FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 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., (FORMERLY KNOWN AS SOUTHWESTERN BELL CORPORATION) MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF
FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
Three months ended
March 31,
1995 1994
Operating Revenues
Local service $ 1,037.2 $ 987.3
Network access 743.3 681.5
Long-distance service 205.7 220.7
Other 161.2 138.1
Total operating revenues 2,147.4 2,027.6
Operating Expenses
Cost of services and products 662.9 642.9
Selling, general and administrative 491.0 468.5
Depreciation and amortization 439.1 419.4
Total operating expenses 1,593.0 1,530.8
Operating Income 554.4 496.8
Other Income (Expense)
Interest expense (85.5) (88.0)
Other expense - net (14.1) (2.8)
Total other income (expense) (99.6) (90.8)
Income Before Income Taxes 454.8 406.0
Income Taxes
Federal 137.1 118.7
State and local 17.4 15.2
Total income taxes 154.5 133.9
Net Income $ 300.3 $ 272.1
See Notes to Financial Statements.
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
BALANCE SHEETS
Dollars in millions
<CAPTION>
March 31, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 26.5 $ 46.1
Accounts receivable - net of allowances for
uncollectibles of $15.9 and $15.2 1,381.2 1,378.5
Material and supplies 140.0 141.8
Deferred charges 56.3 48.1
Deferred income taxes 178.5 184.8
Prepaid expenses and other current assets 128.7 87.1
Total current assets 1,911.2 1,886.4
Property, Plant and Equipment - at cost 27,187.0 26,963.1
Less: Accumulated depreciation and amortization 11,510.2 11,227.1
Property, Plant and Equipment - Net 15,676.8 15,736.0
Other Assets 125.0 166.6
Total Assets $ 17,713.0 $ 17,789.0
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 901.6 $ 660.2
Accounts payable and accrued liabilities 2,283.3 2,440.1
Total current liabilities 3,184.9 3,100.3
Long-Term Debt 4,268.8 4,268.1
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,816.3 1,728.6
Postemployment benefit obligation 2,507.4 2,632.0
Unamortized investment tax credits 357.3 369.2
Other noncurrent liabilities 222.9 277.3
Total deferred credits and other noncurrent liabilities 4,903.9 5,007.1
Shareowner's Equity
Common stock - one share, no par value 1.0 1.0
Paid-in surplus 5,129.8 5,389.9
Retained earnings 224.6 22.6
Total shareowner's equity 5,355.4 5,413.5
Total Liabilities and Shareowner's Equity $ 17,713.0 $ 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)
Three months ended
March 31,
1995 1994
Operating Activities
Net income $ 300.3 $ 272.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 439.1 419.4
Provision for uncollectible accounts 15.8 14.1
Amortization of investment tax credits (11.9) (15.0)
Pensions and other postemployment benefits (103.9) (51.2)
Deferred income tax expense 40.8 11.3
Other - net (223.3) (253.0)
Total adjustments 156.6 125.6
Net Cash Provided by Operating Activities 456.9 397.7
Investing Activities
Construction and capital expenditures (352.2) (362.5)
Net Cash Used in Investing Activities (352.2) (362.5)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 241.3 306.6
Repayment of other short-term borrowings - (5.0)
Issuance of long-term debt - 1.5
Repayment of long-term debt (0.4) (50.6)
Dividends paid (293.2) (285.5)
Equity returned to parent (72.0) -
Net Cash Used in Financing Activities (124.3) (33.0)
Net increase (decrease) in cash and cash
equivalents (19.6) 2.2
Cash and cash equivalents beginning of year 46.1 37.8
Cash and Cash Equivalents End of Period $ 26.5 $ 40.0
Cash paid during the three months ended
March 31 for:
Interest $ 86.3 $ 84.8
Income taxes $ 102.9 $ 201.4
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 - - 272.1
Dividend to shareowner - (285.5) -
Balance, March 31, 1994 $ 1.0 $ 5,421.4 $ (94.3)
Balance, December 31, 1994 $ 1.0 $ 5,389.9 $ 22.6
Net income - - 300.3
Dividend to shareowner - (188.1) (98.3)
Equity returned to parent - (72.0) -
Balance, March 31, 1995 $ 1.0 $ 5,129.8 $ 224.6
<FN>
See Notes to Financial Statements.
</TABLE>
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months then ended: 1995 1994
Return on weighted average total capital . . . . . . 14.34% 13.14%
Debt ratio . . . . . . . . . . . . . . . . . . . . . 49.12% 49.86%
Network access lines in service (000) # . . . . . . . 13,794 13,313
Access minutes of use (000,000) . . . . . . . . . . . 12,678 11,423
Long-distance messages billed (000) # . . . . . . . . 243,792 248,919
Number of employees . . . . . . . . . . . . . . . . 48,280 49,190
# 1994 amounts have been restated to conform to the current year's
classifications.
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
PREPARATION OF INTERIM FINANCIAL STATEMENTS - Southwestern Bell
Telephone Company (Telephone Company) is a wholly-owned subsidiary of
SBC Communications Inc. (SBC), formerly known as Southwestern Bell
Corporation. The financial statements have been prepared by the
Telephone Company pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments (consisting only of normal
recurring accruals) 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.
SOUTHWESTERN BELL TELEPHONE COMPANY
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 $300.3 for the first quarter of 1995. Financial results for
the first quarters of 1995 and 1994 are summarized as follows:
First quarter Percent
change
1995 vs.
1995 1994 1994
Operating revenues $ 2,147.4 $ 2,027.6 5.9%
Operating expenses $ 1,593.0 $ 1,530.8 4.1%
Net income $ 300.3 $ 272.1 10.4%
The primary factor contributing to the increase in net income during
the first quarter of 1995 was growth in demand for services and
products. This increase was partially offset by increased
depreciation expense and accruals for potential revenue sharing.
The Telephone Company's operating revenues in the first quarter of
1995 increased $119.8, or 5.9%, over the first quarter of 1994.
Components of operating revenues for the first quarters of 1995 and
1994 are as follows:
First quarter Percent
change
1995 vs.
1995 1994 1994
Local service $ 1,037.2 $ 987.3 5.1%
Network access
Interstate 497.4 454.9 9.3
Intrastate 245.9 226.6 8.5
Long-distance service 205.7 220.7 (6.8)
Other 161.2 138.1 16.7
Total $ 2,147.4 $ 2,027.6 5.9%
Local service revenues increased in the first quarter of 1995 due
primarily to increases in demand, including 3.6% growth in the
number of access lines since March 31, 1994. This increase was
partially offset by accruals for potential revenue sharing in
Texas.
Interstate network access revenues increased in the first quarter
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.
Intrastate network access revenues increased in the first quarter
of 1995 due primarily to increases in demand, partially offset by
accruals for potential revenue sharing in Texas.
Long-distance service revenues decreased in the first quarter of
1995 due to competition related decreases in residential message
volumes.
Other operating revenues consist of the Telephone Company's non-
regulated network services and products, billing and collection
services performed for interexchange carriers, the provision for
uncollectible revenues related to all revenue classifications and
other miscellaneous revenues. Other operating revenues increased
in the first quarter 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 first quarter of
1995 increased $62.2, or 4.1%, over the first quarter of 1994.
Components of operating expenses for the first quarters of 1995 and
1994 are as follows:
First quarter Percent
change
1995 vs.
1995 1994 1994
Cost of services and products $ 662.9 $ 642.9 3.1%
Selling, general and 491.0 468.5 4.8
administrative
Depreciation and amortization 439.1 419.4 4.7
Total $ 1,593.0 $ 1,530.8 4.1%
Cost of services and products increased for the first quarter 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
first quarter of 1995 due to higher benefit expenses and
increased advertising.
Depreciation and amortization increased in the first quarter of
1995 due equally to a change in plant level and composition and
the estimated effect of depreciation represcription expected to
be granted later this year which would be retroactive to
January 1, 1995.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
Federal Regulatory Developments
The Telephone Company has operated under price cap regulation since
1991. Under this system, prices charged by local exchange carriers
(LEC) for interstate access services are subject to a cap which is
adjusted annually for inflation, a productivity offset and certain
other cost changes. The productivity offset is a fixed percentage
offset to prices, intended to reflect the effects of increased
productivity. Under the original plan, a productivity offset of
either 3.3% or 4.3% was elected annually by each LEC. Since 1991, the
Telephone Company has elected the 3.3% productivity offset, which
requires no sharing of profits up to a 12.25% rate of return on
investment, 50% sharing of profits over 12.25% and 100% sharing over
16.25%.
In 1994, the Federal Communications Commission (FCC) initiated a
review of the existing price cap plan. As a result, in March 1995 the
FCC adopted revised price cap rules which become effective August 1,
1995. The rules require an initial reduction in price caps at a level
based on each LEC's previous selection of productivity offsets. This
would represent a 2.8% initial reduction in price caps for the
Telephone Company. In addition, the new rules give LECs three
productivity/sharing options: (1) 4.0% productivity offset with 50%
sharing of profits above 12.25%, and 100% sharing of profits over
13.25%; (2) 4.7% productivity offset with 50% sharing of profits over
12.25% and 100% sharing of profits over 16.25%; and (3) 5.3%
productivity offset with no sharing. The Telephone Company intends to
elect the 5.3% productivity offset, no-sharing option. Other changes
include the adoption of additional pricing flexibility for certain
services, and a revision to exogenous rules to exclude accounting
changes with no cash flow effects, including Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The total effect of
these changes in price-cap regulation is expected to result in an
annualized reduction in interstate access revenues of approximately
$150.
The plan described above is an interim measure, as the FCC has
indicated that the rules will be revised again in 1996. The FCC is
expected to conduct further proceedings to address various pricing and
productivity issues, and to perform a broader review of how price cap
regulation fits in a competitive environment. The Telephone Company
intends to appeal the revised price cap rules.
Competitive Environment
Pending Legislation
During the first quarter of 1995, legislation was introduced at the
federal and state levels which addresses various aspects of
competition within, and regulation of, the telecommunications
industry. Significant features of the bills, all of which are
currently pending, are discussed below.
Several bills have been introduced in the U.S. Congress which could
significantly affect SBC. Among other things, these bills would, to
differing degrees, define the conditions under which SBC could offer
interLATA long-distance service. Some of these bills would require
the Telephone Company to comply with certain terms and conditions
intended to promote local exchange competition before providing relief
from the long-distance restrictions. The number of potential bills
make it impossible for management to predict what form final
legislation, if any, will take.
In Texas, House Bill 2128 would allow the Telephone Company to elect
to move from rate-of-return regulation to price regulation, which
includes pricing flexibility and elimination of earnings sharing. In
addition, the Telephone Company would commit to a $1.1 billion
infrastructure investment over a six year period. The bill would also
establish a transition to local exchange competition by allowing
multiple providers of local exchange services. Access rates and
intraLATA toll rates would be reduced but the revenue streams
historically used to offset the cost of providing service to all
points within the service area (known as universal service) would be
replaced by a fund contributed to by all providers. The Telephone
Company would remain the default carrier of intraLATA "1 plus" traffic
until SBC is allowed to carry interLATA long-distance. The Texas
Senate is currently considering similar legislation.
All of the pending legislation described above is subject to change.
At this time it is not known whether or in what form any of the above
legislation might be enacted.
Judicial Matters
In 1994, SBC filed a lawsuit in the United States District Court in
Dallas (Court), 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. In
March 1995, the Court ruled in favor of SBC. SBC plans to offer
interactive and cable television programming in 1996 on a test basis
as part of a broadband market trial in Richardson, Texas.
Alternatives for offering such services in other markets within the
five-state area are being evaluated in connection with the Richardson
trial.
In April 1995, SBC joined with Bell Atlantic Corporation, BellSouth
Corporation, the U.S. Telephone Association and two other telephone
industry groups in filing a lawsuit against the FCC and the United
States Attorney General. The lawsuit, filed in the United States
District court in Alexandria, Virginia, challenges the FCC's announced
intention to require telephone companies to file applications with the
FCC before they acquire or operate cable systems in their telephone
service area. SBC is unable to predict the outcome of this
proceeding.
Other Business Matters
Pending Litigation
In March 1995, the Telephone Company reached a preliminary settlement
with the municipalities involved in the class action case City of Port
Arthur, et al., v. Southwestern Bell Telephone Company, et al. which
is further described in the Telephone Company's 1994 Annual Report on
Form 10-K in the "Other Business Matters" section of "Management's
Discussion and Analysis of Financial Condition and Results of
Operations". The settlement has been approved by the court, subject
to ratification by July 1995 by the municipalities involved. If
ratified, the settlement will not materially affect the Telephone
Company's results of operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter
ended March 31, 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
May 9, 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>
THREE MONTHS ENDED
MARCH 31, 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 $ 454.8 $ 406.0 $1,585.9 $1,424.2 $1,324.7 $1,286.3 $1,319.4
Add: Interest Expense 85.5 88.0 357.9 385.2 408.7 456.3 439.3
1/3 Rental Expense 7.0 6.3 25.6 22.8 27.6 22.7 29.6
Adjusted Earnings $ 547.3 $ 500.3 $1,969.4 $1,832.2 $1,761.0 $1,765.3 $1,788.3
Total Interest Charges $ 85.5 $ 88.0 $ 357.9 $ 385.2 $ 408.7 $ 456.3 $ 439.3
1/3 Rental Expense 7.0 6.3 25.6 22.8 27.6 22.7 29.6
Adjusted Fixed Charges $ 92.5 $ 94.3 $ 383.5 $ 408.0 $ 436.3 $ 479.0 $ 468.9
Ratio of Earnings to Fixed Charges 5.92 5.31 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 MARCH 31, 1995 CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 26,500
<SECURITIES> 0<F1>
<RECEIVABLES> 1,397,100
<ALLOWANCES> 15,900
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 1,911,200
<PP&E> 27,187,000
<DEPRECIATION> 11,510,200
<TOTAL-ASSETS> 17,713,000
<CURRENT-LIABILITIES> 3,184,900
<BONDS> 4,268,800
<COMMON> 1,000
0
0
<OTHER-SE> 5,354,400
<TOTAL-LIABILITY-AND-EQUITY> 17,713,000
<SALES> 0<F2>
<TOTAL-REVENUES> 2,147,400
<CGS> 0<F3>
<TOTAL-COSTS> 662,900
<OTHER-EXPENSES> 439,100
<LOSS-PROVISION> 15,800
<INTEREST-EXPENSE> 85,500
<INCOME-PRETAX> 454,800
<INCOME-TAX> 154,500
<INCOME-CONTINUING> 300,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300,300
<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 STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
