FORM 10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1997
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN BELL TELEPHONE COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
March 31,
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Operating Revenues
Local service $ 1,254 $ 1,121
Network access 835 804
Long-distance service 211 217
Other 235 203
- --------------------------------------------------------------------------------
Total operating revenues 2,535 2,345
- --------------------------------------------------------------------------------
Operating Expenses
Cost of services and products 938 854
Selling, general and administrative 425 410
Depreciation and amortization 462 440
- --------------------------------------------------------------------------------
Total operating expenses 1,825 1,704
- --------------------------------------------------------------------------------
Operating Income 710 641
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (84) (83)
Other income - net - 1
- --------------------------------------------------------------------------------
Total other income (expense) (84) (82)
- --------------------------------------------------------------------------------
Income Before Income Taxes 626 559
- --------------------------------------------------------------------------------
Income Taxes 231 208
- --------------------------------------------------------------------------------
Net Income $ 395 $ 351
- --------------------------------------------------------------------------------
See Notes to the Financial Statements.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- --------------------------------------------------------------------------------
BALANCE SHEETS
Dollars in millions
- --------------------------------------------------------------------------------
----------- -------------
March 31, December 31,
----------- -------------
1997 1996
- --------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 73 $ 69
Accounts receivable - net of allowances for
uncollectibles of 1,645 1,674
$23 and $23
Prepaid expenses 291 168
Deferred charges 44 35
Deferred income taxes 38 96
Other current assets 141 137
- --------------------------------------------------------------------------------
Total current assets 2,232 2,179
- --------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 29,690 29,347
Accumulated depreciation and amortization 17,826 17,588
- --------------------------------------------------------------------------------
Property, Plant and Equipment - Net 11,864 11,759
- --------------------------------------------------------------------------------
Other Assets 40 30
- --------------------------------------------------------------------------------
Total Assets $ 14,136 $ 13,968
- --------------------------------------------------------------------------------
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 1,319 $ 921
Accounts payable and accrued liabilities 2,271 2,517
- --------------------------------------------------------------------------------
Total current liabilities 3,590 3,438
- --------------------------------------------------------------------------------
Long-Term Debt 4,168 4,265
- --------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 276 209
Postemployment benefit obligation 2,545 2,646
Unamortized investment tax credits 247 255
Other noncurrent liabilities 286 269
- --------------------------------------------------------------------------------
Total deferred credits and other noncurrent 3,354 3,379
liabilities
- --------------------------------------------------------------------------------
Shareowner's Equity
Common stock - one share, no par value 1 1
Paid-in surplus 3,430 3,687
Retained earnings (deficit) (407) (802)
- --------------------------------------------------------------------------------
Total shareowner's equity 3,024 2,886
- --------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity $ 14,136 $ 13,968
- --------------------------------------------------------------------------------
See Notes to the Financial Statements.
<PAGE>
<TABLE>
- ---------------------------------------------------
SOUTHWESTERN BELL TELEPHONE COMPANY
- -----------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash
and cash equivalents
(Unaudited)
<CAPTION>
- -----------------------------------------------------------------------------------
Three months ended
March 31,
--------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 395 $ 351
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 462 440
Provision for uncollectible accounts 23 18
Amortization of investment tax credits (8) (8)
Pensions and other postemployment expenses 58 19
Deferred income taxes 125 50
Other - net (541) (224)
- -----------------------------------------------------------------------------------
Total adjustments 119 295
- -----------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 514 646
- -----------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (553) (519)
- -----------------------------------------------------------------------------------
Net Cash Used in Investing Activities (553) (519)
- -----------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 256 139
Issuance of other short-term borrowings 120 89
Repayment of other short-term borrowings (75) -
Repayment of long-term debt (1) -
Dividends paid (412) (339)
Equity received from parent 155 -
- -----------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing 43 (111)
Activities
- -----------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4 16
- -----------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 69 43
- -----------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 73 $ 59
- -----------------------------------------------------------------------------------
Cash paid during the three months ended March 31 for:
Interest $ 76 $ 73
Income taxes $ 91 $ 65
<FN>
See Notes to the Financial Statements.
</FN>
</TABLE>
<PAGE>
- -------------------------------------------------------------
SOUTHWESTERN BELL TELEPHONE COMPANY
- --------------------------------------------------------------------------
STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
- ----------------------------------------------------------------------------
Retained
Common Paid-in Earnings
Stock Surplus (Deficit)
- ----------------------------------------------------------------------------
Balance, December 31, 1995 $ 1 $ 4,838 $ (2,171)
Net income - - 351
Dividend to shareowner - (339) -
- ----------------------------------------------------------------------------
Balance, March 31, 1996 $ 1 $ 4,499 $ (1,820)
- ----------------------------------------------------------------------------
Balance, December 31, 1996 $ 1 3,687 $ (802)
Net income - - 395
Dividend to shareowner - (412) -
Equity received from parent - 155 -
- ----------------------------------------------------------------------------
Balance, March 31, 1997 $ 1 $ 3,430 $ (407)
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months then 1997 1996
ended:
------- -------
Return on weighted average total capital. . . . . 22.85% 21.70%
. . . . . . . . . . . . . . . . . . . . . . . .
Debt ratio . . . . . . . . . . . . . . . . . . . 64.47% 65.97%
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
Network access lines in service (000) . . . . . 15,198 14,465
. . . . . . . . . . . . . . . . . . . . . . . . . .
Access minutes of use (000,000) . . . . . . . . . 14,225 13,246
. . . . . . . . . . . . . . . . . . . . . . . . . .
Number of employees . . . . . . . . . . . . . . . 49,640 48,170
. . . . . . . . . . . . . . . . .
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions
1. BASIS OF PRESENTATION - Southwestern Bell Telephone Company (SWBell) is a
wholly-owned subsidiary of SBC Communications Inc. (SBC). The financial
statements have been prepared by SWBell 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. Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 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 SWBell's 1996
Annual Report on Form 10-K.
2. MERGER - On April 1, 1997, SBC and Pacific Telesis Group (PAC) completed
the merger of an SBC subsidiary with PAC, in a transaction in which each
share of PAC common stock was exchanged for 0.73145 of a share of SBC common
stock (equivalent to approximately 313 million shares). With the merger, PAC
became a wholly-owned subsidiary of SBC. The transaction wasaccounted for as
a pooling of interests and a tax-free reorganization.
SWBell's results will include the effect of changes applied retroactively to
conform accounting methodologies between PAC and SBC for, among other items,
sales commissions, resulting from the merger. These changes will be recorded
by SWBell in the second quarter of 1997, retroactive to January 1, 1997, as a
cumulative effect of accounting change of $16, net of tax. Had the merger
occurred January 1, 1997, income before cumulative effect of accounting
change would have decreased by $7.
<PAGE>
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 (SWBell) reported net income of $395 for the
first quarter of 1997. Financial results for the first quarters of 1997 and 1996
are summarized as follows:
- --------------------------------------------------------------------------
First Quarter
-------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------
Operating revenues $ 2,535 $ 2,345 8.1%
Operating expenses $ 1,825 $ 1,704 7.1%
Net income $ 395 $ 351 12.5%
==========================================================================
The primary factor contributing to the increase in net income during the first
quarter of 1997 was growth in demand for services and products.
SWBell's operating revenues in the first quarter of 1997 increased $190, or
8.1%, over the first quarter of 1996. Components of operating revenues for the
first quarters of 1997 and 1996 are as follows:
- --------------------------------------------------------------------------
First Quarter
-------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------
Local service $ 1,254 $ 1,121 11.9%
Network access
Interstate 565 534 5.8
Intrastate 270 270 0.0
Long-distance service 211 217 (2.8)
Other 235 203 15.8
- ----------------------------------------------------------------
Total Operating Revenues $ 2,535 $ 2,345 8.1%
==========================================================================
Local Service revenues increased in the first quarter of 1997 due
primarily to increases in demand, including increases in access lines and
vertical services revenues. The number of access lines increased by 5.1%
since March 31, 1996, of which 66% was due to growth in Texas.
Approximately 29% of access line growth was 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 22%.
Network Access Interstate network access revenues increased in the first
quarter of 1997 due largely to increases 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 were unchanged in the first quarter of
1997 as modest increases in demand, including usage by alternative
intraLATA toll carriers, were offset by net price decreases.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
Long-Distance Service revenues decreased in the first quarter of 1997 due
to the impact of price competition from alternative intraLATA toll
carriers. The decrease in long-distance service revenues also reflects the
introduction and deployment of extended area local service plans.
Other operating revenues increased in the first quarter of 1997 due
primarily to sales of business systems communications equipment
attributable to the December 1996 merger of Southwestern Bell
Telecommunications Inc. (Telecom), a wholly-owned subsidiary of SBC which
marketed business and residential communications equipment, into SWBell.
This increase was somewhat offset by decreased sales of Caller ID
equipment.
SWBell's operating expenses in the first quarter of 1997 increased $121, or
7.1%, over the first quarter of 1996. Components of operating expenses for the
first quarters of 1997 and 1996 are as follows:
- --------------------------------------------------------------------------
First Quarter
-------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------
Cost of services and products $ 938 $ 854 9.8%
Selling, general and administrative 425 410 3.7
Depreciation and amortization 462 440 5.0
- ----------------------------------------------------------------
Total Operating Expenses $ 1,825 $ 1,704 7.1%
==========================================================================
Total Operating Expenses Costs of services and products, and selling,
general and administrative expenses increased on a combined basis $99, or
7.8%, in the first quarter of 1997 due to increases for employee
compensation, network expansion and maintenance, sales agents commissions
and operating taxes. Results for the first quarter of 1997 also reflect
increased expenses for business systems communications equipment, which
subsequent to the merger with Telecom as described above are now sold by
SWBell. These increases were somewhat offset by decreases in expenses for
Caller ID equipment. Depreciation and amortization increased in the first
quarter of 1997 due primarily to growth in plant levels.
Income taxes increased $23, or 11.1%, in the first quarter of 1997 primarily due
to higher income before income taxes.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
OPERATING ENVIRONMENT AND TRENDS OF BUSINESS - Continued
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITIVE ENVIRONMENT
Access reform - On May 7, 1997, the Federal Communications Commission (FCC)
adopted orders on access charge reform and local exchange carrier price caps
which will reduce access charges by, in part, adjusting the productivity factor
to be used in interstate price cap calculations. In presenting the orders, the
FCC estimated there would be a $1.7 billion reduction in industry-wide
interstate access charges which are estimated to aggregate $23 billion.
Management is evaluating the effect of and its response to the orders.
Interconnection Agreements - Companies seeking to connect to SWBell's network
and provide local service must enter into interconnection agreements with
SWBell, which are then subject to approval by the appropriate state commission.
SWBell has entered into agreements in each of its five states, and Texas,
Missouri and Oklahoma commissions have approved various agreements. Several
companies which failed to agree on all terms of an interconnection agreement
with SWBell have filed for binding arbitration before the state commissions in
the five-state area.
In October 1996, in a consolidated arbitration hearing between SWBell and AT&T
Corp., MCI Communications Corporation (MCI), MFS Communications Company, Inc.
(MFS), Teleport Communications Group, and American Communications Services,
Inc., the Texas Public Utility Commission (TPUC) approved interconnection rates
to be charged by SWBell as well as certain other terms of interconnection
between the parties. SWBell also filed revised cost support for the
establishment of rates with the TPUC which may be subject to further hearings.
SWBell, AT&T and MCI filed suit in state and federal court maintaining that, for
various reasons, the arbitration award is unlawful. SWBell has TPUC-approved
interconnection agreements with 26 local service providers, with 17 pending
approvals as of April 15.
As a result of these agreements, SWBell expects that in 1997 it will experience
local exchange competition from one or more of these providers in selected
markets. When these agreements are finalized, SBC intends to use these and all
other approved agreements as a part of its applications to the FCC to provide
interLATA long-distance service in each of its states.
InterLATA Long-distance Filing - On April 11, 1997, SBC filed an application
with the FCC for the provision of interLATA long-distance services in Oklahoma
under the provisions of the Telecom Act. If approved by the FCC, SBC could begin
offering interLATA landline long-distance services to customers in Oklahoma. The
FCC has 90 days to rule on the filing, according to the Telecom Act. The
Oklahoma Corporation Commission approved SBC's application in April 1997.
OTHER BUSINESS MATTERS
Over the next few years, SWBell is expecting to incur significant capital and
software expenditures for interconnection and customer number portability. The
extent and timing of these expenditures will vary depending on the timing and
nature of regulatory action and corresponding or compensating network
improvements, but are likely to be material.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter ended
March 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwestern Bell Telephone Company
May 9 , 1997 /s/ Richard G. Linder
---------------------
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
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
<CAPTION>
------------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss
and Cumulative Effect of $ 626 $ 559 $ 2,168 $ 1,688 $ 1,586 $ 1,424 $ 1,325
Changes
Add:Interest Expense 84 83 327 340 358 385 409
1/3 Rental Expense 9 8 33 26 25 23 27
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Earnings $ 719 $ 650 $ 2,528 $ 2,054 $ 1,969 $ 1,832 $ 1,761
========= ========= ========== ========== ========== =========== ===========
Total Interest Charges $ 89 $ 88 $ 348 $ 340 $ 358 $ 385 $ 409
1/3 Rental Expense 9 8 33 26 25 223 27
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Fixed Charges $ 98 $ 96 $ 381 $ 366 $ 383 $ 408 $ 436
========= ========= ========== ========== ========== =========== ===========
Ratio of Earnings to Fixed Charges 7.34 6.77 6.64 5.61 5.14 4.49 4.04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL TELEPHONE COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 73,000
<SECURITIES> 0
<RECEIVABLES> 1,668,000
<ALLOWANCES> 23,000
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,232,000
<PP&E> 29,690,000
<DEPRECIATION> 17,826,000
<TOTAL-ASSETS> 14,136,000
<CURRENT-LIABILITIES> 3,590,000
<BONDS> 4,168,000
0
0
<COMMON> 1,000
<OTHER-SE> 3,023,000
<TOTAL-LIABILITY-AND-EQUITY> 14,136,000
<SALES> 0<F2>
<TOTAL-REVENUES> 2,535,000
<CGS> 0<F3>
<TOTAL-COSTS> 938,000
<OTHER-EXPENSES> 462,000
<LOSS-PROVISION> 23,000
<INTEREST-EXPENSE> 84,000
<INCOME-PRETAX> 626,000
<INCOME-TAX> 231,000
<INCOME-CONTINUING> 395,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 395,000
<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>
