FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1997
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-1414
PACIFIC BELL
A California Corporation
I.R.S. Employer Identification Number 94-0745535
140 New Montgomery Street, San Francisco, California 94105
Telephone Number: (415) 542-9000
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF PACIFIC TELESIS GROUP, WHICH IS A
WHOLLY-OWNED SUBSIDIARY OF SBC COMMUNICATIONS INC., 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).
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PACIFIC BELL
- ------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------
Three months ended
March 31,
--------------------------------
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Local service $ 1,019 $ 960
Network access 645 622
Long-distance service 305 312
Directory advertising 358 302
Other 162 131
- ------------------------------------------------------------------------------------
Total operating revenues 2,489 2,327
- ------------------------------------------------------------------------------------
Operating Expenses
Cost of services and products 866 879
Selling, general and administrative 451 388
Depreciation and amortization 478 455
- ------------------------------------------------------------------------------------
Total operating expenses 1,795 1,722
- ------------------------------------------------------------------------------------
Operating Income 694 605
- ------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (98) (88)
Other income (expense) - net 3 3
- ------------------------------------------------------------------------------------
Total other income (expense) (95) (85)
- ------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Accounting Change 599 520
Income taxes 239 212
- ------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting
Change 360 308
Cumulative Effect of Accounting Change,
net of tax 85
-
- ------------------------------------------------------------------------------------
Net Income $ 360 $ 393
- ------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC BELL
- -------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
- -------------------------------------------------------------------------------------
March 31, December 31,
------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 90 $ 58
of $175 and $161 2,200 2,133
Prepaid expenses 55 37
Deferred charges 26 45
Other current assets 103 156
- -------------------------------------------------------------------------------------
Total current assets 2,474 2,429
- -------------------------------------------------------------------------------------
Property, Plant and Equipment-at cost 28,840 28,372
Less: Accumulated depreciation and amortization 16,979 16,699
- -------------------------------------------------------------------------------------
Property, Plant and Equipment-Net 11,861 11,673
- -------------------------------------------------------------------------------------
Other Assets 422 547
- -------------------------------------------------------------------------------------
Total Assets $ 14,757 $ 14,649
- -------------------------------------------------------------------------------------
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 714 $ 287
Accounts payable and accrued liabilities 2,266 2,546
- -------------------------------------------------------------------------------------
Total current liabilities 2,980 2,833
- -------------------------------------------------------------------------------------
Long-Term Debt 5,370 5,364
- -------------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 494 476
Postemployment benefit obligation 900 671
Unamortized investment tax credits 225 236
Other noncurrent liabilities 669 1,142
- -------------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 2,288 2,525
- -------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------
Shareowner's Equity
Common shares ($1 par value) 225 225
Capital in excess of par value 6,256 6,100
Accumulated deficit (2,362) (2,398)
- -------------------------------------------------------------------------------------
Total shareowner's equity 4,119 3,927
- -------------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity $ 14,757 $ 14,649
- -------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC BELL
- ------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and
cash equivalents
(Unaudited)
- ------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Three months ended
March 31,
---------------------
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 360 $ 393
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and 478 455
amortization
Provision for uncollectible 57 48
accounts
Amortization of investment tax (11) (11)
credits
Deferred income tax 100 21
expense
Cumulative effect of accounting - (85)
change
Other - net (633) (301)
- ----------------------------------------------------------------------------
Total adjustments (9) 127
- ----------------------------------------------------------------------------
Net Cash Provided by Operating Activities 351 520
- ----------------------------------------------------------------------------
Investing
Activities
Construction and capital expenditures (583) (469)
Other - (7)
- ----------------------------------------------------------------------------
Net Cash Used in Investing Activities (583) (476)
- ----------------------------------------------------------------------------
Financing
Activities
Net change in short-term borrowings with original
maturities of three months or less 424 (244)
Issuance of long-term debt 8 346
Dividends paid (324) (231)
Equity from parent 156 70
- ----------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 264 (59)
- ----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 32 (15)
- ----------------------------------------------------------------------------
Cash and cash equivalents beginning of year 58 68
- ----------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 90 $ 53
- ----------------------------------------------------------------------------
Cash paid during the three months ended March 31 for:
Interest $ 158 $ 120
Income taxes $ 36 $ 6
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC BELL
- ----------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
- ----------------------------------------------------------------------------------
Capital
in
Common Excess Accumulated
of
Shares Par Deficit
Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 225 $ 5,387 $ (2,501)
Net income - - 393
Dividends to shareowner - - (231)
Equity from parent - 70 -
Other - 1 (1)
- ----------------------------------------------------------------------------------
Balance, March 31, 1996 $ 225 $ 5,458 $ (2,340)
- ----------------------------------------------------------------------------------
Balance, December 31, 1996 $ 225 $ 6,100 $ (2,398)
Net income - - 360
Dividends to shareowner - - (324)
Equity from parent - 156 -
Balance, March 31, 1997 $ 225 $ 6,256 $ (2,362)
- ----------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
* * * *
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
At March 31, or for the three months then ended: 1997 1996
---------------------
<S> <C> <C>
Return on weighted average shareowners' equity . . . . . 36.94% 37.80%
Debt ratio . . . . . . . . . . . . . . . . . . . . . . . 59.63% 62.16%
Network access lines in service (000) . . . . . . . . . 16,273 15,674
Access minutes of use (000,000) . . . . . . . . . . . . . 17,519 16,166
Number of employees . . . . . . . . . . . . . . . . . . . 47,980 46,820
</TABLE>
<PAGE>
PACIFIC BELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions
1. BASIS OF PRESENTATION - The consolidated financial statements have been
prepared by Pacific Bell (PacBell ) pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results for the interim periods
shown. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such SEC
rules and regulations. Certain reclassifications have been made to the 1996
consolidated financial statements to conform with the 1997 presentation. The
results for the interim periods are not necessarily indicative of results for
the full year. The consolidated financial statements contained herein should
be read in conjunction with the consolidated financial statements and notes
thereto included in PacBell's 1996 Annual Report on Form 10-K (the Form 10-K)
filed with the Securities and Exchange Commission.
Prior to January 1, 1996, Pacific Bell Directory (a subsidiary of PacBell)
recognized revenues and expenses related to publishing directories in
California using the "amortization" method, under which revenues and expenses
were recognized over the lives of the directories, generally one year. Under
the new "issue basis" method, revenues and expenses are recognized when the
directories are issued. The change to the issue basis method was made because
it is the method generally followed in the publishing industry and better
reflects the operating activity of the business. The change was adopted
during fourth quarter 1996. The cumulative after-tax effect of applying the
change in method to prior years was recognized as of January 1, 1996 as a
one-time, non-cash gain applicable to continuing operations of $85. The gain
is net of deferred taxes of $58. The first three quarters of 1996 were
restated in the Form 10-K to reflect the new method.
In 1996, management amended the salaried pension plan, which changed from a
final pay plan to a cash balance plan. Under the transition to the new plan,
some retirees elected to receive lump-sum payments in settlement of the
pension liability. These lump-sum payments in the first quarter of 1997
exceeded the projected service and interest cost. PacBell recognized a gain
on these settlements in first quarter 1997 that increased net income by $87.
2. CONSOLIDATION - The consolidated financial statements include the accounts of
PacBell and its majority-owned subsidiaries. PacBell is a wholly-owned
subsidiary of Pacific Telesis Group (PAC). All significant intercompany
transactions are eliminated in the consolidation process.
3. MERGER - On April 1, 1997, SBC Communications Inc. (SBC) and PAC completed
the merger of an SBC subsidiary with PAC, in a transaction in which each
share of PAC common stock was exchanged for 0.73145 of a share of SBC common
stock (equivalent to approximately 313 million shares). With the merger, PAC
became a wholly-owned subsidiary of SBC. The transaction was accounted for as
a pooling of interests and a tax-free reorganization.
<PAGE>
PACIFIC BELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
Dollars in millions
PacBell's results will include merger transaction costs and the effects of
changes applied retroactively to conform accounting methodologies between
PacBell and SBC for, among other items, pensions and postretirement benefits.
These changes will be recorded by PacBell in the second quarter of 1997,
retroactive to January 1, 1997, as a cumulative effect of accounting changes
of $342 net of tax. Had the merger occurred January 1, 1997, income before
cumulative effect of accounting changes would have increased by $165. Among
other costs relating to the close of the merger, PacBell will record the
present value of amounts to be returned to California ratepayers as a
condition of the merger of $274, $165 net of tax.
4. COMMITMENTS AND CONTINGENCIES
Purchase Commitments - In December 1994, PacBell contracted for the purchase
of up to $2,000 of Advanced Communications Network (ACN) facilities, which
incorporated new technologies. During 1995, the ability to deploy the
facilities outstripped the ACN vendor's ability to deliver necessary products
and software. Accordingly, management decided to suspend construction at
certain sites, which reduced the expected cost to less than $700. If ACN
facilities meet certain quality and performance criteria (the Network Test),
PacBell is committed to purchase the ACN facilities in 1998. If the ACN
facilities are acquired, due to competition and other factors affecting
PacBell's ability to recover its investment in these facilities, their value
to PacBell could be materially impaired. If ACN facilities fail the Network
Test, PacBell will not be committed to buy the ACN facilities but might be
liable to reimburse the principal ACN vendor for some construction costs up
to $300, which could also result in a material charge.
As of March 31, 1997, PacBell had purchase commitments of about $176
remaining in connection with its previously announced program for deploying
an all digital switching platform with ISDN and SS-7 capabilities.
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 PacBell, on a specific
methodology for valuing utility property for property tax purposes for a
period of eight years. The California Public Utilities Commission (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 of annual property tax savings should be treated as an exogenous cost
reduction in PacBell's annual price cap filings. These intervenors have also
asserted that past property tax savings totaling as much as approximately $75
as of March 31, 1997, 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 and not as an exogenous cost. In an Interim Opinion issued
in June 1995, the CPUC decided to defer a final decision on this matter
pending resolution in a separate proceeding of the criteria for exogenous
cost treatment under its regulatory framework.
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions
RESULTS OF OPERATIONS
Pacific Bell (PacBell) reported net income of $360 for the first quarter of
1997. Financial results for the first quarters of 1997 and 1996 are
summarized as follows:
- --------------------------------------------------------------------------------
First Quarter
------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Operating revenues $ 2,489 $ 2,327 7.0%
Operating expenses $ 1,795 $ 1,722 4.2%
Income before cumulative effect of accounting $ 360 $ 308 16.9%
change
Cumulative effect of accounting change - $ 85 -
Net income $ 360 $ 393 (8.4)%
- --------------------------------------------------------------------------------
The primary factors contributing to the increase in income before cumulative
effect of accounting change during the first quarter of 1997 were an $87
after-tax settlement gain associated with lump-sum pension payments and growth
in demand for services and products at PacBell. Excluding this gain and
accounting changes, first quarter 1997 results decreased slightly due to
increased expenses for start-up costs associated with new growth initiatives,
primarily Personal Communications Systems (PCS) wireless, and expenses in the
wireline business including preparation for increased competition and unusually
high expenses associated with damage caused by winter storms. 1996 net income
included a one-time, non-cash, after-tax gain of $85 associated with a change in
accounting for directory publishing revenues and expenses.
PacBell's operating revenues in the first quarter of 1997 increased $162, or
7.0%. Components of operating revenues for the first quarters of 1997 and 1996
are as follows:
- --------------------------------------------------------------------------------
First Quarter
------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Local service $ 1,019 $ 960 6.1%
Network access
Interstate 459 444 3.4
Intrastate 186 178 4.5
Long-distance 305 312 (2.2)
service
Directory 358 302 18.5
advertising
Other 162 131 23.7
Total $ 2,489 $ 2,327 7.0%
- --------------------------------------------------------------------------------
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions
RESULTS OF OPERATIONS-Continued
Local service revenues increased in the first quarter of 1997 due
primarily to increases in demand, including increases in access lines and
vertical services revenues. The number of access lines increased by 3.8%
since March 31, 1996, with approximately 13% of access line growth due to
the sales of additional access lines to existing residential customers.
Vertical services revenues, which include custom calling options, Caller
ID and other enhanced services, increased by approximately 21%. Local
service revenues also reflect the implementation of the California
Universal Service Fund that went into effect February 1, 1997. This fund
is intended to subsidize the provision of service to high cost areas.
Amounts received from the fund resulted in a shift of equivalent revenues
from intraLATA long-distance and intrastate network access revenues to
local service revenues in the first quarter of 1997. This shift is subject
to final California Public Utilities Commission (CPUC) approval, expected
in second quarter 1997. Increases in revenues were slightly offset by rate
reductions due to CPUC price cap orders.
Network Access Interstate network access revenues increased in the first
quarter of 1997 due primarily to an increase in demand for access services
by interexchange carriers. Growth in revenues from end user charges
attributable to an increasing access line base also contributed to the
increase. Partially offsetting these increases in interstate network
access revenues were sharing accrual adjustments from prior periods.
Intrastate network access revenues increased in the first quarter of 1997
due primarily to increases in demand, including usage by alternative
intraLATA toll carriers, partially offset by the effects of the California
Universal Service Fund described above.
Long-Distance Service revenues decreased slightly in the first quarter of
1997 primarily due to the effects of the California Universal Service Fund
described above primarily offset by increases in demand resulting from
California's growing economy.
Directory advertising revenues increased in the first quarter of 1997 due
mainly to the publication of books not published in 1996 and, to a lesser
extent, increased demand and earlier directory publication.
Other operating revenues increased in the first quarter of 1997 due
primarily to increased demand for PacBell's non-regulated services and
products.
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions
RESULTS OF OPERATIONS-Continued
PacBell's operating expenses in the first quarter of 1997 increased $73 or 4.2%,
over the first quarter of 1996. Components of operating expenses for the first
quarters of 1997 and 1996 are as follows:
- -------------------------------------------------------------------------------
First Quarter
-----------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Cost of services and products $ 866$ 879 (1.5)%
Selling, general and 451 388
administrative 16.2
Depreciation and amortization 478 455 5.1
----------
Total $ 1,795$ 1,722 4.2%
- --------------------------------------------------------------------------------
Total Operating Expenses Costs of services and products and selling,
general and administrative costs increased on a combined basis $50, or
3.9% in the first quarter of 1997. The increase was due primarily to
increases for employee compensation, costs incurred to prepare for local
competition, and expenses associated with damage from winter storms and
other increases related to new business initiatives for Personal
Communications Services (PCS) and the Advanced Communications Network
(ACN). These increases were partially offset by savings due to a $146
settlement gain associated with lump-sum pension payments, changes in plan
assumptions and to changes in benefit plans made in 1996. Depreciation and
amortization increased in the first quarter of 1997 due primarily to
growth in plant levels.
Interest Expense increased $10 in the first quarter of 1997 due to increased
long term debt compared to the first quarter of 1996 and increased interest on
capital leases. These increases were somewhat offset by increased capitalized
interest during construction.
Income taxes increased $27 in the first quarter of 1997 primarily due to higher
income before income taxes.
Cumulative Effect of Accounting Change As discussed in Note 1 to the financial
statements, Pacific Bell Directory changed its method of recognizing directory
publishing revenues and related expenses effective January 1, 1996. The
cumulative after-tax effect of applying the new method to prior years was
recognized as of January 1, 1996 as a one-time, non-cash gain applicable to
continuing operations of $85. The gain is net of deferred taxes of $58.
Management believes this change to the issue basis method is preferable because
it is the method generally followed in the publishing industry, and better
reflects the operating activity of the business. This accounting change is not
expected to have a significant net income effect on future periods.
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
OTHER BUSINESS MATTERS
Restructuring Reserve -PacBell established a restructuring reserve at the end of
1993 to provide for the incremental cost of force reductions associated with
restructuring business processes through 1997. A total of $22 in cash outlays
was charged to the reserve in the first quarter of 1997. As of March 31, 1997,
$72 remained in the restructuring reserve.
Merger - On April 1, 1997, SBC Communications Inc. (SBC) and Pacific Telesis
Group (PAC) completed the merger of an SBC subsidiary with PAC, in a transaction
in which each share of PAC common stock was exchanged for 0.73145 of a share of
SBC common stock (equivalent to approximately 313 million shares). With the
merger, PAC became a wholly-owned subsidiary of SBC. The transaction will be
accounted for as a pooling of interests and a tax-free reorganization. (See Note
3 to the financial statements.)
Access Reform - On May 7, 1997, the FCC adopted orders on access charge reform
and local exchange carrier price caps which will reduce access charges by, in
part, adjusting the productivity factor to be used in interstate price cap
calculations. In presenting the orders, the FCC estimated there would be a $1.7
billion reduction in industry-wide interstate access charges which are estimated
to aggregate $23 billion. Management is evaluating the effect of and is its
response to the orders.
Interconnection Agreements - Companies seeking to connect to PacBell's network
and provide local service must enter into interconnection agreements with
PacBell which are then subject to approval by the CPUC. PacBell has entered into
agreements, some of which have been approved by the CPUC.
PacBell expects that it will experience local exchange competition both from
current providers and other new entrants in 1997. PAC intends to use
interconnection agreements to support its application to the FCC to provide
interLATA long-distance service in California.
FCC Apportionment of Sharing Obligations - The price cap rules require Local
Exchange Carriers (LECs) to apportion sharing obligations among their price cap
baskets based on "cost-causative" methods. The FCC concluded that proportionate
revenues in each price cap basket could be used as a proxy for cost. For years
when PacBell had a sharing obligation, it excluded interstate end user revenues
from the sharing apportionment methodology. On April 17, 1997, the FCC ruled
that end user revenues must be included in the base by which sharing is
apportioned to the baskets. The Order requires PacBell to submit recalculated
price cap indices reflecting its apportionment methodology and to revise its
tariff rates as of July 1, 1997. Management estimates that the effect of this
order could be up to approximately $30 plus interest.
<PAGE>
PACIFIC BELL
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Dollars in millions
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
OTHER BUSINESS MATTERS (Continued)
Revision of FCC 800 Data Base Access Tariffs - In October 1996, the FCC issued a
Report & Order on the 800 Database Access Tariffs. The Order required tariff
revisions and largely disallowed PacBell's request for exogenous treatment of
800 database costs. Rates were revised effective December 21, 1996. The original
rates took effect May 1, 1993 pursuant to potential refund. On April 14, 1997,
the FCC issued an Order that required refunds be made July 1, 1997. PacBell must
file a refund plan on May 14, 1997. Currently, management assesses this refund
to be approximately $22 plus interest.
Other Billing and Collection Allocation Methodology Changes - The FCC adopted
new separations rules effective May 1, 1997 that shift recovery of substantial
other billing and collections costs to the interstate jurisdiction. This rule
change could reduce PacBell's revenues by about $30 in 1997 and about $45 in
each subsequent year. Management is evaluating options to mitigate this effect
on net income.
Revenues Subject to Refund - In 1992, the CPUC issued a decision adopting, with
modification, Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" (FAS 106), for
regulatory accounting purposes. Annual price cap decisions by the CPUC granted
PacBell approximately $100 in each of the years 1993-1996 for partial recovery
of higher costs under FAS 106. In October 1994 the CPUC reopened the proceeding
to review the criteria for exogenous cost treatment and whether PacBell should
continue to recover these costs. The CPUC's order also held that related
revenues collected after October 12, 1994, were subject to refund plus interest
pending future proceedings. These proceedings were concluded on April 9, 1997
when the CPUC reaffirmed that postretirement benefits costs are appropriately
recoverable in PacBell's price cap filings.
<PAGE>
PACIFIC BELL
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 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.
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter ended
March 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Bell
/s/ Michael F.G. Ashby
May 9, 1997 ------------------------------
Michael F.G. Ashby
Vice President and Chief Financial
Officer
<TABLE>
EXHIBIT 12
PACIFIC BELL
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993* 1992
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes, $ 599 $ 520 $ 1,945 $ 1,538 $ 1,692 $ (39) $ 1,738
Extraordinary Loss and Cumulative
Effect of Accounting Change
Add:Interest Expense 98 88 363 410 439 429 460
1/3 Rental Expense 16 12 46 28 40 37 35
-------------------------------------------------------------------------
Adjusted Earnings $ 713 $ 620 $ 2,354 $ 1,976 $ 2,171 $ 427 $ 2,233
-------------------------------------------------------------------------
Total Interest Charges 115 98 $ $ 410 $ $ 429 $
411 439 460
1/3 Rental Expense 16 12 46 28 40 37 35
-------------------------------------------------------------------------
Adjusted Fixed Charges $ $ 110 $ $ 438 $ $ 466 $
131 457 479 495
-------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 5.44 5.64 5.15 4.51 4.53 0.92 4.51
-------------------------------------------------------------------------
<FN>
* Results for 1993 reflect restructuring charges which totaled $924 after taxes.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<CASH> 90
<SECURITIES> 0
<RECEIVABLES> 2,375
<ALLOWANCES> 175
<INVENTORY> 0
<CURRENT-ASSETS> 2,474
<PP&E> 28,840
<DEPRECIATION> 16,979
<TOTAL-ASSETS> 14,757
<CURRENT-LIABILITIES> 2,980
<BONDS> 5,370
<COMMON> 225
0
0
<OTHER-SE> 4,119
<TOTAL-LIABILITY-AND-EQUITY> 14,757
<SALES> 0
<TOTAL-REVENUES> 2,489
<CGS> 0
<TOTAL-COSTS> 1,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 599
<INCOME-TAX> 239
<INCOME-CONTINUING> 360
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 360
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
