Form 10-K
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Required)
For fiscal year ended December 31, 1993
or
______ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Required)
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 78205-2233
Telephone Number 210-821-4105
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares New York, Chicago and
(Par Value $1.00 Per Share) Pacific Stock Exchanges
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
Based on composite closing sales price on February 28, 1994, the
aggregate market value of all voting stock held by non-affiliates
was $23,546,222,094. As of February 28, 1994, 601,820,373 shares
of Common Stock were outstanding.
Documents Incorporated By Reference
(1)Portions of Southwestern Bell Corporation's annual report to
shareowners for the fiscal year ended December 31, 1993 (Parts I
and II).
<PAGE>
(2)Portions of Southwestern Bell Corporation's Notice of 1994
Annual Meeting and Proxy Statement dated March 18, 1994 (Parts
III and IV).
<PAGE>
TABLE OF CONTENTS
PART I
Item Page
1. Business 3
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security
Holders 14
Executive Officers of the Registrant 15
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 16
6. Selected Financial and Operating Data 16
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
8. Financial Statements and Supplementary Data 16
9. Changes in and disagreements with
Accountants on Accounting and Financial
Disclosure 16
PART III
10. Directors and Executive Officers of the
Registrant 16
11. Executive Compensation 16
12. Security Ownership of Certain Beneficial
Owners and Management 16
13. Certain Relationships and Related Transactions 16
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 17
PART I
Item 1. Business
The Company
Southwestern Bell Corporation (Corporation) is a communications
holding company whose subsidiaries are engaged principally in
communications services. The Corporation has several
subsidiaries, which include: Southwestern Bell Telephone Company
(Telephone Company), Southwestern Bell Mobile Systems, Inc.
(Mobile Systems), SBC International, Inc. (SBC International),
Southwestern Bell Yellow Pages, Inc. (Yellow Pages), Associated
Directory Services, Inc. (ADS), Southwestern Bell
Telecommunications, Inc. (Telecom), Southwestern Bell Printing
Company (SB Printing) and Southwestern Bell Enterprises, Inc.
(Enterprises). The Telephone Company provides telephone services
in the states of Arkansas, Kansas, Missouri, Oklahoma and Texas
(five-state area) and is the Corporation's largest subsidiary,
accounting for approximately 71 percent of the Corporation's 1993
income before extraordinary loss and cumulative effect of changes
in accounting principles; Mobile Systems principally provides
wireless communication services; SBC International is a holding
company owning interests in directory, cable television and
telecommunications businesses in Australia, Israel, Mexico and
the United Kingdom; Yellow Pages engages principally in the sale
of advertising for and publication of Yellow Pages and White
Pages directories and in other directory-related activities; ADS
engages principally in the production and distribution of non-
Bell telephone directories and in other directory-related
activities; Telecom is engaged in the sale of customer premises
and private business exchange equipment; and SB Printing is
engaged in the general directory and commercial printing
business.
The Corporation was incorporated under the laws of the State of
Delaware in 1983 by AT&T as one of seven regional holding
companies (RHCs) formed to hold AT&T's local telephone companies.
AT&T divested the Corporation by means of a spin-off of stock to
its shareowners on January 1, 1984 (divestiture). The
divestiture was made pursuant to a consent decree, referred to as
the Modification of Final Judgment (MFJ), issued by the United
States District Court for the District of Columbia (Court).
Operations Under the MFJ
The MFJ, as originally approved by the Court in 1982, placed
restrictions on the types of businesses in which the Corporation
could engage. The principal restriction prohibits the
Corporation from providing interexchange telecommunications
services. An exchange in this context refers to a Local Access
and Transport Area (LATA), which is generally centered on a
standard metropolitan service area or other identifiable
community of interest. Interexchange service refers to the
provision of telecommunications services between exchanges. The
MFJ initially restricted the Corporation from providing
information services and from manufacturing or providing
telecommunications products, other than the provision of customer
premises equipment (CPE) manufactured by others. CPE, as defined
in the MFJ, represents equipment used on customers' premises to
originate, route or terminate telecommunications. The MFJ also
initially restricted the Corporation from engaging in
nontelecommunications lines of business. These services and
products are collectively known as "restricted lines of
business". The MFJ permits the Corporation to obtain relief from
these restrictions upon a showing that there is no substantial
possibility that it could use its monopoly power to impede
competition in the specific market it seeks to enter (waiver
standard).
The Department of Justice (DOJ) initiated a review of the MFJ's
line of business restrictions in 1987. After that review, the
Court removed the restriction against entry into
nontelecommunications lines of business, as well as that portion
of the information services restriction which prohibited voice
messaging services (VMS), electronic mail, electronic White Pages
services and certain gateway functions (i.e., a
telecommunications arrangement, either by video or audio, in
which customers can communicate with many different information
service providers).
In April 1990, the U.S. Court of Appeals for the District of
Columbia Circuit (D.C. Circuit Court) affirmed the Court's
decision not to remove the interexchange and manufacturing
restrictions, but clarified the waiver standard in a manner
beneficial to future waiver requests by the Corporation. The
D.C. Circuit Court also reversed the decision not to lift the
information services restriction in its entirety, and remanded
the issue to the Court for reconsideration under a more lenient
public interest standard which is to apply when AT&T and the DOJ,
the original parties to the MFJ, do not oppose relief. In July
1991, the Court applied this public interest standard and issued
an order which removed the information services restriction in
its entirety, but stayed the effectiveness of the relief it
granted the RHCs, pending appeals. The D.C. Circuit Court has
affirmed the order and the United States Supreme Court (Supreme
Court) has refused to review the matter. Thus, the removal of
the information services restriction on an intraexchange basis
(within the LATA) has become final.
Also as a result of proceedings before the Court since
divestiture, the Corporation has been authorized to engage in the
restricted lines of business outside the United States, subject
to certain conditions designed to prevent an impact on United
States markets. The Corporation has also obtained relief from
the Court to provide interexchange cellular services in various
markets throughout the United States, as well as intersystem
handoff and automatic call delivery capabilities.
Recent Waivers Granted or Denied
In February 1993, the Corporation and the other RHCs were granted
a waiver for generic international relief. The relief allows the
Corporation and other RHCs, through foreign telecommunications
entities, to provide the foreign portion of international
telecommunications traffic between the United States and any
foreign country and to own minority interests in international
satellite and submarine cable facilities. The relief granted
allows the RHCs to pursue international opportunities without the
need to obtain transactional relief on a country-by-country
basis.
Also in February 1993, the Corporation and the other RHCs were
granted a waiver to provide interLATA cellular service for rural
service areas (RSAs). The relief permits clustering of RSAs with
metropolitan service areas (MSAs), and RHC switching for
independent adjoining RSAs, regardless of LATA boundaries.
In September 1993, the Corporation was granted a waiver to
purchase two cable television systems located in Montgomery
County, Maryland and Arlington County, Virginia from Hauser
Communications, Inc. The relief allows the Corporation to own
and operate certain facilities in the provision of video
programming despite LATA boundaries.
The Corporation, jointly with the other RHCs, had appealed a
July 1990 order of the Court holding that the RHCs were not
permitted to transport common channel signaling 7 (CCS7)
information across LATA boundaries for handoff to interexchange
carriers at centralized signal transport points (STPs). CCS7 is
the AT&T version of the internationally standardized signaling
system which transmits signaling and service definition
information between components of the telephone network. The STP
is a type of switch which routes the signaling messages within
the signaling network. The Court held that the MFJ requires that
signaling information be given to the interexchange carriers in
the LATA where the call originated, and also denied the RHCs'
requests for waivers to establish the centralized STP service
arrangement. The order was affirmed by the D.C. Circuit Court,
and in February 1993 the Supreme Court refused to review the
decision.
Pending Waiver Requests and Appeals
The Corporation has initiated other requests with the Court which
seek the removal of some of the remaining restrictions. This
includes a generic request, filed jointly by all the RHCs,
seeking relief from the interexchange prohibition to provide
wireless services without regard to geographic boundaries. In
addition, the Corporation has requested relief to provide
interexchange cellular services in certain of its own regional
markets. The Corporation has also filed waiver requests seeking
relief from the manufacturing restriction, to permit the design
and development of CPE, and the provision of telecommunications
equipment to third parties. All of these requests are pending.
In June 1993, the Corporation, along with the other RHCs, filed a
joint request for a waiver to provide information services on an
interLATA basis. A condition of the request is that the RHCs
lease the interLATA transport from independent interexchange
carriers. Opposition briefs were filed in October 1993.
In January 1992, the Court denied a waiver to allow Ameritech
Corporation (Ameritech), an RHC, to receive royalties from the
sale to third parties of telecommunication equipment designed,
developed and/or manufactured by the unaffiliated party with the
financial assistance of Ameritech. The Court also denied the
DOJ's request for a declaratory ruling that a funding/royalty
agreement with a firm in which an RHC has neither a significant
equity interest nor influence over operations does not constitute
manufacturing. The ruling was appealed to determine whether an
otherwise independent company over which an RHC has no operating
control and only a minimal ownership interest, may be labelled an
"affiliated enterprise" of the RHC under the MFJ, and whether a
funding/royalty relationship such as that proposed by Ameritech
is permissible under the MFJ. In December 1993, the D.C. Circuit
Court ruled that the MFJ bans all arrangements in which RHCs have
a direct and continuing share in the revenues of entities engaged
in restricted activities. However, Ameritech's waiver request
was remanded to the Court for further consideration and is
pending.
The Corporation has requested relief with regard to certain
paging services, as described below. Although the Corporation
recently sold its paging services subsidiary, these requests are
being pursued as they may have relevance to other aspects of the
Corporation's business. In February 1989, the Court granted a
waiver permitting the RHCs to provide multi-LATA one-way paging
services regardless of geographic scope, but included a condition
requiring the interexchange links for multi-LATA paging services
to be obtained from unaffiliated interexchange carriers. The
Corporation appealed that portion of the order which prohibited
it from owning the interexchange links outside the service
territory of the Telephone Company. In October 1990, the D.C.
Circuit Court reversed the Court's decision and remanded the
matter to the Court for reconsideration. This matter is still
pending.
In January 1993, the Corporation filed a request for a waiver to
provide interLATA paging origination and access to voice storage
and retrieval services. This waiver would permit the origination
of pages from outside of LATA boundaries and permit paging
subscribers to access their voice-mail messages from outside of a
LATA. This request is pending with the Court.
Principal Services
The Corporation provides its services through subsidiaries. These
services (which are described more fully below) include landline
and wireless telecommunications services, the sale of advertising
for and publication of Yellow Pages and White Pages directories,
the provision of customer premises, private business exchange
(PBX) and cellular equipment, and cable television services.
Telecommunications services include local services, network
access and long-distance (i.e., toll) services. Landline
telecommunications services are provided in the five-state area
by the Telephone Company and in the United Kingdom by SBC
International. Wireless telecommunications services are provided
by Mobile Systems.
Landline and wireless local services involve the transport of
telecommunications traffic between telephones and other CPE
located within the same local service calling area. Local
services include: basic local exchange service, extended area
service, dedicated private line services for voice and special
services, directory assistance and various vertical services.
Vertical services represent discretionary, generally
nonregulated, services which a customer may choose to supplement
his/her basic line, such as: call waiting, call forwarding, call
blocking, etc.
Landline and wireless toll services involve the transport of
traffic between local calling areas and include such services as
Wide Area Telecommunications Service (WATS or 800 services) and
other special services. Local calling areas are within the same
LATA, except for certain wireless service areas in which MFJ
waivers apply.
Network access services link a subscriber's telephone or other
equipment to the transmission facilities of other non-Telephone
Company carriers which, in turn, provide long-distance and other
communications services. Network access is either switched,
which uses a switched communications path between the carrier and
the customer, or special, which uses a direct nonswitched path.
For financial reporting purposes, the Corporation's revenues are
categorized as local service (principally provided by the
Telephone Company and Mobile Systems), network access (provided
by the Telephone Company), long-distance service (principally
provided by the Telephone Company), directory advertising
(provided by Yellow Pages, the Telephone Company and ADS) and
other (including equipment sales at Mobile Systems, Telecom and
SBC International, the Telephone Company's nonregulated products
and services, billing and collection services for interexchange
carriers provided by the Telephone Company, cable television
services provided by SBC International, printing services
provided by SB Printing, and paging services and equipment sales
provided by Metromedia Paging Services, Inc. (Metromedia Paging)
until it was sold in December 1993).
The following table sets forth for the Corporation the percentage
of total operating revenues by any class of service which
accounted for 10 percent or more of total operating revenues in
any of the last three fiscal years.
Percentage of Total
Operating Revenues
1993 1992 1991
Charges for local
service:
Landline 37% 37% 38%
Wireless 12% 10% 7%
Charges to
interexchange
carriers for network
access 20% 20% 20%
Charges for long-
distance
(i.e., toll) service 9% 10% 11%
Major Customer
See Note 14, "Segment and Major Customer Information," on page 43
of the Corporation's annual report to shareowners for the fiscal
year ended December 31, 1993, which is incorporated herein by
reference pursuant to General Instruction G(2).
Government Regulation
In the five-state area, the Telephone Company is subject to
regulation by state commissions which have the power to regulate
intrastate rates and services, including local, toll, private
line and network access (both intraLATA and interLATA access
within the state) services. The Telephone Company is also
subject to the jurisdiction of the Federal Communications
Commission (FCC) with respect to foreign and interstate rates and
services, including interstate access charges. Access charges
are designed to compensate the Telephone Company for the use of
its facilities for the origination or termination of long-
distance and other communications by non-Telephone Company
carriers.
Additional information relating to federal and state regulation
of the Telephone Company is contained in the registrant's annual
report to shareowners for the fiscal year ended December 31,
1993, under the heading "Regulatory Environment" on page 25 which
is incorporated herein by reference pursuant to General
Instruction G(2).
The Corporation's recently acquired cable systems are subject to
federal and local regulation, including regulation by the FCC and
local franchising authorities concerning rates, service, and
programming access.
Principal Markets
Telecommunications
The Telephone Company provides its services along approximately 9
million residential and 4 million business access lines in the
five-state area. During 1993, more than half of the Telephone
Company's access line growth occurred in Texas. In 1993, 1992
and 1991, approximately 73 percent of the Telephone Company's
total operating revenues were attributable to intrastate
operations. The intrastate operations of the Telephone Company
represented approximately 56 percent, 57 percent and 59 percent
of the Corporation's total operating revenues for 1993, 1992 and
1991, respectively. All intrastate operations of the Corporation
(including the Telephone Company and Mobile Systems) represented
approximately 68 percent, 67 percent and 66 percent of its total
operating revenues in 1993, 1992 and 1991, respectively.
At the end of 1993, Mobile Systems provided cellular services to
2,049,000 customers, or 5.7 out of every 100 people living in its
service areas. These services are provided in 28 metropolitan
markets, including five of the nation's top 15 metropolitan
areas, as follows: Washington, D.C.; Chicago, Illinois; Boston,
Massachusetts; St. Louis, Missouri; and Dallas, Texas. Mobile
Systems (or partnerships in which it has an ownership interest)
is licensed to provide service in 26 RSAs and is currently
providing service in all of these markets. All RSAs are
contiguous to an existing MSA or another RSA operated by Mobile
Systems, which allows for the expansion of service in a way that
adds value to customers' service. Mobile Systems operates in
certain areas under the name of Cellular One, by means of a
partnership arrangement with McCaw Cellular Communications, Inc.
and Vanguard Cellular Systems, Inc., which holds the Cellular One
service mark. These areas include both metropolitan and rural
service areas, such as Washington, D.C.; Chicago, Illinois; and
other service areas in Illinois, Massachusetts, Virginia and West
Virginia.
In February 1994, the Corporation announced an agreement to
purchase, for stock valued at $680, the domestic cellular
business of Associated Communications Corporation, including
cellular systems in Buffalo, Rochester, Albany and Glens Falls,
New York. These properties are adjacent to cellular systems in
Syracuse, Utica and Ithaca, New York, which the Corporation
agreed to purchase from other parties in November 1993. These
acquisitions will increase the number of markets served by Mobile
Systems to 61 and increase Mobile Systems' potential customer
base to more than 40 million. These transactions are expected to
close during 1994.
International
In December 1990, a consortium consisting of SBC International,
together with a subsidiary of France Telecom and a group of
Mexican investors led by Grupo Carso, S.A. de C.V., purchased
from the Mexican government all of the Class AA shares of
Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's national
telecommunications company. The consortium has voting control of
Telmex through its ownership of Class AA shares. SBC
International's interest in the Class AA shares held by the
consortium represents approximately 5 percent of the total equity
capitalization of Telmex. SBC International also holds
530,157,101 Class L shares, which have limited voting rights.
The Class L shares held by SBC International represent
approximately 5 percent of the total equity capitalization of
Telmex, bringing SBC International's total interest to
10 percent. Telmex provides complete landline and wireless
telecommunications services within Mexico. At the end of 1993,
Telmex had 7.6 million access lines in service and provided
cellular service to more than 195,000 subscribers. As of
December 31, 1993, telephone service reached approximately 41 of
every 100 Mexican households. For additional information
regarding the Corporation's investment in Telmex, see Note 13,
"Equity Investments," on page 42 of the Corporation's annual
report to shareowners for the fiscal year ended December 31,
1993, which is incorporated herein by reference pursuant to
General Instruction G(2).
SBC International cable television operations are managed by SBC
Cable Communications Group, Ltd., and include Midlands Cable
Communications and Northwest Cable Communications, both in the
United Kingdom, with combined service areas including 1.1 million
potential households. In May 1993, the Corporation completed the
sale of 25 percent of its United Kingdom cable operations to Cox
Cable Communications (Cox). The Corporation and Cox share
management of the cable operations.
At the end of 1993, SBC International cable television in the
United Kingdom served approximately 80,000 subscribers. SBC
International's penetration rate at the end of 1993 in the United
Kingdom was 21.9 percent. Penetration rate is defined as the
number of customers as a percentage of solicited households that
have network access. Cable operators in the United Kingdom may
provide both cable television and local exchange service. At the
end of 1993, SBC International provided local exchange service to
approximately 39,000 subscribers.
SBC International also holds a minority interest in Golden
Channels, a cable television provider in Israel. Golden Channels
holds franchises in areas containing 412,000 potential
households. At the end of 1993, Golden Channels served
approximately 194,000 households and had a penetration rate (as
defined above) of approximately 55 percent.
In Israel and Australia, SBC International also has interests in
companies involved in the publication of yellow pages directory
advertising.
<PAGE>
Directory Publishing
Yellow Pages publishes nearly 40 million copies of 389 classified
directories within the Telephone Company's five-state area. The
ten largest revenue-producing Yellow Pages directories are
currently published in the second half of the Corporation's
fiscal year. Directory advertising revenues and expenses
associated with Yellow Pages directories are recognized in the
month the related directory is published.
ADS engages principally in the production and distribution of 269
telephone directories for GTE Telephone companies throughout 29
states of the continental United States. ADS also publishes
telephone directories for 17 non-Bell telephone companies, some
of which are co-bound with GTE directories. To a less
significant extent, ADS produces and publishes a number of other
directories unaffiliated with any telephone company.
Customer Premises Equipment and Other Equipment Sales
Telecom markets business and residential communications equipment
through two divisions, Business Systems and Original Equipment.
Telecom's offerings range from single-line and cordless
telephones to sophisticated digital PBX systems. PBX is a
private telephone switching system, usually located on a
customer's premises, which provides intra-premise telephone
services as well as access to the public switched network.
The Business Systems division markets a wide variety of
telecommunications products and services to business customers in
the Telephone Company's five-state area. The Original Equipment
division, through an exclusive, long-term distribution agreement
with Conair Corporation effective April 1993, markets a full line
of residential telephones to retailers nationwide, under the
Freedom Phone name. Separately, the Original Equipment division
markets residential and business products to U.S. telephone
companies, and internationally, in 39 countries.
Mobile Systems markets cellular communications equipment in each
of its service areas.
Printing
In February 1993, the Corporation sold the assets of the
commercial printing operations of Gulf Printing Company (Gulf),
including the Gulf name. The remaining operations are continuing
under the name "Southwestern Bell Printing Company." SB Printing
provides directory printing in the Telephone Company five-state
service area, and prints more than 62 million copies of 809
directories annually. SB Printing maintains a sales office in
St. Louis, Missouri, and also operates one plant in Houston,
Texas. SB Printing's wholly-owned subsidiary, Times Journal
Publishing Company (Times Journal), operates two plants in
Oklahoma City, Oklahoma, and prints smaller telephone directories
and provides commercial printing services.
During 1993, SB Printing was awarded a five-year contract to
print 15.5 million directory copies for Telmex's directory
operations, beginning in 1994.
Domestic Cable Television
In February 1993, the Corporation reached an agreement to
purchase, for $650 million, two cable television systems located
in Montgomery County, Maryland, and Arlington County, Virginia,
from Hauser Communications, Inc. The purchase was closed in
January 1994.
In December 1993, the Corporation and Cox Cable Communications
(Cox) entered into a non-binding Memorandum of Understanding with
respect to the formation of a $4.9 billion partnership to own and
operate cable television systems. In return for a 40 percent
general partnership interest, the Corporation would contribute
$1.6 billion in cash or other assets within four years of
formation. The Corporation would have the option to increase its
initial ownership stake to 50 percent within specified time
frames, through additional cash or asset contributions. Cox
would contribute 21 cable television systems, located throughout
the United States, based on a negotiated value of $3.3 billion,
and would hold a 60 percent general partnership interest and a
$1 billion preferred partnership interest. The transaction is
subject to completion of negotiations and regulatory approvals,
with the formation of the partnership expected to be completed by
late 1994.
Paging Services
In December 1993, the Corporation sold Metromedia Paging, which
provided paging services in 76 markets throughout the United
States, to Local Area Telecommunications, Inc., a New York-based
telecommunications service company.
Status of New Services
Telecommunications
During 1993, the Telephone Company continued to expand its
offering of optional services, known as Easy Options. These
options include, among others: Caller ID, a feature which
displays the telephone number of the person calling and, by next
year, will also display the caller's name in certain markets;
Call Return, a feature that redials the number of the last
incoming call; and Call Blocker, a feature which allows customers
to automatically reject calls from a designated list of telephone
numbers.
Recent changes in Texas law will allow the Telephone Company to
introduce Caller ID in its largest markets during 1994 and 1995.
Caller ID is now being offered in certain markets in all of the
states in the Telephone Company's five-state area.
The FCC has promulgated certain rules that impact the manner in
which the Telephone Company may offer enhanced services, which
generally include services which are more than basic transmission
services. Under FCC decisions known as Computer Inquiry III, the <PAGE>
Telephone Company is permitted to offer enhanced services either
on its own or jointly with its affiliates, subject to
nonstructural safeguards, designed to permit the Telephone
Company's competitors to acquire needed network services on an
efficient, non-discriminatory basis and to reduce the risk of
cross-subsidization. These safeguards include accounting and
reporting procedures, and Open Network Architecture (ONA)
requirements, which represent the Telephone Company's plan
essentially to provide equal access to its network to all
enhanced service providers. Enhanced services are deregulated at
the federal level, and none of the Telephone Company's state
commissions have, as yet, asserted jurisdiction over intrastate
enhanced services.
In December 1991, after various court proceedings, the FCC
slightly modified the original Computer Inquiry III nonstructural
competitive safeguards. The Telephone Company received FCC
acknowledgement of its initial ONA implementation in November
1992. However, the current modified Computer Inquiry III
nonstructural safeguards are subject to an appeal now pending at
the U.S. Court of Appeals for the Ninth Circuit.
In July 1993, Mobile Systems launched the largest digital
deployment program in North America with commercial digital
service in Chicago. Digital service improves sound quality,
provides a greater degree of privacy on individual calls,
increases call-handling capacity of the networks and reduces
exposure to billing fraud. In September, Mobile Systems launched
commercial digital service in its St. Louis market. During 1994,
Mobile Systems plans to provide digital service in
Washington, D.C., Boston, Dallas-Fort Worth and the West Texas
markets of Midland-Odessa, Abilene, Amarillo and Lubbock.
During March 1993, Mobile Systems introduced FreedomLink, a new
wireless business phone system which employs cellular technology
to provide anywhere, anytime communications, using cellular
frequencies.
Voice Messaging Services
Southwestern Bell Messaging Services, Inc. (SMSI), a subsidiary
of Enterprises, currently offers residential and small business
voice messaging services in Dallas-Fort Worth, Houston, Oklahoma
City, Tulsa, St. Louis, Kansas City, Little Rock, San Antonio and
certain other portions of Texas. Effective June 1, 1993, Telecom
assumed SMSI's voice messaging services sales to medium and large
business.
Importance, Duration and Effect of Licenses
The FCC authorizes the licensing of only two cellular carriers in
each geographic market. These cellular licenses have a standard
duration of ten years and are renewable upon application and a
showing of compliance with FCC use and conduct standards.
The FCC licenses granted to Mobile Systems in Washington, D.C.;
Baltimore, Maryland; Kansas City, Missouri/Kansas; St. Louis,
Missouri; and Dallas, Texas all expired on October 1, 1993.
Renewal applications were filed in each of these markets during
August 1993. To date, Mobile Systems has received no competing
applications in these markets nor have any petitions to deny been
filed. Final license grants are expected to be received by
mid-1994. Renewal applications are to be filed in the following
markets during August 1994: Chicago, Illinois; San Antonio,
Texas; Boston, Massachusetts; Oklahoma City, Oklahoma; and
Wichita, Kansas.
Cable television systems generally are operated under
nonexclusive permits or "franchises" granted by local
governmental authorities. The Corporation operates its recently
acquired cable systems under franchises granted by Montgomery
County, Maryland (expires May 25, 1998); Arlington County,
Virginia (expires October 18, 2000); and the City of
Gaithersburg, Maryland (expires November 2, 2001). Each
franchise is renewable upon a showing of compliance with
established local and federal standards.
<PAGE>
Competition
Telecommunications
Information relating to competition in the telecommunications
industry is contained in the registrant's annual report to
shareowners for the fiscal year ended December 31, 1993, under
the heading "Competition" on page 27 which is incorporated herein
by reference pursuant to General Instruction G(2).
International
Most major and several minor cable operators in the United
Kingdom have begun to offer both cable television and local
exchange services in selected franchise service areas. Domestic
United Kingdom telephone companies are restricted from offering
video entertainment over their networks until 1998. The United
Kingdom currently has two major domestic telephone companies. In
addition to cable, viewers in the United Kingdom may select
television programming from four television stations which are
broadcast free, or may subscribe to programming directly from
satellite broadcasting services. Both are sources of programming
for cable companies.
Directory Publishing
Yellow Pages faces competition from numerous directory publishing
companies as well as other advertising media. There are 42 other
directory publishers in the five-state area producing yellow page
directories.
ADS publishes the majority of its directories under a long-term
contract with GTE/Contel. ADS also faces competition from other
publishers and non-directory advertising media.
Voice Messaging Services
SMSI and Telecom face competition in each market in which voice
messaging services are offered. Competition is primarily from
telephone answering services and other voice messaging services
providers. In addition, answering machines and voice messaging
equipment used as adjuncts to PBX systems provide competing
alternatives to voice messaging services.
Customer Premises Equipment
Telecom faces significant price competition from numerous
companies within both its Business Systems division and Original
Equipment division.
Printing
SB Printing and its subsidiary, Times Journal, engage in general
directory and commercial printing and face significant
competition in each of these operations. In the United States
and Canada, there are at least seven large directory printing
companies and over 100 large commercial printing companies in
direct competition with SB Printing.
<PAGE>
Research and Development
The majority of company-sponsored basic and applied research
activities are conducted at Bell Communications Research, Inc.
(Bellcore). The Telephone Company owns a one-seventh interest in
Bellcore along with the other six RHCs. Bellcore is also the
coordinator for the federal government's telecommunications
requirements on national security and emergency preparedness.
Basic and applied research is also conducted at Southwestern Bell
Technology Resources, Inc. (TRI), a subsidiary of the
Corporation. TRI provides technology planning and assessment
services to the Corporation and its subsidiaries.
Employees
As of January 31, 1994, the Corporation and its subsidiaries
employed 59,040 persons. Approximately 67 percent of the
employees are represented by the Communications Workers of
America (CWA). Effective in August 1992, a three-year contract
was negotiated between the CWA and the Telephone Company.
Effective in December 1992, a three-year contract was negotiated
between the CWA and Yellow Pages. These contracts will be
subject to renegotiation in mid-1995. In March 1991, Telecom
negotiated a three-year contract with the CWA. This contract
will be subject to renegotiation in 1994. The CWA also
represents a minor number of employees in other subsidiaries of
the Corporation.
Item 2. Properties.
The properties of the Corporation do not lend themselves to
description by character and location of principal units.
Ninety-two percent of the property, plant and equipment of the
Corporation is owned by the Telephone Company. At December 31,
1993, network access lines represented 45 percent of the
Telephone Company's investment in telephone plant; central office
equipment represented 36 percent; land and buildings represented
10 percent; other miscellaneous property, comprised principally
of furniture and office equipment and vehicles and other work
equipment, represented 7 percent; and information
origination/termination equipment represented 2 percent.
Item 3. Legal Proceedings.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of shareowners in the fourth
quarter of the fiscal year covered by this report.
<PAGE>
Executive Officers of the Registrant as of January 31,
1994.
Name Age Position Held
Since
Edward E. Whitacre 52 Chairman and 1-90
Jr. Chief Executive
Officer
James R. Adams 54 Group President 7-92
Robert A. Dickemper 50 Senior Vice 7-93
President-
Staff/Administration
William E. Dreyer 55 Senior Executive Vice 7-93
President-External
Affairs
James D. Ellis 50 Senior Executive Vice 3-89
President and General
Counsel
Charles E. Foster 57 Group President 10-90
Richard A. Harris 53 Senior Executive Vice 10-90
President- Human
Resources
James S. Kahan 46 Senior Vice 7-93
President- Strategic
Planning and
Corporate Development
Donald E. Kiernan 53 Senior Vice 7-93
President, Treasurer
and Chief Financial
Officer
Robert G. Pope* 58 Vice Chairman of 7-93
Southwestern Bell
Corporation and
President and
Chief Executive
Officer of
Southwestern Bell
Telephone Company
*Mr. Robert G. Pope has announced his intention to retire
effective March 31, 1994.
<PAGE>
All of the above Executive Officers have held high-level
managerial positions with the Corporation, its subsidiaries or
former affiliates for more than the past five years, except for
Messrs. Kiernan and Kahan who have held such high-level
managerial positions since May 1990 and January 1992,
respectively. Prior to their appointments as Executive Officers,
Mr. Kiernan was a partner with Ernst & Young and Mr. Kahan held
responsible managerial positions with the Corporation. Officers
of the Corporation are appointed by the Corporation's Board of
Directors. Officers are not appointed to a fixed term of office
but hold office until their successors are elected and qualified.
PART II
Items 5 through 8.
The information required by these Items is included in the "Stock
Performance" section on page 1, page 20 through page 43 and in
the "Stock Data" section on the back cover of the registrant's
annual report to shareowners for the fiscal year ended December
31, 1993. Such information is incorporated herein by reference
pursuant to General Instruction G(2).
Item 9. Changes in and disagreements with Accountants on
Accounting and Financial Disclosure.
No changes in accountants or disagreements with accountants on
any accounting or financial disclosure matters occurred during
the period covered by this report.
PART III
Items 10 through 13.
Information regarding executive officers required by Item 401 of
Regulation S-K is furnished in a separate disclosure in Part I of
this report since the registrant did not furnish such information
in its definitive proxy statement prepared in accordance with
Schedule 14A.
The other information required by these Items is included in the
registrant's definitive proxy statement, dated March 18, 1994,
from page 4 through page 9 and beginning with the last paragraph
on page 16 through page 24 and is incorporated herein by
reference pursuant to General Instruction G(3).
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as a part of the report:
Page
(1) Consolidated Financial Statements:
Consolidated Statements of Income *
Consolidated Balance Sheets *
Consolidated Statements of Cash Flows *
Consolidated Statements of Shareowners' Equity *
Notes to Consolidated Financial Statements *
Report of Independent Auditors *
__________
* Incorporated herein by reference to the appropriate portions
of the registrant's annual report to shareowners for the
fiscal year ended December 31, 1993. (See Part II.)
Page
(2)Financial Statement Schedules:
Consent of Independent Auditors 25
V-Property, Plant and Equipment 26
VI-Accumulated Depreciation, Depletion
and Amortization of Property, Plant and
Equipment 30
VIII-Valuation and Qualifying Accounts 31
X-Supplementary Income Statement Information 33
Financial statement schedules other than those listed above
have been omitted because the required information is
contained in the financial statements and notes thereto, or
because such schedules are not required or applicable.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the
SEC, are incorporated by reference as exhibits hereto.
3-a Certificate of Incorporation of Southwestern Bell
Corporation (restated), dated June 6, 1988. (Exhibit
3-a to Form 10-K for 1988, File 1-8610.)
3-b Bylaws of Southwestern Bell Corporation, dated June 28,
1991. (Exhibit 3-b to Form 10-Q for the second quarter
1991, File 1-8610.)
4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no
instrument which defines the rights of holders of long
and intermediate term debt of the registrant or any of
its consolidated subsidiaries is filed herewith.
Pursuant to this regulation, the registrant hereby
agrees to furnish a copy of any such instrument to the
SEC upon request.
<PAGE>
4-b Support Agreement dated November 10, 1986, between
Southwestern Bell Corporation and Southwestern Bell
Capital Corporation. (Exhibit 4-b to Registration
Statement No. 33-11669)
4-c Form of Rights Agreement, dated as of January 27, 1989,
between Southwestern Bell Corporation and American
Transtech, Inc., the Rights Agent, which includes as
Exhibit B thereto the form of Rights Certificate.
(Exhibit 4-a to Form 8-A dated February 9, 1989,
File 1-8610.)
4-d Amendment of Rights Agreement, dated as of August 5,
1992, between Southwestern Bell Corporation, American
Transtech, Inc., and The Bank of New York, the
successor Rights Agent, which includes the Form of
Rights Certificate as an attachment identified as
Exhibit B. (Exhibit 4-a to Form 8-K, dated August 7,
1992, File 1-8610.)
4-e Form of Rights Certificate (included in the attachment
to the Amendment of Rights Agreement and identified as
Exhibit B.) (Exhibit 4-b to Form 8-K, dated August 7,
1992, File 1-8610.)
10-a Southwestern Bell Corporation Senior Management Short
Term Incentive Plan, revised January 1, 1991.
(Exhibit 10-a to Form 10-K for 1990, File 1-8610.)
10-b Southwestern Bell Corporation Senior Management Long
Term Incentive Plan, revised effective January 1, 1993.
(Exhibit 10-b to Form 10-K for 1992, File 1-8610.)
10-c Southwestern Bell Corporation Senior Management
Survivor Benefit Plan. (Exhibit 10-c to Form 10-K for
1986, File 1-8610.)
10-d Southwestern Bell Corporation Senior Management
Supplemental Retirement Income Plan, revised effective
January 1, 1993. (Exhibit 10-d to Form 10-K for 1992,
File 1-8610.)
10-e Southwestern Bell Corporation Senior Management
Deferred Compensation Plan Effective for Units of
Participation Having a Unit Start Date Prior to January
1, 1988, revised October 27, 1989. (Exhibit 10-e to
Form 10-K for 1989, File 1-8610.)
10-f Southwestern Bell Corporation Senior Management
Deferred Compensation Plan of 1988 Effective for Units
of Participation Having a Unit Start Date of January 1,
1988 or Later, revised and restated October 27, 1989.
(Exhibit 10-f to Form 10-K for 1989, File 1-8610.)
10-g Southwestern Bell Corporation Senior Management Long
Term Disability Plan. (Exhibit 10-f to Form 10-K for
1986, File 1-8610.) <PAGE>
10-h Southwestern Bell Corporation Senior Management
Incentive Award Deferral Plan. (Exhibit 10-g to
Form 10-K for 1986, File 1-8610.)
10-i Southwestern Bell Corporation Senior Management
Financial Counseling Program. (Exhibit 10-h to Form
10-K for 1986, File 1-8610.)
10-j Southwestern Bell Corporation Senior Management
Executive Health Plan, effective January 1, 1987.
(Exhibit 10-i to Form 10-K for 1986, File 1-8610.)
10-k Southwestern Bell Corporation Retirement Plan for Non-
Employee Directors. (Exhibit 10-t to Form 10-K for
1985, File 1-8610.)
10-l Form of Indemnity Agreement, effective July 1, 1986,
between Southwestern Bell Corporation and each of its
directors and officers. (Appendix 1 to Definitive
Proxy Statement dated March 18, 1987, File 1-8610.)
10-m Form of Southwestern Bell Corporation Change of Control
Severance Agreements for all Officers of the
Corporation and certain Officers of the Corporation's
subsidiaries. (Exhibit 10-p to Form 10-K for 1988,
File 1-8610.)
10-n Southwestern Bell Corporation Stock Savings Plan,
revised effective January 1, 1994. (Appendix A to
Definitive Proxy Statement dated March 18, 1994,
File 1-8610.)
10-o Southwestern Bell Corporation 1992 Stock Option Plan.
(Appendix A to Definitive Proxy Statement dated March
12, 1992, File 1-8610.)
10-p Key Executive Officer Short Term Incentive Plan.
(Appendix B to Definitive Proxy Statement dated March
18, 1994, File 1-8610.)
12 Computation of Ratios of Earnings to Fixed Charges.
13 Portions of Southwestern Bell Corporation's annual
report to shareowners for the fiscal year ended
December 31, 1993 which are incorporated by reference.
21 Subsidiaries of Southwestern Bell Corporation
23 Consent of Independent Auditors
24 Powers of Attorney
99-a Annual Report on Form 11-K for the Southwestern Bell
Corporation Savings Plan for Salaried Employees for the
year 1993 to be filed under Form 10-K/A
99-b Annual Report on Form 11-K for the Southwestern Bell
Corporation Savings and Security Plan (Non-Salaried <PAGE>
Employees) for the year 1993 to be filed under Form 10-
K/A
Southwestern Bell Corporation will furnish to shareowners upon
request, and without charge, a copy of the annual report to
shareowners and the proxy statement, portions of which are
incorporated by reference in the Form 10-K. Southwestern Bell
Corporation will furnish any other exhibit at cost.
(b)Reports on Form 8-K:
On December 7, 1993, Southwestern Bell Corporation filed a
Current Report on Form 8-K, dated December 6, 1993,
reporting on Item 5, Other Events. <PAGE>
<TABLE>
SOUTHWESTERN BELL CORPORATION Schedule V - Sheet 1
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Additions Retirements Other Balance at
Beginning of at cost Changes End of
Classification Period -Note (a) -Note (b) -Note (d) Period
<S> <C> <C> <C> <C> <C>
Year 1993
Aerial Cable $ 1,325.3 $ 52.1 $ 22.2 $ (.7) $ 1,354.5
Aerial Wire 34.8 .8 1.1 - 34.5
Buildings 2,646.8 138.0 36.5 1.8 2,750.1
Buried Cable 6,230.3 453.9 57.6 52.1 6,678.7
Central Office Assets 9,271.4 884.0 449.1 16.9 9,723.2
Conduit Systems 1,294.8 46.9 2.4 .3 1,339.6
Furniture and Office 1,514.6 179.2 95.0 11.2 1,610.0
Equipment
Held for Future Use 8.3 - - (7.9) .4
Information Equipment 510.0 47.5 67.9 27.1 516.7
Intrabuilding Network 143.5 1.1 1.8 - 142.8
Cable
Land 207.3 2.9 3.2 (14.0) 193.0
Other Communications 915.5 298.4 34.2 (306.4) 873.3
Equipment
Poles 312.6 9.3 4.1 - 317.8
Submarine Cable 4.7 .1 .1 .1 4.8
Underground Cable 2,028.7 85.1 15.2 7.1 2,105.7
Vehicles and Work 529.8 46.8 19.9 (31.2) 525.5
Equipment
Total Property, $ 26,978.4 $ 2,246.1 $ 810.3 $ (243.6) $ 28,170.6 <PAGE>
Plant and Equipment
<FN>
Depreciation as a percentage of average depreciable 7.0%
plant and equipment
The Notes on Sheet 4 are an integral part of this Schedule.
</TABLE>
<TABLE>
Schedule V - Sheet 2
SOUTHWESTERN BELL CORPORATION
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Additions Retirements Other Balance at
Beginning of at cost Changes End of
Classification Period -Note (a) -Note (b) -Note (c) Period
Year 1992
<S> <C> <C> <C> <C> <C>
Aerial Cable $ 1,299.7 $ 47.9 $ 22.3 $ - $ 1,325.3
Aerial Wire 34.8 .6 .6 - 34.8
Buildings 2,528.8 130.8 14.4 1.6 2,646.8
Buried Cable 5,918.5 390.2 55.3 (23.1) 6,230.3
Central Office Assets 8,985.3 941.6 528.7 (126.8) 9,271.4
Conduit Systems 1,267.9 28.7 1.8 - 1,294.8
Furniture and Office 1,387.0 184.8 65.7 8.5 1,514.6
Equipment
Held for Future Use 6.6 3.2 .2 (1.3) 8.3
Information Equipment 569.1 45.8 130.1 25.2 510.0
Intrabuilding Network 144.2 1.5 2.4 .2 143.5
Cable
Land 207.6 2.4 3.8 1.1 207.3
Other Communications 610.5 287.4 126.4 144.0 915.5
Equipment
Poles 307.1 9.5 4.0 - 312.6
Submarine Cable 4.7 - - - 4.7
Underground Cable 1,981.2 62.4 15.0 .1 2,028.7
Vehicles and Work 502.4 45.3 17.9 - 529.8
Equipment
Total Property, $25,755.4 $2,182.1 $ 988.6 $ 29.5 $ 26,978.4
Plant and Equipment
<FN>
Depreciation as a percentage of average depreciable 6.8%
plant and equipment
The Notes on Sheet 4 are an integral part of this Schedule.
</TABLE>
<TABLE>
SOUTHWESTERN BELL CORPORATION Schedule V - Sheet 3
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Additions Retirements Other Balance at
Beginning at cost Changes End of
Classification of Period -Note (a) -Note (b) -Note (c) Period
Year 1991
<S> <C> <C> <C> <C> <C>
Aerial Cable $ 1,281.8 $ 46.5 $ 27.2 $ (1.4) $ 1,299.7
Aerial Wire 35.1 .5 .8 - 34.8
Buildings 2,382.3 174.4 13.1 (14.8) 2,528.8
Buried Cable 5,688.7 299.0 67.7 (1.5) 5,918.5
Central Office Assets 8,665.2 820.4 517.8 17.5 8,985.3
Conduit Systems 1,238.8 31.7 2.4 (.2) 1,267.9
Furniture and Office Equipment 1,299.1 161.3 77.3 3.9 1,387.0
Held for Future Use 14.5 2.2 .7 (9.4) 6.6
Information Equipment 532.8 49.9 27.7 14.1 569.1
Intrabuilding Network Cable 141.1 2.1 2.5 3.5 144.2
Land 184.7 23.3 .4 - 207.6
Other Communications Equipment 469.3 155.4 18.2 4.0 610.5
Poles 310.4 9.9 13.2 - 307.1
Submarine Cable 4.8 - .1 - 4.7
Underground Cable 1,931.2 73.0 23.0 - 1,981.2
Vehicles and Work Equipment 490.5 38.3 19.6 (6.8) 502.4
Total Property, Plant and $ 24,670.3 $ 1,887.9 $ 811.7 $ 8.9 $ 25,755.4
Equipment
<FN>
Depreciation as a percentage of average depreciable plant 6.8%
and equipment
The Notes on Sheet 4 are an integral part of this Schedule. <PAGE>
Schedule V - Sheet 4
(a) Includes allowance for funds used during construction and additions to capitalized leases.
(b) Items of telephone plant, when retired or sold are deducted from the property accounts at the
amount of cost originally recorded. Amounts are estimated if original historical cost is not
known.
(c) Primarily includes transfers to and from Material and Supplies for reused material for
Southwestern Bell Telephone Company (Telephone Company). The 1992 amounts include certain
reclassifications.
(d) Primarily equipment sold relating to Metromedia Paging Services, Inc. Also includes transfers
to and from Material and Supplies for reused material for the Telephone Company. Amounts also
include certain reclassifications.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL CORPORATION
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Additions
Balance at Charged Other Balance
Beginning to Expense Changes at End of
Description of Period Retirements -Note Period
<S> <C> <C> <C> <C> <C>
Year 1993 $ 10,079.0 1,906.9 806.2 (100.6) (b) $ 11,079.1
Year 1992 $ 9,245.1 1,762.1 914.4 (13.8) (a) $ 10,079.0
Year 1991 $ 8,348.0 1,676.5 793.3 13.9 (a) $ 9,245.1
<FN>
_________
(a) Comprised principally of the following items:
(1)Amounts received for property, plant and equipment sold primarily relating to Southwestern
Bell Telephone Company (Telephone Company).
(2)Provisions for the cost of removing plant and equipment retired primarily relating to the
Telephone Company.
(3)The Telephone Company's deferral of certain interstate amortization expenses to 1992, as
required by the FCC beginning in July 1991.
(b) Comprised principally of the following items:
(1)Provisions for the cost of removing plant and equipment retired primarily relating to the
Telephone Company and equipment sold relating to Metromedia Paging Services, Inc.
(2)Amounts received for property, plant and equipment sold primarily relating to the Telephone
Company.
</TABLE>
<TABLE>
SOUTHWESTERN BELL CORPORATION Schedule VIII - Sheet 1
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectibles
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2)
Charged
Balance at to Other Balance
Beginning Charged Accounts Deductions at End of
Description of Period to Revenue -Note (a) Note (b) Period
<S> <C> <C> <C> <C> <C>
Year 1993 $ 95.5 149.9 35.2 169.4 $ 111.2
Year 1992 $ 82.3 134.9 36.5 158.2 $ 95.5
Year 1991 $ 81.0 127.8 24.6 151.1 $ 82.3
<FN>
(a)Amounts previously written off which were credited directly to this account when recovered.
(b)Amounts written off as uncollectible.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL CORPORATION Schedule VIII - Sheet 2
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Accumulated Amortization of Intangibles
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2)
Balance at Charged Balance
Beginning Charged to Other Deductions at End of
Description of Period to Expense Accounts Period
<S> <C> <C> <C> <C> <C>
Year 1993 $ 443.6 100.1 .7 176.2 (a) $ 368.2
Year 1992 $ 366.0 80.1 - 2.5 $ 443.6
Year 1991 $ 294.4 88.4 .6 17.4 $ 366.0
<FN>
(a)Primarily related to the disposition of Metromedia Paging Services, Inc.
</TABLE> <PAGE>
SOUTHWESTERN BELL CORPORATION
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Dollars in Millions
Column B -
Charged to
Column A - Item Expense
Year 1993
1. Maintenance and repairs $1,530.4
2. Taxes, other than payroll and
income taxes
Property $ 306.4
Gross receipts $ 179.0
3. Advertising costs $ 89.5
Year 1992
1. Maintenance and repairs $1,676.9
2. Taxes, other than payroll and
income taxes
Property $ 283.1
Gross receipts $ 148.8
3. Advertising costs $ 85.0
Year 1991
1. Maintenance and repairs $1,534.6
2. Taxes, other than payroll and
income taxes
Property $ 274.9
Gross receipts $ 131.3
3. Advertising costs $ 79.0
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 18th day of March, 1994.
SOUTHWESTERN BELL CORPORATION
By /s/ Donald E. Kiernan
(Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the date indicated.
Principal Executive Officer:
Edward E. Whitacre Jr.*
Chairman and
Chief Executive Officer
Principal Financial and
Accounting Officer:
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
/s/ Donald E. Kiernan
Directors: (Donald E. Kiernan, as attorney-
in-fact and on his own behalf as
Principal Financial Officer
Edward E. Whitacre Jr.* and Principal
Clarence C. Barksdale* Accounting Officer)
James E. Barnes*
Jack S. Blanton*
August A. Busch III* March 18, 1994
Ruben R. Cardenas*
Martin K. Eby, Jr.*
Tom C. Frost*
Jess T. Hay*
Bobby R. Inman*
Charles F. Knight*
Sybil C. Mobley*
Haskell M. Monroe, Jr.*
Robert G. Pope *
Carlos Slim Helu*
Patricia P. Upton *
* by power of attorney
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the
SEC, are incorporated by reference as exhibits hereto.
3-a Certificate of Incorporation of Southwestern Bell
Corporation (restated), dated June 6, 1988. (Exhibit
3-a to Form 10-K for 1988, File 1-8610.)
3-b Bylaws of Southwestern Bell Corporation, dated June 28,
1991. (Exhibit 3-b to Form 10-Q for the second quarter
1991, File 1-8610.)
4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no
instrument which defines the rights of holders of long
and intermediate term debt of the registrant or any of
its consolidated subsidiaries is filed herewith.
Pursuant to this regulation, the registrant hereby
agrees to furnish a copy of any such instrument to the
SEC upon request.
4-b Support Agreement dated November 10, 1986, between
Southwestern Bell Corporation and Southwestern Bell
Capital Corporation. (Exhibit 4-b to Registration
Statement No. 33-11669)
4-c Form of Rights Agreement, dated as of January 27, 1989,
between Southwestern Bell Corporation and American
Transtech, Inc., the Rights Agent, which includes as
Exhibit B thereto the form of Rights Certificate.
(Exhibit 4-a to Form 8-A dated February 9, 1989,
File 1-8610.)
4-d Amendment of Rights Agreement, dated as of August 5,
1992, between Southwestern Bell Corporation, American
Transtech, Inc., and The Bank of New York, the
successor Rights Agent, which includes the Form of
Rights Certificate as an attachment identified as
Exhibit B. (Exhibit 4-a to Form 8-K, dated August 7,
1992, File 1-8610.)
4-e Form of Rights Certificate (included in the attachment
to the Amendment of Rights Agreement and identified as
Exhibit B.) (Exhibit 4-b to Form 8-K, dated August 7,
1992, File 1-8610.)
10-a Southwestern Bell Corporation Senior Management Short
Term Incentive Plan, revised January 1, 1991.
(Exhibit 10-a to Form 10-K for 1990, File 1-8610.)
10-b Southwestern Bell Corporation Senior Management Long
Term Incentive Plan, revised effective January 1, 1993.
(Exhibit 10-b to Form 10-K for 1992, File 1-8610.)
10-c Southwestern Bell Corporation Senior Management
Survivor Benefit Plan. (Exhibit 10-c to Form 10-K for
1986, File 1-8610.)
<PAGE>
10-d Southwestern Bell Corporation Senior Management
Supplemental Retirement Income Plan, revised effective
January 1, 1993. (Exhibit 10-d to Form 10-K for 1992,
File 1-8610.)
10-e Southwestern Bell Corporation Senior Management
Deferred Compensation Plan Effective for Units of
Participation Having a Unit Start Date Prior to January
1, 1988, revised October 27, 1989. (Exhibit 10-e to
Form 10-K for 1989, File 1-8610.)
10-f Southwestern Bell Corporation Senior Management
Deferred Compensation Plan of 1988 Effective for Units
of Participation Having a Unit Start Date of January 1,
1988 or Later, revised and restated October 27, 1989.
(Exhibit 10-f to Form 10-K for 1989, File 1-8610.)
10-g Southwestern Bell Corporation Senior Management Long
Term Disability Plan. (Exhibit 10-f to Form 10-K for
1986, File 1-8610.)
10-h Southwestern Bell Corporation Senior Management
Incentive Award Deferral Plan. (Exhibit 10-g to Form
10-K for 1986, File 1-8610.)
10-i Southwestern Bell Corporation Senior Management
Financial Counseling Program. (Exhibit 10-h to Form
10-K for 1986, File 1-8610.)
10-j Southwestern Bell Corporation Senior Management
Executive Health Plan, effective January 1, 1987.
(Exhibit 10-i to Form 10-K for 1986, File 1-8610.)
10-k Southwestern Bell Corporation Retirement Plan for Non-
Employee Directors. (Exhibit 10-t to Form 10-K for
1985, File 1-8610.)
10-l Form of Indemnity Agreement, effective July 1, 1986,
between Southwestern Bell Corporation and each of its
directors and officers. (Appendix 1 to Definitive
Proxy Statement dated March 18, 1987, File 1-8610.)
10-m Form of Southwestern Bell Corporation Change of Control
Severance Agreements for all Officers of the
Corporation and certain Officers of the Corporation's
subsidiaries. (Exhibit 10-p to Form 10-K for 1988,
File 1-8610.)
10-n Southwestern Bell Corporation Stock Savings Plan,
revised effective January 1, 1994. (Appendix A to
Definitive Proxy Statement dated March 18, 1994,
File 1-8610.)
10-o Southwestern Bell Corporation 1992 Stock Option Plan.
(Appendix A to Definitive Proxy Statement dated March
12, 1992, File 1-8610.)
10-p Key Executive Officer Short Term Incentive Plan.
(Appendix B to Definitive Proxy Statement dated March
18, 1994, File 1-8610.) <PAGE>
12 Computation of Ratios of Earnings to Fixed Charges.
13 Portions of Southwestern Bell Corporation's annual
report to shareowners for the fiscal year ended
December 31, 1993 which are incorporated by reference.
21 Subsidiaries of Southwestern Bell Corporation
23 Consent of Independent Auditors
24 Powers of Attorney
99-a Annual Report on Form 11-K for the Southwestern Bell
Corporation Savings Plan for Salaried Employees for the
year 1993 to be filed under Form 10-K/A
99-b Annual Report on Form 11-K for the Southwestern Bell
Corporation Savings and Security Plan (Non-Salaried
Employees) for the year 1993 to be filed under
Form 10-K/A
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
DOLLARS IN MILLIONS
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Changes in Accounting
Principles* $ 1,882.9 $ 1,701.2 $ 1,557.0 $1,541.4 $ 1,479.5
Add:Interest Expense 496.2 530.0 577.7 529.7 543.8
1/3 Rental Expense 41.0 45.1 37.5 43.4 42.5
Adjusted Earnings $ 2,420.1 $ 2,276.3 $ 2,172.2 $2,114.5 $ 2,065.8
Total Interest Charges $ 496.2 $ 530.0 $ 577.7 $ 529.7 $ 543.8
1/3 Rental Expense 41.0 45.1 37.5 43.4 42.5
Adjusted Fixed Charges $ 537.2 $ 575.1 $ 615.2 $ 573.1 $ 586.3
Ratio of Earnings to 4.51 3.96 3.53 3.69 3.52
Fixed Charges
<FN>
*Undistributed earnings on investments accounted for under the equity method have been
excluded.
NOTE:Prior year ratios have been restated to conform to current year methodology of
computing undistributed earnings on investments accounted for under the equity method.
</TABLE>
STOCK PERFORMANCE
On page one of the Annual Report is a stacked bar graph detailing
the Corporation's stock performance for 1993 and 1992. <PAGE>
<TABLE>
Selected Financial and Operating Data
Dollars in millions except per share amounts
<CAPTION>
At December 31 or for the year 1993 1992 1991 1990 1989
ended:
<S> <C> <C> <C> <C> <C>
Operating revenues $ 10,690 $ 10,015 $ 9,332 $ 9,113 $ 8,730
Operating expenses $ 8,310 $ 7,818 $ 7,198 $ 7,071 $ 6,722
Operating income $ 2,380 $ 2,197 $ 2,134 $ 2,042 $ 2,008
Interest expense $ 496 $ 530 $ 578 $ 530 $ 544
Equity in net income of affiliates $ 250 $ 208 $ 95 $ 6 $ 6
Income taxes $ 625 $ 568 $ 488 $ 440 $ 387
Income before extraordinary loss
and cumulative
effect of changes in accounting
principles $ 1,435 $ 1,302 $ 1,157 $ 1,101 $ 1,093
Extraordinary loss on early
extinguishment
of debt, net of tax $ (153) - $ (81) - -
Cumulative effect of changes in
accounting principles, net of tax $ (2,127) - - - -
Net income (loss) $ (845) $ 1,302 $ 1,076 $ 1,101 $ 1,093
Earnings per common share: (1)
Income before extraordinary loss
and cumulative
effect of changes in accounting
principles $ 2.39 $ 2.17 $ 1.93 $ 1.83 $ 1.82
Extraordinary loss on early
extinguishment
of debt, net of tax (0.25) - (0.14) - -
Cumulative effect of changes in
accounting principles,
net of tax (3.55) - - - -
Net income (loss) $ (1.41) $ 2.17 $ 1.79 $ 1.83 $ 1.82
Total assets $ 24,308 $ 23,810 $ 23,179 $ 22,196 $ 21,161
Long-term debt $ 5,459 $ 5,716 $ 5,675 $ 5,483 $ 5,456 <PAGE>
Construction and capital
expenditures $ 2,221 $ 2,144 $ 1,826 $ 1,778 $ 1,483
Free cash flow $ 1,220 $ 1,470 $ 1,067 $ 893 $ 1,283
Dividends declared per common
share (1) $ 1.51 $ 1.46 $ 1.42 $ 1.38 $ 1.30
Book value per common
share (1, 2) $ 12.68 $ 15.51 $ 14.76 $ 14.31 $ 13.92
Ratio of earnings to
fixed charges(3) 4.51 3.96 3.53 3.69 3.52
Return on weighted average
shareowners' equity (4) 19.20% 14.27% 13.03% 12.92% 12.90%
Debt ratio (2) 47.36% 42.92% 45.09% 43.98% 42.01%
Network access lines in service
(000) 13,238 12,803 12,398 12,105 11,759
Access minutes of use (000,000) 43,767 41,235 38,885 36,982 34,295
Long-distance messages (000,000) 1,093 1,057 1,055 1,034 988
Cellular customers (000) 2,049 1,413 960 667 382
Number of employees 58,400 59,500 61,200 66,700 66,200
<FN>
1 Prior years have been restated to reflect two-for-one stock split effective May 25, 1993.
2 Shareowners' equity used in debt ratio and book value per common share calculations includes
extraordinary loss and changes in accounting principles.
3 Prior year ratios have been restated to conform to current year methodology.
4 Calculated using income before extraordinary loss and changes in accounting principles.
These impacts are included in shareowners' equity.
5 Compounded Annual Growth Rate from 1984 to 1993.
NA Not Available.
</TABLE>
<TABLE>
Selected Financial and Operating Data
Dollars in millions except per share amounts
<CAPTION>
At December 31 or for the year 1988 1987 1986 1985 1984CAGR5
ended:
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 8,453 $ 8,003 $ 7,902 $ 7,925 $ 7,191 4.5%
Operating expenses $ 6,503 $ 5,926 $ 5,705 $ 5,802 $ 5,254 5.2%
Operating income $ 1,950 $ 2,077 $ 2,197 $ 2,123 $ 1,937 2.3%
Interest expense $ 578 $ 532 $ 543 $ 542 $ 521 -
Equity in net income of
affiliates $ 8 $ 5 $ 3 $ - $ - -
Income taxes $ 350 $ 544 $ 711 $ 655 $ 579 -
Income before extraordinary loss
and cumulative
effect of changes in accounting
principles $ 1,060 $ 1,047 $ 1,023 $ 996 $ 883 5.5%
Extraordinary loss on early
extinguishment
of debt, net of tax - - - - - -
Cumulative effect of changes in
accounting principles, net of
tax - - - - - -
Net income (loss) $ 1,060 $ 1,047 $ 1,023 $ 996 $ 883 -
Earnings per common share: (1)
Income before extraordinary loss
and cumulative
effect of changes in accounting
principles $ 1.76 $ 1.74 $ 1.71 $ 1.67 $ 1.51 5.2%
Extraordinary loss on early
extinguishment
of debt, net of tax - - - - - -
Cumulative effect of changes in
accounting
principles, net of tax - - - - - -
Net income (loss) $ 1.76 $ 1.74 $ 1.71 $ 1.67 $ 1.51 -
Total assets $ 20,985 $21,500 $20,300 $19,291 $ 18,042 3.4% <PAGE>
Long-term debt $ 5,039 $ 5,649 $ 4,912 $ 5,001 $ 4,935 -
Construction and capital
expenditures $ 1,222 $ 1,450 $ 1,912 $ 1,989 $ 1,727 2.8%
Free cash flow $ 1,308 $ 1,028 $ 659 $ 209 $ 481 10.9%
Dividends declared per
common share (1) $ 1.24 $ 1.16 $ 1.07 $ 1.00 $ .93 5.5%
Book value per
common share (1, 2) $ 14.15 $ 13.63 $ 13.04 $ 12.38 $ 11.71 -
Ratio of earnings to
fixed charges (3) 3.26 3.72 3.91 3.78 3.57 -
Return on weighted average
shareowners' equity (4) 12.69% 12.98% 13.34% 13.71% 13.14% -
Debt ratio (2) 41.42% 44.59% 43.43% 43.72% 43.65% -
Network access lines in service
(000) 11,340 11,105 11,083 10,898 10,650 2.4%
Access minutes of use (000,000) 31,412 30,114 28,034 26,623 NA -
Long-distance messages (000,000) 940 873 831 797 747 -
Cellular customers (000) 244 155 41 35 9 -
Number of employees 64,900 67,100 67,500 71,400 71,900 -
<FN>
1 Prior years have been restated to reflect two-for-one stock split
effective May 25, 1993.
2 Shareowners' equity used in debt ratio and book value per common share
calculations includes extraordinary loss and
changes in accounting principles.
3 Prior year ratios have been restated to conform to current year methodology.
4 Calculated using income before extraordinary loss and changes in accounting principles.
These impacts are included in shareowners' equity.
5 Compounded Annual Growth Rate from 1984 to 1993.
NA Not Available.
</TABLE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwestern Bell Corporation's principal subsidiaries provide
landline and wireless telecommunications services and equipment,
directory advertising, publishing and printing, and cable TV
services.
Dollars in millions except per share amounts
Southwestern Bell Corporation (Corporation) is a holding company
whose subsidiaries operate predominantly in the communications
service industry. The Corporation's subsidiaries principally
provide landline and wireless telecommunications services and
equipment, directory advertising, publishing and printing, and
cable television services. In December 1993, the Corporation
sold Metromedia Paging Services, Inc. (Paging) which provided
paging services.
In 1993, 76 percent of the Corporation's operating revenues came
from its largest subsidiary, Southwestern Bell Telephone Company
(Telephone Company), which provides telecommunications services
through approximately 13.2 million access lines in Arkansas,
Kansas, Missouri, Oklahoma and Texas (five-state area). The
Telephone Company is a public utility subject to regulation by
each of the state jurisdictions in which it operates and by the
Federal Communications Commission (FCC).
This discussion should be read in conjunction with the
consolidated financial statements and the accompanying notes.
Results of Operations
Summary
Financial results, including changes from the prior year, are
summarized as follows:
Percent change
1993 vs. 1992 vs.
1993 1992 1991 1992 1991
Operating revenues $ 10,690.3 $10,015.4 $9,331.9 6.7% 7.3%
Operating expenses $ 8,310.7 $7,818.0 $7,198.3 6.3% 8.6%
Income before
extraordinary loss
and accounting
changes $ 1,435.2 $1,301.7 $1,156.5 10.3% 12.6%
Extraordinary
loss $ (153.2) - $ (80.7) - -
Accounting changes $ (2,127.2) - - - -
Net income (loss) $ (845.2) $1,301.7 $1,075.8 (164.9)% 21.0%
The Corporation reported income before extraordinary loss and
cumulative effect of changes in accounting principles of
$1,435.2, $1,301.7 and $1,156.5 in 1993, 1992 and 1991,
respectively. The corresponding earnings per common share for
those years were $2.39, $2.17 and $1.93, respectively.
Extraordinary loss associated with early extinguishment of debt
was $153.2, or $0.25 per share, in 1993, and $80.7, or $0.14 per
share, in 1991. The adoption of financial accounting standards
relating to postretirement benefits, postemployment benefits and
income taxes resulted in one-time charges of $2,127.2, or $3.55
per share, in the first quarter of 1993. As a result, net loss
for 1993 was $845.2, or $1.41 per share. Net income for 1992 and
1991 was $1,301.7 and $1,075.8, respectively. Subsidiaries other
than the Telephone Company provided 29 percent, 26 percent and 19
percent of the Corporation's income before extraordinary loss and
cumulative effect of changes in accounting principles in 1993,
1992 and 1991, respectively. All per share amounts have been
restated to reflect the 1993 two-for-one stock split.
The primary factors contributing to the increase in income before
extraordinary loss and cumulative effect of changes in accounting
principles in 1993 were the growth in demand for services and
products at Southwestern Bell Mobile Systems, Inc. (Mobile
Systems) and the Telephone Company, the decrease in license fees
paid by the Telephone Company for switching system software, and
the increase in income generated from the Corporation's equity
investments, primarily Telefonos de Mexico, S.A. de C.V.
(Telmex). These factors were partially offset by increased
postretirement benefit and depreciation expenses and accruals for
potential rate reductions, mainly at the Telephone Company.
Results for 1993 also reflect one-time charges for Telephone
Company restructuring and write-off of analog cellular equipment,
partially offset by a gain on the sale of Paging.
The primary factors contributing to the increase in income before
extraordinary loss in 1992 included increased demand for services
and products at the Telephone Company and at Mobile Systems, the
increase in income generated from the Corporation's additional
investment in Telmex and expense reductions from the voluntary
management retirement program implemented in the fourth quarter
of 1991. These factors were partially offset by increases in
license fees for switching system software, depreciation and
benefit expense, mainly at the Telephone Company.
Items affecting the comparison of the operating results between
1993 and 1992, and between 1992 and 1991, are discussed in the
following sections. <PAGE>
Operating Revenues
Total operating revenues increased $674.9, or 6.7 percent, in 1993 and
$683.5, or 7.3 percent, in 1992. Revenue components of total
operating revenues, including changes from the prior year, are as
follows:
Percent change
1993 vs. 1992
1992 vs.
1993 1992 1991 1991
Local service
Landline $ 3,904.9 $ 3,727.5 $ 3,527.9 4.8% 5.7%
Wireless 1,282.5 940.9 701.0 36.3 34.2
Network access
Interstate 1,804.7 1,710.3 1,651.9 5.5 3.5
Intrastate 880.7 837.5 788.9 5.2 6.2
Long-distance 977.3 1,011.7 1,026.6 (3.4) (1.5)
service
Directory 869.0 847.9 847.7 2.5 0.0
advertising
Other 971.2 939.6 787.9 3.4 19.3
$10,690.3 $ 10,015.4 $ 9,331.9 6.7% 7.3%
Local Service Landline revenues increased in 1993 and 1992 due
primarily to increases in demand, including growth in the number
of access lines of 3.4 percent and 3.3 percent, respectively.
Nearly two-thirds of the access line growth occurred in Texas.
Landline revenues for the periods also increased as a result of
extended area service plans which expand the area defined as local
service.
Wireless revenues increased in 1993 and 1992 due primarily to the
growth in the number of cellular customers of 45.0 percent and
47.2 percent, for each year, respectively. These increases were
partially offset by declines in average revenue per customer in
both periods. Market penetration for 1993, 1992 and 1991 was 5.7,
4.0 and 2.7 customers per 100 people, respectively, in Mobile
Systems' service areas.
Network Access Interstate network access revenues increased in
1993 and 1992 due primarily to increases in demand for access
services and growth in revenues from end user charges attributable
to an increasing access line base. These increases were partially
offset by decreases in interstate rates recognized by the
Telephone Company. <PAGE>
Intrastate network access revenues increased in 1993 and 1992, as
compared to prior years, due primarily to increases in demand.
These increases were partially offset by previously ordered rate
reductions, primarily in Texas.
Long-Distance Service Telephone Company long-distance revenues
decreased in 1993 and 1992 due mainly to accruals for potential
rate reductions in Oklahoma and the impact of extended area
service plans. These decreases were partially offset by increases
in demand for long-distance services. Although extended area
service plans have had a negative effect on long-distance service
revenues, this effect is partially offset by related increases in
local service revenues, as noted in the discussion of landline
local service revenues. Results in 1992 were also affected by a
positive change in net settlements with independent telephone
companies.
Directory Advertising revenues in 1993 and 1992 reflect growth in
Yellow Pages revenues in each year. The increases in both years
were offset by the absence of revenues associated with certain
directory operations sold in June 1992.
Other revenues increased in 1993 and 1992 due to increases in
equipment sales, primarily at Mobile Systems, and increases in
demand for the Telephone Company's nonregulated services and
products. In 1993, these increases were partially offset by the
absence of revenues associated with operations sold during 1993,
including residential equipment sales, commercial printing and
paging services. In 1992, other revenues were negatively impacted
by a decrease in revenues associated with billing and collection
services provided to interexchange carriers by the Telephone
Company.
Operating Expenses
Total operating expenses increased $492.7, or 6.3 percent, in 1993 and
$619.7, or 8.6 percent, in 1992. Expense components of total
operating expenses, including changes from the prior year, are as
follows: <PAGE>
Percent
change
1993 1992
vs. vs.
1993 1992 1991 1992 1991
Cost of services
and products $ 3,387.6 $3,423.4 $ 3,159.9 (1.0)% 8.3%
Selling, general
and administrative 2,916.1 2,552.4 2,273.4 14.2 12.3
Depreciation
and amortization 2,007.0 1,842.2 1,765.0 8.9 4.4
$ 8,310.7 $7,818.0 $ 7,198.3 6.3% 8.6%
Cost of Services and Products decreased in 1993 due primarily to a
decrease in license fees paid by the Telephone Company for
switching system software, and the absence of expenses associated
with operations sold, including residential equipment sales and
commercial printing (sold in 1993) and directory advertising
operations (sold in 1992). These decreases were partially offset
by costs related to increased demand for services and products at
Mobile Systems and the Telephone Company, and annual compensation
increases.
The increase in 1992 was primarily due to Telephone Company
expenditures for switching system software associated with advanced
calling features, and an accelerated implementation of a single
national database of 800 numbers as mandated by the FCC, as well as
costs related to increased demand for cellular services and
products. These increases were partially offset by the savings
from the voluntary management retirement program implemented in the
fourth quarter of 1991.
Selling, General and Administrative expenses increased in 1993 due
primarily to increased demand for cellular services and products
and the increase of approximately $110 in postretirement benefits
expense required by the adoption of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (Statement No. 106) as
discussed in Note 2 to the financial statements. The increased
expenses also reflect a one-time charge for restructuring, as
further discussed in "Other Business Matters," as well as increases
in property and other taxes and annual compensation increases.
Comparisons to 1992 are impacted by the recording of one-time
charges in 1992 for an offer of pension enhancements and related
benefits to designated nonmanagement employees and for estimated
expenses associated with relocating the Corporation's headquarters.
In addition to the charges for pension enhancements and relocation
noted above, the increase in 1992 resulted from increased demand
for services and products, primarily cellular, and from higher
benefit expenses mostly attributable to the voluntary management
retirement program implemented in the fourth quarter of 1991.
These increases were partially offset by salary savings due to
force reductions.
Depreciation and Amortization increased in 1993 mainly due to
changes in plant level and composition, particularly at the
Telephone Company. Depreciation expense also increased in 1993 due
to a reduction in cellular analog equipment lives. These increases
were partially offset by a decrease in reserve deficiency
amortization at the Telephone Company.
The increase in 1992 was due mostly to implementation of revised
depreciation rates resulting from the triennial review of rates by
regulators, and a change in plant level and composition. These
increases were partially offset by the decrease in reserve
deficiency amortization.
Interest Expense decreased $33.8, or 6.4 percent, in 1993. The
decrease was due primarily to lower interest rates on debt refinanced
by the Telephone Company and the repayment of debt during 1993.
Interest expense decreased $47.7, or 8.3 percent, in 1992 due to lower
interest rates on short-term obligations and interest savings on long-
term debt refinanced by the Telephone Company in 1991. <PAGE>
Equity in Net Income of Affiliates increased $41.7, or 20.0 percent, in
1993 due primarily to higher earnings at Telmex resulting from overall
growth, including increases in access lines, and increases in rates
sufficient to offset the impact of inflation. In 1992, the increase of
$113.5, or 120.1 percent, was due primarily to the September 1991
increase in the Corporation's equity investment in Telmex from 5 to 10
percent and higher earnings at Telmex resulting from increases in
access lines and an increase in local service rates. In both years,
these factors were offset partially by increases in wages and benefit
expenses, and other operating expenses related to the rehabilitation
and modernization of the telephone network. The Corporation's
investment in Telmex is recorded under U.S. generally accepted
accounting principles which exclude inflation adjustments and include
adjustments for the purchase method of accounting. See Note 13 to the
financial statements for additional information.
Other Expense - Net increased $67.2 in 1993 and was flat in 1992
compared with 1991. The increase was due to a nonrecurring charge for
the write-off of analog cellular equipment, the absence of interest
income associated with the settlement of federal income tax audit
issues in 1992 and an increase in legislative advocacy expenses in
1993. These increases were partially offset by the gain on the sale of
paging operations in 1993.
Federal Income Tax expense increased $62.5, or 12.8 percent, in 1993
and $52.0, or 11.9 percent, in 1992, primarily due to higher income
before income taxes. Federal income taxes in 1993 were also affected
by the increase in income tax rates under the Omnibus Budget
Reconciliation Act. Based on comparable results, management estimates
that the change in rates will decrease net income in 1994 by
approximately $35-40. The increase in 1992 was partially offset by an
increase in the amortization of deferred taxes in 1992.
Extraordinary Item The Telephone Company recorded extraordinary
charges of $153.2 and $80.7 in 1993 and 1991 as a result of refinancing
$2,100 and $732 of long-term debt, respectively. See Note 7 to the
financial statements for additional information.
Operating Environment and Trends of the Business
Regulatory Environment
The Telephone Company operates in a five-state area comprised of
Arkansas, Kansas, Missouri, Oklahoma and Texas. The intrastate
telecommunications operations of Arkansas, Missouri and Oklahoma are
currently regulated under traditional rate-of-return methodology.
Since 1990, Kansas and Texas intrastate telecommunications operations
have been governed by alternative forms of regulation. The Telephone
Company's interstate telecommunications operations in the five states
are regulated by the FCC, using, since 1991, a price-cap methodology. <PAGE>
The Texas Public Utility Commission (TPUC) requires that certain
ratemaking adjustments be made to the Telephone Company's reported
earnings in order to compute earnings subject to sharing according to
its regulatory plan. These adjustments, however, are not used in
preparing the published financial statements. Similarly, other
jurisdictions may require that adjustments be made to reported earnings
in order to compute regulatory returns. As a result, differences may
exist between the returns reported to these regulatory bodies and those
computed from Telephone Company financial information included in the
consolidated financial statements.
Following is a summary of significant regulatory proceedings.
Missouri Missouri has completed its fourth and final year under an
incentive regulation plan (Missouri Plan), formed as part of a
September 1989 agreement among the Missouri Public Service Commission
(MPSC), Office of Public Counsel (OPC) and the Telephone Company.
Under its terms, the Telephone Company was required to reduce annual
revenues, effective October 1989, by approximately $82, and upgrade its
network in Missouri between 1990 and 1997 at an estimated cost of $180.
The Missouri Plan also provided for a sharing of earnings between the
Telephone Company and its customers at certain rate-of-return
thresholds.
Revenue sharing amounts for 1990 and 1991 were refunded to customers in
June 1991 and June 1992, respectively, with no material impact on the
Corporation's financial results. The Telephone Company was not
required to share revenues for 1992, and expects that sharing for 1993,
if any, will be minimal.
In October 1992, the Telephone Company, the MPSC staff and OPC filed
separate recommendations to the MPSC concerning the success of the
Missouri Plan and proposing changes in procedures and parameters. The
Missouri Plan, originally scheduled to expire on December 31, 1992, was
ordered extended until December 31, 1993, to allow for consideration of
the various proposals.
The MPSC staff filed a complaint with the MPSC in January 1993 alleging
that, under traditional rate-of-return methods, the Telephone Company's
intrastate rates should be reduced by $150 annually. In December 1993,
the MPSC issued an order requiring rate reductions of $84.6 annually,
beginning January 1, 1994. The order also offered the Telephone
Company the option of participating in a five-year Accelerated
Modernization Plan (AMP). The AMP would have required annual revenue
reductions of $84.6, which would then be subject to a five-year rate
freeze, as well as continued revenue sharing and accelerated network
modernization. <PAGE>
In December 1993, the Telephone Company declined the AMP offer on the
basis that it would be detrimental to the Telephone Company, and
obtained a temporary restraining order from the Cole County Circuit
Court (Circuit Court), temporarily preventing enforcement of the
ordered rate reductions. In February 1994, the Circuit Court granted a
stay of the ordered rate reductions, pending disposition on appeal.
All revenues in excess of the MPSC proposed reduced rates are being
paid to the Circuit Court at this time and will not be reflected in
1994 operating revenues.
The MPSC order did not impact 1993 financial results. The final impact
of the order on future financial results cannot be determined until all
issues are resolved.
Oklahoma In January 1989, the Oklahoma Corporation Commission (OCC)
ordered an investigation into the reasonableness of the Telephone
Company's intrastate rates. A final order was issued in August 1992,
requiring the Telephone Company to refund revenues in excess of 11.41
percent return on equity, effective April 1991 through the date of the
final order. The ordered refund obligation is $148.4.
The OCC order also would reduce annual revenues by $100.6 effective
September 1992 (of which $24.5 relates to wide-area calling plans which
had already been implemented when the order was issued, and $7.4
relates to expanded wide-area calling plans implemented during 1993
through March 1994), partially offset by a positive annual revenue
adjustment of $7.8 to compensate the Telephone Company for its
investment of $84 over the next five years for network modernization.
The order would also lower the allowed return on equity from 14.25
percent to 12.20 percent. In addition, the order denies recovery of
depreciation expense associated with certain network assets and changes
the regulatory method of accounting for pension expense. These actions
could result in a maximum one-time reduction in net income of
approximately $36.
In September 1992, the Telephone Company appealed to the Oklahoma
Supreme Court which suspended the effectiveness of the entire order
pending final disposition. This appeal is still pending.
The Telephone Company is contesting all aspects of the OCC's actions.
Although it is unable to predict the outcome of the proceeding at this
time, management believes that the OCC-ordered refund of revenues
collected before the date of the OCC's August 1992 order is illegal
under Oklahoma law, and will be overturned by the Court. The Court may
require the Telephone Company to implement some portion of the annual
rate reductions indicated in the OCC order. Management is unable to
determine the outcome of the remaining portions of the OCC order.
Ultimate resolution of the entire OCC order is not expected to have a
material impact on the Corporation's financial results.
In 1986, the OCC made an inquiry into the effects of the Tax Reform Act
of 1986 on the Telephone Company. As a result, in October 1989, the
OCC concluded that the Telephone Company had a revenue surplus of
$27.5, and required the Telephone Company to invest this surplus,
together with interest, to upgrade its network in Oklahoma rather than
refund it to customers. In addition, prospective annual rate
reductions totaling $7.8 were ordered, effective October 1989.
In October 1989, the OCC order was appealed to the Oklahoma Supreme
Court by various parties, including the Telephone Company. In
December 1991, the Court upheld the portion of the OCC's decision that
required the Telephone Company to invest the revenue surplus in network
upgrades. The Court also determined that the OCC's finding of a
depreciation reserve deficiency was not supported by substantial
evidence and that the OCC's treatment of employee severance payments
and cash working capital analysis was inappropriate. The OCC has not
reconsidered the remand issues. A prehearing conference has been
scheduled for April 1994. Although the final outcome of the OCC's
reconsideration is uncertain at this time, management does not expect
the decision to have a material future impact on the Corporation's
financial results.
Texas The Telephone Company has completed the third year of its four-
year incentive regulation agreement (the Agreement), which was approved
by the TPUC in November 1990. Under the terms of the Agreement the
Telephone Company has agreed, over a four-year period ending November
29, 1994, to cap certain local rates, provide annual rate reductions
and other benefits to customers in Texas, and upgrade the network at a
cost of approximately $329. Rate reductions and customer benefits for
1991 were approximately $246. Additional rate reductions of $34 and
$21 were implemented in 1992 and 1993, respectively, and additional
rate reductions of approximately $146 will be implemented in 1994.
The Agreement also provides an earnings-sharing mechanism designed to
encourage efficiency and innovation by the Telephone Company. Revenue
sharing amounts for 1991 and 1992 were refunded to customers in 1993,
with no material impact on the Corporation's financial results.
Management expects that sharing for 1993, if any, will be minimal.
In 1991, the Agreement was appealed through the courts, and, in
February 1993, the Texas Court of Appeals (Appeals Court) upheld the
Agreement, but found that the TPUC incorrectly applied laws on the
treatment of federal income tax benefits related to disallowed expenses
and directed the matter back to the TPUC for resolution. In August
1993, the Telephone Company and opposing intervenors filed appeals in
the Texas Supreme Court, and the matter is pending.
In October 1992, the Office of Public Utility Counsel (OPUC) filed a
petition for inquiry into the rates of the Telephone Company, alleging
that the Telephone Company had realized excess annual earnings of
approximately $234, which the sharing mechanism failed to capture. The
Telephone Company filed a motion to dismiss in November 1992. In
July 1993, TPUC granted the Telephone Company's motion to dismiss.
Postretirement Benefits Other Than Pensions The adoption of Statement
No. 106 for ratemaking purposes has been addressed by regulatory
authorities in most of the Telephone Company's state jurisdictions.
See Note 2 to the financial statements for additional information on
Statement No. 106. Texas and Arkansas, through commission order, and
Kansas, through stipulation and commission order, have agreed to
accrual accounting for postretirement benefit expenses, with some
funding requirements. In Missouri, the MPSC has ordered continued pay-
as-you-go treatment for postretirement benefit expenses. The Telephone
Company intends to appeal this order. In Oklahoma, the OCC has not
ruled on the issue, although OCC staff has recommended accrual
accounting for postretirement benefit expenses, with some funding
requirements.
An FCC order issued in December 1991 required all local exchange
carriers to use the amortization method for recognition of the
transition benefit obligation. In June 1992, the Telephone Company
asked the FCC for the ability to increase its price caps to take into
account the incremental interstate costs resulting from the accrual
accounting required by Statement No. 106 (referred to as exogenous
treatment). In January 1993, the FCC issued an order denying exogenous
treatment for these incremental costs, but did not preclude the seeking
of exogenous treatment of the transition benefit obligation in a
separate filing in 1993. In February 1993, the Telephone Company
joined with other local exchange carriers in an appeal of the January
1993 FCC order. In April 1993, the Telephone Company filed tariffs
with the FCC requesting exogenous treatment of the transition benefit
obligation. In June 1993, the FCC allowed the proposed rates to go
into effect on July 1, 1993, subject to further investigation which
could result in future refunds for all or part of the amount
attributable to the transition benefit obligation. Potential refunds
are currently being accrued by the Telephone Company; however, any
future refunds are not expected to have a material impact on the
Corporation's financial results.
Competition
Competition is growing in the telecommunications industry. Regulatory
and court decisions have expanded the number of alternative service
providers offering telecommunications services. Technological advances
have expanded the types and uses of services and products available.
Accordingly, the Corporation faces increasing competition in
significant portions of its business.
The Telephone Company currently faces competition from, but not limited
to, competitive access providers (CAPs), private networks, residential
multi-tenant services, interexchange carriers, cellular providers,
resellers and providers of telecommunications equipment. CAPs
typically build fiber optic "rings" throughout large metropolitan areas
to provide transport services (generally high-speed data) for large
business customers and interexchange carriers. Also, an increasing
number of individual firms, particularly large business customers, have
established their own private network systems to transmit voice and
data, bypassing Telephone Company facilities. The extent of the
economic incentive to bypass the local exchange network depends upon
local exchange prices, access charges, regulatory policy and other
factors. End user charges ordered by the FCC are designed to mitigate
the effect of system bypass.
Recent regulatory rulings have sought to expand competition for special
and switched access services. Special access refers to a dedicated
transmission path, used primarily by large business customers and long-
distance carriers, which does not involve switching at the local
exchange carrier central office. Switched access refers to the link
between local exchange carriers' switching facilities and long-distance
carriers' networks; switched access transport is one component of this
process. In October 1992, the FCC released an order requiring large
local exchange carriers, including the Telephone Company, to file
tariffs permitting independent parties to physically collocate (i.e.,
locate) their equipment within local exchange carrier central offices
for purposes of providing certain special access services. Local
exchange carriers were also required to work out virtual collocation
agreements for central offices where there is insufficient space for
physical collocation. Virtual collocation involves a set of technical
and pricing rules intended to position the interconnector as if its
equipment were located in the central office. Tariffs were filed in
February 1993, and became effective in June 1993. In November 1992,
the Telephone Company joined with 11 local exchange carriers in a
petition filed with the FCC to stay the physical collocation
requirement, and also filed a separate petition to stay the virtual
collocation requirement. After denial of the petitions, the Telephone
Company and several other local exchange carriers filed an appeal with
the U.S. Court of Appeals for the District of Columbia Circuit. Oral
arguments were presented in February 1994.
In September 1993, the FCC released an order essentially imposing the
same collocation requirements for switched access transport services as
for special access services. In November 1993, the Telephone Company
and other local exchange carriers filed an appeal of that order as
well. Switched access transport collocation tariffs were filed in
November 1993, and became effective in February 1994.
State regulatory commissions are also addressing issues pertaining to
CAPs. In Texas, the TPUC was asked to determine whether CAPs must
first obtain a certificate of convenience and necessity before
providing certain intrastate services. In response, the TPUC adopted a
change to the definition of local exchange service that would allow
CAPs to provide certain intrastate services without specific TPUC
approval. The Telephone Company is appealing this decision. In
February 1993, the TPUC denied a petition filed by a CAP seeking
intrastate collocation, rate unbundling and the elimination of resale
restrictions in Telephone Company tariffs, and indicated it would
address these issues in separate proceedings. In Missouri, CAPs are
permitted to provide certain services, including special access and
interexchange and intraexchange private line services, upon a showing
of financial viability and authorization from the MPSC. In Missouri, a
number of CAPs are presently certified to offer services.
The MPSC, in December 1992, granted the Telephone Company
transitionally competitive status for toll, WATS, 800, operator and
private line services, which has been appealed by several parties.
This decision permits the Telephone Company to file minimum and maximum
rates for those services, within which it can change rates without
prior MPSC approval once enabling tariffs are approved. The Telephone
Company plans to file for these rates in early 1994.
In February 1993, the Arkansas Public Service Commission issued an
order granting Tier 1 local exchange carriers, including the Telephone
Company, the choice between physical and virtual collocation. The
Telephone Company has appealed that decision to the Arkansas Court of
Appeals. In Oklahoma, the OCC issued an order in February 1993,
adopting a policy of local exchange carrier discretion to choose
between physical and virtual collocation. In Texas, the TPUC adopted a
rule in January 1994, requiring expanded interconnection for special
access services on terms similar to the interstate tariffs. The rule
also requires the Telephone Company to provide expanded interconnection
for private line services, and to unbundle special access and private
line services. In Missouri, the MPSC has initiated preliminary
discussions on expanded interconnection. The Kansas Corporation
Commission (KCC) presently does not authorize intrastate collocation.
The Telephone Company faces increasing competition in its intraLATA
toll markets, primarily from interexchange carriers and resellers.
IntraLATA toll competition currently exists in various forms in
Arkansas, Missouri and Texas. In Kansas, certain types of intraLATA
toll competition went into effect in November 1993. And in Oklahoma,
the OCC is currently considering an Administrative Law Judge's
recommendation to allow certain types of intraLATA toll competition.
In the future, it is likely that additional competitors will emerge in
the telecommunications industry. Cable television companies and
electric utilities have expressed an interest in providing
telecommunications services. Interexchange carriers have also
expressed interest in providing local service, either directly or
through alternative wireless networks, and one carrier has publicly
announced its intent to provide local service in certain markets, some
of which may be in the Telephone Company's five-state area. During
1993, several regional holding companies announced mergers,
acquisitions, or investments in domestic cable companies, subject to
court and regulatory approval. As a result of these mergers and
acquisitions, the Corporation may face competition from entities
offering both cable and telephone services over their transport mediums
in the Telephone Company's operating territory.
In September 1993, the FCC adopted an order allocating radio spectrum
and outlining development of licenses for new personal communications
services (PCS). PCS utilizes wireless telecommunications technology,
using different radio spectrum than cellular, and, like cellular, is
designed to permit access to a variety of communications services
regardless of subscriber location. Under an auction process scheduled
to begin in May 1994, up to seven new licenses could be awarded in each
of 51 geographic areas. Licenses may be combined by spectrum amounts
and geographically, including creation of a nationwide service. The
Corporation would be allowed to fully participate in areas outside its
cellular service areas, and would be allowed to bid on a smaller
license in areas where it has a cellular presence. The Corporation is
currently evaluating its options under the order.
Competitive opportunities may arise as a result of pending legislative
and legal proceedings. Legislation has recently been introduced in the
United States Congress which, if adopted, could allow the Corporation
to enter previously restricted lines of business. Specifically,
provisions of certain of these bills seek to eliminate or modify
restrictions imposed at divestiture by the Modification of Final
Judgment related to electronic publishing, telecommunications equipment
manufacturing and interLATA telecommunications services, and would
allow local exchange carriers to compete in the cable television
business in their own areas. In addition, pricing flexibility could be
granted for services subject to competition. In February 1994, the
Corporation filed a lawsuit in the U.S. District Court in Dallas,
seeking to overturn provisions of the Cable Communications Policy Act
of 1984, in order to provide cable television service in the Telephone
Company's five-state area. The outcome of these proceedings cannot be
predicted at this time.
The Corporation is aggressively representing its interests regarding
competition before federal and state regulatory bodies and courts, and
before Congress and state legislatures, and will continue to evaluate
the increasingly competitive nature of its business and the appropriate
regulatory, legislative and industry solutions needed to respond
effectively to competition.
The Corporation currently accounts for the economic effects of
regulation in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (Statement No. 71). Continued application of Statement No.
71 is appropriate only if it is reasonable to assume that rates
designed to recover costs can be charged to and collected from
customers. This assumption requires, among other things, consideration
of anticipated changes in levels of demand or competition during the
recovery period for any capitalized costs. It is management's opinion
that application of Statement No. 71 to the Corporation is appropriate
at this time. If, as a result of actual and anticipated increases in
competition and other changes in the telecommunications industry,
including the manner of determining rates, the Corporation determines
that it no longer qualifies for the provisions of Statement No. 71,
management expects that the resulting non-cash extraordinary charge
would be material.
Other Business Matters
Operational Restructuring During the third quarter of 1993, the
Telephone Company announced a restructuring of its operations. The
restructuring realigns the Telephone Company into two operating
divisions, Customer Services, comprised of nine geographic market
areas, and Network Services, which focuses on technology planning and
deployment. As part of the restructuring, approximately 800 management
positions were eliminated during 1993. Costs for severance, relocation
and benefits associated with the positions currently eliminated were
accrued during 1993, reducing net income by approximately $35. Over
the next 18 to 24 months, approximately 700 additional management
positions will be eliminated.
Cable Television Partnership In December 1993, the Corporation and Cox
Cable Communications (Cox) entered into a non-binding Memorandum of
Understanding with respect to the formation of a $4.9 billion
partnership to own and operate cable television systems. See Note 12
to the financial statements for additional information.
Acquisitions and Dispositions During 1993, the Corporation sold Paging,
sold portions of its commercial printing operations, and entered into
an agreement which exclusively licensed sales under its residential
equipment trademark. None of these transactions had a material effect
on the Corporation's financial results in 1993.
In January 1994, the Corporation completed the purchase, for $650, of
two cable television systems located in Montgomery County, Maryland,
and Arlington County, Virginia, from Hauser Communications, Inc. In
February 1994, the Corporation announced an agreement to purchase, for
stock valued at $680, the domestic cellular business of Associated
Communications Corporation, including cellular systems in Buffalo,
Rochester, Albany and Glens Falls, New York. These properties are
adjacent to cellular systems in Syracuse, Utica and Ithaca, New York,
which the Corporation agreed to purchase from other parties in November
1993. These transactions are expected to close during 1994.
Management does not expect any of these acquisitions to have a material
effect on the Corporation's financial results in 1994.
Pending Litigation The Telephone Company is presently engaged in
litigation with four Texas cities arising from the Telephone Company's
alleged breach of certain ordinances relating to the Telephone
Company's use of, and work activities in, streets and other public
ways. The cases are entitled City of Mesquite v. Southwestern Bell
Telephone Company, et al., and City of Harlingen and City of
Brownsville v. Southwestern Bell Telephone Company, et al., in the U.S.
District Court for the Northern District of Texas, and City of Port
Arthur, et al., v. Southwestern Bell Telephone Company, et al., in the
136th Judicial District Court of Jefferson County, Texas. The City of
Port Arthur action was certified as a class action on November 20,
1992. The certification order has been appealed by the Telephone
Company. If the class certification is affirmed, the class could
include approximately 110 Texas cities.
The ordinances provide for the payment of a percentage of the gross
receipts received by the Telephone Company from the provision of
certain services within the cities. While the particular claims of the
cities vary, they all allege that the Telephone Company should have
included revenues received from other services in calculating the
compensation described in the ordinances. The cities have demanded
general unspecified actual and exemplary damages or have not
specifically alleged the amount of damages resulting from the gross
receipts claims. The Telephone Company believes it has several
meritorious defenses to the claims and intends to vigorously pursue
these defenses. Although the outcomes of these cases are uncertain,
the Telephone Company believes that it will either be successful on the
merits of the cases or that any unfavorable result will not have a
material impact on the Corporation's financial results. <PAGE>
Liquidity and Capital Resources
Capital Expenditures and Other Commitments
To provide high-quality communications services to its customers, the
Corporation, particularly the Telephone Company and Mobile Systems,
must make significant investments in property, plant and equipment.
The capital investment is influenced by regulatory commitments and
demand.
The Corporation's capital expenditures totaled $2,221.1, $2,144.3 and
$1,826.4 for 1993, 1992 and 1991, respectively. The 1993 increase in
capital expenditures was primarily due to increases in Telephone
Company expenditures on broadband infrastructure and customer
contracted requirements, continued build-out of cable television and
telephone network facilities in the United Kingdom, and growth and
digital conversion at Mobile Systems. The increase in capital
expenditures in 1992 resulted primarily from the introduction of new
services and products at the Telephone Company, as well as network
enhancements to provide for the portability of 800 service among
interexchange carriers, as required by the FCC, and improved network
standardization. Other 1992 increases related mainly to digital
conversion and growth in cellular operations and the construction of
cable television facilities in the United Kingdom.
The Telephone Company committed, beginning in 1990, to make network
upgrades estimated to cost approximately $329 in Texas over a four-year
period, $180 in Missouri over an eight-year period and $160 in Kansas
over a five-year period. As of December 31, 1993, in Texas, Missouri
and Kansas, the Telephone Company had invested $264.8, $174.4 and
$137.7, respectively. In addition, the Telephone Company has
committed, beginning in 1994, to make network upgrades in Arkansas over
a four-year period, at an estimated cost of $231.
Management expects capital expenditures in 1994 to be between $2,200
and $2,400. Capital expenditure increases in 1994 for the Corporation
will relate to the continued build-out of Mobile Systems existing
markets and digital conversions, the construction of cable television
and telephone network facilities in the United Kingdom, and domestic
cable television build-out and installations. Capital spending at the
Telephone Company is expected to be relatively flat in 1994. The
Corporation expects to fund ongoing capital expenditures with cash
provided by operations.
In connection with the proposed partnership with Cox discussed in Note
12 to the financial statements, the Corporation has committed to
contribute $1,600 to the partnership in cash or other assets within
four years of formation. The size, nature and timing of these
contributions are subject to many factors, the evaluation of which will
include consideration of funding alternatives. In addition,
commitments for pending acquisitions of cellular properties, as also
discussed in Note 12, will be satisfied through a combination of cash,
stock and assumption of debt.
In 1993, cash received from the sales of businesses exceeded cash paid
for acquisitions by $257.4. The January 1994 acquisition of cable
television systems in Maryland and Virginia was accomplished with a
combination of cash, assumed debt and stock totaling $650.
Dividends Declared
Dividends declared by the Corporation totaled $905.3 ($1.51 per share)
in 1993, $876.2 ($1.46 per share) in 1992, and $852.4 ($1.42 per share)
in 1991. Management's dividend policy considers both the expectations
and requirements of shareowners, internal requirements of the
Corporation, and long-term growth opportunities.
Cash, Lines of Credit and Free Cash Flow
The Corporation had $618.4 of cash and cash equivalents available at
December 31, 1993. Commercial paper borrowings as of December 31,
1993, totaled $890.5. The Corporation has entered into agreements with
several banks for lines of credit totaling $770.0, all of which may be
used to support commercial paper borrowings. The Corporation had no
borrowings outstanding under these lines of credit as of December 31,
1993.
During 1993, as in 1992 and 1991, the Corporation's primary source of
funds continued to be cash generated from operations, as shown in the
Consolidated Statements of Cash Flows. Net cash provided by operating
activities exceeded the Corporation's construction and capital
expenditures during 1993, as in 1992 and 1991.
The Corporation generated free cash flow of $1,219.7, $1,470.4 and
$1,066.6 in 1993, 1992 and 1991, respectively. In 1993, cash provided
by operating activities was reduced by the contribution of $135.5 to
the collectively bargained Voluntary Employee Beneficiary Association
trusts. Comparisons to 1992 are also impacted by the inclusion of
refunds associated with the settlement of federal income tax audit
issues in 1992. Free cash flow in 1991 reflected cash payments
associated with the voluntary management reduction plan implemented in
1990.
The Corporation issued $2,207 in debt during 1993, primarily at the
Telephone Company. Included in this amount was the refinancing of
Telephone Company long-term debt with an aggregate principal amount of
$2,100. Since June 1991, the Telephone Company has refinanced $3,182
in long-term debt. Annualized interest savings resulting from debt
refinancing in 1993 are approximately $50; since 1991, annualized
savings are approximately $96. Other repayments of debt totaled $204
during 1993. <PAGE>
Total Capital
The Corporation's total capital consists of debt (long-term debt and
debt maturing within one year) and shareowners' equity. Total capital
decreased in 1993 due to the effects of adopting new accounting
standards and the extraordinary loss on early extinguishment of debt.
Absent these factors, total capital increased in 1993 and 1992 due
primarily to reinvestment of earnings.
Debt Ratio
The Corporation's debt ratio (long-term debt and debt maturing within
one year, as a percentage of total capital) was 47.4 percent, 42.9
percent and 45.1 percent at December 31, 1993, 1992 and 1991,
respectively. Changes in accounting standards resulted in a decrease
in equity in 1993 and increased the debt ratio by 6.1 percent. The
debt ratio decreased in 1992 from 1991 due primarily to higher equity
levels.
Stock Repurchase Program
See Note 10 to the financial statements for additional information.
Employee Stock Ownership Plans
See Note 8 to the financial statements for additional information. <PAGE>
Report of Management
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The
integrity and objectivity of the data in these financial
statements, including estimates and judgments relating to matters
not concluded by year end, are the responsibility of management,
as is all other information included in the Annual Report, unless
otherwise indicated.
The financial statements of Southwestern Bell Corporation
(Corporation) have been audited by Ernst & Young, independent
auditors. Management has made available to Ernst & Young all of
the Corporation's financial records and related data, as well as
the minutes of shareowners' and directors' meetings.
Furthermore, management believes that all representations made to
Ernst & Young during its audit were valid and appropriate.
Management has established and maintains a system of internal
accounting controls that provide reasonable assurance as to the
integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition and the
prevention and detection of fraudulent financial reporting. The
concept of reasonable assurance recognizes that the costs of an
internal accounting controls system should not exceed, in
management's judgment, the benefits to be derived.
Management also seeks to ensure the objectivity and integrity of
its financial data by the careful selection of its managers, by
organizational arrangements that provide an appropriate division
of responsibility and by communication programs aimed at ensuring
that its policies, standards and managerial authorities are
understood throughout the organization. Management continually
monitors the system of internal accounting controls for
compliance. The Corporation maintains an internal auditing
program that independently assesses the effectiveness of the
internal accounting controls and recommends improvements thereto.
The Audit Committee of the Board of Directors, which consists of
seven directors who are not employees, meets periodically with
management, the internal auditors and the independent auditors to
review the manner in which they are performing their
responsibilities and to discuss auditing, internal accounting
controls and financial reporting matters. Both the internal
auditors and the independent auditors periodically meet alone
with the Audit Committee and have access to the Audit Committee
at any time.
/s/ Edward E. Whitacre Jr.
Edward E. Whitacre Jr.
Chairman of the Board and
Chief Executive Officer
/s/ Donald E. Kiernan
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
Report of Independent Auditors
The Board of Directors and Shareowners
Southwestern Bell Corporation
We have audited the accompanying consolidated balance sheets of
Southwestern Bell Corporation as of December 31, 1993 and 1992,
and the related consolidated statements of income, shareowners'
equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Southwestern Bell Corporation at
December 31, 1993 and 1992, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Notes 2 and 3 to the consolidated financial
statements, in 1993 the Corporation changed its method of
accounting for postretirement benefits other than pensions,
postemployment benefits, and income taxes.
/s/ Ernst & Young
San Antonio, Texas
February 11, 1994
Consolidated Statements of Income
Dollars in millions except per share amounts
1993 1992 1991
Operating Revenues
Local service $ 5,187.4 $ 4,668.4 $ 4,228.9
Network access 2,685.4 2,547.8 2,440.8
Long-distance service 977.3 1,011.7 1,026.6
Directory advertising 869.0 847.9 847.7
Other 971.2 939.6 787.9
Total operating revenues 10,690.3 10,015.4 9,331.9
Operating Expenses
Cost of services and products 3,387.6 3,423.4 3,159.9
Selling, general and administrative 2,916.1 2,552.4 2,273.4
Depreciation and amortization 2,007.0 1,842.2 1,765.0
Total operating expenses 8,310.7 7,818.0 7,198.3
Operating Income 2,379.6 2,197.4 2,133.6
Other Income (Expense)
Interest expense (496.2) (530.0) (577.7)
Equity in net income of affiliates 249.7 208.0 94.5
Other expense - net (72.9) (5.7) (6.2)
Total other income (expense) (319.4) (327.7) (489.4)
Income Before Income Taxes, Extraordinary
Loss and Cumulative Effect of Changes
in Accounting Principles 2,060.2 1,869.7 1,644.2
Income Taxes
Federal 550.7 488.2 436.2
State and local 74.3 79.8 51.5
Total income taxes 625.0 568.0 487.7
Income Before Extraordinary Loss and
Cumulative Effect of Changes in
Accounting Principles 1,435.2 1,301.7 1,156.5
Extraordinary Loss on Early Extinguishment
of Debt, net of tax (153.2) - (80.7)
Cumulative Effect of Changes in Accounting
Principles, net of tax (2,127.2) - -
Net Income (Loss) $ (845.2) $ 1,301.7 $ 1,075.8
Earnings Per Common Share:*
Income Before Extraordinary Loss and
Cumulative Effect of Changes in
Accounting Principles $ 2.39 $ 2.17 $ 1.93
Extraordinary Loss on Early Extinguishment
of Debt, net of tax (0.25) - (0.14)
Cumulative Effect of Changes in Accounting
Principles, net of tax (3.55) - -
Net Income (Loss) $ (1.41) $ 2.17 $ 1.79
Weighted Average Number of Common Shares
Outstanding (in millions) 599.8 600.2 600.3
*Restated to reflect two-for-one stock split effective May 25, 1993.
The accompanying notes are an integral part of the consolidated
financial statements.
Consolidated Balance Sheets
Dollars in millions except per share amounts
Dec
1993 1992
Assets
Current Assets
Cash and cash equivalents $ 618.4 $ 505.2
Accounts receivable - net of allowances for
uncollectibles of $111.2 and $95.5 2,055.2 1,929.6
Material and supplies 148.9 130.1
Prepaid expenses 126.5 139.5
Deferred charges 192.0 181.0
Deferred income taxes 197.0 86.5
Other 281.8 231.2
Total current assets 3,619.8 3,203.1
Property, Plant and Equipment - Net 17,091.5 16,899.4
Intangible Assets - Net of Accumulated Amortization of
$368.2 and $443.6 1,147.4 1,323.3
Investments in Equity Affiliates 1,420.8 1,249.4
Other Assets 1,028.0 1,134.8
Total Assets $24,307.5 $23,810.0
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 1,385.7 $ 1,279.3
Accounts payable and accrued liabilities 2,876.2 2,634.1
Dividends payable 226.6 219.0
Total current liabilities 4,488.5 4,132.4
Long-Term Debt 5,459.4 5,716.1
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 2,387.0 3,527.6
Postemployment benefit obligation 2,897.0 -
Unamortized investment tax credits 430.4 496.2
Other noncurrent liabilities 1,036.6 633.4
Total deferred credits and other noncurrent liabilities 6,751.0 4,657.2
Commitments (Notes 5, 12)
Shareowners' Equity
Preferred shares ($1 par value, 10,000,000 authorized:
none issued) - -
Common shares ($1 par value, 1,100,000,000 authorized:
issued 602,744,484 at December 31, 1993, and
601,778,178* at December 31, 1992) 602.7 300.9
Capital in excess of par value 5,577.0 5,834.8
Retained earnings 1,891.4 3,634.8
Guaranteed obligations of employee stock ownership plans (352.9) (397.3)
Treasury shares (2,510,404 at December 31, 1993, and
2,031,584* at December 31, 1992, at cost) (109.6) (68.9)
Total shareowners' equity 7,608.6 9,304.3
Total Liabilities and Shareowners' Equity $24,307.5 $23,810.0
*Restated to reflect two-for-one stock split effective May 25, 1993.
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Dollars in millions, increase (decrease) in cash and cash equivalents
1993 1992 1991
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (845.2) $ 1,301.7 $ 1,075.8
Adjustments to reconcile net income (loss)
to net cash
provided by operating activities:
Depreciation and amortization 2,007.0 1,842.2 1,765.0
Undistributed earnings from investments
in equity affiliates (177.3) (168.5) (87.2)
Provision for uncollectible accounts 149.9 134.9 127.8
Amortization of investment tax credits (65.8) (72.9) (87.4)
Pensions and other postemployment expenses 289.9 78.6 (57.8)
Deferred income tax expense (123.8) 19.4 14.5
Extraordinary loss, net of tax 153.2 - 80.7
Cumulative effect of accounting
changes, net of tax 2,127.2 - -
Changes in operating assets and liabilities:
Accounts receivable (275.5) (284.9) (168.4)
Other current assets (5.7) (134.0) (86.7)
Accounts payable and accrued liabilities 303.3 353.8 162.7
Other - net (96.4) 544.4 154.0
Total adjustments 4,286.0 2,313.0 1,817.2
Net Cash Provided by Operating Activities 3,440.8 3,614.7 2,893.0
Investing Activities
Construction and capital expenditures (2,221.1) (2,144.3) (1,826.4)
Investments in equity affiliates - - (467.3)
Purchase of short-term investments (419.7) (195.0) (126.8)
Proceeds from sale of short-term investments 315.5 120.4 259.1
Dispositions and (acquisitions) - net 257.4 (60.9) (201.5)
Net Cash Used in Investing Activities (2,067.9) (2,279.8) (2,362.9)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (11.0) (332.2) 21.1
Issuance of other short-term borrowings 16.0 521.4 -
Repayment of other short-term borrowings (137.7) (394.8) -
Issuance of long-term debt 2,178.1 556.6 1,218.7
Repayment of long-term debt (215.8) (245.7) (9.8)
Early extinguishment of debt and related
call premiums (2,190.3) (355.6) (799.5)
Issuance of common shares 18.0 - -
Purchase of treasury shares (191.1) (161.5) (147.3)
Issuance of treasury shares 77.6 35.0 23.3
Dividends paid (803.5) (780.4) (759.3)
Net Cash Used in Financing Activities (1,259.7) (1,157.2) (452.8)
Net increase in cash and cash equivalents 113.2 177.7 77.3
Cash and cash equivalents beginning of year 505.2 327.5 250.2
Cash and Cash Equivalents End of Year $ 618.4 $ 505.2 $ 327.5
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
Consolidated Statements of Shareowners' Equity
Dollars in millions except per share amounts
<CAPTION>
Guaranteed
Obligations
Capital of Employee
in Stock
Common Shares Excess of Retained Ownership Treasury Shares
Shares Amount Par Value Earnings Plans Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1990 300,889,089 $300.9 $5,824.0 $2,985.9 $(475.6) (1,019,640) $(54.0) $8,581.2
Net income for the
year
($1.79 per share*) - - - 1,075.8 - - -
Dividends to
shareowners
($1.42 per share*) - - - (852.4) - - -
Reduction of debt
Employee Stock
Ownership Plans - - - - 36.9 - -
Purchase of treasury
shares - - - - - (2,757,626) (147.3)
Issuance of treasury
shares
Dividend
Reinvestment Plan - - 3.2 - - 1,864,012 97.5
Other issuances - - 1.9 - - 1,182,055 62.4
Balance, December
31, 1991 300,889,089 300.9 5,829.1 3,209.3 (438.7) (731,199) (41.4) 8,859.2
Net income for the
year
($2.17 per share*) - - - 1,301.7 - - - <PAGE>
Dividends to
shareowners
($1.46 per share*) - - - (876.2) - - -
Reduction of debt
Employee Stock
Ownership Plans - - - - 41.4 - -
Purchase of treasury
shares - - - - - (2,514,092) (161.5)
Issuance of treasury
shares
Dividend
Reinvestment Plan - - 5.5 - - 1,799,731 108.6
Other issuances - - 0.2 - - 429,768 25.4
Balance, December
31, 1992 300,889,089 300.9 5,834.8 3,634.8 (397.3) (1,015,792) (68.9) 9,304.3
Net income (loss)
for the year
($(1.41) per share) - - - (845.2) - - -
Dividends to
shareowners
($1.51 per share) - - - (905.3) - - -
Two-for-one stock
split 300,889,089 300.9 (300.9) - - (731,569) -
Reduction of debt
Employee Stock
Ownership Plans - - - - 44.4 - -
Issuance of common
shares 966,306 0.9 41.2 - - - -
Purchase of treasury
shares - - - - - (3,660,698) (192.9)
Issuance of treasury
shares
Dividend
Reinvestment Plan - - 4.0 - - 1,889,232 103.2
Other issuances - - (2.1) - - 1,008,423 49.0
Other - - - 7.1 - - - <PAGE>
Balance, December
31, 1993 602,744,484 $602.7 $5,577.0 $1,891.4 $(352.9) (2,510,404) $(109.6) $7,608.6
<FN>
* Restated to reflect two-for-one stock split effective May 25, 1993.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
1. Summary of Significant Accounting Policies
Basis of Presentation The consolidated financial statements
include the accounts of Southwestern Bell Corporation and
its majority-owned subsidiaries (Corporation). Southwestern
Bell Telephone Company (Telephone Company) is the
Corporation's largest subsidiary. All significant
intercompany transactions are eliminated in the
consolidation process. Investments in partnerships, joint
ventures and less than majority-owned subsidiaries are
principally 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 Corporation's year end. Certain amounts in prior period
financial statements have been reclassified to conform to
the current year's presentation.
Regulatory Accounting The Corporation prepares its
financial statements in accordance with the provisions of
Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation"
(Statement No. 71). The provisions of Statement No. 71
require, among other things, that regulated enterprises
reflect rate actions of regulators in their financial
statements, when appropriate. These rate actions can
provide reasonable assurance of the existence of an asset,
reduce or eliminate the value of an asset, or impose a
liability on a regulated enterprise.
Allowance for Funds Used During Construction Where capital
invested by the Telephone Company in construction projects
is not allowed in the rate base upon which revenue
requirements are determined, it is the practice of
regulatory authorities to allow, in lieu thereof, a
capitalization of interest and equity costs during periods
of construction. These capitalized costs are reflected as
income during the construction period and as an addition to
the cost of plant constructed, and are included in other
expense-net on the Corporation's Consolidated Statements of
Income.
Income Taxes Deferred income taxes are provided for certain
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for tax purposes. <PAGE>
Investment tax credits resulted from federal tax law
provisions that allowed for a reduction in income tax
liability based on certain construction and capital
expenditures. Corresponding income tax expense reductions
were deferred and are being amortized as reductions in
income tax expense over the life of the property, plant and
equipment that gave rise to the credits.
Effective January 1, 1993, the Corporation adopted a
new accounting standard for accounting for income taxes.
See Note 3.
Cash Equivalents Cash equivalents include all highly liquid
investments with an original maturity of three months or
less. The carrying amount of cash equivalents approximates
fair value.
Deferred Charges Certain cellular service sales commissions
are deferred and amortized over 12 months. Directory
advertising costs are deferred until the directory is
published and advertising revenues related to these costs
are recognized.
Material and Supplies New and reusable materials are
carried principally at average original cost. Specific
costs are used for large individual items. Nonreusable
material is carried at estimated salvage value.
Property, Plant and Equipment The cost of additions and
substantial betterments of property, plant and equipment is
capitalized. Cost includes salaries and wages, material,
applicable taxes, pensions and other benefits, allowance for
funds used during construction and certain other items.
The Telephone Company computes depreciation using
certain straight-line methods as prescribed by the FCC and
the applicable state regulatory authorities. The Telephone
Company's provision for depreciation includes the
amortization of interstate and certain intrastate
accumulated depreciation deficiencies (reserve deficiency
amortization). Reserve deficiency amortization allows
additional depreciation to be recognized currently in an
attempt to reflect more accurately prior years' actual
consumption of telephone plant.
When a portion of the Telephone Company's depreciable
property, plant and equipment is retired, the gross book
value is charged to accumulated depreciation.
Property, plant and equipment of the Corporation, other
than the Telephone Company, are depreciated on a straight-
line method over their estimated useful lives, generally
ranging from 3 to 40 years.
The cost of maintenance and repairs of property, plant
and equipment, including the cost of replacing minor items
not constituting substantial betterments, is charged to
operating expenses.
Intangible Assets Intangible assets consist primarily of
licenses, customer lists and the excess of consideration
paid over net assets acquired in business combinations and
are being amortized using the straight-line method, over
periods generally ranging from 5 to 40 years.
Earnings Per Common Share The earnings per common share
computation uses the weighted average number of common
shares outstanding, including shares held by employee stock
ownership plans. Common stock equivalents outstanding are
not considered dilutive.
2. Employee Retirement Benefits
Pensions Substantially all employees of the Corporation are
covered by noncontributory pension and death benefit plans.
The pension benefit formula used in the determination of
pension cost is based on a flat dollar amount per year of
service according to job classification for nonmanagement
employees, and a stated percentage of adjusted career income
for management employees.
The Corporation's objective in funding the plans, in
combination with the standards of the Employee Retirement
Income Security Act of 1974 (as amended), is to accumulate
funds sufficient to meet its benefit obligations to
employees upon their retirement. Contributions to the plans
are made to a trust for the benefit of plan participants.
Plan assets consist primarily of stocks, U.S. government and
domestic corporate bonds and real estate. <PAGE>
Net pension cost is composed of the following:
1993 1992 1991
Service cost--benefits earned $ 131.1 $ 126.5 $ 116.0
during the period
Interest cost on projected 428.3 399.5 382.8
benefit obligation
Actual return on plan assets (1,019.9) (312.0) (1,545.1)
Other--net 498.7 (139.8) 988.5
Net pension cost (credit) $ 38.2 $ 74.2 $ (57.8)
Amount capitalized in $ 1.5 $ 11.5 $ (5.5)
property, plant and
equipment
The following table sets forth the pension plans' funded
status and amounts recognized as other assets in the
Corporation's Consolidated Balance Sheets as of December 31:
1993 1992
Fair value of plan assets $ 7,507.9 $6,970.2
Less: Actuarial present 6,319.5 5,772.2
value of projected benefit
obligation
Plan assets in excess of 1,188.4 1,198.0
projected benefit
obligation
Unrecognized prior service 785.5 744.6
cost
Unrecognized net gain (867.4) (591.1)
Unamortized transition (849.3) (930.7)
asset
Prepaid pension cost $ 257.2 $ 420.8
Significant assumptions used in developing pension
information include:
1993 1992 1991
Assumed discount rate for
determining projected 7.25% 7.5% 7.5%
benefit obligation
Assumed long-term rate 8.0% 8.0% 7.75%
of return on plan assets
Assumed composite rate of 4.6% 4.6% 4.6%
compensation increase
The projected benefit obligation is the actuarial present
value of all benefits attributed by the pension benefit formula
to previously rendered employee service. It is measured based on
assumptions concerning future interest rates and employee
compensation levels. Should actual experience differ from the
actuarial assumptions, the benefit obligation will be affected.
The actuarial estimate of the accumulated benefit obligation
does not include assumptions about future compensation levels.
The accumulated benefit obligation as of December 31, 1993, was
$5,815.0, of which $5,197.8 was vested. At December 31, 1992,
these amounts were $5,324.1 and $4,804.2, respectively.
In December 1993 and 1992, under the provisions of Section
420 of the Internal Revenue Code, the Corporation transferred
$123.9 and $114.5, respectively, in pension assets to a health
care benefit account for the reimbursement of retiree health care
benefits paid by the Corporation. <PAGE>
Supplemental Retirement Plans The Corporation also provides
senior and middle management employees with nonqualified,
unfunded supplemental retirement and savings plans. The plans
allow employees to defer and invest portions of their current
compensation for later payment, and the Corporation matches a
percentage of the compensation deferral according to thresholds
specified in the plans. Expenses related to these plans were
$66.8, $63.1 and $52.3 in 1993, 1992 and 1991, respectively.
Liabilities of $483.4 and $412.9 related to these plans have been
included in other noncurrent liabilities in the Corporation's
Consolidated Balance Sheets at December 31, 1993 and 1992,
respectively.
Voluntary Retirement Programs As a result of a March 1992
agreement with the Communications Workers of America (CWA), the
Telephone Company offered a limited early retirement plan to
designated nonmanagement employees which included incentives
affecting service pension eligibility and amounts. Approximately
1,200 nonmanagement employees participated in this offer. The
plan resulted in a charge to 1992 net income of approximately
$24.
In 1991, the Corporation amended the pension plan for
management employees and offered incentives for managers to
retire or resign effective December 30, 1991. Approximately
3,700 managers participated in the program in 1991. The
voluntary management retirement program resulted in a charge to
1991 net income of approximately $30.
Postretirement Benefits The Corporation provides certain
medical, dental and life insurance benefits to substantially all
retired employees. Effective January 1, 1993, the Corporation
adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement No. 106), which requires accrual of
actuarially determined postretirement benefit costs as active
employees earn these benefits. Prior to the adoption of
Statement No. 106, the Corporation expensed retiree medical
benefits when claims were incurred.
In implementing Statement No. 106, the Corporation
immediately recognized an accumulated obligation for
postretirement benefits (transition obligation) in the amount of
$2,861.2 and a related deferred income tax benefit of $1,013.4.
The resulting 1993 charge to net income of $1,847.8, or $3.08 per
share, is included in the cumulative effect of changes in
accounting principles in the Consolidated Statement of Income.
In accordance with Statement No. 71, a regulatory asset
associated with the transition obligation was not recorded by the
Telephone Company. <PAGE>
Postretirement benefit cost is composed of the following for
the year ended December 31, 1993:
Health Life Total
Insurance
Service cost--benefits earned
during the period $ 43.1 $ 5.0 $ 48.1
Interest cost on accumulated
postretirement benefit 212.3 19.3 231.6
obligation (APBO)
Actual return on assets (10.4) (17.8) (28.2)
Other--net 1.4 (5.0) (3.6)
Postretirement benefit cost $ 246.4 $ 1.5 $ 247.9
Expense recognized under the claims incurred method would
have been approximately $129.5 for 1993. In 1992 and 1991, the
cost of providing these postretirement benefits was $104.9 and
$97.2, respectively.
In connection with the 1992 collective bargaining agreements
negotiated between subsidiaries of the Corporation and the CWA,
the Corporation established collectively bargained Voluntary
Employee Beneficiary Association (CBVEBA) trusts to fund
postretirement benefits. In March 1993, the Corporation
contributed $135.5 into the CBVEBA trusts to be ultimately used
for the payment of postretirement benefits. The Corporation also
funds postretirement life insurance benefits at an actuarially
determined rate. Assets consist principally of stocks and U.S.
government and corporate bonds. <PAGE>
The following table sets forth the plans' funded status and
the amount included in postemployment benefit obligation in the
Corporation's Consolidated Balance Sheet as of December 31, 1993:
Life
Health Insurance Total
Retirees $ 1,785.9 $ 166.9 $ 1,952.8
Fully eligible active plan 241.8 19.6 261.4
participants
Other active plan participants 800.4 85.9 886.3
Total APBO 2,828.1 272.4 3,100.5
Fair value of plan assets (145.9) (296.6) (442.5)
APBO in excess of plan assets 2,682.2 (24.2) 2,658.0
Unrecognized net gain (loss) 141.7 (6.9) 134.8
Accrued (prepaid) postretirement $ 2,823.9 $ (31.1)$ 2,792.8
benefit
The APBO was determined using an assumed discount rate of
7.25 percent, a rate of future compensation increases of
4.6 percent, and an expected long-term rate of return on plan
assets of 8.0 percent. The assumed medical cost trend rate in
1994 is approximately 10.5 percent, decreasing gradually to
5.5 percent in 2004, prior to adjustment for cost-sharing
provisions of the plan for active and certain recently retired
employees. The assumed dental cost rate in 1994 is 7.0 percent
reducing to 5.0 percent in 2002. The discount rate used in
determining the postretirement benefit cost is 7.5 percent.
Raising the annual medical and dental cost trend rates by one
percentage point increases the APBO as of December 31, 1993 by
$206.4 and the net periodic postretirement benefit cost for the
year ended December 31, 1993 by approximately $18.5.
Postemployment Benefits Under its benefit plans, the Corporation
provides employees varying levels of disability pay, workers'
compensation and medical benefits under specified circumstances.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" (Statement No. 112). Statement No.
112 requires accrual of these postemployment benefits at the
occurrence of an event that renders an employee inactive or, if
the benefits ratably vest, over the vesting period. These
expenses were previously recognized as the claims were incurred.
A charge to net income of $65.5, or $.11 per share, after a
deferred tax benefit of $36.1, is included in the cumulative
effect of changes in accounting principles in the 1993
Consolidated Statement of Income. Management does not anticipate
that Statement No. 112 will materially affect ongoing
postemployment benefit expense. <PAGE>
3. Income Taxes
The Corporation adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(Statement No. 109) effective January 1, 1993. In adopting
Statement No. 109, the Corporation adjusted its net deferred
income tax liability for all temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes, computed based on provisions of the enacted tax
law. Financial statements prior to January 1, 1993, have
not been restated to apply the provisions of Statement No.
109. The cumulative effect of adopting Statement No. 109 as
of January 1, 1993 was to decrease net income for 1993 by
$213.9, or $.36 per share, resulting primarily from the
establishment of a deferred tax liability associated with
certain prior acquisitions not related to the Telephone
Company. The adoption of Statement No. 109 had no material
effect on pre-tax income.
As a result of implementing Statement No. 109, the
Telephone Company recorded a $431.4 net reduction in its
deferred tax liability. This reduction was substantially
offset by the establishment of a net regulatory liability in
accordance with Statement No. 71, with minimal effect on net
income. The net regulatory liability recognizes the
differences between the recording of income taxes for
financial reporting purposes and recovery of those taxes
through telephone service rates. Amounts comprising the net
liability will be amortized over the regulatory lives of the
associated assets. Future regulatory proceedings may affect
the period in which these amounts are recognized in net
income. <PAGE>
Significant components of the Corporation's deferred
tax liabilities and assets as of December 31, 1993 are as
follows:
Depreciation and $ 3,439.1
amortization
Employee benefits 131.9
Other 423.1
Gross deferred tax 3,994.1
liabilities
Employee benefits 1,281.6
Unamortized investment tax 156.9
credits
Other 462.7
Gross deferred tax assets 1,901.2
Deferred tax assets 70.0
valuation allowance
Net deferred tax $ 2,162.9
liabilities
The components of income tax expense are as follows:
1993 1992 1991
Federal:
Current $ 727.3 $ 560.4 $ 516.7
Deferred--net (110.8) 0.7 6.9
Amortization of investment (65.8) (72.9) (87.4)
tax credits
550.7 488.2 436.2
State and local:
Current 87.3 61.1 43.9
Deferred--net (13.0) 18.7 7.6
74.3 79.8 51.5
Total $ 625.0 $ 568.0 $ 487.7
The components of deferred federal income tax expense
for 1992 and 1991 as recorded prior to the adoption of
Statement No. 109 are as follows:
1992 1991
Depreciation and amortization $ 29.6 $ (13.8)
Employee benefits (93.7) (13.6)
Undistributed earnings from
investments in equity 60.7 25.5
affiliates
Other--net 4.1 8.8
Total $ 0.7 $ 6.9
A reconciliation of income tax expense and the amount
computed by applying the statutory federal income tax rate
(35 percent for 1993, 34 percent for 1992 and 1991) to
income before income taxes, extraordinary loss and
cumulative effect of changes in accounting principles is as
follows:
1993 1992 1991
Taxes computed at federal $ 721.1 $635.7 $559.0
statutory rate
Increases (decreases) in
taxes resulting from:
Amortization of investment
tax credits over the life
of the plant that gave rise (65.8) (72.9) (87.4)
to the credits
Excess deferred taxes due to (43.2) (74.3) (55.8)
rate change
Depreciation of telephone
plant construction costs
previously deducted for tax 22.5 21.7 23.2
purposes--net
State and local income
taxes--net of federal tax 48.3 52.7 34.0
benefit
Other--net (57.9) 5.1 14.7
Total $ 625.0 $568.0 $487.7 <PAGE>
On August 10, 1993, the Omnibus Budget Reconciliation
Act was signed into law. Among other provisions, the top
corporate tax rate was raised to 35 percent, effective
January 1, 1993. The effect on net income was not material,
as the increase in taxes on operating income and non-
Telephone Company deferred tax liabilities was offset by an
increase in deferred tax assets associated with the
postemployment benefit obligation. Increases in previously
recorded deferred tax liabilities at the Telephone Company
were offset by decreases in the net regulatory liability.
4. Property, Plant and Equipment
Property, plant and equipment, which is stated at cost,
is summarized as follows at December 31:
1993 1992
Telephone Company plant:
In service $25,970.0 $25,005.4
Under construction 261.3 265.5
26,231.3 25,270.9
Accumulated depreciation and
amortization (10,532.2) (9,604.8)
Total Telephone Company 15,699.1 15,666.1
Other 1,939.3 1,707.5
Accumulated depreciation and
amortization (546.9) (474.2)
Total Other 1,392.4 1,233.3
Property, plant and equipment--net $17,091.5 $16,899.4 <PAGE>
5. Leases
Certain facilities and equipment used in operations are
under capital or operating leases. Rental expenses under
operating leases were $122.9, $135.2 and $112.6 for 1993,
1992 and 1991, respectively. At December 31, 1993, the
aggregate minimum rental commitments under noncancelable
leases were as follows:
Operating Capital
Year Leases Leases
1994 $ 71.7 $ 6.4
1995 58.7 3.0
1996 40.6 2.2
1997 32.9 1.3
1998 28.1 1.3
Thereafter 153.2 3.4
Total minimum lease payments $ 385.2 17.6
Amount representing executory costs (1.7)
Amount representing interest (4.3)
Present value of minimum lease
payments $ 11.6
6. Debt Maturing Within One Year
Debt maturing within one year consists of the
following at December 31:
1993 1992 1991
Commercial paper $ 890.5 $ 1,023.1 $ 1,228.6
Current maturities of 495.2 256.2 370.7
long-term debt
Total $ 1,385.7 $ 1,279.3 $ 1,599.3
Commercial paper:
Average amount outstanding
during the year * $ 1,139.5 $ 1,288.0 $ 1,328.6
Maximum amount at any month
end during the year $ 1,379.5 $ 1,423.0 $ 1,643.8
Weighted average interest rate
at December 31, 3.3% 3.5% 4.9%
Weighted average interest rate on
average commercial paper ** 3.2% 3.9% 6.1%
* Amounts represent average daily face amount.
** Computed by dividing the average daily face amount of
commercial paper into the aggregate related interest expense.
At December 31, 1993 and 1992, the carrying amount of
commercial paper approximates fair value.
The Corporation has entered into agreements with
several banks for lines of credit totaling $770.0. All of
these agreements may be used to support commercial paper
borrowings. The majority of these lines are on a negotiated
fee basis with interest rates negotiable at time of
borrowing. There were no borrowings outstanding under these
lines of credit at December 31, 1993. <PAGE>
7. Long-Term Debt
Long-term debt, including interest rates and
maturities, is summarized as follows at December 31:
Maturities 1993 1992
Telephone Company debentures
4.50%-5.88% 1995-2006 $ 700.0 $ 500.0
6.12%-6.88% 2000-2024 1,050.0 350.0
7.00%-7.75% 1994-2025 1,400.0 800.0
8.25%-9.63% 1996-2024 650.0 2,750.0
3,800.0 4,400.0
Unamortized discount-net of premium (34.2) (168.9)
Total Telephone Company debentures
(Fair value of $3,830.8 and $4,427.0) 3,765.8 4,231.1
Telephone Company notes
5.04%-7.35% 1994-2010 900.0 285.0
Unamortized discount (4.8) (1.3)
Total Telephone Company notes
(Fair value of $915.1 and $288.3) 895.2 283.7
Guaranteed obligations of employee stock
ownership plans #
8.41%-9.40% 1993-2000
(Fair value of $398.5 and $397.5) 354.3 397.6
Southwestern Bell Capital Corporation notes
4.59%-6.95% 1993-2000 191.5 213.0
7.00%-9.00% 1993-2004 736.1 826.6
Total Southwestern Bell Capital Corporation
notes
(Fair value of $983.6 and $886.6) 927.6 1,039.6
Capitalized leases and other 11.7 20.3
Total long-term debt, including current 5,954.6 5,972.3
maturities
Current maturities (495.2) (256.2)
Total long-term debt $ 5,459.4 $5,716.1
# See Note 8. <PAGE>
The fair value of the Telephone Company debentures was
based on quoted market prices. The fair values of the notes
for both the Telephone Company and Southwestern Bell Capital
Corporation and the guaranteed obligations of employee stock
ownership plans were estimated using a discounted cash flow
analysis based on the yield to maturity of each issue.
The Corporation recorded extraordinary losses on the
refinancing of long-term bonds by the Telephone Company of
$153.2 and $80.7 in 1993 and 1991, respectively, net of
related income tax benefits of $92.2 and $48.6,
respectively.
The aggregate principal amounts of long-term debt
scheduled for repayment for the years 1994 through 1998 are
$495.2, $319.5, $377.6, $299.5 and $299.1, respectively. As
of December 31, 1993, the Corporation was in compliance with
all covenants and conditions of indentures relating to its
debt.
8. Employee Stock Ownership Plans
The Corporation maintains contributory savings plans
which cover substantially all employees. Under the savings
plans, the Corporation matches a stated percentage of
eligible employee contributions, subject to a specified
ceiling.
The Corporation has two leveraged Employee Stock
Ownership Plans (ESOPs) as part of the existing savings
plans. The ESOPs were funded with notes issued by the
savings plans, the proceeds of which were used to purchase
shares of the Corporation's common stock in the open market.
The notes are unconditionally guaranteed by the Corporation.
The unpaid balance of notes is included in the
accompanying consolidated balance sheets as long-term debt
and as a reduction in shareowners' equity, reported as
guaranteed obligations of employee stock ownership plans.
The notes will be repaid with Corporation contributions to
the savings plans, dividends paid on Corporation shares and
interest earned on funds held by the ESOPs.
Since 1990, the Corporation's match of employee
contributions to the savings plans has been fulfilled with
shares of stock allocated from the ESOPs and with purchases
of the Corporation's stock in the open market. Benefit cost
is based on a combination of the contributions to the
savings plans and the cost of shares allocated to
participating employees' accounts. Both benefit cost and
interest expense on the notes are reduced by dividends on
the Corporation's shares held by the ESOPs and interest
earned on the ESOPs' funds. <PAGE>
Activity for the ESOPs and the savings plans for 1993,
1992 and 1991 is summarized in the table below:
1993 1992 1991
Benefit expense - net of dividends and
interest income $29.0 $ 27.7 $ 24.0
Interest expense - net of dividends and
interest income 19.9 22.6 25.2
Net ESOP expense 48.9 50.3 49.2
Additional savings plans stock purchases 0.5 4.7 9.6
Total expense $49.4 $ 55.0 $ 58.8
Company contributions for ESOPs $50.3 $ 50.4 $ 52.3
Dividends and interest income for debt
service $26.3 $ 26.0 $ 25.7
9. Stock Option Plans
Under various plans, the Corporation is authorized to
issue to senior and middle management employees up to 24
million options to purchase shares of the Corporation's
common stock (adjusted to reflect the two-for-one stock
split effective May 25, 1993). Additionally, the
Corporation is seeking shareowner approval at the 1994
Annual Meeting of Shareowners to increase the number of
options which may be issued under these plans to 28.5
million. Options become exercisable in periods of one year
to three years after the date of grant and expire ten years
after the date of grant. All options issued through
December 31, 1993, have been issued with exercise prices
equal to the market price of the stock at the date of
grant. <PAGE>
Information related to outstanding options is
summarized below:
Weighted
Average
Exercise
Number of Price Per
Options* Option*
Outstanding January 1, 1991 -- --
Granted 439,388 $27.00
Cancelled (754) 27.00
Outstanding December 31, 1991 438,634 $27.00
Granted 5,192,742 32.73
Exercised (24,782) 27.00
Cancelled (23,648) 32.36
Outstanding December 31, 1992 5,582,946 $32.31
Granted 5,062,285 40.25
Exercised (368,053) 30.72
Cancelled (482,513) 35.89
Outstanding December 31, 1993 9,794,665 $36.30
* Number of options and per option data restated to reflect
two-for-one stock split effective May 25, 1993.
Options to purchase 2,297,538 shares of Corporation
stock were exercisable at December 31, 1993.
10. Shareowners' Equity
Common Stock Split The Board of Directors of the
Corporation declared a two-for-one stock split in the form
of a stock dividend on the shares of the Corporation's
common stock, effective May 25, 1993. The Corporation
issued 300,889,089 additional shares of common stock in
connection with the stock split and retained the current par
value of $1.00 per share for all outstanding shares of
common stock. An amount equal to the aggregate par value of
the additional shares of common stock issued was transferred
from Capital in Excess of Par Value to Common Shares.
Weighted average common share amounts for periods prior to
May 25, 1993 have been restated to reflect the effects of
the stock split. <PAGE>
Stock Repurchase Program The Board has authorized the
repurchase of up to 30 million shares, or 5 percent, of the
Corporation's outstanding common stock. These purchases
would be in addition to purchases which may be made by or
for the Corporation's employee benefit plans or the
Southwestern Bell Corporation Dividend Reinvestment Plan for
shareowners. As of December 31, 1993, no shares had been
repurchased pursuant to this authorization.
Shareowners' Rights Plan The Corporation has a Shareowners'
Rights Plan (Plan). The Plan becomes operative in certain
events involving the acquisition of 20 percent or more of
the Corporation's common stock by any person or group in a
transaction not approved by the Board, or the designation by
the Board of a person or group owning more than 10 percent
of the outstanding stock as an adverse person, as provided
in the Plan. Upon the occurrence of these events, each
right, unless redeemed by the Board, generally entitles the
holder (other than the holder triggering the right) to
purchase an amount of common stock of the Corporation (or,
in certain circumstances, of the potential acquiror) having
a value equal to two times the exercise price of $160. The
rights expire in January 1999. After giving effect to the
stock split in May 1993, each share of common stock also
represents one-half of a right.
The rights have certain antitakeover effects. The
rights will cause substantial dilution to a person or group
that attempts to acquire the Corporation on terms not
approved by the Board.
The rights should not interfere with any merger or
other business combination approved by the Board since the
rights may be redeemed. <PAGE>
11. Additional Financial Information
December 31,
Balance Sheets 1993 1992
Accounts payable and accrued
liabilities:
Accounts payable $ 893.1 $ 951.5
Accrued taxes 554.5 429.1
Advance billing and customer 278.6 251.3
deposits
Compensated future absences 202.7 196.8
Accrued interest 130.9 136.8
Accrued payroll 117.7 116.0
Other 698.7 552.6
Total $2,876.2 $2,634.1
Statements of Income 1993 1992 1991
Interest expense:
Long-term debt $ 448.0 $ 476.7 $ 478.9
Notes payable 36.8 50.1 81.1
Other 11.4 3.2 17.7
Total $ 496.2 $ 530.0 $ 577.7
Allowance for funds
used during
construction $ 21.5 $ 30.7 $ 34.1
Statements of Cash 1993 1992 1991
Flows
Cash paid during the
year for:
Interest $ 502.0 $ 538.4 $ 581.5
Income taxes $ 592.3 $ 605.9 $ 430.4 <PAGE>
12. Pending Acquisitions
In January 1994, the Corporation completed the
purchase, for $650, of two cable television systems located
in Montgomery County, Maryland, and Arlington County,
Virginia. Management does not expect the transaction to
have a material effect on the Corporation's financial
position or results of operations.
In December 1993, the Corporation and Cox Cable
Communications (Cox) entered into a non-binding Memorandum
of Understanding with respect to the formation of a $4.9
billion partnership to own and operate cable television
systems. In return for a 40 percent general partnership
interest, the Corporation would contribute $1.6 billion in
cash or other assets within four years of formation. The
Corporation would have the option to increase its initial
ownership stake to 50 percent within specified time frames,
through additional cash or asset contributions. Cox would
contribute 21 cable television systems based on a negotiated
value of $3.3 billion, and would hold a 60 percent general
partnership interest and a $1 billion preferred partnership
interest. The transaction is subject to completion of
negotiations and regulatory approvals.
In February 1994, the Corporation announced an
agreement to purchase, for stock valued at $680, the
domestic cellular business of Associated Communications
Corporation (Assocciated), including cellular systems in
Buffalo, Rochester, Albany and Glens Falls, New York. These
properties are adjacent to cellular systems in Syracuse,
Utica and Ithaca, New York, which the Corporation agreed to
purchase from other parites in November 1993. These
transactions are subject to approvals by regulatory
authorities, and in the case of the Associated acquisition,
by its shareowners.
13. Equity Investments
Investments in affiliates accounted for under the
equity method consist primarily of the Corporation's
investment in Telefonos de Mexico, S.A. de C.V. (Telmex),
Mexico's national telecommunications company. In December
1990, a consortium consisting of SBC International, Inc.
(SBC International), a wholly-owned subsidiary of the
Corporation, together with a subsidiary of France Telecom
and a group of Mexican investors led by Grupo Carso, S.A. de
C.V., purchased all the Class AA shares of Telmex from the
Mexican government. The consortium has voting control of
Telmex through its ownership of Class AA shares. The
Mexican investors have voting control of the consortium.
SBC International's share of the purchase price,
including an option to buy certain additional shares, was
$485.8. In September 1991, SBC International exercised the
option to purchase 530,157,101 Class L shares of Telmex for
$467.3. The Class L shares have limited voting rights. SBC
International's interest in Telmex represents approximately
10 percent of Telmex's total equity capitalization.
The Telmex acquisitions were recorded using the
purchase method of accounting. The purchase price in excess
of the underlying fair value of identifiable net assets
acquired is being amortized over 40 years.
The investment in Telmex L shares would not have had a
material impact on consolidated results of operations for
1991 had this acquisition occurred on January 1, 1991.
Other equity investments include interests in
Australian and Israeli operations which provide directory,
cable television and other services.
The following is a reconciliation of the Corporation's
equity investments:
1993 1992 1991
Beginning of year $ 1,249.4 $ 1,081.3 $ 524.1
Additional investments -- -- 470.1
Equity in net income 249.7 208.0 94.5
Dividends received and other (78.3) (39.9) (7.4)
End of year $ 1,420.8 $ 1,249.4 $ 1,081.3
The following table presents summarized financial
information obtained from filings with the Securities and
Exchange Commission by Telmex at December 31, or for the
year ended:
1993 1992 1991
Balance Sheets
Current assets $ 4,247.0 $ 3,930.6 $ 4,008.5
Noncurrent assets 12,785.6 11,212.1 10,555.0
Current liabilities 1,255.6 1,133.1 1,272.2
Noncurrent liabilities 3,848.5 3,244.4 3,823.0
Shareowners' equity 11,928.6 10,765.0 9,468.4
Income Statements
Operating revenues $ 7,920.9 $ 7,200.2 $ 6,334.7
Operating income 3,310.4 3,125.0 2,765.9
Net income 2,898.7 2,773.4 2,719.4 <PAGE>
Such public information is based on Mexican generally
accepted accounting principles and is adjusted to recognize the
effects of inflation, including restatement of 1992 and 1991
financial information for the 1993 inflation effect.
Translation to U.S. dollars was computed using the reported
December 31, 1993, exchange rate of 3.1059 new pesos per
dollar.
Reconciliation to U.S. generally accepted accounting
principles (GAAP) as reported by Telmex in such filings,
including the cumulative effect of adopting Statement No. 109
retroactive to January 1, 1990, reduced shareowners' equity at
December 31, 1993, 1992 and 1991, by approximately $1,581,
$1,793 and $1,873, respectively; and reduced net income for the
12 months ended December 31, 1993, 1992 and 1991, by
approximately $191, $293 and $702, respectively.
Earnings reported by Telmex are not directly comparable to
the Corporation's equity in net income of Telmex, which is
based on U.S. GAAP, includes adjustments made pursuant to the
purchase method of accounting and does not recognize the
effects of inflation.
14. Segment and Major Customer Information
The Corporation operates predominantly in the
communications service industry.
Approximately 12 percent in 1993 and 1992 and 14 percent
in 1991 of the Corporation's consolidated revenues were from
services provided to AT&T. No other customer accounted for
more than 10 percent of consolidated revenues. <PAGE>
15. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Calendar Total Operating Earnings Per
Quarter Revenues Operating Income Net Income (Loss) Common Share
1993 1992 1993 1992 1993 1992 1993 1992*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First $ 2,457.8 $ 2,287.1 $ 520.7 $ 443.5 $(1,914.1)# $ 261.6 $(3.19)# $0.44
Second 2,539.3 2,388.6 574.9 518.5 294.4 # 304.5 0.49 # 0.51
Third 2,795.1 2,617.7 655.3 635.9 388.6 # 385.6 0.65 # 0.64
Fourth 2,898.1 2,722.0 628.7 599.5 385.9 350.0 0.64 0.58
Total $10,690.3 $10,015.4 $2,379.6 $2,197.4 $(845.2) $1,301.7 $ (1.41) $ 2.17
<FN>
* Restated to reflect two-for-one stock split effective May 25, 1993.
# Includes extraordinary losses of $89.4 or $.15 per share, $43.6 or $.07 per share and
$20.2 or $.03 per share for the first, second and third quarter of 1993, respectively. The
first quarter also includes a charge of $2,127.2 or $3.55 per share for cumulative effect of
changes in accounting principles. <PAGE>
</TABLE>
Stock Data
Trading: Southwestern Bell Corporation is listed on the New York,
Chicago and Pacific stock exchanges, as well as international
exchanges in London, Zurich, Geneva and Basel.
Ticker symbol (NYSE): SBC
Daily newspaper stock table listing: SwBell or SowestBell <PAGE>
APPENDIX
All page numbers referenced in this Exhibit and the Form 10-K
relate to the printed Annual Report and/or Form 10k. The
order of the sections is as they appear in the printed
Annual Report. The colored graphs and related footnotes
that appear in the printed document are approximately
1-1/2 inches by 3-1/2 inches. The Stock Data section
appears on the back cover.
A graph titled "Stock Performance (by quarter, adjusted for
splits)" is shown on page 1. Colored indicators are used to
shown the 1993 High/Low; 1992 High/Low; and the Close. Listed
below are the plot points for the graph:
High Low Close
1992 First Quarter 33.000 28.500 28.750
Second Quarter 31.938 28.313 30.500
Third Quarter 34.500 30.438 34.250
Fourth Quarter 37.375 31.750 37.000
1993 First Quarter 39.063 34.188 39.063
Second Quarter 40.750 37.000 38.750
Third Quarter 47.000 38.625 43.000
Fourth Quarter 45.250 39.625 41.500
The section titled "Selected Financial and Operating Data" (shown
on pages 20 and 21), details 10 year financial information for
the Corporation. In the printed document, the information is
spread horizontally across two pages with just one set of
headings on page 20. Due to constraints in the EDGAR system for
page width, the EDGAR version contains two sets of headings.
The section titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appears on pages
22-30. The text of this section appears in two columns. <PAGE>
A bar graph titled "Income Before Extraordinary Loss and
Accounting Changes (in billions of dollars)" appears on page 22
and to the right side of the subsection titled "Results of
Operations - Summary". The graph shows Income Before
Extraordinary Loss and Accounting Changes for the past five
years. The actual figures are listed on the graph. Listed below
are the plot points:
1989 1.09
1990 1.10
1991 1.16
1992 1.30
1993 1.44
The following footnote appears at the base of the graph:
Earnings grew at a compound annual rate of 7.0 percent from 1989
to 1993.
A stacked bar graph titled "Distribution of Revenues(in billions
of dollars)" appears on page 23 and to the right side of the
subsection titled "Local Service". The graph shows various
categories of revenue distribution for the past five years. The
actual figures are listed on the graph. Listed below are the
plot points by category:
Year Total Local Network Long- Directory Other
service access distance advertising
1989 8.7 3.7 2.7 1.0 0.7 0.6
1990 9.1 3.9 2.6 1.1 0.8 0.7
1991 9.3 4.2 2.4 1.0 0.9 0.8
1992 10.0 4.7 2.5 1.0 0.9 0.9
1993 10.7 5.2 2.7 1.0 0.9 0.9
The following footnote appears at the base of the graph:
Landline and wireless local service revenues grew to nearly half
of total revenues in 1993. <PAGE>
A bar graph titled "Access Lines (in millions)" appears in the
right column on page 23 and to the left side of the subsection
titled "Network Access". The graph shows access line totals for
the past five years. The actual figures are listed on the graph.
Listed below are the plot points:
1989 11.8
1990 12.1
1991 12.4
1992 12.8
1993 13.2
The following footnote appears at the base of the graph: Access
lines have grown 12.6 percent since 1989, including 3.4 percent
growth in 1993.
A stacked bar graph titled "Distribution of Expenses (in billions
of dollars)" appears in the left column on page 24 and to the
right side of the subsection titled "Cost of Services and
Products". The graph shows the categories of expenses for the
past five years. The actual figures are listed on the graph.
Listed below are the plot points:
Year Total Cost of Selling, Depreciation
services general and and
and administrative amortization
products
1989 6.7 2.9 1.9 1.9
1990 7.1 3.2 2.2 1.7
1991 7.2 3.1 2.3 1.8
1992 7.8 3.4 2.6 1.8
1993 8.3 3.4 2.9 2.0
The following footnote appears at the base of the graph: Cost of
services and products represents more than 40 percent of total
operating expenses.
<PAGE>
In the section titled "Operating Environment and Trends of the
Business" and subsection "Regulatory Environment",
approximately one inch icons of the states of Missouri,
Oklahoma and Texas appear to the sides of the
subsections of the respective state.
A bar graph titled "Capital Expenditures (in billions of
dollars)" appears in the right column on page 29 and to the left
side of the section titled "Liquidity and Capital Resources" and
the subsection titled "Capital Expenditures and Other
Commitments". The graph shows Capital Expenditures for the past
five years. The actual figures are listed on the graph. Listed
below are the plot points:
1989 1.48
1990 1.78
1991 1.83
1992 2.14
1993 2.22
The following footnote appears at the base of the graph: Network
modernization, digital conversion and cable television build-out
contributed to 1992 and 1993 increases in capital expenditures.
A bar graph titled "Dividends per Share (adjusted for splits)"
appears in the left column on page 30 and to the right side of
the subsection titled "Dividends Declared". The graph shows
Dividends for the past five years. The actual figures are listed
on the graph. Listed below are the plot points:
1989 1.30
1990 1.38
1991 1.42
1992 1.46
1993 1.51
The following footnote appears at the base of the graph:
Dividends increased 3.4 percent in 1993, the largest annual
increase since 1990. <PAGE>
Exhibit 21
SUBSIDIARIES OF SOUTHWESTERN BELL CORPORATION
AS OF JANUARY 1, 1994
State of Conducts
Name Incorporation Business
Under
Southwestern Bell Missouri Same
Telephone Company
Southwestern Bell Dually Same
Mobile Systems, Inc. incorporated in
Delaware and
Virginia
SBC International, Inc. Delaware Same
Southwestern Bell Missouri Same
Yellow Pages, Inc.
Associated Directory Delaware Same
Services, Inc.
Southwestern Bell Delaware Same
Telecommunications,
Inc.
Southwestern Bell Missouri Same
Printing Company
Southwestern Bell Delaware Same
Enterprises, Inc.
EXHIBIT 23
Consent Of Independent Auditors
We consent to the incorporation by reference in this Annual
Report (Form 10K) of Southwestern Bell Corporation of our report
dated February 11, 1994, included in the 1993 Annual Report to
Shareowners of Southwestern Bell Corporation.
Our audits also included the financial statement schedules of
Southwestern Bell Corporation listed in Item 14(a). These
schedules are the responsibility of the Corporation's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the
Registration Statements (Form S-8) pertaining to the Southwestern
Bell Corporation Savings Plan for Salaried Employees and Savings
and Security Plan (Non-Salaried Employees) (No. 33-38706), the
Stock Savings Plan, Management Stock Savings Plan and Stock Based
Savings Plan (No. 33-37451) and the Southwestern Bell Corporation
1992 Stock Option Plan (No. 33-49855), and in the Registration
Statements (Form S-3) pertaining to the Southwestern Bell
Corporation Dividend Reinvestment Plan (Nos. 2-99261 and 33-
49893), and Southwestern Bell Capital Corporation and
Southwestern Bell Corporation (No. 33-45490), and in the related
Prospectuses of our report dated February 11, 1994, with respect
to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph
with respect to the financial statement schedules included in
this Annual Report (From 10-K) for the year ended December 31,
1993.
/s/ ERNST & YOUNG
San Antonio, Texas
March 15, 1994
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SOUTHWESTERN BELL CORPORATION, a Delaware
corporation, hereinafter referred to as the "Corporation,"
proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as
amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is an officer or a director, or
both, of the Corporation, as set forth beneath his or her
signature;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Robert G. Pope, James D. Ellis, William J. Free, Donald
E. Kiernan, Judith M. Sahm, or any one of them, his or her
attorney, for him or her and in his or her name, place and stead,
and in his or her office and capacity in the Corporation as an
officer or a director, or, if he or she holds both such offices,
then as both an officer and as a director, to execute and file
such annual report, and thereafter to execute and file any
amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform each
and every act and thing whatsoever requisite or necessary to be
done in and concerning the premises, as fully to all intents and
purposes as he or she might or could do if personally present at
the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by
virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of
Attorney the 28th day of January, 1994.
/s/ Edward E. Whitacre, Jr.
Edward E. Whitacre, Jr.
Director and Chairman of the Board
and Chief Executive Officer
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SOUTHWESTERN BELL CORPORATION, a Delaware
corporation, hereinafter referred to as the "Corporation,"
proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as
amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is an officer or a director, or
both, of the Corporation, as set forth beneath his or her
signature;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Edward E. Whitacre, Jr., Robert G. Pope, James D. Ellis,
William J. Free, Donald E. Kiernan, Judith M. Sahm, or any one of
them, his or her attorney, for him or her and in his or her name,
place and stead, and in his or her office and capacity in the
Corporation as an officer or a director, or, if he or she holds
both such offices, then as both an officer and as a director, to
execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto, hereby giving and
granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite or
necessary to be done in and concerning the premises, as fully to
all intents and purposes as he or she might or could do if
personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do, or
cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of
Attorney the 28th day of January, 1994.
/s/ Clarence C. Barksdale /s/ James E. Barnes
Clarence C. Barksdale James E. Barnes
Director Director
/s/ Jack S. Blanton /s/ August A. Busch III
Jack S. Blanton August A. Busch III
Director Director
<PAGE>
/s/ Ruben R. Cardenas /s/ Martin K. Eby, Jr.
Ruben R. Cardenas Martin K. Eby, Jr.
Director Director
/s/ Tom C. Frost /s/ Jess Hay
Tom C. Frost Jess Hay
Director Director
/s/ B. R. Inman /s/ Charles F. Knight
B. R. Inman Charles F. Knight
Director Director
/s/ Sybil C. Mobley /s/ Haskell M. Monroe, Jr.
Sybil C. Mobley Haskell M. Monroe, Jr.
Director Director
/s/ Carlos Slim Helu /s/ Patricia P. Upton
Carlos Slim Helu Patricia P. Upton
Director Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SOUTHWESTERN BELL CORPORATION, a Delaware
corporation, hereinafter referred to as the "Corporation,"
proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as
amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is an officer or a director, or
both, of the Corporation, as set forth beneath his or her
signature;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Edward E. Whitacre, Jr., James D. Ellis, William J.
Free, Donald E. Kiernan, Judith M. Sahm, or any one of them, his
or her attorney, for him or her and in his or her name, place and
stead, and in his or her office and capacity in the Corporation
as an officer or a director, or, if he or she holds both such
offices, then as both an officer and as a director, to execute
and file such annual report, and thereafter to execute and file
any amendment or amendments thereto, hereby giving and granting
to said attorneys full power and authority to do and perform each
and every act and thing whatsoever requisite or necessary to be
done in and concerning the premises, as fully to all intents and
purposes as he or she might or could do if personally present at
the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by
virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of
Attorney the 28th day of January, 1994.
/s/ R. G. Pope
R. G. Pope
Director and Vice Chairman <PAGE>
