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, 1995
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 SBC COMMUNICATIONS INC.,
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Operating Revenues
Local service $ 1,070.5 $ 995.4 $ 2,107.7 $ 1,982.7
Network access 766.6 705.7 1,509.9 1,387.2
Long-distance service 203.9 226.3 409.6 447.0
Other 164.8 146.4 326.0 284.5
Total operating revenues 2,205.8 2,073.8 4,353.2 4,101.4
Operating Expenses
Cost of services and products 687.1 656.3 1,350.0 1,299.2
Selling, general and
administrative 518.0 472.3 1,009.0 940.8
Depreciation and amortization 443.9 424.5 883.0 843.9
Total operating expenses 1,649.0 1,553.1 3,242.0 3,083.9
Operating Income 556.8 520.7 1,111.2 1,017.5
Other Income (Expense)
Interest expense (86.4) (87.6) (171.9) (175.6)
Other expense - net (8.1) (8.4) (22.2) (11.2)
Total other income (expense) (94.5) (96.0) (194.1) (186.8)
Income Before Income Taxes 462.3 424.7 917.1 830.7
Income Taxes
Federal 139.4 126.6 276.5 245.3
State and local 15.9 15.6 33.3 30.8
Total income taxes 155.3 142.2 309.8 276.1
Net Income $ 307.0 $ 282.5 $ 607.3 $ 554.6
See Notes to Financial Statements.
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
BALANCE SHEETS
Dollars in millions
<CAPTION>
June 30, December
1995 1994
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 46.1 $ 46.1
Accounts receivable - net of allowances for
uncollectibles of $22.4 and $15.2 1,436.5 1,378.5
Material and supplies 152.6 141.8
Deferred charges 59.1 48.1
Deferred income taxes 180.1 184.8
Prepaid expenses and other current assets 124.9 87.1
Total current assets 1,999.3 1,886.4
Property, Plant and Equipment - at cost 27,416.2 26,963.1
Less: Accumulated depreciation and amortization 11,748.5 11,227.1
Property, Plant and Equipment - Net 15,667.7 15,736.0
Other Assets 104.2 166.6
Total Assets $ 17,771.2 $ 17,789.0
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 768.7 $ 660.2
Accounts payable and accrued liabilities 2,489.7 2,440.1
Total current liabilities 3,258.4 3,100.3
Long-Term Debt 4,217.5 4,268.1
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,844.3 1,728.6
Postemployment benefit obligation 2,537.6 2,632.0
Unamortized investment tax credits 345.3 369.2
Other noncurrent liabilities 205.3 277.3
Total deferred credits and other noncurrent liabilities 4,932.5 5,007.1
Shareowner's Equity
Common stock - one share, no par value 1.0 1.0
Paid-in surplus 5,020.9 5,389.9
Retained earnings 340.9 22.6
Total shareowner's equity 5,362.8 5,413.5
Total Liabilities and Shareowner's Equity $ 17,771.2 $ 17,789.0
<FN>
See Notes to Financial Statements.
</TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
Six months ended
June 30,
1995 1994
Operating Activities
Net income $ 607.3 $ 554.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 883.0 843.9
Provision for uncollectible accounts 36.4 33.9
Amortization of investment tax credits (23.9) (29.9)
Pensions and other postemployment benefits (60.9) (37.1)
Deferred income tax expense 50.9 (17.0)
Other - net (103.8) (132.9)
Total adjustments 781.7 660.9
Net Cash Provided by Operating Activities 1,389.0 1,215.5
Investing Activities
Construction and capital expenditures (781.7) (765.0)
Net Cash Used in Investing Activities (781.7) (765.0)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (135.5) 380.8
Issuance of other short-term borrowings 60.0 7.5
Repayment of other short-term borrowings - (5.0)
Issuance of long-term debt 149.7 0.7
Repayment of long-term debt (16.7) (285.9)
Dividends paid (592.8) (555.9)
Equity returned to parent (72.0) -
Net Cash Used in Financing Activities (607.3) (457.8)
Net increase (decrease) in cash and cash equivalents 0.0 (7.3)
Cash and cash equivalents beginning of year 46.1 37.8
Cash and Cash Equivalents End of Period $ 46.1 $ 30.5
Cash paid during the six months ended June 30 for:
Interest $ 170.8 $ 177.3
Income taxes $ 197.0 $ 348.1
See Notes to Financial Statements.
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
Retained
Common Paid-in Earnings
Stock Surplus (Deficit)
<S> <C> <C> <C>
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
Balance, December 31, 1994 $ 1.0 $ 5,389.9 $ 22.6
Net income - - 607.3
Dividend to shareowner - (297.0) (289.0)
Equity returned to parent - (72.0) -
Balance, June 30, 1995 $ 1.0 $ 5,020.9 $ 340.9
<FN>
See Notes to Financial Statements.
</TABLE>
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At June 30, or for the six months then ended: 1995 1994
Return on weighted average total capital . . . . . . . 14.48% 13.30%
Debt ratio . . . . . . . . . . . . . . . . . . . . . . 48.18% 49.06%
Network access lines in service (000) # . . . . . . . . 13,899 13,366
Access minutes of use (000,000) . . . . . . . . . . . . 26,145 23,540
Long-distance messages billed (000) # . . . . . . . . . 497,493 512,100
Number of employees . . . . . . . . . . . . . . . . . 48,130 49,020
# 1994 amounts have been revised to reflect the most current information
available
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS - Southwestern Bell
Telephone Company (Telephone Company) is a wholly-owned subsidiary of
SBC Communications Inc. (SBC). 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) 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. Certain reclassifications have
been made to the 1994 financial statements to conform with the 1995
presentation. 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 1994
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 $307.0 for the second quarter of 1995 and $607.3 for the
first six months of 1995. Financial results for the second quarters
and first six months of 1995 and 1994 are summarized as follows:
Second Quarter Six-Month Period
Percent Percent
1995 1994 Change 1995 1994 Change
Operating $ 2,205.8 $ 2,073.8 6.4% $ 4,353.2 $ 4,101.4 6.1%
revenues
Operating $ 1,649.0 $ 1,553.1 6.2% $ 3,242.0 $ 3,083.9 5.1%
expenses
Net income $ 307.0 $ 282.5 8.7% $ 607.3 $ 554.6 9.5%
The primary factor contributing to the increase in net income during
the second quarter and first six months of 1995 was growth in demand
for services and products, partially offset by increased selling,
general and administrative and depreciation expense.
The Telephone Company's operating revenues in the second quarter and
first six months of 1995 increased $132.0, or 6.4%, and $251.8, or
6.1%, over the second quarter and first six months of 1994,
respectively. Components of operating revenues for the second
quarters and first six months of 1995 and 1994 are as follows:
Second Quarter Six-Month Period
Percent Percent
1995 1994 Change 1995 1994 Change
Local service $ 1,070.5 $ 995.4 7.5% $ 2,107.7 $ 1,982.7 6.3%
Network access
Interstate 510.8 460.9 10.8 1,008.2 915.8 10.1
Intrastate 255.8 244.8 4.5 501.7 471.4 6.4
Long-distance 203.9 226.3 (9.9) 409.6 447.0 (8.4)
service
Other 164.8 146.4 12.6 326.0 284.5 14.6
Total $ 2,205.8 $ 2,073.8 6.4% $ 4,353.2 $ 4,101.4 6.1%
Local service revenues increased in the second quarter and first
six months of 1995 due primarily to increases in demand,
including 4.0% growth in the number of access lines since June
30, 1994 and increased demand for enhanced services, including
Caller ID.
Interstate network access revenues increased in the second
quarter and first six months of 1995 due primarily to an increase
in demand for access services and growth in end user charges
attributable to an increasing access line base. Results for the
second quarter of 1994 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 1995 due primarily to increases
in demand, including usage by alternative intraLATA toll
carriers. Revenues for the second quarter of 1994 also include
the billing adjustment noted above.
Long-distance service revenues decreased in the second quarter
and first six months of 1995 due to competition related decreases
in residential message volumes. Competition from interexchange
carriers has continued to increase through advertising and usage
of "10xxx" and "1-800" access numbers. The decrease in long-
distance service revenues is partially offset by higher access
revenues, as noted above.
Other operating revenues consist of the Telephone Company's non-
regulated 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 1995 due to
increases in demand for non-regulated services and products,
including Caller ID equipment.
The Telephone Company's operating expenses in the second quarter and
first six months of 1995 increased $95.9, or 6.2%, and $158.1, or
5.1%, over the second quarter and first six months of 1994,
respectively. Components of operating expenses for the second
quarters and first six months of 1995 and 1994 are as follows:
Second Quarter Six-Month Period
Percent Percent
1995 1994 Change 1995 1994 Change
Cost of services
and products $ 687.1 $ 656.3 4.7% $ 1,350.0 $ 1,299.2 3.9%
Selling, general
and 518.0 472.3 9.7 1,009.0 940.8 7.2
administrative
Depreciation and
amortization 443.9 424.5 4.6 883.0 843.9 4.6
Total $ 1,649.0 $ 1,553.1 6.2% $ 3,242.0 $ 3,083.9 5.1%
Cost of services and products increased for the second quarter
and first six months of 1995 due primarily to demand related
increases for enhanced services and annual compensation
increases. These increases were partially offset by a decrease
in switching system software license fees.
Selling, general and administrative expenses increased in the
second quarter and first six months of 1995 due to higher benefit
expenses, increased advertising and contracted services, and
costs associated with damage from the Oklahoma City bombing.
Depreciation and amortization increased in the second quarter and
first six months of 1995 due equally to a change in plant level
and composition and the effect of depreciation represcription.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITIVE ENVIRONMENT
Legislative Developments
In Texas, House Bill 2128 facilitating telecommunications reform was
signed into law on May 26, 1995, to be effective September 1, 1995.
Following are major provisions of the new legislation.
The bill allows the Telephone Company and other local exchange
carriers (LEC) to elect to move from rate of return regulation to
price regulation, with elimination of earnings sharing. Basic network
service rates will be capped at existing levels for four years.
Pricing flexibility is provided for other services according to their
classification as "discretionary" (e.g., Call Waiting, Call Return,
ISDN, 1 plus intraLATA toll, etc.) or "competitive" (e.g., WATS, 800
services, private lines, special access, etc.) The Texas Public
Utility Commission (TPUC) is prohibited from reducing access rates
charged to interexchange carriers for a four-year period.
Rather than establish a specific infrastructure dollar commitment,
LECs electing price regulation will commit to end-result
infrastructure goals, including expansion of digital switching and
advanced high speed services to qualifying public institutions such as
schools, libraries and hospitals requesting the services. An
infrastructure grant fund will also be established for use by public
institutions in upgrading their communications and computer
technology. The fund will assess $150 annually on all
telecommunications providers in Texas for a ten year period, half of
which will be paid by the cellular industry. SBC's annual payment, in
total, is currently estimated to be approximately $60.
The bill establishes local exchange competition by allowing multiple
providers of local exchange services to be certified by the TPUC,
subject to certain buildout requirements, resale restrictions and
minimum service requirements. The Telephone Company will remain the
default carrier of intraLATA "1 plus" traffic until all LECs are
allowed to carry interLATA long-distance.
The specific financial impacts of this legislation cannot be
reasonably estimated until required filings are completed by the
Telephone Company and other companies intending to provide local
service.
At the federal level, the Senate and House of Representatives have
each passed their own versions of legislation intended to address
various aspects of competition within, and regulation of, the
telecommunications industry. Among other things, these bills would
define the conditions under which SBC could offer interLATA
long-distance service and establish certain terms and conditions
intended to promote competition for the Telephone Company's local
exchange services. It is expected that a joint Congressional
conference committee will reconcile differences between the two bills
when Congress reconvenes in September, after which a final bill will
go back to both the House and Senate for a final vote.
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
depreciation of telephone plant using rates set by regulators which
are usually lower than those established by unregulated companies, and
deferral of certain costs and obligations based on regulatory actions
(regulatory assets and liabilities).
Continued application of Statement No. 71 is appropriate only if it is
reasonable to assume that rates designed to recover the costs of
providing service can be charged to and collected from customers.
This assumption requires, among other things, consideration of
anticipated changes in levels of demand and 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, it is increasingly likely that the
rapid pace of change within the industry will invalidate this
assumption in the near future, due to anticipated increases in
competition, technological development, and changes in regulation,
including the manner of determining rates. Should the Telephone
Company determine it no longer qualifies for the provisions of
Statement No. 71, it would be required to adjust the carrying amount
of its telephone plant to the extent such amount is overstated due to
longer regulator-prescribed lives or is not recoverable, and to
eliminate its regulatory assets and liabilities. The net effect would
be reflected in the financial statements as a non-cash, extraordinary
charge to income. Under most combinations of circumstances which
would cause the Telephone Company to discontinue application of
Statement No. 71, management would anticipate the after-tax amount of
the charge to be between $2.5 billion and $3.0 billion.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Since the close of the first quarter, nine class action lawsuits were
filed and are pending against the Telephone Company in state and
federal courts in Texas, Missouri, Oklahoma and Kansas involving the
provision by the Telephone Company of maintenance and trouble
diagnosis services covering standard telephone inside wire located on
the customer's premises. The actions allege that the Telephone
Company's sales practices in connection with these services violated
antitrust, fraud and/or deceptive trade practices statutes and seek
unspecified damages together with punitive damages and attorney's
fees. The Telephone Company believes it has several meritorious
defenses to these claims and intends to vigorously contest the
allegations. Although the outcomes of these cases are uncertain,
management believes that this litigation will not have a material
adverse impact on the Telephone Company's results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second
quarter ended June 30, 1995.
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 8, 1995 /s/ Edward L. Glotzbach
Edward L. Glotzbach
Vice President-Chief Financial
Officer and Treasurer (Principal
Accounting/Financial Officer)
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL TELEPHONE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1995 1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Changes in
Accounting Principles $ 917.1 $ 830.7 $1,585.9 $1,424.2 $1,324.7 $1,286.3 $1,319.4
Add: Interest Expense 171.9 175.6 357.9 385.2 408.7 456.3 439.3
1/3 Rental Expense 8.2 12.3 25.6 22.8 27.6 22.7 29.6
Adjusted Earnings $ 1,097.2 $1,018.6 $1,969.4 $1,832.2 $1,761.0 $1,765.3 $1,788.3
Total Interest Charges $ 171.9 $ 175.6 $ 357.9 $ 385.2 $ 408.7 $ 456.3 $ 439.3
1/3 Rental Expense 8.2 12.3 25.6 22.8 27.6 22.7 29.6
Adjusted Fixed Charges $ 180.1 $ 187.9 $ 383.5 $ 408.0 $ 436.3 $ 479.0 $ 468.9
Ratio of Earnings to Fixed Charges 6.09 5.42 5.14 4.49 4.04 3.69 3.81
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL TELEPHONE COMPANY'S JUNE 30, 1995 CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 46,100
<SECURITIES> 0<F1>
<RECEIVABLES> 1,458,900
<ALLOWANCES> 22,400
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 1,999,300
<PP&E> 27,416,200
<DEPRECIATION> 11,748,500
<TOTAL-ASSETS> 17,771,200
<CURRENT-LIABILITIES> 3,258,400
<BONDS> 4,217,500
<COMMON> 1,000
0
0
<OTHER-SE> 5,361,800
<TOTAL-LIABILITY-AND-EQUITY> 17,771,200
<SALES> 0<F2>
<TOTAL-REVENUES> 4,353,200
<CGS> 0<F3>
<TOTAL-COSTS> 1,350,000
<OTHER-EXPENSES> 883,000
<LOSS-PROVISION> 36,400
<INTEREST-EXPENSE> 171,900
<INCOME-PRETAX> 917,100
<INCOME-TAX> 309,800
<INCOME-CONTINUING> 607,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 607,300
<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 REVENUES" TAG.
<F3>COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICES AND PRODUCTS
IN THE FINANCIAL STATEMETNS AND THE "TOTAL-COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
