<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------
For The Fiscal Year Ended December 31, 1993
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1414
PACIFIC BELL
A California Corporation I.R.S. Employer Number 94-0745535
140 New Montgomery Street, San Francisco, California 94105
Telephone - Area Code (415) 542-9000
-------------------
Securities registered pursuant to Section 12(b) of the Act:
See attached Schedule A.
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 .
--- ---
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF PACIFIC TELESIS GROUP, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1) (a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION J(2).
<PAGE>
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act*:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
7.800% Debenture due 03/01/07 * New York Stock Exchange
7.250% Debenture due 02/01/08 * New York Stock Exchange
7.625% Debenture due 06/01/09 * New York Stock Exchange
7.250% Note due 07/01/02 * New York Stock Exchange
6.250% Note due 03/01/05 * New York Stock Exchange
7.125% Debenture due 03/15/26 * New York Stock Exchange
7.500% Debenture due 02/01/33 * New York Stock Exchange
6.875% Debenture due 08/15/23 * New York Stock Exchange
6.625% Debenture due 10/15/34 * New York Stock Exchange
* Pacific Bell has other securities outstanding not registered pursuant
to Section 12(b) of the Act.
2
<PAGE>
TABLE OF CONTENTS
PART I
Description
-----------
Item Page
- ---- ----
1. Business ..................................................... 4
2. Properties ................................................... 22
3. Legal Proceedings ............................................ 22
4. Submission of Matters to a Vote of Security Holders (Omitted
pursuant to General Instruction J(2))
PART II
Description
-----------
5. Market for Registrant's Common Equity and Related Stockholder
Matters ...................................................... 23
6. Selected Financial Data (Omitted pursuant to General
Instruction J(2))
7. Management's Discussion and Analysis of Results of Operations. 24
8. Financial Statements and Supplementary Data .................. 43
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 67
PART III
Description
-----------
10. Directors and Executive Officers of Registrant (Omitted
pursuant to General Instruction J(2))
11. Executive Compensation (Omitted pursuant to General
Instruction J(2))
12. Security Ownership of Certain Beneficial Owners and Management
(Omitted pursuant to General Instruction J(2))
13. Certain Relationships and Related Transactions (Omitted
pursuant to General Instruction J(2))
PART IV
Description
-----------
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ..................................................... 68
3
<PAGE>
PART I
Item 1. Business.
GENERAL
Pacific Bell (the "Company") was incorporated in 1906 under the laws of the
State of California and has its principal executive offices at 140 New
Montgomery Street, San Francisco, California 94107 (telephone number (415)
542-9000).
Through December 31, 1983, the Company was a subsidiary of American Telephone
and Telegraph Company ("AT&T"). Effective January 1, 1984, the Company became
a subsidiary of Pacific Telesis Group ("Telesis" or the "Corporation"), one of
the seven regional holding companies (the "RHCs") formed in connection with
the 1984 divestiture by AT&T of its 22 wholly owned operating telephone
companies ("Bell Operating Companies" or "BOCs") pursuant to a consent decree
settling antitrust litigation ("Consent Decree") approved by the United States
District Court for the District of Columbia (the "Court") which has retained
jurisdiction over the interpretation and enforcement of the Consent Decree.
Under the terms of the Consent Decree, all territory served by the BOCs was
divided into geographical areas called "Local Access and Transport Areas"
("LATAs", also referred to as "service areas"). The Consent Decree generally
prohibits BOCs and their affiliates* from providing communications services
that cross service area boundaries; however, the networks of the BOCs
interconnect with carriers that provide such services (commonly referred to as
"interexchange carriers").
The Company and its wholly owned subsidiaries, Pacific Bell Directory and
Pacific Bell Information Services, provide a variety of communications
services in California. These services include: (1) dial tone and usage
services, including local service (both exchange and private line), message
toll services within a service area, Wide Area Toll Service (WATS)/800
services, Centrex service (a central office-based switching service) and
various special and custom calling services; (2) exchange access to
interexchange carriers and information service providers for the origination
and termination of switched and non-switched (private line) voice and data
traffic; (3) billing services for interexchange carriers and information
service providers; (4) various operator services; (5) installation and
maintenance of customer premises wiring; (6) public communications services
(including service for coin telephones); (7) directory publishing; and
(8) selected information services, such as voice mail and electronic mail (See
also "Pacific Bell Information Services," below). Efforts to develop
additional advanced services are described below.
- -------------------
* The terms of the Consent Decree, with certain exceptions, apply generally
to all the BOCs and their affiliates.
4
<PAGE>
LINE OF BUSINESS RESTRICTIONS
The Consent Decree provides that the RHCs shall not engage in certain lines of
business. The principal restrictions initially prohibited the provision of
interexchange telecommunications, information services and telecommunications
equipment. As described below, the information services prohibition was
lifted in 1991. The telecommunications businesses permitted by the Consent
Decree include the provision of exchange telecommunications* and exchange
access services, customer premises equipment ("CPE") and printed directory
advertising. The RHCs are prohibited from manufacturing telecommunications
equipment and CPE. On December 3, 1987, the Court interpreted the
manufacturing restriction to mean that the RHCs are prohibited from designing
and developing telecommunications equipment and CPE as well as from
fabricating them. The Consent Decree provides that the Court may waive the
line of business restrictions (i.e., grant a "Waiver") upon a showing that
there is no substantial possibility that the RHCs could use their monopoly
power to impede competition in the market they seek to enter. The Court has
placed certain conditions on the Waivers it has granted and may do so again on
future Waivers.
In May 1993, the U.S. Court of Appeals for the District of Columbia affirmed
the Court's removal of the ban on the provision of information services by the
Corporation. The removal of this ban in July 1991 allowed the Company to
offer a variety of new information services, subject to regulatory approvals,
such as enhanced voice mail and electronic yellow pages. In November 1993,
the U.S. Supreme Court declined to review the Appeals Court decision.
In November 1993, legislation was introduced in Congress that would simplify
the procedures under which BOCs seek relief from provisions of the Consent
Decree that prohibit the Company from manufacturing telephone equipment or
providing long-distance service. The legislation would set conditions and
establish waiting periods of up to five years before the RHCs could seek
authority to enter all aspects of these businesses. One of the bills would
also impose stringent separate subsidiary requirements on RHC electronic
publishing ventures.
- -------------------
* "Exchange telecommunications" includes toll or long-distance services
within a service area as well as local service.
5
<PAGE>
SPIN-OFF OF THE CORPORATION'S WIRELESS OPERATIONS
In December 1992, Telesis' Board of Directors approved a plan to spin off the
Corporation's wireless operations. Telesis will continue to own the Company
and its directory publishing and information services subsidiaries, Nevada
Bell, and several smaller diversified entities, including real estate assets.
Telesis will spin off AirTouch Communications ("AirTouch"), formerly PacTel
Corporation, and its domestic and international wireless operations as a
separate entity. On March 10, 1994, the Telesis Board gave final approval to
the spin-off of AirTouch. The spin-off will be effected April 1, 1994.
In February 1993, the California Public Utilities Commission ("CPUC")
instituted an investigation of the proposed spin-off of the Corporation's
wireless businesses for the purpose of assessing any effects it might have on
telephone customers of the Company and regulated cellular and paging firms in
California. On November 2, 1993, the CPUC adopted a decision permitting the
spin-off to proceed. The CPUC further ordered a refund by Telesis of
approximately $50 million (including interest) of cellular pre-operational and
development expenses. Further proceedings will determine how the refund will
be disbursed. The CPUC decision was effective immediately.
Two parties to the CPUC investigation filed Applications for Rehearing by the
CPUC of its treatment of the claims for compensation owed to the Company's
customers. The CPUC's Division of Ratepayer Advocates filed a Petition for
Modification of the CPUC's decision. In March 1994 the CPUC denied these
requests. One of these parties further stated that if it were unsuccessful
with the CPUC it would seek review by the California Supreme Court. In the
event the California Supreme Court were to review and reverse the CPUC's
decision, no assurance can be given that the CPUC might not reach a new
decision materially less favorable to Telesis or AirTouch with respect to the
compensation issues. In addition, a substantial period of time could elapse
before final resolution of these issues should a review be granted. The
Company believes that the California Supreme Court will deny a review.
Upon the spin-off of AirTouch, Telesis and AirTouch will have no common
directors, officers or employees. Philip J. Quigley will become Chairman and
Chief Executive Officer of the Corporation and will remain as President and
Chief Executive Officer of the Company. Sam Ginn, currently Chairman and
Chief Executive Officer of the Corporation, will leave Telesis but will
continue as Chairman and Chief Executive Officer of AirTouch.
6
<PAGE>
Pacific Bell Directory
Pacific Bell Directory ("Directory") is a publisher of the Company's SMART
Yellow Pages(R). Directory is the oldest and largest publisher of directory
information products in California and is among the largest Yellow Pages
publishers in the United States. Directory has enhanced the content,
organization and visual appeal of the local information in its directories and
improved other features to make the SMART Yellow Pages even more helpful and
easier to use. Most recently, a "Government Officials" section was added that
contains the names, address, telephone numbers and photographs of elected
officials, along with a map identifying congressional and state representative
boundaries. An audiotext feature called "Local Talk" is planned for
60 markets statewide by the end of 1994. In addition, government, business
and residential listings have been divided into separate sections in the White
Pages for faster accessibility, with colored tabs on the outer edges of the
pages identifying each section. As part of its ongoing small business
advocacy efforts, Directory also produces Small Business Success in
partnership with the U.S. Small Business Administration. Small Business
Success is an annual publication now in its seventh year that addresses
subjects of critical importance to entrepreneurs.
Pacific Bell Information Services
Effective January 1, 1993, the Company transferred its Information Services
Group to Pacific Bell Information Services ("PBIS"). PBIS provides business
and residential voice mail and other selected information services. Current
products include The Message Center for home use, Pacific Bell Voice Mail for
businesses, and Pacific Bell Call Management, a service that routes incoming
business calls and connects computer data bases to answer routine customer
questions. (See "Information Services Subsidiary" in Item 7 below,
"Management's Discussion and Analysis of Results of Operations" ("MD&A") for
discussion of CPUC proceeding concerning PBIS).
RESEARCH AND DEVELOPMENT
Bell Communications Research, Inc. ("Bellcore") furnishes the BOCs, including
the Company, with technical and consulting assistance to support their
provision of exchange telecommunications and exchange access services. Each
of the other six RHCs or their BOCs, including the Company, holds one-seventh
of the voting stock of Bellcore, which serves as a central point of contact
for coordinating the efforts of the RHCs in meeting the national security and
emergency preparedness requirements of the federal government. In addition,
the Company conducts research and development internally. The Company has
spent approximately $25 million, $30 million and $30 million in 1993, 1992 and
1991, respectively, on research and development activities.
7
<PAGE>
FINANCING ACTIVITIES
In 1993, the Company redeemed $2.55 billion and issued $2.65 billion of
long-term debt. As of December 31, 1993, the Company had remaining authority
to issue up to $1.25 billion in long- and intermediate-term debt pursuant to a
CPUC order issued in September 1993. As of December 31, 1993, the Company had
authority to issue up to $650 million in long- and intermediate-term debt
through a shelf registration statement on file with the Securities and
Exchange Commission (the "SEC"). Proceeds from debt issuances in 1993 and
future issuances will be used to refund maturing debt and to refinance other
debt issues. Effective April 23, 1993, AT&T redeemed $300 million in long-
term debt for which the Company was a secondary obligor. This debt was
assumed by AT&T at divestiture. Additional discussion of the Company's
financing activities is in Note F to the Consolidated Financial Statements
below.
The following are bond and commercial paper ratings for the Company:
| Long- and
|Intermediate-Term
Commercial Paper | Debt
- ----------------------------------------------------------|-----------------
|
Pacific | Pacific
Bell | Bell
- ----------------------------------------------------------|-----------------
Moody's Investors Service, Inc. Prime-1 | Aa3
Standard & Poor's Corporation A-1+ | AA-
Duff and Phelps, Inc. Duff 1+ | AA
- -----------------------------------------------------------------------------
No recapitalization of the Company is planned as a result of Telesis' spin-off
of AirTouch. After the Telesis Board announced its decision in December 1992
to spin off AirTouch and its wireless operations, Duff and Phelps, Inc.
("D&P") reaffirmed its rating of the Company's debt. Standard & Poor's
("S&P") affirmed its rating on the commercial paper programs and the Company's
outstanding long-term debt of the Company. S&P also revised its ratings
outlook for the Company's long-term debt from "stable" to "positive."
Additionally, Moody's stated that the Company's debt rating is unlikely to be
affected by the spin-off.
The ratings noted above reflect the views of the rating agencies; they should
be evaluated independently of one another and are not recommendations to buy,
sell or hold the securities of the Company. There is no assurance that such
ratings will continue for any period of time or that they will not be changed
or withdrawn.
8
<PAGE>
PRINCIPAL SERVICES:
Significant components of the Company's operating revenues are depicted in the
chart below:
% of Total Operating Revenues
-----------------------------
Revenues by Major Category 1993 1992
- ---------------------------------------------------------------------------
Local Service
Recurring .............................. 22% 21%
Other Local ............................ 17% 17%
Network Access
Carrier Access Charges ................. 18% 18%
End User & Other ....................... 7% 7%
Toll Service*
Message Toll Service.................... 21% 20%
Other................................... 2% 4%
Other Service Revenues
Directory Advertising .................. 11% 11%
Other .................................. 4% 4%
Uncollectibles (2%) (2%)
------ ------
TOTAL ...................................... 100% 100%
===========================================================================
* Percentages for 1993 are not comparable to prior year's percentages due to
reclassifications in the current presentation.
The percentages of total operating revenues attributable to interstate and
intrastate telephone operations are displayed below:
% of Total Operating Revenues
-----------------------------
1993 1992
- ---------------------------------------------------------------------------
Interstate telephone operations ............ 18% 18%
Intrastate telephone operations ............ 82% 82%
------ ------
TOTAL ...................................... 100% 100%
===========================================================================
As of December 31, 1993 about 33 percent of the network access lines of the
Company were in Los Angeles and vicinity and about 25 percent were in San
Francisco and vicinity. The Company provided approximately 77 percent of the
total access lines in California on December 31, 1993. The Company does not
furnish local service in certain sizeable areas of California which are served
by non-affiliated telephone companies.
MAJOR CUSTOMER
Payments from AT&T for access charges and other services accounted for
11 percent of the Company's operating revenues during 1993. No other customer
accounted for more than 10 percent of the Company's operating revenues in
1993.
9
<PAGE>
STATE REGULATION
As a provider of telecommunications services in California, the Company is
subject to regulation by the CPUC with respect to intrastate rates and
services, the issuance of securities and other matters.
The CPUC adopted a new regulatory framework, which is a form of "price cap" or
"incentive" regulation, for the Company and one other large local exchange
carrier in California in October 1989. The authorized market-based rate of
return under the CPUC's new regulatory framework is 11.5 percent. If the
Company's rate of return exceeds 13 percent, earnings above the 13 percent
benchmark must be shared 50-50 with customers. Earnings above 16.5 percent
must be returned 100 percent to customers. The third phase of the CPUC's
ongoing investigation into alternative regulatory frameworks has addressed
competition for intra-service area toll and related services. The CPUC's
formal authorization of competition into the Company's intra-service area toll
market is expected in 1994. (See "Toll Services Competition" below.)
Under incentive-based regulation, the CPUC requires the Company to submit an
annual price cap filing to determine prices for categories of services for
each new year. Price adjustments reflect the effects of any change in the
Gross National Product Price Index ("GNPPI") less 4.5 percent, the
productivity factor established by the CPUC under the new incentive
regulation. The annual price adjustments also reflect the effects on the
Company's costs of exogenous events beyond its control. In December 1993, the
CPUC approved the Company's annual price cap filing for 1994 in which the
Company had proposed a $105 million rate reduction. This reduction includes a
decrease of $85 million because the 4.5 percent productivity factor of the
price cap formula exceeded the increase in the GNPPI by 1.3 percent. The
filing also included several additional factors which will decrease revenues*
by an additional $20 million.
In 1992, the CPUC began its scheduled review of the current incentive-based
regulatory framework. Among other issues, this review has examined elements
of the price cap formula, including the productivity factor and the benchmark
rate of return on investment adopted in the 1989 New Regulatory Framework
("NRF") order. The Company proposed no significant changes to the new
framework because its experience to date suggests that it is working as
intended.
- ----------------
* Unless otherwise indicated, revenue changes from CPUC price cap orders are
estimated on an annual basis and may be more or less than the amount
ordered, due to later changes in volumes of business.
10
<PAGE>
In March 1994, a CPUC Administrative Law Judge issued a proposed decision in
the NRF review. The proposed decision would eliminate an element of the
regulatory framework which requires equal sharing with customers of earnings
exceeding a benchmark rate of return. Earnings above a rate of return of
16.5 percent would continue to be returned to customers. The proposed
decision also recommends increasing the productivity factor of the price cap
formula from 4.5 percent to 6.0 percent for the period 1994 through 1996. If
adopted by the CPUC, the change in the productivity factor would reduce
annualized revenues by approximately $100 million each year through 1996. The
Company plans to file comments objecting to the proposed increase in the
productivity factor. The Company is unable to predict the final outcome of
these proceedings or the effective date of any rate reductions.
In August 1993, the CPUC issued a proposal to allow competition in the
provision of intrastate switched transport services. The CPUC proposes to
allow competitors to locate transmission facilities in the Company's central
offices; adopt a new transport rate structure that includes pricing
flexibility for dedicated traffic; and authorize competition for switched
transport services within the state. Revenues from intrastate switched
transport services represent approximately four percent of the Company's total
revenues. The Company is unable to predict the outcome of this proceeding.
In April 1993, the CPUC initiated an investigation to establish a framework to
govern open network access; i.e., access to so-called "bottleneck" services.
The CPUC proposes to adopt specific requirements for the unbundling and
nondiscriminatory provision of functions underlying services provided by
dominant telecommunications providers. Functions considered bottleneck and
subject to open access for competitive telecommunications providers include
all transport, switching, call processing and call management. In comments
filed in February 1994, the Company urged the CPUC to recognize that
widespread competition exists throughout the telecommunications industry and
asked the CPUC to consider rules for local competition immediately.
The Company's proposal calls for the separation of the loop (the telephone
line between a customer's location and the telephone company's central office)
from the switch (the central office equipment that selects the paths to be
used for transmission of information.) The Company has filed an application
for authority to conduct tests and trials with a variety of industry
participants to test the feasibility of unbundling the loop from the switch
and of various points of interconnection. The trials would allow competitors
to connect to the Company's network to carry calls. Eventually, customers
would be able to decide whether they want the Company to provide all of their
telecommunications services, including local service, or if they want to
subscribe to another provider for dialtone and other services. The Company
also believes it should be given the opportunity to compete in other markets,
such as long-distance, cable television programming and manufacturing. The
Company's entry into these markets would benefit consumers by providing them
alternatives to existing sources of products and services. The Company is
unable to predict the outcome of this proceeding.
In December 1993, the CPUC released a report to the Governor proposing
streamlined regulation of telecommunications companies. The report states
that the benefits of deregulation and fostering advanced telecommunications in
California would be substantial. It predicts that expanded use of
telecommunications will create new products, services and job opportunities,
and could increase the productivity of the state's businesses.
11
<PAGE>
The CPUC proposes that within the next year California should: streamline
regulation where markets are workably competitive; continue the CPUC's focus
on consumer protection in all markets; develop policies and partnerships that
encourage consumer demand and the increased use of advanced telecommunications
networks; and, establish a grant program to enhance development and use of
advanced telecommunications in schools and libraries. The report recommends
that disincentives to investments (such as the current cap on earnings and
sharing mechanisms) be removed, that restrictions on the Company's ability to
provide certain services be removed and that interconnection and
interoperability among competing networks be required to expand customer
choice.
Additionally, the CPUC proposed that within three years California open all
markets to all competitors, thereby making the state an "open competition
zone." It would also restructure universal service funding, and gradually
redefine the concept of basic service to ensure that all residents benefit
from advanced telecommunications technologies. In addition, it would make
digital access to networks available as a prelude to making switched video and
mobile services available throughout the state by the end of the decade.
By opening markets to competition, the policies proposed by the CPUC would
increase demand for and stimulate the private development of new types of
telecommunications and video services, bringing innovative new products into
businesses, homes, and communities. Various elements of these proposals
require consideration by the California Legislature as well as formal review
by the CPUC.
The Company continues to support changes in public policy and regulation that
will allow it to offer the products and services that customers want.
Discussion of other CPUC proceedings, including regulatory and ratemaking
treatment for postretirement benefits in connection with the adoption of
Financial Accounting Standard No. 106, and the limited rehearing of a decision
involving certain erroneous late payment charges, is included in Item 7 below,
MD&A.
FEDERAL REGULATION
The Company is subject to the jurisdiction of the Federal Communications
Commission (the "FCC") with respect to interstate access charges and other
matters. The FCC prescribes a Uniform System of Accounts and interstate
depreciation rates for operating telephone companies. The FCC also prescribes
"separations procedures," which are the principles and standard procedures
used to separate plant investment, expenses, taxes and reserves between those
applicable to interstate services under the jurisdiction of the FCC, and
intrastate services under the jurisdiction of state regulatory authorities.
The Company is also required to file tariffs with the FCC for the services it
provides. In addition, the FCC establishes procedures for allocating costs
and revenues between regulated and unregulated activities.
12
<PAGE>
Beginning in 1991, the FCC adopted a price cap system of incentive-based
regulation for local exchange carriers. The Company's access rates were
retargeted to a new 11.25 percent rate of return on rate base assets. The
FCC's price cap system provides a formula for adjusting rates annually for
changes in the GNPPI, less a productivity factor, and changes in certain costs
that are triggered by administrative, legislative or judicial action beyond
the control of the local exchange carriers.
The FCC's price cap plan allows the Company to choose between two productivity
offset factors of 3.3 or 4.3 percent on an annual basis. This choice affects
both the sharing threshold and the threshold above which all earnings must be
returned to customers. In its third annual access filing, the Company again
chose the productivity factor of 3.3 percent, which the FCC approved in June
1993. This choice sets the benchmark rate of return for sharing of earnings
at 12.25 percent. If earnings for 1993 are determined to exceed this
threshold, the Company must share the excess earnings with customers.
Earnings above 16.25 percent must be returned entirely to customers. New
annual access rates became effective July 1, 1993. The Company's access rates
were decreased by $17 million for the 12 months July 1993 through June 1994.
The reductions reflect the net effects of inflation, productivity gains and
other required cost adjustments.
In February 1994, the FCC issued a notice of proposed rulemaking to review its
"price cap" alternative regulatory framework. Parties, including the Company,
will file comments with the FCC in April 1994. The FCC is looking for
comments on three main sets of issues: (1) refining the goals of price caps to
better meet the public interest and the purposes of the Communications Act;
(2) whether to revise the current plan (which became effective January 1,
1991) to help it better meet the FCC's goals, or to adjust the plan to changes
in circumstances; and (3) possible transition from the baseline price cap plan
toward reduced or streamlined regulation of services by local exchange
carriers ("LECs") as competition grows.
The FCC released a Notice of Inquiry in December 1991 "to open public debate
on the interrelationship of Open Network Architecture with emerging network
design" and to gather information on future network capabilities. The FCC
stated that its goal is to encourage development of future local exchange
networks that are as open, responsive and procompetitive as possible,
consistent with the FCC's other public interest goals. The Company filed
comments on March 3, 1993, stating that market forces must drive network
evolution. In August 1993, the FCC issued a notice of proposed rulemaking to
require Tier I local telephone companies implementing intelligent networks to
offer third party mediated access to their networks. In comments filed with
the FCC, the Company asserted that access to intelligent networks should not
be mandated because market forces are sufficient to bring about open access.
Effective in June 1993, the FCC ordered expanded network interconnection for
interstate special access services. Special access services are used
primarily by large businesses to connect to their branch offices or to
interexchange carriers. The decision requires large LECs, including the
Company, to offer expanded interconnection to customers, including other
access providers. The decision permits these customers to locate their
transmission facilities in the LECs' central offices.
13
<PAGE>
The FCC granted additional, but limited, pricing flexibility to the LECs to
respond to the increased competition that will result. Along with other LECs,
the Company has filed a petition for review of this FCC decision with the U.S.
Court of Appeals for the D.C. Circuit. We are unable to predict the outcome
of this appeal. The Company currently has orders from Competitive Access
Providers to locate facilities in more than 20 of its central offices, with
more requests expected to follow. Interstate special access revenues subject
to increased competition represent less than three percent of the Company's
total revenues.
Effective in February 1994, the FCC ordered LECs, including the Company, to
provide all interested customers, including competitors, with expanded
interconnection for interstate switched transport services. The LECs must
allow interconnectors to physically locate their transmission facilities in
the LECs' central offices, and certain other LEC locations, in order to
terminate their own switched transport facilities. Along with other LECs, the
Company has filed a petition for review of this FCC decision with the U.S.
Court of Appeals for the D.C. Circuit. The Court has held this case in
abeyance pending the Court's decision in the appeal of the FCC's special
access collocation order. Switched transport services help connect a business
or residential customer with an interexchange carrier. One of the FCC's goals
is to promote increased competition for these services. The FCC also granted
additional, but limited, pricing flexibility for these services so that the
LECs can better respond to the competition that will result. Revenues from
interstate switched transport services represent approximately three percent
of the Company's total revenues. Rates reflecting the new rules became
effective in early 1994.
To facilitate expanded interconnection for switched transport services, the
FCC ordered a new interim rate structure effective December 1993. Under the
new structure, interexchange carriers pay different rates based on volume,
distance and other factors. The FCC intends these interim rates to be revenue
neutral. The Company and others have petitioned the FCC for reconsideration
of this decision, contending that the interim rate structure will cause
revenue losses. The Company is unable to predict the outcome of this
proceeding.
In August 1992, the FCC modified its rules to permit LECs, including the
Company, to provide a tariffed basic platform ("video dialtone") that will
deliver video programming developed by others on a nondiscriminatory basis.
(See "Video Services," below, for a discussion of the Company's four
applications to provide video dialtone services.) The FCC's order has been
appealed but the appeals are stayed pending the FCC's reconsideration
decision. The FCC also recommended that Congress repeal the statutory cross-
ownership restriction imposed on cable and telephone companies. Until
Congress acts, additional services authorized by the FCC rules include video
gateways, interactive enhanced services, video transport, video customer
premises equipment, and billing and collection.
In July 1993, five of the RHCs, including the Corporation, filed a petition
with the FCC asking for new rules governing the provision of long-distance
services. The RHCs are currently prohibited from providing long-distance
services by the terms of the Consent Decree. Even with a favorable ruling
from the FCC, the RHCs must still obtain relief from the Consent Decree from
Congress, or the courts, before providing long-distance services.
14
<PAGE>
During 1993, the Company joined other members of the United States Telephone
Association ("USTA") in a petition to the FCC to establish a rulemaking for
the purpose of reforming regulation of interstate access services. USTA urges
the FCC to address several major matters needing reform including existing
subsidy funding and recovery mechanisms, the need for greater pricing
flexibility as competition increases and the need to revise current price cap
rules.
NEW TECHNOLOGY AND ADVANCED SERVICES
The Company continues to modernize and expand its telephone networks to meet
customer demands for faster and more reliable services as well as demands for
new products and services. New technologies being deployed include optical
fiber, digital switches and Signaling System 7 ("SS-7"). Digital switches and
optical fiber, a technology using thin filaments of glass or other transparent
materials to transmit coded light pulses, greatly increase the capacity and
reliability of transmitted data while reducing maintenance costs. SS-7
permits faster call setup and new custom calling features. Investments in key
technologies are summarized in Item 7 below, MD&A.
SS-7 has made it possible for the Company to offer many new custom calling
features, subject to regulatory approvals. New custom calling features
include call return, priority ringing, call trace and other Custom Local Area
Signaling Services ("CLASS"). The Company began offering priority ringing,
repeat dialing and select call forwarding services in selected areas in 1992.
The Company introduced call trace, call screen and call return services in
1993. Over half a million customers subscribed to these new services in 1993.
The Company will introduce additional features and expand the availability of
the "CLASS" Services in 1994. However, as a result of a CPUC decision in
November 1992, the Company has decided not to offer caller identification
("Caller ID"). The stringent number blocking requirements placed on the
service by the CPUC prevent the Company from offering customers a viable
service at a reasonable price. The Company continues to work with the CPUC in
this area, with the goal of providing California customers the benefits of
Caller ID service. In March 1994, the FCC adopted free per call blocking as
the national standard for the offering of Caller ID on interstate calls,
effective April, 1995.
The Company, either directly or through its subsidiary, Pacific Bell
Information Services, also offers voice mail, electronic messaging and
interactive voice response services. (See "Pacific Bell Information
Services," above.) Other enhanced services may be offered in the future. The
Company does not expect revenues from enhanced services to have a material
effect on reported earnings in 1994 but the new services are expected to
increase the use of the Company's network.
15
<PAGE>
In November 1993, the Company announced a capital investment plan totaling
$16 billion over the next seven years to upgrade its core network
infrastructure and to begin building California's "communications
superhighway." This will be an integrated telecommunications, information and
entertainment network providing advanced voice, data and video services.
Using a combination of fiber optics and coaxial cable, the Company expects to
provide broadband services to more than 1.5 million homes by the end of 1996
and more than 5.0 million homes by the end of the decade. As part of its
current plan, the Company has made purchase commitments totaling nearly $600
million in accordance with its previously announced $1 billion program for
deploying an all digital switching platform with ISDN (Integrated Services
Digital Network) and SS-7 capabilities. The advanced network will make
possible capital and operational cost savings, service quality improvements
and new revenues from the array of new service possibilities. The offering of
any new advanced services will depend upon their economic and technological
feasibility. Construction of the portions of the network that are not video-
specific will begin early in the second quarter of 1994. (See "Video
Services," below.) The network should be capable of offering fully
interactive digital telephone services by the end of 1996.
In order to offer the new products and services customers want, the Company
has been making substantial investments to improve its telephone network.
During 1993, the Company invested $1.8 billion in its network.
Capital expenditures in 1994 for the Company are forecast to be $1.8 billion
including $1,111 million for projects designed to generate revenues and $580
million for projects designed to reduce costs. Capital expenditures under the
Company's seven year investment plan are not expected to increase until 1996
due to the timing of capital expenditures associated with the construction of
the broadband network.
CHANGING INDUSTRY ENVIRONMENT
The new information services industry is being shaped by advances in digital
and fiber-optic technologies that will make possible the provision of
interactive broadband services by the Company as well as others. Although the
convergence of the telecommunications, computer and video industries will
bring further competition, it also should mean unprecedented reasons to enter
new businesses from which we have been barred historically. The Clinton
administration has indicated it will support legislation to remove many of the
legal restrictions that have prevented telephone companies from offering video
services. The administration has also indicated it will support the removal
of restrictions which prevent the RHCs from providing long-distance services.
Similar proposals have been made by the CPUC to the Governor of California.
The public policy initiatives discussed below will determine the terms and
conditions under which the Company may offer new services in this dynamic
marketplace.
Video Services
As described above, the FCC currently permits LECs, including the Company, to
provide a tariffed basic platform that will deliver video programming
developed by others ("video dialtone") and to provide certain other services
to customers of this basic platform. In December 1993, the Company filed an
application with the FCC seeking authority to offer video dialtone services in
specific locations in four of its service areas: the San Francisco Bay Area;
16
<PAGE>
Los Angeles; San Diego; and Orange County. The advanced integrated broadband
telecommunications network which the Company plans to build over the next
seven years will be capable of delivering an array of services including
traditional voice, data and video services. Once FCC approval is obtained,
the Company will deploy the video exclusive components of the advanced
network.
In addition to providing advanced telecommunications services, the new network
will also serve as a platform for other information providers, and will offer
customers an alternative to existing cable television providers. The
integrated network is also expected to spur the development of new interactive
consumer services in education, entertainment, government and health care.
In November 1993, the Corporation sued to overturn the 1984 Cable Act
provision barring telephone companies from providing video programming in
their own service areas. The Cable Act bars telephone companies from having
more than a de minimis ownership stake in video programming services, although
it permits them to carry other companies' programs. The Company believes that
video programming is a form of speech protected by the First Amendment of the
United States Constitution. If the suit is successful, the Corporation plans
to begin providing programming in California as soon as Pacific Bell's video
dialtone network is deployed.
In November 1993, legislation was introduced in Congress that would permit
LECs, including the Company, to provide video programming to subscribers in
their own service areas, subject to separate subsidiary requirements and other
safeguards. The legislation would also permit competition in the provision of
local telephone service and allow access to LEC facilities by competitors.
In January 1994, Pacific Telesis Video Services, a newly created Pacific
Telesis subsidiary, announced an advanced interactive television services
trial with AT&T that will test consumer acceptance of sophisticated services
such as multi-player games, interactive home shopping and educational
programs, movies-on-demand, and time-shifted television programs. PTVS will
purchase transport from the Company when video dialtone tariffs are approved.
Electronic Publishing Services
In November 1993, legislation was introduced in Congress that would simplify
the procedures under which BOCs may seek relief from provisions of the Consent
Decree. However, the bill would also impose stringent separate subsidiary
requirements on RHC electronic publishing ventures. In November 1993, the
Company filed an application with the CPUC stating its intent to enter the
electronic publishing business, either by itself or through an affiliate.
Personal Communications Services
In October 1993, the FCC issued an order allocating radio spectrum and
setting forth licensing requirements to provide PCS. PCS relies on a network
of transceivers that may be placed throughout a neighborhood, business complex
or community to provide customers with mobile voice and data communications.
The FCC established two different sizes of service areas nationwide for PCS:
47 large areas referred to as Major Trading Areas ("MTAs") and 487 smaller
areas. The MTA licenses are for 30 megahertz of spectrum. In any given area,
there will be as many as seven licenses, including two MTA licenses. Most of
the licenses will be awarded by competitive bidding in auctions expected in
17
<PAGE>
late 1994 or early 1995. The Corporation plans to aggressively pursue PCS
licenses at these auctions and is well-placed to be part of the expected
multi-billion dollar market for PCS. (See discussion of the FCC's award of
pioneer preferences for PCS in Item 7 below, MD&A.)
A wholly owned subsidiary of Telesis, Telesis Technologies Laboratory, Inc.
("TTL"), has been conducting PCS experiments and investigating various
technological issues under an experimental license granted by the FCC. With a
spin-off of AirTouch, Telesis will be eligible to bid on PCS licenses in the
service areas of the Company.
Some of the assets that have been engaged in PCS research and development work
were transferred to AirTouch in late 1993 in accordance with the terms of the
Separation Agreement between Telesis and AirTouch. The Company will form a
new subsidiary to receive the remaining assets of TTL that have been engaged
in PCS research and development work. It will provide PCS services if Telesis
wins a license at auction.
COMPETITION
Regulatory, legislative and judicial actions since the Consent Decree, as well
as advances in technology, have expanded the types of available communications
services and products and the number of companies offering such services.
Various forms of competition are growing steadily and are already having a
significant effect on the Company's earnings. An increasing amount of this
competition is from large companies with substantial capital, technological
and marketing resources. There is also increased competition among existing
and new common carriers, including subsidiaries of the RHCs and AT&T, for the
provision of voice and data communications services.
Toll Services Competition
In 1993, the CPUC continued Phase III of its ongoing investigation into
alternative regulatory frameworks (See "State Regulation" above). In
Phase III, the CPUC is considering how to lift its current ban on intra-
service area competition for toll and toll-related services and how to
rebalance the Company's rates.
In September 1993, the CPUC announced a decision providing that, beginning in
1994, long-distance and other telecommunications companies would be allowed to
compete with the Company and other local telephone companies in providing toll
service, among other services. The decision would have also lowered local
exchange company toll and switched access rates, while increasing basic rates,
bringing each closer to cost. Other rates would have also changed. Overall,
the CPUC's order was intended to be revenue neutral; that is, the effect of
rate decreases would be offset by the effect of rate increases.
In October 1993, the CPUC rescinded its September decision after questions
were raised about its decision-making process. The CPUC has requested
additional comments on its original decision. The Company expects a final
decision in 1994, but is unable to predict the revenue impacts of the decision
and the increased competition that will follow. In a future proceeding, the
CPUC intends to address whether to require LECs to provide a way for customers
to presubscribe to their carrier of choice for intra-service area toll
services.
18
<PAGE>
In 1993, the Company experienced a decline in revenues from services subject
to competition, while revenues from other services continued to grow. The
total impact of competition on revenues, however, cannot be quantified
separately from the effects of the recession in California. (See "California
Economy" in Item 7 below, MD&A.)
Interstate Special Access Competition
Expanded interconnection for interstate special access services became
effective on June 16, 1993. Special access services are used primarily by
large businesses to connect to their branch offices or to connect directly to
interexchange carriers. Expanded interconnection allows customers, including
other access providers, to collocate their transmission facilities in an LEC
central office. This allows interexchange carriers ("IECs") to choose among
competing providers for transport into the LECs' central offices. (See
"Federal Regulation" above.)
Switched Transport Competition
Effective February 15, 1994, expanded interconnection became available for the
transport portion of interstate switched access services under similar price,
terms and conditions as for special access services. Switched access services
link IECs with most residential and business customers.
In recognition of the local transport competition which exists today and the
increased competition that will result from expanded interconnection, the FCC
has approved limited rate deaveraging by zones of central offices and volume
and term discounts for LEC access transport services, once certain conditions
are met.
In August 1993, the CPUC also issued a proposal to allow competition in the
provision of intrastate switched transport services. The CPUC proposes to
allow competitors to locate transmission facilities in the Company's central
offices; adopt a new transport rate structure that includes pricing
flexibility for dedicated traffic; and authorize competition for switched
transport services within the state. (See "State Regulation" and "Federal
Regulation" above.)
Open Network Access/Local Competition
Early in 1993, the CPUC initiated a rulemaking proceeding and set forth a
number of proposed policies, rules and issues for comment on ways to establish
a receptive environment for competitive providers of telecommunications
services. The rulemaking focuses on one approach: Requiring local exchange
carriers to unbundle "bottleneck" elements of their network and make those
elements available to unaffiliated providers on an open and non-discriminatory
basis.
The Company's response to this rulemaking urges the CPUC to examine the full
set of issues that result from a competitive local exchange market. Among
such issues are: the need to establish a new universal service mechanism that
spreads the subsidy burden to all telecommunications providers, to reform
pricing rules to be consistent with increasing competition, to remove entry
barriers including current in-state long distance restrictions on the Company,
to remove investment disincentives such as sharing and to establish standards
for interconnection, interoperability and unbundling of essential facilities
19
<PAGE>
that apply to all competing networks and not just those of the LECs. (See
"State Regulation" above.)
Bypass
Artificially high prices for toll and access services create an economic
incentive for large business users (and IECs) to use alternative
communications systems capable of originating and/or terminating calls and
thus bypass the local exchange network. This bypass reduces the revenues that
the Company collects from toll and access services to support the total costs
of the local exchange network and increases the amounts the Company has to
recover from other services, notably basic exchange services. The Company is
unable to determine precisely to what extent bypass has occurred and may
continue to occur in the future. (See preceding sections, from "Toll Services
Competition" through "Open Network Access/Local Competition" above.)
To reduce the threat of bypass of the local network, the Company has strongly
supported the use of cost-based pricing policies before both its state
regulatory commission and the FCC. (See "State Regulation" and "Federal
Regulation" above.)
Centrex
The Company provides Centrex service to business customers in California.
Centrex is a central office-based switching system for customers who require
sophisticated call transport and management capabilities as part of their
business communication systems. Businesses not using Centrex service
generally use Private Branch Exchange ("PBX") and other systems provided by
other companies. The Company offers Centrex by contract, as approved by the
CPUC, as well as pursuant to tariff. The ability to offer Centrex by contract
gives the Company pricing flexibility as well as the opportunity to tailor the
specific features and conditions of a given transaction. The market for
multi-line business telephone products is very competitive and includes large
well-financed competitors.
Directory Publishing
Other producers of printed directories offer products that compete with
certain Pacific Bell Directory SMART Yellow Pages products. Competitors
include large companies that have significant resources. Competition is not
limited to directory publishers, but includes newspapers, radio, television
and increasingly, direct mail. In addition, new advertising and information
products may compete directly or indirectly with the SMART Yellow Pages. The
Company is unable to predict the extent to which these competitors may affect
future revenues of the Company.
20
<PAGE>
EMPLOYEES
As of December 31, 1993, the Company and its subsidiaries employed 54,026
persons. About 70 percent of the Company's employees are represented by
unions. In September 1992, the unions which represent these employees
ratified labor contracts for a three-year term. The agreements provide for a
12 percent increase in wages, including job upgrades and a 13 percent increase
in pensions over the three-year term. In addition, the contracts include
incentives for early retirement, enhanced employment security, improvements in
work and family life benefits and increases in health and dental care
coverage. In 1993, the Company reduced the number of employees by 1,516.
Looking ahead, the Company has begun a major effort to reengineer its internal
business processes. This effort confronts an increasingly competitive and
complex telecommunications environment by streamlining and consolidating
operations, including business offices, network, installation and collection
centers, as well as other facilities. As a result, the Company has announced
a force reduction program that will result in a net reduction of 10,000
positions from 1994 through 1997. (See Item 7 below, MD&A, for discussion of
related 1993 restructuring charge.) The Company has also deferred salary
increases for all managers, including officers, for an indefinite period of
time pending a review of 1994 business needs.
21
<PAGE>
Item 2. Properties.
The properties of the Company do not lend themselves to description by
character and location of principal units. At December 31, 1993, the
percentage distribution of total telephone plant by major category for the
Company was as follows:
Telephone Property, Plant and Equipment 1993
- -------------------------------------------------------------------------
Land and buildings (occupied principally by central offices) .....
10%
Cable and conduit ................................................ 40%
Central office equipment ......................................... 37%
Other ............................................................ 13%
----
Total ............................................................ 100%
=========================================================================
At December 31, 1993, the Company's central office equipment was utilized to
approximately 90 percent of capacity.
Substantially all of the installations of central office equipment and
administrative offices are in owned buildings on land held in fee. Many
garages, business offices and telephone service centers are in rented
quarters.
Item 3. Legal Proceedings.
Contingent Liabilities Related to Predivestiture Events
The Plan of Reorganization ("Plan") approved by the Court in connection with
the Consent Decree provides for the recognition and payment of liabilities of
the BOCs and AT&T (collectively, the former "Bell System") that are
attributable to predivestiture events (including transactions to implement the
divestiture), which were not certain and hence not recorded in the books of
account until after divestiture. These contingent liabilities relate
principally to litigation and other claims with respect to the Bell System's
rates, taxes, contracts and torts (including business torts, such as alleged
violations of the antitrust laws).
The Plan provides various rules for the sharing of such contingent liabilities
among the BOCs and AT&T which have been followed since divestiture.
AT&T, its subsidiaries and the BOCs, including the Company, may have liability
under the contingent liabilities provisions of the Plan in a number of tax
matters relating to the audit by various taxing authorities of predivestiture
periods and in a number of tort, contract and environmental proceedings
relating to predivestiture Bell System operations. While complete assurance
cannot be given as to the outcome of any litigation, with respect to such tax
matters and tort, contract and environmental proceedings, in the opinion of
the Company, the likelihood is remote that any liability resulting from them
under the contingent liabilities provisions of the Plan would have a material
effect on the reported earnings of the Company.
22
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company has 224,504,982 shares of common stock outstanding without par
value. Pacific Telesis Group, incorporated in 1983 under the laws of the
State of Nevada, holds all the Company's outstanding shares.
Additional information about the Company's common shares and dividends paid
thereon, is in the Consolidated Financial Statements under "Item 8. Financial
Statements and Supplementary Data," incorporated herein by reference.
23
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations.
OVERVIEW
Pacific Bell (the "Company"), a wholly owned subsidiary of Pacific Telesis
Group (the "Corporation"), provides telecommunications services including
local exchange, network access and toll services; directory advertising
through its wholly owned subsidiary, Pacific Bell Directory ("Directory"); and
selected information services through its wholly owned subsidiary, Pacific
Bell Information Services ("PBIS").
PLANNED SPIN-OFF
To meet the challenges facing our industry, the Board of Directors (the
"Board") of the Company's parent, Pacific Telesis Group, approved a plan in
December 1992 to spin off the Corporation's wireless operations. The
Corporation will continue to own the Company and its directory publishing and
information services subsidiaries, Nevada Bell, and several smaller
diversified entities, including real estate assets. The Corporation will spin
off AirTouch Communications ("AirTouch"), formerly PacTel Corporation, and its
domestic and international operations as a separate entity. On March 10,
1994, the Board gave final approval to the spin-off of AirTouch. The spin-off
will be effected April 1, 1994.
In November 1993, the California Public Utilities Commission (the "CPUC")
adopted a decision permitting the spin-off to proceed (see "Pending Regulatory
Issues" on page 40.) In connection with the separation, AirTouch completed an
initial public offering in December 1993 of 14 percent of its common stock,
raising about $1.5 billion. As of the spin-off date, the remaining 86 percent
of AirTouch common stock currently held by the Corporation will be distributed
to the Corporation's shareowners in proportion to their shares in the
Corporation. Each shareowner will receive one share of AirTouch common stock
for each Pacific Telesis Group share held prior to the spin-off. The Internal
Revenue Service (the "IRS") has ruled that the distribution qualifies as a
tax-free transaction to shareowners. The distribution will be accounted for
as a stock dividend by the Corporation.
CHALLENGES
The Company is facing difficult challenges ahead -- increasing competition for
existing services; a changing environment for the provision of new services;
and the stagnant California economy. These challenges, along with our
strategies to remain the customer's choice, are discussed below.
o Competition
-----------
The most significant challenge facing the Company in 1994 is increasing
competition for existing services. The Company welcomes the opportunity to
compete if public policies allow for a level playing field. Although facing
increased competition, the Company expects to be a strong competitor in terms
of price, service, and use of advanced technologies. Revenues from the
services discussed below will be subject to increased competition.
24
<PAGE>
Toll Services Competition
In September 1993, the CPUC announced a decision in Phase III of its
investigation into alternative regulatory frameworks for local exchange
carriers in California. The decision provided that, beginning in 1994, long
distance and other telecommunications companies would be allowed to compete
with the Company and other local telephone companies in providing toll
service, among other services. The decision would have also lowered local
exchange company toll and switched access rates, while increasing basic rates,
bringing each closer to cost. Other rates would have also changed. Overall,
the CPUC's order was intended to be revenue neutral; that is, the effect of
rate decreases would be offset by the effect of rate increases.
In October 1993, the CPUC rescinded its September decision after questions
were raised about its decision-making process. The CPUC has requested
additional comments on its original decision. The Company expects a final
decision in 1994, but is unable to predict the revenue impacts of the decision
and the increased competition that will follow. The CPUC intends to address,
in a future proceeding, whether to require LECs to provide presubscription for
intra-service area toll services.
Interstate Special Access Competition
Effective in June 1993, the Federal Communications Commission (the "FCC")
ordered expanded network interconnection for interstate special access
services. Special access services are used primarily by large businesses to
connect to their branch offices or to interexchange carriers. The decision
requires large local exchange carriers ("LECs"), including the Company, to
offer expanded interconnection to customers, including other access providers.
The decision permits these customers to locate their transmission facilities
in the LEC's central offices. Along with other LECs,the Company has filed a
petition for review of this FCC decision with the U.S. Court of Appeals for
the D.C. Circuit. The Company is unable to predict the outcome of this
appeal. The Company currently has orders from Competitive Access Providers to
locate facilities in at least 20 of its central offices, with more requests
expected to follow. The FCC also granted additional, but limited, pricing
flexibility to the LECs to respond to the increased competition that will
result. Interstate special access revenues subject to increased competition
represent less than three percent of total revenues.
25
<PAGE>
Switched Transport Competition
Effective in February 1994, the FCC ordered LECs, including the Company, to
provide all interested customers, including competitors, with expanded
interconnection for interstate switched transport services. The LECs must
allow interconnectors to physically locate their transmission facilities in
the LECs' central offices, and certain other LEC locations, in order to
terminate their own switched transport facilities. Along with other LECs, the
Company has filed a petition for review of this FCC decision with the U.S.
Court of Appeals for the D.C. Circuit. The Court has held this case in
abeyance pending the Court's decision in the appeal of the FCC's special
access collocation order. Switched transport services help connect a business
or residential customer with an interexchange carrier. One of the FCC's goals
is to promote increased competition for these services. The FCC also granted
additional, but limited, pricing flexibility for these services so that the
LECs can better respond to the competition that will result. Revenues from
interstate switched transport services represent approximately three percent
of total revenues. Rates reflecting the new rules became effective in early
1994.
To facilitate expanded interconnection for switched transport services, the
FCC ordered a new interim rate structure effective December 1993. Under the
new structure, interexchange carriers pay different rates based on volume,
distance and other factors. The FCC intends these interim rates to be revenue
neutral. The Company and others have petitioned the FCC for reconsideration
of this decision, contending that the interim rate structure will cause
revenue losses. The Company is unable to predict the outcome of this
proceeding.
In August 1993, the CPUC issued a proposal to allow competition in the
provision of intrastate switched transport services. The CPUC proposes to
allow competitors to locate transmission facilities in the Company's central
offices; adopt a new transport rate structure that includes pricing
flexibility for dedicated traffic; and authorize competition for switched
transport services within the state. Revenues from intrastate switched
transport services represent approximately four percent of total revenues.
The Company is unable to predict the outcome of this proceeding.
Open Network Access/Local Competition
In April 1993, the CPUC initiated an investigation to establish a framework to
govern open network access; i.e., access to services labeled "bottleneck."
The CPUC proposes to adopt specific requirements for the unbundling and
nondiscriminatory provision of functions underlying services provided by
dominant telecommunications providers. Functions considered bottleneck and
subject to open access for competitive telecommunications providers include
all transport, switching, call processing and call management. In comments
filed in February 1994, the Company urged the CPUC to recognize that
widespread competition exists throughout the telecommunications industry and
asked the CPUC to consider rules for local competition immediately.
26
<PAGE>
The Company's proposal calls for the separation of the loop (the telephone
line between a customer's location and the telephone company's central office)
from the switch (the central office equipment that selects the paths to be
used for transmission of information). Pacific Bell has filed an application
for authority to conduct tests and trials with a variety of industry
participants to test the feasibility of unbundling the loop from the switch
and of various points of interconnection. The trials would allow competitors
to connect to the Company's network to carry calls. Eventually, customers
would be able to decide whether they want the Company to provide all of their
telecommunications services, including local service, or if they want to
subscribe to another provider for dialtone and other services. The Company
also believes it should be given the opportunity to compete in other markets,
such as long-distance, cable television programming and manufacturing. This
could bring great benefits to consumers by offering additional alternatives.
The Company is unable to predict the outcome of this proceeding.
Streamlined Regulation in California
In December 1993, the CPUC released a report to the Governor proposing
streamlined regulation of telecommunications companies. The report states
that the benefits of deregulation and fostering advanced telecommunications in
California would be substantial. It predicts that expanded use of
telecommunications will create new products and services, new job
opportunities and could increase the productivity of the state's businesses.
The CPUC proposes that within the next year California should: streamline
regulation where markets are workably competitive; continue the CPUC's focus
on consumer protection in all markets; develop policies and partnerships that
encourage consumer demand and the increased use of advanced telecommunications
networks; and, establish a grant program to enhance development and use of
advanced telecommunications in schools and libraries. The report recommends
that disincentives to investments (such as the current cap on earnings and
sharing mechanisms) be removed, that restrictions on the Company's ability to
provide certain services be removed and that interconnection and
interoperability among competing networks be required to expand customer
choice.
Additionally, the CPUC proposed that within three years California open all
markets to all competitors, thereby making the state an "open competition
zone." It would also restructure universal service funding, and gradually
redefine the concept of basic service to ensure that all residents benefit
from advanced telecommunications technologies. In addition, it would make
digital access to networks available as a prelude to making switched video and
mobile services available throughout the state by the end of the decade.
By opening markets to competition, the policies proposed by the CPUC would
increase demand for and stimulate the private development of new types of
telecommunications and video services, bringing innovative new products into
businesses, homes, and communities. Various elements of these proposals
require consideration by the California Legislature as well as formal review
by the CPUC.
The Company continues to support changes in public policy and regulation that
will allow it to offer the products and services that our customers want.
27
<PAGE>
o Changing Industry Environment
-----------------------------
Another challenge facing the Company is the accelerating convergence of the
telecommunications, computer and video industries. The new information
services industry is being shaped by advances in digital and fiber-optic
technologies that will make possible the provision of interactive broadband
services by the Company as well as others. Although this convergence will
bring further competition, it also should mean unprecedented reasons to enter
new businesses from which we have been barred historically. The Clinton
administration has indicated it will support legislation to remove many of the
legal restrictions that have prevented telephone companies from offering video
services. The administration has also indicated it will support the removal
of restrictions which prevent the Regional Holding Companies ("RHC"s) from
providing long-distance services. Similar proposals have been made by the
CPUC to the Governor. The public policy initiatives discussed below will
determine the terms and conditions under which the Company may offer new
services in this dynamic marketplace.
Video Services
The FCC currently permits LECs, including the Company, to provide a tariffed
basic platform that will deliver video programming developed by others ("video
dialtone") and to provide certain other services to customers of this basic
platform. Services authorized by the current FCC rules are primarily limited
to video gateways, video customer premises equipment, and billing and
collection. In December 1993, the Company filed an application with the FCC
seeking authority to offer video dialtone services in specific locations in
four of its service areas: the San Francisco Bay Area; Los Angeles; San Diego;
and Orange County. The advanced integrated broadband telecommunications
network which the Company plans to build over the next seven years will be
capable of delivering an array of services including traditional voice, data
and video services. Once FCC approval is obtained, the Company will deploy
the video exclusive components of the advanced network.
In addition to providing advanced telecommunications services, the new network
will also serve as a platform for other information providers, and will offer
customers an alternative to existing cable television providers. The
integrated network is also expected to spur the development of new interactive
consumer services in education, entertainment, government and health care.
In November 1993, the Corporation sued to overturn the 1984 Federal Cable
Act's provision barring telephone companies from providing video programming
in their own service areas. The Cable Act bars telephone companies from
having more than a de minimis ownership stake in video programming services,
although it permits them to carry other companies' programs. The Company
believes that video programming is a form of speech protected by the First
Amendment of the United States Constitution. If the suit is successful, the
Corporation plans to begin providing programming as soon as its video dialtone
network is deployed.
In November 1993, legislation was introduced in Congress that would permit
LECs, including the Company, to provide video programming to subscribers in
their own service areas, subject to separate subsidiary requirements and other
safeguards. The legislation would also permit competition in the provision of
local telephone service and allow access to LEC facilities by competitors.
28
<PAGE>
Information and Long-Distance Services
In July 1991, the U.S. District Court for the District of Columbia removed the
information services prohibition of the 1982 Consent Decree related to the
divestiture of AT&T (the "Consent Decree"). In May 1993, the U.S. Court of
Appeals for the District of Columbia affirmed the removal of this ban. In
November 1993, the U.S. Supreme Court declined to review the Appeals Court
decision. The removal of this ban allows the Company to offer a variety of new
information services, subject to regulatory approvals, such as enhanced voice
mail and electronic yellow pages. In November 1993, the Company filed an
application with the CPUC stating its intent to enter the electronic
publishing business, either by itself or through an affiliate.
In July 1993, five of the RHCs, including the Corporation, filed a petition
with the FCC asking for new rules governing the provision of long-distance
services. The RHCs are currently prohibited from providing long-distance
services by the terms of the Consent Decree. Even with a favorable ruling
from the FCC, the RHCs must still obtain relief from the Consent Decree from
Congress, or the courts, before providing long-distance services. During
1993, the Company joined other members of the United States Telephone
Association ("USTA") in a petition to the FCC to establish a rulemaking for
the purpose of reforming regulation of interstate access services. USTA urges
the FCC to address several major matters needing reform including existing
subsidy funding and recovery mechanisms, the need for greater pricing
flexibility as competition increases and the need to revise current price cap
rules.
In November 1993, legislation was introduced in Congress that would simplify
the procedures under which BOCs may seek relief from provisions of the Consent
Decree. However, the bill would also impose stringent separate subsidiary
requirements on RHC electronic publishing ventures. In November 1993, the
Company filed an application with the CPUC stating its intent to enter the
electronic publishing business, either by itself or through an affiliate.
o California Economy
------------------
In contrast to the national economy, California's economy did not rebound in
1993. At best, the California recession started to ease near year-end as the
unemployment rate dipped. However, with the state's jobless rate two to three
percentage points above the nation's rate for most of the year, job seekers
left or were deterred from coming to California. This caused the state's
population growth rate to slow.
The recession continued to dampen demand for the Company's services. Access
line growth was about 2.2 percent in 1993, somewhat improved from the 2.0
percent increase in 1992. However, in the late 1980s access line growth was
more than 4.0 percent annually. Minutes of use rose 6.1 percent in 1993, down
from a 6.7 percent growth rate in 1992.
29
<PAGE>
In 1994, the California economy is expected to slowly reorient toward growth,
but at a far less rapid pace than in other modern recessions. The
opportunities for economic growth in 1995 and 1996 will continue to be
constrained by the ongoing cutbacks in defense spending, base closings, and
slow state and local government spending. These weaknesses may limit the
scope of any recovery for 1994. However, California's telecommunications
markets remain among the nation's most attractive.
STRATEGIC RESPONSE
As discussed below, the Company is focusing on several key strategies in
response to the challenges it faces. As the industry environment changes and
competition intensifies, the Company is taking the steps necessary to remain
the customer's choice. These strategies include reducing costs by
reengineering core processes, lowering prices for existing competitive
services, and offering new products and services customers want.
o Reduce Costs
------------
To remain the customer's choice, the Company must increase productivity and
reduce costs. In 1993, the Company reduced its workforce by about 1,500
employees. As a result, employees per ten thousand access lines decreased
4.6 percent, while revenues per employee increased 4.4 percent.
Looking ahead, the Company has begun a major effort to reengineer its internal
business processes. This effort confronts an increasingly competitive and
complex telecommunications environment by streamlining and consolidating
operations, including business offices, network, installation, and collection
centers, as well as other facilities. This will result in a more efficient
company through the closure and abandonment of redundant operations. As a
result, the Company has announced a force reduction program that will result
in a net reduction of 10,000 positions from 1994 through 1997. (See page 36
for discussion of related 1993 restructuring charge.)
Reengineering is a bold step by the Company to provide reliable, powerful and
yet competitively-priced telecommunications services to its customers in
California. Based on current estimates, the future expense savings as a
result of reengineering and the associated force reduction program should be
about $170 million in 1994, with savings growing to nearly $1 billion annually
in four years. In addition, effective in December 1993, the Company deferred
management salary increases for an indefinite period pending review of 1994
business needs.
o Lower Prices for Competitive Services
-------------------------------------
The CPUC's formal authorization of competition into the Company's intra-
service area toll market is expected in 1994. To be competitive, the Company
has proposed price reductions in toll services of up to 60 percent. The
proposed revenue decrease would be essentially offset by increased basic
rates, moving both toll and basic rates closer to the actual cost of providing
those services. (See also "Toll Services Competition" discussion on page 25.)
30
<PAGE>
o Offer New Products and Services Customers Want
----------------------------------------------
In order to offer the new products and services customers want, the Company
has been making substantial investments to improve the telephone network.
During 1993, the Company invested $1.8 billion in the network. In addition,
the Company has been conducting personal communications services ("PCS")
experiments since June 1991 with help from an affiliate, Telesis Technologies
Laboratory, Inc.
Advanced Network Services
To meet customer demand for faster and more reliable services as well as
demand for new products and services, the Company has made substantial
investments in advanced digital technologies. The focus of these investments
has been in the key technologies summarized below:
December 31,
----------------
Technology Deployment 1993 1992
- -------------------------------------------------------------------------
Access lines served by digital switches................. 51% 43%
Access lines with SS-7 capability....................... 79% 66%
Access lines with ISDN capability....................... 60% 44%
Miles of installed optical fiber (thousands)............ 364 304
- -------------------------------------------------------------------------
Digital switches and optical fiber, a technology using thin filaments of glass
or other transparent materials to transmit coded light pulses, increase the
capacity and reliability of transmitted data while reducing maintenance costs.
ISDN (Integrated Services Digital Network) allows simultaneous voice, video
and data over a single telephone line. Signaling System 7 ("SS-7") permits
faster call setup and new custom calling features.
In November 1993, the Company announced a capital investment plan totaling $16
billion over the next seven years to upgrade its core network infrastructure
and to begin building California's "communications superhighway." This will
be an integrated telecommunications, information and entertainment network
providing advanced voice, data and video services. Using a combination of
fiber optics and coaxial cable, the Company expects to provide broadband
services to more than 1.5 million homes by the end of 1996 and more than 5.0
million homes by the end of the decade. As part of its current plan, the
Company has made purchase commitments totaling nearly $600 million in
accordance with its previously announced $1 billion program for deploying an
all digital switching platform with ISDN and SS-7 capabilities. The advanced
network will make possible capital and operational cost savings, service
quality improvements and new revenues from the array of new service
possibilities. Construction of the portions of the network that are not
video-specific will begin early in the second quarter of 1994. The network
should be capable of offering fully interactive digital telephone services by
the end of 1996.
31
<PAGE>
In January 1994, an affiliate, Pacific Telesis Video Services, announced an
advanced interactive television services trial that will let participants help
decide what will be on California's communications superhighway. The trial
will test consumer acceptance of sophisticated services such as multi-player
games, interactive home shopping and educational programs, movies-on-demand
and time shifted television programs.
Capital expenditures in 1994 are forecast to be $1.8 billion including $1,111
million for projects designed to generate revenues and $580 million for
projects designed to reduce costs. Capital expenditures under the Company's
seven-year investment plan are not expected to increase until 1996 due to the
timing of capital expenditures associated with the construction of the
broadband network.
Personal Communications Services
In October 1993, the FCC issued an order allocating radio spectrum and
setting forth licensing requirements to provide PCS. PCS relies on a network
of small, low-powered transceivers that may be placed throughout a
neighborhood, business complex or community to provide customers with mobile
voice and data communications. The FCC established two different sizes of
service areas nationwide for PCS: 47 large areas referred to as Major Trading
Areas ("MTAs") and 487 smaller areas. The MTA licenses are for 30 megahertz
of spectrum. In any given area, there will be as many as seven licenses,
including two MTA licenses. Most of the licenses will be awarded by
competitive bidding in auctions expected in late 1994 or early 1995.
The Corporation plans to aggressively pursue PCS licenses at these auctions
and is well placed to be part of the expected multi-billion dollar market for
PCS. A wholly owned subsidiary of the Corporation, Telesis Technologies
Laboratory, Inc. ("TTL"), has been conducting PCS experiments and
investigating various technological issues under an experimental license
granted by the FCC. With a spin-off of AirTouch, the Corporation will be
eligible to bid on PCS licenses in the service areas of the Company.
Some of the assets that have been engaged in PCS research and development work
were transferred to AirTouch in late 1993 in accordance with the terms of the
Separation Agreement between the Corporation and AirTouch. The Company will
form a new subsidiary to receive the remaining assets of TTL that have been
engaged in PCS research and development work. It will provide PCS services if
the Corporation wins a license at auction.
On December 23, 1993, the FCC awarded a "pioneer preference" to another
company for one of the two larger MTA licenses covering the Los Angeles, San
Diego, and Las Vegas market area. That company will receive the license
without charge. This is expected to place the successful bidder for the
remaining MTA license in that area at a significant competitive disadvantage
because of its higher cost structure. Winning bids in major PCS markets are
expected to require large capital expenditures. The Corporation has filed a
letter with the FCC asserting that improper contacts were made with the FCC by
the parties who were awarded pioneer preferences.
32
<PAGE>
RESULTS OF OPERATIONS
Change
----------------
Operating Statistics 1993 1992 Amount Percent
- ---------------------------------------------------------------------------
Return on average common equity .... (2.1%) 15.5% (17.6) -
Operating ratio .................... 93.4% 73.7% 19.7 -
Total employees .................... 54,026 55,542 (1,516) (2.7)
Revenues per employee (thousands) .. $165 $158 $ 7 4.4
Employees per ten thousand
access lines* .................... 35.3 37.0 (1.7) (4.6)
- ---------------------------------------------------------------------------
* Excludes Directory employees
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Net income (loss) ................. $ (130) $1,131 (1,261) (111.5)
- --------------------------------------------------------------------------
The 1993 reported loss of $130 million reflects a restructuring charge
relating to planned force reductions, associated curtailment, and the adoption
of new accounting rules for postemployment benefits. (See "Operating
Expenses" and "Cumulative Effect of Accounting Change" on pages 36 and 39,
respectively.) After tax, the charge for the restructuring reduced earnings
by $576 million. The Company also recorded a $348 million after-tax
curtailment charge to accelerate recognition of a portion of its embedded
postretirement benefits costs that would otherwise have been recorded over the
next 19 years. In addition, the Company restated first quarter 1993 results
to recognize an after-tax charge totaling $148 million due to the adoption of
new accounting rules for postemployment benefits.
1993 earnings were also reduced by several other one-time items totaling
$53 million, and by about $33 million as the net impact of adopting new
accounting rules for postretirement benefits. (See - "Change in Accounting
for Postretirement and Postemployment Costs" on page 51.) 1992 earnings were
increased by several one-time items totaling $25 million which contributed to
the comparative decrease.
Looking ahead, short-term results are expected to continue to be affected by
increasing competition and a continuing recession in California. However,
long-term growth prospects and recovery of the California economy should
provide opportunity for stronger earnings.
33
<PAGE>
Operating Revenues
- ------------------
Change
----------------
Volume Indicators 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Customer switched access lines
in service at December 31
(thousands) .................... 14,617 14,306 311 2.2
Carrier access minutes-of-use
(millions) ..................... 48,657 45,881 2,776 6.1
Interstate ..................... 28,318 26,538 1,780 6.7
Intrastate ..................... 20,339 19,343 996 5.1
Toll messages (millions)* ........ 4,230 4,132 98 2.4
- ---------------------------------------------------------------------------
* Toll messages include Message Telecommunications Services, Optional
Calling Plans, WATS and terminating 800 messages. Toll messages for 1992
have been restated to conform to the current presentation.
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Total operating revenues ........ $8,894 $8,749 $145 1.7
- --------------------------------------------------------------------------
In 1993, total operating revenues increased reflecting a net growth in
customer demand of $207 million and a CPUC order granting partial recovery of
higher costs due to the new accounting rules for postretirement benefits
("PBOPs"). (See - "Other Postretirement Benefits Costs" on page 40.) Also
contributing to the year-over-year increase was a refund in 1992 ordered by
the CPUC related to the treatment of enhanced services development costs (the
"Product Development Refund") which lowered comparative 1992 revenues by $38
million. These increases were partially offset by a $120 million rate
reduction for productivity and other factors from the 1993 CPUC price cap
order, the annual rate adjustment determination under incentive-based
regulation.
In December 1993, the CPUC approved the Company's annual price cap filing for
1994 in which the Company had proposed a $105 million rate reduction. This
reduction includes a decrease of $85 million because the 4.5 percent
productivity factor of the price cap formula exceeded the increase in the
Gross National Product Price Index by 1.3 percent. The filing also included
several additional factors which will decrease revenues by an additional
$20 million.
34
<PAGE>
Factors affecting 1993 revenue growth are summarized below:
1992
CPUC Price Cap
Product
---------------- Total
Develop- Produc- Misc. Change
ment
tivity Rates Customer from
($ millions) Refund PBOPs & Other & Other Demand 1992
- ---------------------------------------------------------------------------
Local service ..... $18 $52 $(58) $17 $66 $ 95
Network access
Interstate ...... (56) 94 38
Intrastate ...... 5 14 (16) (17) 30 16
Toll service ...... 15 42 (46) (16) (42) (47)
Other revenues .... (16) 44 28
Less: Provision for
uncollectibles .. 15 15
-------- ------- ------- -------- -------- -------
Total operating
revenues ....... $38 $108 $(120) $(88) $207 $145
- ---------------------------------------------------------------------------
Local service revenues include basic monthly service fees and usage charges.
Fees and charges for custom calling features, coin phones, installation, and
service connections are also included in this category. The 1993 increase in
local service revenues due to customer demand in the above table reflects a
2.2 percent increase from a year ago in customer access lines. It also
includes $13 million for new custom calling features introduced in 1993.
Network access revenues reflect charges to interexchange carriers and to
business and residential customers for access to the local network. The
increase in interstate network access revenues due to customer demand reported
above reflects a 6.7 percent increase in carrier access minutes-of-use over
1992, as well as increased access lines. The increase in intrastate network
access revenues due to customer demand reflects 5.1 percent growth in minutes-
of-use.
Toll services revenues include charges for long-distance services within
service area boundaries. Competition and the California recession combined to
reduce toll service revenues due to customer demand in 1993.
Other revenues are generated from a variety of services including directory
advertising, information services, and billing and collection. Other revenues
for 1993 includes an increase in information services revenues of $25 million
chiefly due to the success of the Company's business and residential voice
mail products. The increase was partially offset by a $14 million decrease in
directory advertising revenues over the year due to the continuing recession
in California.
35
<PAGE>
Operating Expenses
- ------------------
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Total operating expenses ......... $8,309 $6,447 $1,862 28.9
- --------------------------------------------------------------------------
The increase in total operating expenses for 1993 reflects pre-tax
restructuring and curtailment charges recorded by the Company during the
fourth quarter totaling $1.57 billion.
The Company recorded a pre-tax restructuring charge of $977 million to
recognize the incremental cost of force reductions associated with
restructuring its internal business processes through 1997. This
restructuring is necessary to reduce future costs to respond to increasing
competition. (See "Competition" beginning on page 24) One component of this
charge is for incremental costs of severance benefits associated with
terminating approximately 14,400 employees from 1994 through 1997. A net
reduction of 10,000 positions is expected by the end of 1997. A second
component is for information systems reengineering expenses which will allow
force reduction through the use of information technology to radically
redesign and streamline existing business practices. The consolidation of
facilities will also be necessary to support this downsizing initiative. The
Company expects to relocate 10,600 employees due to the consolidation of
business offices, network, installation and collection centers, as well as
other facilities.
The components of the restructuring charge and the projected costs (cash
outflows) which will be charged to the related reserve are displayed below:
Restructuring 1994 1995 1996 1997 Total
- ---------------------------------------------------------------------------
($ millions)
Severance ..................... $ 120 $241 $174 $115 $ 650
Information systems
reengineering ............... 94 167 97 38 396
Consolidation of facilities ... 12 28 9 2 51
------- ------- ------- ------- -------
Projected costs to be
charged to the reserve....... 226 436 280 155 1,097
1991 restructuring reserve..... (77) - - - (77)
Capitalized to construction ... (8) (16) (12) (7) (43)
------- ------- ------- ------- -------
1993 restructuring charge ..... $141 $420 $268 $148 $ 977
======= ======= ======= ======= =======
Associated force reductions ... 2,700 5,500 3,800 2,400 14,400
- --------------------------------------------------------------------------
Based on current estimates, future expenses will be reduced by about $170
million in 1994 as a result of the restructuring, with expense reductions
expected to grow to nearly $1 billion annually in four years. Actual Cash
outflows for severance and other expenditures required to effect the
restructuring will be substantially offset by cash savings in 1994. These
savings are also expected to grow to nearly $1 billion annually in four years.
36
<PAGE>
In 1991, the Company recorded a $201 million pre-tax restructuring charge
which included $166 million for the cost of force reduction programs through
1994 and $35 million for associated pension expense. After reduction for
incremental force reduction costs in 1993 and 1992, the remaining balance of
this reserve as of December 31, 1993 and 1992 was approximately $77 million
and $101 million, respectively. The 1993 restructuring charge is net of the
$77 million remaining balance in the 1991 restructuring reserve.
In addition, the Company recorded a $590 million pre-tax charge to accelerate
recognition of a portion of the embedded postretirement benefits costs that
would otherwise have been recorded over the next 19 years. Accelerated
recognition of these costs is required under the curtailment provisions of
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits other than Pensions" ("SFAS 106") because the
Company expects to significantly reduce its workforce.
Without the effects of the restructuring and curtailment charges, total
operating expenses would have increased by $295 million compared to 1992.
Higher costs for postretirement benefits under the new accounting rules were
responsible for the largest portion of this increase. Miscellaneous one-time
items accounted for $75 million of the increase and salaries and wages
increased $74 million. Expense increases were partially offset by a decrease
of $51 million in Signaling System 7 ("SS-7") licensing fees because of the
substantial progress made on the upgrade program in 1992. The completion of
the amortization of CPUC equal access costs in 1992 also lowered 1993 expenses
by $23 million.
In January 1994, an earthquake damaged 31 Company buildings in the Los Angeles
area. The Company estimates repair costs may approach $25 million. The
Company is insured for property damage exceeding this amount.
Salary and Wage Expense
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Salary and wage expense .......... $2,169 $2,095 $74 3.5
Employees-Average during year ....
55,038 56,805 (1,767) (3.1)
Employees-End of year ............ 54,026 55,542 (1,516) (2.7)
- --------------------------------------------------------------------------
Salary and wage expense is the largest component of total operating expenses.
Higher compensation rates increased salary and wages by $73 million primarily
due to a nonsalaried wage increase. In September 1992, labor contracts were
reached with unions which represent about 70 percent of the Company's
employees. The agreements provide a 12 percent increase in wages, including
job upgrades, and a 13 percent increase in pensions over the three-year term.
In addition, the contracts include incentives for early retirement, enhanced
employment security, improvements in work and family life benefits, and
increases in health care and dental care coverage. Salaries and wages
increased $38 million due to overtime pay for extended customer service hours.
In December, the Company scaled back these extended hours due to a lack of
customer demand. These increases were partially offset by a $55 million
decrease due to fewer employees.
37
<PAGE>
Depreciation and Amortization
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Depreciation and amortization ..... $1,703 $1,674 $29 1.7
Depreciation as a percent of
average depreciable plant (%) ... 6.9 7.0 (0.1) -
- --------------------------------------------------------------------------
Depreciation expense increased primarily due to an expanded plant base
resulting from accelerated network modernization. The Company's planned
capital expenditures are expected to further increase plant levels causing
higher depreciation expense in future years.
Other Employee-Related Expenses
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Postretirement Benefits ........... $338 $103 $235 228.2
Healthcare and life insurance
benefits of active employees** .. $221 $231 (10) (4.3)
Other benefits** .................. $126 $142 (16) (11.3)
Payroll taxes ..................... $175 $169 6 3.6
Pensions ......................... 0 5 (5) (100.0)
--------------------------------------
Total* ............................ $860 $650 $210 32.3
- ---------------------------------------------------------------------------
* Excludes SFAS 106 curtailment and postemployment benefits accounting change
(See - "Cumulative effect of Accounting Change" on page 39)
** 1992 amounts have been revised to conform to the current presentation.
Other employee-related expense increased primarily due to the adoption of
SFAS 106 effective January 1, 1993. The adoption of SFAS 106 increased
postretirement benefits expense by $173 million.
Prior to 1993, all postretirement benefits were charged to general,
administrative, and other expense. Beginning in 1993, these costs were also
allocated to all line items on the income statement that include salaries and
wages expense. This caused employee benefits in cost of products and services
to increase by $121 million, customer operations and selling expenses to
increase by $148 million and general and administrative expense to decrease by
$90 million.
Income Taxes
- ------------
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Income taxes ...................... $(57) $607 $(664) (109.4)
Effective tax rate (%) ............ 132.4 36.1 96.3 -
- --------------------------------------------------------------------------
38
<PAGE>
Income tax expense decreased $683 million due to lower pre-tax income caused
by restructuring and the 1993 adoption of SFAS 106. Income tax expense also
decreased due to the 1992 adoption of a new income tax accounting standard
which increased comparative expense $10 million in 1992. Partially offsetting
these decreases was an increase of $21 million due to the realization of less
tax benefit in 1993 from the reversal of deferred tax liabilities.
During August 1993, new tax provisions were enacted under the Omnibus Budget
Reconciliation Act of 1993 which included an increase in the corporate tax
rate from 34 to 35 percent retroactive to January 1, 1993. The cumulative
effect of the new tax provisions was recognized in third quarter 1993
increasing tax expense by $15 million. However, this increase was offset by
the tax benefit recognized in the 4th quarter due to restructuring and
curtailment. Overall, the new tax provisions did not affect the Company's tax
expense for the year. The effective tax rate increased due to lower pretax
income caused by the restructuring charge and the postretirement benefits
curtailment. (See also Footnote C - "Income Taxes.")
Interest Expense
- ----------------
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Interest expense ................. $429 $460 $(31) (6.7)
- --------------------------------------------------------------------------
Interest expense decreased $37 million due to lower interest rates on long-
term debt. During 1993, the Company issued $2.65 billion of long-term debt to
refinance higher interest rate issues. This refinancing is expected to save
$36 million annually.
Other Income (Expense)
- ----------------------
Change
----------------
($ millions) 1993 1992 Amount Percent
- --------------------------------------------------------------------------
Other income (expense) ............. $(14) $83 $(97) (116.9)
- --------------------------------------------------------------------------
Other income (expense) is a net expense in 1993 due to decreases in
miscellaneous income and increases in miscellaneous expenses. Income from
this category decreased primarily due to a $44 million after tax gain recorded
in 1992 for interest on a favorable tax settlement. The interstate portion of
costs related to the early retirement of long-term debt increased $13 million
after tax.
Cumulative Effect of Accounting Change
- --------------------------------------
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employer's Accounting for
Postemployment Benefits." SFAS 112 requires a change from cash to accrual
accounting by recording a cumulative catch-up-charge at implementation. A
one-time, noncash charge was recorded against earnings of $148 million, which
is net of a deferred income tax benefit of $103 million. In subsequent years,
the Company expects that periodic expense will not differ materially from
expense under the prior method.
39
<PAGE>
PENDING REGULATORY ISSUES
Spin-off of AirTouch
In February 1993, the CPUC instituted an investigation of the spin-off of the
Corporation's wireless operations for the purpose of assessing any effects it
might have on the telephone customers of the Company. On November 2, 1993,
the CPUC adopted a decision permitting the spin-off to proceed. The CPUC
further ordered a refund by the Corporation of approximately $50 million
(including interest) of cellular pre-operational and development expenses.
Further proceedings will determine how the refund will be disbursed. The CPUC
decision was effective immediately.
Two parties to the CPUC investigation have filed Applications for Rehearing by
the CPUC of its treatment of the claims for compensation owed to the Company's
customers. One of these parties has further stated that if it is unsuccessful
with the CPUC it will seek review by the California Supreme Court. Another
party has filed a Petition for Modification of the CPUC's decision. In March
1994, the CPUC denied these requests. In the event the California Supreme
Court were to review and reverse the CPUC's decision, no assurance can be
given that the CPUC might not reach a new decision materially less favorable
to the Corporation with respect to the compensation issues. In addition, a
substantial period of time could elapse before final resolution of these
issues should a review be granted. The Corporation believes that the
California Supreme Court will deny a review.
Other Postretirement Benefits Costs
In December 1992, the CPUC issued a decision adopting, with modification,
SFAS 106 for regulatory accounting purposes. The CPUC decision also granted
the Company $108 million for partial recovery of 1993 SFAS 106 costs. The
Company is required to file annually for recovery in conjunction with its
price cap filing, and therefore such recovery will vary. The 1994 CPUC price
cap decision grants Pacific Bell $100 million for partial recovery of SFAS 106
costs. Two ratepayer advocacy groups have each challenged certain aspects of
the decision adopting SFAS 106, which could affect rate recovery. The Company
is unable to predict the outcome of these pending challenges.
Universal Lifeline Telephone Service ("ULTS") Trust Audit
In October 1992, the CPUC's Commission Advisory and Compliance Division
released an audit report recommending that the Company return $36 million to
the ULTS trust. This trust reimburses local telephone companies for revenues
lost and expenses incurred as a result of providing subsidized telephone
service to low income Californians. In November 1993, the Company and the
CPUC's Division of Ratepayer Advocates jointly filed a settlement agreement
with the CPUC. Subject to CPUC approval, the Company will return
approximately $8 million to the ULTS trust via installments over one year and
additionally reduce future billings to the trust by about $1 million annually.
The Company recorded this liability in 1993.
40
<PAGE>
Information Services Subsidiary
Effective January 1, 1993, the Company transferred its Information Services
Group to a wholly owned subsidiary, Pacific Bell Information Services
("PBIS"). PBIS provides business and residential voice mail and other
selected information services. In July 1992, the CPUC issued a decision which
would require the Company to reduce rates by the difference between the "going
concern" value of PBIS and its adjusted net book value. In October 1992, the
CPUC denied the Company's Application for Rehearing of this decision but
invited the Company to file a Petition for Modification. The Company filed a
petition in January 1993 based on its belief that the decision results in a
double reduction in rates to customers.
The Company believes that, at a minimum, any reduction in rates should be
further offset by $111 million: $57 million previously granted customers in
the Product Development Refund and $54 million provided by shareowners for
PBIS. Further, any remainder should be prorated according to proportionate
risks borne by shareowners and the Company's customers. The Company is unable
to predict the outcome of this issue.
Late Payment Charge Complaint
In March 1991, a consumer advocacy group filed a complaint with the CPUC
against the Company alleging that erroneous late payment charges were assessed
against some customers. In May 1993, the CPUC ordered the Company to refund
about $35 million in late payment and reconnection charges which resulted from
problems with its payment processing system. The CPUC also imposed penalties
totaling $15 million on the Company for improperly assessing late payment
charges and disconnecting customers between 1986 and February 1991. The
Company believes the decision misinterprets California law. In November 1993,
the CPUC granted the Company a limited rehearing of the decision. The
rehearing will examine the legal basis for the penalties, the statute of
limitations on refunds, and whether unclaimed refunds must escheat to the
state. A resolution of this issue is expected in 1994; however, the Company
is unable to predict the final outcome.
Two shareowner derivative lawsuits were filed in San Francisco Superior Court
in July 1993 against directors and officers in connection with the same
allegations made in the late payment charge complaint filed with the CPUC.
These suits were dismissed in February 1994; however, the cases are subject to
rehearing and possible appeal.
In addition, a consumer class action seeking refunds, with interest, of late
payment charges erroneously collected from the Company's customers was filed
in San Diego Superior Court in February 1992. The Company has argued that the
court lacks jurisdiction while the CPUC is reviewing the same issues. The
court rejected this argument. However, a stay of this action has been ordered
pending the outcome of the CPUC proceedings. The Company is unable to predict
the outcome of this case or whether any damages awarded by the court would be
duplicative of any penalties imposed by the CPUC.
41
<PAGE>
CPUC Regulatory Framework
In 1992, the CPUC began its scheduled review of the current incentive-based
regulatory framework. Among other issues, this review has examined elements
of the price cap formula, including the productivity factor and the rate of
return on investment, adopted in the 1989 New Regulatory Framework ("NRF")
order. The Company proposed no significant changes to the current framework
because it has resulted in lower prices for customers and our experience to
date suggests the framework is working as intended.
In March 1994, a CPUC Administrative Law Judge issued a proposed decision in
the NRF review. The proposed decision would eliminate an element of the NRF
which requires equal sharing with customers of earnings exceeding a benchmark
rate of return. Earnings above a rate of return of 16.5 percent would
continue to be returned to customers. The proposed decision also recommends
increasing the productivity factor of the price cap formula from 4.5 percent
to 6.0 percent for the period 1994 through 1996. If adopted by the CPUC, the
change in the productivity factor would reduce annualized revenues
approximately $100 million each year through 1996. The Company plans to file
comments objecting to the proposed increase in the productivity factor. The
Company is unable to predict the final outcome of these proceedings or the
effective date of any rate reductions.
FCC Regulatory Framework
In 1994, the FCC will review its "Price Cap" alternative regulatory framework.
The FCC is looking for comments on three main sets of issues: (1) refining the
goals of price caps to better meet the public interest and the purposes of the
Communications Act; reduced or streamlined regulation of LEC services as
competition grows; (2) whether to revise the current plan (which became
effective Jan. 1, 1991) to help it better meet the FCC's goals, or to adjust
the plan to changes in circumstances; and (3) possible transition from the
baseline price cap plan toward relaxation of regulatory oversight and rate
regulation as competition develops in the local loop.
ACCOUNTING UNDER REGULATION
The Company currently accounts for the economic effects of regulation under
Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting
for the Effects of Certain Types of Regulation." If it becomes no longer
reasonable to assume the Company will recover its costs through rates charged
to customers, whether resulting from the effects of increased competition or
specific regulatory actions, SFAS 71 would no longer apply. If the Company
were no longer to qualify for the provisions of SFAS 71, the financial effects
would be material.
42
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF MANAGEMENT
The management of Pacific Bell is responsible for preparing the accompanying
financial statements and for their integrity and objectivity. The statements
were prepared in accordance with generally accepted accounting principles
applied on a consistent basis and are not misstated due to material fraud or
error. In instances where exact measurement is not possible, the financial
statements include amounts based on management's best estimates and judgments.
Management also prepared the other information contained in this annual
financial review and is responsible for its accuracy and consistency with the
financial statements.
The Company's financial statements have been audited by Coopers & Lybrand,
independent accountants. Management has made available to Coopers & Lybrand
all the Company's financial records and related data, as well as the minutes
of directors' meetings. Furthermore, management believes that all of its
representations made to Coopers & Lybrand during their audit were valid and
appropriate.
Management has established and maintains a system of internal control that
provides 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 system of internal control provides for appropriate division
of responsibility and is documented by written policies and procedures that
are communicated to employees with significant roles in the financial
reporting process and are updated as necessary. Management continually
monitors the system of internal control for compliance and maintains a strong
internal auditing program that independently assesses the effectiveness of the
internal controls and recommends improvements when necessary. In addition,
as part of their audit of the Company's financial statements, Coopers &
Lybrand have obtained a sufficient understanding of the internal control
structure to determine the nature, timing and extent of audit tests to be
performed. Management has considered the internal auditors' and Coopers &
Lybrand's recommendations concerning the Company's system of internal control
and has taken actions that it believes are cost-effective under the
circumstances to respond appropriately to these recommendations. Management
believes that the Company's system of internal control is adequate to
accomplish the objectives discussed.
Management also recognizes its responsibility to foster a strong ethical
climate that enables the Company to conduct its affairs according to the
highest standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of corporate conduct, which
is publicized throughout the Company. The code of conduct addresses, among
other things: potential conflicts of interests; compliance with all domestic
laws, including those relating to foreign transactions and financial
disclosure; and the confidentiality of proprietary information. The Company
maintains a systematic program to assess compliance with these policies.
43
<PAGE>
Financial Statements and Supplementary Data (continued)
The Audit Committee of the Board of Directors is responsible for overseeing
the Company's financial reporting process on behalf of the Board. In
fulfilling its responsibility, the Committee recommends to the Board, subject
to shareowner ratification, the selection of the Company's independent
accountants. The Committee consists of six members of the Board who are
neither officers nor employees of the Company. It meets regularly with
representatives of management, internal audit and the independent accountants
to review internal accounting controls and accounting, auditing and financial
reporting matters. In 1993, the Committee held five meetings. The Company's
internal auditors and independent accountants periodically meet alone with the
Committee to discuss the matters previously noted and have direct access to it
for private communication at any time.
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowner of Pacific Bell:
We have audited the consolidated financial statements and financial statement
schedules of Pacific Bell (a wholly owned subsidiary of Pacific Telesis Group)
and Subsidiaries (the "Company") as listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
As discussed in Note A to the Consolidated Financial Statements, the Company
adopted new accounting rules for postretirement and postemployment benefits
during 1993.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pacific Bell and
Subsidiaries as of December 31, 1993 and 1992 and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted
accounting principles. In addition, 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 required to be included therein.
/s/ Coopers & Lybrand
San Francisco, California
March 3, 1994
45
<PAGE>
PACIFIC BELL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the year ended
December 31,
----------------------------
(Dollars in millions) 1993 1992 1991
- ---------------------------------------------------------------------------
OPERATING REVENUES:
Local service ............................ $3,411 $3,316 $3,279
Network access
Interstate ............................. 1,572 1,534 1,467
Intrastate ............................. 679 663 773
Toll service ............................. 2,035 2,082 2,159
Other revenues............................ 1,358 1,330 1,312
Less: provision for uncollectibles ....... 161 176 136
------- ------- -------
Total Operating Revenues ................... 8,894 8,749 8,854
------- ------- -------
OPERATING EXPENSES:
Cost of products and services ............ 1,945 1,870 1,916
Depreciation and amortization ............ 1,703 1,674 1,706
Customer operations and selling expense .. 1,796 1,512 1,466
General, administrative and other expense. 1,298 1,391 1,395
Restructuring and curtailment ............ 1,567 - 201
------- ------- -------
Total Operating Expenses ................... 8,309 6,447 6,684
------- ------- -------
Net Operating Revenues ..................... 585 2,302 2,170
------- ------- -------
Operating Taxes:
Income taxes ............................. (57) 607 573
Other taxes .............................. 181 187 205
------- ------- -------
Total Operating Taxes ...................... 124 794 778
------- ------- -------
OPERATING INCOME ........................... 461 1,508 1,392
------- ------- -------
Other Income (Expense) (14) 83 35
------- ------- -------
Income before interest expense and
cumulative effect of change in accounting
principle ................................ 447 1,591 1,427
Interest expense ........................... 429 460 485
------- ------- -------
Income before cumulative effect of change
in accounting principle .................. 18 1,131 942
Cumulative effect of change in accounting
principle ................................ (148) - -
------- ------- -------
NET INCOME (LOSS) .......................... $ (130) $1,131 $ 942
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
46
<PAGE>
PACIFIC BELL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in millions) 1993 1992
- ---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ........................ $ 57 $ 57
Accounts receivable-net of allowances for
uncollectibles of $136 and $127 ................ 1,518 1,447
Prepaid expenses and other current assets ........ 862 836
-------- --------
Total current assets ............................. 2,437 2,340
-------- --------
Property, plant, and equipment ................... 25,660 25,064
Less: accumulated depreciation ................ 9,708 9,276
-------- --------
Property, plant, and equipment - net ............. 15,952 15,788
-------- --------
Deferred charges and other noncurrent assets ..... 989 1,054
-------- --------
TOTAL ASSETS ..................................... $19,378 $19,182
===========================================================================
LIABILITIES AND SHAREOWNER'S EQUITY
Accounts payable:
Trade .......................................... 245 $ 224
Other .......................................... 1,010 874
-------- --------
Total accounts payable ........................... 1,255 1,098
Debt maturing within one year .................... 542 410
Other current liabilities ........................ 1,136 1,017
-------- --------
Total current liabilities ........................ 2,933 2,525
-------- --------
Long-term obligations ............................ 4,753 4,805
-------- --------
Deferred Credits:
Accumulated deferred income taxes .............. 2,280 2,761
Other noncurrent liabilities and deferred
credits ..................................... 3,258 1,800
-------- --------
Total deferred credits ........................... 5,538 4,561
-------- --------
Common shares ($1.00 stated value, 300,000,000
shares authorized, 224,504,982 shares issued
and outstanding) ............................... 225 225
Additional paid-in capital ....................... 5,168 5,168
Reinvested earnings .............................. 761 1,898
-------- --------
Total shareowner's equity ........................ 6,154 7,291
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY ........ $19,378 $19,182
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
47
<PAGE>
PACIFIC BELL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY
For the year ended
December 31,
-----------------------------
(Dollars in millions) 1993 1992 1991
- ---------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year ............. $ 225 $ 225 $ 225
------- ------- -------
Balance at end of year ................... 225 225 225
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year .............
5,168 5,168 4,946
Equity investment by parent .............. - - 222
------- ------- -------
Balance at end of year ...................
5,168 5,168 5,168
------- ------- -------
REINVESTED EARNINGS
Balance at beginning of year ............. 1,898 1,824 1,916
Net Income (Loss) ........................ (130) 1,131 942
Common dividends declared ................ (1,007) (1,057) (1,034)
------- ------- -------
Balance at end of year ................... 761 1,898 1,824
------- ------- -------
TOTAL SHAREOWNER'S EQUITY................... $6,154 $7,291 $7,217
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
48
<PAGE>
PACIFIC BELL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended
December 31,
----------------------------
(Dollars in millions) 1993 1992 1991
- ---------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES
Net Income (loss) ......................... $ (130) $1,131 $ 942
Adjustments to reconcile net income for
items currently not affecting operating
cash flows:
Depreciation and amortization .......... 1,703 1,674 1,706
Restructuring and curtailment........... 1,567 - 201
Deferred income taxes .................. (525) (686) (75)
Unamortized investment tax credits ..... (48) (61) (68)
Allowance for funds used during
construction ......................... (34) (31) (30)
Changes in operating assets and
liabilities:
Accounts receivable ................ (78) 74 (22)
Prepaid expenses and other current
assets ........................... 23 108 (61)
Deferred charges and other
noncurrent assets ................ 76 (6) 12
Accounts payable ................... 128 18 (199)
Other current liabilities .......... (71) 66 (86)
Other noncurrent liabilities and
deferred credits ................. 129 452 121
Other adjustments, net ................. 31 12 17
-------- -------- --------
Cash from operating activities ............... 2,771 2,751 2,458
-------- -------- --------
CASH FROM (USED FOR) INVESTING ACTIVITIES
Additions to property, plant, and
equipment ................................ (1,802) (1,669) (1,601)
Other investing activities, net ............ (11) (3) 4
-------- --------- --------
Cash used for investing activities............ (1,813) (1,672) (1,597)
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
49
<PAGE>
PACIFIC BELL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the year ended
December 31,
----------------------------
(Dollars in millions) 1993 1992 1991
- ---------------------------------------------------------------------------
CASH FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ... $ 2,578 $ 925 $ 425
Retirements of long-term debt .............. (2,669) (972) (517)
Equity infusion from parent ................ - - 222
Dividends paid ............................. (1,007) (1,057) (1,034)
Increase in short-term borrowings, net ..... 133 116 80
Principal payments under capital lease
obligations .............................. (5) (5) -
Other financing activities, net ............ 12 (74) (55)
-------- -------- --------
Cash used for financing activities ......... (958) (1,067) (879)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents .............................. 0 12 (18)
Cash and cash equivalents at January 1 ..... 57 45 63
-------- -------- --------
Cash and cash equivalents at December 31 ... $ 57 $ 57 $ 45
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
50
<PAGE>
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Pacific Bell, (the "Company"), a wholly owned subsidiary of Pacific
Telesis Group, provides telecommunications services including local
exchange, network access and toll services; directory advertising through
its wholly owned subsidiary, Pacific Bell Directory ("Directory"); and
selected information services through its wholly owned subsidiary, Pacific
Bell Information Services ("PBIS").
The Consolidated Financial Statements include the accounts of Pacific
Bell, Directory, and PBIS. All significant intercompany balances and
transactions have been eliminated.
The Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles. In accordance with the
provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," the Company
is required to reflect rate actions of regulators in the financial
statements when appropriate.
Change in Accounting for Postretirement and Postemployment Costs.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). This new rule requires a
change from the cash to accrual method of accounting for these costs.
Previously, the Company expensed these retiree benefits as they were paid.
The Company is amortizing the transition obligation over 20 years. The
transition obligation represents the unrecognized cost of benefits that
had already been earned by retirees and active employees when the new
standard was adopted.
This treatment is consistent with a CPUC decision which granted Pacific
Bell $108 million for partial recovery of 1993 SFAS 106 costs. The CPUC
requires that any recoveries granted be used solely to pay for future
postretirement benefits. Therefore, the Company contributes these
recoveries to Voluntary Employee Benefit Association trusts. The Company
is required to file annually for recovery in conjunction with the price
cap filing, and therefore such recovery will vary. The 1994 CPUC price
cap decision grants Pacific Bell $100 million for partial recovery of SFAS
106 costs. Two ratepayer advocacy groups have each challenged certain
aspects of the decision adopting SFAS 106 for ratemaking, which could
affect recovery. The Company is unable to predict the outcome of these
pending challenges.
The ongoing periodic expense recognized by the Company under SFAS 106
during 1993 amounted to $338 million before taxes. The $338 million
represents an increase of about $183 million over the previous method.
51
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employer's Accounting for
Postemployment Benefits." SFAS 112 establishes accounting standards for
benefits that are provided to former or inactive employees after
employment but before retirement (e.g., workers' compensation, long-term
disability benefits and disability pensions.)
The new Statement requires immediate recognition of the cumulative effect
of applying the new rule to prior years. The Company restated first
quarter 1993 results to recognize a postemployment benefit liability of
$251 million. The net income impact of adopting this accounting standard
was $148 million, net of a deferred income tax benefit of $103 million.
In subsequent years, the Company expects that periodic expense will not
differ materially from expense under the prior method.
Cash and Cash Equivalents
The Company considers all highly liquid monetary instruments with
maturities of 90 days or less from the date of purchase to be cash
equivalents.
Income Taxes
Pacific Telesis Group allocates consolidated taxes as if the Company were
a separate taxpayer. The Company records its share of the consolidated
taxes as tax liabilities and pays amounts due to tax authorities through
Pacific Telesis Group.
Deferred income taxes are provided to reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for tax
purposes.
Investment tax credits earned prior to their repeal by the Tax Reform Act
of 1986 are amortized as reductions in tax expense over the lives of the
assets which gave rise to the credits.
Property, Plant, and Equipment
Property, plant, and equipment, (which consists primarily of telephone
plant dedicated to providing telecommunications services) is carried at
cost. The cost of self-constructed plant includes employee wages and
benefits, materials and other costs. Regulators allow the Company to
accrue an allowance for funds used during construction as a cost of
constructing certain plant and as an item of income. This income is not
realized in cash currently, but will be realized over the service lives of
the related plant.
Depreciation of telephone plant is computed primarily using the remaining-
life method, essentially a form of straight-line depreciation, using
depreciation rates prescribed by state and federal regulatory agencies.
When retired, the original cost of depreciable telephone plant is charged
to accumulated depreciation.
52
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Expenditures in excess of $500 that increase the capacity, operating
efficiency or useful life of an individual asset are capitalized.
Expenditures for maintenance and repairs are charged to expense.
Premium on Debt Retirement
When debt is refinanced before maturity, the Company recognizes as expense
any difference between net book value and redemption price evenly over the
term of the replacing issue for intrastate operations, in accordance with
the ratemaking treatment of such costs. These costs are expensed as
incurred for interstate operations.
B. RESTRUCTURING AND CURTAILMENT
During 1993, the Company recorded a pre-tax restructuring charge of $977
million to recognize the incremental cost of force reductions associated
with reengineering its internal business processes through 1997. This
charge will cover the incremental severance costs associated with
terminating approximately 14,400 employees from 1994 through 1997. It
will also cover the incremental costs of consolidating and streamlining
operations and facilities to support this downsizing initiative.
In addition, the Company recorded a $590 million pre-tax expense to
accelerate recognition of a portion of its embedded post-retirement
benefits costs that would otherwise have been recorded over the next 19
years. Accelerated recognition of these costs is required under the
curtailment provisions of SFAS 106 because the Company expects to
significantly reduce its workforce. Because Pacific Telesis Group already
recognized all of its post-retirement benefit transition costs in the
first quarter 1993, this additional charge did not affect its consolidated
financial statements.
In 1991 the Company recorded a $201 million pre-tax restructuring charge
which included $166 million for the cost of management force reduction
programs through 1994 and $35 million for associated pension expense.
C. INCOME TAXES
Effective January 1, 1992, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes." This standard requires companies to record all deferred
tax liabilities or assets for the deferred tax consequences of all
temporary differences, and requires ongoing adjustments for enacted
changes in tax rates and regulations. Specific provisions of SFAS 109
require regulated companies to record an asset or a liability when
recognizing deferred income taxes, if it is probable that these deferred
taxes will be reflected in future rates.
53
<PAGE>
The components of income tax expense for continuing operations for each
year are as follows:
(Dollars in millions) 1993 1992 1991
----------------------------------------------------------------------
Current:
Federal.................................. $519 $649 $552
State and local income taxes............. 156 170 163
--------------------------
Total current.............................. 675 819 715
Deferred:
Federal.................................. (548) (107) (83)
State and local income taxes............. (148) (12) (6)
--------------------------
Total deferred............................. (696) (119) (89)
--------------------------
Amortization of investment
tax credits - net........................ (51) (61) (53)
--------------------------
Total income taxes......................... (72) 639 573
Less: Non-operating income tax expense..... (15) 32 -
--------------------------
Operating income taxes..................... (57) $607 $573
==========================
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1993 are as follows:
December 31
-----------------------
(Dollars in millions) 1993 1992
----------------------------------------------------------------------
Deferred tax (assets)/liabilities - due to:
Depreciation and amortization ............ $2,971 $2,837
Restructuring ............................ (401) -
Employee Benefits ........................ (321) -
Customer rate reductions ................. (126) (218)
Other, net ............................... (189) (160)
--------- ----------
Net deferred tax liabilities ................ $1,934 $2,459
========= ==========
Amounts recorded in consolidated
balance sheet:
Deferred tax assets* .................. $1,449 $ 597
========= ==========
Deferred tax liabilities* ............. $3,383 $3,056
========= ==========
----------------------------------------------------------------------
* Reflects reclassification of certain current and noncurrent amounts
to a net presentation.
54
<PAGE>
The components of deferred income taxes for 1991 are as follows:
(Dollars in millions) 1991
------------------------------------------------------------------------
Deferred tax - due to:
Depreciation and amortization ....................... $ (58)
Revenue refunds ..................................... 20
Advance funding of VEBA employee
benefit trust ..................................... (14)
Restructuring reserves .............................. (50)
Other ............................................... 13
------
Total deferred taxes .................................. $(89)
======
During August 1993, new tax provisions were enacted under the Omnibus
Budget Reconciliation Act of 1993 which included an increase in the
corporate tax rate from 34 to 35 percent retroactive to January 1, 1993.
The cumulative effect of the new tax provisions was recognized in third
quarter 1993 increasing tax expense by $15 million. However, this
increase was offset by the tax benefit recognized in the fourth quarter
due to restructuring and curtailment. Overall, the new tax provisions did
not affect the Company's tax expense for the year.
The reasons for differences each year between the effective income tax
rate and the statutory federal income tax rate are provided in the
following reconciliation:
1993 1992 1991
-----------------------------------------------------------------------
Federal statutory rate ..................... 35.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
Plant basis differences - net of
applicable depreciation ................ (63.6) 2.0 2.2
Amortization of investment tax credits ... 92.9 (3.5) (3.5)
State income taxes - net of federal
income tax benefit ..................... (9.2) 5.9 6.9
Excess deferred taxes due to rate change.. 70.1 (3.6) (3.1)
Other differences ........................ 7.2 1.3 1.6
--------------------------
Effective income tax rate .................. 132.4% 36.1% 38.1%
-----------------------------------------------------------------------
The effective tax rate increased due to lower pre-tax income caused by the
restructuring charge and the postretirement benefits curtailment.
In 1987, the company paid $113 million to the Internal Revenue Service
("IRS") under a Summary Assessment relating to contested issues for pre-
divestiture tax years 1979 and 1980. In 1992, the IRS refunded the above
$113 million plus accrued interest of approximately $68 million. The
Company recorded an after-tax gain of approximately $44 million during
first quarter 1992.
55
<PAGE>
D. EMPLOYEE RETIREMENT PLANS
Defined Benefit Plans
The Company provides pension, death and survivor benefits to substantially
all of its employees through participation in certain Pacific Telesis
Group defined benefit pension plans. For some of these plans, benefits
are based on a flat dollar amount which varies according to employee job
classification and years of service. For other plans, benefits are based
on a percentage of final five-year average pay and vary according to years
of service.
The Company is responsible for contributing enough to the pension plans,
while the employee is still working, to ensure that adequate funds are
available to provide the benefit payments upon the employee's retirement.
These contributions are made to an irrevocable trust fund in amounts
determined using the aggregate cost actuarial method, one of the actuarial
methods specified by the Employee Retirement Income Security Act of 1974
("ERISA"), subject to ERISA and IRS limitations.
The Company records pension costs and related obligations under the
provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" and Statement of Financial Accounting
Standards No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits". Specific
provisions for regulated enterprises require the Company to recognize
pension cost consistent with its ratemaking treatment. Pension costs
recognized reflect a California Public Utilities Commission ("CPUC") order
requiring the continued use of the aggregate cost method subject to ERISA
and IRS limitations, for intrastate operations and a Federal
Communications Commission ("FCC") requirement to use SFAS 87 and SFAS 88
for interstate operations.
During 1992, the Company amended its nonsalaried pension plan to increase
benefits for specified groups of employees who elected early retirement
under incentive plans. Approximately 1,000 employees elected early
retirement under these amendments.
During 1991, approximately 4,400 eligible management employees elected
early retirement or voluntary severance under management force reduction
programs offered by the Company. (See "Note B - Restructuring and
Curtailment" on page 53).
56
<PAGE>
D. EMPLOYEE RETIREMENT PLANS (Continued)
Components of pension costs and the funded status of the plans are not
presented because the structure of the Pacific Telesis plans does not
permit this data to be disaggregated by subsidiary. Pension amounts
recognized in the financial statements during each year presented are:
Pension Cost 1993 1992 1991
---------------------------------------------------------------------
($ millions)
Current year pension cost ................ $ 10 $ 0 $(6)
Settlements & curtailments ............... (10) 5 35
--------------------------
Pension cost recognized .................. $ 0 $ 5 $29
---------------------------------------------------------------------
Accrued pension cost liability
recognized in the consolidated
balance sheets ......................... $620 $573 --
---------------------------------------------------------------------
The amounts shown above for annual pension cost reflect the effects of
strong fund asset performance and IRS funding limitations.
The assets of the plans are primarily composed of common stocks, U.S.
Government and corporate obligations, index funds, and real estate
investments. The plans' projected benefit obligations for employee
service to date reflect the Corporation's expectations of the effects of
future salary progression and benefit increases. As of December 31, 1993
and 1992, the actuarial present values of the plans' accumulated benefit
obligations, which do not anticipate future salary increases, were $8,537
and $7,570 million, respectively. Of these amounts, $7,668 and
$6,777 million, respectively, were vested.
The assumptions used in computing the present values of benefit
obligations include a discount rate of 7.5 percent for 1993 and
8.5 percent for 1992 and 1991. An 8.0 percent long-term rate of return on
assets is assumed in calculating pension costs.
On March 28, 1994, there will be a special pension window benefit which
removes any age discount from pensions for employees eligible to retire
with a service pension on that date. This window benefit will only apply
to those who are eligible for a service pension that is normally subject
to a discount and who retire on March 28, 1994. As of March 21, 1994,
about 300 employees had submitted an election form for this offering.
Effective December 31, 1993, the Company permanently removed the age
discount from the normal pension for salaried employees who have 30 or
more years of net credited service. It is estimated that approximately
400 employees are affected by this amendment.
57
<PAGE>
D. EMPLOYEE RETIREMENT PLANS (Continued)
The Company has entered into labor negotiations with union-represented
employees in the past and expects to do so in the future. Pension
benefits have been included in these negotiations and improvements in
benefits have been made periodically. Additionally, the Company has
increased benefits to pensioners on an ad hoc basis. While no assurance
can be offered with respect to future increases, the Company's
expectations for future benefit increases have been reflected in
determining pension costs.
Defined Contribution Plans
The Company also participates in certain Pacific Telesis Group-sponsored
defined contribution retirement plans covering substantially all
employees. These plans include the Pacific Telesis Group Supplemental
Retirement and Savings Plan for Salaried Employees and the Pacific Telesis
Group Supplemental Retirement and Savings Plan for Nonsalaried Employees
(collectively, the "Savings Plans").
The Company's contributions to the Savings Plans are based on matching a
portion of eligible employee contributions. All matching employer
contributions to the Savings Plans are made through a leveraged employee
stock ownership ("ESOP") trust. Total Company contributions to these
plans, including contributions allocated to participant accounts through
the leveraged ESOP trust, were $64 million, $61 million and $66 million in
1993, 1992 and 1991, respectively.
E. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Substantially all retirees and their dependents are covered under the
Company's plans for medical, dental and life insurance benefits.
Approximately 40,000 retirees were eligible to receive these benefits as
of January 1, 1993. Employees become eligible upon retirement with
eligibility for a service pension. The Company retains the right, subject
to applicable legal requirements, to amend or terminate these benefits.
Currently, the Company pays the full cost of retiree benefits; however,
future cost sharing provisions are reflected in the current postretirement
benefit cost and liability. Beginning in 1999, employees retiring in 1991
onward will pay a share of the costs of medical coverage that exceed a
defined dollar medical cap.
58
<PAGE>
E. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (Continued)
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). The standard requires that
the cost of retiree benefits be recognized in the financial statements
from an employee's date of hire until the employee becomes eligible for
these benefits. Previously, the Company expensed these retiree benefits
as they were paid. The Company is amortizing the transition obligation
over 20 years. The transition obligation represents the unrecognized cost
of benefits that had already been earned by retirees and active employees
when the new standard was adopted. This treatment is consistent with
a CPUC decision which granted Pacific Bell $108 million for partial
recovery of 1993 SFAS 106 costs. The CPUC requires that any recoveries
granted be used solely to pay for future postretirement benefits.
Therefore, the Company contributes these recoveries to Voluntary Employee
Benefit Association trusts. The Company is required to file annually for
recovery in conjunction with the price cap filing, and therefore such
recovery will vary. The 1994 CPUC price cap decision grants Pacific Bell
$100 million for partial recovery of SFAS 106 costs. Two ratepayer
advocacy groups have each challenged certain aspects of the decision
adopting SFAS 106 for ratemaking, which could affect recovery. The
Company is unable to predict the outcome of these pending challenges.
The ongoing periodic expense recognized by the Company under SFAS 106
during 1993 amounted to $338 million before taxes. The $338 million
represents an increase of about $183 million over the previous method.
Prior to 1993, postretirement health care costs were expensed as claims
were incurred. Postretirement life insurance benefits were expensed on an
advance-funded basis for retirees and certain active employees. The
costs of these benefits recognized in 1992 and 1991 were $103 and
$107 million, respectively.
Plan assets are invested primarily in domestic and international stocks
and domestic investment-grade bonds. The assumed long-term rate of return
on plan assets is 8.5 percent. The assumed discount rate, used to measure
the accumulated postretirement benefit obligation was 7.5 percent at
December 31, 1993.
The components of net periodic postretirement benefit cost for 1993 are as
follows:
(Dollars in millions) 1993
---------------------------------------------------------------------
Service cost ......................................... $ 40
Interest cost on accumulated postretirement
benefit obligation ................................. 242
Actual return on plan assets ......................... (79)
Net amortization and deferral......................... 160
Curtailment due to force reduction ................... 632
------
Postretirement periodic benefit cost ................. $995
=====================================================================
59
<PAGE>
E. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (continued)
The funded status of the plans is as follows:
December 31,
(Dollars in millions) 1993
---------------------------------------------------------------------
Accumulated postretirement benefit obligation
at September 30, 1993:
Retirees .......................................... $2,314
Eligible active employees ......................... 207
Other active employees ............................ 919
--------
Total accumulated postretirement benefit
obligation ......................................... 3,440
Less:
Fair value of plan assets at September 30, 1993*... (708)
Contributions during fourth quarter 1993........... (78)
Transition obligation ............................. (1,799)
Unrecognized net loss**............................ (328)
--------
Accrued net postretirement benefit obligation
recognized in the consolidated balance sheets
at December 31, 1993................................ $ 527
=====================================================================
* Estimated allocation of the Company's portion of Pacific Telesis Group
plans.
** The unrecognized net loss is amortized over time and reflects
differences between actuarial assumptions and actual experience. It
also includes the impact of changes in actuarial assumptions.
An annual increase in health care costs of approximately 14 percent is
assumed for retirees in 1993. A 13 percent increase is assumed for 1994,
declining to an ultimate rate of 6 percent by the year 2002. Should the
health care cost trend rate increase by one percent each year, the 1993
increase would be $416 million for the accumulated postretirement benefit
obligation and $38 million for the combined service and interest cost
components of net periodic cost.
As of January 1, 1993, the Company adopted SFAS 112 for accounting for
postemployment benefits. Postemployment benefits offered by the Company
include workers' compensation, disability benefits, disability-related
pensions, medical benefit continuation, and severance pay. These benefits
are paid to former or inactive employees not yet retired.
SFAS 112 requires a change from cash to accrual accounting by recording a
cumulative catch-up-charge at implementation. A one-time, noncash charge
was recorded against earnings applicable to continuing operations of
$148 million, which is net of a deferred income tax benefit of
$103 million. In subsequent years, the Company expects that periodic
expense will not differ materially from expense under the prior method.
60
<PAGE>
F. DEBT AND LEASE OBLIGATIONS
Long-Term obligations as of December 31, 1993 and 1992 consist principally
of debentures of $4,047 and $4,170 million, respectively, and corporate
notes of $1,161 and $936 million, respectively. Maturities and interest
rates of long-term obligations follow:
December 31
-------------------------
Maturities and Interest Rates 1993 1992
--------------------------------------------------------------------
(Dollars in millions)
1996 7.625%................ $ 0 $ 100
1999-2043 4.625% to 8.700% ..... 5,208 5,006
-------------------------
Long-term debt 5,208 5,106
Unamortized discount-net of premium ..... (475) (325)
Long-term capital lease obligations ..... 20 24
--------------------------
Total long-term obligations ............. $4,753 $4,805
====================================================================
The Company has remaining authority from the CPUC to issue up to
$1.25 billion of long and intermediate-term debt from a total of $1.8
billion authorized in September 1993. The proceeds may be used to redeem
maturing debt and to refinance other debt issues. The Company has
remaining authority from the SEC to issue up to $650 million of long- and
intermediate-term debt through a shelf registration filed in April 1993.
Debt maturing within one year consists of short-term borrowings and the
portion of long-term obligations that matures within one year as follows:
December 31
-------------------------
1993 1992
--------------------------------------------------------------------
(Dollars in millions)
Advances from Pacific Telesis Group....... - 2
Notes payable to banks ................... $ 4 $ 11
Commercial paper ......................... 534 392
-------------------------
Total short-term borrowings .............. 538 405
-------------------------
Current maturities of
long-term obligations .................. 4 5
-------------------------
Total debt maturing within one year ...... $ 542 $410
======================================================================
61
<PAGE>
F. DEBT AND LEASE OBLIGATIONS (continued)
Lines of Credit
The Company has various formal and informal lines of credit with certain
banks. For the most part, these arrangements do not require compensating
balances or commitment fees and, accordingly, are subject to continued
review by the lending institutions. At December 31, 1993 and 1992, the
total unused lines of credit available were approximately $1.6 and
$1.3 billion, respectively.
Issuances and redemptions of long-term debentures and notes during 1993
are described in the tables below.
Issuances
Issue Principal Interest Due
Date Amount Rate Date Price** Yield
-----------------------------------------------------------------------
(Dollars in millions)
2/09/93 $ 400* 7.500% 2/01/33 96.913% 7.751%
3/11/93 325 6.250% 3/01/05 97.939% 6.500%
3/23/93 625 7.125% 3/15/26 98.106% 7.277%
6/30/93 350 7.375% 6/15/25 98.797% 7.474%
7/23/93 300 7.375% 7/15/43 99.373% 7.423%
8/18/93 100 6.875% 8/15/23 96.262% 7.180%
10/20/93 550 6.625% 10/15/34 96.523% 6.880%
---------
Total $2,650
=======================================================================
Redemptions
Call Principal Interest Due Call Related
Date Amount Rate Date Price** Issuance
-----------------------------------------------------------------------
(Dollars in millions)
3/01/93 $ 300 9.625% 11/01/14 105.28% 2/09/93
4/01/93 175 8.750% 10/01/06 102.50% 3/11/93
4/01/93 150 8.650% 4/01/05 102.02% 3/11/93
4/14/93 350 9.250% 3/01/26 106.16% 3/23/93
4/14/93 250 9.500% 6/15/11 104.16% 3/23/93
7/19/93 350 8.750% 8/15/25 103.47% 6/30/93
8/16/93 300 9.000% 1/15/18 105.29% 7/23/93
8/20/93 100 7.625% 11/15/96 100.75% -
9/10/93 100 8.625% 4/15/23 103.61% 8/18/93
10/12/93 123 9.125% 12/15/30 114.32% 10/20/93
11/08/93 200 8.625% 4/15/23 103.61% 10/20/93
11/12/93 150 8.375% 2/01/17 105.02% 10/20/93
---------
Total $2,548
=======================================================================
* A portion of the proceeds of this issue were used to refinance
$72 million of debentures which had been redeemed in 1992.
** Percent of principal amount.
62
<PAGE>
G. FINANCIAL INSTRUMENTS
The following table presents information required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methods. However, considerable
judgment enters into estimates of fair value. Accordingly, the estimates
presented may not be indicative of the amounts that the Company could
realize in a current market exchange.
December 31, 1993 December 31, 1992
- ----------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Dollars in Millions)
- ----------------------------------------------------------------------------
Assets:
Cash and short-term
investments............... $ 60 $ 60 $ 48 $ 48
Notes receivable............ 2 2 8 8
Liabilities:
Debt maturing within one
year excluding current
portion of capital
leases.................... 538 538 402 402
Deposit liabilities......... 290 290 266 266
Long-term debt.............. 5,208 5,302 5,106 5,183
- -----------------------------------------------------------------------------
Cash, other current assets, notes receivable and current obligations:
Amounts are a reasonable estimate of fair value.
Long-term debt: Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues that are not quoted on an exchange.
H. RELATED PARTY TRANSACTIONS
The Company receives certain services associated with corporate functions,
e.g., legal, financial, external affairs and governmental relations, human
resources and corporate strategy, performed on the Company's behalf by its
parent, Pacific Telesis Group. Costs incurred by Pacific Telesis Group
which are attributable to the Company are charged directly to the Company.
The Company is also charged for its proportionate share of other indirect
costs incurred by Pacific Telesis Group. Total costs charged by Pacific
Telesis Group and included in general, administrative, and other expenses
were $76 million, $65 million and $64 million in 1993, 1992 and 1991,
respectively.
The Company provides nontelecommunications and telecommunications services
including local, toll and access services to certain Pacific Telesis Group
affiliated companies. Revenues recorded for these services totaled $30
million, $30 million and $33 million in 1993, 1992 and 1991, respectively.
63
<PAGE>
I. ADDITIONAL FINANCIAL INFORMATION
December 31
---------------------
(Dollars in millions) 1993 1992
- ---------------------------------------------------------------------------
Prepaid expenses and other current assets:
Prepaid directory expenses .................. $336 $332
Miscellaneous prepaid expenses .............. 23 25
Notes and other receivables ................. 45 73
Materials and supplies ...................... 68 70
Current deferred income tax benefits ........ 346 302
Pacific Telesis Group and subsidiaries ...... 17 9
Other ....................................... 27 25
------ ------
Total ........................................... $862 $836
===========================================================================
Property, plant, and equipment - net:
Land and buildings ......................... $ 2,538 $ 2,417
Cable, conduit, and connections ............. 10,251 9,878
Central office equipment .................... 9,396 9,358
Furniture, equipment, and other ............. 2,906 2,897
Construction in progress .................... 569 514
-------- --------
25,660 25,064
Less: accumulated depreciation 9,708 9,276
-------- --------
Total ........................................... $15,952 $15,788
==========================================================================
Deferred charges and other noncurrent assets:
Deferred charges ............................ $ 107 $ 225
Deferred compensated absence ................ 226 223
SFAS 87 pension deferral .................... 367 330
Investments ................................. 79 67
VEBA III .................................... 176 181
Other ....................................... 34 28
-------- --------
Total ........................................... $ 989 $1,054
===========================================================================
Other accounts payable:
Pacific Telesis Group and subsidiaries ...... $ 23 $ 15
AT&T and subsidiaries ....................... 214 240
Payroll ..................................... 52 42
Checks outstanding .......................... 177 235
Switch replacements ......................... 132 -
Incentive awards payable .................... 188 182
Bellcore .................................... 19 19
Other ....................................... 205 141
------ ------
Total ........................................... $1,010 $874
==========================================================================
64
<PAGE>
I. ADDITIONAL FINANCIAL INFORMATION (continued)
December 31
---------------------
(Dollars in millions) 1993 1992
- ---------------------------------------------------------------------------
Other current liabilities:
Taxes accrued ................................ $ 25 $ 94
Interest accrued ............................. 114 119
Advance billing customers' deposits .......... 269 247
Accrued compensated absence .................. 284 272
Accrued refunds .............................. - 40
Deferred regulatory liabilities (SFAS 109) ... 120 150
Restructuring ................................ 274 70
Other ........................................ 50 25
------ ------
Total ............................................ $1,136 $1,017
===========================================================================
Other noncurrent liabilities and deferred credits:
Unamortized investment tax credits ........... $ 526 $ 574
Accrued pension cost liability ............... 620 573
Deferred regulatory liabilities (SFAS 109) ... 108 356
Workers' compensation ........................ 175 68
Restructuring ................................ 823 31
SFAS 106 Liability............................ 703 -
Other ........................................ 303 198
------ ------
Total ............................................ $3,258 $1,800
==========================================================================
For the Year Ended
December 31
----------------------------------
(Dollars in millions) 1993 1992 1991
- ---------------------------------------------------------------------------
Other revenues:
Directory advertising ............. $ 989 $1,003 $1,002
Billing and collections ............ 79 86 96
Non-regulated revenue .............. 169 112 82
Other .............................. 121 129 132
------- ------- -------
Total .................................. $1,358 $1,330 $1,312
===========================================================================
Other income (expense):
Allowance for funds used during
construction ..................... $ 35 $ 31 $ 30
Interest income .................... 5 103 33
Other .............................. (54) (52) (28)
------- ------- -------
Total .................................. $ (14) $ 83 $ 35
===========================================================================
Maintenance and repairs ................ $1,396 $1,369 $1,386
Property tax expenses .................. $ 173 $ 176 $ 195
===========================================================================
Cash payments for:
Interest ........................... $ 614 $ 529 $ 517
Income taxes ....................... $ 744 $ 829 $ 732
===========================================================================
65
<PAGE>
Major Customer
Nearly all of the Company's revenues were from telecommunications and related
services. Approximately 11 percent, 12 percent and 12 percent of operating
revenues were earned for services provided to AT&T in 1993, 1992 and 1991,
respectively. No other customer accounted for more than 10 percent of
operating revenues.
J. QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in millions)
-----------------------------------------
1993 First Second Third Fourth
----------------------------------------------------------------------
Total Operating Revenues.... $2,200 $2,237 $2,251 $2,206
Operating Income............ $ 356 $ 368 $ 361 $ (624)
Cumulative effect of
accounting changes........ $ (148) - - -
Net Income.................. $ 96 $ 263 $ 257 $ (746)
----------------------------------------------------------------------
1992 First Second Third Fourth
----------------------------------------------------------------------
Total Operating Revenues.... $2,156 $2,209 $2,213 $2,171
Operating Income............ $ 354 $ 384 $ 396 $ 374
Net Income.................. $ 287 $ 284 $ 286 $ 274
----------------------------------------------------------------------
First quarter 1993 results have been restated to reflect the adoption of
SFAS 112, "Employers' Accounting for Postemployment Benefits" effective
January 1, 1993. Adoption of the new standard reduced first quarter net
income by $148 million.
Fourth quarter 1993 net income was reduced by a restructuring charge of
$576 million to recognize the cost of force reductions associated with
reengineering internal business processes through 1997. Also as a result
of force reductions, fourth quarter 1993 net income was further reduced by
$348 million to accelerate recognition of a portion of post-retirement
benefits costs in accordance with the curtailment provisions of SFAS 106.
First and second quarter 1992 results reflect restatements made in 1992
for the adoption, effective January 1, 1992, of SFAS 109, "Accounting for
Income Taxes," and a customer refund (the "Product Development Refund").
The adoption of the new accounting rules reduced first quarter net income
by $10 million. The restatements made for the Product Development Refund
reduce first and second quarter net income by $28 million and $3 million,
respectively.
First quarter 1992 results also reflect one-time after-tax gains of $44
million from the settlement of a pre-divestiture tax matter and $15
million from a court order regarding interstate access earnings.
66
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No disagreements with accountants on any accounting or financial disclosure
matters occurred during the period covered by this report.
67
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of the report:
(1) Financial Statements:
Report of Management ............................... 43
Report of Independent Accountants .................. 45
Financial Statements:
Consolidated Statements of Income ............. 46
Consolidated Balance Sheets ................... 47
Consolidated Statements of Shareowner's
Equity ........................................ 48
Consolidated Statements of Cash Flows ......... 49
Notes to Consolidated Financial Statements..... 51
(2) Financial Statement Schedules:
V - Property, Plant, and Equipment ......... 73
VI - Accumulated Depreciation ............... 77
VIII - Valuation and Qualifying Accounts ...... 80
IX - Short-Term Borrowings .................. 81
Financial statement schedules other than those listed
above have been omitted because the required information
is contained in the Consolidated 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 herein by reference as exhibits
hereto.
68
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto. All other exhibits are
provided as part of the electronic transmission.
Exhibit
Number Description
------- -----------
2a Modification of Final Judgment (Exhibit (28) to Form 8-K, date of
report August 24, 1982, File No. 1-1105).
2b Plan of Reorganization (Exhibit (2) to Form 8-K, date of report
December 16, 1982, File No. 1-1105).
2c March 14, 1983 Motion to Approve Amended Plan of Reorganization
(Exhibit (2)a to Form 8-K, date of report March 14, 1983, File No.
1-1105).
2d March 25, 1983 Motion to Approve Plan of Reorganization as Further
Amended (Exhibit (2)b to Form 8-K, date of report March 14, 1983,
File No. 1-1105).
2e April 7, 1983 Motion to Approve Plan of Reorganization as Further
Amended (Exhibit (2)c to Form 8-K, date of report March 14, 1983, File
No. 1-1105).
2f Order issued April 20, 1983 in "U.S. v. Western Electric Company,
Incorporated et al.," by the United States District Court for the
District of Columbia, Civil Action No. 82-0192 (Exhibit (2) to Form 8-
K, date of report April 20, 1983, File No. 1-1105).
2g August 5, 1983 Memorandum and Order of United States District Court
for the District of Columbia approving Plan of Reorganization as
Amended (Exhibit (2) to Form 8-K, date of report July 8, 1983, File
No. 1-1105).
2h September 10, 1987 Opinion and Order of the United States District
Court for the District of Columbia in "U.S. v. Western Electric
Company, Incorporated, et. al.," Civil Action No. 82-0192 (Exhibit 2h
to Form SE filed November 10, 1987 in connection with Pacific Telesis
Group's Form 10-Q, for the quarter ended September 30, 1987, File No.
1-8609).
2i March 7, 1988 Opinion and Order of the United States District Court
for the District of Columbia in "U.S. v. Western Electric Company,
Incorporated et al.," Civil Action No. 82-0192 (Exhibit 2h to Form SE
filed March 29, 1988 in connection with Pacific Telesis Group's Form
10-K for 1987, File No. 1-8609).
2j April 3, 1990 Opinion of the United States Court of Appeals, District
of Columbia in "U.S. v. Western Electric Company, Incorporated, et
al.," Case Nos. 87-5388 et al. (Exhibit 2j to Form SE filed May 11,
1990 for the quarter ended March 31, 1990 in connection with Pacific
Telesis Group's Form 10-Q, File No. 1-8609).
69
<PAGE>
2k July 25, 1991 Opinion & Order of the United States District Court for
the District of Columbia in "U.S. v. Western Electric Company,
Incorporated, et al.," Civil Action No. 82-0192 (Exhibit 2k to Form SE
filed August 12, 1991 in connection with Pacific Telesis Group's Form
10-Q for the quarter ended June 30, 1991, File No. 1-8609).
2l October 7, 1991 Order of the United States Court of Appeals, District
of Columbia in "U.S. v. Western Electric Company, Incorporated, et
al.," Case No. 91-5262, et al. (Exhibit 2l to Form SE filed March 26,
1992, as part of Pacific Telesis Group's Form 10-K for 1991, File No.
1-8609).
2m May 28, 1993, Order of the United States Court of Appeals, District of
Columbia in "U.S v. Western Electric Company, Incorporated, et al.,
and National Assn. of Broadcasters, et al.," Case Bis, 81-5263, et al.
(Exhibit 2m filed August 12, 1993, in connection with Pacific Telesis
Group's Form 10-Q for the quarter ended June 30, 1993, File No. 1-
8609).
2n December 28, 1993 Order of the United States Court of Appeals,
District of Columbia in "U.S. v. Western Electric Company,
Incorporated, et al.," Case Nos. 92-5111, et al. (Exhibit 2n to
Pacific Telesis Group's Form 10-K for 1993, File No. 1-8609).
3a Articles of Incorporation of Pacific Bell, as amended and restated to
January 11, 1993 (Exhibit (3)a to Form SE filed March 26, 1993 in
connection with the Company's Form 10-K for 1992).
3b By-Laws of Pacific Bell, as amended to March 10, 1994.
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Bell and its subsidiaries is filed
herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant
to this regulation, Pacific Bell hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
10a Reorganization and Divestiture Agreement dated as of November 1, 1983
between American Telephone and Telegraph Company, Pacific Telesis
Group and its affiliates (Exhibit (10)a to Form 10-K for 1983, File
No. 1-8609).
10b Agreement Concerning Patents, Technical Information and Copyrights
dated as of November 1, 1983 between American Telephone and telegraph
Company and Pacific Telesis Group (Exhibit (10)g to Form 10-K for
1983, File No. 1-8609).
10c Agreement Concerning Contingent Liabilities, Tax Matters and
Termination of Certain Agreements dated as of November 1, 1983 among
American Telephone and Telegraph Company, Bell System Operating
Companies and Regional Holding Companies (including Pacific Telesis
Group and affiliates) (Exhibit (10)j to Form 10-K for 1983, File No.
1-8609).
70
<PAGE>
10d Agreement Regarding Allocation of Contingent Liabilities dated as of
January 28, 1985 between American Telephone and Telegraph Company,
American Information Technologies Corporation, Bell Atlantic
Corporation, BellSouth Corporation, NYNEX Corporation, Pacific
Telesis Group and Southwestern Bell Corporation (Exhibit 10c to Form
SE filed March 26, 1986 in connection with Pacific Telesis Group's
Form 10-K, File No. 1-8609).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Coopers & Lybrand.
24 Powers of Attorney executed by Directors and Officers who signed this
Form 10-K.
The Corporation will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Reports on Form 8-K:
Form 8-K, Date of Report October 5, 1993, was filed with the SEC
containing the Underwriting Agreement between the Company and the
Underwriters, together with a form of Certificate, in connection with
the Company's 6 5/8% Debentures due October 15, 2034.
71
<PAGE>
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.
PACIFIC BELL
BY /s/ William E. Downing
-------------------------
William E. Downing, Vice President, Chief Financial Officer, Treasurer and
Controller
DATE March 29, 1994
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.
Sam Ginn,* Chairman of the Board
P. J. Quigley,* President, Chief Executive Officer and Director
William Downing,* Vice President, Chief Financial Officer, Treasurer and
Controller
Ivan J. Houston,* Director Toni Rembe,* Director
Herman E. Gallegos,* Director J. R. Harvey,* Director
S. Donley Ritchey,* Director William Clark,* Director
Paul Hazen,* Director Donald E. Guinn,* Director
Frank C. Herringer,* Director Mary S. Metz,* Director
Lewis E. Platt,* Director
*BY
/s/ Richard W. Odgers
-------------------------
Richard W. Odgers, attorney-in-fact
DATE March 29, 1994
72
<PAGE>
Sheet 1 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
(Dollars in millions)
- ---------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------
Balance Additions Other Balance
at at Cost Retirements Changes at
Classification 12/31/92 (a) (b) (c) 12/31/93
- ---------------------------------------------------------------------------
Year 1993
Land and buildings.. $2,417 $ 155 $ 34 $ - $ 2,538
Cable and conduit... 9,878 493 120 - 10,251
Central office
equipment ........ 9,358 779 743 2 9,396
Furniture, equipment
and other......... 2,897 367 356 (2) 2,906
Construction in
progress.......... 514 58 3 - 569
--------------------------------------------------------
Total property,
plant, and
equipment ........ $25,064 $1,852 $1,256 $ - $25,660
===========================================================================
See accompanying notes on Sheet 4 of 4.
73
<PAGE>
Sheet 2 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
(Dollars in millions)
- ---------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------
Balance Additions Other Balance
at at Cost Retirements Changes at
Classification 12/31/91 (a) (b) (c) 12/31/92
- ---------------------------------------------------------------------------
Year 1992
Land and buildings.. $2,328 $ 105 $ 16 - $ 2,417
Cable and conduit... 9,499 480 101 - 9,878
Central office
equipment ........ 9,114 634 390 - 9,358
Furniture, equipment
and other......... 2,824 387 314 - 2,897
Construction in
progress.......... 457 59 2 - 514
--------------------------------------------------------
Total property,
plant, and
equipment ........ $24,222 $1,665 $823 - $25,064
===========================================================================
See accompanying notes on Sheet 4 of 4.
74
<PAGE>
Sheet 3 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
(Dollars in millions)
- ---------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------
Balance Additions Other Balance
at at Cost Retirements Changes at
Classification 12/31/90 (a) (b) (c) 12/31/91
- ---------------------------------------------------------------------------
Year 1991
Land and buildings.. $2,170 $175 $ 17 - $2,328
Station connections. 1,546 19 1,565 - -
Cable and conduit... 9,141 465 107 - 9,499
Central office
equipment ........ 8,663 770 319 - 9,114
Furniture, equipment
and other......... 2,809 280 265 - 2,824
Construction in
progress.......... 492 (31) 4 - 457
--------------------------------------------------------
Total property,
plant, and
equipment ........ $24,821 $1,678 $2,277 - $24,222
===========================================================================
See accompanying notes on Sheet 4 of 4.
75
<PAGE>
Sheet 4 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
- -------------------
(a) Property, plant, and equipment, (which consists primarily of telephone
plant dedicated to providing telecommunications services) is carried at
cost. The cost of self-constructed plant includes employee wages and
benefits, materials and other costs. Regulators allow the Company to
accrue an allowance for funds used during construction as a cost of
constructing certain plant and as an item of income. Additions to
property, plant, and equipment under construction are reported net of
amounts transferred to in-service classifications upon completion and,
as a result, may be negative.
(b) When the Company retires or sells property, plant and equipment, the
original cost is credited to the corresponding plant accounts and
charged to accumulated depreciation.
(c) Primarily reflects the reclassification of amounts within asset
categories.
- -------------------
The Company's provision for depreciation is computed primarily using the
remaining-life method, essentially a form of straight-line depreciation,
using depreciation rates prescribed by state and federal regulatory
agencies. The remaining-life method provides for the full recovery of the
investment in telephone plant. For the years 1993, 1992 and 1991
depreciation expressed as a percentage of average depreciable plant was
6.9 percent, 7.0 percent, and 7.1 percent, respectively.
- -------------------
76
<PAGE>
Sheet 1 of 3
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION
(Dollars in millions)
- ---------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------
Balance Additions (a) Balance
at Charged to Retire- Other at
Classification 12/31/92 Expense ments Changes 12/31/93
- ---------------------------------------------------------------------------
Year 1993
Land and buildings.. $ 399 $ 82 $ 16 $(26) $ 439
Cable and conduit... 3,358 488 120 (34) 3,692
Central office
equipment ........ 4,005 781 743 36 4,079
Furniture, equipment
and other......... 1,514 356 356 (16) 1,498
--------------------------------------------------------
Total accumulated
depreciation ..... $9,276 $1,707 $1,235 $(40) $9,708
===========================================================================
(a) Other changes for 1993 primarily reflect salvage, cost of removal and
reclassifications of amounts within asset categories.
77
<PAGE>
Sheet 2 of 3
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION
(Dollars in millions)
- ---------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------
Balance Additions (a) Balance
at Charged to Retire- Other at
Classification 12/31/91 Expense ments Changes 12/31/92
- ---------------------------------------------------------------------------
Year 1992
Land and buildings.. $ 350 $ 74 $ 15 $(10) $ 399
Cable and conduit... 3,025 451 99 (19) 3,358
Central office
equipment ........ 3,643 796 387 (47) 4,005
Furniture, equipment
and other......... 1,422 353 323 62 1,514
--------------------------------------------------------
Total accumulated
depreciation ..... $8,440 $1,674 $824 $(14) $9,276
===========================================================================
(a) Other changes for 1992 primarily reflect salvage, cost of removal and
reclassifications of amounts within asset categories.
78
<PAGE>
Sheet 3 of 3
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION
(Dollars in millions)
- ---------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------
Balance Additions Other Balance
at Charged to Retire- Changes at
Classification 12/31/90 Expense ments (a) 12/31/91
- ---------------------------------------------------------------------------
Year 1991
Land and buildings.. $ 315 $ 61 $ 21 $(5) $ 350
Station connections. 1,565 - 1,565 - -
Cable and conduit... 2,617 495 88 1 3,025
Central office
equipment ........ 3,139 791 330 43 3,643
Furniture, equipment
and other......... 1,319 359 263 7 1,422
--------------------------------------------------------
Total accumulated
depreciation ..... $8,955 $1,706 $2,267 $46 $8,440
===========================================================================
(a) Other changes primarily include salvage and amortization deferred to 1992
relating to a depreciation reserve deficiency per FCC order.
79
<PAGE>
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in millions)
- ---------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------
Allowance for Doubtful Accounts
- -------------------------------
Additions
----------------------
(1) (2)
Booked as Charged
Balance at Reductions to Other Balance at
End of Prior to Revenues Accounts Deductions End of
Period (a) (b) (c) Period
- ---------------------------------------------------------------------------
Year 1993 $127 $147 $140 $278 $136
Year 1992 $ 95 $159 $164 $291 $127
Year 1991 $ 81 $123 $125 $234 $ 95
===========================================================================
(a) Provision for uncollectibles as stated in the Consolidated Statements of
Income includes certain direct write-offs which are not reflected in this
account.
(b) Amounts in this column reflect items of uncollectible interstate and
intrastate accounts receivable purchased from and billed for AT&T and
other interexchange carriers under contract arrangements.
(c) Amounts in this column include items written off, net of amounts that had
previously been written off but subsequently recovered.
Reserve for Restructuring
- -------------------------
Additions
----------------------
(1) (2)
Charged Charged
Balance at to Costs to Other Balance at
End of Prior and Expenses Accounts Deductions End of
Period (d) (e) Period
- ---------------------------------------------------------------------------
Year 1993 $101 $977 $43 $24 $1097
Year 1992 $165 $0 $0 $64 $101
Year 1991 $0 $166 $21 $22 $165
===========================================================================
(d) In 1993 and 1991 respectively, Pacific Bell recorded pre-tax restructuring
charges to recognize the incremental cost of force reductions.
(e) Amounts in this column reflect items capitalized to construction.
80
<PAGE>
Sheet 1 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
(Dollars in millions)
- ---------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- ---------------------------------------------------------------------------
Weighted Weighted
Average Average Average
Interest Daily Interest
Rate Maximum Amount Rate
at the Amount Outstanding During
Balance End of Outstanding During the the
at End the at any Period - Period -
Description of Period Period Month-End (a) (b)
- ---------------------------------------------------------------------------
Year 1993
Advances and
notes from
Pacific
Telesis
Group and
subsidiaries. - - $ 22 $ 4 3.20%
Notes payable
to banks (c). $ 4 6.12% $ 18 $ 8 5.79%
Commercial
paper (d).... $534 3.23% $597 $259 3.22%
------
Total ......... $538
===========================================================================
See accompanying notes on Sheet 4 of 4.
81
<PAGE>
Sheet 2 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
(Dollars in millions)
- ---------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- ---------------------------------------------------------------------------
Weighted Weighted
Average Average Average
Interest Daily Interest
Rate Maximum Amount Rate
at the Amount Outstanding During
Balance End of Outstanding During the the
at End the at any Period - Period -
Description of Period Period Month-End (a) (b)
- ---------------------------------------------------------------------------
Year 1992
Advances and
notes from
Pacific
Telesis
Group and
subsidiaries. $ 2 3.46% $181 $52 3.95%
Notes payable
to banks (c). 11 5.55% $ 17 $13 6.07%
Commercial
paper (d).... 392 3.42% $392 $26 3.47%
------
Total ......... $405
===========================================================================
See accompanying notes on Sheet 4 of 4.
82
<PAGE>
Sheet 3 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
(Dollars in millions)
- ---------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- ---------------------------------------------------------------------------
Weighted Weighted
Average Average Average
Interest Daily Interest
Rate Maximum Amount Rate
at the Amount Outstanding During
Balance End of Outstanding During the the
at End the at any Period - Period -
Description of Period Period Month-End (a) (b)
- ---------------------------------------------------------------------------
Year 1991
Advances and
notes from
Pacific
Telesis
Group and
subsidiaries. $223 4.73% $223 $200 6.05%
Notes payable
to banks (c). 12 7.30% $ 23 $ 14 8.33%
Commercial
paper (d).... 54 4.62% $622 $180 5.82%
------
Total ......... $289
===========================================================================
See accompanying notes on Sheet 4 of 4.
83
<PAGE>
Sheet 4 of 4
PACIFIC BELL AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
- -----------------------------
(a) Computed by dividing the aggregate daily face amount of advances and
notes outstanding by the number of days in the year.
(b) Computed by dividing the aggregate related interest expense by the
average daily amount outstanding.
(c) Comprised primarily of borrowings under informal lines of credit with
original maturities of 180 days or less.
(d) Original maturities of 120 days or less.
- -----------------------------
84
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto. All other exhibits are
provided as part of the electronic transmission.
Exhibit
Number Description
- ------- -----------
2a Modification of Final Judgment (Exhibit (28) to Form 8-K, date of
report August 24, 1982, File No. 1-1105).
2b Plan of Reorganization (Exhibit (2) to Form 8-K, date of report
December 16, 1982, File No. 1-1105).
2c March 14, 1983 Motion to Approve Amended Plan of Reorganization
(Exhibit (2)a to Form 8-K, date of report March 14, 1983, File No.
1-1105).
2d March 25, 1983 Motion to Approve Plan of Reorganization as Further
Amended (Exhibit (2)b to Form 8-K, date of report March 14, 1983, File
No. 1-1105).
2e April 7, 1983 Motion to Approve Plan of Reorganization as Further
Amended (Exhibit (2)c to Form 8-K, date of report March 14, 1983, File
No. 1-1105).
2f Order issued April 20, 1983 in "U.S. v. Western Electric Company,
Incorporated et al.," by the United States District Court for the
District of Columbia, Civil Action No. 82-0192 (Exhibit (2) to Form 8-
K, date of report April 20, 1983, File No. 1-1105).
2g August 5, 1983 Memorandum and Order of United States District Court
for the District of Columbia approving Plan of Reorganization as
Amended (Exhibit (2) to Form 8-K, date of report July 8, 1983, File
No. 1-1105).
2h September 10, 1987 Opinion and Order of the United States District
Court for the District of Columbia in "U.S. v. Western Electric
Company, Incorporated, et. al.," Civil Action No. 82-0192 (Exhibit 2h
to Form SE filed November 10, 1987 in connection with Pacific Telesis
Group's Form 10-Q, for the quarter ended September 30, 1987, File No.
1-8609).
2i March 7, 1988 Opinion and Order of the United States District Court for
the District of Columbia in "U.S. v. Western Electric Company,
Incorporated et al.," Civil Action No. 82-0192 (Exhibit 2h to Form SE
filed March 29, 1988 in connection with Pacific Telesis Group's Form
10-K for 1987, File No. 1-8609).
2j April 3, 1990 Opinion of the United States Court of Appeals, District
of Columbia in "U.S. v. Western Electric Company, Incorporated, et
al.," Case Nos. 87-5388 et al. (Exhibit 2j to Form SE filed May 11,
1990 for the quarter ended March 31, 1990 in connection with Pacific
Telesis Group's Form 10-Q, File No. 1-8609).
85
<PAGE>
2k July 25, 1991 Opinion & Order of the United States District Court for
the District of Columbia in "U.S. v. Western Electric Company,
Incorporated, et al.," Civil Action No. 82-0192 (Exhibit 2k to Form SE
filed August 12, 1991 in connection with Pacific Telesis Group's Form
10-Q for the quarter ended June 30, 1991, File No. 1-8609).
2l October 7, 1991 Order of the United States Court of Appeals, District
of Columbia in "U.S. v. Western Electric Company, Incorporated, et
al.," Case No. 91-5262, et al. (Exhibit 2l to Form SE filed March 26,
1992, as part of Pacific Telesis Group's Form 10-K for 1991, File No.
1-8609).
2m May 28, 1993, Order of the United States Court of Appeals, District of
Columbia in "U.S v. Western Electric Company, Incorporated, et al., and
National Assn. of Broadcasters, et al.," Case Bis, 81-5263, et al.
(Exhibit 2m filed August 12, 1993, in connection with Pacific Telesis
Group's Form 10-Q for the quarter ended June 30, 1993, File No. 1-
8609).
2n December 28, 1993 Order of the United States Court of Appeals, District
of Columbia in "U.S. v. Western Electric Company, Incorporated, et
al.," Case Nos. 92-5111, et al. (Exhibit 2n to Pacific Telesis Group's
Form 10-K for 1993, File No. 1-8609).
3a Articles of Incorporation of Pacific Bell, as amended and restated to
January 11, 1993 (Exhibit (3)a to Form SE filed March 26, 1993 in
connection with the Company's Form 10-K for 1992).
3b By-Laws of Pacific Bell, as amended to March 10, 1994.
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Bell and its subsidiaries is filed
herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant
to this regulation, Pacific Bell hereby agrees to furnish a copy of any
such instrument to the SEC upon request.
10a Reorganization and Divestiture Agreement dated as of November 1, 1983
between American Telephone and Telegraph Company, Pacific Telesis Group
and its affiliates (Exhibit (10)a to Form 10-K for 1983, File No.
1-8609).
10b Agreement Concerning Patents, Technical Information and Copyrights
dated as of November 1, 1983 between American Telephone and telegraph
Company and Pacific Telesis Group (Exhibit (10)g to Form 10-K for 1983,
File No. 1-8609).
10c Agreement Concerning Contingent Liabilities, Tax Matters and
Termination of Certain Agreements dated as of November 1, 1983 among
American Telephone and Telegraph Company, Bell System Operating
Companies and Regional Holding Companies (including Pacific Telesis
Group and affiliates) (Exhibit (10)j to Form 10-K for 1983, File No.
1-8609).
86
<PAGE>
10d Agreement Regarding Allocation of Contingent Liabilities dated as of
January 28, 1985 between American Telephone and Telegraph Company,
American Information Technologies Corporation, Bell Atlantic
Corporation, BellSouth Corporation, NYNEX Corporation, Pacific Telesis
Group and Southwestern Bell Corporation (Exhibit 10c to Form SE filed
March 26, 1986 in connection with Pacific Telesis Group's Form 10-K,
File No. 1-8609).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Coopers & Lybrand.
24 Powers of Attorney executed by Directors and Officers who signed this
Form 10-K.
The Corporation will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Reports on Form 8-K:
Form 8-K, Date of Report October 5, 1993, was filed with the SEC
containing the Underwriting Agreement between the Company and the
Underwriters, together with a form of Certificate, in connection with
the Company's 6 5/8% Debentures due October 15, 2034.
87
<PAGE>
Exhibit 3b
----------
BY-LAWS
OF
PACIFIC BELL
(As Amended to March 10, 1994)
ARTICLE I
SHAREHOLDERS' MEETINGS
SECTION 1. The annual meeting of shareholders may be called at any time
between March 1 and July 31 of each year on such day (other than a legal
holiday), at such time and at such place as may be designated by the Board of
Directors, and in the absence of such designation at the principal office of
the corporation, at 10 a.m. on the fourth Friday in April, or, if said day is
a legal holiday, then on the first business day of the following week, to
elect directors and to transact such other business as may properly come
before the meeting.
(As Amended February 26, 1982)
Written notice of the time and place of said meeting and the business to be
transacted thereat shall be given by the Secretary to the shareholders
personally or by mail, to the extent and in the manner specified by law, at
least ten days but no more than sixty days before the meeting.
(As Amended December 22, 1976)
SECTION 2. Special meetings of the shareholders may be called at any time by
the Chairman of the Board of Directors, if one has been elected, by the
President, by the Board of Directors or by three or more of the directors, or
by any number of shareholders representing not less than ten percent of the
votes entitled to be cast at the meeting, and may be held at any time, whether
on a holiday or not, and at any place.
(As Amended December 22, 1976)
Written notice of the time and place of such meeting and the business to be
transacted thereat shall be given by the Secretary to the shareholders
personally or by mail, to the extent and in the manner specified by law, at
least ten days but no more than sixty days before the meeting.
(As Amended December 22, 1976)
SECTION 3. At any meeting of shareholders, whether regular or special, the
presence in person or by proxy of shareholders entitled to exercise a majority
of the voting power of the outstanding shares entitled to vote at such meeting
shall constitute a quorum for the transaction of business.
(As Amended January 22, 1960)
1
<PAGE>
SECTION 4. The Board of Directors may fix a time as a record date for the
determination of the shareholders entitled to notice of and to vote at any
meeting of shareholders or entitled to receive any dividend or distribution,
or any allotment of rights, or to exercise rights in respect to any change,
conversion or exchange of shares. The record date so fixed shall not be more
than sixty nor less than ten days prior to the date of the meeting nor more
than sixty days prior to any other event for the purposes of which it is fixed
and only shareholders of record on that date are entitled to notice of and
vote at the meeting or to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be.
(As Amended December 22, 1976)
ARTICLE II
THE BOARD OF DIRECTORS,
AND DIRECTORS' MEETINGS
SECTION 1. The number of directors shall be fixed at 10 until changed by
resolution of the Board of Directors but at no time shall be less than 9 nor
more than 17 until changed by amendment of these By-Laws. The Board of
Directors shall be elected by the shareholders at the annual meeting or at any
other meeting held for that purpose, and directors shall hold office until the
next annual election and until their successors are elected. Any vacancy or
vacancies in the Board of Directors may be filled by a majority of the
remaining directors.
(As Amended March 10, 1994)
SECTION 2. Regular meetings of the Board of Directors may be held without
notice at such time and place as shall from time to time be determined by the
Board and no notice of such meeting shall be necessary to the newly elected
directors in order legally to constitute the meeting, provided a quorum shall
be present.
(As Amended July 28, 1989)
SECTION 3. Special meetings of the Board of Directors may be called by the
Chairman of the Board or the President, or a Vice Chairman, and shall be
called by the Chairman of the Board, the President or Secretary on the written
request of a majority of the directors. Notice of special meetings shall be
given by the Secretary or Assistant Secretary of the corporation to each
director personally or by telephone, facsimile transmission or telegram at
least 48 hours before the meeting, or by mailing written notice at least four
days before the meeting.
(As Amended November 20, 1992)
SECTION 4. Six members of the Board of Directors shall constitute a quorum
at any meeting.
(As Amended August 5, 1948)
2
<PAGE>
SECTION 5. The Board of Directors may, by resolution adopted by a majority of
the authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the Board.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
Any such committee, to the extent provided in the resolution of the Board or
in the By-Laws, shall have all the authority of the Board, except with respect
to those powers enumerated in Article III, Section 2 of these By-Laws.
Unless other procedures are established by resolution adopted by the Board,
the provisions of Sections 2 and 3 of this Article II shall be applicable to
committees of the Board of Directors, if any are established. For such
purpose, references to "the Board" or "the Board of Directors" shall be deemed
to refer to each such committee. The committees shall keep regular minutes of
their proceedings and report the same to the Board when required.
A majority of the committee members at a meeting duly assembled shall be
necessary to constitute a quorum for the transaction of business and the act
of a majority of the committee members present at any meeting at which a
quorum is present shall be the act of the committee. Any action required or
permitted to be taken at a meeting of the committee may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the committee members entitled to vote with respect to the
subject matter thereof.
(As Amended July 28, 1989)
ARTICLE III
EXECUTIVE COMMITTEE
SECTION 1. The Executive Committee, if one is appointed, shall consist of not
less than five directors including the Chairman of the Board of Directors, if
one has been elected, the Vice Chairmen of the Board of Directors, if one or
more have been elected, and the President. The remaining directors shall be
alternate members of the Executive Committee, and, in the absence or
disability of any regular member of the Executive Committee, any such
alternate member may be called by the Chairman or by the President to serve in
the place of such absent or disabled regular member.
(As Amended January 28, 1983)
3
<PAGE>
SECTION 2. The Executive Committee may exercise all the powers of the Board
of Directors during the intervals between meetings of the Board, except the
powers to:
(a) Approve any action which under the General Corporation Law also
requires shareholders' approval or approval of the outstanding shares.
(b) Fill vacancies on the Board or on any committee.
(c) Fix the compensation of the directors for serving on the Board or on
any committee.
(d) Adopt, amend, or repeal By-Laws.
(e) Amend or repeal any resolution of the Board which by its express terms
is not so amendable or repealable.
(f) Cause a distribution to the shareholders, except at a rate or in a
periodic amount or within a price range determined by the Board.
(g) Appoint other committees of the Board or the members thereof.
(As Amended December 22, 1976)
SECTION 3. Meetings of the Executive Committee may be called for any time and
place by the Chairman of the Board of Directors, if one has been elected, or
by the President.
SECTION 4. Notice of a meeting of the Executive Committee shall be given by
the Secretary or an Assistant Secretary of the corporation to each member
personally or by telephone, facsimile transmission or telegram at least 48
hours before the meeting or by mailing written notice at least four days
before the meeting.
(As Amended November 20, 1992)
SECTION 5. A majority of the Executive Committee shall constitute a quorum at
any meeting. All actions taken at meetings of the Committee shall be
recorded, and shall be reported to the Board of Directors from time to time.
ARTICLE IV
OFFICERS
The officers of the corporation shall be elected by the Board of Directors and
shall hold office at the pleasure of the Board. The officers of the
corporation shall consist of the Chairman of the Board, such Vice Chairmen of
the Board as the Board of Directors may elect, a President, such Executive
Vice Presidents and such Vice Presidents as the Board may elect, a Secretary,
a Treasurer, a Controller, such Assistant Secretaries and Assistant Treasurers
as the Board may elect, and such other officers as the Board may elect. The
Board of Directors shall designate one officer of the corporation as the Chief
Financial Officer.
(As Amended July 28, 1989)
4
<PAGE>
ARTICLE V
CHAIRMAN OF THE BOARD OF DIRECTORS;
VICE CHAIRMEN OF THE BOARD OF DIRECTORS
SECTION 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board of Directors, of the Executive Committee and of the
shareholders and have such authority and shall perform such other duties as
the By-Laws establish or as the Board of Directors may from time to time
assign.
(As Amended January 27, 1984)
SECTION 2. Each Vice Chairman of the Board shall have such powers and shall
perform such duties as may from time to time be assigned by the Board of
Directors or as the Chairman of the Board of Directors may from time to time
delegate or direct.
(As Amended July 28, 1989)
ARTICLE VI
PRESIDENT
The President shall be the Chief Executive Officer of the corporation and
shall have such powers and shall perform such duties as may from time to time
be assigned by the Board of Directors or as the Chairman of the Board may from
time to time delegate or direct.
(As Amended January 27, 1984)
ARTICLE VII
POWERS AND DUTIES
SECTION 1. Each officer of the corporation shall have such powers and perform
such duties as the Board of Directors or the Chairman of the Board may from
time to time delegate or direct. The Board of Directors or the Chairman of
the Board may delegate to certain officers the power to define the authority
and powers of other officers.
(As Amended July 14, 1987)
ARTICLE VIII
SHARES AND SHARE CERTIFICATES
SECTION 1. The certificates for shares of the corporation shall be in form
and content as required by law and as approved by the Board of Directors.
SECTION 2. The corporation shall not issue any certificate evidencing, either
singly or with other shares, any fractional part of or interest in a share.
5
<PAGE>
SECTION 3. The person, firm, or corporation in whose name shares stand on the
books of the corporation, whether individually or as trustee, pledgee or
otherwise, may be recognized and treated by the corporation as the absolute
owner of the shares, and the corporation shall in no event be obliged to deal
with or to recognize the rights or interests of other persons in such shares
or in any part thereof.
ARTICLE IX
ANNUAL REPORTS
An annual report shall be sent to the shareholders not later than one hundred
twenty days after the close of the fiscal year, but at least fifteen days
prior to the next annual meeting of shareholders to be held during the next
fiscal year.
(As Amended December 22, 1976)
ARTICLE X
SEAL
The corporate seal shall have inscribed thereon the name of the corporation,
the year of its organization and the State within which it is incorporated.
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
(As Amended November 20, 1992)
ARTICLE XI
ADOPTION, AMENDMENT, AND REPEAL OF BY-LAWS
These By-Laws may be amended or repealed or new by-laws may be adopted by the
vote of shareholders entitled to exercise a majority of the voting power of
the corporation or by the written assent of such shareholders filed with the
Secretary. Subject to the right of the shareholders to amend or repeal these
By-Laws, or to adopt new by-laws, the Board of Directors may adopt, amend or
repeal any by-law other than Article II, Section 1 hereof.
(As Amended November 25, 1953)
6
<PAGE>
ARTICLE XII
INDEMNIFICATION OF OFFICERS AND DIRECTORS
This corporation shall, to the maximum extent permissible under applicable
common or statutory law, state or federal, indemnify each of its agents
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was an agent of this corporation. For
purposes of this Article XII, an 'agent' of this corporation includes any
person who is or was a director or officer of this corporation, or who is or
was serving at the request of this corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
Prior to the disposition of any such proceeding, this corporation, upon the
request of any such agent, shall promptly advance to such agent, or otherwise
as directed by such agent, such amounts as shall be equal to the expenses
which shall have been incurred by such agent in defending such proceeding,
provided that such agent requesting such amounts shall first have delivered to
this corporation an undertaking to repay any and all such advances unless it
shall be determined ultimately that such agent is entitled to be indemnified
with respect thereto in accordance with this Article XII.
(As Amended February 28, 1986)
7
<PAGE>
Exhibit 12
----------
PACIFIC BELL AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
-----------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
1. Earnings
--------
(a) Income before
Interest Expense $ 447 $1,591 $1,427 $1,541 $1,698
(b) Federal Income
Taxes (68) 458 416 446 532
(c) State and local
Income Taxes 11 149 157 178 205
(d) 1/3 Operating
Rental Expense 37 35 33 33 30
------- ------- ------- ------- ------
Total $ 427 $2,233 $2,033 $2,198 $2,465
2. Fixed Charges
-------------
(a) Total Interest
Deductions 429 $ 460 $ 485 $ 501 $ 504
(b) 1/3 Operating
Rental Expense 37 35 33 33 30
------- ------- ------- ------- -------
Total 466 $ 495 $ 518 $ 534 $ 534
3. Ratio (1 divided by 2) .92* 4.51 3.92** 4.12 4.62
* This figure reflects the restructuring and curtailment charges totaling
$924 million after taxes taken in the fourth quarter 1993.
** This figure reflects the restructuring charges of $121 million after taxes
taken in fourth quarter 1991.
<PAGE>
SIGNATURE
Exhibit 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report dated March 3,
1994, on our audits of the consolidated financial statements and financial
statement schedules of Pacific Bell and Subsidiaries as of December 31, 1993
and 1992, and for each of the three years in the period ended December 31,
1993, which report is included in this Annual Report on Form 10-K, and in
Pacific Bell's registration statement as follows:
Form S-3: Pacific Bell $1.575 Billion Debt Securities
/s/ COOPERS & LYBRAND
San Francisco, California
March 29, 1994
<PAGE>
SIGNATURE
Exhibit 24
----------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, PACIFIC BELL, a California corporation (the "Company"), proposes to
file with the Securities and Exchange Commission (the "SEC"), under the
provisions of the Securities Act of 1934, as amended, an Annual Report on Form
10-K; and
WHEREAS, each of the undersigned is a director of the Company;
NOW, THEREFORE, each of the undersigned, hereby constitutes and appoints
S. Ginn, P. J. Quigley, W. E. Downing, and R. W. Odgers, and each of them,
his/her attorney for him/her in his/her stead, in his capacity as a director
of the Company, to execute and to file with the SEC such Annual Report on Form
10-K, and any and all amendments, modifications or supplements thereto, and
any exhibits thereto, and granting to each of said attorneys full power and
authority to sign and file any and all other documents and to perform and do
all and every act and thing whatsoever requisite and necessary to be done as
fully, to all intents and purposes, as he/she might or could do if personally
present at the doing thereof, and hereby ratifying and confirming all that
said attorneys may or shall lawfully do, or cause to be done, by virtue hereof
in connection with effecting the filing of the aforesaid Annual Report on Form
10-K.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his/her hand this
25th day of March, 1994.
/s/ William P. Clark /s/ Ivan J. Houston
Director Director
/s/ Herman E. Gallegos /s/ Mary S. Metz
Director Director
/s/ Donald E. Guinn /s/ Lewis E. Platt
Director Director
/s/ James R. Harvey /s/ Toni Rembe
Director Director
/s/ Paul Hazen /s/ S. Donley Ritchey
Director Director
/s/ Frank C. Herringer
Director
1
<PAGE>
SIGNATURE
Exhibit 24
----------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, PACIFIC BELL, a California corporation (the "Company"), proposes to
file with the Securities and Exchange Commission (the "SEC"), under the
provisions of the Securities Act of 1934, as amended, an Annual Report on Form
10-K; and
WHEREAS, each of the undersigned is an officer or director, or both, of the
Company; as indicated below under his name;
NOW, THEREFORE, each of the undersigned, hereby constitutes and appoints
S. Ginn, P. J. Quigley, W. E. Downing and R. W. Odgers, and each of them, his
attorney for him in his stead, in his capacity as an officer or director, or
both, of the Company, to execute and file such Annual Report on Form 10-K, and
any and all amendments, modifications or supplements thereto and any exhibits
thereto, and granting to each of said attorneys full power and authority to
sign and file any and all other documents and to perform and do all and every
act and thing whatsoever requisite and necessary to be done as fully, to all
intents and purposes, as he might or could do if personally present at the
doing thereof, and hereby ratifying and confirming all that said attorneys may
or shall lawfully do, or cause to be done, by virtue hereof in connection with
effecting the filing of the aforesaid Annual Report on Form 10-K.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand this
25th day of March 1994.
/s/ Sam Ginn
Chairman of the Board
/s/ P. J. Quigley
President, Chief Executive Officer
and Director
/s/ William E. Downing
Vice President, Chief Financial Officer, Treasurer and Controller
2
<TABLE>
<PAGE>
DATA STATED IN MILLIONS
VOLUNTARY SCHEDULE - CERTAIN FINANCIAL INFORMATION
<CAPTION>
- ---------Column A-------- ----------------Column B---------------- ---Column C-- --Column D--- --Column E---
Regulation
Number Statement Caption 1993 1992 1991
- ------------------------- ---------------------------------------- ------------- ------------- -------------
<S> <S> <C> <C> <C>
5-02(1) Cash and cash equivalents $ 57 $ 57 $ 45
5-02(3)(a)(1) Accounts receivable - trade 1,654 1,574 1,607
5-02(4) Allowance for doubtful accounts 136 127 95
5-02(9) Total current assets 2,437 2,340 2,207
5-02(18) Total assets 19,378 19,182 19,036
5-02(21) Total current liabilities 2,933 2,525 2,375
5-02(22) Long-term obligations 4,753 4,805 4,918
5-02(24) Total deferred credits 5,538 4,561 4,526
5-02(30) Common stock 225 225 225
5-02(31)(a)(1) Additional paid-in capital 5,168 5,168 5,168
5-02(31)(a)(3)(ii) Reinvested earnings - unappropriated 761 1,898 1,824
5-03(b)(1)(b) Operating revenues 8,894 8,749 8,854
5-03(b)(2)(b) Operating expenses 8,309 6,447 6,684
5-03(b)(8) Interest expense 429 460 485
5-03(b)(19) Net income (130) 1,131 942
</TABLE>
