FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1994
or
X Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8610
SOUTHWESTERN BELL CORPORATION
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
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 29, 1994, 600,441,852 common shares were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three months ended
March 31,
1994 1993
Operating Revenues
Local service $ 1,364.2 $ 1,222.0
Network access 681.5 637.7
Long-distance service 223.6 238.5
Directory advertising 119.5 111.2
Other 257.4 248.4
Total operating revenues 2,646.2 2,457.8
Operating Expenses
Cost of services and products 839.5 787.4
Selling, general and administrative 716.3 677.3
Depreciation and amortization 492.0 472.4
Total operating expenses 2,047.8 1,937.1
Operating Income 598.4 520.7
Other Income (Expense)
Interest expense (115.5) (127.9)
Equity in net income of affiliates 70.0 54.1
Other expense - net (13.9) (7.5)
Total other income (expense) (59.4) (81.3)
Income Before Income Taxes, Extraordinary Loss and
Cumulative Effect of Changes in
Accounting Principles 539.0 439.4
Income Taxes
Federal 159.0 116.7
State and local 22.3 20.2
Total income taxes 181.3 136.9
Income Before Extraordinary Loss and Cumulative
Effect of Changes in Accounting Principles 357.7 302.5
Extraordinary Loss on Early Extinguishment
of Debt, net of tax - (89.4)
Cumulative Effect of Changes in Accounting
Principles, net of tax - (2,127.2)
Net Income (Loss) $ 357.7 $ (1,914.1)
See Notes to Consolidated Financial Statements.
(Continued)
SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three months ended
March 31,
1994 1993 *
Earnings Per Common Share:
Income Before Extraordinary Loss and Cumulative
Effect of Changes in Accounting Principles $ 0.59 $ 0.50
Extraordinary Loss on Early Extinguishment
of Debt, net of tax - (0.15)
Cumulative Effect of Changes in Accounting
Principles, net of tax - (3.54)
Net Income (Loss) $ 0.59 $ (3.19)
Weighted Average Number of Common Shares
Outstanding (in millions) 601.8 600.1
Dividends Declared Per Common Share $ 0.3950 $ 0.3775
*Restated to reflect two-for-one stock split effective May 25, 1993.
See Notes to Consolidated Financial Statements.
SOUTHWESTERN BELL CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
March 31, December 31
1994 1993
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 374.9 $ 618.4
Accounts receivable - net of allowances for
uncollectibles of
$109.2 and $111.2 1,935.1 2,055.2
Material and supplies 152.8 148.9
Prepaid expenses 220.4 126.5
Deferred charges 233.6 192.0
Deferred income taxes 196.0 197.0
Other 193.9 281.8
Total current assets 3,306.7 3,619.8
Property, Plant and Equipment - at cost 28,694.2 28,170.6
Less: Accumulated depreciation and amortization 11,412.0 11,079.1
Property, Plant and Equipment - Net 17,282.2 17,091.5
Intangible Assets - Net of Accumulated Amortization
of $353.9 and $368.2 1,617.3 1,147.4
Investments in Equity Affiliates 1,489.5 1,420.8
Other Assets 973.8 1,028.0
Total Assets $24,669.5 $ 24,307.5
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 1,808.1 $ 1,385.7
Accounts payable and accrued liabilities 2,750.6 2,876.2
Dividends payable 237.8 226.6
Total current liabilities 4,796.5 4,488.5
Long-Term Debt 5,470.8 5,459.4
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 2,447.2 2,387.0
Postemployment benefit obligation 2,663.4 2,897.0
Unamortized investment tax credits 415.5 430.4
Other noncurrent liabilities 1,049.5 1,036.6
Total deferred credits and other
noncurrent liabilities 6,575.6 6,751.0
Shareowners' Equity
Common shares issued ($1 par value) 603.6 602.7
Capital in excess of par value 5,616.7 5,577.0
Retained earnings 2,012.3 1,891.4
Guaranteed obligations of employee stock
ownership plans (341.4) (352.9)
Treasury shares (at cost) (64.6) (109.6)
Total shareowners' equity 7,826.6 7,608.6
Total Liabilities and Shareowners' Equity $24,669.5 $ 24,307.5
See Notes to Consolidated Financial Statements.
SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalent
(Unaudited)
Three months ended
March 31,
1994 1993
Operating Activities
Net income (loss) $ 357.7 $ (1,914.1)
Adjustments to reconcile net income (loss)
to net cash
provided by operating activities:
Depreciation and amortization 492.0 472.4
Undistributed earnings from investments in (69.1) (53.0)
equity affiliates
Provision for uncollectible accounts 27.8 26.2
Amortization of investment tax credits (14.9) (16.7)
Pensions and other postemployment expenses 84.6 80.5
Deferred income tax expense 50.8 81.1
Extraordinary loss, net of tax - 89.4
Cumulative effect of accounting changes,
net of tax - 2,127.2
Other - net (421.6) (592.3)
Total adjustments 149.6 2,214.8
Net Cash Provided by Operating Activities 507.3 300.7
Investing Activities
Construction and capital expenditures (478.6) (443.8)
Purchase of short-term investments (60.7) (121.2)
Proceeds from short-term investments 121.0 51.6
Dispositions and (acquisitions) - net (563.8) 7.0
Net Cash Used in Investing Activities (982.1) (506.4)
Financing Activities
Net change in short-term borrowings with
oritinal maturities of three months
or less 502.4 475.0
Repayment of other short-term borrowings (5.0) (118.6)
Issuance of long-term debt 51.5 696.2
Repayment of long-term debt (93.0) (77.1)
Early extinguishment of debt and
related call premiums - (632.1)
Issuance of common shares 11.1 -
Purchase of treasury shares (43.3) (47.8)
Issuance of treasury shares 10.0 20.6
Dividends paid (202.4) (195.9)
Net Cash Provided by Financing Activities 231.3 120.3
Net decrease in cash and cash equivalents (243.5) (85.4)
Cash and cash equivalents beginning of year 618.4 505.2
Cash and Cash Equivalents End of Period $ 374.9 $ 419.8
Cash Paid During the Three Months Ended
March 31 for:
Interest $ 124.4 $ 129.9
Income taxes $ 332.4 $ 170.2
See Notes to Consolidated Financial Statements.
<TABLE>
SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
Guaranteed
Obligations
Capital in of Employee
Common Excess of Retained Stock Owner- Treasury
Shares Par Value Earnings ship Plans Shares
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $300.9 $5,834.8 $3,634.8 ($397.3) ($68.9)
Net Income (Loss) - - (1,914.1) - -
Dividends to shareowners - - (226.5) - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 11.0 -
Purchase of treasury shares - - - - (48.0)
Issuance of treasury shares:
Dividend Reinvestment Plan - 0.9 - - 30.0
Other issuances - 0.8 - - 20.2
Other - - 1.5 - -
Balance, March 31, 1993 $300.9 $5,836.5 $1,495.7 ($386.3) ($66.7)
Balance, December 31, 1993 $602.7 $5,577.0 $1,891.4 ($352.9) ($109.6)
Net Income - - 357.7 - -
Dividends to shareowners - - (238.4) - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 11.5 -
Issuance of common shares:
Dividend Reinvestment Plan 0.9 35.1 - - -
Purchase of treasury shares - - - - (43.4)
Issuance of treasury shares - 4.6 - - 88.4
Other - - 1.6 - -
Balance, March 31, 1994 $603.6 $5,616.7 $2,012.3 ($341.4) ($64.6)
</TABLE>
See Notes to Consolidated Financial Statements
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months then ended: 1994 1993
Return on weighted average shareowners' equity* . . . . 18.26% 15.89%
Debt ratio . . . . . . . . . . . . . . . . . . . . . . . 48.19% 50.63%
Network access lines in service (000) . . . . . . . . . . 13,416 12,961
Access minutes of use (000,000) . . . . . . . . . . . . 11,423 10,355
Long-distance messages (000) . . . . . . . . . . . . 269,924 261,740
Cellular customers (000) . . . . . . . . . . . . . . 2,206 1,513
Number of employees . . . . . . . . . . . . . . . . 59,040 59,670
* 1993 calculated using Income Before Extraordinary Loss and Cumulative
Effect of Changes in Accounting Principles.
SOUTHWESTERN BELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS - The
consolidated financial statements have been prepared by
Southwestern Bell Corporation (Corporation) pursuant to the
rules and regulations of the Securities and Exchange
Commission (SEC) and, in the opinion of management, include
all adjustments (consisting only of normal recurring
accruals and adjustments necessary for adoption of new
accounting standards) necessary to present fairly the
results for the interim periods shown. Certain information
and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted
pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the
information presented not misleading. Certain
reclassifications have been made to the 1993 consolidated
financial statements to conform with the 1994 presentation.
The results for the interim periods are not necessarily
indicative of results for the full year. The financial
statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto
included in the Corporation's 1993 Annual Report.
2. CONSOLIDATION - The consolidated financial statements
include the accounts of the Corporation and its majority-
owned subsidiaries. Southwestern Bell Telephone Company
(Telephone Company) is the Corporation's largest subsidiary.
All significant intercompany transactions are eliminated in
the consolidation process. Investments in companies in which
the Corporation owns 20 percent to 50 percent of the voting
common stock or otherwise exercises significant influence
over operating and financial policies of the company are
accounted for under the equity method. Earnings from foreign
investments accounted for under the equity method are
included for periods ended within three months of the date
of the Corporation's Consolidated Statements of Income.
3. SUBSEQUENT EVENTS - On April 5, 1994, the Corporation
announced the termination of plans to form a $4.9 billion
cable television partnership with Cox Cable Communications
(Cox) in the United States. The Corporation and Cox had
entered into a non-binding Memorandum of Understanding in
December 1993 under which the Corporation would have
contributed $1.6 billion in cash or other assets to the
proposed partnership within four years, in exchange for a
40 percent general partnership interest. The termination of
the planned partnership had no impact on the Corporation's
financial results.
SOUTHWESTERN BELL CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
Southwestern Bell Corporation (Corporation) reported net income
of $357.7 or $.59 per share for the first quarter of 1994.
Financial results for the first quarters of 1994 and 1993 are
summarized as follows:
Percent
First Quarter change
1994 vs.
1994 1993 1993
Operating revenues $ 2,646.2 $ 2,457.8 7.7 %
Operating expenses $ 2,047.8 $ 1,937.1 5.7 %
Income before extraordinary $ 357.7 $ 302.5 18.2 %
loss and accounting
changes
Extraordinary loss - $ (89.4) -
Accounting changes - $ (2,127.2) -
Net income (loss) $ 357.7 $ (1,914.1) -
The primary factors contributing to the increase in income before
extraordinary loss and cumulative effect of changes in accounting
principles during the first quarter were growth in demand for
services and products at Southwestern Bell Mobile Systems, Inc.
(Mobile Systems) and Southwestern Bell Telephone Company
(Telephone Company), and an increase in equity in net income of
affiliates from the Corporation's investment in Telefonos de
Mexico, S.A. de C.V. (Telmex). These increases were partially
offset by a combination of previously ordered rate reductions and
accruals for potential rate reductions at the Telephone Company,
as discussed in the Corporation's 1993 Annual Report.
First quarter 1993 results reflect an extraordinary loss of $89.4
associated with refinancing of Telephone Company long-term debt.
In addition, effective January 1, 1993, the Corporation adopted
new financial accounting standards relating to postretirement
benefits, postemployment benefits, and income taxes resulting in
a one-time, non-cash charge to first quarter 1993 earnings of
$2,127.2.
The Corporation's operating revenues in the first quarter of 1994
increased $188.4, or 7.7 percent over the first quarter of 1993.
Components of operating revenues for the first quarters of 1994
and 1993 are as follows:
First Quarter Percent
change
1994 vs.
1994 1993 1993
Local service
Landline $ 991.5 $ 949.0 4.5 %
Wireless 372.7 273.0 36.5
Network access
Interstate 454.9 432.1 5.3
Intrastate 226.6 205.6 10.2
Long-distance service 223.6 238.5 (6.2)
Directory advertising 119.5 111.2 7.5
Other 257.4 248.4 3.6
$ 2,646.2 $ 2,457.8 7.7 %
Landline local service revenues increased in the first
quarter of 1994 due primarily to increases in demand,
including growth in the number of access lines of
3.5 percent from March 31, 1993. This was partially offset
by the impact of previously ordered rate reductions in Texas
and accruals for potential rate reductions in Missouri.
Wireless local service revenues increased in the first
quarter of 1994 due primarily to a 45.8 percent increase in
cellular customers offset partially by a decline in average
revenue per customer.
Interstate network access revenues increased in the first
quarter of 1994 due primarily to an increase in demand for
access services and growth in end user charges attributable
to an increasing access line base. These increases were
partially offset by the impact of accruals for sharing
under the Federal Communications Commission (FCC) price cap
plan.
Intrastate network access revenues increased in the first
quarter of 1994 due to an increase in demand, partially
offset by previously ordered rate reductions, primarily in
Texas. Also, beginning in 1994, access revenues reflect the
replacement of the Texas pool settlement process with a
system of primary toll carrier charges. Charges paid to the
Telephone Company by other intrastate carriers are now
recorded as access revenues, while those paid by the
Telephone Company are recorded as cost of services and
products. These amounts are offsetting and did not
materially affect operating income in the first quarter of
1994. Previously, only the net settlement pool payment or
receipt was recorded as access revenue.
Long-distance service revenues decreased in the first
quarter of 1994 due mainly to accruals for potential rate
reductions, primarily in Missouri, and reclassification of
certain revenues to access revenues.
Directory advertising revenues increased in the first
quarter due to recognition in 1994 of white pages
advertising revenues in the month of publication, conforming
to the recognition of other directory advertising revenues.
In 1993, white pages revenues were recorded ratably.
Other operating revenues increased in the first quarter of
1994 due to increased cellular telephone equipment sales at
Mobile Systems and the addition of cable television revenues
resulting from the acquisition of two systems from Hauser
Communications, Inc. These increases were partially offset
by the absence of revenues associated with Metromedia Paging
Services, Inc. and the residential equipment sales
operations of Southwestern Bell Telecommunications, Inc.,
both of which were sold after the first quarter of 1993.
The Corporation's operating expenses in the first quarter of 1994
increased $110.7, or 5.7 percent, over the first quarter of 1993.
Components of operating expenses for the first quarters of 1994
and 1993 are as follows:
First quarter Percent change
1994 vs.
1994 1993 1993
Cost of services
and products $ 839.5 $ 787.4 6.6%
Selling, general and
administrative 716.3 677.3 5.8
Depreciation and
amortization 492.0 472.4 4.1
$ 2,047.8 $ 1,937.1 5.7%
Cost of services and products increased for the first quarter
of 1994 due to increased demand for cellular services and
products, increased switching system software license fees at
the Telephone Company, including fees related to enhanced
services, annual compensation increases and Texas primary toll
carrier access expenses discussed above. These increases were
partially offset by the absence of expenses associated with
paging services and residential equipment sales operations
sold after the first quarter of 1993.
Selling, general and administrative expenses increased in the
first quarter of 1994 due to growth in cellular operations,
wage increases and higher operating taxes, partially offset by
savings associated with 1993 force reductions.
Depreciation and amortization increased in the first quarter
of 1994 due primarily to a growth in plant level and changes
in plant composition.
Interest expense decreased $12.4, or 9.7 percent, in the first
quarter of 1994 due primarily to lower interest rates on
Telephone Company debt refinanced in 1993.
Equity in net income of affiliates, which relates primarily to
Telmex, increased $15.9, or 29.4 percent, in the first quarter of
1994 due primarily to access line growth and increases in rates
at Telmex. Telmex earnings are recorded by the Corporation for
periods ended within three months of the financial statement
date, are stated in accordance with U.S. generally accepted
accounting principles, are not adjusted for the effects of
inflation and reflect certain other purchase accounting
adjustments. The Corporation's future earnings from Telmex may
be negatively affected by recent declines in the value of the
Mexican peso, although the impact on the Corporation's financial
results as a whole is not expected to be material.
Federal income tax expense increased $42.3, or 36.2 percent, in
the first quarter of 1994 due primarily to higher income before
income taxes and the 1 percent increase in the federal income tax
rate enacted in the third quarter of 1993.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1994, as in 1993, the Corporation's
primary source of funds continued to be cash provided by
operating activities. Other sources of cash used in the 1994
acquisition of cable television properties included proceeds from
the issuance of short-term debt and sales of short-term
investments. In addition, a portion of the acquisition was
completed through the issuance of treasury shares. In both 1994
and 1993, cash provided by operating activities is affected by
contributions of $101.0 and $135.5, respectively, to the
collectively bargained Voluntary Employee Beneficiary Association
trusts for the purpose of funding certain postretirement
benefits.
The Corporation had $374.9 of cash and cash equivalents available
at March 31, 1994. The Corporation has entered into agreements
with several banks for lines of credit totaling $780.0, all of
which may be used to support commercial paper borrowings. These
lines had not been utilized as of March 31, 1994. Commercial
paper borrowings as of March 31, 1994 totaled $1,388.0.
PART II - OTHER INFORMATION
SOUTHWESTERN BELL CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed
Charges.
(b) Reports on Form 8-K
On March 15, 1994, Southwestern Bell Corporation
(Corporation) filed a Current Report on Form 8-K, reporting
on Item 7, Financial Statements and Exhibits. The
Corporation filed exhibits relating to the issuance of
floating rate Medium-Term Notes by Southwestern Bell
Capital Corporation.
SIGNATURES
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.
Southwestern Bell Corporation
May 10, 1994 /s/ Donald E. Kiernan
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
DOLLARS IN MILLIONS
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Changes in Accounting
Principles* $ 469.9 $ 386.4 $1,882.9 $1,701.2 $1,557.0 $1,541.4 $1,479.5
Add:Interest Expense 115.5 127.9 496.2 530.0 577.7 529.7 543.8
1/3 Rental Expense 10.0 8.9 41.0 45.1 37.5 43.4 42.5
Adjusted Earnings $ 595.4 $ 523.2 $2,420.1 $2,276.3 $2,172.2 $2,114.5 $2,065.8
Total Interest Charges $ 115.5 $ 127.9 $496.2 $ 530.0 $ 577.7 $ 529.7 $543.8
1/3 Rental Expense 10.0 8.9 41.0 45.1 37.5 43.4 42.5
Adjusted Fixed Charges $ 125.5 $ 136.8 $537.2 $ 575.1 $ 615.2 $ 573.1 $586.3
Ratio of Earnings to
Fixed Charges 4.74 3.82 4.51 3.96 3.53 3.69 3.52
* Undistributed earnings on investments accounted for under
the equity method have been excluded.
</TABLE>
