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 June 30, 1994
or
_____ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-2346
SOUTHWESTERN BELL TELEPHONE COMPANY
Incorporated under the laws of the State of Missouri
I.R.S. Employer Identification Number 43-0529710
One Bell Center, St. Louis, Missouri 63101-3099
Telephone Number: (314) 235-9800
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF SOUTHWESTERN BELL
CORPORATION, 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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
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Three months ended Six months ended
June 30, June 30,
1994 1993 1994 1993
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Operating Revenues
Local service $ 995.4 $ 964.4 $ 1,982.7 $ 1,913.0
Network access 705.7 662.6 1,387.2 1,300.3
Long-distance service 226.3 242.1 447.0 478.1
Other 146.4 130.1 284.5 268.3
Total operating revenues 2,073.8 1,999.2 4,101.4 3,959.7
Operating Expenses
Cost of services and products 656.3 622.3 1,299.2 1,218.2
Selling, general and administrative 472.3 470.4 940.8 950.5
Depreciation and amortization 424.5 418.6 843.9 832.8
Total operating expenses 1,553.1 1,511.3 3,083.9 3,001.5
Operating Income 520.7 487.9 1,017.5 958.2
Other Income (Expense)
Interest expense (87.6) (102.0) (175.6) (201.1)
Other expense - net (8.4) (12.5) (11.2) (15.9)
Total other income (expense) (96.0) (114.5) (186.8) (217.0)
Income Before Income Taxes,
Extraordinary Loss and Cumulative Effect
of Changes in Accounting Principles 424.7 373.4 830.7 741.2
Income Taxes
Federal 126.6 96.3 245.3 192.9
State and local 15.6 11.3 30.8 26.4
Total income taxes 142.2 107.6 276.1 219.3
Income Before Extraordinary Loss
and Cumulative Effect of Changes
in Accounting Principles 282.5 265.8 554.6 521.9
Extraordinary Loss on Early Extinguishment
of Debt, net of tax - (43.6) - (133.0)
Cumulative Effect of Changes in Accounting
Principles, net of tax - - - (1,849.4)
Net Income (Loss) $ 282.5 $ 222.2 $ 554.6 $ (1,460.5)
See Notes to Financial Statements.
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SOUTHWESTERN BELL TELEPHONE COMPANY
BALANCE SHEETS
Dollars in millions
June 30, December 31,
1994 1993
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 30.5 $ 37.8
Accounts receivable - net of allowances
for uncollectibles of
$19.3 and $14.2 1,426.0 1,375.0
Material and supplies 121.8 129.0
Deferred charges 47.1 46.8
Deferred income taxes 165.9 152.4
Prepaid expenses and other current assets 138.9 56.6
Total current assets 1,930.2 1,797.6
Property, Plant and Equipment - at cost 26,688.8 26,231.3
Less: Accumulated depreciation and amortization 11,028.0 10,532.2
Property, Plant and Equipment - Net 15,660.8 15,699.1
Other Assets 360.0 401.7
Total Assets $ 17,951.0 $ 17,898.4
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 776.6 $ 663.0
Accounts payable and accrued liabilities 2,341.1 2,160.0
Total current liabilities 3,117.7 2,823.0
Long-Term Debt 4,367.6 4,383.0
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,783.0 1,746.7
Postemployment benefit obligation 2,622.4 2,817.7
Unamortized investment tax credits 399.9 429.8
Other noncurrent liabilities 320.2 356.7
Total deferred credits and other noncurrent
liabilities 5,125.5 5,350.9
Shareowner's Equity
Common stock - one share, no par value 1.0 1.0
Paid-in surplus 5,317.8 5,706.9
Retained earnings (deficit) 21.4 (366.4)
Total shareowner's equity 5,340.2 5,341.5
Total Liabilities and Shareowner's Equity $ 17,951.0 $ 17,898.4
See Notes to Financial Statements.
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
Six months ended
June 30,
1994 1993
Operating Activities
Net income (loss) $ 554.6 $ (1,460.5)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation and amortization 843.9 832.8
Provision for uncollectible accounts 33.9 29.6
Amortization of investment tax credits (29.9) (32.2)
Pensions and other postemployment expenses 154.7 131.1
Deferred income tax expense (17.0) 14.8
Extraordinary loss, net of tax - 133.0
Cumulative effect of accounting changes,
net of tax - 1,849.4
Other - net (324.7) (508.3)
Total adjustments 660.9 2,450.2
Net Cash Provided by Operating Activities 1,215.5 989.7
Investing Activities
Construction and capital expenditures (765.0) (841.3)
Net Cash Used in Investing Activities (765.0) (841.3)
Financing Activities
Net change in short-term borrowings with
original maturities of three months or less 380.8 451.1
Issuance of other short-term borrowings 7.5 -
Repayment of other short-term borrowings (5.0) (126.6)
Issuance of long-term debt 0.7 1,056.2
Repayment of long-term debt (285.9) (5.9)
Early extinguishment of debt and related
call premiums - (1,094.8)
Dividends paid (555.9) (438.2)
Net Cash Used in Financing Activities (457.8) (158.2)
Net decrease in cash and cash equivalents (7.3) (9.8)
Cash and cash equivalents beginning of year 37.8 44.9
Cash and Cash Equivalents End of Period $ 30.5 $ 35.1
Cash Paid During the Six Months Ended
June 30 for:
Interest $ 177.3 $ 209.1
Income taxes $ 348.1 $ 176.4
See Notes to Financial Statements.
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
Retained
Common Paid-in Earnings
Stock Surplus (Deficit)
Balance, December 31, 1992 $ 6,469.9 $ - $ 621.2
Net income (loss) - - (1,460.5)
Dividend to shareowner - (434.7) -
Transfer of equity (6,468.9) 6,468.9 -
Balance, June 30, 1993 $ 1.0 $ 6,034.2 $ (839.3)
Balance, December 31, 1993 $ 1.0 $ 5,706.9 $ (366.4)
Net income - - 554.6
Dividend to shareowner - (389.1) (166.8)
Balance, June 30, 1994 $ 1.0 $ 5,317.8 $ 21.4
See Notes to Financial Statements.
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At June 30, or for the six months then ended: 1994 1993
Return on weighted average total capital* . . . 13.30% 12.86%
Debt ratio . . . . . . . . . . . . . . . . . . 49.06% 51.28%
Network access lines in service (000) . . . . . 13,472 13,023
Access minutes of use (000,000) # . . . . . . . . 23,540 21,451
Long-distance messages (000) . . . . . . . . . 548,638 539,765
Number of employees . . . . . . . . . . . . . . 49,020 50,410
* 1993 calculated using Income Before Extraordinary Loss and Cumulative Effect
of Changes in Accounting Principles.
# 1993 amounts have been restated to conform to the current year's
classifications.
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
PREPARATION OF INTERIM FINANCIAL STATEMENTS - Southwestern Bell
Telephone Company (Telephone Company) is a wholly-owned subsidiary of
Southwestern Bell Corporation (Corporation). The financial statements
have been prepared by the Telephone Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in
the opinion of management, include all adjustments (consisting only of
normal recurring accruals and adjustments necessary for adoption of
new accounting standards) necessary to present fairly the results for
the interim periods shown. Certain information and footnote
disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such SEC rules and regulations.
Management believes that the disclosures made are adequate to make the
information presented not misleading. The results for the interim
periods are not necessarily indicative of results for the full year.
The financial statements contained herein should be read in
conjunction with the financial statements and notes thereto included
in the Telephone Company's 1993 Annual Report on Form 10-K.
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS
Southwestern Bell Telephone Company (Telephone Company) reported net
income of $282.5 for the second quarter of 1994 and $554.6 for the
first six months of 1994. Financial results for the second quarters
and first six months of 1994 and 1993 are summarized as follows:
Second Quarter Six-Month Period
% %
1994 1993 Change 1994 1993 Change
Operating $ 2,073.8 $ 1,999.2 3.7% $ 4,101.4 $ 3,959.7 3.6%
revenues
Operating $ 1,553.1 $ 1,511.3 2.8% $ 3,083.9 $ 3,001.5 2.7%
expenses
Income before
extraordinary
loss and $ 282.5 $ 265.8 6.3% $ 554.6 $ 521.9 6.3%
accounting
changes
Extraordinary - $ (43.6) - - $ (133.0) -
loss
Accounting - - - - $ (1,849.4) -
changes
Net income $ 282.5 $ 222.2 27.1% $ 554.6 $ (1,460.5) -
(loss)
The primary factor contributing to the increase in income before
extraordinary loss and cumulative effect of changes in accounting
principles during the second quarter and first six months of 1994 was
growth in demand for services and products. This increase was
partially offset by a combination of previously ordered rate
reductions and accruals for potential rate reductions, as discussed in
the Telephone Company's 1993 Annual Report on Form 10-K, and increased
fees for switching system software licenses.
Results for the second quarter and first six months of 1993 reflect
extraordinary losses of $43.6 and $133.0, respectively, associated with
refinancing of long-term debt. In addition, effective January 1,1993,
the Telephone Company adopted new financial accounting standards
relating to postretirement benefits, postemployment benefits, and
income taxes resulting in a one-time, non-cash charge to 1993 earnings
of $1,849.4.
The Telephone Company's operating revenues in the second quarter and
first six months of 1994 increased $74.6, or 3.7 percent, and $141.7,
or 3.6 percent, over the second quarter and first six months of 1993,
respectively. Components of operating revenues for the second
quarters and first six months of 1994 and 1993 are as follows:
Second Quarter Six-Month Period
% %
1994 1993 Change 1994 1993 Change
Local $ 995.4 $ 964.4 3.2% $ 1,982.7 $ 1,913.0 3.6%
service
Network access
Interstate 460.9 445.2 3.5 915.8 877.3 4.4
Intrastate 244.8 217.4 12.6 471.4 423.0 11.4
Long-
distance 226.3 242.1 (6.5) 447.0 478.1 (6.5)
service
Other 146.4 130.1 12.5 284.5 268.3 6.0
Total $ 2,073.8 $ 1,999.2 3.7% $ 4,101.4 $ 3,959.7 3.6%
Local service revenues increased in the second quarter and first
six months of 1994 due primarily to increases in demand,
including growth in the number of access lines of 3.4 percent
since June 30, 1993. This increase was partially offset by the
impact of previously ordered rate reductions in Texas and
accruals for potential rate reductions in Missouri.
Interstate network access revenues increased in the second
quarter and first six months of 1994 due primarily to an increase
in demand for access services and growth in end user charges
attributable to an increasing access line base, partially offset
by the impact of accruals for sharing under the Federal
Communications Commission (FCC) price cap plan. Network access
revenues also reflect a retroactive billing adjustment that
decreased interstate revenues while increasing intrastate
revenues.
Intrastate network access revenues increased in the second
quarter and first six months of 1994 due to an increase in
demand, partially offset by previously ordered rate reductions,
primarily in Texas. Approximately one-third of the increase
reflects the 1994 partial replacement of the Texas pool
settlement process with a system of primary toll carrier charges.
Charges paid to the Telephone Company by other intrastate
carriers are now recorded as access revenues, while those paid by
the Telephone Company are recorded as cost of services and
products. These amounts are offsetting and did not materially
affect operating income in the second quarter and first six
months of 1994. Previously, the net settlement pool payment or
receipt was recorded as an increase or decrease in revenue.
Revenues also increased as a result of the billing adjustment
noted above.
Long-distance service revenues decreased in the second quarter
and first six months of 1994 due mainly to accruals for potential
rate reductions, primarily in Missouri, and reclassification of
certain revenues to access revenues.
Other operating revenues consist of the Telephone Company's non-
regulated network services and products, billing and collection
services performed for interexchange carriers, the provision for
uncollectible revenues related to all revenue classifications and
other miscellaneous revenues. Other operating revenues increased
in the second quarter and first six months of 1994 due to
increases in demand for non-regulated services and products,
including Caller ID equipment, offset by decreases in
miscellaneous revenues.
The Telephone Company's operating expenses in the second quarter and
first six months of 1994 increased $41.8, or 2.8 percent, and $82.4,
or 2.7 percent, over the second quarter and first six months of 1993,
respectively. Components of operating expenses for the second
quarters and first six months of 1994 and 1993 are as follows:
Second Quarter Six-Month Period
% %
1994 1993 Change 1994 1993 Change
Cost of
services and $ 656.3 $ 622.3 5.5% $ 1,299.2 $ 1,218.2 6.6%
products
Selling,
general and 472.3 470.4 0.4 940.8 950.5 (1.0)
administrative
Depreciation
and 424.5 418.6 1.4 843.9 832.8 1.3
amortization
Total $ 1,553.1 $ 1,511.3 2.8% $ 3,083.9 $ 3,001.5 2.7%
Cost of services and products increased for the second quarter
and first six months of 1994 due to increased expense for
switching system software license fees, including fees related to
enhanced services, annual compensation increases and Texas
primary toll carrier access expenses discussed above.
Selling, general and administrative expenses were flat in the
second quarter and decreased in the first six months of 1994 due
to savings associated with 1993 force reductions. This decrease
was offset by annual compensation increases, higher property,
gross receipts and payroll taxes, and higher pension benefit
expenses.
Depreciation and amortization increased in the second quarter and
first six months of 1994 due primarily to a change in plant level
and composition.
Interest expense decreased $14.4, or 14.1 percent, and $25.5, or
12.7 percent, in the second quarter and first six months of 1994,
respectively, due primarily to lower interest rates on debt refinanced
in 1993. Comparisons are also favorably affected by the recording of
interest expense associated with the settlement of federal income tax
audit issues in the second quarter of 1993.
Federal income tax expense increased $30.3, or 31.5 percent, in the
second quarter and $52.4, or 27.2 percent, for the first six months of
1994 due primarily to higher income before income taxes and the 1
percent increase in the federal income tax rate enacted in the third
quarter of 1993.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
Regulatory Developments
Federal - In June 1994, the United States Court of Appeals for the
District of Columbia Circuit (Court of Appeals) released its opinion
on an appeal filed by the Telephone Company and several other local
exchange carriers. The local exchange carriers had appealed the FCC's
October 1992 order which required local exchange carriers to file
tariffs permitting independent parties to physically collocate their
equipment within local exchange carrier central offices for the
purposes of providing certain special access services. The Court of
Appeals vacated the FCC's physical collocation requirement and
remanded the order in all other respects, such as virtual collocation,
to the FCC for further proceedings. Virtual collocation involves a
set of technical and pricing rules intended to position the
interconnector as if its equipment were located in the central office.
In July 1994, the FCC released a Memorandum, Opinion and Order (the
Order) requiring certain local exchange carriers to file virtual
collocation tariffs by September 1, 1994 to become effective December
15, 1994. Under the Order, local exchange carriers are required to
provide equipment designated by independent parties to offer virtual
collocation within the local exchange carriers' central offices.
Local exchange carriers may choose to continue offering physical
collocation instead of filing new tariffs for virtual collocation.
The Telephone Company intends to appeal the Order. At this time,
management is unable to estimate the financial impact of the
Order on the Telephone Company.
In July 1994, the Court of Appeals remanded the FCC's decision to deny
increases to the price caps (referred to as "exogenous treatment") to
reflect the incremental interstate costs associated with the accrual
accounting required by Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement No. 106). The Court of Appeals remand requires
the FCC to reconsider the Telephone Company's existing request for
interstate rate recovery of Statement No. 106 costs. Because the
remand requires further FCC action, interpretation and negotiation
with the Telephone Company and other local exchange carriers, the
financial impact of the remand cannot be estimated at this time.
In June 1994, Southwestern Bell Corporation (the Corporation) filed a
motion with the United States District Court for the District of
Columbia (the Court) seeking removal of restrictions that prevent it
from providing interLATA long-distance service to its cellular
customers. This filing follows a period of almost two and one-half
years of preliminary discussions between the Corporation and the
United States Department of Justice (DOJ). In July 1994, the
Corporation asked the DOJ to support a waiver allowing the Corporation
to offer interLATA long-distance service through subsidiaries outside
the five-state Telephone Company service region. Both of these
matters are pending.
In July 1994, the Corporation joined with three other Regional Holding
Companies (RHC) in a joint petition asking the Court to vacate the
consent decree issued by the Court at the time of AT&T's divestiture
of the RHCs. Among other items, the consent decree prevents the RHCs
from providing interLATA telephone service and manufacturing
telecommunications equipment. This matter is pending.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Southwestern Bell Telephone Company
August 10, 1994 /s/ Edward L. Glotzbach
Edward L. Glotzbach
Vice President-Chief Financial
Officer and Treasurer (Principal
Accounting/Financial Officer)
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EXHIBIT 12
SOUTHWESTERN BELL TELEPHONE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
DOLLARS IN MILLIONS
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SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
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Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Changes in
Accounting Principles $ 830.7 $ 741.2 $1,424.2 $1,324.7 $1,286.3 $1,319.4 $1,268.9
Add: Interest Expense 175.6 201.1 385.2 408.7 456.3 439.3 476.6
1/3 Rental Expense 12.3 10.8 22.8 27.6 22.7 29.6 28.2
Adjusted Earnings $1,018.6 $ 953.1 $1,832.2 $1,761.0 $1,765.3 $1,788.3 $1,773.7
Total Interest Charges $ 175.6 $ 201.1 $ 385.2 $ 408.7 $ 456.3 $ 439.3 $ 476.6
1/3 Rental Expense 12.3 10.8 22.8 27.6 22.7 29.6 28.2
Adjusted Fixed Charges $ 187.9 $ 211.9 $ 408.0 $ 436.3 $ 479.0 $ 468.9 $ 504.8
Ratio of Earnings to Fixed Charges 5.42 4.50 4.49 4.04 3.69 3.81 3.51
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