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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8609
PACIFIC TELESIS GROUP
I.R.S. Employer No. 94-2919931
A Nevada Corporation
130 Kearny Street, San Francisco, California 94108
Telephone - Area Code (415) 394-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
At April 30, 1994 424,065,165 common shares were outstanding.
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements
Review Report of Independent Accountants .............. 3
Condensed Consolidated Statements of Income ........... 4
Condensed Consolidated Balance Sheets ................. 6
Condensed Consolidated Statements of
Shareowners' Equity ............................... 7
Condensed Consolidated Statements of Cash Flows ....... 8
Notes to Condensed Consolidated Financial Statements .. 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .................... 13
PART II. OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K ........................ 21
SIGNATURE ........................................................ 22
- - ---------
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners
of Pacific Telesis Group:
We have reviewed the accompanying condensed consolidated balance sheet of
Pacific Telesis Group and Subsidiaries as of March 31, 1994, and the related
condensed consolidated statements of income, shareowners' equity, and cash
flows for the three-month periods ended March 31, 1994 and 1993. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Pacific Telesis Group and
Subsidiaries as of December 31, 1993, and the related consolidated statements
of income, shareowners' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 3, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1993, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Coopers & Lybrand
San Francisco, California
May 13, 1994
3
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
1994 1993
OPERATING REVENUES --------- ---------
Local service ....................................... $ 856 $ 856
Network access
Interstate ........................................ 409 402
Intrastate ........................................ 175 168
Toll service ........................................ 498 516
Other service revenues............................... 356 344
--------- ---------
TOTAL OPERATING REVENUES ............................ 2,294 2,286
--------- ---------
OPERATING EXPENSES
Cost of products and services ....................... 476 509
Customer operations and
selling expenses .................................. 422 417
General, administrative, and
other expenses .................................... 407 387
Restructuring charges ............................... - 413
Depreciation and amortization ....................... 441 435
--------- ---------
TOTAL OPERATING EXPENSES ............................ 1,746 2,161
--------- ---------
OPERATING INCOME .................................... 548 125
Interest expense .................................... 108 125
Miscellaneous income ................................ 12 9
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................................ 452 9
Income taxes ........................................ 170 3
--------- ---------
INCOME FROM CONTINUING OPERATIONS.................... 282 6
Income (loss) from spin-off
operations, net of tax (Notes A and B)............. 23 (9)
--------- ---------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES ...................... 305 (3)
Cumulative effect of
accounting changes ................................ - (1,724)
--------- ---------
NET INCOME (LOSS) ................................... $ 305 $(1,727)
========= =========
(Continued)
4
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Continued)
(Dollars in millions, except per share amounts)
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
1994 1993
--------- ---------
Earnings (loss) per share:
Income from continuing operations ................. $ 0.67 $ 0.01
Income (loss) from spin-off operations ............ 0.05 (0.02)
--------- ---------
Income (loss) before cumulative
effect of accounting changes .................... 0.72 (0.01)
Cumulative effect of
accounting changes .............................. - (4.24)
--------- ---------
Net income (loss) ................................. $ 0.72 $(4.25)
========= =========
Dividends per share ................................. $0.545 $0.545
Average shares outstanding
(thousands) ....................................... 423,695 406,660
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
5
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
March 31, December 31,
1994 1993
----------- ------------
ASSETS: (Unaudited)
Cash and cash equivalents ................... $ 59 $ 69
Accounts receivable -(net of allowances for
uncollectibles of $145 and $138 in 1994 and
1993, respectively) ....................... 1,533 1,548
Prepaid expenses and other current assets.... 1,015 1,029
----------- -----------
Total current assets ........................ 2,607 2,646
----------- -----------
Property, plant, and equipment - at cost .... 26,558 26,607
Less: accumulated depreciation ........... (10,055) (9,961)
----------- -----------
Property, plant, and equipment - net ........ 16,503 16,646
----------- -----------
Net assets of spin-off operations
(Notes A and B) ........................... 2,901 2,874
----------- -----------
Deferred charges and other noncurrent assets. 1,324 1,271
----------- -----------
TOTAL ASSETS ................................ $23,335 $23,437
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY:
Accounts payable and accrued liabilities .... $ 1,707 $ 1,645
Debt maturing within one year ............... 308 595
Other current liabilities ................... 1,139 1,168
----------- -----------
Total current liabilities.................... 3,154 3,408
----------- -----------
Long-term obligations ....................... 5,141 5,129
----------- -----------
Deferred income taxes ....................... 1,588 1,598
----------- -----------
Spin-off stock distribution payable (Note B). 2,901 -
----------- -----------
Other noncurrent liabilities and
deferred credits .......................... 5,529 5,516
----------- -----------
Commitments and contingencies (Notes C and D)
Total shareowners' equity.................... 5,022 7,786
----------- -----------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY ... $23,335 $23,437
=========== ===========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
6
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(Dollars in millions)
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
1994 1993
-------- --------
COMMON STOCK
Balance at beginning of period ............... $ 43 $ 43
-------- --------
Balance at end of period ..................... 43 43
-------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period ............... 6,372 5,220
Spin-off stock distribution (Note B).......... (2,901) -
Issuance of shares ........................... 22 (5)
Other changes ................................ 1 3
-------- --------
Balance at end of period ..................... 3,494 5,218
-------- --------
REINVESTED EARNINGS
Balance at beginning of period ............... 2,040 4,459
Net income (loss) ............................ 305 (1,727)
Dividends declared ........................... (231) (223)
Other changes................................. (7) 8
-------- --------
Balance at end of period ..................... 2,107 2,517
-------- --------
TREASURY STOCK
Balance at beginning of period ............... (283) (1,011)
Issuance of shares ........................... 27 145
-------- --------
Balance at end of period ..................... (256) (866)
-------- --------
DEFERRED COMPENSATION - LESOP TRUST
Balance at beginning of period ............... (386) (460)
Cost of trust shares allocated
to employee accounts ....................... 20 23
-------- --------
Balance at end of period ..................... (366) (437)
-------- --------
TOTAL SHAREOWNERS' EQUITY ...................... $ 5,022 $ 6,475
======== ========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
7
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited) For the 3 Months Ended
March 31,
----------------------
1994 1993
CASH FROM (USED FOR) OPERATING ACTIVITIES: --------- ---------
Net income (loss)................................... $ 305 $(1,727)
Adjustments to net income (loss):
(Income) loss from spin-off operations (Note A)... (23) 9
Cumulative effect of accounting changes .......... - 1,724
Restructuring charges ............................ - 413
Depreciation and amortization .................... 441 435
Deferred income taxes ............................ (32) (42)
Changes in operating assets and liabilities:
Accounts receivable ............................ 13 32
Prepaid expenses and other current assets ...... (7) (38)
Deferred charges and other noncurrent assets ... (29) 45
Accounts payable and accrued liabilities ....... 82 (224)
Other current liabilities....................... (29) 32
Noncurrent liabilities and deferred credits .... 29 (76)
Other adjustments, net ........................... (55) (6)
---------- ---------
Cash from operating activities of continuing
operations........................................ 695 577
---------- ---------
CASH FROM (USED FOR) INVESTING ACTIVITIES:
Additions to property, plant, and equipment ........ (347) (388)
Net investment in spin-off operations............... (3) (565)
Decrease in net receivable from
spin-off operations .............................. 25 448
Other investing activities, net .................... 23 58
---------- ---------
Cash used for investing activities ................. (302) (447)
---------- ---------
CASH FROM (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of common and
treasury shares .................................. 98 112
Proceeds from issuance of long-term debt ........... 10 1,319
Retirements of long-term debt ...................... - (342)
Dividends paid ..................................... (214) (183)
Decrease in short-term borrowings, net ............. (287) (524)
Other financing activities, net .................... (10) (15)
---------- ---------
Cash from (used for) financing activities .......... (403) 367
---------- ---------
Increase (decrease) in cash and cash equivalents ... (10) 497
Cash and cash equivalents at January 1 ............. 69 74
---------- ---------
Cash and cash equivalents at March 31............... $ 59 $ 571
========== =========
(Continued)
8
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in millions)
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
1994 1993
- - ----------------------------------------------------------------------------
Cash payments for:
Interest ......................................... $ 131 $ 131
Income taxes ..................................... $ 33 $ 118
- - ----------------------------------------------------------------------------
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
9
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
Pacific Telesis Group (the "Corporation") and its wholly and majority
owned subsidiaries. The Corporation includes a holding company, Pacific
Telesis; its telephone subsidiaries: Pacific Bell and its subsidiaries,
Pacific Bell Directory and Pacific Bell Information Services, and Nevada
Bell (the "Telephone Companies"); and several smaller units.
The Condensed Consolidated Financial Statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (the "SEC") applicable to interim financial information.
Certain information and footnote disclosures included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in these interim statements
pursuant to such SEC rules and regulations. Management recommends that
these interim financial statements be read in conjunction with both the
Corporation's 1993 annual report on Form 10-K and its 1994 Proxy Statement
that includes the audited 1993 financial statements.
In management's opinion, the Condensed Consolidated Financial Statements
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position and results of
operations for each interim period shown. The Condensed Consolidated
Financial Statements have been reviewed by Coopers & Lybrand, independent
accountants. Their report is on page 3.
The Corporation's financial statements have been reclassified to conform
to the current presentation. The Corporation's interests in the operating
results and net assets of AirTouch Communications ("AirTouch") are
classified separately as "spin-off operations." These are excluded from
amounts for "continuing operations." (See also Note B - "Spin-off"
following.) In addition, the Corporation's cash flow statements exclude
the activities of AirTouch. Intercompany transactions with AirTouch and
its subsidiaries which were previously eliminated in consolidation are now
reflected in the Corporation's financial statements. Financial
information presented for AirTouch in the Pacific Telesis Group
consolidated financial statements has been prepared solely for the purpose
of reporting Pacific Telesis Group results and should not be viewed as a
report on the results of AirTouch itself.
10
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
B. SPIN-OFF
Effective April 1, 1994, the Corporation spun off to shareowners its
domestic and international cellular, paging, and other wireless operations
in a one-for-one stock distribution of its 86 percent interest in
AirTouch. As of March 31, 1994, the distribution is reflected in the
Corporation's balance sheet as a stock distribution payable. As a result,
the Corporation's shareowners' equity was reduced by $2,901 million during
first quarter 1994. The stock distribution payable is recorded at the
carrying amount of the net assets of spin-off operations. Effective with
the spin-off's completion on April 1, 1994, the net assets of spin-off
operations and the stock distribution payable will no longer be carried
within the Corporation's balance sheet. The stock distribution itself is
a noncash transaction which will not affect the Corporation's cash flow
statement.
Under a separation agreement, any unrecorded non-tax contingent
liabilities that become certain after the spin-off date will be allocated
based on origin of the claim, and acts by, or benefits to, the Corporation
or AirTouch. Effective with the spin-off, the Corporation's
responsibilities terminate in connection with any future obligations under
AirTouch's joint venture agreement with Cellular Communications, Inc., as
well as various off-balance-sheet financial instruments used by AirTouch.
As of December 31, 1993, these financial instruments included foreign
currency swap and forward contracts with face amounts totaling
$291 million.
C. PRIOR YEAR ACCOUNTING CHANGES AND RESTRUCTURING CHARGES
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Postretirement Benefits Other than Pensions," and Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for
Postemployment Benefits." These new rules require a change from the cash
to the accrual method of accounting for these costs. The cumulative
effects of applying the new rules to prior years were recognized in first
quarter 1993 by one-time charges applicable to continuing operations
totaling $1.724 billion. The charges are net of deferred income tax
benefits of $1.155 billion and reduced earnings applicable to continuing
operations by $4.24 per share. Under decisions by the California Public
Utilities Commission (the "CPUC"), Pacific Bell was granted $100 and
$108 million for 1994 and 1993, respectively, for partial recovery of its
higher costs under SFAS 106. Two ratepayer advocacy groups have each
challenged certain aspects of the original CPUC decision adopting SFAS 106
for ratemaking, which could affect Pacific Bell's rate recovery. The
Corporation is unable to predict the outcome of these pending challenges.
11
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
C. PRIOR YEAR ACCOUNTING CHANGES AND RESTRUCTURING CHARGES (Continued)
As previously reported, the Corporation recorded pre-tax restructuring
charges during first quarter 1993 relating to its planned disposal of real
estate assets, the spin-off of AirTouch, and other restructuring
activities. Overall, these charges reduced first quarter 1993 income from
continuing operations by $258 million, or $.63 per share.
D. LOAN GUARANTEE CONTINGENCY
In June 1990, Prime Cable of Chicago, Inc. ("Prime Cable"), acquired
certain Chicago cable television properties from Group W. The
Corporation, through its PacTel Cable subsidiary, holds options to
purchase up to a 75 percent interest in Prime Cable upon receiving the
necessary regulatory and legal approvals. TC Cable, Inc. ("TC Cable") now
holds this interest. PacTel Capital Funding, a wholly owned subsidiary of
the Corporation, has guaranteed bank financing used by TC Cable and its
parent corporation to acquire this interest. The guarantees cover initial
loan amounts of $60 million as well as interest accruing on the loans
which will be added to the outstanding loan balances up to an aggregate of
$136 million. In the Corporation's opinion, the likelihood that it will
be required to pay principal or interest on this debt under these
guarantees is remote.
12
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Effective April 1, 1994, Pacific Telesis Group (the "Corporation") spun off to
shareowners its domestic and international cellular, paging, and other
wireless operations in a one-for-one stock distribution of its 86 percent
interest in AirTouch Communications ("AirTouch"). (See Note B - "Spin-off" on
page 11.) The Corporation continues to own its telephone subsidiaries,
Pacific Bell and Nevada Bell (the "Telephone Companies"), along with several
smaller units. The Corporation's share of the operating results of AirTouch
each period is classified separately within the Corporation's financial
statements as "spin-off operations." These operations are excluded from the
revenues and expenses of "continuing operations" discussed in this section.
The following discussions and data compare the three-month period ended
March 31, 1994 to the corresponding period in 1993. Results for the first
three months of 1994 may not be indicative of results for the full year. (See
discussions of "Pending Regulatory Issues" beginning on page 19.)
A summary of supplemental financial and operating data is shown below:
For the 3 Months Ended
March 31,
----------------------
%
Selected Operating Data* 1994 1993 Change
- - ----------------------------------------------------------------------------
Return on shareowners' equity (%)................... 22.3 (98.0) -
Operating ratio (%)................................. 76.1 94.6 -19.6
Total employees at March 31......................... 53,660 56,535 -5.1
Revenues per employee ($ in thousands).............. 42 40 5.0
Telephone Company employees per
ten thousand access lines**....................... 34.0 36.5 -6.8
- - ----------------------------------------------------------------------------
* continuing operations
** excludes Pacific Bell Directory employees
Earnings
- - --------
For first quarter 1994, the Corporation reported earnings of $305 million, or
$0.72 per share, compared to a reported loss a year ago of $1.7 billion, or
$4.25 per share. Last year's first quarter results reflected after-tax
charges of $1.7 billion relating to the Corporation's adoption of new
accounting standards and $258 million of after-tax restructuring charges.
Without last year's charges and one-time effects in the current quarter,
earnings from continuing operations would have increased about nine percent.
13
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Operating Revenues
- - ------------------
For the 3 Months Ended
March 31,
----------------------
%
Volume Indicators 1994 1993 Change
- - ----------------------------------------------------------------------------
Customer switched access
lines in service at
March 31 (thousands).............................. 14,986 14,645 2.3
Carrier access minutes-of-use (millions)............ 13,184 12,004 9.8
Interstate........................................ 7,872 6,993 12.6
Intrastate........................................ 5,312 5,011 6.0
Toll messages (millions)* .......................... 1,096 1,039 5.5
- - ----------------------------------------------------------------------------
* Toll messages for 1993 have been restated to conform to the current
presentation.
For the 3 Months Ended
March 31,
----------------------
(Dollars in millions) 1994 1993 Change
- - ----------------------------------------------------------------------------
Total operating revenues ............................ $2,294 $2,286 $ 8
0.3%
- - ----------------------------------------------------------------------------
Although revenues for first quarter 1994 increased only slightly, the
Corporation noted faster growth in access lines and carrier access minutes-of-
use. Revenue increases from customer demand were, however, largely offset by
price cap rate reductions. These rate reductions were ordered by the
California Public Utilities Commission (the "CPUC") and the Federal
Communications Commission (the "FCC") under incentive-based regulation. (See
also "Pending Regulatory Issues" beginning on page 19.)
14
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Factors affecting revenue growth are summarized in the following table.
Total
Misc. Change
Price Cap Rates Customer from
(Dollars in millions) Rates & Other Demand 1993
- - ---------------------------------------------------------------------------
Local service .................... -$ 13 -$ 11 $24 $ -
Network access
Interstate ..................... -5 -17 29 7
Intrastate ..................... -4 -4 15 7
Toll service ..................... -10 -12 4 -18
Other service revenues ........... 4 8 12
--------- --------- -------- --------
Total operating revenues ......... -$ 32 -$ 40 $80 $ 8
- - ---------------------------------------------------------------------------
The first quarter 1994 increase in local service revenues due to customer
demand in the above table reflects a 2.3 percent increase from a year ago in
the Telephone Companies' customer access lines.
The increase in interstate network access revenues due to customer demand
reflects a 12.6 percent increase in minutes-of-use, as well as increased
access lines. However, the interstate revenue increase was partially offset
by net adjustments by Pacific Bell of $19 million to a provision for sharing
earnings with customers. The FCC requires sharing earnings above an
authorized rate of return under price cap regulation. The increase in
intrastate network access revenues due to customer demand reflects 6.0 percent
growth in minutes-of-use.
Competition continues to constrain demand for Pacific Bell's toll services.
The increase in other service revenues reflects the success of Pacific Bell's
business and residential voice mail products. The increase was partially
offset by a decrease in directory advertising revenues.
15
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Operating Expenses
- - ------------------
For the 3 Months Ended
March 31,
-----------------------
%
(Dollars in millions) 1994 1993 Change
- - --------------------------------------------------- -----------------------
Cost of products
and services .................................... $ 476 $ 509 -6.5
Customer operations and
selling expenses ................................ 422 417 1.2
General, administrative,
and other expenses .............................. 407 387 5.2
Restructuring charges ............................. - 413 -
Depreciation and
amortization .................................... 441 435 1.4
------- ------- ------
Total operating expenses .......................... $1,746 $2,161 -19.2
- - ----------------------------------------------------------------------------
The decrease in total operating expenses for first quarter 1994 is due
primarily to restructuring charges recorded a year ago. Last year's first
quarter charges relate to the Corporation's planned disposal of real estate
assets, the spin-off of AirTouch, and other restructuring activities. Without
those charges, recorded expenses would have been flat.
At the Telephone Companies, a combined decrease in salaries, wages and
employee benefits was offset by increases in contracted services and software
licensing fees. Salary and wage expense at Pacific Bell declined primarily as
a result of storm-related overtime in Southern California in the comparable
period last year. Contracted services expense increased primarily because of
research and development costs supporting Pacific Bell's previously announced
plans to upgrade its core network infrastructure and to begin building an
integrated telecommunications, information, and entertainment network.
Licensing fees for digital switching software increased as Pacific Bell
implemented plans to create a fully digital telecommunications network.
In December 1993, Pacific Bell and the Pacific Telesis holding company
announced a temporary freeze on management salary increases pending a review
of 1994 business needs. In April 1994, the Corporation announced that it was
lifting this salary freeze effective July 1, 1994.
Interest Expense
- - ----------------
Interest expense for first quarter 1994 decreased by $17 million, or
13.6 percent. Lower interest rates on long-term debt contributed in part to
the decrease, reflecting Pacific Bell's refinancing efforts in recent years.
A reduction in average short-term borrowings also contributed to the decrease.
16
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Income Taxes
- - ------------
The increase in income tax expense for first quarter 1994 is due primarily to
higher pre-tax income. The effective tax rate on pre-tax income of 37.6
percent for first quarter reflects the increase in the corporate federal tax
rate from 34 percent to 35 percent which was enacted in August 1993. Due to
the effects of the lower level of last year's pre-tax earnings, the 1993
annual effective rate of 5.0 percent is not comparable to the current rate.
Cumulative Effect of Accounting Changes
- - ---------------------------------------
Effective January 1, 1993, the Corporation adopted two new accounting rules
for postretirement benefits and postemployment benefits and recorded related
first quarter 1993 charges. These noncash charges represent the cumulative
after-tax effects of applying the new rules to prior years. (See also Note C
- - - "Prior Year Accounting Changes and Restructuring Charges" on page 11.)
These new accounting rules will increase annual benefit costs, but are not
expected to materially affect reported earnings.
Status of Restructuring Reserves
- - --------------------------------
As previously reported, Pacific Bell established a restructuring reserve at
the end of 1993 to provide for the incremental cost of force reductions and
other related costs to restructure its internal business processes through
1997. A total of 1,800 employees left Pacific Bell during first quarter 1994.
A total of $21 million was charged to the reserve in first quarter 1994,
leaving a balance of $1,076 million as of March 31, 1994. These costs were
primarily to cover severance benefits for about 600 employees. The majority
of this year's costs will be incurred during the second half of 1994.
During first quarter 1994, the Corporation charged $11 million of incurred
losses to reserves previously established for the planned disposal of the
assets of its real estate subsidiary. As of March 31, 1994, the remaining
balance of the reserves for potential future losses on sales and estimated
operating losses totaled $327 million.
LIQUIDITY AND FINANCIAL CONDITION
The Corporation defines liquidity as its ability to generate resources to
finance business expansion, construct capital assets, pay its current
obligations, and pay dividends. The Corporation has met most of its financing
needs from internally generated funds, but also can obtain external financing
through the issuance of common stock and short- and long-term debt, if needed.
The Corporation expects to continue to meet most of the financing needs of its
capital program from internally generated funds.
17
<PAGE>
Short-term borrowings are available under a commercial paper program and
through unused formal and informal lines of credit. These lines of credit are
subject to continued review by the lending banks.
For longer term borrowings, Pacific Bell has remaining authority from the CPUC
to issue up to $1.25 billion of long- and intermediate-term debt. The
proceeds may be used to redeem maturing debt and to refinance other debt
issues. Pacific Bell has remaining authority from the SEC to issue up to $650
million of long- and intermediate-term debt through an April 1993 shelf
registration. The Corporation's PacTel Capital Resources subsidiary may also
issue up to $192 million of medium-term notes through an SEC shelf
registration.
Cash flow from operating activities of continuing operations increased $118
million for the three months ended March 31, 1994, compared to the same period
in 1993. Timing differences in the payment of accounts payable and other
liabilities contributed to the increase, along with a reduction in cash
payments for income taxes.
Cash used for investing activities decreased $145 million primarily due to the
level of capital contributions which were made to AirTouch last year. During
1993, AirTouch substantially repaid its intercompany balances due the
Corporation primarily using proceeds of capital contributions from the Pacific
Telesis holding company. Contributions made during first quarter 1993, less
repayments of intercompany receivables from AirTouch, raised cash used for
investing activities in that period by $117 million.
During first quarter 1994, the Corporation sold its remaining cable franchises
in the United Kingdom ("UK"). The Corporation previously sold four other UK
cable franchises during first quarter 1993. Sales proceeds of $30 and
$49 million, respectively, are reflected in cash provided from other investing
activities each period.
During first quarter 1994, $403 million of cash was used for financing
activities. A year ago $367 million had been provided from these activities.
However, first quarter 1993 financing activities reflected a temporary
increase in cash resulting from a lag between debt issuances and related
refinancings. Pacific Bell redeemed $925 million of debt in April 1993 from
the proceeds of debt issuances received in first quarter 1993.
The Corporation's debt ratio, excluding spin-off operations, of 52.0 percent
at March 31, 1994 improved from 53.8 percent at December 31, 1993. During
first quarter 1994, the Corporation decreased the level of its short-term
borrowings, primarily commercial paper, by $287 million. Pre-tax interest
coverage was 5.2 times for the first three months in 1994. Last year,
calculations of this indicator were negative due to the Corporation's 1993
reported loss.
For first quarter 1994, the Pacific Telesis Group Board of Directors (the
"Board") maintained the Corporation's dividend at $0.545 per share. This
represents the same annual dividend level of $2.18 per share as for 1993 and
1992. Management intends to recommend to the Board that this level be
maintained for 1994.
18
<PAGE>
PENDING REGULATORY ISSUES
CPUC Regulatory Framework Review
- - --------------------------------
In March 1994, a CPUC Administrative Law Judge issued a proposed decision in
the New Regulatory Framework ("NRF") review. Among other issues, this review
has examined elements of the price cap formula, including the productivity
factor and the rate of return on investment, adopted in the 1989 NRF order.
The proposed decision would eliminate an element of the NRF which requires
equal sharing with customers of earnings exceeding a benchmark rate of return.
Earnings above a rate of return of 16.5 percent would continue to be returned
to customers. The proposed decision also recommends increasing the
productivity factor of the price cap formula from 4.5 percent to 6.0 percent
for the period 1994 through 1996. If adopted by the CPUC, the change in the
productivity factor would reduce annualized revenues about $100 million each
year, when compared to the previous year, through 1996. The Corporation does
not believe that the record in this proceeding supports an increase in the
productivity factor.
In April 1994, the Assigned Commissioner asked for additional comments on
whether the record would support modification of the price cap formula.
Modifications would include eliminating the rate of return ceiling, indexing
the rate of return floor to the 30 year Treasury Bond rate, and redefining
requirements for recovery of costs resulting from exogenous events. The new
definition would authorize recovery only for substantial costs sustained as a
result of a natural disaster or calamity. In response, Pacific Bell filed
comments noting the record supported elimination of the rate of return
ceiling. Pacific Bell also commented that the record does not support the
proposed indexing of the rate of return floor, but does support eliminating
the floor. In addition, there is support for the redefinition of exogenous
costs with the modification that recovery for jurisdictional cost shifts also
be included. The Corporation is unable to predict the final outcome of these
proceedings or the effective date of rate reductions, if any.
PSCN Regulatory Review
- - ----------------------
In Nevada, the Public Service Commission of Nevada (the "PSCN") has opened a
proceeding to consider revising existing regulations for telecommunications
providers. In April 1994, Nevada Bell joined an industry group of
interexchange carriers and local exchange carriers in proposing to the PSCN
fundamental changes in the nature of telecommunications regulation. The
proposal would permit competition where it is in the public interest and would
establish guidelines by which all competitors would be regulated. If adopted
by the PSCN, the proposal would allow local exchange carriers to elect a form
of price regulation.
19
<PAGE>
Late Payment Charge Complaint
- - -----------------------------
In March 1991, a consumer advocacy group filed a complaint with the CPUC
against Pacific Bell alleging that erroneous late payment charges were
assessed against some customers. In May 1993, the CPUC ordered Pacific Bell
to refund about $35 million in late payment and reconnection charges which
resulted from problems with its payment processing system. The CPUC also
imposed penalties totaling $15 million on Pacific Bell for improperly
assessing late payment charges and disconnecting customers between 1986 and
February 1991. In November 1993, the CPUC granted Pacific Bell a limited
rehearing of the decision. The rehearing examined the legal basis for the
penalties, the statute of limitations on refunds, and whether unclaimed
refunds must escheat to the state. In April 1994, the CPUC announced that it
would let its May 1993 order stand with minor modifications. As a result, the
Corporation will reflect an after-tax charge of about $30 million during
second quarter 1994. However, the Corporation believes the CPUC's most recent
decision continues to misinterpret California law and exceeds the CPUC's
authority. For these reasons, the Corporation will seek review of the
decision by the California Supreme Court. The Corporation is unable to
predict the outcome of this matter.
FCC Annual Access Tariff Filing
- - -------------------------------
In April 1994, the Telephone Companies submitted their annual access tariff
filings to the FCC under price cap regulation. Pacific Bell in its filing
proposed an annual revenue reduction of about $20 million effective July 1,
1994. This decrease reflects the net effect of changes in the inflation and
productivity factors, plus exogenous cost reductions of $21 million required
by the FCC's rules. In its filing, Nevada Bell proposed a $2 million annual
revenue reduction.
Personal Communications Services
- - --------------------------------
The Corporation plans to aggressively pursue licenses for personal
communications services ("PCS") at FCC auctions expected late this year or
early in 1995. In December 1993, the FCC awarded "pioneer preferences" to
several companies. One company received one of the two larger Major Trading
Area ("MTA") licenses covering the Los Angeles, San Diego, and Las Vegas
market area. That company will receive the license without charge. This is
expected to place the successful bidder for the remaining MTA license in that
area at a significant competitive disadvantage because of its higher cost
structure. Winning bids in major PCS markets are expected to require large
capital expenditures. On March 1, 1994, Pacific Bell filed Petitions for
Review with the U.S. Court of Appeals for the D.C. Circuit seeking review of
the FCC's orders that granted pioneer preference awards at no charge. A
subcommittee of Congress is investigating the FCC's policy for making these
awards as well.
20
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number Description
- - ------- -----------
4a Rights Agreement, dated as of September 22, 1989, between Pacific
Telesis Group and The First National Bank of Boston, as successor
Rights Agent, which includes as Exhibit B thereto the form of Rights
Certificate (Exhibits 1 and 2 to Form SE filed September 25, 1989 as
part of Form 8-A, File No. 1-8609).
4b No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Telesis Group or its subsidiaries
is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, Pacific Telesis Group hereby agrees to
furnish a copy of any such instrument to the SEC upon request.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
The Corporation will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
21
<PAGE>
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Telesis Group
BY /s/ R. W. Odgers
--------------------------
R. W. Odgers
Executive Vice President -
General Counsel & External Affairs
May 13, 1994
22
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto. All other exhibits are
provided as part of the electronic transmission.
Exhibit
Number Description
- - ------- -----------
4a Rights Agreement, dated as of September 22, 1989, between Pacific
Telesis Group and The First National Bank of Boston, as successor
Rights Agent, which includes as Exhibit B thereto the form of Rights
Certificate (Exhibits 1 and 2 to Form SE filed September 25, 1989 as
part of Form 8-A, File No. 1-8609).
4b No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Telesis Group or its subsidiaries
is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, Pacific Telesis Group hereby agrees to
furnish a copy of any such instrument to the SEC upon request.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
23
<PAGE>
Exhibit 11
----------
PACIFIC TELESIS GROUP AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Dollars in millions, except per share amounts; shares in thousands)
For the 3 Months Ended
March 31,
-----------------------
1994 1993
-----------------------
Net income (loss) ................................ $ 305 $ (1,727)
========= ==========
Weighted average number
of common shares
outstanding .................................... 423,695 406,660
Common stock equivalent
shares applicable to
stock options .................................. 1,510 0
--------- ----------
Total number of shares
for computing primary
earnings (loss)
per share ...................................... 425,205 406,660
Incremental shares for
computing fully diluted
earnings (loss)
per share ...................................... 0 0
--------- ---------
Total number of shares
for computing fully
diluted earnings (loss)
per share .............. ....................... 425,205 406,660
========== =========
Earnings (loss) per common
share (as reported) ............................ $ 0.72 $ (4.25)
Primary earnings (loss)
per share ...................................... $ 0.72 $ (4.25)
Fully diluted earnings
(loss) per share ............................... $ 0.72 $ (4.25)
Earnings (loss) per share amounts for the three-months ended March 31, 1994
and March 31, 1993, as reported in the Condensed Consolidated Statements of
Income, were based on the weighted average number of common shares outstanding
for the respective periods. Primary and fully diluted earnings (loss) per
share amounts were not shown in the Condensed Consolidated Statements of
Income, as they differ from the reported earnings per share amounts by less
than three percent. Common stock equivalents were excluded from the 1993
primary and fully dilutive loss per share calculations because their inclusion
would have diluted the reported loss per share.
<PAGE>
Exhibit 15
----------
COOPERS
& LYBRAND
May 13, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Re: Pacific Telesis Group
Registrations on Forms S-3, Form S-4, and Forms S-8
---------------------------------------------------
We are aware that our report dated May 13, 1994 on our review of the interim
financial information of Pacific Telesis Group and Subsidiaries for the three-
month period ended March 31, 1994 and included in this Form 10-Q is
incorporated by reference in the Corporation's registration statements as
follows:
Form S-3: PacTel Capital Resources $500,000,000 Debt Securities and
Guarantee thereof by Pacific Telesis Group
Form S-3: Secondary Offering of 137,504 shares of Pacific Telesis Group
Common Stock
Form S-3: Shareowner Dividend Reinvestment and Stock Purchase Plan
Form S-4: ABI American Businessphones, Inc. Merger
Form S-8: Nonemployee Director Stock Option Plan
Form S-8: Supplemental Retirement and Savings Plan for Salaried Employees
Form S-8: Supplemental Retirement and Savings Plan for Nonsalaried
Employees
Form S-8: Stock Option and Stock Appreciation Rights Plan
Form S-8: PacTel Corporation Retirement Plan
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statements prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ Coopers & Lybrand
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
RESTATEMENT
(Unaudited)
DATA STATED IN MILLIONS, EXCEPT PER SHARE AMOUNTS
VOLUNTARY SCHEDULE - CERTAIN FINANCIAL INFORMATION
<CAPTION>
- - -------Column A-------- ----------------Column B---------------- ---Column C-- ---Column D--
First First
Quarter Quarter
Regulation Number Statement Caption 1994 1993
- - ----------------------- ---------------------------------------- ------------- -------------
<S> <S> <C> <C>
5-02(1) Cash and cash equivalents 59 571
5-02(3)(a)(1) Accounts receivable - trade 1,678 1,578
5-02(4) Allowance for uncollectibles 145 136
5-02(9) Total current assets 2,607 3,235
5-02(18) Total assets 23,335 22,392
5-02(21) Total current liabilities 3,154 3,816
5-02(22) Long-term obligations 5,141 5,236
5-02(24) Other liabilities 2,901 -
5-02(26) Total deferred credits 7,117 6,865
5-02(30) Common stock 43 43
5-02(31)(a)(1) Additional paid-in capital 3,494 5,218
5-02(31)(a)(2) Other additional capital (622) (1,303)
5-02(31)(a)(3)(ii) Reinvested earnings 2,107 2,517
5-03(b)(1)(b) Total operating revenues 2,294 2,286
5-03(b)(2)(b) Total operating expenses 1,746 2,161
5-03(b)(8) Interest expense 108 125
5-03(b)(10) Income before income taxes 452 9
5-03(b)(11) Income taxes 170 3
5-03(b)(14) Income from continuing operations 282 6
5-03(b)(15) Income (loss) from spin-off operations 23 (9)
5-03(b)(18) Cumulative effect of accounting changes - (1,724)
5-03(b)(19) Net income (loss) 305 (1,727)
5-03(b)(20) Earnings (loss) per share 0.72 (4.25)
</TABLE>
