FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For fiscal year ended December 31, 1994
OR
_______TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
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
Securities registered pursuant to Section 12(b) of the Act: (See
attached Schedule A)
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF SOUTHWESTERN BELL
CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING
THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION J(2).
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]
SCHEDULE A
Securities Registered Pursuant To Section 12(b) Of The Act:
Title of each Class Name of each exchange
on which registered
Five Year 8.30% Notes, New York Stock Exchange
due June 1, 1996
Seven Year 6-1/8% Notes, New York Stock Exchange
due March 1, 2000
Eight Year 6-3/8% Notes, New York Stock Exchange
due April 1, 2001
Twelve Year 6-5/8% Notes, New York Stock Exchange
due April 1, 2005
Thirty-Eight Year 7-3/4% American Stock Exchange
Debentures,
due September 1, 2009
Forty Year 6-7/8% Debentures, American Stock Exchange
due February 1, 2011
Forty Year 7-3/8% Debentures, American Stock Exchange
due May 1, 2012
Forty Year 7-5/8% Debentures, American Stock Exchange
due October 1, 2013
Forty Year 8-1/4% Debentures, American Stock Exchange
due March 1, 2014
Twenty-Two Year 7% Debentures, New York Stock Exchange
due July 1, 2015
Forty Year 8-1/4% Debentures, American Stock Exchange
due April 1, 2017
Thirty Year 7-5/8% Notes, New York Stock Exchange
due March 1, 2023
Thirty-Two Year 7-1/4% New York Stock Exchange
Debentures,
due July 15, 2025
TABLE OF CONTENTS
PART I
Item Page
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders *
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters
6. Selected Financial and Operating Data
7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction J(2))
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners and
Management *
13. Certain Relationships and Related Transactions *
PART IV
14.Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
__________
*Omitted pursuant to General Instruction J(2).
PART I
ITEM 1. BUSINESS
GENERAL
Southwestern Bell Telephone Company (Telephone Company) was
incorporated in 1882 under the laws of the State of Missouri, and
has its principal executive offices at One Bell Center,
St. Louis, Missouri 63101-3099 (telephone number 314-235-9800).
The Telephone Company is a wholly-owned subsidiary of
Southwestern Bell Corporation (SBC), which was incorporated under
the laws of the State of Delaware in 1983 by AT&T Corp. (AT&T) as
one of seven regional holding companies (RHCs) formed to hold
AT&T's local telephone companies. AT&T divested SBC by means of
a spin-off of stock to its shareowners on January 1, 1984
(divestiture). The divestiture was made pursuant to a consent
decree, referred to as the Modification of Final Judgment (MFJ),
issued by the United States District Court for the District of
Columbia (District Court).
THE MFJ AND LINE OF BUSINESS RESTRICTIONS
The MFJ, as originally approved by the District Court in 1982,
placed restrictions on the types of businesses in which SBC could
engage. The principal restriction prohibits SBC from providing
telecommunications services between Local Access and Transport
Areas (LATAs), which are generally centered on a standard
metropolitan statistical area or other identifiable community of
interest. The MFJ also initially restricted SBC from providing
information services, engaging in nontelecommunications lines of
business, and manufacturing or providing telecommunications
products, other than the provision of customer premises equipment
(CPE) manufactured by others. CPE, as defined in the MFJ,
represents equipment used on customers' premises to originate,
route or terminate telecommunications. These services and
products are collectively known as "restricted lines of
business."
The MFJ permits SBC to obtain relief from these restrictions upon
a showing that there is no substantial possibility that it could
use its monopoly power to impede competition in the specific
market it seeks to enter (the Waiver Standard). As a result of
proceedings before the District Court since divestiture, the
restrictions against engaging in nontelecommunications lines of
business and providing intraLATA information services have been
removed. SBC has also been authorized to engage in the
restricted lines of business outside the United States, subject
to certain conditions designed to prevent an impact on United
States markets. SBC has submitted various requests to the
District Court which seek to remove or modify the remaining
restrictions. These include, among others, pending waiver
requests to provide information services on an interLATA basis
and to provide interLATA long-distance service outside the five-
state area (defined below) and to cellular customers. In
addition, SBC and two other RHCs have asked the District Court,
in a joint petition filed in July 1994, to vacate the MFJ. This
matter is currently pending.
BUSINESS OPERATIONS
The Telephone Company's principal services include local, long-
distance and network access services, which are provided in the
states of (listed by number of access lines) Texas, Missouri,
Oklahoma, Kansas and Arkansas (five-state area). Local services
involve the transport of telecommunications traffic between
telephones and other CPE located within the same local service
calling area. Local services include: basic local exchange
service, extended area service, dedicated private line services
for voice and special services, directory assistance and various
custom calling services. Long-distance services involve the
transport of telecommunications traffic between local calling
areas within the same LATA (intraLATA). Long-distance services
also include such other services as Wide Area Telecommunications
Service (WATS or 800 services) and other special services.
Network access services connect a subscriber's telephone or other
equipment to the transmission facilities of non-Telephone Company
carriers which provide long-distance (principally interLATA) and
other communications services. Network access services are
either switched, which use a switched communications path between
the carrier and the customer, or special, which use a direct
nonswitched path.
The following table sets forth for the Telephone Company the
percentage of total operating revenues by any class of service
which accounted for 10% or more of total operating revenues in
any of the last three fiscal years.
Percentage of Total
Operating Revenues
1994 1993 1992
Local service 48% 48% 48%
Long-distance service 11% 12% 13%
Network access 34% 33% 33%
The Telephone Company provides its services over approximately 9
million residential and 4 million business access lines in the
five-state area. During 1994, nearly two-thirds of the Telephone
Company's access line growth occurred in Texas.
During 1994, the Telephone Company continued to expand its
offering of optional services including Caller ID, a feature
which displays the telephone number of the person calling and the
caller's name in certain markets; Call Return, a feature that
redials the number of the last incoming call; and Call Blocker, a
feature which allows customers to automatically reject calls from
a designated list of telephone numbers. Caller ID is now being
offered in certain markets in all of the states in the Telephone
Company's five-state area.
In February 1994, the Telephone Company announced plans for a
consumer trial of video and interactive services in Richardson,
Texas. With the construction of the broadband network currently
under way, the Telephone Company plans to begin offering
telephone service to customers over the network in early 1995.
Delivery of video service is expected to begin during 1996.
Eventually, 42,000 homes will be included in the trial.
The Federal Communications Commission (FCC) has certain rules
that impact the manner in which the Telephone Company may offer
network services for enhanced service providers. Enhanced
services are services other than basic transmission services.
Under these rules, the Telephone Company is permitted to offer
enhanced services either on its own or jointly with its
affiliates, subject to nonstructural safeguards designed to
permit the Telephone Company's competitors to acquire needed
network services on an efficient, non-discriminatory basis and to
reduce the risk of cross-subsidization. These safeguards include
accounting and reporting procedures and Open Network Architecture
(ONA) requirements, which represent the Telephone Company's plan
to provide equal access to its network to all enhanced service
providers. Enhanced services are deregulated at the federal
level, and thus far none of the state commissions to which the
Telephone Company is subject has asserted jurisdiction over
intrastate enhanced services. The nonstructural safeguards are
currently being reviewed by the FCC as a result of an
October 1994 judicial remand, which charged that the FCC had not
adequately explained how ONA would prevent discrimination against
competitors. While the outcome cannot be predicted, it is
anticipated that the FCC will reaffirm the nonstructural
safeguards.
GOVERNMENT REGULATION
In the five-state area, the Telephone Company is subject to
regulation by state commissions which have the power to regulate
intrastate rates and services, including local, long-distance and
network access (both intraLATA and interLATA access within the
state) services. The Telephone Company is also subject to the
jurisdiction of the FCC with respect to foreign and interstate
rates and services, including interstate access charges. Access
charges are designed to compensate the Telephone Company for the
use of its facilities for the origination or termination of long-
distance and other communications by non-Telephone Company
carriers.
Additional information relating to federal and state regulation
of the Telephone Company is contained in Item 7, Management's
Discussion and Analysis of Results of Operations of this report
under the heading "Regulatory Environment" beginning on page 12
of this report.
MAJOR CUSTOMER
Approximately 15% in 1994 and 1993, and 16% in 1992, of the
Telephone Company's revenues were from services provided to AT&T.
No other customer accounted for more than 10% of total revenues.
COMPETITION
Information relating to competition in the telecommunications
industry is contained in Item 7, Management's Discussion and
Analysis of Results of Operations of this report under the
heading "Competition" beginning on page 13 of this report.
RESEARCH AND DEVELOPMENT
The majority of company-sponsored basic and applied research
activities is conducted at Bell Communications Research, Inc.
(Bellcore). The Telephone Company owns a one-seventh interest in
Bellcore along with the other six RHCs. Bellcore is the central
point of contact for coordinating the Federal government's
telecommunications requirements on national security and
emergency preparedness.
Basic and applied research is also conducted at Southwestern Bell
Technology Resources, Inc. (TRI), a subsidiary of SBC. TRI
provides technology planning and assessment services to SBC and
its subsidiaries.
EMPLOYEES
As of December 31, 1994, the Telephone Company employed 48,440
persons. Approximately 76% of the employees are represented by
the Communications Workers of America (CWA). Effective in August
1992, a three-year contract was negotiated between the CWA and
the Telephone Company. This contract will be subject to
renegotiation in mid 1995.
ITEM 2. PROPERTIES
The properties of the Telephone Company do not lend themselves to
description by character and location of principal units. At
December 31, 1994, network access lines represented 45% of the
Telephone Company's investment in telephone plant; central office
equipment represented 37%; land and buildings represented 10%;
other miscellaneous property, comprised principally of furniture
and office equipment and vehicles and other work equipment,
represented 6%; and information origination/termination equipment
represented 2%.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction J(2).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
At December 31, or for the year ended
1994 1993
Return on Weighted Average 13.02% 12.48%*
Total Capital
Debt Ratio (debt, including 47.65% 48.58%
current maturities, as a
percentage of total
capital)
Network access lines in 13,612 13,145#
service (000)
Access minutes of use 48,430 44,203#
(000,000)
Long-distance messages 1,018 1,012#
billed (000,000)
Number of employees 48,440 49,320
* Calculated using income before extraordinary loss and
cumulative effect of changes in accounting principles. These
impacts are included in shareowner's equity.
# 1993 data has been restated to reflect the most current
information available.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS
Dollars in millions
This discussion should be read in conjunction with the financial
statements and the accompanying notes.
Results of Operations
Summary
Financial results, including changes from the prior year, are
summarized as follows:
Percent
1994 1993 change
1994 vs.
1993
Operating revenues $ 8,376.2 $ 8,072.9 3.8%
Operating expenses $ 6,401.4 $ 6,240.9 2.6%
Income before extraordinary loss $ 1,071.9 $ 1,015.0 5.6%
and accounting changes
Extraordinary loss - $ (153.2) -
Accounting changes - $(1,849.4) -
Net income (loss) $ 1,071.9 $ (987.6) -
The Telephone Company reported income before extraordinary loss
and cumulative effect of changes in accounting principles of
$1,071.9 and $1,015.0 in 1994 and 1993, respectively. In 1993,
an extraordinary loss associated with early extinguishment of
debt was $153.2, and the adoption of financial accounting
standards relating to postretirement benefits, postemployment
benefits and income taxes resulted in one-time charges totaling
$1,849.4. As a result, net loss for 1993 was $987.6.
The primary factor contributing to the increase in income before
extraordinary loss and cumulative effect of changes in accounting
principles in 1994 was the growth in demand for services and
products. This was partially offset by rate reductions and an
increase in license fees for switching system software.
Comparisons to 1993 are also favorably impacted by the recording
of one-time charges relating to restructuring of operations in
1993.
Items affecting the comparison of the operating results between
1994 and 1993 are discussed in the following sections.
Operating Revenues
Total operating revenues increased $303.3, or 3.8%, in 1994.
Components of total operating revenues, including changes from
the prior year, are as follows:
Percent
1994 1993 change
1994 vs.
1993
Local service $ 4,022.0 $ 3,898.3 3.2%
Network access
Interstate 1,912.5 1,804.7 6.0
Intrastate 944.5 880.7 7.2
Long-distance service 903.5 965.7 (6.4)
Other 593.7 523.5 13.4
$ 8,376.2 $ 8,072.9 3.8%
Local Service revenues increased in 1994 due to increases in
demand, including growth in the number of access lines of
3.6%. Nearly two-thirds of the access line growth occurred
in Texas. Previously ordered rate reductions, primarily in
Texas and Missouri, reduced 1994 revenues by approximately
$80.
Network Access Interstate network access revenues increased
in 1994 due largely to increases in demand for access
services. Growth in revenues from end user charges
attributable to an increasing access line base also
contributed to the increase. Revenues in 1994 also reflect a
retroactive billing adjustment that decreased interstate
access revenues slightly while increasing intrastate access
revenues.
Intrastate network access revenues increased in 1994 due
primarily to increases in demand. Also affecting intrastate
revenues in 1994 was the partial replacement of the Texas
pool settlement process with a system of primary toll carrier
access charges. Under this system, charges received by the
Telephone Company from other intrastate carriers are recorded
as intrastate access revenues, while those paid by the
Telephone Company are recorded as cost of services and
products. These amounts were each approximately $40 and did
not materially affect operating income in 1994. Previously,
only the net settlement pool payment or receipt was
recognized as an adjustment to revenue. The retroactive
billing adjustment noted in the preceding paragraph also
slightly increased intrastate access revenues. Previously
ordered rate reductions, primarily in Texas, reduced revenues
by approximately $120 during 1994.
Long-Distance Service message volumes in 1994 are relatively
unchanged from 1993, as the implementation of optional
calling plans encouraged higher volumes which offset
competition-related decreases in messages. These optional
calling plans also lower the average revenue per message and,
combined with other demand-related decreases and rate
decreases (primarily in Missouri), caused a decrease in long-
distance service revenue.
Other operating revenues consist of the Telephone Company's
non-regulated network services and products, billing and
collection services performed for interexchange carriers and
other miscellaneous revenues, offset by the provision for
uncollectible revenues related to all revenue
classifications. Other operating revenues increased in 1994
due primarily to increases in demand for the Telephone
Company's nonregulated services and products, including
Caller ID equipment, computer network services and
videoconferencing services.
Operating Expenses
Total operating expenses increased $160.5, or 2.6%, in 1994.
Components of total operating expenses, including changes from
the prior year, are as follows:
Percent change
1994 1993 1994 vs. 1993
Cost of services and products $ 2,761.0 $ 2,519.1 9.6%
Selling, general and 1,948.2 2,022.2 (3.7)
administrative
Depreciation and amortization 1,692.2 1,699.6 (0.4)
$ 6,401.4 $ 6,240.9 2.6%
Cost of Services and Products increased in 1994 due to
increases of approximately $100 in switching system software
licensing fees, including fees related to enhanced services,
increased demand for services and products, and Texas primary
toll carrier access charges noted in the discussion of
intrastate network access revenues.
Selling, General and Administrative expenses in 1993 included
a one-time charge for the restructuring of operations as
discussed in Other Business Matters. Decreases in expenses
in 1994 were also due to savings associated with 1993 force
reductions and other cost control measures. These decreases
were partially offset by higher pension benefit expenses and
operating taxes.
Depreciation and Amortization in 1994 was relatively
unchanged from 1993 levels as increases resulting from
changes in plant levels and composition were more than offset
by the completion of accelerated regulatory amortization of
certain analog equipment.
Interest Expense decreased $27.3, or 7.1%, in 1994. The decrease
was due to lower interest rates on debt refinanced by the
Telephone Company and the repayment of debt during 1993,
partially offset by interest accrued on potential rate
reductions.
Federal Income Tax expense increased $91.6, or 25.1%, in 1994
primarily due to higher income before income taxes. Comparisons
to 1993 are also affected by a one-time net reduction of expense
in 1993 due to adjustment of deferred tax assets and liabilities
to reflect changes in federal and state corporate income tax
rates.
Extraordinary Item The Telephone Company recorded extraordinary
charges of $153.2 in 1993 as a result of refinancing $2,100 of
long-term debt. See Note 3 to the financial statements for
additional information.
Operating Environment and Trends of the Business
Regulatory Environment
The Telephone Company's intrastate telecommunications operations
in Texas, Missouri and Kansas are presently operating under
incentive regulation plans, while operations in Oklahoma and
Arkansas are regulated under traditional rate-of-return
methodology. The Telephone Company's interstate
telecommunications operations in the five states are regulated by
the FCC, using a price cap system. The FCC is in the process of
reviewing the current price cap plan, in order to evaluate issues
related to price cap methodology, the goals of price cap regulation
and transition to a fully competitive market. It is expected that
the FCC will complete their review during the first half of 1995.
Regulatory jurisdictions may require that adjustments be made to
reported earnings in order to compute earnings subject to sharing
or regulatory returns, as applicable, according to its regulatory
plan. As a result, differences may exist between the returns
reported to these regulatory bodies and those computed from
Telephone Company financial information included in the financial
statements.
Following is a summary of significant regulatory proceedings.
Texas In 1994, the Telephone Company completed the final year of
its four-year incentive regulation agreement. Under its terms,
the Telephone Company agreed to cap certain local rates, provide
annual rate reductions and other benefits to customers in Texas,
and upgrade the network at a cost of approximately $329. Rate
reductions for 1994 and 1993 were $146 and $21, respectively.
Rate reductions and customer benefits for 1992 were $34.
The agreement also provided an earnings-sharing mechanism
designed to encourage efficiency and innovation by the Telephone
Company. Revenue sharing amounts for 1992 were not significant,
and there will be no sharing of 1993 revenues. Sharing amounts
for 1994 have not been approved by the Texas Public Utility
Commission (TPUC), but are estimated to be approximately $30.
The Telephone Company has offered to extend the agreement until
September 1, 1995. This extension was offered because of the
possibility that new legislation concerning utility regulation
may be written during the 1995 session of the Texas legislature.
Such legislation, if enacted, would become effective in September
1995. Although no formal reply regarding the extension has been
received from the TPUC, no objections have been raised by the
TPUC and the Telephone Company is continuing to operate under the
provisions of the original agreement.
Missouri In response to a Missouri Public Service Commission
(MPSC) staff complaint, the MPSC issued an order in December 1993
requiring rate reductions of $84.6 annually, beginning
January 1994. The Telephone Company appealed the order and, in
August 1994, reached a settlement agreement with the MPSC and
Office of Public Counsel (OPC).
Under the terms of the settlement agreement, the Telephone
Company implemented annual rate reductions of $69.6 effective
October 1, 1994, representing the original $84.6 reduction
ordered by the MPSC, offset by $15 for recovery of a portion of
the costs associated with postretirement benefit accruals,
allowed by legislation enacted in 1994. In addition, customers
were given one-time credits totaling $64 for rate reductions
which were accrued under the original order and paid to the court
beginning in 1994. The Telephone Company has also committed to
invest an average of $275 annually in capital expenditures during
the term of the agreement.
The agreement extends through December 31, 1998. During this
period, the agreement provides that the Telephone Company will
not file a general rate case or raise local service rates and
there will be no sharing of earnings. In addition, the MPSC and
the OPC have agreed not to file complaints about the level of
Telephone Company earnings during the term of the agreement. The
agreement does not preclude the Telephone Company from increasing
its revenues through the introduction of new or additional
services or features during this period. Two interexchange
carriers and the Missouri Cable TV Association have challenged
the legality of the agreement in a case currently pending in the
Cole County Circuit Court.
Oklahoma In January 1989, the Oklahoma Corporation Commission
(OCC) ordered an investigation into the reasonableness of the
Telephone Company's intrastate rates. In August 1992, a final
order was issued requiring the Telephone Company to refund
revenues in excess of an 11.41% return on equity, effective April
1991 through the date of the final order. The ordered refund
obligation is $148.4.
The OCC order also would reduce annual revenues by $100.6
effective September 1992 (of which $44.6 relates to plans already
implemented), partially offset by a positive annual revenue
adjustment of $7.8 to compensate the Telephone Company for its
investment of $84 for network modernization over five years
following the date the order becomes effective. The order would
also lower the allowed return on equity from 14.25% to 12.20%.
In September 1992, the Telephone Company appealed to the Oklahoma
Supreme Court (Court), which suspended the effectiveness of the
entire order pending final disposition. This appeal is still
pending.
The Telephone Company is contesting all aspects of the OCC's
actions. Management believes that the OCC-ordered refund of
revenues collected before the date of the OCC's August 1992 order
is illegal under Oklahoma law and will be overturned by the
Court. The Court may require the Telephone Company to implement
some portion of the annual rate reductions indicated in the OCC
order. Management is unable to determine the outcome of the
remaining portions of the OCC order. Future effects arising from
an unfavorable ruling would not be expected to have a material
impact on the Telephone Company's financial results.
Competition
Competition is growing in the telecommunications industry.
Regulatory and court decisions have expanded the number of
alternative service providers offering telecommunications
services. Technological advances have expanded the types and
uses of services and products available. Accordingly, the
Telephone Company faces increasing competition in significant
portions of its business.
The Telephone Company currently faces competition principally
from competitive access providers (CAPs), private networks,
shared tenant services, providers of telecommunications
equipment, interexchange carriers, resellers and cellular
providers.
CAPs typically build fiber optic "rings" throughout large
metropolitan areas to provide transport services (generally
high-speed data) for large business customers and interexchange
carriers. Also, an increasing number of high usage customers,
particularly large businesses, now bypass Telephone Company
facilities by establishing alternative telecommunications links
for voice and data, such as private network systems, shared
tenant services or private branch exchange (PBX) systems (which
are customer-owned and provide internal switching functions
without use of Telephone Company central office facilities). The
extent of the economic incentive to bypass the local exchange
network depends upon local exchange prices, access charges,
regulatory policy and other factors. End user charges ordered by
the FCC are designed to mitigate the effect of system bypass.
The FCC has adopted rules requiring large local exchange
carriers, including the Telephone Company, to provide expanded
interconnection to independent parties for provision of special
access and switched access transport services. (Special access
refers to a dedicated transmission path, used primarily by large
business customers and long-distance carriers, which does not
involve switching at the local exchange carrier central office.
Switched access refers to the link between local exchange
carriers' switching facilities and long-distance carriers'
networks; switched access transport is one component of this
process.) A July 1994 FCC order requires that local exchange
carriers provide equipment and establish a set of technical and
pricing rules intended to position alternate providers as if
their equipment were located in the central office (referred to
as virtual collocation). Alternatively, the local exchange
carrier may, at its discretion, allow alternate providers to
physically collocate their equipment within its central office.
This order followed a June 1994 judicial remand which vacated the
FCC's previous order requiring physical collocation. Various
aspects of the FCC rules are being contested by a number of local
exchange carriers, including the Telephone Company.
Collocation for access services is also being addressed at the
state regulatory level. In general, collocation requirements in
Texas and Oklahoma follow terms similar to those of interstate
requirements. Proceedings in Missouri and Arkansas have been
delayed awaiting the outcome of pending FCC collocation issues.
The Kansas Corporation Commission presently does not authorize
intrastate collocation.
Competition exists in all of the Telephone Company's intraLATA
toll markets. Principal competitors are interexchange carriers,
which are assigned an access code (e.g., "10XXX") used by their
customers to route intraLATA calls through the interexchange
carrier's network, and resellers, which sell toll services
obtained at bulk rates.
Pending regulatory and legislative proceedings could allow
increased competition for local exchange services in the future.
In Texas, three companies have filed applications with the TPUC
seeking authority to provide local exchange services in selected
metropolitan areas within the Telephone Company's service
territory. Hearings on these applications are scheduled to begin
in mid 1995. In Missouri, a commission appointed by the Governor
recommended in January 1995 that legislation be adopted to open
the Telephone Company's local exchange market to competition.
The report also recommended an end to earnings regulation for the
Telephone Company, but provided only limited pricing flexibility
for its services. It is not known whether such legislation will
be passed in the 1995 legislative session. In Oklahoma and
Kansas, there are generic competition dockets pending which
address competitive issues related to the provision and
regulation of intrastate telecommunications services.
Wireless telecommunications services, such as cellular,
increasingly compete with landline services. Furthermore, the
FCC adopted an order in 1993 allocating radio spectrum and
outlining development of licenses for new personal communications
services (PCS). PCS utilizes wireless telecommunications
technology using radio spectrum different from cellular. Like
cellular, it is designed to permit access to a variety of
communications services regardless of subscriber location. Under
an auction process, up to seven PCS licenses could be awarded in
each of 51 geographic areas. Licenses may be combined by
spectrum amounts and geographically, including creation of a
nationwide service. Though a potential source of competition for
landline services, PCS also represents a competitive opportunity
for SBC, which is allowed to participate fully in bidding for
licenses in areas outside its cellular service areas, and may bid
on a smaller license in areas where it has a cellular presence.
SBC is participating in the auctions, which began in December
1994, and is pursuing licenses in a number of markets that would
complement its existing cellular service territories.
In the future, it is likely that additional competitors will
emerge in the telecommunications industry. Cable television
companies and electric utilities have expressed an interest in
providing telecommunications services. As a result of recent and
prospective mergers and acquisitions within the industry, the
Telephone Company may face competition from entities offering
both cable and telephone services over their transport mediums in
its operating territory. Interexchange carriers have also
expressed interest in providing local service, either directly or
through alternative wireless networks, and a number of major
carriers have publicly announced their intent to provide local
service in certain markets, some of which are in the Telephone
Company's five-state area.
Competitive opportunities may arise as a result of pending and
anticipated legislative and legal proceedings. Federal
policymakers have indicated strong interest in telecommunications
reform - namely, lowering regulatory and legislative barriers to
competition. Legislation was introduced in the 1994 United
States Congress which, had it been adopted, would have allowed
SBC to enter previously restricted lines of business, including
interLATA telecommunications services, electronic publishing and
telecommunications equipment manufacturing, and would have
allowed local exchange carriers to compete in the cable
television business in their own areas. Legislation achieving
these goals will be advocated by SBC during the 1995
Congressional session; however, no assurance can be given as to
whether or in what form such legislation might be enacted.
SBC and two RHCs are asking the United States District Court for
the District of Columbia, in a joint petition filed in July 1994,
to vacate the consent decree issued at the time of AT&T's
divestiture of the RHCs. Among other items, the consent decree
prevents the RHCs from providing interLATA telecommunications
service and manufacturing telecommunications equipment. This
matter is pending and the outcome cannot be predicted. Also in
1994, SBC filed a lawsuit in the United States District Court in
Dallas, seeking to overturn provisions of the Cable
Communications Policy Act of 1984, in order to provide cable
television service in the Telephone Company's five-state area.
While there can be no assurance of a favorable ruling to SBC,
three Circuit Courts of Appeals have held this statute to be
unconstitutional in similar factual circumstances.
SBC is aggressively representing its interests regarding
competition before federal and state regulatory bodies and
courts, and before Congress and state legislatures, and will
continue to evaluate the increasingly competitive nature of its
business and the appropriate regulatory, legislative and industry
solutions needed to respond effectively to competition.
Regulatory Accounting
The Telephone Company currently accounts for the economic effects
of regulation in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (Statement No. 71). Statement No.
71 requires deferral of certain costs and obligations based on
regulatory actions (regulatory assets and liabilities). In
addition, under Statement No. 71, telephone plant is depreciated
using rates set by regulators in a joint federal and state
triennial review process. These rates are usually lower than
used by unregulated companies. The Telephone Company will
present proposed depreciation rates for 1995 through 1997 to
federal and state regulators in triennial review meetings
scheduled for mid 1995.
Continued application of Statement No. 71 is appropriate only if
it is reasonable to assume that rates which are adequate to
recover costs can be charged to and collected from customers.
This assumption requires, among other things, consideration of
anticipated changes in levels of demand or competition during the
recovery period for any capitalized costs. It is management's
opinion that application of Statement No. 71 to the Telephone
Company remains appropriate at this time. However, due to the
rapid pace of change in the telecommunications industry, the
Telephone Company must continually assess its position with
respect to Statement No. 71. If, as a result of actual and
anticipated increases in competition, technological development
and other changes in the telecommunications industry including
the manner of determining rates, the Telephone Company determines
that it no longer qualifies for the provisions of Statement No.
71, the Telephone Company would be required to eliminate its
regulatory assets and liabilities, and adjust the carrying amount
of its telephone plant to the extent that it determines that such
amount is not recoverable. The net effect would be reflected in
the financial statements as a non-cash, extraordinary charge to
income. Because of the uncertainties regarding the timing,
extent and potential combination of circumstances which would
cause the Telephone Company to discontinue application of
Statement No. 71, management cannot estimate a specific amount of
the charge at this time, but under most combinations of
circumstances would anticipate the after-tax amount of the charge
to be between $2.0 billion and $3.0 billion.
Other Business Matters
Operational Restructuring During the third quarter of 1993, the
Telephone Company announced a restructuring of its operations.
The restructuring realigns the Telephone Company into two
operating divisions, Customer Services, comprised of nine
geographic market areas, and Network Services, which focuses on
technology planning and deployment. As part of the
restructuring, approximately 800 management positions were
eliminated during 1993. Costs for severance, relocation and
benefits associated with the positions eliminated were accrued
during 1993, reducing net income by approximately $35.
Pending Litigation The Telephone Company is presently engaged in
litigation with 57 Texas cities arising from the Telephone
Company's alleged breach of certain ordinances relating to the
Telephone Company's use of, and work activities in, streets and
other public ways. In November 1992, City of Port Arthur, et
al., v. Southwestern Bell Telephone Company, et al., in the 136th
Judicial District Court of Jefferson County, Texas, was certified
as a class action. Trial is set for 1995. In addition, three
municipalities participating in the class action had filed
separate lawsuits, which have been suspended pending the outcome
of the class action.
The ordinances provide for the payment of a percentage of the
gross receipts received by the Telephone Company from the
provision of certain services within the cities. While the
particular claims of the cities vary, they all allege that the
Telephone Company should have included revenues received from
other services in calculating the compensation described in the
ordinances. The Telephone Company believes it has several
meritorious defenses to the claims and intends to vigorously
pursue these defenses. The Telephone Company further believes
that it will either be successful on the merits of the cases or
that any unfavorable result will not have a material impact on
the Telephone Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
The Board of Directors
Southwestern Bell Telephone Company
We have audited the accompanying balance sheets of Southwestern
Bell Telephone Company as of December 31, 1994 and 1993, and the
related statements of income, shareowner's equity and cash flows
for each of the three years in the period ended December 31,
1994. Our audits also included the financial statement schedules
listed in the Index at Item 14 (a). These financial statements
and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Southwestern Bell Telephone Company at December 31, 1994 and
1993, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.
As discussed in Notes 5 and 6 to the financial statements, in
1993 the Company changed its method of accounting for income
taxes, postretirement benefits other than pensions, and
postemployment benefits.
ERNST & YOUNG LLP
San Antonio, Texas
February 10, 1995
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME
Dollars in millions
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Operating Revenues
Local service $ 4,022.0 $ 3,898.3 $ 3,727.3
Network access 2,857.0 2,685.4 2,547.8
Long-distance service 903.5 965.7 1,003.4
Other 593.7 523.5 465.5
Total operating revenues 8,376.2 8,072.9 7,744.0
Operating Expenses
Cost of services and products 2,761.0 2,519.1 2,594.3
Selling, general and administrative 1,948.2 2,022.2 1,830.7
Depreciation and amortization 1,692.2 1,699.6 1,615.0
Total operating expenses 6,401.4 6,240.9 6,040.0
Operating Income 1,974.8 1,832.0 1,704.0
Other Income (Expense)
Interest expense (357.9) (385.2) (408.7)
Other income (expense) - net (31.0) (22.6) 29.4
Total other income (expense) (388.9) (407.8) (379.3)
Income Before Income Taxes, Extraordinary
Loss and Cumulative Effect of Changes
in Accounting Principles 1,585.9 1,424.2 1,324.7
Income Taxes
Federal 456.0 364.4 316.7
State and local 58.0 44.8 43.9
Total income taxes 514.0 409.2 360.6
Income Before Extraordinary Loss and Cumulative
Effect of Changes in Accounting Principles 1,071.9 1,015.0 964.1
Extraordinary Loss on Early Extinguishment
of Debt, net of tax - (153.2) -
Cumulative Effect of Changes in Accounting
Principles, net of tax - (1,849.4) -
Net Income (Loss) $ 1,071.9 $ (987.6) $ 964.1
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
BALANCE SHEETS
Dollars in millions
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 46.1 $ 37.8
Accounts receivable - net of allowances for
uncollectibles of $15.2 and $14.2 1,378.5 1,375.0
Material and supplies 141.8 129.0
Deferred charges 48.1 46.8
Deferred income taxes 184.8 152.4
Prepaid expenses and other current assets 87.1 56.6
Total current assets 1,886.4 1,797.6
Property, Plant and Equipment - Net 15,736.0 15,699.1
Other Assets 166.6 401.7
Total Assets $ 17,789.0 $17,898.4
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 660.2 $ 663.0
Accounts payable and accrued liabilities 2,440.1 2,160.0
Total current liabilities 3,100.3 2,823.0
Long-Term Debt 4,268.1 4,383.0
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,728.6 1,746.7
Postemployment benefit obligation 2,632.0 2,817.7
Unamortized investment tax credits 369.2 429.8
Other noncurrent liabilities 277.3 356.7
Total deferred credits and other noncurrent liabilities 5,007.1 5,350.9
Shareowner's Equity
Common stock - one share, without par value,
owned by parent 1.0 1.0
Paid-in surplus 5,389.9 5,706.9
Retained earnings (deficit) 22.6 (366.4)
Total shareowner's equity 5,413.5 5,341.5
Total Liabilities and Shareowner's Equity $ 17,789.0 $17,898.4
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 1,071.9 $ (987.6) $ 964.1
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,692.2 1,699.6 1,615.0
Provision for uncollectible accounts 71.5 66.0 62.6
Amortization of investment tax credits (60.6) (65.5) (72.0)
Pensions and other postemployment expenses 175.8 125.1 179.1
Deferred income tax expense (112.2) (163.8) (99.0)
Extraordinary loss, net of tax - 153.2 -
Cumulative effect of accounting changes, net of tax - 1,849.4 -
Changes in operating assets and liabilities:
Accounts receivable (80.4) (176.7) (145.5)
Other current assets (75.5) (36.9) (37.2)
Accounts payable and accrued liabilities 285.5 245.3 104.4
Other - net (192.1) (83.4) 143.3
Total adjustments 1,704.2 3,612.3 1,750.7
Net Cash Provided by Operating Activities 2,776.1 2,624.7 2,714.8
Investing Activities
Construction and capital expenditures (1,656.0) (1,667.8) (1,617.4)
Net Cash Used in Investing Activities (1,656.0) (1,667.8) (1,617.4)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 172.9 38.1 (189.9)
Issuance of other short-term borrowings 35.5 16.0 521.4
Repayment of other short-term borrowings (40.5) (137.6) (394.8)
Issuance of long-term debt 0.9 2,086.1 284.3
Repayment of long-term debt (287.6) (10.7) (11.1)
Early extinguishment of debt and related call premiums - (2,190.3) (355.6)
Dividends paid (1,065.0) (865.6) (960.6)
Equity from parent 72.0 100.0 -
Net Cash Used in Financing Activities (1,111.8) (964.0) (1,106.3)
Net increase (decrease) in cash and cash equivalents 8.3 (7.1) (8.9)
Cash and cash equivalents beginning of year 37.8 44.9 53.8
Cash and Cash Equivalents End of Year $ 46.1 $ 37.8 $ 44.9
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
<CAPTION>
Retained
Common Paid-in Earnings
Stock Surplus (Deficit)
<S> <C> <C> <C>
Balance, December 31, 1992 $ 6,469.9 $ - $ 621.2
Net income (loss) - - (987.6)
Dividend to shareowner - (862.0) -
Equity from parent - 100.0 -
Transfer of equity (6,468.9) 6,468.9 -
Balance, December 31, 1993 1.0 5,706.9 (366.4)
Net income - - 1,071.9
Dividend to shareowner - (389.0) (682.9)
Equity from parent - 72.0 -
Balance, December 31, 1994 $ 1.0 $ 5,389.9 $ 22.6
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
Notes to Financial Statements
Dollars in millions
1. Summary of Significant Accounting Policies
Southwestern Bell Telephone Company (Telephone Company) is a regulated
utility which provides telecommunications services to customers in
Arkansas, Kansas, Missouri, Oklahoma and Texas. The Telephone Company
is a wholly-owned subsidiary of Southwestern Bell Corporation (SBC).
Regulatory Accounting - The Telephone Company prepares its financial
statements in accordance with the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (Statement No. 71). The provisions of Statement
No. 71 require, among other things, that regulated enterprises reflect
rate actions of regulators in their financial statements when certain
criteria are met. These rate actions can provide reasonable assurance
of the existence of an asset, reduce or eliminate the value of an
asset, or impose a liability on a regulated enterprise. The Telephone
Company continually assesses its position as to the applicability of
Statement No. 71 based upon the current regulatory and competitive
environment.
Allowance for Funds Used During Construction - Where capital invested
by the Telephone Company in construction projects is not allowed in
the rate base upon which revenue requirements are determined, it is
the practice of regulatory authorities to allow, in lieu thereof, a
capitalization of interest and equity costs during periods of
construction. These capitalized costs are reflected as income during
the construction period and as an addition to the cost of plant
constructed, and are included in other income (expense) - net on the
Telephone Company's Statements of Income.
Income Taxes - The Telephone Company is included in SBC's consolidated
federal income tax return. Federal income taxes are provided for in
accordance with the provisions of the Tax Allocation Agreement
(Agreement) between the Telephone Company and SBC. In general, the
Telephone Company's income tax provision under the Agreement reflects
the financial consequences of income, deductions and credits which can
be utilized on a separate return basis or in consolidation with SBC
and which are assured of realization.
Deferred income taxes are provided for certain temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.
Investment tax credits resulted from federal tax law provisions that
allowed for a reduction in income tax liability based on certain
construction and capital expenditures. Corresponding income tax
expense reductions were deferred and are being amortized as reductions
in income tax expense over the life of the property, plant and
equipment that gave rise to the credits.
Cash Equivalents - Cash equivalents include all highly liquid
investments with an original maturity of three months or less.
Material and Supplies - New and reusable materials are carried
principally at average original cost. Specific costs are used for
large individual items. Nonreusable material is carried at estimated
salvage value.
Property, Plant and Equipment - Property, plant and equipment is
stated at cost. The cost of additions and substantial betterments of
property, plant and equipment is capitalized. The cost of maintenance
and repairs of property, plant and equipment is charged to operating
expenses.
The Telephone Company computes depreciation using certain straight-
line methods and rates as prescribed by the Federal Communications
Commission (FCC) and the applicable state regulatory authorities. The
Telephone Company's provision for depreciation includes the
amortization of interstate and certain intrastate accumulated
depreciation deficiencies (reserve deficiency amortization). Reserve
deficiency amortization allows additional depreciation to be
recognized currently in an attempt to reflect more accurately prior
years' actual consumption of telephone plant.
When a portion of the Telephone Company's depreciable property, plant
and equipment is retired, the gross book value is charged to
accumulated depreciation.
Reclassifications - Certain amounts in prior period financial
statements have been reclassified to conform to the current year's
presentation.
2. Property, Plant and Equipment
Property, plant and equipment, which is stated at cost, is summarized
as follows at December 31:
1994 1993
Telephone Company plant
In service $ 26,731.6 $ 25,970.0
Under construction 231.5 261.3
26,963.1 26,231.3
Accumulated depreciation and (11,227.1) (10,532.2)
amortization
Property, plant and equipment--net $ 15,736.0 $ 15,699.1
For 1994, 1993 and 1992, the Telephone Company's depreciation as a
percentage of average depreciable plant was 6.5%, 6.7% and 6.6%,
respectively.
Certain facilities and equipment used in operations are under
operating or capital leases. Rental expenses under operating leases
for 1994, 1993 and 1992 were $76.8, $68.3 and $82.8, respectively. At
December 31, 1994, the aggregate minimum rental commitments under
noncancelable operating leases for the years 1995 through 1999 were
$33.6, $25.3, $14.1, $9.2 and $12.6, respectively, and $15.4
thereafter. Capital leases were not significant.
3. Debt
Long-term debt, including interest rates and maturities, is summarized
as follows at December 31:
1994 1993
Debentures
4.50%-5.88% 1995-2006 $ 700.0 $ 700.0
6.12%-6.88% 2000-2024 1,050.0 1,050.0
7.00%-7.75% 1994-2025 1,200.0 1,400.0
8.25%-8.30% 1996-2017 650.0 650.0
3,600.0 3,800.0
Unamortized discount-net of premium (31.2) (34.2)
Total debentures 3,568.8 3,765.8
Notes
5.04%-7.35% 1994-2010 815.9 900.0
Unamortized discount (5.2) (4.8)
Total notes 810.7 895.2
Capitalized leases 5.8 10.0
Total long-term debt, including current 4,385.3 4,671.0
maturities
Current maturities (117.2) (288.0)
Total long-term debt $ 4,268.1 $ 4,383.0
The Telephone Company recorded an extraordinary loss on the
refinancing of long-term debentures of $153.2 in 1993, net of related
income tax benefits of $92.2.
At December 31, 1994, the aggregate principal amounts of long-term
debt scheduled for repayment for the years 1995 through 1999 were
$117.2, $201.1, $120.7, $173.0 and $63.6, respectively. As of
December 31, 1994, the Telephone Company was in compliance with all
covenants and conditions of instruments governing its debt.
Debt maturing within one year consists of the following at
December 31:
1994 1993
Commercial paper $ 543.0 $ 375.0
Current maturities of long-term debt 117.2 288.0
Total $ 660.2 $ 663.0
The weighted average interest rate on commercial paper debt at
December 31, 1994 and 1993 was 6.0% and 3.3%, respectively. The
Telephone Company has entered into agreements with several banks for
lines of credit totaling $270.0, all of which may be used to support
commercial paper borrowings. All of these lines are on an informal
basis with interest rates determined at time of borrowing. There were
no borrowings outstanding under these lines of credit at December 31,
1994.
4. Financial Instruments
The Telephone Company does not have any financial instruments held or
issued for trading purposes. The carrying amounts reported in the
Balance Sheets for cash and cash equivalents and commercial paper debt
approximate fair values. The carrying amounts and fair values of the
Telephone Company's long-term debt, including current maturities, are
summarized as follows at December 31:
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Debentures $3,568.8 $3,169.3 $3,765.8 $3,830.8
Notes 810.7 730.2 895.2 915.1
The fair value of the debentures was based on quoted market prices.
The fair value of the notes was based on discounted cash flows using
current interest rates.
5. Income Taxes
The Telephone Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (Statement No. 109)
effective January 1, 1993. In adopting Statement No. 109, the
Telephone Company adjusted its net deferred income tax liability for
all temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, computed based on provisions of the enacted tax
law. Financial statements prior to January 1, 1993, have not been
restated to apply the provisions of Statement No. 109. The cumulative
effect of adopting Statement No. 109 as of January 1, 1993 was to
decrease net income for 1993 by $8.6. The adoption of Statement
No. 109 had no material effect on pre-tax income for 1993.
As a result of implementing Statement No. 109, the Telephone Company
recorded a $431.4 net reduction in its deferred tax liability. This
reduction was substantially offset by the establishment of a net
regulatory liability in accordance with Statement No. 71, resulting in
minimal effect on net income. The net regulatory liability recognizes
the differences between the recording of income taxes for financial
reporting purposes and recovery of those taxes through telephone
service rates. Amounts comprising the net liability will be amortized
over the regulatory lives of the associated assets. Future regulatory
proceedings may affect the period in which these amounts are
recognized in net income.
Significant components of deferred tax liabilities and assets are as
follows at December 31:
1994 1993
Depreciation $ 2,947.0 $ 2,893.5
Employee benefits 24.8 116.3
Other 97.2 105.0
Gross deferred tax liabilities 3,069.0 3,114.8
Employee benefits 1,101.8 1,091.9
Unamortized investment tax credits 134.8 156.9
Other 288.6 271.7
Gross deferred tax assets 1,525.2 1,520.5
Net deferred tax liabilities $ 1,543.8 $ 1,594.3
The components of income tax expense are as follows:
1994 1993 1992
Federal
Current $ 619.1 $ 568.9 $ 489.4
Deferred--net (102.5) (139.0) (100.7)
Amortization of investment (60.6) (65.5) (72.0)
tax credits
456.0 364.4 316.7
State and local
Current 67.7 69.6 42.2
Deferred--net (9.7) (24.8) 1.7
58.0 44.8 43.9
Total $ 514.0 $ 409.2 $ 360.6
The components of deferred federal income tax expense for 1992 as
recorded prior to the adoption of Statement No. 109 were as follows:
1992
Depreciation $ (23.7)
Employee benefits (70.0)
Other--net (7.0)
Total $ (100.7)
A reconciliation of income tax expense and the amount computed by
applying the statutory federal income tax rate (35% for 1994 and 1993,
34% for 1992) to income before income taxes, extraordinary loss and
cumulative effect of changes in accounting principles is as follows:
1994 1993 1992
Taxes computed at federal statutory $ 555.1 $ 498.5 $ 450.4
rate
Increases (decreases) in taxes
resulting from:
Amortization of investment tax
credits over the life of the plant (60.6) (65.5) (72.0)
that gave rise to the credits
Excess deferred taxes due to (34.6) (43.2) (74.3)
rate change
Depreciation of telephone plant
construction costs previously 18.3 22.5 21.7
deducted for tax purposes--net
State and local income taxes-- 37.7 29.1 29.0
net of federal tax benefit
Other--net (1.9) (32.2) 5.8
Total $ 514.0 $ 409.2 $ 360.6
6. Employee Benefits
Pensions - Substantially all employees of the Telephone Company are
covered by noncontributory pension and death benefit plans sponsored
by SBC. The pension benefit formula used in the determination of
pension cost is based on a flat dollar amount per year of service
according to job classification for nonmanagement employees, and a
stated percentage of adjusted career income for management employees.
SBC's objective in funding the plans, in combination with the
standards of the Employee Retirement Income Security Act of 1974 (as
amended), is to accumulate funds sufficient to meet its benefit
obligations to employees upon their retirement. Contributions to the
plans are made to a trust for the benefit of plan participants. Plan
assets consist primarily of stocks, U.S. government and domestic
corporate bonds and real estate.
Significant assumptions used by SBC in developing pension information
include:
1994 1993 1992
Assumed discount rate for determining 7.5% 7.25% 7.5%
projected benefit obligation
Assumed long-term rate of return on plan 8.0% 8.0% 8.0%
assets
Assumed composite rate of compensation 4.6% 4.6% 4.6%
increase
Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions", requires certain disclosures to be made of
components of net periodic pension cost for the period and a
reconciliation of the funded status of the plans with amounts reported
in the balance sheets. Since the funded status of plan assets and
obligations relates to the plans as a whole, which are sponsored by
SBC, this information is not presented for the Telephone Company. The
Telephone Company recognized pension cost for 1994, 1993 and 1992 of
$79.6, $21.6 and $61.5, respectively. As of December 31, 1994 and
1993, the amount of the Telephone Company's cumulative contributions
made to the pension trust in excess of its cumulative amount of
pension cost recognized was $51.4 and $251.8, respectively. Based on
the actuarial valuations of each plan, the fair value of each plan's
assets exceeded the estimated actuarial projected benefit obligation
at December 31, 1994 and 1993.
Voluntary Retirement Program - As a result of a March 1992 agreement
with the Communications Workers of America, the Telephone Company
offered a limited early retirement plan to designated nonmanagement
employees which included incentives affecting service pension
eligibility and amounts. Approximately 1,200 nonmanagement employees
participated in this offer. The plan resulted in a charge to 1992 net
income of approximately $24.
Postretirement Benefits - The Telephone Company provides certain
medical, dental and life insurance benefits to substantially all
retired employees. Effective January 1, 1993, the Telephone Company
adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement No. 106), which requires accrual of actuarially
determined postretirement benefit costs as active employees earn these
benefits. Prior to the adoption of Statement No. 106, the Telephone
Company expensed retiree medical benefits when claims were incurred.
In implementing Statement No. 106, the Telephone Company immediately
recognized an accumulated obligation for postretirement benefits
(transition obligation) in the amount of $2,756.9 and a related
deferred income tax benefit of $976.2. The resulting charge to net
income of $1,780.7 is included in the cumulative effect of changes in
accounting principles in the 1993 Statement of Income.
Most of the Telephone Company's state regulatory jurisdictions have
addressed the adoption of Statement No. 106 for ratemaking purposes,
recognizing all or a portion of accrued expenses, with some funding
requirements. The FCC has allowed increases to the interstate price
caps for all postretirement benefit expenses, including the transition
obligation, subject to further proceedings. Because of the
uncertainty surrounding the interstate treatment and the conditional
nature of the intrastate recovery, the Telephone Company does not meet
the requirements to establish a regulatory asset in accordance with
Statement No. 71.
In connection with 1992 collective bargaining agreements, SBC
established collectively bargained Voluntary Employee Beneficiary
Association (CBVEBA) trusts to fund postretirement benefits. During
1994 and 1993, the Telephone Company contributed $130.6 and $132.3,
respectively, into the CBVEBA trusts to be ultimately used for the
payment of postretirement benefits. The Telephone Company also funds
postretirement life insurance benefits at an actuarially determined
rate. Assets consist principally of stocks and U.S. government and
corporate bonds.
Statement No. 106 requires certain disclosures to be made of
components of net periodic postretirement benefit cost and a
reconciliation of the funded status of the plans to amounts reported
in the balance sheets. Since the funded status of assets and
obligations relates to the plans as a whole, this information is not
presented for the Telephone Company. The Telephone Company recognized
postretirement benefit cost for 1994 and 1993 of $224.1 and $238.8,
respectively. Expense recognized under the claims incurred method for
providing postretirement benefits was $102.6 for 1992 and would have
been approximately $126.6 for 1993. At December 31, 1994 and 1993,
the amount included in the Balance Sheets for accrued postretirement
benefit obligation was $2,692.7 and $2,722.6, respectively.
Significant assumptions used by SBC in developing the accumulated
postretirement benefit obligation (APBO) information include:
1994 1993
Assumed discount rate 7.5% 7.25%
Assumed long-term rate of return on plan assets 8.0% 8.0%
Assumed composite rate of compensation increase 4.6% 4.6%
The assumed medical cost trend rate in 1995 is 10.0%, decreasing
gradually to 5.5% in 2004, prior to adjustment for cost-sharing
provisions of the plan for active and certain recently retired
employees. The assumed dental cost rate in 1995 is 6.75%, reducing to
5.0% in 2002. The discount rate used in determining the
postretirement benefit cost for 1993 was 7.5%. Raising the annual
medical and dental cost trend rates by one percentage point increases
the net periodic postretirement benefit cost for the year ended
December 31, 1994 by approximately 7.6%.
Postemployment Benefits - Under its benefit plans, the Telephone
Company provides employees varying levels of disability pay, workers'
compensation and medical benefits under specified circumstances.
Effective January 1, 1993, the Telephone Company adopted Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (Statement No. 112). Statement No. 112
requires accrual of these postemployment benefits at the occurrence of
an event that renders an employee inactive or, if the benefits ratably
vest, over the vesting period. These expenses were previously
recognized as the claims were incurred. A charge to net income of
$60.1, after a deferred tax benefit of $32.9, is included in the
cumulative effect of changes in accounting principles in the 1993
Statement of Income. Statement No. 112 has not materially affected
postemployment benefit expense.
Savings Plans - Substantially all employees are eligible to
participate in contributory savings plans sponsored by SBC. Under the
savings plans, the Telephone Company matches a stated percentage of
eligible employee contributions, subject to a specified ceiling.
Since 1990, the Telephone Company's match of employee contributions to
the savings plans has been fulfilled with SBC's shares of stock
allocated from two Employee Stock Ownership Plans and with purchases
of SBC's stock in the open market. The costs relating to these
savings plans were $37.1, $43.5 and $48.6 in 1994, 1993 and 1992,
respectively.
7. Reallocation of Shareowner's Equity
On March 25, 1993, the Board of Directors of the Telephone Company
(Board) approved the reduction of common stock to $1.0 and the
reallocation of all amounts in excess of $1.0 to paid-in surplus.
Dividends are paid out of paid-in surplus whenever retained earnings
fall below a specified amount established by the Board.
8. Additional Financial Information
December 31,
Balance Sheets 1994 1993
Accounts payable and accrued
liabilities
Accounts payable $ 856.5 $ 748.7
Accrued taxes 292.4 379.9
Advance billing and 237.3 222.2
customer deposits
Compensated future 170.4 182.8
absences
Accrued interest 85.2 86.8
Accrued payroll 91.7 91.0
Other 706.6 448.6
Total $ 2,440.1 $ 2,160.0
Statements of Income 1994 1993 1992
Interest expense
Long-term debt $ 311.5 $ 354.8 $ 381.0
Notes payable 25.8 21.3 25.9
Other 20.6 9.1 1.8
Total $ 357.9 $ 385.2 $ 408.7
Allowance for funds used
during construction $ 18.6 $ 20.7 $ 30.1
Statements of Cash Flows 1994 1993 1992
Cash paid during the year for:
Interest $ 359.5 $ 389.6 $ 416.3
Income taxes $ 740.8 $ 477.8 $ 563.5
Approximately 15% in 1994 and 1993, and 16% in 1992, of the Telephone
Company's revenues were from services provided to AT&T Corp. No other
customer accounted for more than 10% of total revenues.
9. Quarterly Financial Information (Unaudited)
Calendar Total Operating
Quarter Revenues Operating Income Net Income (Loss)
1994 1993 1994 1993 1994 1993
First $2,027.6 $1,960.5 $ 496.8 $ 470.3 $ 272.1 $(1,682.7)#
Second 2,073.8 1,999.2 520.7 487.9 282.5 222.2#
Third 2,101.0 2,060.6 500.8 428.9 278.5 232.1#
Fourth 2,173.8 2,052.6 456.5 444.9 238.8 240.8
Total $8,376.2 $8,072.9 $1,974.8 $1,832.0 $1,071.9 $ (987.6)
#Includes extraordinary losses of $89.4, $43.6 and $20.2 for the first,
second and third quarters of 1993, respectively. The first quarter of 1993
also includes a charge of $1,849.4 for cumulative effect of changes in
accounting principles.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in accountants or disagreements with accountants on any
accounting or financial disclosure matters occurred during the period
covered by this report.
PART III
ITEMS 10 THROUGH 13.
Omitted pursuant to General Instruction J(2).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report: Page
(1) Report of Independent Auditors
Financial Statements Covered by Report of Independent Auditors:
Statements of Income
Balance Sheets
Statements of Cash Flows
Statements of Shareowner's Equity
(2) Financial Statement Schedules Covered by Report of Independent
Auditors:
VIII - Valuation and Qualifying Accounts
Financial statement schedules other than those listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not
required or applicable.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission (SEC), are incorporated herein by reference as
exhibits hereto.
Exhibit
Number
4 Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no
instrument which defines the rights of holders of long-term debt
of the registrant is filed herewith. Pursuant to this
regulation, the registrant hereby agrees to furnish a copy of any
such instrument to the SEC upon request.
12 Computation of Ratios of Earnings to Fixed Charges.
23 Consent of Ernst & Young LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the Registrant during the last
quarter of the year covered by this report.
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectibles
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2)
Balance at Charged Charged Balance
Description Beginning of to Costs to Other Deductions at End of
Period and Expenses Accounts -Note (b) Period
-Note (a)
<S> <C> <C> <C> <C> <C>
Year 1994 $ 14.2 84.1 30.9 114.0 $ 15.2
Year 1993 $ 11.3 66.0 35.1 98.2 $ 14.2
Year 1992 $ 12.3 62.6 34.8 98.4 $ 11.3
<FN>
(a) Amounts previously written off which were credited directly to this
account when recovered.
(b) Amounts written off as uncollectible.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
14th day of March, 1995.
SOUTHWESTERN BELL TELEPHONE COMPANY
By /s/ Edward L. Glotzbach
(Edward L. Glotzbach
Vice President-Chief Financial
Officer and Treasurer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
Royce S. Caldwell*
President and Chief
Executive Officer
Principal Financial and
Accounting Officer:
Edward L. Glotzbach
Vice President-Chief Financial
Officer and Treasurer
/s/ Edward L. Glotzbach
Directors: (Edward L. Glotzbach, as attorney-in-fact
and on his own behalf as Principal
Royce S. Caldwell* Financial Officer and Principal
Cassandra C. Carr* Accounting Officer)
William E. Dreyer*
J. Cliff Eason*
James D. Ellis* March 14, 1995
Donald E. Kiernan*
Edward A. Mueller*
* by power of attorney
EXHIBIT INDEX
Exhibit
Number
4 Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no
instrument which defines the rights of holders of long-term debt
of the registrant is filed herewith. Pursuant to this
regulation, the registrant hereby agrees to furnish a copy of any
such instrument to the SEC upon request.
12 Computation of Ratios of Earnings to Fixed Charges.
23 Consent of Ernst & Young LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions EXHIBIT 12
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Changes in Accounting
Principles $ 1,585.9 $ 1,424.2 $ 1,324.7 $ 1,286.3 $ 1,319.4
Add: Interest Expense 357.9 385.2 408.7 456.3 439.3
1/3 Rental Expense 25.6 22.8 27.6 22.7 29.6
Adjusted Earnings $ 1,969.4 $ 1,832.2 $ 1,761.0 $ 1,765.3 $ 1,788.3
Total Interest Charges $ 357.9 $ 385.2 $ 408.7 $ 456.3 $ 439.3
1/3 Rental Expense 25.6 22.8 27.6 22.7 29.6
Adjusted Fixed Charges $ 383.5 $ 408.0 $ 436.3 $ 479.0 $ 468.9
Ratio of Earnings to Fixed Charges 5.14 4.49 4.04 3.69 3.81
</TABLE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 33-49967) of Southwestern Bell Telephone
Company and in the related Prospectus of our report dated
February 10, 1995, with respect to the financial statements and
schedules of Southwestern Bell Telephone Company included in this
Annual Report (Form 10-K) for the year ended December 31, 1994.
ERNST & YOUNG LLP
San Antonio, Texas
March 10, 1995
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SOUTHWESTERN BELL TELEPHONE COMPANY, a
Missouri corporation, hereinafter referred to as the "Company,"
proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as
amended, an annual report on Form 10-K, and
WHEREAS, each of the undersigned is an officer or a
director, or both, of the Company, as set forth beneath his
signature;
NOW, THEREFORE, each of the undersigned hereby constitutes
and appoints James E. Taylor and Edward L. Glotzbach, or either
of them, the undersigned's attorneys for the undersigned and in
the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Company as an officer or a director,
or, if the undersigned holds both such offices, then as both an
officer and as a director, to execute and file such annual
report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys
full power and authority to do and perform each and every act and
thing whatsoever requisite or necessary to be done in and
concerning the premises, as fully to all intents and purposes as
the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set
his hand on the date set forth opposite his signature.
/s/ Royce S. Caldwell 2/20/95
Royce S. Caldwell Date
Chairman of the Board,
President and Chief
Executive Officer
/s/ Cassandra C. Carr 2/22/95
Cassandra C. Carr Date
Director
/s/ William E. Dreyer 2/23/95
William E. Dreyer Date
Director
/s/ J. Cliff Eason 2/28/95
J. Cliff Eason Date
Director and President-
Network Services
/s/ James D. Ellis 2/20/95
James D. Ellis Date
Director
/s/ Donald E. Kiernan 2/24/95
Donald E. Kiernan Date
Director
/s/ Edward A. Mueller 3/6/95
Edward A. Mueller Date
Director and President-
Customer Services
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL TELEPHONE COMPANY'S DECEMBER 31, 1994 FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 46,100
<SECURITIES> 0
<RECEIVABLES> 1,393,700
<ALLOWANCES> 15,200
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 1,886,400
<PP&E> 26,963,100
<DEPRECIATION> 11,227,100
<TOTAL-ASSETS> 17,789,000
<CURRENT-LIABILITIES> 3,100,300
<BONDS> 4,268,100
<COMMON> 1,000
0
0
<OTHER-SE> 5,412,500
<TOTAL-LIABILITY-AND-EQUITY> 17,789,000
<SALES> 0<F2>
<TOTAL-REVENUES> 8,376,200
<CGS> 0<F3>
<TOTAL-COSTS> 2,761,000
<OTHER-EXPENSES> 1,692,200
<LOSS-PROVISION> 71,500
<INTEREST-EXPENSE> 357,900
<INCOME-PRETAX> 1,585,900
<INCOME-TAX> 514,000
<INCOME-CONTINUING> 1,071,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,071,900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> THIS AMOUNT IS IMMATERIAL.
<F2> NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL
STATEMENTS PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS
INCLUDED IN THE "TOTAL-REVENUE" TAG.
<F3> COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICES AND PRODUCTS
IN THE FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
