<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1414
PACIFIC BELL
I.R.S. Employer No. 94-0745535
A California Corporation
140 New Montgomery Street, San Francisco, California 94105
Telephone - Area Code (415) 542-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
At April 30, 1996, 224,504,982 common shares were outstanding.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF PACIFIC TELESIS GROUP, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
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PACIFIC BELL AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Review Report of Independent Accountants .............. 1
Condensed Consolidated Statements of Income ........... 2
Condensed Consolidated Balance Sheets ................. 3
Condensed Consolidated Statements of Cash Flows ....... 4
Notes to Condensed Consolidated Financial Statements .. 5
Item 2. Management's Discussion and Analysis of Results of
Operations ............................................ 8
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Report on Form 8-K ......................... 17
SIGNATURE ........................................................ 18
- ---------
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowner of Pacific Bell:
We have reviewed the accompanying condensed consolidated balance sheet of
Pacific Bell and Subsidiaries (the "Company") as of March 31, 1996, and the
related condensed consolidated statements of income and cash flows for the
three-month periods ended March 31, 1996 and 1995. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
The Company discontinued application of Statement of Financial Accounting
Standards No. 71 effective third quarter 1995.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Pacific Bell and Subsidiaries as
of December 31, 1995, and the related consolidated statements of income,
shareowner's equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 22, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
May 13, 1996
1
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PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------------------------------
OPERATING REVENUES:
Local service.......................................... $ 960 $ 931
Network access:
Interstate.......................................... 443 431
Intrastate.......................................... 178 166
Toll service........................................... 312 314
Other service revenues................................. 390 370
------ ------
TOTAL OPERATING REVENUES............................... 2,283 2,212
------ ------
OPERATING EXPENSES:
Cost of products and services.......................... 442 499
Customer operations and selling expenses............... 462 436
General, administrative, and other expenses............ 311 302
Property and other taxes............................... 44 45
Depreciation and amortization.......................... 452 460
------ ------
TOTAL OPERATING EXPENSES............................... 1,711 1,742
------ ------
OPERATING INCOME....................................... 572 470
Interest expense....................................... 88 108
Miscellaneous income (expense)-net..................... 3 20
------ ------
INCOME BEFORE INCOME TAXES............................. 487 382
Income taxes........................................... 197 136
------ ------
NET INCOME............................................. $ 290 $ 246
===========================================================================
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
2
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PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in millions) 1996 1995
- ---------------------------------------------------------------------------
ASSETS: (Unaudited)
Cash and cash equivalents......................... $ 53 $ 68
Accounts receivable - (net of allowance for
uncollectibles of $140 and $131 in 1996
and 1995, respectively)......................... 1,416 1,475
Prepaid expenses and other current assets......... 813 802
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Total current assets.............................. 2,282 2,345
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Property, plant, and equipment - at cost.......... 26,994 26,688
Less: accumulated depreciation................. (15,880) (15,608)
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Property, plant, and equipment - net.............. 11,114 11,080
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Other noncurrent assets........................... 475 474
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TOTAL ASSETS...................................... $13,871 $13,899
======= =======
LIABILITIES AND SHAREOWNER'S EQUITY:
Accounts payable and accrued liabilities.......... $ 1,943 $2,109
Debt maturing within one year..................... 537 781
Other current liabilities......................... 488 552
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Total current liabilities......................... 2,968 3,442
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Long-term obligations............................. 4,955 4,608
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Deferred income taxes............................. 330 321
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Other noncurrent liabilities and deferred credits. 2,378 2,417
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Commitments and contingencies (Note B)
Common stock ($1.00 stated value, 300,000,000
shares authorized, 224,504,982 shares issued
and outstanding)................................ 225 225
Additional paid-in capital...................... 5,458 5,387
Accumulated deficit............................. (2,443) (2,501)
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Total shareowner's equity......................... 3,240 3,111
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TOTAL LIABILITIES AND SHAREOWNER'S EQUITY......... $13,871 $13,899
==========================================================================
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
3
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PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES:
Net income........................................... $290 $246
Adjustments to net income:
Depreciation and amortization...................... 452 460
Change in deferred income taxes.................... 2 7
Unamortized investment tax credits................. (11) (12)
Changes in operating assets and liabilities:
Accounts receivable............................. 70 186
Prepaid expenses and other current assets....... (16) (7)
Other noncurrent assets......................... 2 13
Accounts payable and accrued liabilities........ (180) (238)
Other current liabilities....................... (64) (12)
Noncurrent liabilities and deferred credits..... (28) (30)
Other adjustments, net............................. 3 (5)
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Cash from operating activities....................... 520 608
------ ------
CASH FROM (USED FOR) INVESTING ACTIVITIES:
Additions to property, plant, and equipment.......... (469) (331)
Other investing activities, net...................... (7) -
------ ------
Cash used for investing activities................... (476) (331)
------ ------
CASH FROM (USED FOR) FINANCING ACTIVITIES:
Equity infusion from parent.......................... 70 -
Dividends paid....................................... (231) (242)
Proceeds from issuance of long-term debt............. 248 -
Decrease in short-term borrowings, net............... (244) (54)
Other financing activities, net...................... 98 (1)
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Cash used for financing activities................... (59) (297)
------ ------
Decrease in cash and cash equivalents................ (15) (20)
Cash and cash equivalents at January 1............... 68 62
------ ------
Cash and cash equivalents at March 31................ $ 53 $ 42
====== ======
- --------------------------------------------------------------------------
Cash payments for:
Interest........................................... $120 $127
Income taxes....................................... $ - $ -
==========================================================================
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
4
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PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
Pacific Bell, and its wholly owned subsidiaries, Pacific Bell Directory,
Pacific Bell Information Services, Pacific Bell Mobile Services,
Pacific Bell Internet Services, Pacific Bell Network Integration and
others, hereinafter referred to as the "Company." All significant
intercompany balances and transactions have been eliminated. The
Condensed Consolidated Financial Statements reflect reclassifications
made to conform with the current year presentation.
The Condensed Consolidated Financial Statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") applicable to interim financial information. Certain
information and footnote disclosures included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted in these interim statements pursuant to such
SEC rules and regulations. Management recommends that these interim
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 1995
annual report on Form 10-K. Effective third quarter 1995, the Company
discontinued accounting under Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation."
In management's opinion, the Condensed Consolidated Financial Statements
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position and results of
operations for each interim period shown. The Condensed Consolidated
Financial Statements have been reviewed by Coopers & Lybrand L.L.P.,
independent accountants. Their report is on page 1.
B. COMMITMENTS AND CONTINGENCIES
Merger Agreement
On April 1, 1996, SBC Communications Inc. ("SBC") and Pacific Telesis,
the Company's parent, jointly announced a definitive agreement whereby
Pacific Telesis will become a wholly owned subsidiary of SBC. Under terms
of the merger agreement, each share of Pacific Telesis common stock will
be exchanged for 0.733 shares of SBC common stock, subject to adjustment.
The transaction, which has been approved by the Board of Directors of
each company, is intended to be accounted for as a pooling of interests
and to be a tax-free reorganization. Completion of the merger is subject
to certain conditions, including regulatory approvals and approval by the
shareowners of each company.
5
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PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B. COMMITMENTS AND CONTINGENCIES (Continued)
Purchase Commitments
In December 1994, the Company contracted for the purchase of up to
$2 billion of Advanced Communications Network facilities, which will
incorporate emerging technologies. The Company is committed to
purchase these facilities in 1998 if they meet certain quality and
performance criteria. Management expects the purchase amount to be less
than $800 million in 1998.
As of March 31, 1996 the Company had purchase commitments of about
$260 million remaining in connection with its previously announced
program for deploying an all digital switching platform with ISDN and
SS-7 capabilities.
Revenues Subject to Refund
In 1992, the California Public Utilities Commission ("CPUC") issued a
decision adopting, with modification, SFAS 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," for regulatory
accounting purposes. Annual price cap decisions by the CPUC granted the
Company approximately $100 million in each of the years 1993-1996 for
partial recovery of higher costs under SFAS 106. However, the CPUC in
October 1994 reopened the proceeding to determine the criteria for
exogenous cost treatment and whether the Company should continue to
recover these costs. The CPUC's order held that related revenues
collected after October 12, 1994, are subject to refund plus interest. It
is possible that the CPUC could decide this issue in the near term, and
that the decision could have a material adverse effect on the Company.
Related revenues subject to refund totaled about $147 million at March
31, 1996. Management believes postretirement benefits costs are
appropriately recoverable in the Company's price cap filings.
6
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PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B. COMMITMENTS AND CONTINGENCIES (Continued)
Property Tax Investigation
In 1992, a settlement agreement was reached between the State Board of
Equalization, all California counties, the State Attorney General, and
28 utilities, including the Company, on a specific methodology for
valuing utility property for property tax purposes. The CPUC opened an
investigation to determine if any resulting property tax savings should
be returned to customers. Intervenors have asserted that as much as
$20 million of annual property tax savings should be treated as an
exogenous cost reduction in the Company's annual price cap filings.
These intervenors have also asserted that past property tax savings
totaling as much as $60 million plus interest should be returned to
customers. Management believes that, under the CPUC's regulatory
framework, any property tax savings should be treated only as a component
of the calculation of shareable earnings. In an Interim Opinion issued
in June 1995, the CPUC decided to defer a final decision on this matter
pending resolution of the criteria for exogenous cost treatment under its
regulatory framework. The criteria are being considered in a separate
proceeding initiated for rehearing of the CPUC's postretirement benefits
other than pensions decision discussed above. It is possible that the
CPUC could decide this issue in the near term, and that the decision
could have a material adverse effect on the Company.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains historical information and certain
forward-looking statements that involve potential risks and uncertainties.
Pacific Bell's (the "Company") actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein and
those discussed in "Management's Discussion and Analysis of Results of
Operations" included in the Company's December 31, 1995 Form 10-K. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation
to revise or update these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
The following discussions and data compare the results of operations of the
Company for the three-month period ended March 31, 1996 to the corresponding
period in 1995. Results for the first three months of 1996 may not be
indicative of results for the full year.
A summary of selected operating data is shown below:
For the 3 Months Ended
March 31,
----------------------
%
Operating Statistics 1996 1995 Change
- ------------------------------------------------------------------------------
Return on shareowner's equity (%).................. 36.6 15.8 -
Capital expenditures ($mil)........................ 487 290 67.9
Total employees at March 31........................ 46,817 49,884 -6.1
Telephone network employees at March 31*........... 44,151 47,183 -6.4
Telephone network employees per ten thousand
access lines*.................................... 28.1 31.2 -9.9
==============================================================================
* Excludes Pacific Bell Directory and Pacific Bell Mobile Services employees.
8
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Earnings
- --------
For first quarter 1996, the Company reported earnings of $290 million,
compared to $246 million for first quarter 1995. This represents an increase
of 17.9 percent.
The Company's first quarter results reflect a significant increase in access
line growth, highlighting the Company's success in marketing additional access
lines for the home and paralleling California's continued economic resurgence.
The California Public Utilities Commission ("CPUC") authorized facilities-
based local services competition effective January 1996, and resale
competition effective March 1996. As of March 31, 1996, this recently
authorized local competition had not caused a significant effect on the
Company's earnings. Management is concerned, however, that under certain
scenarios such competition could deprive the Company of the opportunity to
earn a fair rate-of-return depending on the outcome of certain open issues in
the local competition rules proceeding.
For the 3 Months Ended
March 31,
----------------------
%
Volume Indicators 1996 1995 Change
- ------------------------------------------------------------------------------
Switched access lines at March 31 (thousands)...... 15,716 15,133 3.9
Residence.................................... 9,828 9,533 3.1
Business..................................... 5,680 5,392 5.3
Other........................................ 208 208 -
ISDN access lines at March 31...................... 65 27 140.7
(thousands, included in above)
Interexchange carrier access
minutes-of-use (millions)......................... 15,518 14,096 10.1
Interstate................................... 8,356 7,873 6.1
Intrastate................................... 7,162 6,223 15.1
Toll messages (millions)........................... 1,249 1,163 7.4
Toll minutes-of-use (millions)..................... 3,805 3,567 6.7
Voice mailbox equivalents at March 31 (thousands).. 1,501 1,200 25.1
Custom calling services at March 31 (thousands).... 7,343 6,683 9.9
==============================================================================
9
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The total number of access lines in service grew to 15,716 thousand, an
increase of 3.9 percent for the twelve months ended March 31, 1996. The
residential access line growth rate increased to 3.1 percent for the twelve
months ended March 31, 1996 from 1.9 percent last year. Changes in technology,
telecommuting and the Company's increased marketing efforts are fueling
increased demand for additional telephone lines in the home. Second access
lines in residences grew 11.0 percent, from 1,665 thousand lines to 1,848
thousand lines. The growth rate in business access lines climbed to 5.3
percent for the twelve months ended March 31, 1996 from 4.0 percent last year.
The growth in business access lines reflects increased employment levels in
California. The number of ISDN lines in service increased 140.7 percent for
the twelve months ended March 31, 1996 as customers increased telecommuting
and demanded faster data transmission and Internet access. Sales of the
Company's high-speed data transmission products are growing rapidly due to
improved market segmentation and sales training.
Access minutes-of-use represent the volume of traffic carried by interexchange
carriers over the Company's local networks. Access minutes-of-use for the
three months ended March 31, 1996 increased by 10.1 percent compared to a 9.1
percent increase during the same period last year due primarily to economic
growth.
Toll messages and minutes-of-use are comprised of Message Telecommunications
Service and Optional Calling Plans ("local toll") as well as WATS and
terminating 800 services. For the three months ended March 31, 1996, toll
minutes-of-use increased by 6.7 percent. The increase was driven by economic
growth partially offset by competitive losses.
High demand for the Company's voice mail products continued in 1996. Voice
mailbox equivalents in service increased 25.1 percent for the 12 months ended
March 31, 1996 to 1,501 thousand. Similarly, demand for Custom Calling
Services, such as call waiting, grew 9.9 percent for the 12 months ended March
31, 1996 as customers asked for greater convenience and more control over
their telephone communications.
10
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Operating Revenues
- ------------------
For the 3 Months Ended
March 31,
---------------------
($ millions) 1996 1995 Change
- ------------------------------------------------------------------------------
Total operating revenues........................ $2,283 $2,212 $71
3.2%
- ------------------------------------------------------------------------------
Revenues for first quarter 1996 increased $71 million from the same period
last year primarily due to increased customer demand of $112 million for the
Company's telephone services driven by the strengthening of California's
economy, partially offset by $30 million of revenue reductions ordered by the
Federal Communications Commission ("FCC"). The CPUC issued an order in
December 1995 suspending use of the "inflation minus productivity" component
of the price cap formula for 1996 through 1998. This action freezes the price
caps on most of the Company's regulated services through 1998 except for
adjustments due to exogenous costs or price changes approved through the
CPUC's application process.
Factors affecting revenue changes for the first quarter of 1996 are summarized
in the following table.
Total
Price Change
Cap Customer From
($ millions) Orders Misc. Demand 1995
- ---------------------------------------------------------------------------
Local service........................ $ - $ 7 $ 22 $29
Network access:
Interstate....................... -30 22 20 12
Intrastate....................... - -9 21 12
Toll service......................... - -33 31 -2
Other service revenues............... - 2 18 20
----- ----- ----- ----
Total operating revenues............. -$30 -$11 $112 $71
===========================================================================
The $22 million increase in customer demand for local service is the result of
the 3.9 percent growth in access lines and the 9.9 percent growth in custom
calling services. These increases were generated by the improved economy in
California and the Company's focused customer retention efforts.
The $20 million increase in interstate network access revenues due to customer
demand reflects increased interexchange carrier access minutes-of-use, as well
as increased access lines. The $21 million customer demand-related increase in
intrastate network access revenues also resulted from growth in access
minutes-of-use.
11
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The $31 million increase in customer demand-related toll service revenues is
driven primarily by increased local toll usage resulting from general economic
growth. The customer demand-related increase in local toll service revenues
was partially offset by competitive losses in WATS and 800 services.
Interexchange carriers currently have the competitive advantage of being able
to offer WATS and 800 services both within and between service areas.
The increase in other service revenues reflects the continuing success of the
Company's voice mail products and directory operations.
Operating Expenses
- ------------------
For the 3 Months Ended
March 31,
----------------------
($ millions) 1996 1995 Change
- ----------------------------------------------------------------------------
Total operating expenses....................... $1,711 $1,742 -$31
-1.8%
- ----------------------------------------------------------------------------
The decrease in total operating expenses for the three months ended March 31,
1996 compared to the same period in 1995 reflects the Company's continuing
cost reduction efforts in the core telephone business. Increased expenses for
new business initiatives largely offset these decreases. Primary factors
affecting expense changes are summarized below.
Salaries Employee Subsi- Total
($ millions) & Wages* Benefits* Misc.* diaries Change
- ------------------------------------------------------------------------------
Cost of products & services.... -$22 -$26 -$ 7 -$ 2 -$57
Customer operations
& selling expenses......... 6 -5 2 23 26
General, admin.
& other expenses........... -5 -1 13 2 9
Property & other taxes......... - - -1 - -1
Depreciation & amortization.... - - -10 2 -8
---- ---- ---- ---- ----
Total operating expenses....... -$21 -$32 -$ 3 $25 -$31
==============================================================================
*Excludes Pacific Bell subsidiaries
Salary and wage expense at Pacific Bell, excluding its subsidiaries, decreased
$21 million for first quarter 1996 compared to the same period in 1995,
primarily due to the continued force reduction programs and decreased overtime
in 1996 due to milder weather when compared to 1995. The effect of these
decreases was partially offset by wage increases associated with new labor
agreements effective August 1995.
12
<PAGE>
Employee benefits expense at Pacific Bell, excluding its subsidiaries,
decreased $32 million for the three-month period ending March 31, 1996
compared to the same period in 1995 primarily due to changes in employee
benefit plans and benefit plan assumptions. The effect of these decreases was
partially offset by increased pension expense as a result of discontinuing the
application of Statement of Financial Accounting Standards No. ("SFAS") 71,
"Accounting for the Effects of Certain Types of Regulation", that was
effective third quarter 1995. Management expects the changes in employee
benefit plans and benefit plan assumptions to continue to produce savings
throughout the year.
Depreciation expense at Pacific Bell, excluding its subsidiaries, decreased
$10 million for the three-month period ending March 31, 1996 compared to the
same period in 1995 primarily due to the elimination of the amortization of
certain regulatory assets associated with the discontinued application of SFAS
71. The effect of this decrease was partially offset by higher
telecommunications plant balances in first quarter 1996.
The Company's subsidiaries total operating expenses increased for first
quarter 1996 compared to first quarter 1995 due to expenses for new business
initiatives, such as Personal Communications Services ("PCS") and Internet
access.
Interest Expense
- ----------------
For the 3 Months Ended
March 31,
----------------------
($ millions) 1996 1995 Change
- ----------------------------------------------------------------------------
Interest expense.................................... $88 $108 -$20
-18.5%
- ----------------------------------------------------------------------------
Interest expense for first quarter 1996 decreased compared to the same period
in 1995 due primarily to lower interest rates and the change in classification
of interest during construction from an item of miscellaneous income to a
reduction in interest expense due to the discontinued application of SFAS 71.
13
<PAGE>
Miscellaneous Income (Expense)-Net
- ----------------------------------
For the 3 Months Ended
March 31,
----------------------
($ millions) 1996 1995 Change
- ----------------------------------------------------------------------------
Miscellaneous income (expense)-net..................... $3 $20 -$17
-85.0%
- ----------------------------------------------------------------------------
Miscellaneous income decreased for first quarter 1996 compared to first
quarter 1995 primarily due to interest income received on a tax refund in
first quarter 1995 and the change in classification of interest during
construction from an item of miscellaneous income to a reduction of interest
expense.
Income Taxes
- ------------
For the 3 Months Ended
March 31,
---------------------
($ millions) 1996 1995 Change
- ----------------------------------------------------------------------------
Income taxes...................................... $197 $136 $61
44.9%
- ----------------------------------------------------------------------------
The increase in income tax expense for first quarter 1996 compared to first
quarter 1995 is primarily due to higher pre-tax income, tax adjustments and
tax refunds received in 1995.
Status of Reserves
- ------------------
As previously reported, the Company established a restructuring reserve at the
end of 1993 to provide for the incremental cost of force reductions and other
related costs to restructure its internal business processes through 1997.
After new hires, net force reduction for Pacific Bell, excluding its
subsidiaries, was approximately 190 employees for the first three months of
1996. A total of $71 million in cash outlays was charged to the reserve in
first quarter 1996. These costs were primarily for information systems
reengineering and facilities consolidation. As of March 31, 1996, a balance
of $148 million remained in the restructuring reserve.
14
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Capital Expenditures
- --------------------
The Company invested $487 million during the first three months of 1996, an
increase of 67.9 percent from first quarter 1995, primarily due to investments
in the Pacific Bell Mobile Services PCS network and to modernize and expand
the Company's core telecommunications network.
CREDIT RATINGS
In March 1996, Moody's Investors Services, Inc. placed the senior long-term
debt ratings of the Company under review for possible downgrade. The ratings
are still under review.
In April 1996, reflecting the announcement of the merger agreement with SBC
Communications Inc. ("SBC"-see below), Standard & Poor's Corporation's credit
rating outlook remains negative. Also reflecting the merger announcement,
Duff and Phelps, Inc. reaffirmed its ratings of Duff 1+ and Double-A-Minus
("AA-") on the Company's commercial paper and debentures, respectively.
MERGER AGREEMENT
On April 1, 1996, SBC and Pacific Telesis, the Company's parent, jointly
announced a definitive agreement whereby Pacific Telesis will become a wholly
owned subsidiary of SBC. Under terms of the merger agreement, each share of
Pacific Telesis common stock will be exchanged for 0.733 shares of SBC common
stock, subject to adjustment. The transaction, which has been approved by the
Board of Directors of each company, is intended to be accounted for as a
pooling of interests and be a tax-free reorganization. Completion of the
merger agreement is subject to certain conditions, including regulatory
approvals and approval by the shareowners of each company.
PENDING REGULATORY ISSUES
1996 Interstate Access Charge Filing
- ------------------------------------
In April 1996, the Company filed its 1996 annual access tariff with the FCC.
That tariff proposes rate increases of about $24 million for the July 1, 1996
through June 30, 1997 tariff year.
15
<PAGE>
FCC Proposal on Wireless Interconnection
- ----------------------------------------
In January 1996, the FCC released a Notice of Proposed Rulemaking in which the
FCC proposed to change the arrangement under which the Company and other local
exchange carriers ("LECs") are compensated for interconnecting with and
terminating traffic for Commercial Mobile Radio Service ("CMRS") providers
(including cellular and PCS providers). Under the FCC's proposal, for an
interim period the Company would no longer receive compensation for these
functions. Each carrier would terminate traffic for the other at no charge
("bill and keep"). LECs terminate over four times more traffic for CMRS
providers than CMRS providers terminate traffic for LECs. The Company has
advocated interconnection based on negotiated mutual compensation agreements.
It is possible that the FCC could decide this issue in the near term. If
adopted, bill and keep would have a material adverse effect on the Company.
16
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PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits.
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
- ------- -----------
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Bell 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.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 1st Quarter 1996 Form 10-Q.
The Company will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Report on Form 8-K.
Form 8-K, Date of Report February 1, 1996, was filed with the SEC
under Item 7, attaching the Underwriting Agreement dated February 1,
1996, between Pacific Bell and the Underwriter in connection with the
5 7/8% Debentures due February 15, 2006 of Pacific Bell.
17
<PAGE>
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Bell
By /s/ Peter A. Darbee
---------------------------------------
Peter A. Darbee
Vice President, Chief Financial Officer
and Controller
May 13, 1996
18
<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
- ------- -----------
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Bell 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.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 1st Quarter 1996 Form 10-Q.
19
<PAGE>
Exhibit 15
----------
COOPERS & LYBRAND L.L.P.
May 13, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Re: Pacific Bell
Registration Statement on Form S-3
------------------------------------
We are aware that our report dated May 13, 1996 on our review of the interim
financial information of Pacific Bell and Subsidiaries for the three-month
period ended March 31, 1996 included in this Form 10-Q is incorporated by
reference in the Company's registration statement as follows:
Form S-3: Pacific Bell $1.575 Billion Debt Securities
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statement prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<PERIOD-TYPE> 3-MOS
<CASH> 53
<SECURITIES> 0
<RECEIVABLES> 1,416
<ALLOWANCES> 140
<INVENTORY> 0
<CURRENT-ASSETS> 2,282
<PP&E> 26,994
<DEPRECIATION> 15,880
<TOTAL-ASSETS> 13,871
<CURRENT-LIABILITIES> 2,968
<BONDS> 4,955
<COMMON> 225
0
0
<OTHER-SE> 3,015
<TOTAL-LIABILITY-AND-EQUITY> 13,871
<SALES> 0
<TOTAL-REVENUES> 2,283
<CGS> 0
<TOTAL-COSTS> 1,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> 487
<INCOME-TAX> 197
<INCOME-CONTINUING> 290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
