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, 1995
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 SBC COMMUNICATIONS
INC., 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:
Name of each exchange
Title of each Class 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% Debentures, American Stock Exchange
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
Twenty-Two Year 7% Debentures, New York Stock Exchange
due July 1, 2015
Thirty Year 7-5/8% Debentures, New York Stock Exchange
due March 1, 2023
Thirty-Two Year 7-1/4% Debentures, New York Stock Exchange
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 SBC
Communications Inc. (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).
FEDERAL LEGISLATION AND THE MFJ
On February 8, 1996, the Telecommunications Act of 1996 (the Act)
was enacted into law. The Act is intended to address various
aspects of competition within, and regulation of, the
telecommunications industry. The Act provides that all post-
enactment conduct or activities which were subject to the MFJ are
now subject to the provisions of the Act. Among other things,
the Act also defines conditions SBC must comply with before being
permitted to offer interLATA long-distance service and
establishes certain terms and conditions intended to promote
competition for the Telephone Company's local exchange services.
Additional information relating to the Act is contained in Item
7, Management's Discussion and Analysis of Results of Operations
under the heading "Competition" beginning on page 14 of this
report.
The MFJ, as originally approved by the District Court in 1982,
had placed restrictions, known as the "line of business"
restrictions, on the types of businesses in which SBC could
engage. SBC could obtain relief from these restrictions upon a
showing that there was no substantial possibility that it could
use its monopoly power to impede competition in the specific
market it sought to enter (the Waiver Standard).
As a result of waiver proceedings before the District Court since
divestiture, the MFJ's initial line of business restrictions
against engaging in nontelecommunications businesses, providing
intraLATA information services, and providing telecommunications
products had all been removed. SBC was also 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. However, SBC was prohibited from
providing interexchange telecommunications services and
manufacturing telecommunications products and customer premises
equipment (CPE).
Interexchange telecommunications refers to telecommunications
between Local Access and Transport Areas (LATAs) which were
created during the divestiture process, and are generally
centered on a standard metropolitan statistical area or other
identifiable community of interest. The District Court
interpreted manufacturing to include design and development
activities, as well as actual equipment fabrication.
Through 1995, SBC had submitted various requests to the District
Court, seeking to remove or modify the remaining restrictions.
The passage of the Act potentially supersedes many of these and
other court actions filed by SBC or to which SBC was a party.
Among these actions are a petition requesting the MFJ be vacated,
a court order establishing conditions under which SBC could offer
interLATA long-distance service over its wireless network and a
suit challenging the Federal Communications Commission's (FCC)
intention to require telephone companies to file applications
with the FCC before they acquire or operate cable television
systems in their telephone service areas.
BUSINESS OPERATIONS
The Telephone Company's principal services include local, long-
distance and network access services, which are provided in the
states of 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 other
services such 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 other 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
1995 1994 1993
Local service 48% 48% 48%
Network access 34% 34% 33%
Long-distance service 9% 11% 12%
The Telephone Company provides its services over approximately
9.5 million residential and 4.5 million business access lines in
the five-state area. During 1995, nearly two-thirds of the
Telephone Company's access line growth occurred in Texas.
During 1995, 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.
The 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 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 ruled 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.
During 1996, Southwestern Bell Telecommunications Inc., a wholly-
owned subsidiary of SBC which markets business and residential
communications equipment, will be merged into the Telephone
Company. The merger is not expected to have a significant impact
on the Telephone Company's results of operations.
GOVERNMENT REGULATION
In the five-state area, the Telephone Company is subject to
regulation by state commissions which have the power to regulate,
in varying degrees, 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 other carriers. There are currently no access
charges for access to the Internet.
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 13% in 1995, 14% in 1994 and 15% in 1993 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 14 of this report.
RESEARCH AND DEVELOPMENT
The majority of company-sponsored basic and applied research is
conducted at Bell Communications Research, Inc. (Bellcore). The
Telephone Company owns a one-seventh interest in Bellcore along
with the other six RHCs. In April 1995, SBC and the other RHCs
announced their intention to pursue the disposition of their
interests in Bellcore. A disposition would be subject to
obtaining satisfactory financial and other terms and all
necessary approvals. If a disposition were to occur, the RHCs
would retain the portion of Bellcore that coordinates the Federal
government's telecommunications requirements for 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 evaluation services to SBC and
its subsidiaries.
EMPLOYEES
As of December 31, 1995, the Telephone Company employed 48,180
persons. Approximately 76% of the employees are represented by
the Communications Workers of America (CWA). A three-year
contract was negotiated between the CWA and the Telephone
Company, which became effective in August 1995. This contract
will be subject to renegotiation in mid-1998.
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, 1995, 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
Seven class action lawsuits are now 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 is vigorously contesting 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 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
1995 1994
Return on Weighted Average 14.95% 13.02%
Total Capital *
Debt Ratio (debt, including 65.06% 47.65%
current maturities, as a
percentage of total capital)
Network access lines in 14,223 13,612
service (000)
Access minutes of use (000,000) 53,681 48,430
Long-distance messages billed 988 1,018
(000,000)
Number of employees 48,180 48,440
* Calculated using income before extraordinary loss. The impact
of this charge is included in shareowner's equity.
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
1995 1994 Change
1995 vs.
1994
Operating revenues $ 8,937.7 $ 8,447.7 5.8%
Operating expenses $ 6,903.0 $ 6,500.9 6.2%
Income before extraordinary $ 1,120.7 $ 1,071.9 4.6%
loss
Extraordinary loss $ (2,819.3) - -
Net income (loss) $ (1,698.6) $ 1,071.9 -
The Telephone Company reported income before extraordinary loss
of $1,120.7 and $1,071.9 in 1995 and 1994, respectively. In
1995, the Telephone Company recognized an extraordinary loss of
$2,819.3 from the discontinuance of regulatory accounting. As a
result, net loss for 1995 was $1,698.6.
The primary factor contributing to the increase in income before
extraordinary loss in 1995 was the growth in demand for services
and products, partially offset by increases in operating expenses
and an after-tax charge of $57.8 recorded in connection with
SBC's strategic functional realignment.
Items affecting the comparison of the operating results between
1995 and 1994 are discussed in the following sections.
Operating Revenues
Total operating revenues increased $490.0, or 5.8%, in 1995.
Components of total operating revenues, including changes from
the prior year, are as follows:
Percent
1995 1994 Change
1995 vs.
1994
Local service $ 4,302.3 $ 4,022.0 7.0%
Network access
Interstate 2,034.4 1,912.5 6.4
Intrastate 1,032.3 944.5 9.3
Long-distance service 821.9 903.5 (9.0)
Other 746.8 665.2 12.3
$ 8,937.7 $ 8,447.7 5.8%
Local Service revenues increased in 1995 due to increases in
demand, including growth in the number of access lines of
4.5%. Nearly two-thirds of the access line growth occurred
in Texas. Approximately 25% of access line growth was due to
the sales of additional residential lines. Increased demand
for enhanced services, including Caller ID, also contributed
to the increase in revenues.
Network Access Interstate network access revenues increased
in 1995 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. The increase was partially
offset by rate reductions of approximately $65 under the
FCC's revised price cap plan which became effective August 1,
1995. Revenues in 1994 reflect a retroactive billing
adjustment that decreased interstate network access revenues
slightly while increasing intrastate network access revenues.
Intrastate network access revenues increased in 1995 due
primarily to increases in demand, including usage by
alternative intraLATA toll carriers. Revenues in 1994
reflect the retroactive billing adjustment noted above.
Long-Distance Service revenues decreased in 1995, reflecting
the continuing trend of competition-related decreases in
residential message volumes and the impact of optional
calling plans and extended area service plans. 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 revenue was partially
mitigated by higher network access revenues, as noted above,
and the impact of extended area service plans.
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. The increase in 1995 was 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. Other operating revenues no longer include the
provision for uncollectibles, which has been reclassified to
selling, general and administrative expenses. During 1996,
Southwestern Bell Telecommunications Inc., a wholly-owned
subsidiary of SBC which markets business and residential
communications equipment, will be merged into the Telephone
Company. Other operating revenues in 1996 will reflect these
equipment sales subsequent to the merger.
Operating Expenses
Total operating expenses increased $402.1, or 6.2%, in 1995.
Components of total operating expenses, including changes from
the prior year, are as follows:
Percent
1995 1994 Change
1995 vs.
1994
Cost of services and products $ 2,844.7 $ 2,761.0 3.0%
Selling, general and 2,304.2 2,047.7 12.5
administrative
Depreciation and amortization 1,754.1 1,692.2 3.7
$ 6,903.0 $ 6,500.9 6.2%
Cost of Services and Products increased in 1995 due to demand-
related increases for enhanced services and annual
compensation increases. The increase was partially offset by
a decrease in switching system software license fees.
Selling, General and Administrative expenses increased in
1995 primarily due to a $92.7 charge for costs associated
with the strategic realignment discussed in Other Business
Matters. Increased advertising, contracted services and
operating taxes also contributed to the increase.
Depreciation and Amortization increased in 1995 due to
changes in plant level and composition and the effect of
regulatory depreciation represcription.
Interest Expense decreased $18.5, or 5.2%, in 1995 due to the
change in accounting for capitalized interest related to the
discontinuance of regulatory accounting (described in Note 2 to
the financial statements) and the interest accrued in 1994 on
potential rate reductions.
Federal Income Tax expense increased $55.1, or 12.1%, in 1995
primarily due to higher income before income taxes and a
reduction in the amortization of investment tax credits
resulting from the discontinuance of regulatory accounting.
Extraordinary Loss In 1995, the Telephone Company recorded an
extraordinary loss of $2.8 billion from the discontinuance of
regulatory accounting. The loss included a reduction in the
net carrying value of telephone plant partially offset by the
elimination of net regulatory liabilities. Management does not
expect a significant increase in depreciation expense in the
near future as a result of the discontinuance of regulatory
accounting.
Operating Environment and Trends of the Business
Regulatory Environment
The Telephone Company's telecommunications operations are subject
to regulation by each of the five states in which it operates for
intrastate services and by the FCC for interstate services. Each
of the states and the FCC have adopted incentive regulation, in
the form of price caps, to regulate prices for various services
provided by the Telephone Company. The Telephone Company is
permitted to establish and modify prices, not to exceed the price
caps, subject to approval by the governing jurisdiction. Prices
for other services not specifically covered by price caps are
also subject to regulatory approval.
The states set intrastate price caps for various periods,
depending upon the state. Price caps set by the FCC are adjusted
annually for inflation, a productivity offset and certain other
changes in costs. The productivity offset is a fixed percentage
used to reduce price caps and is designed to encourage increased
productivity.
Under the original FCC plan adopted in 1991, the Telephone
Company applied a productivity offset of 3.3%, with sharing at
various rates of return on investment. The FCC adopted revised
price cap rules which became effective August 1, 1995. These
revised rules required an initial reduction of 2.8% in price caps
for the Telephone Company, based on its previous productivity
offset. In addition, the new rules allowed a choice of three new
productivity offsets, two of which provide for a sharing of
profits with consumers above certain earnings levels. The
Telephone Company elected a 5.3% productivity offset with no
sharing. Other changes adopted by the FCC include changes to the
Telephone Company's costs that may be used to adjust price caps
(referred to as Exogenous Treatment), which, among other things,
exclude the effects of the 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 Telephone Company has filed two separate judicial appeals of
certain aspects of the FCC's price cap plan which are still
pending.
The revised plan described above is an interim measure and should
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 price cap regulation in a
competitive environment.
Following is a summary of significant state regulatory
developments.
Texas In Texas, House Bill 2128 facilitating telecommunications
reform was signed into law on May 26, 1995, effective
September 1, 1995. Following are major provisions of the new
legislation.
The law allows the Telephone Company and other Local Exchange
Carriers (LECs) to elect to move from rate of return regulation
to price regulation, with elimination of earnings sharing. On
September 1, 1995, the Telephone Company notified the Texas
Public Utility Commission (TPUC) that it elected incentive
regulation under the new law. 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, Integrated
Services Digital Network (ISDN), 1 plus intraLATA toll, etc.) or
"competitive" (e.g., WATS, 800 services, private lines, special
access, etc.). The TPUC is prohibited from reducing switched
access rates charged to interexchange carriers for a four-year
period.
The law requires LECs electing price regulation to commit to
network and infrastructure improvement goals, including expansion
of digital switching and advanced high speed services to
qualifying public institutions such as schools, libraries and
hospitals requesting the services. The law also establishes an
infrastructure grant fund for use by public institutions in
upgrading their communications and computer technology. The law
provides for a fund that will assess a total of $150 annually on
all telecommunications providers in Texas for a ten-year period,
half of which would be paid by the cellular and wireless
industry. The constitutionality of the law requiring the
establishment of different assessment rates for the landline
service providers and the cellular and wireless service providers
was challenged in state district court by a number of paging and
cellular phone companies. In January 1996, the court ruled that
the law requiring two different rates was unconstitutional and
ordered the lower rate be applied to both categories of service
providers, which will result in less than a $150 annual
assessment. Based on this order, the Telephone Company's annual
payment is currently estimated to be approximately $35 to $40.
It is not yet known whether the state will challenge the court's
ruling. Depending upon the final resolution of any subsequent
state actions, the Telephone Company's annual payment could
change.
The law establishes local exchange competition by allowing other
providers of local exchange services to apply for certification
by the TPUC, subject to certain build-out requirements, resale
restrictions and minimum service requirements. The Telephone
Company will remain the default carrier of 1 plus intraLATA toll
traffic until all LECs are allowed to carry interLATA long-
distance.
In January 1996, MCI Communications Corporation (MCI) sued the
state of Texas, alleging that the law violates the Texas state
constitution. MCI claims the law establishes anticompetitive
barriers designed to prevent MCI, AT&T Corp. (AT&T) and Sprint
Corporation (Sprint) from providing local services within Texas.
Management is unable to predict the outcome of this proceeding.
More than 20 applications for competitive local service
certification have been filed with the TPUC, and several have
been approved. As a result, the Telephone Company expects
competition to continue to develop for its local services, but
the specific financial impacts of this legislation cannot be
reasonably estimated until all required tariff filings are
approved by the TPUC for the Telephone Company and other
companies intending to provide local service.
Prior to September 1, 1995, the Telephone Company operated under
an extension of a four-year incentive regulation agreement which
ended in November 1994. 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. The agreement also
provided an earnings-sharing mechanism designed to encourage
efficiency and innovation by the Telephone Company. There was no
sharing of 1993 revenues. Sharing amounts for the period ending
November 1994 included earnings sharing credits of approximately
$30 plus additional Lifeline Surplus credits for the four-year
period of approximately $18. Sharing amounts for the period
ending August 1995 have not been approved by the TPUC but are
estimated to be approximately $20.
Missouri On September 7, 1995, in response to a legal challenge
brought by interexchange carriers and the Missouri Cable TV
Association, the Cole County Circuit Court (Circuit Court)
overturned the August 1994 settlement agreement reached among the
Telephone Company, the Missouri Public Service Commission (MPSC)
and the Office of Public Counsel (OPC).
The settlement agreement had ended a legal dispute with the MPSC
over a December 1993 order which had required rate reductions of
$84.6 annually, beginning in 1994. Under the agreement, which
would have continued in effect through December 31, 1998, the
Telephone Company implemented annual rate reductions of $69.6,
issued one-time credits to customers totaling $64, and committed
to an average annual capital investment of $275, including $35 in
special projects, during the term of the agreement. It also
provided that the Telephone Company would not file a general rate
case or increase basic local exchange service rates. There would
be no sharing of earnings under the agreement. The MPSC and OPC
agreed not to initiate any complaints regarding the Telephone
Company's earnings prior to January 1, 1999.
The practical effect of the Circuit Court's decision is to
eliminate the prospective commitments under the settlement
agreement including the rate review moratorium and capital
investment requirements. The decision has no immediate impact on
the Telephone Company's current rates because they were approved
by the MPSC in separate proceedings, which were not appealed.
The Telephone Company is continuing to fulfill the terms of the
settlement agreement.
The MPSC and the Telephone Company appealed the Circuit Court's
decision on October 12 and 13, 1995, respectively. These appeals
are currently pending.
Oklahoma On October 30, 1995, the Oklahoma Corporation
Commission (OCC) approved a settlement that resolved pending
court appeals of a 1992 rate order. The settlement ended a
dispute which began in 1989, when the OCC ordered an
investigation into the reasonableness of the Telephone Company's
intrastate rates. An order was issued in August 1992, requiring
the Telephone Company to refund $148.4, representing revenues in
excess of an 11.41% return on equity for the period April 1991
through the date of the final order. The order also called for
prospective annual rate reductions of $100.6 effective September
1992, required an investment of $84 in network modernization over
five years, and lowered the allowed return on equity from 14.25%
to 12.20%.
Under the terms of the settlement, the Telephone Company paid a
cash settlement of $170 to business and residential customers,
and offered discounts with a retail value of $268 for certain
Telephone Company services. Previously ordered rate reductions
of $100.6 have been lowered to $84.4, of which $57.1 had already
been implemented. The settlement allows the remaining $27.3 in
rate reductions to be deferred, with approximately $8.9 becoming
effective in 1996 and the remainder during 1997. The Telephone
Company will continue a previously announced $84 network
modernization plan for rural Oklahoma. The settlement also
provides that no overearnings complaint can be filed against the
Telephone Company until January 1, 1998. In addition, the OCC
began exploring alternative forms of regulation.
Management anticipates that this settlement will not have a
significant impact on earnings. The Telephone Company began
accruing for the order in 1992, and the settlement and associated
costs had been fully accrued as of the end of the third quarter
of 1995.
Competition
Competition continues to expand in the telecommunications
industry. Legislation and regulatory and court decisions have
increased 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.
Recent federal legislation will increase both competition and
competitive opportunities for SBC. On February 8, 1996, the
Telecommunications Act of 1996 (the Act) was enacted into law.
The Act is intended to address various aspects of competition
within, and regulation of, the telecommunications industry. The
Act provides that all post-enactment conduct or activities which
were subject to the consent decree issued at the time of AT&T's
divestiture of the Regional Holding Companies (RHCs) are now
subject to the provisions of the Act. Among other things, the
Act also defines conditions SBC must comply with before being
permitted to offer interLATA long-distance service and
establishes certain terms and conditions intended to promote
competition for the Telephone Company's local exchange services.
SBC may immediately offer interLATA long-distance outside the
five-state area and over its wireless network both inside and
outside the five-state area. Before being permitted to offer
landline interLATA long-distance service in the five-state area,
the Telephone Company must obtain state and FCC approval of an
interconnection agreement with a predominantly facilities-based
competitor serving residential and business customers. The
interconnection agreement must comply with the 14 point
competitive checklist contained in the Act. If no competing
provider within a state requests an interconnection agreement,
the Telephone Company may receive interLATA authority from the
FCC upon obtaining a state-approved statement of terms and
conditions under which it will offer access and interconnection,
which includes all items in the competitive checklist. The Act
directs the FCC to establish rules and regulations to implement
the Act, and to preempt specific state law provisions under
certain circumstances. The Act also allows RHCs to provide cable
services over their own networks, but sets limits on RHCs
acquiring interests in cable television operations in their
telephone service areas. It is anticipated that many of the new
services and products that SBC is allowed to offer under the Act
will be provided by subsidiaries of SBC other than the Telephone
Company.
The passage of the Act potentially supersedes various court
actions filed by SBC or to which SBC was a party. Among these
court actions are a petition requesting the consent decree be
vacated, a court order establishing conditions under which SBC
could offer interLATA long-distance over its wireless network and
a suit challenging the FCC's intention to require telephone
companies to file applications with the FCC before they acquire
or operate cable television systems in their telephone service
areas.
The Telephone Company currently faces competition from various
local service providers. Some of these providers have built
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 in
part to mitigate the effect of system bypass.
The FCC adopted rules requiring large LECs, 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
LEC central office. Switched access refers to the link between
LECs' switching facilities and long-distance carriers' networks;
switched access transport is one component of this service.) A
July 1994 FCC order required that LECs provide equipment and
establish a set of technical and pricing rules intended to
position alternative providers as if their equipment were located
in the central office (referred to as virtual collocation).
Alternatively, the LEC could, at its discretion, allow
alternative providers to physically collocate their equipment
within its central office.
The current FCC collocation rules will be affected by the Act
which requires incumbent LECs to provide physical collocation of
equipment necessary for interconnection or access to unbundled
network elements at the premises of the LEC. The Act allows the
incumbent LEC to provide virtual collocation if the LEC
demonstrates to state commissions that physical collocation is
not practical for technical reasons or because of space
limitations.
Competition exists and continues to intensify in 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.
Recently enacted and pending state regulatory and legislative
proceedings also allow increased competition for local exchange
services in the future. In Texas, the TPUC has granted several
companies authority to provide local exchange services in areas
within the Telephone Company's service territory. Hearings
continue on additional applications. In Missouri, legislation
that embraced most of the recommendations of a commission
appointed by the Governor was proposed but not adopted in 1995.
The legislation would have opened the Telephone Company's local
exchange market to competition and ended earnings regulation for
the Telephone Company, but also would have provided only limited
pricing flexibility for its services. Similar legislation has
been filed for the 1996 legislative session, and other proposals
to permit basic local exchange competition and authorize price
cap and other forms of incentive regulation are also expected to
be introduced, but it is not known whether such legislation will
be passed during 1996. Additionally, the MPSC has established a
docket to investigate local competition issues. In Kansas, the
Kansas Corporation Commission (KCC) has approved direct local
telephone service competition in Kansas City, Kansas and,
pursuant to a 1994 KCC order, Wichita, Kansas has local private
line competition. In Kansas and Oklahoma, there are generic
competition dockets pending which address competitive issues
related to the provision and regulation of intrastate
telecommunications services.
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,
or already are, providing telecommunications services. As a
result of recent and prospective mergers and acquisitions within
the industry, SBC may face competition from entities offering
both cable and telephone services in the Telephone Company's
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.
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 video
service in the Telephone Company's five-state area. In March
1995, the Court ruled in favor of SBC. In December 1995, SBC
began offering video services to 1,800 customers in a consumer
trial in Richardson, Texas. The advanced broadband network in
Richardson is capable of delivering a variety of video and
communications services. Alternatives for offering these
services in other markets within the five-state area are being
evaluated in connection with the Richardson trial.
SBC is aggressively representing its interests regarding
competition before federal and state regulatory bodies, courts,
Congress and state legislatures. SBC will continue to evaluate
the increasingly competitive nature of its business and develop
the appropriate regulatory, legislative and competitive solutions
needed to respond effectively to competition.
Other Business Matters
Strategic Realignment In July 1995, SBC announced a strategic
realignment which will position the company to be a single-source
provider of telecommunications services. All of SBC's operations
within the five-state area will report to one management group,
while international operations and domestic operations outside
the five-state area will report to a separate management group.
In connection with this realignment of functions, in 1995 the
Telephone Company recognized $92.7 in selling, general and
administrative expenses. These expenses include postemployment
benefits for employees arising from the consolidation of
operations within the five-state area, streamlining support and
administrative functions and integrating financial systems over
the next 18 to 24 months. The realignment is expected to
eliminate approximately 2,400 positions throughout SBC. The
charge reduced the Telephone Company's net income for 1995 by
approximately $57.8.
Pending Litigation During 1995, the Telephone Company settled
litigation with several 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. 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 varied, they all alleged that the
Telephone Company should have included revenues received from
other services in calculating the compensation described in
the ordinances. The settlement did 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, 1995 and 1994, and the
related statements of income, shareowner's equity and cash flows
for each of the three years in the period ended December 31,
1995. 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, 1995 and
1994, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995, 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 Note 2 to the financial statements, the Company
discontinued its application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" in 1995. As discussed in Notes 6 and 7 to the
financial statements, the Company changed its method of
accounting for income taxes, postretirement benefits other than
pensions, and postemployment benefits in 1993.
ERNST & YOUNG LLP
San Antonio, Texas
February 9, 1996
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
STATEMENTS OF INCOME
Dollars in millions
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Operating Revenues
Local service $ 4,302.3 $ 4,022.0 $ 3,898.3
Network access 3,066.7 2,857.0 2,685.4
Long-distance service 821.9 903.5 965.7
Other 746.8 665.2 589.5
Total operating revenues 8,937.7 8,447.7 8,138.9
Operating Expenses
Cost of services and products 2,844.7 2,761.0 2,519.1
Selling, general and administrative 2,304.2 2,047.7 2,107.4
Depreciation and amortization 1,754.1 1,692.2 1,699.6
Total operating expenses 6,903.0 6,500.9 6,326.1
Operating Income 2,034.7 1,946.8 1,812.8
Other Income (Expense)
Interest expense (339.4) (357.9) (385.2)
Other expense - net (7.0) (3.0) (3.4)
Total other income (expense) (346.4) (360.9) (388.6)
Income Before Income Taxes, Extraordinary
Loss and Cumulative Effect of Changes in
Accounting Princip1es 1,688.3 1,585.9 1,424.2
Income Taxes
Federal 511.1 456.0 364.4
State and local 56.5 58.0 44.8
Total income taxes 567.6 514.0 409.2
Income Before Extraordinary Loss and
Cumulative Effect of Changes in
Accounting Principles 1,120.7 1,071.9 1,015.0
Extraordinary Loss from Discontinuance
of Regulatory Accounting, net of tax (2,819.3) - -
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) $ (1,698.6)$ 1,071.9 $ (987.6)
<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,
1995 1994
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 42.7 $ 46.1
Accounts receivable - net of allowances for uncollectibles of
$15.5 and $15.2 1,509.2 1,378.5
Material and supplies 130.6 141.8
Deferred charges 31.9 48.1
Deferred income taxes 143.3 184.8
Prepaid expenses and other current assets 81.4 87.1
Total current assets 1,939.1 1,886.4
Property, Plant and Equipment - Net 11,127.4 15,736.0
Other Assets 75.4 166.6
Total Assets $ 13,141.9 $ 17,789.0
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 750.4 $ 660.2
Accounts payable and accrued liabilities 2,289.8 2,440.1
Total current liabilities 3,040.2 3,100.3
Long-Term Debt 4,217.1 4,268.1
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 174.3 1,728.6
Postemployment benefit obligation 2,656.7 2,632.0
Unamortized investment tax credits 286.0 369.2
Other noncurrent liabilities 99.7 277.3
Total deferred credits and other noncurrent liabilities 3,216.7 5,007.1
Shareowner's Equity
Common stock - one share, without par value, owned by parent 1.0 1.0
Paid-in surplus 4,837.8 5,389.9
Retained earnings (deficit) (2,170.9) 22.6
Total shareowner's equity 2,667.9 5,413.5
Total Liabilities and Shareowner's Equity $ 13,141.9 $ 17,789.0
<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>
1995 1994 1993
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (1,698.6) $ 1,071.9 $ (987.6)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,754.1 1,692.2 1,699.6
Provision for uncollectible accounts 76.3 71.5 66.0
Amortization of investment tax credits (42.3) (60.6) (65.5)
Pensions and other postemployment expenses 105.6 175.8 125.1
Deferred income taxes 125.0 (112.2) (163.8)
Extraordinary loss, net of tax 2,819.3 - 153.2
Cumulative effect of accounting changes,
net of tax - - 1,849.4
Changes in operating assets and liabilities:
Accounts receivable (194.7) (80.4) (176.7)
Other current assets 5.7 (75.5) (36.9)
Accounts payable and accrued liabilities (162.5) 285.5 245.3
Other - net (22.5) (192.1) (83.4)
Total adjustments 4,464.0 1,704.2 3,612.3
Net Cash Provided by Operating Activities 2,765.4 2,776.1 2,624.7
Investing Activities
Construction and capital expenditures (1,734.4) (1,656.0) (1,667.8)
Net Cash Used in Investing Activities (1,734.4) (1,656.0) (1,667.8)
Financing Activities
Net change in short-term borrowings with
original maturities of three months or less 6.3 172.9 38.1
Issuance of other short-term borrowings 91.1 35.5 16.0
Repayment of other short-term borrowings (91.1) (40.5) (137.6)
Issuance of long-term debt 595.5 0.9 2,086.1
Repayment of long-term debt (117.3) (287.6) (10.7)
Early extinguishment of debt and related
call premiums (465.0) - (2,190.3)
Dividends paid (1,138.9) (1,065.0) (865.6)
Net equity received from parent 85.0 72.0 100.0
Net Cash Used in Financing Activities (1,034.4) (1,111.8) (964.0)
Net increase (decrease) in cash and cash equivalents (3.4) 8.3 (7.1)
Cash and cash equivalents beginning of year 46.1 37.8 44.9
Cash and Cash Equivalents End of Year $ 42.7 $ 46.1 $ 37.8
<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
Net income (loss) - - (1,698.6)
Dividend to shareowner - (637.1) (494.9)
Equity from parent - 85.0 -
Balance, December 31, 1995 $ 1.0 $ 4,837.8 $ (2,170.9)
<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) provides
telecommunications services to customers in Texas, Missouri,
Oklahoma, Kansas and Arkansas. The Telephone Company is a wholly-
owned subsidiary of SBC Communications Inc. (SBC).
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Certain amounts in prior period financial statements have been
reclassified to conform to the current year's presentation.
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 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.
Property, plant and equipment is depreciated using straight-line
methods over its estimated useful lives, generally ranging from 3
to 50 years. Prior to September 1995, the Telephone Company
computed depreciation using certain straight-line methods and rates
as prescribed by regulators. In accordance with composite group
depreciation methodology, when a portion of the Telephone Company's
depreciable property, plant and equipment is retired in the
ordinary course of business, the gross book value is charged to
accumulated depreciation.
2. Discontinuance of Regulatory Accounting
In 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,"
(FAS 71). FAS 71 requires depreciation of telephone plant using
lives set by regulators which are generally longer than those
established by unregulated companies, and deferral of certain costs
and obligations based on regulatory actions (regulatory assets and
liabilities). As a result of the adoption of price-based
regulation for most of the Telephone Company's revenues and the
acceleration of competition in the telecommunications market,
management determined that the Telephone Company no longer met the
criteria for application of FAS 71.
Upon discontinuance of FAS 71, the Telephone Company recorded a non-
cash, extraordinary charge to net income of $2,819.3 (after a net
deferred tax benefit of $1,764.0). This charge is comprised of an
after-tax charge of $2,897.3 to reduce the net carrying value of
telephone plant, partially offset by an after-tax benefit of $78.0
for the elimination of net regulatory liabilities. The components
of the charge are as follows:
Pre-tax After-tax
Increase telephone plant accumulated $4,657.0 $ 2,897.3
depreciation
Adjust unamortized investment tax (40.9) (25.4)
credits
Eliminate tax-related regulatory (87.5) (87.5)
assets and liabilities
Eliminate other regulatory assets 54.7 34.9
Total $4,583.3 $ 2,819.3
The increase in accumulated depreciation of $4,657.0 reflects the
effects of adopting depreciable lives for many of the Telephone
Company's plant categories which more closely reflect the economic
and technological lives of the plant. The adjustment was supported
by a discounted cash flow analysis which estimated amounts of
telephone plant that may not be recoverable from future discounted
cash flows. This analysis included consideration of the effects of
anticipated competition and technological changes on plant lives
and revenues. The adjustment also included elimination of
accumulated depreciation deficiencies recognized by regulators and
amortized as part of depreciation expense.
Following is a comparison of new lives to those prescribed by
regulators for selected plant categories:
Average Lives (in Years)
Regulator- Estimated
Prescribed Economic
Digital switch 17 11
Digital circuit 12 7
Copper cable 24 18
Fiber cable 27 20
Conduit 57 50
The increase in accumulated depreciation also includes an
adjustment of approximately $450 to fully depreciate analog
switching equipment scheduled for replacement. Remaining analog
switching equipment will be depreciated using an average remaining
life of four years.
Investment tax credits have historically been deferred and
amortized over the estimated lives of the related plant. The
adjustment to unamortized investment tax credits reflects the
shortening of those plant lives discussed above. Regulatory assets
and liabilities are related primarily to accounting policies used
by regulators in the ratemaking process which are different from
those used by non-regulated companies, predominantly in the
accounting for income taxes and deferred compensated absences.
These items are required to be eliminated with the discontinuance
of accounting under FAS 71.
Additionally, in September 1995, the Telephone Company began
accounting for interest on funds borrowed to finance construction
as an increase in property, plant and equipment and a reduction of
interest expense. Under the provisions of FAS 71, the Telephone
Company accounted for a capitalization of both interest and equity
costs allowed by regulators during periods of construction as other
income and as an addition to the cost of plant constructed.
3. Property, Plant and Equipment
Property, plant and equipment, which is stated at cost, is
summarized as follows at December 31:
1995 1994
Property, plant and equipment
In service $ 27,763.6 $ 26,731.6
Under construction 245.1 231.5
28,008.7 26,963.1
Accumulated depreciation and (16,881.3) (11,227.1)
amortization
Property, plant and equipment--net $ 11,127.4 $ 15,736.0
The Telephone Company's depreciation expense as a percentage of
average depreciable plant was 6.5% for 1995 and 1994 and 6.7% for
1993.
Certain facilities and equipment used in operations are under
operating or capital leases. Rental expenses under operating
leases for 1995, 1994 and 1993 were $77.7, $76.8 and $68.3,
respectively. At December 31, 1995, the future minimum rental
payments under noncancelable operating leases for the years 1996
through 2000 were $27.7, $23.1, $13.6, $33.5 and $7.5,
respectively, and $8.2 thereafter. Capital leases were not
significant.
4. Debt
Long-term debt, including interest rates and maturities, is
summarized as follows at December 31:
1995 1994
Debentures
4.50%-5.88% 1995-2006 $ 600.0 $ 700.0
6.12%-6.88% 2000-2024 1,200.0 1,050.0
7.00%-7.75% 2009-2026 1,500.0 1,200.0
8.25%-8.30% 1996-2017 200.0 650.0
3,500.0 3,600.0
Unamortized discount--net of premium (30.7) (31.2)
Total debentures 3,469.3 3,568.8
Notes
5.04%-7.67% 1995-2010 950.5 815.9
Unamortized discount (5.4) (5.2)
Total notes 945.1 810.7
Capitalized leases 3.8 5.8
Total long-term debt, including 4,418.2 4,385.3
current maturities
Current maturities (201.1) (117.2)
Total long-term debt $ 4,217.1 $ 4,268.1
During 1995, the Telephone Company refinanced long-term debentures.
Costs of $18.2 associated with refinancing are included in other
income (expense) - net, with related income tax benefits of $6.8
included in income taxes, in the Telephone Company's Statements of
Income.
During 1993, the Telephone Company recorded an extraordinary loss
on the refinancing of long-term debentures of $153.2, net of
related income tax benefits of $92.2.
At December 31, 1995, the aggregate principal amounts of long-term
debt scheduled for repayment for the years 1996 through 2000 were
$201.1, $120.7, $172.1, $63.7 and $150.1, respectively. As of
December 31, 1995, 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:
1995 1994
Commercial paper $ 549.3 $ 543.0
Current maturities of long-term debt 201.1 117.2
Total $ 750.4 $ 660.2
The weighted average interest rate on commercial paper debt at
December 31, 1995 and 1994 was 5.7% and 6.0%, respectively. The
Telephone Company has entered into agreements with several banks
for lines of credit totaling $410.0, all of which may be used to
support commercial paper borrowings. The majority 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, 1995.
5. Financial Instruments
The carrying amounts and estimated fair values of the Telephone
Company's long-term debt, including current maturities, are
summarized as follows at December 31:
1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
Debentures $3,469.3 $3,553.4 $3,568.8 $3,169.3
Notes 945.1 964.8 810.7 730.2
The fair values of the debentures were estimated based on quoted
market prices. The fair values of the notes were based on
discounted cash flows using current interest rates. The carrying
amounts of cash and cash equivalents and commercial paper debt
approximate fair values.
The Telephone Company does not hold or issue any financial
instruments for trading purposes.
6. Income Taxes
The Telephone Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FAS 109) effective
January 1, 1993. In adopting FAS 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. The
cumulative effect of adopting FAS 109 as of January 1, 1993 was to
decrease net income for 1993 by $8.6. The adoption of FAS 109 had
no material effect on pre-tax income for 1993.
As a result of implementing FAS 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, resulting in minimal effect on net income for
1993. The net regulatory liability was eliminated with the
discontinued application of FAS 71 in September 1995 (see Note 2).
Significant components of deferred tax liabilities and assets are as
follows at December 31:
1995 1994
Depreciation $ 1,411.5 $ 2,947.0
Other 81.0 122.0
Gross deferred tax liabilities 1,492.5 3,069.0
Employee benefits 1,151.0 1,101.8
Unamortized investment tax credits 108.3 134.8
Other 202.2 288.6
Gross deferred tax assets 1,461.5 1,525.2
Net deferred tax liabilities $ 31.0 $ 1,543.8
The components of income tax expense are as follows:
1995 1994 1993
Federal
Current $ 447.5 $ 619.1 $ 568.9
Deferred--net 105.9 (102.5) (139.0)
Amortization of (42.3) (60.6) (65.5)
investment tax credits
511.1 456.0 364.4
State and local
Current 37.4 67.7 69.6
Deferred--net 19.1 (9.7) (24.8)
56.5 58.0 44.8
Total $ 567.6 $ 514.0 $ 409.2
A reconciliation of income tax expense and the amount computed by
applying the statutory federal income tax rate (35%) to income
before income taxes, extraordinary loss and cumulative effect of
changes in accounting principles is as follows:
1995 1994 1993
Taxes computed at federal statutory $ 590.9 $ 555.1 $ 498.5
rate
Increases (decreases) in taxes
resulting from:
Amortization of investment tax
credits over the life of the plant (38.8) (60.6) (65.5)
that gave rise to the credits--1995
net of deferred tax
Excess deferred taxes due to rate (24.2) (34.6) (43.2)
change
Depreciation of telephone plant
construction costs previously 14.3 18.3 22.5
deducted for tax purposes--net
State and local income 36.7 37.7 29.1
taxes--net of federal tax benefit
Other--net (11.3) (1.9) (32.2)
Total $ 567.6 $ 514.0 $ 409.2
7. 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:
1995 1994 1993
Discount rate for determining 7.25% 7.5% 7.25%
projected benefit obligation
Long-term rate of return on plan 8.0% 8.0% 8.0%
assets
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 1995, 1994 and 1993 of $104.2, $79.6 and $21.6, respectively.
As of December 31, 1995, the amount of the Telephone Company's
cumulative amount of pension cost recognized in excess of its
cumulative contributions made to the trust was $52.8. As of
December 31, 1994, 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.
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" (FAS 106), which requires accrual of actuarially
determined postretirement benefit costs as active employees earn
these benefits. Prior to the adoption of FAS 106, the Telephone
Company expensed retiree medical benefits when claims were
incurred.
In implementing FAS 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.
SBC maintains collectively bargained Voluntary Employee Beneficiary
Association (CBVEBA) trusts to fund postretirement benefits.
During 1995 and 1994, the Telephone Company contributed $147.0 and
$130.6, 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.
FAS 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 1995, 1994 and 1993 of $209.3, $224.1 and $238.8
respectively. At December 31, 1995 and 1994, the amount included
in the Balance Sheets for accrued postretirement benefit obligation
was $2,632.8 and $2,692.7 respectively. Significant assumptions
for the discount rate, long-term rate of return on plan assets and
composite rate of compensation increase used by SBC in developing
the accumulated postretirement benefit were the same as those used
in developing the pension information.
The assumed medical cost trend rate in 1996 is 9.5%, 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 trend rate in 1996 is 6.5%,
reducing to 5.0% in 2002. 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, 1995 by
approximately 7.3%.
Postemployment Benefits - Under its benefit plans, the Telephone
Company provides employees varying levels of severance pay,
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"
(FAS 112), which 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. FAS 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.
The Telephone Company's match of employee contributions to the
savings plans is 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 $32.0, $37.1 and $43.5 in 1995, 1994 and 1993,
respectively.
8. Additional Financial Information
December 31,
Balance Sheets 1995 1994
Accounts payable and accrued
liabilities
Accounts payable $ 829.2 $ 856.5
Accrued taxes 258.0 292.4
Advance billing and customer 249.4 237.3
deposits
Compensated future absences 178.0 170.4
Accrued interest 80.6 85.2
Accrued payroll 88.3 91.7
Other 606.3 706.6
Total $ 2,289.8 $ 2,440.1
Statements of Income 1995 1994 1993
Interest expense incurred $ 344.3 $ 357.9 $ 385.2
Capitalized interest (4.9) - -
Total interest expense $ 339.4 $ 357.9 $ 385.2
Allowance for funds used
during construction $ 10.6 $ 18.6 $ 20.7
Statements of Cash Flows 1995 1994 1993
Cash paid during the year for:
Interest $ 344.1 $ 359.5 $ 389.6
Income taxes $ 510.0 $ 740.8 $ 477.8
Approximately 13% in 1995, 14% in 1994 and 15% in 1993 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.
Approximately 76% of the Telephone Company's employees are
represented by the Communications Workers of America (CWA). A
three-year contract was negotiated between the CWA and the
Telephone Company, which became effective in August 1995. This
contract will be subject to renegotiation in mid-1998.
9. Quarterly Financial Information (Unaudited)
Calendar Total Operating
Quarter Revenues Operating Income Net Income (Loss)
1995 1994 1995 1994 1995 1994
First $2,163.2 $2,041.7 $ 539.3 $ 489.0 $ 300.3 $ 272.1
Second 2,226.4 2,093.6 544.9 513.2 307.0 282.5
Third (1) 2,262.5 2,125.5 550.5 495.7 (2,513.8) 278.5
Fourth (2) 2,285.6 2,186.9 400.0 448.9 207.9 238.8
Annual (1) $8,937.7 $8,447.7 $2,034.7 $1,946.8 $(1,698.6) $1,071.9
(1) 1995 Net Loss reflects an extraordinary loss of $2,819.3 from
discontinuance of regulatory accounting.
(2) 1995 Operating Income reflects $92.7 in selling, general and
administrative expenses associated with a strategic realignment of
functions. These expenses include postemployment benefits for employees
arising from the consolidation of operations within the five-state area,
streamlining support and administrative functions and integrating financial
systems.
1995 Net Income reflects after-tax charges of $57.8 for the strategic
realignment of functions and $11.4 for refinancing of debt.
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:
II - 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 II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectibles
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2)
Charged
Balance at Charged to Other Balance
Beginning to Costs Accounts Deductions at End of
Description of Period and -Note (a) -Note (b) Period
Expenses
<S> <C> <C> <C> <C> <C>
Year 1995 $ 15.2 83.4 25.4 108.5 $ 15.5
Year 1994 $ 14.2 84.1 30.9 114.0 $ 15.2
Year 1993 $ 11.3 66.0 35.1 98.2 $ 14.2
<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
12th day of March, 1996.
SOUTHWESTERN BELL TELEPHONE COMPANY
By /s/ Richard G. Lindner
(Richard G. Lindner
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:
Edward A. Mueller*
President and Chief
Executive Officer
Principal Financial and
Accounting Officer:
Richard G. Lindner
Vice President-Chief Financial
Officer and Treasurer
/s/ Richard G. Lindner
Directors: (Richard G. Lindner, 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*
James D. Ellis* March 12, 1996
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>
EXHIBIT 12
SOUTHWESTERN BELL TELEPHONE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Changes in Accounting
Principles $ 1,688.3 $ 1,585.9 $ 1,424.2 $ 1,324.7 $ 1,286.3
Add: Interest Expense 339.4 357.9 385.2 408.7 456.3
1/3 Rental Expense 25.9 25.6 22.8 27.6 22.7
Adjusted Earnings $ 2,053.6 $ 1,969.4 $ 1,832.2 $ 1,761.0 $ 1,765.3
Total Interest Charges $ 339.4 $ 357.9 $ 385.2 $ 408.7 $ 456.3
1/3 Rental Expense 25.9 25.6 22.8 27.6 22.7
Adjusted Fixed Charges $ 365.3 $ 383.5 $ 408.0 $ 436.3 $ 479.0
Ratio of Earnings to Fixed Charges 5.62 5.14 4.49 4.04 3.69
</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 9, 1996, 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, 1995.
ERNST & YOUNG LLP
San Antonio, Texas
March 8, 1996
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
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 a director of the Company;
NOW, THEREFORE, each of the undersigned hereby constitutes and
appoints T. Michael Payne and Richard G. Lindner, or either one of
them, his or her attorneys for him or her and in his or her name,
place and stead, and in his or her office and capacity in the Company,
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
he 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
or her hand on the date set forth opposite his or her signature.
/s/ Royce S. Caldwell 2/28/96
Royce S. Caldwell Date
Chairman of the Board
/s/ Cassandra C. Carr 2/29/96
Cassandra C. Carr Date
Director
/s/ William E. Dreyer 3/4/96
William E. Dreyer Date
Director
/s/ James D. Ellis 2/27/96
James D. Ellis Date
Director
/s/ Donald E. Kiernan 2/29/96
Donald E. Kiernan Date
Director
/s/ Edward A. Mueller 3/6/96
Edward A. Mueller Date
Director and President and
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL TELEPHONE COMPANY'S DECEMBER 31, 1995 FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 42,700
<SECURITIES> 0
<RECEIVABLES> 1,524,700
<ALLOWANCES> 15,500
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 1,939,100
<PP&E> 28,008,700
<DEPRECIATION> 16,881,300
<TOTAL-ASSETS> 13,141,900
<CURRENT-LIABILITIES> 3,040,200
<BONDS> 4,217,100
0
0
<COMMON> 1,000
<OTHER-SE> 2,666,900
<TOTAL-LIABILITY-AND-EQUITY> 13,141,900
<SALES> 0<F2>
<TOTAL-REVENUES> 8,937,700
<CGS> 0<F3>
<TOTAL-COSTS> 2,844,700
<OTHER-EXPENSES> 1,754,100
<LOSS-PROVISION> 76,300
<INTEREST-EXPENSE> 339,400
<INCOME-PRETAX> 1,688,300
<INCOME-TAX> 567,600
<INCOME-CONTINUING> 1,120,700
<DISCONTINUED> 0
<EXTRAORDINARY> (2,819,300)
<CHANGES> 0
<NET-INCOME> (1,698,600)
<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>
