FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1996
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
March 31,
1996 1995
Operating Revenues
Local service $ 1,120.8 $ 1,037.2
Network access 804.0 743.3
Long-distance service 216.6 205.7
Other 203.6 177.0
Total operating revenues 2,345.0 2,163.2
Operating Expenses
Cost of services and products 720.7 662.9
Selling, general and administrative 543.6 521.9
Depreciation and amortization 440.0 439.1
Total operating expenses 1,704.3 1,623.9
Operating Income 640.7 539.3
Other Income (Expense)
Interest expense (82.7) (85.5)
Other income - net 1.0 1.0
Total other income (expense) (81.7) (84.5)
Income Before Income Taxes 559.0 454.8
Income Taxes
Federal 184.8 137.1
State and local 23.4 17.4
Total income taxes 208.2 154.5
Net Income $ 350.8 $ 300.3
See Notes to Financial Statements.
SOUTHWESTERN BELL TELEPHONE COMPANY
BALANCE SHEETS
Dollars in millions
March 31, December 31,
1996 1995
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 58.8 $ 42.7
Accounts receivable - net of allowances
for uncollectibles of $15.5 and $15.5 1,507.2 1,509.2
Material and supplies 93.4 130.6
Deferred charges 39.8 31.9
Deferred income taxes 109.8 143.3
Prepaid expenses and other current assets 200.5 81.4
Total current assets 2,009.5 1,939.1
Property, Plant and Equipment - at cost 28,460.4 28,008.7
Less: Accumulated depreciation and amortization 17,196.6 16,881.3
Property, Plant and Equipment - Net 11,263.8 11,127.4
Other Assets 36.6 75.4
Total Assets $ 13,309.9 $ 13,141.9
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 978.4 $ 750.4
Accounts payable and accrued liabilities 2,180.6 2,289.8
Total current liabilities 3,159.0 3,040.2
Long-Term Debt 4,217.6 4,217.1
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 190.3 174.3
Postemployment benefit obligation 2,648.4 2,656.7
Unamortized investment tax credits 278.3 286.0
Other noncurrent liabilities 136.2 99.7
Total deferred credits and other noncurrent
liabilities 3,253.2 3,216.7
Shareowner's Equity
Common stock - one share, no par value 1.0 1.0
Paid-in surplus 4,499.2 4,837.8
Retained earnings (deficit) (1,820.1) (2,170.9)
Total shareowner's equity 2,680.1 2,667.9
Total Liabilities and Shareowner's Equity $ 13,309.9 $ 13,141.9
See Notes to Financial Statements.
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
Three months ended
March 31,
1996 1995
Operating Activities
Net income $ 350.8 $ 300.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 440.0 439.1
Provision for uncollectible accounts 18.5 15.8
Amortization of investment tax credits (7.7) (11.9)
Pensions and other postemployment expenses 18.7 (103.9)
Deferred income taxes 49.6 40.8
Other - net (224.0) (223.3)
Total adjustments 295.1 156.6
Net Cash Provided by Operating Activities 645.9 456.9
Investing Activities
Construction and capital expenditures (518.8) (352.2)
Net Cash Used in Investing Activities (518.8) (352.2)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 139.1 241.3
Issuance of other short-term borrowings 88.8 -
Issuance of long-term debt 0.1 -
Repayment of long-term debt (0.5) (0.4)
Dividends paid (338.5) (293.2)
Equity returned to parent - (72.0)
Net Cash Used in Financing Activities (111.0) (124.3)
Net increase (decrease) in cash and cash equivalents 16.1 (19.6)
Cash and cash equivalents beginning of year 42.7 46.1
Cash and Cash Equivalents End of Period $ 58.8 $ 26.5
Cash paid during the three months ended March 31 for:
Interest $ 73.3 $ 86.3
Income taxes $ 65.4 $ 102.9
See Notes to Financial Statements.
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
Retained
Common Paid-in Earnings
Stock Surplus (Deficit)
Balance, December 31, 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
Balance, December 31, 1995 $ 1.0 $ 4,837.8 $ (2,170.9)
Net income - - 350.8
Dividend to shareowner - (338.6) -
Balance, March 31, 1996 $ 1.0 $ 4,499.2 $ (1,820.1)
See Notes to Financial Statements.
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months then ended: 1996 1995
Return on weighted average total capital* . . . . 21.70% 14.34%
Debt ratio * . . . . . . . . . . . . . . . . . . 65.97% 49.12%
Network access lines in service (000) . . . . . 14,466 13,794
Access minutes of use (000,000) . . . . . . . . . 14,048 12,678
Long-distance messages billed (000) . . . . . . . 243,034 243,792
Number of employees . . . . . . . . . . . . . . . 48,170 48,280
* 1996 reflects the impact of the 1995 third quarter extraordinary loss from
discontinuance of regulatory accounting on shareowner's equity.
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions
1. BASIS OF PRESENTATION - 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
1995 financial statements to conform with the 1996 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 1995 Annual Report on Form 10-K. Effective
September 1995, the Telephone Company discontinued its
application of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of
Regulation."
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 $350.8 for the first quarter of 1996. Financial
results for the first quarters of 1996 and 1995 are summarized as
follows:
First Quarter Percent
Change
1996 vs.
1996 1995 1995
Operating revenues $ 2,345.0 $ 2,163.2 8.4%
Operating expenses $ 1,704.3 $ 1,623.9 5.0%
Net income $ 350.8 $ 300.3 16.8%
The primary factor contributing to the increase in net income
during the first quarter of 1996 was growth in demand for
services and products.
The Telephone Company's operating revenues in the first quarter
of 1996 increased $181.8, or 8.4%, over the first quarter of
1995. Components of operating revenues for the first quarters of
1996 and 1995 are as follows:
First Quarter Percent
Change
1996 vs.
1996 1995 1995
Local service $ 1,120.8 $ 1,037.2 8.1%
Network access
Interstate 533.6 497.4 7.3%
Intrastate 270.4 245.9 10.0%
Long-distance service 216.6 205.7 5.3%
Other 203.6 177.0 15.0%
Total $ 2,345.0 $ 2,163.2 8.4%
Local service revenues increased in the first quarter of
1996 due primarily to increases in demand, including 4.9%
growth in the number of access lines since March 31, 1995,
and increased demand for enhanced services, including Caller
ID. Approximately 29% of access line growth was due to
sales of additional access lines to existing residential
customers. Results for the first quarter of 1995 were
negatively impacted by accruals for revenue sharing under
the previous regulatory plan that was in effect through
August 1995 in Texas.
Interstate network access revenues increased in the first
quarter of 1996 due primarily to an increase in demand for
access services. Growth in revenues from end user charges
attributable to an increasing access line base also
contributed to the increase.
Intrastate network access revenues increased in the first
quarter of 1996 due primarily to increases in demand,
including usage by alternative intraLATA toll carriers.
Long-distance service revenues increased in the first
quarter of 1996 due to the inclusion in 1995 of accruals for
rate reductions relating to an appealed 1992 rate order in
Oklahoma. The settlement of the appeals in October 1995
eliminated the need for these accruals. Excluding the
effect of these accruals, long-distance service revenues in
the first quarter of 1996 decreased due to the continuing
impact of competition. However, long-distance service
message volumes in the first quarter of 1996 were relatively
unchanged from the first quarter of 1995, as competition-
related decreases were mostly offset by the higher message
volumes caused by optional calling plans.
Other operating revenues consist of the Telephone Company's
non-regulated services and products, billing and collection
services performed for interexchange carriers and other
miscellaneous revenues. Other operating revenues increased
in the first quarter of 1996 due primarily to increased
demand for the Telephone Company's non-regulated services
and products, including Caller ID equipment.
The Telephone Company's operating expenses in the first quarter
of 1996 increased $80.4, or 5.0%, over the first quarter of 1995.
Components of operating expenses for the first quarters of 1996
and 1995 are as follows:
First Quarter Percent
Change
1996 vs.
1996 1995 1995
Cost of services and products $ 720.7 $ 662.9 8.7%
Selling, general and 543.6 521.9 4.2%
administrative
Depreciation and amortization 440.0 439.1 0.2%
Total $ 1,704.3 $ 1,623.9 5.0%
Cost of services and products increased for the first
quarter of 1996 due primarily to demand related increases,
largely in the form of increases in materials, contract
services and annual compensation increases.
Selling, general and administrative expenses increased in
the first quarter of 1996 due to higher operating taxes,
including the new Texas Infrastructure Fund established as
part of legislation that became effective in September 1995.
Income taxes increased $53.7, or 34.8%, in the first quarter of
1996 due to higher earnings and the effect on taxes of the
discontinuance of regulatory accounting in the third quarter of
1995.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINES
REGULATORY ENVIRONMENT
Telecommunications Reform Legislation Both the Missouri and
Kansas legislatures recently passed bills designed to reform
state telecommunications regulation and facilitate implementation
of the federal Telecommunications Act of 1996 (the Act). A
further description of the Act is contained in the Telephone
Company's 1995 annual report on Form 10-K. Both bills would
replace rate of return regulation with forms of price cap
regulation. Basic local rates will be capped at their current
levels for four years in Missouri and three years in Kansas.
The Missouri bill provides for pricing flexibility and is
designed to provide equal regulation for all competitors with the
potential for price deregulation after five years unless the
Missouri Public Service Commission finds that "effective
competition" does not exist.
The Kansas bill provides for reduced regulation, including the
possibility for price deregulation if the Kansas Corporation
Commission finds that an alternative provider of comparable
telecommunications services exists. Other provisions of the bill
include a revenue neutral rate rebalancing between intrastate
access charges and local service rates. This rebalancing is
designed to lower intrastate long-distance rates, making them
more comparable to interstate rates.
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, 1996.
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 7, 1996 /s/ Richard G. Lindner
Richard G. Lindner
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,
1996 1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and
Cumulative Effect of Changes
in Accounting Principles $ 559.0 $ 454.8 $1,688.3 $1,585.9 $1,424.2 $1,324.7 $1,286.3
Add: Interest Expense 82.7 85.5 339.4 357.9 385.2 408.7 456.3
1/3 Rental Expense 8.1 7.0 25.9 25.6 22.8 27.6 22.7
Adjusted Earnings $ 649.8 $ 547.3 $2,053.6 $1,969.4 $1,832.2 $1,761.0 $1,765.3
Total Interest Charges $ 87.5 $ 85.5 $ 339.4 $ 357.9 $ 385.2 $ 408.7 $ 456.3
1/3 Rental Expense 8.1 7.0 25.9 25.6 22.8 27.6 22.7
Adjusted Fixed Charges $ 95.6 $ 92.5 $ 365.3 $ 383.5 $ 408.0 $ 436.3 $ 479.0
Ratio of Earnings to Fixed
Charges 6.80 5.92 5.62 5.14 4.49 4.04 3.69
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL TELEPHONE COMPANY'S MARCH 31, 1996 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-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 58,800
<SECURITIES> 0
<RECEIVABLES> 1,522,700
<ALLOWANCES> 15,500
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,009,500
<PP&E> 28,460,400
<DEPRECIATION> 17,196,600
<TOTAL-ASSETS> 13,309,900
<CURRENT-LIABILITIES> 3,159,000
<BONDS> 4,217,600
0
0
<COMMON> 1,000
<OTHER-SE> 2,679,100
<TOTAL-LIABILITY-AND-EQUITY> 13,309,900
<SALES> 0<F2>
<TOTAL-REVENUES> 2,345,000
<CGS> 0<F3>
<TOTAL-COSTS> 720,700
<OTHER-EXPENSES> 440,000
<LOSS-PROVISION> 18,500
<INTEREST-EXPENSE> 82,700
<INCOME-PRETAX> 559,000
<INCOME-TAX> 208,200
<INCOME-CONTINUING> 350,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350,800
<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>
