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, 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
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Operating Revenues
Local service $ 1,171.6 $ 1,070.5 $ 2,292.4 $ 2,107.7
Network access 803.8 766.6 1,607.8 1,509.9
Long-distance service 225.8 203.9 442.4 409.6
Other 208.8 185.4 412.4 362.4
Total operating revenues 2,410.0 2,226.4 4,755.0 4,389.6
Operating Expenses
Cost of services and products 737.5 687.1 1,458.2 1,350.0
Selling, general and administration 593.3 550.5 1,136.9 1,072.4
Depreciation and amortization 445.2 443.9 885.2 883.0
Total operating expenses 1,776.0 1,681.5 3,480.3 3,305.4
Operating Income 634.0 544.9 1,274.7 1,084.2
Other Income (Expense)
Interest expense (80.5) (86.4) (163.2) (171.9)
Other income - net 1.3 3.8 2.3 4.8
Total other income (expense) (79.2) (82.6) (160.9) (167.1)
Income Before Income Taxes 554.8 462.3 1,113.8 917.1
Income Taxes
Federal 183.4 139.4 368.2 276.5
State and local 23.0 15.9 46.4 33.3
Total income taxes 206.4 155.3 414.6 309.8
Net Income $ 348.4 $ 307.0 $ 699.2 $ 607.3
See Notes to Financial Statements.
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
BALANCE SHEETS
Dollars in millions
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 62.3 $ 42.7
Accounts receivable - net of allowances for uncollectibles
of $24.6 and $15.5 1,559.6 1,509.2
Material and supplies 84.2 130.6
Deferred charges 41.9 31.9
Deferred income taxes 105.5 143.3
Prepaid expenses and other current assets 214.1 81.4
Total current assets 2,067.6 1,939.1
Property, Plant and Equipment - at cost 28,757.2 28,008.7
Less: Accumulated depreciation and amortization 17,391.0 16,881.3
Property, Plant and Equipment - Net 11,366.2 11,127.4
Other Assets 47.2 75.4
Total Assets $ 13,481.0 $ 13,141.9
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 815.2 $ 750.4
Accounts payable and accrued liabilities 2,302.9 2,289.8
Total current liabilities 3,118.1 3,040.2
Long-Term Debt 4,217.9 4,217.1
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 190.9 174.3
Postemployment benefit obligation 2,645.5 2,656.7
Unamortized investment tax credits 270.4 286.0
Other noncurrent liabilities 157.1 99.7
Total deferred credits and other noncurrent liabilities 3,263.9 3,216.7
Shareowner's Equity
Common stock - one share, no par value 1.0 1.0
Paid-in surplus 4,351.8 4,837.8
Retained earnings (deficit) (1,471.7) (2,170.9)
Total shareowner's equity 2,881.1 2,667.9
Total Liabilities and Shareowner's Equity $ 13,481.0 $ 13,141.9
See Notes to Financial Statements.
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
<CAPTION>
Six months ended
June 30,
1996 1995
<S> <C> <C>
Operating Activities
Net income $ 699.2 $ 607.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 885.2 883.0
Provision for uncollectible accounts 43.8 36.4
Amortization of investment tax credits (15.6) (23.9)
Pensions and other postemployment expenses 55.3 (60.9)
Deferred income taxes 54.4 50.9
Other - net (239.4) (103.8)
Total adjustments 783.7 781.7
Net Cash Provided by Operating Activities 1,482.9 1,389.0
Investing Activities
Construction and capital expenditures (1,041.7) (781.7)
Net Cash Used in Investing Activities (1,041.7) (781.7)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 190.0 (135.5)
Issuance of other short-term borrowings 163.8 60.0
Repayment of other short-term borrowings (88.8) -
Issuance of long-term debt 0.2 149.7
Repayment of long-term debt (200.8) (16.7)
Dividends paid (686.0) (592.8)
Equity from (returned to) parent 200.0 (72.0)
Net Cash Used in Financing Activities (421.6) (607.3)
Net increase in cash and cash equivalents 19.6 0.0
Cash and cash equivalents beginning of year 42.7 46.1
Cash and Cash Equivalents End of Period $ 62.3 $ 46.1
Cash paid during the six months ended June 30 for:
Interest $ 164.4 $ 170.8
Income taxes $ 238.4 $ 197.0
See Notes to Financial Statements.
</TABLE>
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 - - 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
Balance, December 31, 1995 $ 1.0 $ 4,837.8 $(2,170.9)
Net income - - 699.2
Dividend to shareowner - (686.0) -
Equity from parent - 200.0 -
Balance, June 30, 1996 $ 1.0 $ 4,351.8 $ (1,471.7)
See Notes to Financial Statements.
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At June 30, or for the six months then ended: 1996 1995
Return on weighted average total capital* . . . 21.54% 14.48%
Debt ratio * . . . . . . . . . . . . . . . . . . 63.60% 48.18%
Network access lines in service (000) . . . . . 14,632 13,899
Access minutes of use (000,000) . . . . . . . . 28,724 26,145
Long-distance messages billed (000) . . . . . . 498,246 497,493
Number of employees . . . . . . . . . . . . . . . 48,360 48,130
* 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 $348.4 for the second quarter and $699.2 for the
first six months of 1996. Financial results for the second
quarters and first six months of 1996 and 1995 are summarized as
follows:
Second Quarter Six-Month Period
1996 1995 Percent 1996 1995 Percent
Change Change
Operating $ 2,410.0 $ 2,226.4 8.2% $ 4,755.0 $ 4,389.6 8.3%
revenues
Operating $ 1,776.0 $ 1,681.5 5.6% $ 3,480.3 $ 3,305.4 5.3%
expenses
Net income $ 348.4 $ 307.0 13.5% $ 699.2 $ 607.3 15.1%
The primary factor contributing to the increase in net income
during the second quarter and first six months of 1996 was growth
in demand for services and products.
The Telephone Company's operating revenues in the second quarter
and first six months of 1996 increased $183.6, or 8.2%, and
$365.4, or 8.3%, over the second quarter of and first six months
of 1995, respectively. Components of operating revenues for the
second quarters of 1996 and 1995 are as follows:
Second Quarter Six-Month Period
1996 1995 Percent 1996 1995 Percent
Change Change
Local service $ 1,171.6 $ 1,070.5 9.4% $ 2,292.4 $ 2,107.7 8.8%
Network
access
Interstate 530.6 510.8 3.9 1,064.2 1,008.2 5.6
Intrastate 273.2 255.8 6.8 543.6 501.7 8.4
Long-distance 225.8 203.9 10.7 442.4 409.6 8.0
service
Other 208.8 185.4 12.6 412.4 362.4 13.8
Total $ 2,410.0 $ 2,226.4 8.2% $ 4,755.0 $ 4,389.6 8.3%
Local service revenues increased in the second quarter and
first six months of 1996 due primarily to increases in
demand, including increases in access lines and vertical
services revenues. The number of access lines since
June 30, 1995 increased by 5.3%, with approximately 29% of
access line growth due to sales of additional access lines
to existing residential customers. Vertical services
revenues, which include custom calling options, Caller ID
and other enhanced services, increased by approximately 20%.
Interstate network access revenues increased in the second
quarter and first six months of 1996 due primarily to an
increase in demand for access services by interexchange
carriers. 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 second
quarter and first six months of 1996 due primarily to
increases in demand, including usage by alternative
intraLATA toll carriers.
Long-distance service revenues increased in the second
quarter and first six months of 1996 due to intraLATA toll
pool settlements and 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 to continue these accruals. Excluding
these items, long-distance service revenues in the second
quarter and first six months of 1996 decreased due to the
continuing impact of competition from alternative intraLATA
toll carriers. However, long-distance service message
volumes were relatively unchanged; competition-related
decreases in volumes were mostly offset by higher volumes
caused by optional calling plans offered by the Telephone
Company.
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 second quarter and first six months of 1996 due
primarily to increased demand for the Telephone Company's
non-regulated services and products.
The Telephone Company's operating expenses in the second quarter
and first six months of 1996 increased $94.5, or 5.6%, and
$174.9, or 5.3%, over the second quarter and first six months of
1995. Components of operating expenses for the second quarters
and first six months of 1996 and 1995 are as follows:
Second Quarter Six-Month Period
1996 1995 Percent 1996 1995 Percent
Change Change
Cost of
services and $ 737.5 $ 687.1 7.3% $ 1,458.2 $ 1,350.0 8.0%
products
Selling,
general and 593.3 550.5 7.8 1,136.9 1,072.4 6.0
administrative
Depreciation
and 445.2 443.9 0.3 885.2 883.0 0.2
amortization
Total $ 1,776.0 $ 1,681.5 5.6% $ 3,480.3 $ 3,305.4 5.3%
Cost of services and products increased for the second
quarter and first six months of 1996 due to demand related
increases, primarily increases in switching system software
license fees, materials and contract services as well as
annual compensation increases.
Selling, general and administrative expenses increased in
the second quarter and first six months of 1996 due to
higher operating taxes, including the new Texas
Infrastructure Fund established for use by public
institutions in upgrading their communications and computer
technology, and higher promotional expenses.
Interest expense decreased $5.9, or 6.8%, and $8.7, or 5.1%, in
the second quarter and first six months of 1996 due to lower debt
levels and capitalization of interest during construction
required by the discontinuance of regulatory accounting in the
third quarter of 1995. Under regulatory accounting, the
Telephone Company accounted for a capitalization of both interest
and equity costs during periods of construction as other income.
Income taxes increased $51.1, or 32.9%, and $104.8, or 33.8%, in
the second quarter and first six months 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 BUSINESS
COMPETITION
Texas Local Service Certification Approximately 70 applications
for competitive local service certification have been filed by
alternative providers with the Texas Public Utility Commission
(TPUC), and more than half have been approved. Among the
applicants is Sprint Corporation (Sprint), which has sought to
avoid the Texas law's build-out requirements for a competitive
local service certificate in the Telephone Company's service area
through a request for waiver. Texas state law specifies build-
out levels for proposed holders of facilities based certificates
of authority, but the TPUC has indicated that it will waive the
build-out requirements for Sprint.
Interconnect Agreements SBC has signed several interconnect
agreements with companies seeking to provide local service within
portions of the Telephone Company's service areas in Texas and
Missouri. These agreements are subject to approval by the
respective state commissions.
On August 1, 1996, the Federal Communications Commission (FCC)
adopted rules concerning implementation of the Local Competition
Provisions and other sections of the Telecommunications Act of
1996 and Interconnection between Local Exchange Carriers (LECs)
and Commercial Mobile Radio Service Providers. The full text of
the order has not yet been made available at the time of this
filing. Some of the provisions of these rules were stated to
include: establishing a baseline of terms and conditions for all
arbitrated agreements, including default interim ceilings and
ranges for interconnection agreements, discounts from retail
prices for resale and transportation and termination charges;
concluding that cellular, PCS, specialized mobile radio and other
mobile radio service providers are telecommunications carriers,
but not LECs, and, therefore, entitled to reciprocal compensation
arrangements for the completion of calls originating with another
carrier and may request interconnection with a LEC's network
facilities; and, identifying a minimum set of seven network
elements which provide technically feasible points of
interconnection and requiring incumbent LECs to provide access to
those network elements, allowing the requesting carriers to
combine such elements as they choose. Nothing in the FCC's order
as announced currently alters the collection of access charges
paid by an interexchange carrier when the incumbent LEC provides
exchange access service either directly or through resale.
Separate access charge reform and universal service proceedings
will address that issue. Management is not able to assess the
effects of these rules on SBC's financial position or 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 second
quarter ended June 30, 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
August 6, 1996 /s/ Richard G. Lindner
Richard G. Lindner
Vice President and Chief Financial
Officer (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,
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 $ 1,113.8 $ 917.1 $1,688.3 $1,585.9 $1,424.2 $1,324.7 $1,286.3
Add: Interest Expense 163.2 171.9 339.4 357.9 385.2 408.7 456.3
1/3 Rental Expense 7.3 8.2 25.9 25.6 22.8 27.6 22.7
Adjusted Earnings $ 1,284.3 $1,097.2 $2,053.6 $1,969.4 $1,832.2 $1,761.0 $1,765.3
Total Interest Charges $ 174.1 $ 171.9 $ 339.4 $ 357.9 $ 385.2 $ 408.7 $ 456.3
1/3 Rental Expense 7.3 8.2 25.9 25.6 22.8 27.6 22.7
Adjusted Fixed Charges $ 181.4 $ 180.1 $ 365.3 $ 383.5 $ 408.0 $ 436.3 $ 479.0
Ratio of Earnings to Fixed Charges 7.08 6.09 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 JUNE 30, 1996 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-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 62,300
<SECURITIES> 0
<RECEIVABLES> 1,584,200
<ALLOWANCES> 24,600
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,067,600
<PP&E> 28,757,200
<DEPRECIATION> 17,391,000
<TOTAL-ASSETS> 13,481,000
<CURRENT-LIABILITIES> 3,118,100
<BONDS> 4,217,900
0
0
<COMMON> 1,000
<OTHER-SE> 2,880,100
<TOTAL-LIABILITY-AND-EQUITY> 13,481,000
<SALES> 0<F2>
<TOTAL-REVENUES> 4,755,000
<CGS> 0<F3>
<TOTAL-COSTS> 1,458,200
<OTHER-EXPENSES> 885,200
<LOSS-PROVISION> 43,800
<INTEREST-EXPENSE> 163,200
<INCOME-PRETAX> 1,113,800
<INCOME-TAX> 414,600
<INCOME-CONTINUING> 699,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 699,200
<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>
