FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1994
or
__ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8610
SOUTHWESTERN BELL CORPORATION
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
At October 31, 1994, 599,654,873 common shares were outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Operating Revenues
Local service $ 1,473.9 $ 1,325.1 $ 4,273.2 $ 3,827.5
Network access 707.7 688.0 2,094.9 1,988.3
Long-distance service 242.4 255.5 695.7 739.1
Directory advertising 307.5 286.7 550.3 507.3
Other 268.6 239.8 796.8 730.0
Total operating revenues 3,000.1 2,795.1 8,410.9 7,792.2
Operating Expenses
Cost of services and products 959.0 873.5 2,665.5 2,464.8
Selling, general and administrative 764.4 782.1 2,220.0 2,140.3
Depreciation and amortization 506.3 484.2 1,502.8 1,436.2
Total operating expenses 2,229.7 2,139.8 6,388.3 6,041.3
Operating Income 770.4 655.3 2,022.6 1,750.9
Other Income (Expense)
Interest expense (116.9) (123.8) (349.6) (382.5)
Equity in net income of affiliates 73.1 65.7 210.5 179.6
Other expense - net (6.3) (10.0) (38.0) (36.5)
Total other income (expense) (50.1) (68.1) (177.1) (239.4)
Income Before Income Taxes,
Extraordinary Loss and Cumulative Effect
of Changes in Accounting Principles 720.3 587.2 1,845.5 1,511.5
Income Taxes
Federal 211.1 162.4 545.9 408.1
State and local 28.4 16.0 75.6 54.1
Total income taxes 239.5 178.4 621.5 462.2
Income Before Extraordinary Loss
and Cumulative Effect of Changes
in Accounting Principles 480.8 408.8 1,224.0 1,049.3
Extraordinary Loss on Early Extinguishment
of Debt, net of tax - (20.2) - (153.2)
Cumulative Effect of Changes in Accounting
Principles, net of tax - - - (2,127.2)
Net Income (Loss) $ 480.8 $ 388.6 $ 1,224.0 $ (1,231.1)
FSee Notes to Consolidated Financial Statements.
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(Continued)
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SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Earnings Per Common Share:
Income Before Extraordinary Loss and
Cumulative Effect of Changes in
Accounting Principles $ 0.80 $ 0.68 $ 2.03 $ 1.75
Extraordinary Loss on Early
Extinguishment of Debt, net of tax - (0.03) - (0.25)
Cumulative Effect of Changes in
Accounting Principles, net of tax - - - (3.55)
Net Income (Loss) $ 0.80 $ 0.65 $ 2.03 $ (2.05)
Weighted Average Number of Common
Shares Outstanding (in millions) 601.7 599.0 601.6 599.8
Dividends Declared Per Common Share $ 0.3950 $ 0.3775 $ 1.1850 $ 1.1325
See Notes to Consolidated Financial Statements.
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SOUTHWESTERN BELL CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
<CAPTION>
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 431.0 $ 618.4
Accounts receivable - net of allowances for
uncollectibles of $124.9 and $111.2 2,136.6 2,055.2
Material and supplies 157.5 148.9
Prepaid expenses 235.4 126.5
Deferred charges 235.0 192.0
Deferred income taxes 208.1 197.0
Other 329.9 281.8
Total current assets 3,733.5 3,619.8
Property, Plant and Equipment - at cost 29,366.6 28,170.6
Less: Accumulated depreciation and amortization 11,793.0 11,079.1
Property, Plant and Equipment - Net 17,573.6 17,091.5
Intangible Assets - Net of Accumulated Amortization of
$393.8 and $368.2 1,796.5 1,147.4
Investments in Equity Affiliates 1,471.1 1,420.8
Other Assets 950.3 1,028.0
Total Assets $ 25,525.0 $ 24,307.5
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 1,938.9 $ 1,385.7
Accounts payable and accrued liabilities 3,165.1 2,876.2
Dividends payable 237.1 226.6
Total current liabilities 5,341.1 4,488.5
Long-Term Debt 5,365.3 5,459.4
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 2,576.2 2,387.0
Postemployment benefit obligation 2,686.0 2,897.0
Unamortized investment tax credits 384.7 430.4
Other noncurrent liabilities 1,124.9 1,076.8
Total deferred credits and other noncurrent liabilities 6,771.8 6,791.2
Shareowners' Equity
Common shares issued ($1 par value) 606.1 602.7
Capital in excess of par value 5,714.2 5,577.0
Retained earnings 2,407.5 1,891.4
Guaranteed obligations of employee stock ownership plans (318.0) (352.9)
Foreign currency translation adjustment (142.2) (40.2)
Treasury shares (at cost) (220.8) (109.6)
Total shareowners' equity 8,046.8 7,568.4
Total Liabilities and Shareowners' Equity $ 25,525.0 $ 24,307.5
See Notes to Consolidated Financial Statements.
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SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
<CAPTION>
Nine months ended
September 30,
1994 1993
<S> <C> <C>
Operating Activities
Net income (loss) $ 1,224.0 $ (1,231.1)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,502.8 1,436.2
Undistributed earnings from investments in
equity affiliates (159.8) (108.7)
Provision for uncollectible accounts 110.2 96.3
Amortization of investment tax credits (45.7) (49.0)
Pensions and other postemployment expenses 254.2 217.4
Deferred income tax expense 108.0 64.2
Extraordinary loss, net of tax - 153.2
Cumulative effect of accounting changes,
net of tax - 2,127.2
Other - net (397.4) (438.1)
Total adjustments 1,372.3 3,498.7
Net Cash Provided by Operating Activities 2,596.3 2,267.6
Investing Activities
Construction and capital expenditures (1,674.0) (1,629.5)
Purchase of short-term investments (305.3) (302.1)
Proceeds from short-term investments 249.3 243.8
Dispositions - 67.2
Acquisitions (773.6) -
Net Cash Used in Investing Activities (2,503.6) (1,620.6)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 697.4 (115.6)
Issuance of other short-term borrowings 35.5 11.0
Repayment of other short-term borrowings (12.5) (126.6)
Issuance of long-term debt 193.8 1,985.5
Repayment of long-term debt (411.4) (187.7)
Early extinguishment of debt and related
call premiums - (1,563.2)
Issuance of common shares 32.3 4.0
Purchase of treasury shares (204.8) (191.1)
Issuance of treasury shares 15.4 72.5
Dividends paid (625.8) (601.4)
Net Cash Used in Financing Activities (280.1) (712.6)
Net decrease in cash and cash equivalents (187.4) (65.6)
Cash and cash equivalents beginning of year 618.4 505.2
Cash and Cash Equivalents End of Period $ 431.0 $ 439.6
Cash Paid During the Nine Months Ended
September 30 for:
Interest $ 348.9 $ 381.2
Income taxes $ 650.6 $ 397.6
See Notes to Consolidated Financial Statements.
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SOUTHWESTERN BELL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
Guaranteed
Obligations Foreign
Capital in of Employee Currency
Common Excess of Retained Stock Owner- Translation Treasury
Shares Par Value Earnings ship Plans Adjustment Shares
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 300.9 $ 5,834.8 $ 3,634.8 $ (397.3) $ (27.9) $ (68.9)
Net income (loss) - - (1,231.1) - - -
Dividends to shareowners - - (679.0) - - -
Two-for-one stock split 300.9 (300.9) - - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 33.2 - -
Foreign currency translation adjustment - - - - (13.1) -
Issuance of common shares:
Dividend Reinvestment Plan 0.1 3.9 - - - -
Purchase of treasury shares - - - - - (192.5)
Issuance of treasury shares:
Dividend Reinvestment Plan - 3.9 - - - 103.2
Other issuances - (1.4) - - - 44.8
Other - - 5.3 - -
Balance, September 30, 1993 $ 601.9 $ 5,540.3 $ 1,730.0 $ (364.1) $ (41.0) $ (113.4)
Balance, December 31, 1993 $ 602.7 $ 5,577.0 $ 1,891.4 $ (352.9) $ (40.2) $ (109.6)
Net income - - 1,224.0 - - -
Dividends to shareowners - - (712.9) - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 34.9 - -
Foreign currency translation adjustment - - - - (102.0) -
Issuance of common shares:
Dividend Reinvestment Plan 2.6 103.3 - - - -
Other 0.8 29.8 - - - -
Purchase of treasury shares - - - - - (205.0)
Issuance of treasury shares - 4.1 - - - 93.8
Other - - 5.0 - -
Balance, September 30, 1994 $ 606.1 $ 5,714.2 $ 2,407.5 $ (318.0) $ (142.2) $ (220.8)
See Notes to Consolidated Financial Statements.
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* * * *
SELECTED FINANCIAL AND OPERATING DATA
At September 30, or for the nine months then ended: 1994 1993
Return on weighted average shareowners' equity* # . . 20.59% 18.89%
Debt ratio # . . . . . . . . . . . . . . . . . . . . 47.58% 49.42%
Network access lines in service (000) . . . . . . . 13,598 13,157
Access minutes of use (000,000) # . . . . . . . . . 35,859 32,796
Long-distance messages billed (000) . . . . . . . . 773,075 762,376
Cellular customers (000) . . . . . . . . . . . . . . 2,593 1,777
Number of employees . . . . . . . . . . . . . . . 59,350 60,240
* 1993 calculated using Income Before Extraordinary Loss and Cumulative
Effect of Changes in Accounting Principles.
# 1993 amounts have been restated to conform to the current
year's classifications.
SOUTHWESTERN BELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS - The consolidated
financial statements have been prepared by Southwestern Bell
Corporation (SBC) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments (consisting only of normal
recurring accruals and adjustments necessary for adoption of new
accounting standards) necessary to present fairly the results for the
interim periods shown. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the
information presented not misleading. Certain reclassifications have
been made to the 1993 consolidated financial statements to conform
with the 1994 presentation. The results for the interim periods are
not necessarily indicative of results for the full year. The
financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto included
in SBC's 1993 Annual Report.
2. CONSOLIDATION - The consolidated financial statements include the
accounts of SBC and its majority-owned subsidiaries. Southwestern
Bell Telephone Company (Telephone Company) is SBC's largest
subsidiary. All significant intercompany transactions are eliminated
in the consolidation process. Investments in companies in which SBC
owns 20 percent to 50 percent of the voting common stock or otherwise
exercises significant influence over operating and financial policies
of the company are accounted for under the equity method. Earnings
from foreign investments accounted for under the equity method are
included for periods ended within three months of the date of SBC's
Consolidated Statements of Income.
SOUTHWESTERN BELL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
Southwestern Bell Corporation (SBC) reported net income of $480.8, or
$.80 per share, for the third quarter of 1994 and net income of
$1,224.0, or $2.03 per share, for the first nine months of 1994.
Financial results for the third quarter and first nine months of 1994
and 1993 are summarized as follows:
Third Quarter Nine-Month Period
% %
1994 1993 Change 1994 1993 Change
Operating $ 3,000.1 $ 2,795.1 7.3% $ 8,410.9 $ 7,792.2 7.9%
revenues
Operating $ 2,229.7 $ 2,139.8 4.2% $ 6,388.3 $ 6,041.3 5.7%
expenses
Income before
extraordinary
loss and $ 480.8 $ 408.8 17.6% $ 1,224.0 $ 1,049.3 16.6%
accounting
changes
Extraordinary - $ (20.2) - - $ (153.2) -
loss
Accounting - - - - $ (2,127.2) -
changes
Net income $ 480.8 $ 388.6 23.7% $ 1,224.0 $ (1,231.1) -
(loss)
The primary factors contributing to the increase in income before
extraordinary loss and cumulative effect of changes in accounting
principles during the third quarter and first nine months of 1994 were
growth in demand for services and products at Southwestern Bell Mobile
Systems, Inc. (Mobile Systems) and Southwestern Bell Telephone Company
(Telephone Company), and an increase in the equity in net income of
affiliates from SBC's investment in Telefonos de Mexico, S.A. de C.V.
(Telmex). These increases were partially offset by rate reductions at
the Telephone Company. Comparisons are also favorably impacted by the
recording of one-time charges relating to restructuring of operations
at the Telephone Company in the third quarter of 1993.
Results for the third quarter and first nine months of 1993 reflect
extraordinary losses of $20.2 and $153.2, respectively, associated with
refinancing of Telephone Company long-term debt. In addition,
effective January 1, 1993, SBC adopted new financial accounting
standards relating to postretirement benefits, postemployment benefits
and income taxes resulting in a one-time, non-cash charge to 1993
earnings of $2,127.2.
SBC's operating revenues in the third quarter and first nine months of
1994 increased $205.0, or 7.3 percent, and $618.7, or 7.9 percent,
over the third quarter and first nine months of 1993, respectively.
Components of operating revenues for the third quarter and first nine
months of 1994 and 1993 are as follows:
Third Quarter Nine-Month Period
% %
1994 1993 Change 1994 1993 Change
Local service
Landline $ 1,020.0 $ 991.6 2.9% $ 3,012.3 $ 2,905.9 3.7%
Wireless 453.9 333.5 36.1 1,260.9 921.6 36.8
Network access
Interstate 475.4 454.5 4.6 1,391.2 1,331.8 4.5
Intrastate 232.3 233.5 (0.5) 703.7 656.5 7.2
Long-distance 242.4 255.5 (5.1) 695.7 739.1 (5.9)
service
Directory 307.5 286.7 7.3 550.3 507.3 8.5
advertising
Other 268.6 239.8 12.0 796.8 730.0 9.2
Total $ 3,000.1 $ 2,795.1 7.3% $ 8,410.9 $ 7,792.2 7.9%
Landline local service revenues increased in the third quarter
and first nine months of 1994 due primarily to increases in
demand, including 3.4 percent growth in the number of access
lines since September 30, 1993. This increase was partially
offset by the impact of previously ordered rate reductions in
Texas and accruals for rate reductions in Missouri.
Wireless local service revenues increased in the third quarter
and first nine months of 1994 due primarily to a 45.9 percent
increase in cellular customers (43.9 percent increase excluding
acquisitions) offset partially by a decline in average revenue
per customer.
Interstate network access revenues increased in the third quarter
and first nine months of 1994 due primarily to an increase in
demand for access services and growth in end user charges
attributable to an increasing access line base. For the nine-
month period, increases were partially offset by the impact of
higher accruals for revenue sharing under the Federal
Communications Commission (FCC) price cap plan, as well as a
retroactive billing adjustment in the second quarter of 1994 that
decreased interstate revenues while increasing intrastate
revenues.
Intrastate network access revenues were flat in the third quarter
of 1994 compared to 1993 as the impact of previously ordered rate
reductions in Texas and accruals for rate reductions in Missouri
offset increases related to demand and the 1994 partial
replacement of the Texas pool settlement process with a system of
primary toll carrier charges. Under this system, charges paid to
the Telephone Company by other intrastate carriers are recorded
as access revenues, while those paid by the Telephone Company are
recorded as cost of services and products. These amounts are
offsetting and did not materially affect operating income in the
third quarter and first nine months of 1994. Previously, only
the net settlement pool payment or receipt was recorded in
revenue. Intrastate network access revenues for the first nine
months of 1994 were higher, as demand and the Texas primary toll
carrier charges exceeded rate reductions. Year to date revenues
also increased as a result of the retroactive billing adjustment
noted in the preceding paragraph.
Long-distance service revenues decreased in the third quarter and
first nine months of 1994 due to decreases in demand compared to
1993, accruals for rate reductions, primarily in Missouri, and
reclassification of certain revenues to access revenues. Demand
in 1993 was unusually high due to flood-related activity.
Directory advertising revenues increased in the third quarter and
first nine months of 1994 primarily due to recognition in 1994 of
white pages advertising revenues in the month of publication,
conforming to the recognition of other directory advertising
revenues. In 1993, white pages revenues were recorded ratably
throughout the year. Third quarter increases also reflect growth
in yellow pages revenues. Two-thirds of SBC's directory
advertising revenues are recognized in the third and fourth
quarters of the year.
Other operating revenues increased in the third quarter and first
nine months of 1994 due to increased cellular telephone equipment
sales at Mobile Systems, the addition of cable television
revenues resulting from the January 1994 acquisition of two
systems from Hauser Communications, Inc., and increased demand
for the Telephone Company's non-regulated services and products,
including Caller ID equipment. These increases were partially
offset by the absence of revenues associated with Metromedia
Paging Services, Inc., sold in the fourth quarter of 1993.
SBC's operating expenses in the third quarter and first nine months of
1994 increased $89.9, or 4.2 percent, and $347.0, or 5.7 percent, over
the third quarter and first nine months of 1993, respectively.
Components of operating expenses for the third quarter and first nine
months of 1994 and 1993 are as follows:
Third Quarter Nine-Month Period
% %
1994 1993 Change 1994 1993 Change
Cost of
services and $ 959.0 $ 873.5 9.8% $ 2,665.5 $ 2,464.8 8.1%
products
Selling,
general and 764.4 782.1 (2.3) 2,220.0 2,140.3 3.7
administrative
Depreciation
and 506.3 484.2 4.6 1,502.8 1,436.2 4.6
amortization
Total $ 2,229.7 $ 2,139.8 4.2% $ 6,388.3 $ 6,041.3 5.7%
Cost of services and products increased for the third quarter and
first nine months of 1994 due to increased demand for cellular
services and products, increased switching system software
license fees at the Telephone Company, including fees related to
enhanced services, and Texas primary toll carrier access expenses
discussed above. These increases were partially offset by the
absence of expenses associated with paging services sold in the
fourth quarter of 1993, expenses in the third quarter of 1993
related to flood damage in portions of the Telephone Company's
Midwestern service territory and, for the nine-month period,
product costs in residential equipment sales operations sold in
1993.
Selling, general and administrative expenses in 1993 included a
one-time charge for the restructuring of operations at the
Telephone Company. The charge related to costs of severance,
relocation and benefits for 800 management positions eliminated
through October 1993, reducing net income by approximately $35.
Excluding this charge, expenses increased in the third quarter
and first nine months of 1994 due to growth in cellular
operations, higher pension benefit expenses and higher operating
taxes, partially offset by savings associated with 1993 force
reductions and other cost control measures.
Depreciation and amortization increased in the third quarter and
first nine months of 1994 due primarily to a growth in plant
level and changes in plant composition partially offset by the
completion of accelerated regulatory amortization of certain
analog equipment at the Telephone Company.
Interest expense decreased $6.9, or 5.6 percent, and $32.9, or
8.6 percent, in the third quarter and first nine months of 1994,
respectively, due primarily to lower interest rates on Telephone
Company debt refinanced in 1993. For the nine-month period, interest
expense also declined due to the recording of interest expense
associated with the settlement of federal income tax audit issues in
the second quarter of 1993.
Equity in net income of affiliates, which relates primarily to Telmex,
increased $7.4, or 11.3 percent, and $30.9, or 17.2 percent, in the
third quarter and first nine months of 1994, respectively. The
increases were due primarily to access line growth, increases in
customer rates and long distance usage growth, partially offset by
declines in the value of the Mexican peso. Telmex earnings are
recorded by SBC for periods ended within three months of the financial
statement date, are stated in accordance with U.S. generally accepted
accounting principles, are not adjusted for the effects of inflation
and reflect certain other purchase accounting adjustments.
Federal income tax expense increased $48.7, or 30.0 percent, in the
third quarter and $137.8, or 33.8 percent, for the first nine months
of 1994 due primarily to higher income before income taxes.
Comparisons to 1993 are also affected by a one-time net reduction of
expense in the third quarter of 1993 due to adjustment of deferred tax
assets and liabilities to reflect changes in federal and state
corporate income tax rates.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
Regulatory Developments
Missouri - In August 1994, the Telephone Company, the Missouri Public
Service Commission (MPSC) and the Office of Public Counsel (OPC)
reached an agreement that will resolve the Telephone Company's appeal
of the MPSC's December 1993 rate reduction order. The agreement
requires the Telephone Company to implement annual rate reductions of
$69.6 effective October 1, 1994, representing rate reductions of $84.6
in the original December 1993 MPSC order, offset by an increase of $15
to recover a portion of incremental costs associated with
postretirement benefit accruals. In addition, customers will be given
one-time credits totaling $65 for rate reductions, accrued and paid to
the Cole County Circuit Court since the beginning of the year under
the original order.
The agreement extends through December 31, 1998. During this period,
the agreement provides that there will be no proposed rate increases
by the Telephone Company and no sharing of earnings. In addition,
during the period of the agreement the Telephone Company will not be
subject to earnings review. The agreement does not preclude the
Telephone Company from increasing its revenues through the
introduction of new or additional services or features during this
period.
Additionally, the Telephone Company has committed to invest an average
of $275 annually in capital expenditures during the term of the
agreement, of which $35 will be earmarked for advanced
telecommunications technology, including fiber optic infrastructure
development, elimination of party line service, distance learning,
telemedicine applications and centers for interactive video
telecommunications.
Other Business Matters
Regulatory Accounting - SBC 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). Statement No. 71 requires
deferral of certain costs and obligations based on regulatory actions
(regulatory assets and liabilities). In addition, under Statement No.
71, telephone plant is depreciated using rates set by regulators in a
joint federal and state triennial review process. These rates are
usually lower than those established by unregulated companies.
Without a complete historical assessment of the differences between
regulatory and competitive environments, it is not practicable to
estimate what depreciation would have been absent regulation. SBC
will present proposed depreciation rates for 1995 through 1997 to
federal and state regulators in triennial review meetings scheduled
for mid-1995.
Continued application of Statement No. 71 is appropriate only if it is
reasonable to assume that rates can be charged to and collected from
customers which are adequate to recover costs. 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 SBC remains appropriate at this time. However,
due to the rapid pace of change in the telecommunications industry,
SBC must continually assess its position with respect to Statement No.
71. If, as a result of actual and anticipated increases in
competition, technological development, and other changes in the
telecommunications industry, including the manner of determining
rates, SBC determines that it no longer qualifies for the provisions
of Statement No. 71, SBC would be required to eliminate its
regulatory assets and liabilities, and to adjust the carrying amount
of its telephone plant to the extent that it determines that such
amount is not recoverable. Management expects that the resulting
non-cash, extraordinary charge would be material. Because of
uncertainties regarding the timing, extent and potential combination
of circumstances which would cause SBC to discontinue application of
Statement No. 71, the magnitude of this charge cannot be reasonably
estimated at this time.
Acquisitions and dispositions - In October 1994, SBC announced the
formation of a strategic alliance with Compagnie Generale des Eaux
(CGE), a French diversified public company and Vodafone Group PLC., an
international cellular company based in the United Kingdom. Through
this alliance SBC will invest $626 to acquire an effective 10 percent
ownership of Societe Francaise de Radiotelephone (SFR), France's
second national cellular company, and minority ownership positions in
other communications businesses controlled by CGE. In turn, CGE will
invest $247 for an effective 10 percent interest in SBC's Washington,
D.C.-Baltimore wireless operations.
Also in October 1994, SBC completed the sale of an additional 25
percent of its United Kingdom cable television operations to Cox Cable
Communications (Cox). SBC and Cox each own 50 percent and share
management of the cable operations. SBC will account for its
remaining investment using the equity method of accounting.
Name change - In October 1994, Southwestern Bell Corporation announced
it is changing its name to SBC Communications Inc., pending shareowner
approval at the 1995 Annual Meeting of Shareowners. The new name
better reflects SBC's position as a diversified, global communications
company.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1994, as in 1993, SBC's primary source
of funds continued to be cash provided by operating activities. Other
sources of cash used in the 1994 acquisitions of cable television
properties in Washington, D.C., and cellular properties included
proceeds from the issuance of short-term debt and sales of short-term
investments. In addition, portions of the acquisitions were completed
through the issuance of SBC's common shares.
SBC had $431.0 of cash and cash equivalents available at September 30,
1994. SBC has entered into agreements with several banks for lines of
credit totaling $780.0, all of which may be used to support commercial
paper borrowings. These lines had not been utilized as of September
30, 1994. Commercial paper borrowings as of September 30, 1994
totaled $1,610.9.
SOUTHWESTERN BELL CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed
Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month
period ended September 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Southwestern Bell Corporation
November 8, 1994 /s/ Donald E. Kiernan
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
DOLLARS IN MILLIONS
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and
Cumulative Effect of Changes in
Accounting Principles* $1,685.7 $1,402.8 $1,882.9 $1,701.2 $1,557.0 $1,541.4 $1,479.5
Add: Interest Expense 349.6 382.5 496.2 530.0 577.7 529.7 543.8
1/3 Rental Expense 30.4 29.7 41.0 45.1 37.5 43.4 42.5
Adjusted Earnings $2,065.7 $1,815.0 $2,420.1 $2,276.3 $2,172.2 $2,114.5 $2,065.8
Total Interest Charges $ 349.6 $ 382.5 $ 496.2 $ 530.0 $ 577.7 $ 529.7 $ 543.8
1/3 Rental Expense 30.4 29.7 41.0 45.1 37.5 43.4 42.5
Adjusted Fixed Charges $ 380.0 $ 412.2 $ 537.2 $ 575.1 $ 615.2 $ 573.1 $ 586.3
Ratio of Earnings to Fixed Charges 5.44 4.40 4.51 3.96 3.53 3.69 3.52
*Undistributed earnings on investments accounted for under the equity method have been excluded.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL CORPORATION'S SEPTEMBER 30, 1994 CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 431,000
<SECURITIES> 0<F1>
<RECEIVABLES> 2,261,500
<ALLOWANCES> 124,900
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 3,733,500
<PP&E> 29,366,600
<DEPRECIATION> 11,793,000
<TOTAL-ASSETS> 25,525,000
<CURRENT-LIABILITIES> 5,341,100
<BONDS> 5,365,300
<COMMON> 606,100
0
0
<OTHER-SE> 7,440,700
<TOTAL-LIABILITY-AND-EQUITY> 25,525,000
<SALES> 0<F2>
<TOTAL-REVENUES> 8,410,900
<CGS> 0<F3>
<TOTAL-COSTS> 2,665,500
<OTHER-EXPENSES> 1,502,800
<LOSS-PROVISION> 110,200
<INTEREST-EXPENSE> 349,600
<INCOME-PRETAX> 1,845,500
<INCOME-TAX> 621,500
<INCOME-CONTINUING> 1,224,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,224,000
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.03
<FN>
<F1> THIS AMOUNT IS IMMATERIAL.
<F2> NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL
STATEMENTS PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS
INCLUDED IN THE "TOTAL-REVENUES" TAG.
<F3> COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICES AND PRODUCTS
IN THE FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
