers managed differently business requires different technologies andor marketing strategies bellsouth evaluates performance based net income exclusive certain intercompany certain nonoperating items strategic business unit accounting policies underlying reported segment data described summary significant accounting policies see note generally bellsouth accounts intersegment sales transfers sales transfers third parties current market prices corporate eliminations includes intercompany eliminations well certain nonoperating items follow table provides information operating segment year ended december 31 1998 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note l segment information continued year ended december 31 1997 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note l segment information continued year ended december 31 1996 net revenues external customers based location customer geographic information december 31 1998 1997 1996 follows bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note financial instruments recorded amounts cash equivalents temporary cash investments bank loans commercial paper approximate fair value due shortterm nature instruments fair value bellsouth telecommunications longterm debt estimated based closing market prices issue december 31 1998 1997 fair value estimates guarantee esop debt capital funding longterm debt foreign exchange contracts foreign currency swaps interest rate swaps based quotes dealers since judgment required develop estimates estimated amounts presented herein may indicative amounts bellsouth could realize current market exchange following summary financial instruments fair values differ recorded amounts december 31 1998 1997 derivative financial instruments bellsouth time party currency swap agreements interest rate swap agreements foreign exchange forward contracts normal course business purposes trading financial instruments used mitigate foreign currency interest rate risks although extent expose company market risks credit risks credit risks associated instruments controlled evaluation continual monitoring creditworthiness counterparties event counterparty fails meet terms contract agreement bellsouths exposure limited current value currency rate interest rate differential full notional contract amount contracts agreements executed creditworthy financial institutions bellsouth considers risk nonperformance remote currency swap bellsouth entered currency swap 1994 hedge european currency units ecu 125000000 debt issued capital funding currency swap related debt mature february 1999 december 31 1998 net currency swap receivable equals fair value swap 7 related net interest receivable 7 included accounts receivable consolidated balance sheets december 31 1998 interest rate swaps bellsouth enters interest rate swap agreements exchange fixed variable rate interest payment obligations without exchange underlying principal amounts december 31 1998 1997 bellsouth party various interest rate swaps aggregate notional amount 920 swap agreements bellsouth paid fixed rates averaging 611 713 december 31 1998 1997 received variable rates averaging 554 569 december 31 1998 1997 respectively bellsouth also paid variable rates averaging 569 bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note financial instruments continued received fixed rates averaging 600 december 31 1998 swaps mature dates ranging 2001 2002 bellsouth also issued letters credit financial guarantees approximate 523 december 31 1998 total 360 represents us dollar equivalent outstanding debt eplus partiallyowned wireless communications company located germany guaranteed bellsouth agreed guarantee eplus borrowings us dollar equivalent 422 705 million german marks december 31 1998 since market instruments practicable estimate fair value concentrations credit risk financial instruments potentially subject bellsouth credit risk consist principally trade accounts receivable concentrations credit risk respect receivables long distance carriers limited due composition customer base includes large number individuals businesses december 31 1998 1997 approximately 472 485 respectively trade accounts receivable long distance carriers note n commitments contingencies leases bellsouth entered operating leases facilities equipment used operations rental expense operating leases 242 273 269 1998 1997 1996 respectively capital leases currently effect significant following table summarizes approximate future minimum rentals noncancelable operating leases effect december 31 1998 outside plant bellsouth currently selfinsures outside plant casualty losses net book value outside plant 7234 7408 december 31 1998 1997 respectively outside plant located nine southeastern states served bellsouth telecommunications susceptible damage severe weather conditions perils including hurricanes outsourcing contracts beginning 1997 bellsouth telecommunications contracted various entities outsource performance certain engineering functions well information technology operations application development contracts expire various dates 2008 generally renewable cancelable upon payment additional fees nonperformance future minimum payments contracts range 400 625 annually next nine years reciprocal compensation following enactment telecommunications act 1996 bellsouth telecommunications various competitive local exchange carriers clecs entered interconnection agreements providing among things payment reciprocal compensation local calls initiated customers one carrier completed network carrier numerous clecs claim entitlement bellsouth telecommunications compensation associated dialup calls originating bellsouth telecommunications network connecting internet service providers isps served clecs networks bellsouth telecommunications bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note n commitments contingencies continued maintained federal communications commission fcc previously determined internet calls dedicated lines jurisdictionally interstate dialup calls isps local calls terminating compensation due interconnection agreements courts state commissions considered matter ruled calls invoke reciprocal compensation obligation fcc indicated would release order would address jurisdictional nature switched isp traffic bellsouth telecommunications believes good basis claims reciprocal compensation owed clecs however december 31 1998 bellsouth telecommunications exposure related unrecorded amounts withheld clecs approximately 135 including accrued interest claims bellsouth subsidiaries subject claims arising ordinary course business involving allegations personal injury breach contract anticompetitive conduct employment law issues regulatory matters actions bellsouth telecommunications also subject claims attributable predivestiture events involving environmental liabilities rates taxes contracts torts certain contingent liabilities predivestiture events shared att corp complete assurance cannot given outcome legal claims bellsouth believes financial impact would material results operations financial position cash flows note quarterly financial information unaudited following summary quarterly financial information adjustments necessary fair presentation period included results fourth quarter 1998 include pretax gain 180 110 tax sale bellsouths operation new zealand well additional income 102 62 tax resulted early repayment loan first quarter 1998 results include pretax gain 155 96 tax resulting additional proceeds sale itt world directories results third quarter 1997 include pretax gains sales operations 787 increased net income 480 due rounding sum quarterly eps amounts may agree yeartodate eps amounts bellsouth corporation notes consolidated financial statements continued dollars millions except per share amounts note p subsequent event bellsouth holds equity interests two wireless communications consortia brazil accounted equity method accounting december 31 1998 brazilian operations incurred approximately 2300 us dollardenominated liabilities january 1999 brazilian government allowed currency trade freely currencies resulting immediate devaluation brazilian real january 1999 latest internal financial reporting period bellsouth recognize foreign exchange rate loss resulting devaluation approximately 364 recording share equity earnings brazilian equity investments aforementioned exchange loss subject upward downward adjustment based fluctuations us dollarbrazilian real exchange rate item 9nannannannannannannan nannannannannannannannanitem 15 exhibits financial statement schedules reports form 8k pages form 10k documents filed part report 1 financial statements report independent accountants report independent auditors consolidated statements income consolidated balance sheets consolidated statements cash flows consolidated statements shareholders equity comprehensive income notes consolidated financial statements 2 financial statement schedules omitted required information contained financial statements notes thereto schedules required applicable 3 exhibits identified parentheses file sec incorporated herein reference exhibits hereto management contracts compensatory plans arrangements required filed exhibits form 10k report pursuant item 15c filed exhibits 10a 10jj inclusive exhibit number 3a amended articles incorporation bellsouth corporation adopted december 5 2000 exhibit 3a form 10k year ended december 31 2000 file 18607 3b bylaws bellsouth corporation adopted december 5 2000 exhibit 3a form 10k year ended december 31 2000 file 18607 bellsouth corporation shareholder rights agreement exhibit 1 report form 8a dated november 23 1999 file 18607 4a instrument defines rights holders long intermediate term debt bellsouth corporation filed herewith pursuant regulation sk item 601b4iiia pursuant regulation bellsouth corporation hereby agrees furnish copy instrument sec upon request 10a bellsouth corporation officer short term incentive award plan exhibit 10y form 10q quarter ended september 30 1996 file 18607 bellsouth 2002 85 10c bellsouth corporation executive long term disability survivor protection plan amended restated effective january 1 1994 exhibit 10c1 form 10k year ended december 31 1993 file 18607 10d bellsouth corporation executive transfer plan exhibit 10ee registration statement 287846 10e bellsouth corporation death benefit program exhibit 10ff form 10k year ended december 31 1989 file 18607 10f bellsouth corporation plan nonemployee directors travel accident insurance exhibit 10ii registration statement 287846 10g bellsouth corporation executive incentive award deferral plan amended restated effective september 23 1996 exhibit 10g form 10k year ended december 31 1996 file 18607 10h bellsouth corporation nonqualified deferred compensation plan amended restated effective november 25 1996 exhibit 10h form 10k year ended december 31 1996 file 18607 10i bellsouth corporation supplemental executive retirement plan amended march 23 1998 exhibit 10i form 10q quarter ended march 31 1998 file 18607 10j bellsouth corporation directors retirement plan exhibit 10qq form 10k year ended december 31 1986 file 18607 10k bellsouth corporation financial counseling plan exhibit 10r form 10k year ended december 31 1992 file 18607 10k1 amendment dated november 3 1995 bellsouth corporation financial counseling plan executives exhibit 1011 form 10k year ended december 31 1995 file 18607 10l bellsouth corporation deferred compensation plan nonemployee directors exhibit 10gg registration statement 287846 10m bellsouth corporation executive life insurance plan amended restated bellsouth splitdollar life insurance plan effective august 31 1998 exhibit 10m form 10k year ended december 31 1998 file 18607 10n bellsouth corporation nonemployee director stock plan exhibit 10z form 10q quarter ended march 31 1997 file 18607 10p bellsouth nonemployee directors charitable contribution program exhibit 10z form 10k year ended december 31 1992 file 18607 10q bellsouth personal retirement account pension plan amended restated effective january 1 1998 exhibit 10q form 10k year ended december 31 1998 file 18607 10q1 amendment dated december 22 1998 bellsouth personal retirement account pension plan exhibit 10q1 form 10k year ended december 31 1998 file 18607 10q2 amendment dated march 22 1999 bellsouth personal retirement account pension plan exhibit 10q2 form 10q quarter ended march 31 1999 file 18607 10q3 amendment dated april 7 1999 bellsouth personal retirement account pension plan exhibit 10q3 form 10q quarter ended march 31 1999 file 18607 10q4 amendment dated may 6 1999 bellsouth personal retirement account pension plan exhibit 10q4 form 10q quarter ended june 30 1999 file 18607 10q5 amendment dated may 6 1999 bellsouth personal retirement account pension plan exhibit 10q5 form 10q quarter ended june 30 1999 file 18607 10q6 amendment dated may 7 1999 bellsouth personal retirement account pension plan exhibit 10q6 form 10q quarter ended june 30 1999 file 18607 10q7 amendment dated september 13 1999 bellsouth personal retirement account pension plan exhibit 10q7 form 10q quarter ended september 30 1999 file 18607 10q8 amendment dated december 22 1999 bellsouth personal retirement account pension plan exhibit 10q8 form 10k year ended december 31 1999 file 18607 10q9 amendment dated december 15 2000 bellsouth personal retirement account pension plan exhibit 10q9 form 10k year ended december 31 2000 file 18607 10q10 amendment dated december 15 2000 bellsouth personal retirement account pension plan exhibit 10q10 form 10k year ended december 31 2000 file 18607 10q11 amendment dated december 15 2000 bellsouth personal retirement account pension plan exhibit 10q11 form 10k year ended december 31 2000 file 18607 10q12 amendment dated december 15 2000 bellsouth personal retirement account pension plan exhibit 10q12 form 10q quarter ended september 30 2001 file 18607 10q13 amendment dated december 18 2001 bellsouth personal retirement account pension plan exhibit 10q13 form 10k year ended december 31 2001 file 18607 10q14 amendment dated december 17 2002 bellsouth personal retirement account pension plan 10r bellsouth corporation trust executive benefit plans amended april 28 1995 exhibit 10u1 form 10q quarter ended june 30 1995 file 18607 10r1 amendment dated may 23 1996 bellsouth corporation trust executive benefit plans exhibit 10s1 form 10q quarter ended june 30 1996 file 18607 10r2 second amendment dated july 8 2002 bellsouth corporation trust executive benefit plans exhibit 10r2 form 10q quarter ended september 30 2002 file 18607 86 bellsouth 2002 10s bellsouth telecommunications inc trust executive benefit plans amended april 28 1995 exhibit 10v1 form 10q quarter ended june 30 1995 file 18607 10s1 amendment dated may 23 1996 bellsouth telecommunications inc trust executive benefit plans exhibit 10t1 form 10q quarter ended june 30 1996 file 18607 10s2 second amendment dated july 8 2002 bellsouth telecommunications inc trust executive benefit plans exhibit 10s2 form 10q quarter ended september 30 2002 file 18607 10t bellsouth corporation trust board directors benefit plans amended april 28 1995 exhibit 10w1 form 10q quarter ended june 30 1995 file 18607 10t1 amendment dated may 23 1996 bellsouth corporation trust board directors benefit plans exhibit 10u1 form 10q quarter ended june 30 1996 file 18607 10u bellsouth telecommunications inc trust board directors benefit plans amended april 28 1995 exhibit 10x1 form 10q quarter ended june 30 1995 file 18607 10u1 amendment dated may23 1996 bellsouth telecommunications inc trust board directors benefit plans exhibit 10v1 form 10q quarter ended june 30 1996 file 18607 10v1 amended restated bellsouth corporation stock plan effective april 24 1995 amended exhibit 10v1 form 10k year ended december 31 2000 file 18607 10w bellsouth retirement savings plan amended restated effective july 1 2001 exhibit 10w form 10k year ended december 31 2001 file 18607 10w1 first amendment dated december 18 2001 bellsouth retirement savings plan exhibit 10w1 form 10k year ended december 31 2001 file 18607 10w2 second amendment dated march 14 2002 bellsouth retirement savings plan exhibit 10w2 form 10q quarter ended september 30 2002 file 18607 10w3 third amendment bellsouth retirement savings plan effective may 1 2002 december 10 2002 10x bellsouth corporation officer estate enhancement plan agreement exhibit 10x form 10k year ended december 31 1996 file 18607 10y bellsouth change control executive severance agreements exhibit 10y form 10k year ended december 31 1996 file 18607 10z bellsouth compensation deferral plan amended restated effective september 28 1998 exhibit 10z form 10q quarter ended september 30 2001 file 18607 10aa bellsouth employee stock investment plan exhibit 10aa form 10q quarter ended march 31 1998 file 18607 10aa1 amendment dated november 27 1996 bellsouth employee stock investment plan exhibit 10aa1 form 10q quarter ended march 31 1998 file 18607 10aa2 amendment dated march 21 1997 bellsouth employee stock investment plan exhibit 10aa2 form 10q quarter ended march 31 1998 file 18607 10aa3 amendment dated may 5 1998 bellsouth employee stock investment plan exhibit 10aa3 form 10q quarter ended march 31 1998 file 18607 10aa4 amendment dated december 15 2000 bellsouth employee stock investment plan exhibit 10aa4 registration statement 33352416 10aa5 amendment dated december 18 2001 bellsouth employee stock investment plan exhibit 10aa5 form 10k year ended december 31 2001 file 18607 10bb bellsouth officer motor vehicle policy exhibit 10bb form 10q quarter ended march 31 1998 file 18607 10dd agreement chief executive officer exhibit 10dd form 10k year ended december 31 1998 file 18607 10gg retention agreement dated october 18 2000 francis dramis exhibit 10gg form 10k year ended december 31 2000 file 18607 10gg1 bellsouth corporation stock plan restricted shares award agreement dated october 18 2000 francis dramis exhibit 10gg1 form 10k year ended december 31 2000 file 18607 10gg2 bellsouth corporation stock plan restricted shares award escrow agreement dated october 18 2000 francis dramis exhibit 10gg2to form 10k year ended december 31 2000 file 18607 10hh retention agreement dated october 26 2000 ronald dykes exhibit 10hh form 10k year ended december 31 2000 file 18607 10hh1 retention agreement dated november 19 2001 ronald dykes exhibit 10hh1 form 10k year ended december 31 2001 file 18607 10hh2 bellsouth corporation stock plan restricted shares award agreement dated october 26 2000 ronald dykes exhibit 10hh1 form 10k year ended december 31 2000 file 18607 10hh3 bellsouth corporation stock plan restricted shares award escrow agreement dated october 26 2000 ronald dykes exhibit 10hh2 form 10k year ended december 31 2000 file 18607 10ii retention agreement dated october 18 2000 gary forsee exhibit 10ii form 10k year ended december 31 2000 file 18607 bellsouth 2002 87 10ii1 bellsouth corporation stock plan restricted shares award agreement dated october 18 2000 gary forsee exhibit 10ii1 form 10k year ended december 31 2000 file 18607 10ii2 bellsouth corporation stock plan restricted shares award escrow agreement dated october 18 2000 gary forsee exhibit 10ii2 form 10k year ended december 31 2000 file 18607 10jj1 amended restated bell south officer compensation deferral plan effective september 1 2002 amended computation earnings per share computation ratio earnings fixed charges subsidiaries bellsouth powers attorney 99a annual report form 11k bellsouth retirement savings plan fiscal year ended december 31 2002 filed form 11k within 180 days end period covered report 99b annual report form 11k bellsouth savings security esop plan fiscal year ended december 31 2002 filed form 11k within 180 days end period covered report b reports form 8k none 88 bellsouth 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation w patrick shannon w patrick shannon vice presidentfinance february 28 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer f duane ackerman chairman board president chief executive officer principal financial officer ronald dykes chief financial officer principal accounting officer w patrick shannon vice presidentfinance directors f duane ackerman reuben v anderson james h blanchard j hyatt brown armando codina kathleen f feldstein james p kelly joseph magliochetti leo f mullin eugene f murphy robin b smith william stavropoulos w patrick shannon w patrick shannon individually attorneyinfact february 28 2003 bellsouth 2002 89 certifications f duane ackerman certify 1i reviewed annual report form 10k bellsouth corporation 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 20 2003 f duane ackerman f duane ackerman chairman board chief executive officer president 90 bellsouth 2002 ronald dykes certify 1i reviewed annual report form 10k bellsouth corporation 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 20 2003 ronald dykes ronald dykes chief financial officer bellsouth 2002 91 consent independent accountants hereby consent incorporation reference report dated february 10 2003 relating financial statements bellsouth corporation appears form 10k following registration statements form s3 file 33321233 form s3 file 33367084 form s8 file 3338264 form s8 file 33331600 form s8 file 33349169 form s8 file 33352416 form s8 file 33375660 pricewaterhousecoopers llp atlanta georgia february 28 2003 consent independent auditors consent use report dated february 7 2003 respect consolidated financial statements cingular wireless llc included separately herein annual report form 10k bellsouth corporation year ended december 31 2002 ernst young llp atlanta georgia february 27 2003 92 bellsouth 2002item 15 exhibits financial statement schedules reports form 8k bellsouth 2003 91 92 bellsouth 2003 93 94 bellsouth signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation w patrick shannon w patrick shannon vice president finance february 24 2004 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer f duane ackerman chairman board president chief executive officer principal financial officer ronald dykes chief financial officer principal accounting officer w patrick shannon vice president finance directors f duane ackerman reuben v anderson james h blanchard j hyatt brown armando codina kathleen f feldstein james p kelly leo f mullin eugene f murphy robin b smith william stavropoulos w patrick shannon w patrick shannon individually attorneyinfact february 24 2004 bellsouth 2003 95item 15 exhibits financial statement schedules exhibits financial statement schedules continued bellsouth corporation exhibits financial statement schedules continued bellsouth corporation exhibits financial statement schedules continued bellsouth corporation signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation w patrick shannon w patrick shannon senior vice president finance controller march 7 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer f duane ackerman chairman board president chief executive officer principal financial officer ronald dykes chief financial officer principal accounting officer w patrick shannon senior vice president finance controller directors f duane ackerman reuben v anderson james h blanchard j hyatt brown armando codina kathleen f feldstein james p kelly leo f mullin robin b smith william stavropoulos w patrick shannon w patrick shannon individually attorneyinfact march 7 2005item 15 exhibits financial statement schedules bellsouth 2005 87 exhibits financial statement schedules continued bellsouth corporation 88 bellsouth 2005 bellsouth 2005 89 exhibits financial statement schedules continued bellsouth corporation 90 bellsouth 2005 bellsouth 2005 91 exhibits financial statement schedules continued bellsouth corporation 92 bellsouth 2005 bellsouth 2005 93 exhibits financial statement schedules continued bellsouth corporation 94 bellsouth 2005 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bellsouth corporation raymond e winborne jr raymond e winborne jr controller february 28 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer f duane ackerman chairman board chief executive officer principal financial officer w patrick shannon chief financial officer principal accounting officer raymond e winborne jr controller directors f duane ackerman reuben v anderson james h blanchard j hyatt brown armando codina mark l feidler kathleen f feldstein james p kelly leo f mullin robin b smith william stavropoulos raymond e winborne jr raymond e winborne jr individually attorneyinfact february 28 2006 bellsouth 2005 95nan